Item 1.
Business.
Introduction
Enerteck Corporation (the “Company” or “EnerTeck Parent”), formerly named Gold Bond Mining Company and then Gold Bond Resources, Inc., was incorporated under the laws of the State of Washington on July 30, 1935. On January 9, 2003, we acquired EnerTeck Chemical Corp. (“EnerTeck Sub”) as our wholly owned operating subsidiary. As a result of the acquisition, we are now acting as a holding company, with EnerTeck Sub as our primary operating business. Subsequent to this transaction, on November 24, 2003, we changed our domicile from the State of Washington to the State of Delaware and changed our name from Gold Bond Resources, Inc. to EnerTeck Corporation. Unless the context otherwise requires, the terms “we,” “us” or “our” refer to EnerTeck Corporation and its consolidated subsidiary.
EnerTeck Sub, our wholly owned operating subsidiary, was incorporated in the State of Texas on November 29, 2000. It was formed for the purpose of commercializing a diesel fuel specific combustion catalyst known as EnerBurn®, as well as other combustion enhancement and emission reduction technologies. Nalco/Exxon Energy Chemicals, L.P. (“Nalco/Exxon L.P.”), a joint venture between Nalco Chemical Corporation and Exxon Corporation commercially introduced EnerBurn in 1998. When Nalco/Exxon L.P. went through an ownership change in 2000, our founder, Dwaine Reese, formed EnerTeck Sub. It acquired the EnerBurn trademark and related assets and took over the Nalco/Exxon L.P. relationship with the EnerBurn formulator and blender, and its then supplier, Ruby Cat Technology, LLC (“Ruby Cat”).
Since the first quarter of 2011, we have owned a 40% membership interest in a newly formed entity called EnerTeck Environmental, LLC, which was formed for the purpose of marketing and selling a diesel fuel emission reduction technology with the creators of such specific technology (see “Business of the Company and Current Operations” below).
Business of the Company and Current Operations
We, through our wholly owned subsidiary, specialize in the sales and marketing, and since August 2006, in the manufacturing of a fuel borne catalytic engine treatment for diesel engines known as EnerBurn®. We utilize a sales process that includes detailed proprietary customer fleet monitoring protocols in on-road applications that quantify data and assists in managing certain internal combustion diesel engine operating results while utilizing EnerBurn. Test data prepared by Southwest Research Institute and actual customer usage has indicated that the use of EnerBurn in diesel engines improves fuel economy, lowers smoke, and decreases engine wear and the dangerous emissions of both Nitrogen Oxide (NOx) and microscopic airborne solid matter (particulates). Our principal target markets have included the trucking, heavy construction, maritime shipping, railroad and mining industries, as well as federal, state and international government applications. Each of these industries share certain common financial characteristics, i.e. (i) diesel fuel represents a disproportionate share of operating costs; and (ii) relatively small operating margins are prevalent. Considering these factors, management believes that the use of EnerBurn and the corresponding derived savings in diesel fuel costs can positively effect the operating margins of its customers while contributing to a cleaner environment.
We own the EnerBurn trademark and, since July 2006, the EnerBurn formulas and technology. Prior to July 13, 2006, we obtained EnerBurn products and services from Ruby Cat and its affiliates pursuant to arrangement made with Ruby Cat. Pursuant to a memorandum of understanding with Ruby Cat which expired on December 31, 2003, the Company was granted the exclusive, global marketing rights from Ruby Cat and an option to purchase the EnerBurn technology and associated assets by December 31, 2003 for $6.6 million which was not exercised. Following expiration of the memorandum of understanding, Ruby Cat and its affiliates continued to supply EnerBurn products to the Company but not pursuant to a formal written contract. On July 13, 2006, we completed the acquisition of the EnerBurn formulas, technology and associated assets pursuant to an Asset Purchase Agreement executed as of the same date between the Company and the owner of Ruby Cat (see “Our Purchase of the EnerBurn Technology” below).
The majority of our marketing effort since 2005 has been directed at targeting and gaining a foothold in one of several major target areas, including the inland marine diesel market, trucking, heavy construction and mining. Management has focused virtually all resources at pinpointing and convincing certain large potential customers within these markets, with our diesel fuel additive product lines. While we still believe that this is a valid theory, the results, to date, have been less than we had expected. For example, in 2005, we appointed Custom Fuel Services Inc., a subsidiary of Ingram Barge and which provides dockside and midstream fueling from nine service locations in Louisiana, Kentucky, Illinois, West Virginia, Missouri and Iowa, as our exclusive reseller of EnerBurn and the related technology on the Western Rivers of the United States, meaning the Mississippi River, its tributaries, South Pass, and Southwest Pass, excluding the Intra Coastal Waterway. Since 2006, sales have been sporadic with Custom and we cannot guarantee that we will ever generate meaningful revenues from our relationship with Custom.
A substantial portion of 2010 was spent redirecting our marketing emphasis for our primary product, EnerBurn, to solidify our major customers and expanding to newer, more innovative areas. As such, we have created marketing alliances domestically and internationally with two new marketing groups, EnerGreen Technologies PTY, based in Australia (“EnerGreen”), and G2 Fuel Technologies, LLC (“G2 Technologies”), a minority owned marketing firm working in both the domestic and foreign markets (see “Sales and Marketing Strategy” below”).
As testing is either underway or has been completed with several potential new customers and in new areas with existing customers, more sales should occur. We have been informed by EnerGreen, our distributor for Australia, that testing has successfully been completed with a new large customer there and that implementation will start shortly. This implementation will require the installation of injection systems on each of the customer vessels which may take through the end of 2013 to fully occur.
In addition, G2 Technologies, our new Certified Minority supplier and distributor, had advised us that several of its customers would start using EnerBurn during 2012. This was delayed by a delay in the crucial test being handled by Auburn University that is required by several Government entities. This test is to complete during the second quarter of 2013 and should open the door for several of their large customers. G2 Technologies now expects that sales should show significant increases during the third and fourth quarters of 2013 and thereafter.
