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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended September 30, 2004
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from __________ to _____________ .
Commission File Number: 333-100099
HydroFlo, Inc.
(Exact name of registrant as specified in charter)
North Carolina 56-2171767
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3721 Junction Blvd. Raleigh, NC 27603
(Address of principal executive offices)
(919) 772-9925
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES (X) NO ( )
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 12, 2004.
31,611,441
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
1
HydroFlo, Inc.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet as of September 30, 2004 and June 30,
2004........................................................... 4
Statements of Operations for the three months ended September
30, 2004 and 2003.............................................. 5
Statements of Cash Flows for the three months ended September
30, 2004 and 2003 ............................................. 6
Notes to Financial Statements.................................. 7
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations (including cautionary statement)..... 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk...... 13
Item 4. Controls and Procedures........................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities.......................................... 15
Item 3. Defaults Upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Securities Holders.......... 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures 15
2
PART I
In this Quarterly Report, the "Company", "we", "us" and "our" refer to
HydroFlo, Inc. and our wholly owned subsidiary unless the context otherwise
requires.
Different accounting principles are used in the preparation of financial
statements of a business development company under the Investment Company Act of
1940 and, as a result, the financial results for periods ending before March 4,
2004 are not comparable to the periods commencing after March 4, 2004 and are
not expected to be representative of our financial results in the future.
FORWARD-LOOKING STATEMENTS
This Form 10-Q, press releases and certain information provided
periodically in writing or orally by our officers or our agents contain
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended; Section 21E of the Securities
Exchange Act of 1934; and the Private Securities Litigation Reform Act of 1995.
The words "may", "would", "could", "will", "expect", "estimate", "anticipate",
"believe", "intend", "plan", "goal", and similar expressions and variations
thereof are intended to specifically identify forward-looking statements. These
statements appear in a number of places in this Form 10-Q and include all
statements that are not statements of historical fact regarding the intent,
belief or current expectations of us, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources; (ii)
our financing opportunities and plans; (iii) trends affecting our future
financial condition or results of operations; (iv) our growth strategy and
operating strategy; and (v) the declaration and payment of dividends.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception, and
have experienced and continue to experience negative operating margins and
negative cash flows from operations (see Note A to the financial statements);
(ii) any material inability of us to successfully internally develop our
products; (iii) any adverse effect or limitations caused by Governmental
regulations; (iv) any adverse effect on our cash flow or on our ability to
obtain acceptable financing in connection with our growth plans; (v) any
increased competition in our business; (vi) any inability of us to successfully
conduct our business in new markets; and (vii) other risks including those
identified in our filings with the Securities and Exchange Commission. We
undertake no obligation to publicly update or revise the forward looking
statements made in this Form 10-Q to reflect events or circumstances after the
date of this Form 10-Q or to reflect the occurrence of unanticipated events.
3
HydroFlo, Inc.
BALANCE SHEETS
____________________________________________________________________________________
September
30, 2004 June 30,
(Unaudited) 2004
ASSETS
INVESTMENTS IN AND ADVANCES TO CONTROLLED COMPANIES
(at fair value with a cost of $2,631,578 and
$2,008,000, respectively) $ 2,620,000 $ 2,011,000
CASH 359,632 406,762
PROPERTY AND EQUIPMENT (net of accumulated
depreciation of $15,376 and $13,892, respectively) 16,534 16,363
TOTAL $ 2,996,166 $ 2,434,125
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 23,105 $ 1,781
Note payable to related party - -
Total current liabilities 23,105 1,781
CONVERTIBLE NOTES PAYABLE - LONG TERM - -
Total liabilities 23,105 1,781
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.001 par value,
5,000,000 shares authorized; 4,000,000 shares
issued and outstanding, no liquidation value 4,000 4,000
Common stock, $.01 par value, 500,000,000 shares
authorized; 31,611,441 and 28,277,912 shares
issued and outstanding, respectively 316,115 282,780
Additional paid-in capital 3,265,009 2,590,344
Stock subscription receivable (2,958) (2,958)
Stock purchase warrants 147,834 147,834
Deficit (756,939) (589,656)
Total stockholders' equity 2,973,061 2,432,344
TOTAL $ 2,996,166 $ 2,434,125
============ ============
NET ASSET VALUE PER SHARE $ 0.09 $ 0.09
============ ============
____________________________________________________________________________________
See notes to condensed financial statements.