As indicated above, since the first quarter of 2011, we have owned a 40% membership interest in a newly formed entity called EnerTeck Environmental, LLC (“EnerTeck Environmental”), which was formed for the purpose of marketing and selling a diesel fuel emission reduction technology with the creators of such specific technology. EnerTeck Environmental was formed as a joint venture with Indian Nation Technologies, LLC (“Indian Nation”) located in Comanche, Oklahoma for the testing and manufacture of an innovative new type of environmental equipment for the remediation of diesel engine emissions for diesel engines in the marine industry. Indian Nation has filed a patent for this equipment called PEx® (Particle Extraction) and we will hold the exclusive marketing rights for this technology for the various applications within the marine diesel industry. Testing commenced late in the first quarters of 2011 on a towboat located on the Mississippi River. To date the tested engine has logged in more than 10,000 successful hours of operation with no apparent degrading of the effectiveness of the equipment. To comply with regulations of the California Air Quality Control Board (CARB), additional monitoring and warning equipment has been developed and has been mounted on the equipment to supply ongoing emissions information for the crew. As a result of such installation, the PEx Beta unit is in the process of running an additional 1,000 hours to log ongoing results before final testing is completed. It is anticipated that subsequent to the final testing and acceptance of this technology this new technology will open vast new marketing opportunities for us in the coming years.
The Industry
General Discussion of Diesel Fuel and Diesel Fuel Additives
As crude oil is heated, various components evaporate at increasingly higher temperatures. First to evaporate is butane, the lighter-than-air gas used in cigarette lighters, for instance. The last components of crude oil to evaporate, and the heaviest, include the road tars used to make asphalt paving. In between are gasoline, jet fuel, heating oil, lubricating oil, bunker fuel (used in ships), and of course diesel fuel. The fuel used in diesel engine applications such as trucks and locomotives is a mixture of different types of molecules of hydrogen and carbon and include aromatics and paraffin. Diesel fuel cannot burn in liquid form. It must vaporize into its gaseous state. This is accomplished by injecting the fuel through spray nozzles at high pressure. The smaller the nozzles utilized and the higher the pressure, the finer the fuel spray and vaporization. When more fuel vaporizes, combustion is more complete, so less soot will form inside the cylinders and on the injector nozzles. Soot is the residue of carbon, partially burned and unburned fuel.
Sulfur is also found naturally in crude oil. Sulfur is a slippery substance and it helps lubricate fuel pumps and injectors. It also forms sulfuric acid when it burns and is a catalyst for the formation of particulate matter (one of the exhaust emissions being regulated). In an effort to reduce emissions, the sulfur content of diesel fuel is being reduced through the refinery process; however, the result is a loss of lubricity.
Diesel fuel has other properties that affect its performance and impact on the environment as well. The main problems associated with diesel fuel include:
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Difficulty getting it to start burning o Difficulty getting it to burn completely o Tendency to wax and gel
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With introduction of low sulfur fuel, reduced lubrication
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Soot clogging injector nozzles
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Particulate emissions
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Water in the fuel
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Bacterial growth
Diesel fuel additives have been developed to address the variety of problems associated with diesel fuel performance.
Diesel Fuel and the Environment
Diesel fuel is the most cost effective fuel/engine technology available for heavy-duty industrial and vehicle service. However, environmentally it needs dramatic improvement. Governments worldwide are legislating specifications regarding the fuel itself and diesel engine design.
Today’s advanced diesel engines are far cleaner than the smoke-belching diesels of recent decades. Unfortunately, even smokeless diesel engines are not clean enough to meet current stricter air pollution regulations.
While diesel engines are the only existing cost-effective technology making significant inroads in reducing “global warming” emissions from motor vehicles, it is not sufficient to satisfy regulators and legislators. Diesel engines will soon be required to adhere to stringent regulatory/legislative guidelines that meet near “zero” tailpipe emissions, especially on smog-forming nitrogen oxides (NOx), particulate matter (PM) and “toxins”; the organic compounds of diesel exhaust.
Diesel engines can become ultra-clean. Meeting the environmental challenges will require extensive research on clean-diesel technology. Research in this area is currently being sponsored by government agencies, major engine companies, truck manufacturers, automobile makers, catalyst producers and, for fuels, oil refining companies and their technology suppliers.
The search for ultra-clean diesel is far from over. Discoveries and breakthroughs will continue to prevail. Large Fortune 500 companies, as well as small, emerging technology companies are investing hundreds of millions of dollars in research and development worldwide on these and other clean-diesel technologies.
Today, there is no economic alternative to diesel engines for most industrial applications. This is true for ocean vessels, tug boats, commercial/recreational vessels, locomotive, trucking, bus transport, construction, mining, agriculture, logging, distributed power generation, and, in many parts of the world, personal transportation. In short, diesel fuel does the world’s heavy work.
Products and Services
The Diesel Fuel Additive Product Line
EnerBurn Combustion Catalyst for Diesel Fuel
EnerBurn is a liquid, chemical formulation, presently sold in bulk quantities to fleet and vessel operators, under three product codes differentiated by market application and product concentration, as indicated below:
Product Application
EnerBurn EC5805A U.S. On-Road Market
EnerBurn EC5931A U.S. Off-Road Market
EnerBurn EC5805C International Market
Although added to diesel fuel and generally referred to as a diesel fuel additive within the industry, EnerBurn functions as an engine treatment application by removing carbon deposits from the combustion surfaces of the engine and greatly reducing further carbon deposit buildup. It also provides for an increased rate of combustion. By adding EnerBurn to diesel fuel in accordance with proprietary methodology, it forms a non-hazardous catalytic surface in the diesel engine combustion chamber and on the surface of the piston heads. This surface is visible in the form of a monomolecular film that develops after initiation of treatment and remains active for a period of time after cessation of treatment.
The buildup of carbon within the combustion chamber of a diesel engine can generate greater exhaust opacity and increased engine wear. These carbon deposits can cause piston rings to stick and reduce compression resulting in decreased engine efficiency with extended use.
The unique chemical formulation of EnerBurn, when applied in accordance with proprietary methodology, has been shown to produce benefits in fuel economy, NOx formation, smoke, brake horsepower and engine wear (See “Product Testing”, below).
EnerBurn Volumetric Proportioning Injector Equipment (VPI)
Volumetric proportioning injection equipment is used to deliver proper dosage ratios of EnerBurn to the diesel fuel, and are typically offered to our customers in support of an EnerBurn sale. Three equipment vendors supply additive injection equipment to us that is either installed at a bulk fueling depot or onboard the vehicle or vessel.
Product Testing
Southwest Research Institute
The Southwest Research Institute (“SWRI”) of San Antonio, Texas has extensively tested the EnerBurn technology. This institute is an independent, nonprofit, applied engineering and physical sciences research and development organization with 11 technical divisions using multidisciplinary approaches to problem solving. The Institute occupies 1,200 acres and provides nearly two million square feet of laboratories, test facilities, workshops, and offices for more the 2,700 employees who perform contract work for industry and government clients.
The extensive testing of EnerBurn conducted by SWRI confirmed product claims of lower highway smoke, reduced NOx emissions, a significant reduction in engine wear and an increase in horsepower. Actual customer usage data has also confirmed the claim that EnerBurn usage reduces fuel consumption.
EnerBurn Proof of Performance Demonstrations
An integral part of our sales process is to conduct proof of performance demonstrations for potential customers wherein we accumulate historical fleet data that documents the effects of the use of EnerBurn (i.e. advantages in terms of increased fuel economy, a decrease in engine wear and reductions in toxic emissions) on that customer’s specific vehicles or vessels. In connection with these proofs of performance demonstrations, we provide fleet monitoring services and forecasts of fuel consumption for purposes of the prospective customer’s own analysis.
The results below are indicative of typical customer experiences using EnerBurn. In many instances, customers have directly informed us about their satisfaction with EnerBurn and the fuel savings that its use has provided them. In all cases, our own comparison of the customer provided historical fuel usage data with the EnerBurn usage (which we have monitored) data has proven to us and the customer that the use of EnerBurn has reduced their fuel consumption. In addition to fuel consumption reduction, the decrease in emissions resulting from EnerBurn use is measured with a device called the UEI Intelligent Solutions Meter. Similarly, the percentage reduction in opacity (smoke generated by diesel engines) is measured by the Wager 6500 Meter (manufactured by Robert H. Wager Co., Inc.).
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An EnerBurn proof of performance demonstration of a long haul truck fleet began in August of 1998. The number of trucks treated with EnerBurn exceeded 3,000-Century Class Freightliners, most of that were equipped with Caterpillar or similar type engines. This company’s measurable fuel savings averaged 10.4% over a 3 plus year period while using EnerBurn, resulting in annual fuel savings in excess of $6.5 million. In addition, the company’s maintenance department observed significant reductions in metal loss in crankcase wear-parts, although they did not attempt to quantify the value of this phenomenon.
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A fleet of 24 three-year-old 1400 horsepower Morrison Knudson MK1500 locomotives with Caterpillar 3512 diesel engines were used for a 12-month proof of performance demonstration of the effectiveness of EnerBurn. This demonstration started on July 1, 1999 and clearly documented a 10.8% reduction in fuel consumption and a 9.5% reduction in Brake Specific Fuel Consumption (“BSFC”). The demonstration also reflected a significant reduction in engine wear, confirmed by a 56% reduction in copper content of the lube oil.
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Three maritime vessels were selected from a large fleet, based on size and typical routes for accessibility of regular fueling at this company’s bulk fueling barge. A proof of performance protocol was developed under the guidance and supervision of this company’s management. The base line demonstration commenced on July 11, 2001 and the final demonstration was performed on February 28, 2002. One of the three demonstration vessels represented an untreated placebo; two were treated with EnerBurn. The two treated vessels exhibited a measured reduction in fuel consumption of 7% and 9.9%, while the untreated placebo experienced nearly a 10% increase in fuel consumption. Additionally five vessels with different diesel engines were selected for proof of performance under the same protocols yielding results in excess of 10% in fuel savings, significant reductions in opacity, from 33%-86%, reductions of NOx emissions between 11% and 20%.
Overview of Worldwide Diesel Fuel Consumption
The U.S. Department of Energy, Energy Information Administration (“EIA”) estimates that worldwide annual consumption of diesel fuel approximates 210 billion U.S. gallons. A breakdown of this estimate is summarized as follows:
Domestic Diesel Fuel Consumption
Based on further EIA published data, the following table* depicts domestic distillate fuel oil consumption by end use for 2011.
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* Sources: Energy Information Administration’s Form EIA-821, “Sales of Fuel Oil and Kerosene,” for 2006-2011. Totals may not equal sum of components due to independent rounding.
Our Target Markets
Our principal target markets have included the trucking, heavy construction, maritime shipping, railroad and mining industries, as well as federal, state and international government applications. We believe each of these industries shares certain common financial characteristics, i.e. (i) diesel fuel represents a disproportionate share of operating costs; and (ii) relatively small operating margins are prevalent. Considering these factors, management believes that the use of EnerBurn and the corresponding derived savings in diesel fuel costs can positively affect the operating margins of its customers while contributing to a cleaner environment.
Sales and Marketing Strategy
The fuel additive industry has historically been mired by a myriad of technically dubious products and potential customers are usually wary of promotional claims by product manufacturers or “snake oil” peddlers as they are sometimes labeled.
Prospective customers in all targeted market sectors and geographic locations are primarily concerned about the potential business risks associated with the adoption of any new fuel or engine treatment. Thus, the first resistant barrier to adoption of a fleet proof of performance demonstration is dispelling fear about impact on engine warranties and any potential business risk associated with a fleet shutdown caused by our product. The potential EnerBurn fuel and maintenance savings are strong motivators but are secondary to risk avoidance. The SWRI fitness for use testing and customer testimonials are paramount in assisting us in addressing these fears.
Potential customers have a strong predisposition to accept only demonstrable proof-of-benefit in their own fleet as justification for any new expenditure. After risk avoidance, the ability to demonstrate and prove results is the primary obstacle for market adoption of the EnerBurn product.
Our sales process begins with a proof of performance demonstration that is a thorough analysis of the potential customer, including fleet type, size, and opportunity. (See “Business - Product Testing - EnerBurn Proof of Performance Demonstrations”, above). This is followed with sales presentations at both the executive level and maintenance level. Executive level sales presentations emphasize return on investment (“ROI”), while maintenance level sales presentations emphasize our technology and why it does not impact engine warranties and any potential business risk associated with a fleet shutdown.