4
HydroFlo, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
__________________________________________________________________________________________
Prior to converting
to a Business
Development Company
("BDC")
_____________
For the three For the three
months ended months ended
September 30, 2004 September 30, 2003
REVENUE $ - $ 68,818
COST OF GOODS SOLD - 16,798
GROSS MARGIN - 52,020
OPERATING EXPENSES:
Employee compensation 450 242,129
Management fee 13,800 13,800
Research and development - 470
Rent 4,379 4,728
Marketing 51,995 2,087
General and administrative 84,234 190,736
Total operating expenses 154,858 453,950
OPERATING LOSS - 401,930
OTHER INCOME -
Interest income 1,746 278
NET UNREALIZED LOSS ON INVESTMENTS 14,170 -
NET LOSS $ (167,282) $ (401,652)
============== =============
NET LOSS PER SHARE - Basic and Diluted $ (0.01) $ (0.03)
============== =============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - Basic and Diluted 30,441,800 15,811,485
============== =============
__________________________________________________________________________________________
See notes to condensed financial statements.
5
HydroFlo, Inc.
STATEMENTS OF CASH FLOWS
(unaudited)
____________________________________________________________________________________________________
Prior to converting
to a Business
Development Company
("BDC")
______________
For the For the
three months three months
ended September ended September
30, 2004 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (167,282) $ (401,652)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 1,483 5,562
Amortization of patent costs - 140
Stock based Compensation - 203,887
Loss on impairment of patent costs - 5,949
(Increase) decrease in accounts receivable - (53,735)
(Increase) decrease in inventory, net - (27,682)
Decrease (increase) in prepaid expenses - 74,483
Increase in accounts payable and accrued expenses 21,324 64,583
Increase in deferred revenue - 417
NET CASH (USED IN) OPERATING ACTIVITIES (144,475) (128,048)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in controlled companies (129,000) -
Purchases of property and equipment (1,655) (2,686)
NET CASH (USED IN) INVESTING ACTIVITIES (130,655) (2,686)
CASH FLOWS FROM FINANCING ACTIVITIES-
Issuances of common stock, net of transaction expenses 228,000 -
NET (DECREASE) INCREASE IN CASH (47,130) (130,734)
CASH AT BEGINNING OF PERIOD 406,762 131,373
CASH AT END OF PERIOD $ 359,632 $ 639
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ - $ -
============ ===========
Interest paid $ - $ -
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH NON-CASH INANCING ACTIVITES:
Common stock issued for services rendered $ - $ 68,000
============ ===========
Commons stock issued to acquire investment $ 480,000 $ -
============ ===========
____________________________________________________________________________________________________
See notes to condensed financial statements.
6
HydroFlo, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
________________________________________________________________________________
Note A - Summary of Significant Accounting Policies
Nature of Operations and Background
HydroFlo, Inc. (the "Company") was incorporated in North Carolina on December 8,
1999, to design and distribute aeration and oxygen mixing equipment specifically
designed for municipalities and industry requiring improved dissolved oxygen in
water.
From inception to June 30, 2002, the Company focused primarily on developing and
patenting this new technology for the sewage treatment industry. Beginning July
1, 2002, the Company emerged from the development stage and focused on marketing
and selling their technology to this industry.
Effective March 4, 2004, the Company became a diversified internally managed,
closed-end investment company that elected to be treated as a business
development company ("BDC") under the Investment Company Act of 1940, as
amended. As a BDC, the Company intends to provide long-term debt and equity
investment capital to support the expansion of companies in a variety of
industries. These investments are expected to generally be illiquid securities
negotiated through private transactions.
In connection with the Company's conversion to a BDC, the Company formed
Hydroflo Water Treatment, Inc., and simultaneously transferred substantially all
of its operating assets and liabilities (exclusive of cash and certain property
and equipment) to such entity. 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.
Basis of Presentation
In accordance with SEC rules and regulations for BDCs, the Company does not
consolidate or use the equity method to account for its controlling investment
in HydroFlo Water Treatment, Inc. Rather, the Company's investment in such
entity is reported at fair value, and the fluctuation in such fair value since
the date of the conversion to a BDC has been reflected as an unrealized loss on
investment in the accompanying unaudited statement of operations.
Our accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange Commission (the "SEC").