Convincing a potential customer to undertake a proof of performance demonstration is a difficult task because there is a significant expense to be borne by the potential customer. Specifically, the potential customer must pay for both the EnerBurn that is used during the demonstration as well as purchase the additive injection equipment that is also needed. The cost will vary according to the potential customer and the industry in which it is in. For a proof of performance demonstration on a typical fleet of 100 diesel engine trucks, the cost of the EnerBurn would be approximately $30,000, while the average cost of the equipment used would be approximately $20,000 to $50,000. The personnel costs related to providing fleet monitoring services and forecasts of fuel consumption for the potential customer’s analysis are borne either by the Company, its supplier or the sales agent. For a demonstration involving a fleet of 100 hundred trucks, typically 50 to 100 man-hours are involved. The current sales cycle from inception to full customer implementation is typically six to 12-months from initial customer contact. This includes the two to six months it usually takes for the benefits of EnerBurn to begin to take effect in the subject engines during the proof of performance demonstration period.
As indicated above, we have created marketing alliances both domestically and internationally with two marketing groups, EnerGreen and G2 Technologies. We have entered into a Distributorship Agreement with EnerGreen which has a wide network of industrial sector contacts in Australia, Southern Asia, Europe, Brazil, Peru and Paraguay. G2 Technologies has entered into a Reseller and Market Development Agreement with us. G2 Technologies, which is a large minority-owned U.S. defense contractor, intends to sell EnerBurn, injection equipment and emissions control systems to the government and related customers, and has qualified EnerBurn into a government-approved catalog for fuel efficiency and emissions control products.
Our Purchase of the EnerBurn Technology
As mentioned above, prior to July 2006, we obtained EnerBurn products and services from Ruby Cat and its affiliates pursuant to arrangement made with Ruby Cat. Pursuant to a memorandum of understanding with Ruby Cat which expired on December 31, 2003, the Company was granted the exclusive, global marketing rights from Ruby Cat and an option to purchase the EnerBurn technology and associated assets by December 31, 2003 for $6.6 million which was not exercised. Following expiration of the memorandum of understanding, Ruby Cat and its affiliates continued to supply EnerBurn products to the Company but not pursuant to a formal written contract.
On July 13, 2006, we acquired the EnerBurn formulas, technology and associated assets pursuant to an Asset Purchase Agreement executed as of the same date (the “EnerBurn Acquisition Agreement”) between the Company and the owner of Ruby Cat (the “Seller”). Pursuant thereto, the Company acquired from the Seller all of its rights with respect to the liquid diesel motor vehicle fuel additives known as EC5805A and EC5931A products (the “Products”) as well as its rights to certain intellectual property and technology associated with the Products (collectively, the “Purchased Assets”). The purchase price for the Purchased Assets was $3.0 million, payable as follows: (i) $1.0 million paid on July 13, 2006 in cash, and (ii) the remaining $2.0 million evidenced by a promissory note (the “Note”) bearing interest each month at a rate of 4.0% per annum, compounded monthly, and which is to be paid in four annual payments of $500,000 plus accumulated interest to that date on each anniversary of the closing until the entire purchase price is paid in full. In order to secure the debt represented by the Note, the Company executed and delivered to the Seller a Security Agreement in which the Company granted the Seller a first priority lien on the Purchased Assets. The first payment of $500,000 was made in advance in May 2007. An additional $500,000 due July 13, 2008 was also made in advance of the due date, on July 3, 2008. Due to litigation commenced between the Company and the Seller, the Company requested the court to grant it leave to pay the remaining installments under the EnerBurn Acquisition Agreement into the registry of the court pending adjudication of such matter. The court granted the request and the Company paid the third annual installment of $500,000 plus accrued interest into the registry on July 13, 2009. On March 31, 2010, the parties to the lawsuit entered into a settlement agreement pursuant to which, among other things, the remaining installments due under the EnerBurn Acquisition Agreement were paid by the Company on July 22, 2010, along with an additional sum of $75,000.
The EnerBurn Acquisition Agreement provides that for five years after closing the Seller will not, within the United States or anywhere abroad, be engaged in the business of researching, developing, manufacturing, marketing or selling products intended to improve the fuel efficiency of heavy duty diesel engines.
Contemporaneously with the closing, the Company granted the Seller a non-exclusive, fully paid, perpetual, non-revocable, royalty-free, assignable license, to manufacture, market and sell a certain product known as “Thermoboost II”, which has the same chemical formulation as one of the Products and which is used exclusively in home heating oil.
Manufacturing
The acquisition of the EnerBurn formulas, technology and associated assets has provided us the ability to transform our business from a sales organization to a fully integrated manufacturer and distributor of EnerBurn. From 2006 to 2009, the manufacturing of our EnerBurn product had been undertaken pursuant to a Manufacturing and Supply Agreement entered into on August 18, 2006 with Independent Contract Packaging, Inc., a Texas corporation located in Cut and Shoot, Texas (“ICP”). Pursuant to the agreement, ICP was appointed as our non-exclusive manufacturer, blender and packager of our EnerBurn product for a term of three years which ended in 2009. We subsequently moved our principal manufacturing operation to Magna Blend of Waxahachie, Texas, with a second company, J. T. Enterprises of Tyler, Texas as our backup manufacturing facility. We have agreed to supply certain tanks and related equipment and raw materials to be used by J. T. Enterprise to manufacture, blend and package the EnerBurn product, and both Magna Blend and J. T. Enterprises have agreed to provide their manufacturing, blending and packaging services on a commercially reasonably prompt basis according to the specifications received from and required by us. For such services, we have agreed to pay each its fees pursuant to an agreed upon fee schedule. On October 3, 2011, a fire broke out at the Magna Blend Chemical plant in Waxahachie, Texas. Magna Blend has been the principal blending plant for our EnerBurn product and was the storage location of our entire stock of raw materials and finished goods inventory. Magna Blend subsequently has reimbursed Enerteck the full replacement value of our lost inventory. During the interim, to insure that at least some of our new and smaller customers could be serviced, one of our established customers agreed to supply us with several drums of EnerBurn, which were being held in their supply inventory. We have in turn replaced these drums of chemical with new EnerBurn stock, as soon as the required raw material inventories could be acquired, blended at our new blending facility at ChemJet Chemicals located in Conroe, Texas and was shipped back to our customer’s warehouses. We do not feel this incident will have a material adverse effect on our operations, nor do we expect it to reoccur in the future.
Competition
The market for products and services that increase diesel fuel economy, reduce emissions and engine wear is rapidly evolving and intensely competitive and management expects it to increase due to the implementation of stricter environmental standards. Competition can come from other fuel additives, fuel and engine treatment products and from producers of engines that have been modified or adapted to achieve these results. In addition, we believe that new technologies, including additives, will further increase competition.
Our primary current competitors include Lubrizol Corporation, Chevron Oronite Company (a subsidiary of Chevron Corporation), Octel Corp., Clean Diesel Technologies, Inc. and Ethyl Corporation.
Many of our competitors have been in business longer than it has, have significantly greater financial, technical, and other resources, or greater name recognition. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Competition could negatively impact our business. Competitive pressures could cause us to lose market share or to reduce the price of its products, either of which could harm its business, financial condition and operating results.
Management believes that the principal competitive factors in the Company’s market include the:
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effectiveness of the product;
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cost;
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proprietary technology;
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ease of use; and
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Quality of customer service and support.
Government Regulation - Fuel Additive Registration
We need to comply with registration requirements for each geographic jurisdiction in which it sells EnerBurn. On January 21, 2001, the US Environmental Protection Agency, pursuant to the Environmental Protection Act (the “Act”) (40 CFR 79.23) issued permit number EC 5805A in connection with the use of EnerBurn. This registration allows EnerBurn to be used anywhere in the United States for highway use in all over-the-road diesel applications. Additionally, on March 30, 2004, we received a second EPA permit, permit number EC 5931A in connection with the use of EnerBurn. This registration allows EC 5931A to be used anywhere in the United States for use in all diesel applications. Under these registrations, we have pass through rights from the formulator, blender and supplier to sell EnerBurn in on-road applications. However, there are provisions in the Act under which the EPA could require further testing. The EPA has not exercised these provisions yet for any additive. Internationally, we intend to seek registration in other countries as we develops market opportunities.
Our business is impacted by air quality regulations and other regulations governing vehicle emissions as well as emissions from stationary engines. If such regulations were abandoned or determined to be invalid, its prospects may be adversely affected. As an example, if crude oil and resulting diesel prices were to reach or approach historical lows, the emphasis for fuel efficiency would be diminished, potentially impacting sales velocity of the products, consequently adversely affecting our performance. Typically, there are registration and regulation requirements for fuel additives in each country in which they are sold. In the United States, fuel and fuel additives are registered and regulated pursuant to Section 211 of the Clean Air Act. 40 CFR Part 79 and 80 specifically relates to the registration of fuels and fuel additives
In accordance with the Clean Air Act regulations at 40 CFR 79, manufacturers (including importers) of gasoline, diesel fuel and additives for gasoline or diesel fuel, are required to have their products registered by the EPA prior to their introduction into commerce. Registration involves providing a chemical description of the fuel or additive, and certain technical, marketing, and health-effects information. The health-effects research is divided into three tiers of requirements for specific categories of fuels and additives. Tier 1 requires a health-effects literature search and emissions characterization. Tier 2 requires short-term inhalation exposures of laboratory animals to emissions and screened for adverse health effects, unless comparable data are already available. Alternative Tier 2 testing can be required in lieu of standard Tier 2 if EPA concludes that such testing would be more appropriate. Certain small businesses are exempt from some or all the Tier 1 and Tier 2 requirements. Tier 3 provides for follow-up research, if necessary.
Employees
We currently employ four individuals on a full-time basis, and we also engage independent sales representatives. None of our employees are covered by a collective bargaining agreement. We believe that relations with our employees are good.
Item 1A.
Item 1A. Risk Factors.
In addition to other information and financial data set forth elsewhere in this report, the following risk factors should be considered carefully in evaluating the Company.
Business and Financial Risks
THE CONTINUING GLOBAL ECONOMIC DOWNTURN AND UNCERTAINTIES MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS AND FINANCIAL CONDITION THAT WE CURRENTLY CANNOT PREDICT. The global economy remains in a prolonged economic downturn which has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, and declining consumer and business confidence. As a result of these conditions and uncertainties, our suppliers and customers might experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing which could result in interruptions or delays in our suppliers’ or customers’ performance of any contracts, reductions and delays in customer purchases, delays in or the inability of customers to obtain financing to purchase our products, and bankruptcy of customers. While we cannot predict the duration or severity of the global economic downturn, it could materially affect our business and financial condition.
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE AND WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES AND OUR FINANCIAL RESULTS. For the years ended December 31, 2012 and 2011, we generated revenues of $126,000 and $113,000, respectively, and incurred net losses of $1,612,000 and $2,278,000, respectively. Continued failure to increase our revenues significantly will harm our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, our gross margins fail to maintain its current improvement, or our operating expenses exceed our expectations, our operating results will suffer. If we are unable to sell our products at acceptable prices relative to our costs, or if we fail to develop and introduce on a timely basis new products from which we can derive additional revenues, our financial results will suffer.
WE FACED CERTAIN RISKS AND CHALLENGES AS A COMPANY WITH A LIMITED OPERATING HISTORY. We acquired EnerTeck Sub on January 9, 2003 which company was only formed in November 2000 and, therefore, has a limited operating history. As a result, we are subject to all the risks and challenges associated with the operation of a enterprise with a limited operating history, including inexperience, lack of a track record, difficulty in entering the targeted market place, competition from more established businesses with greater financial resources and experience, an inability to attract and retain qualified personnel (including, most importantly, sales and marketing personnel) and a need for additional capital to finance our marketing efforts and intended growth. In addition, we cannot rely upon historical results in order to anticipate and timely adapt to increases or decreases in sales, revenues or expenses. We cannot assure you that we will be successful in overcoming these and other risks and challenges that we face as an enterprise with a limited operating history.