Accordingly, these unaudited condensed financial statements do not include all
of the footnotes required by accounting principles generally accepted in the
United States of America. In our opinion, all adjustments (consisting of normal
and recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three months ended September 30, 2004
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2005. The accompanying condensed financial statements and the
notes thereto should be read in conjunction with our audited financial
statements as of and for the year ended June 30, 2004 contained in our Form
10-K.
Although the nature of the Company's operations and its reported financial
position, results of operations and cash flows are dissimilar for the periods
prior and subsequent to becoming a BDC, its unaudited financial position as of
7
September 30, 2004 and June 30, 2004, and its unaudited operating results and
cash flows for the three months ended September 30, 2004 and 2003 are presented
in the accompanying financial statements pursuant to Regulation S-X.
Going Concern
The Company has suffered net losses and negative cash flows from operations
since its inception. These losses have been funded through the sale of common
stock, primarily to related parties. Until such time that the Company can
generate sustained profitable operations (for which no assurance can be given),
the Company will require additional funding to implement its business plan.
Management believes it will be able to raise any additional capital it may need;
however there can be no assurance that the Company will be successful in any
such efforts, or that any such financing will be on terms favorable, or
acceptable, to the Company.
The accompanying unaudited 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 has adopted Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure". This
statement amends FASB statement No. 123, "Accounting for Stock Based
Compensation". It provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for employee
stock based compensation. It also amends the disclosure provision of FASB
statement No. 123 to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. As permitted by SFAS No. 123 and amended by
SFAS No. 148, we continue to apply the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," to account for our stock-based employee compensation arrangements.
Had our compensation expense for stock-based compensation plans been determined
based upon fair values at the grant dates for awards under this plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net
loss and pro forma net loss per share amounts would not have been materially
different.
8
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
9
$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.
Note C - Stockholders' Equity
During the three months ended September 30, 2004 we sold 510,000 shares of our
common stock at prices ranging from $0.05 to $0.50/share. These transactions
generated gross proceeds to the Company of $228,000.
10
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 unaudited
condensed financial statements as of and for the three months ended September
30, 2004 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.
Because of our conversion to a Business Development Company ("BDC") the results
of operations for the three months ended September 30, 2003 (pre conversion) are
not comparable to the three months ended September 30, 2004 (post conversion).
The principal differences between these two reporting periods are: (1) we no
longer include the operations of our operating ("portfolio") companies in our
financial statements, and (2) we now value our ownership of the portfolio
companies at fair value.
11
THREE MONTHS ENDED SEPTEMBER 30, 2004 (POST-CONVERSION TO A BUSINESS
DEVELOPMENT CORPORATION)
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 million 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.
THREE MONTHS ENDED SEPTEMBER 30, 2003 (PRIOR TO CONVERTING TO A BUSINESS
DEVELOPMENT CORPORATION)
OPERATING INCOME
Our aggregate sales were approximately $69,000 for the three months ended
September 30, 2003.
OPERATING EXPENSES
Employee compensation expenses were approximately $242,000 for the three months
ended September 30, 2003.
Management fees (related-party) expenses were $13,800 for the three months ended
September 30, 2003.
Research and development expenses were $470 for the three months ended September
30, 2003.
Other General and Administrative expenses were approximately $191,000 for the
three months ended September 30, 2003.
NET LOSS
As a result of the foregoing, we incurred a loss of approximately $402,000 for
the three months ended September 30, 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004 we had approximately $360,000 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
12
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, 2004:
Name of Company Nature of its Principal Business Approximate Cost Fair Value
HydroFlo Water Treatment, Inc. Waste water treatment solutions $2,139,000 $2,100,000
Arsenic Removal Technologies, Inc Arsenic removal technology $492,000 $520,000
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.
13
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 and
reported within the specified time periods. As of the end of the period covered
by this report, the Corporation's Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the Corporation's disclosure controls and
procedures. Based on the evaluation, which disclosed no significant deficiencies
or material weaknesses, the Corporation's Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective as of the end of the period covered by this report.
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.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
During the three months ended September 30, 2004 we sold 510,000 shares of our
common stock at prices ranging from $0.05 to $0.50/share. These transactions
generated gross proceeds to the Company of $228,000.
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
The following exhibits are filed as part of this Form 10-Q.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification
(b) Reports on Form 8-K.
None
SIGNATURES
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/ DENNIS L. MAST
Dennis L. Mast
Chief Executive Officer
Chief Financial Officer
15