THE ENERBURN TECHNOLOGY HAS NOT GAINED MARKET ACCEPTANCE, NOR DO WE KNOW WHETHER A MARKET WILL DEVELOP FOR IT IN THE FORESEEABLE FUTURE TO GENERATE ANY MEANINGFUL REVENUES. The EnerBurn technology has received only limited market acceptance. This technology is a relatively new product to the market place and we have not generated any significant sales. Although ever growing concerns and regulation regarding the environment and pollution has increased interest in environmentally friendly products generally, the engine treatment and fuel additive market remains an evolving market. The EnerBurn technology competes with more established companies such as Lubrizol Corporation, Chevron Oronite Company (a subsidiary of Chevron Corporation), Octel Corp., Clean Diesel Technologies, Inc. and Ethyl Corporation, as well as other companies whose products or services alter, modify or adapt diesel engines to increase their fuel efficiency and reduce pollutants. Acceptance of EnerBurn as an alternative to such traditional products and/or services depends upon a number of factors including:
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favorable pricing visa vie projected savings from increased fuel efficiency
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the ability to establish the reliability of EnerBurn products relative to available fleet data
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public perception of the product
For these reasons, we are uncertain whether our technology will gain acceptance in any commercial markets or that demand will be sufficient to create a market large enough to produce any meaningful revenue or earnings. Our future success depends upon customers’ demand for our products in sufficient amounts.
OUR TECHNOLOGY MAY BE ADVERSELY AFFECTED BY FUTURE TECHNOLOGICAL CHANGES AND ENVIRONMENTAL REGULATORY REQUIREMENTS. Although diesel engines are now being manufactured that have reduced dangerous emissions, this has not satisfied governmental regulators and legislators. We believe that diesel engines themselves may soon be required to adhere to stringent guidelines that produce nearly zero tailpipe emissions. Research in this area is currently being sponsored by governmental agencies, major engine companies, truck manufacturers, automobile makers, catalyst producers, oil refining companies and their technology suppliers. If such research is successful, it could eventually reduce the need for diesel fuel additives such as EnerBurn as they relate to pollution control.
OUR LACK OF DIVERSIFICATION WILL INCREASE THE RISK OF AN INVESTMENT IN US. Our business has historically been entirely dependent upon the acceptance of EnerBurn in the market place. Beginning in 2011, however, we became involved in a joint venture for the testing and manufacture of an innovative new type of environmental equipment for the remediation of diesel engine emissions for diesel engines in the marine industry which we believe will lead to new marketing and revenue opportunities. While we may no longer be entirely dependent upon the acceptance of EnerBurn in the marketplace for our success, our business opportunities are still limited and lack significant diversification. As a result, we are impacted more acutely by factors affecting our industry or the regions in which we operate that we would if our business were more diversified, enhancing our risk profile.
OUR SALES PROCESS IS COSTLY AND TIME CONSUMING WHICH DECREASES OUR ABILITY TO EFFECT SALES. In order to affect EnerBurn sales, we must prove to a potential customer that the use of our product is specifically beneficial to and cost effective for that potential customer. We accomplish this by conducting proof of performance demonstrations. Our supplier, our sales agent and/or we bear the cost to provide the personnel to do the monitoring and analyzing of compiled data. However, the potential customer must bear the cost of the EnerBurn and equipment used during the trial period. We cannot assure you that we will be able to convince potential customers to undertake this expense and affect a significant number of sales. Furthermore, we cannot assure you that the results of a specific proof of performance demonstration will prove that the use of EnerBurn will be beneficial to that specific potential customer, or if beneficial, that the potential customer will purchase EnerBurn. If, after conducting the proof of performance demonstration, the potential customer does not purchase our product, we will have wasted the time and the cost of providing personnel to the proof of performance demonstration.
WE FACE INTENSE COMPETITION AND MAY NOT HAVE THE FINANCIAL AND HUMAN RESOURCES NECESSARY TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES WHICH MAY RESULT IN OUR TECHNOLOGY BECOMING OBSOLETE. The diesel fuel additive business and related anti-pollutant businesses are subject to rapid technological change, especially due to environmental protection regulations, and subject to intense competition. We compete with both established companies and a significant number of startup enterprises. We face competition from producers and/or distributors of other diesel fuel additives (such as Lubrizol Corporation, Chevron Oronite Company, Octel Corp., Clean Diesel Technologies, Inc. and Ethyl Corporation), from producers of alternative mechanical technologies (such as Algae-X International, Dieselcraft, Emission Controls Corp. and JAMS Turbo, Inc.) and from alternative fuels (such as bio-diesel fuel and liquefied natural gas) all targeting the same markets and claiming increased fuel economy, and/or a decrease in toxic emissions and/or a reduction in engine wear. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we cannot keep up with these advances in a timely manner, we will be unable to compete in our chosen markets.
THE COMPANY NEEDS TO MAINTAIN ENERBURN’S EPA REGISTRATIONS. In accordance with the regulations promulgated under the US Clean Air Act, manufacturers (including importers) of gasoline, diesel fuel and additives for gasoline or diesel fuel, are required to have their products registered with the EPA prior to their introduction into the market place. Currently, EnerBurn products have two such registrations (EPA # 5805A and 5931A). However, unforeseen future changes to the registration requirements may be made, and these products, or either one of them, may not be able to qualify for registration under such new requirements. The loss of the EPA registrations or restrictions on the current registrations could have an adverse affect on our business and plan of operation.
Ruby Cat registered these products with the US Environmental Protection Agency which registrations we acquired in connection with the EnerBurn Acquisition Agreement. EnerBurn is registered in the United States only, and we are considering its registration in other countries. Further testing could be needed in these or other countries. We cannot assure you that EnerBurn will pass any future testing that may be required. The failure of EnerBurn to obtain registration in countries or areas where we would like to market it, could have a materially adverse effect on our business and plan of operation.
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH POTENTIAL WOULD BE DETRIMENTAL TO HOLDERS OF OUR SECURITIES. Since we have limited operating history, any significant growth will place considerable strain on our financial resources and increase demands on our management and on our operational and administrative systems, controls and other resources. There can be no assurance that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employees and maintain close coordination among our technical, accounting, finance, marketing, sales and editorial staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems. We may fail to adequately manage our anticipated future growth. We will also need to continue to attract, retain and integrate personnel in all aspects of our operations. Failure to manage our growth effectively could hurt our business.
WE ARE RELIANT UPON THIRD-PARTY MANUFACTURERS FOR OUR PRODUCTS; ANY PROBLEMS THEY ENCOUNTER WILL DETRIMENTALLY IMPACT OUR BUSINESS. The manufacturing of our products are undertaken by third-party manufacturers. There can be no assurance that such manufacturers will be reliable in meeting delivery schedules, or that such manufacturers will not experience their own financial difficulties or encounter other problems which could detrimentally impact our business. Since 2009, our principal manufacturing facility was with Magna Blend of Waxahachie, Texas. As a result of a fire which occurred in October 2011 at Magna Blend’s plant, we did lose inventory which lead to certain delays in fulfilling product orders. Subsequent to the fire, we were reimbursed by Magna Blend for the full replacement value of our lost inventory and one of our established customers agreed to supply us with several drums of EnerBurn which were being held in its supply inventory so that we could service our customers. In addition, we have now moved our manufacturing to ChemJet Chemicals located in Conroe, Texas. Although we do not believe this incident had a material adverse affect on our financial condition or operations, there is no guarantee that such will be the case in the event we should encounter a similar or different problem with our manufacturing arrangements in the future. Furthermore, in the event we need to secure other manufacturers, there can be no assurance that we will be able to secure such arrangements on terms acceptable to the Company.
WE ARE DEPENDENT ON KEY PERSONNEL INCLUDING OUR EXECUTIVE OFFICERS. Due to the specialized nature of our business, our success depends in part upon attracting and retaining the services of qualified managerial and technical personnel. The market for such persons remains competitive and the relative small size of the Company may make it more difficult for us to recruit and retain qualified persons. In addition, and since we are a small company, a loss of one or more of our current officers could severely and negatively impact our operations.
MAINTAINING AND IMPROVING OUR FINANCIAL CONTROLS MAY STRAIN OUR RESOURCES AND DIVERT MANAGEMENT’S ATTENTION. We are subject to the requirements of the Securities Exchange Act of 1934, including the requirements of the Sarbanes-Oxley Act of 2002. The requirements of these rules and regulations have increased, and we expect will continue to increase, our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. As a result of this and similar activities, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
RELATED PARTY NOTES AND ADVANCES PRESENT A SIGNIFICANT RISK. Due to our lack of meaningful revenues, we have been forced to finance our operations primarily from capital which has been raised from third parties and promissory notes and advances from related parties. As of December 31, 2012, such loans and advances from related parties total $1,840,000. While one of such notes is currently due, the other loans mature from 2013 through 2014 or are due on demand. Although the Company does not expect any of such lenders to demand payment until the Company has adequate resources to pay back such loans and advances, there can be no assurance that such will be the case. This presents a significant risk to the Company in that in the event any of such lenders demand payment, the Company may not have the necessary cash to meet such payment obligations, or if it does, such payments may draw significantly on the Company’s cash position. Any of such events will likely have a materially detrimental effect on the Company.
Risks Related To Our Common Stock
WE HAVE ISSUED A SUBSTANTIAL NUMBER OF WARRANTS TO PURCHASE OUR COMMON STOCK WHICH WILL RESULT IN SUBSTANTIAL DILUTION TO THE OWNERSHIP INTERESTS OF OUR EXISTING SHAREHOLDERS.As of December 31, 2012, we had 23,224,517 shares of common stock outstanding. Up to an additional 4,256,714.5 shares are issuable upon the exercise of the warrants currently outstanding and up to 553,401 shares are issuable upon exercise of options currently outstanding. The exercise of all of these warrants and options will substantially dilute the ownership interests of our existing shareholders.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. We have never declared or paid a dividend on our common stock. We intend to retain earnings, if any, for use in the operation and expansion of our business and, therefore, do not anticipate paying any dividends in the foreseeable future.
THE TRADING PRICE OF OUR COMMON STOCK MAY BE VOLATILE. The trading price of our shares has, from time to time, fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this report as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the market place, and other events or factors. Although we believe a number of registered broker dealers currently make a market in our common stock, we cannot assure you that any of these firms will continue to serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future trading price of our common stock.
OUR STOCK PRICE MAY EXPERIENCE VOLATILITY. The market price of the common stock, which currently trades over-the-counter, has, in the past, fluctuated over time and may in the future be volatile. The Company believes that there are a small number of market makers that make a market in the Company’s common stock. The actions of any of these market makers could substantially impact the volatility of the Company’s common stock.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Many of the shares of Common Stock presently held by management and others are “restricted securities” as that term is defined in Rule 144, promulgated under the Securities Act. Under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a certain holding period, may, under certain circumstances sell such shares or a portion of such shares. Effective as of February 15, 2008, the holding period for the resale of restricted securities of reporting companies was shortened from one year to six months. Additionally, the SEC substantially simplified Rule 144 compliance for non-affiliates by allowing non-affiliates of reporting companies to freely resell restricted securities after satisfying a six-month holding period (subject only to the Rule 144(c) public information requirement until the securities have been held for one year) and by allowing non-affiliates of non-reporting companies to freely resell restricted securities after satisfying a 12-month holding period. Such holding periods have already been satisfied in many instances. Therefore, actual sales or the prospect of sales of such shares under Rule 144 in the future may depress the prices of the Company’s securities.
OUR COMMON STOCK IS A PENNY STOCK. Our Common Stock is classified as a penny stock, which trades over-the-counter. As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the Common Stock. In addition, the “penny stock” rules adopted by the Securities and Exchange Commission subject the sale of the shares of the Common Stock to certain regulations which impose sales practice requirements on broker-dealers. For example, broker-dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Furthermore, if the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer’s account by obtaining information concerning the customer’s financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission’s rules may result in the limitation of the number of potential purchasers of the shares of the Common Stock. In addition, the additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market of the Company’s Common Stock.
THE OVER-THE-COUNTER MARKET IS VULNERABLE TO MARKET FRAUD. Securities which trade over-the-counter are frequent targets of fraud or market manipulation, both because of their generally low prices and because reporting requirements for such securities are less stringent than those of the stock exchanges or NASDAQ.
INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT STOCK PRICE. Over-the-counter market dealers’ spreads (the difference between the bid and ask prices) may be large, causing higher purchase prices and less sale proceeds for investors.
Except as required by the Federal Securities Law, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-KSB or for any other reason.
Item 1B.
Item 1B.
Unresolved Staff Comments.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 2.
Item 2.
Properties.
We do not own any real estate. We lease approximately 2,722 square feet of space for our executive offices at 10701 Corporate Drive, Suite No. 150, Stafford, Texas. Such lease, which commenced on February 1, 2001, had an original term of three years and has been extended to August 31, 2014. We have an option to renew for an additional two years at that time. Rent expense for the years ended December 31, 2012 and December 31, 2011 totaled approximately $47,464 and $49,368, respectively. Management believes that the current facility is adequate for the foreseeable future.
Item 3.
Item 3.
Legal Proceedings.
The Company is not currently a party to any pending material legal proceeding nor is it aware of any proceeding contemplated by any individual, company, entity or governmental authority involving the Company.
Item 4.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s common stock currently trades over-the-counter under the symbol “ETCK”. Until February 23, 2011, the Company’s common stock was listed on the OTC Bulletin Board but has since been listed on the OTCQB, officially part of the OTC Market Group’s OTC Link quotation system. The OTCQB is a relatively new market started in April 2010 for OTC traded companies that are current in their reporting obligations to the SEC. The following table sets forth the range of high and low sales prices per share of the common stock for each of the calendar quarters identified below. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
Holders
As of December 31, 2012, there were approximately 925 stockholders of record of the Company’s Common Stock. This does not reflect persons or entities that hold their stock in nominee or “street name”.
Dividends
The Company has not paid any cash dividends to date, and it has no intention of paying any cash dividends on its common stock in the foreseeable future. The declaration and payment of dividends is subject to the discretion of its Board of Directors and to certain limitations imposed under the Delaware Corporation law. The timing, amount and form of dividends, if any, will depend on, among other things, results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
We sold the following equity securities during the fiscal years ended December 31, 2011 and 2012 that were not registered under the Securities Act of 1933, as amended:
During the first quarter of 2011, we issued a total of 215,235 shares of our common stock to Asher Enterprises, Inc. in connection with the full conversion of a $55,000 convertible promissory note held by Asher and issued on June 7, 2010. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 there under.
During the second quarter of 2011, we issued a total of 68,182 shares of our common stock to Asher Enterprises, Inc. in connection with the conversion of $15,000 of the principal due on a $33,000 convertible promissory note held by Asher and issued on December 3, 2010. During the third quarter of 2011, Asher Enterprises converted the remaining $18,000 balance of such note and accrued interest of $1,320 into 93,650 shares of common stock. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 there under.
During the second quarter of 2011, we issued 60,000 shares of our common stock to an investor in connection with proceeds of $30,000 which had been advanced by such investor during the second quarter of 2009. On March 18, 2010 such investor signed the subscription agreement and was issued 60,000 shares of common stock in April 2011. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 there under.
During the second quarter of 2011, the Board of Directors granted 1,000,000 and 100,000 warrants respectfully as future compensation for Mr. Thomas Donino and to Mr. Richard Dicks. These warrants were issued to replace the same number of warrants which expired in the fourth quarter of 2010. These warrants have an exercise price of $0.60 per share and will expire in May 2016. An additional 950,000 warrants with the same exercise price were also issued in the second quarter of 2011 to certain lenders as and for additional consideration for their loans to the Company which were made in 2010.
During the third quarter of 2011, the Company granted 540,000 warrants to a director and his designee, 30,000 of which were issued in replacement of 30,000 warrants which expired in the second quarter of 2011 and 510,000 of which were issued in replacement of 510,000 warrants exercisable at $2.00 per share which were to expire in October 2012 and have been cancelled. All of the new warrants have an exercise price of $0.60 per share. An additional 250,000 warrants with the same exercise price were issued in the third quarter of 2011 to such director and another officer/director of the Company as and for additional consideration for previous loans to the Company. Also, in the third quarter of 2011, three of the four directors of the Company were each granted 250,000 warrants for services rendered which warrants are exercisable at $0.60 per share. All of the warrants have a term of five years.
During the third quarter of 2011, options to acquire 225,001 shares were issued under our 2003 Stock Option Plan to four employees with options are immediately exercisable. These options have an exercise price of $0.60 per share and expire in five years from their issue date.
During the first quarter of 2011, the Company received an advance of $125,000 in gross proceeds for 250,000 shares of common stock at $.50 per share from three investors in a private placement offering to accredited investors only. During the first quarter of 2012, we issued 175,000 shares to two of such investors in connection with gross proceeds of $87,500. Pending completion of the subscription agreement from the third investor, the balance of 75,000 shares will be issued in connection with the remaining gross proceeds of $37,500. These securities were sold directly by the Company, without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 thereunder.
During the third quarter of 2011, we sold to one accredited investor in a private placement offering 100,000 units at $0.50 per unit with each unit consisting of one share of our common stock and one common stock purchase warrant. Each warrant is exercisable into one share of common stock at $0.75 per share. During the first quarter of 2012, we issued the 100,000 shares in connection therewith. These securities were sold directly by the Company, without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 thereunder.
During the first quarter of 2012, we sold to one accredited investor in a private placement offering 166,667 units at $0.60 per unit with each unit consisting of two shares of our common stock and one common stock purchase warrant. Each warrant is exercisable into one share of common stock at $0.50 per share. These securities were sold directly by the Company, without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 thereunder.
During the third quarter of 2012, we sold 196,500 shares of common stock to an unrelated third party for $196.50 in cash which shares were issued pursuant to the terms of a consulting agreement entered into as of June 1, 2012. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Other Information
Pursuant to an Investment Agreement dated as of July 15, 2011 between the Company and Kodiak Capital Group, LLC (“Kodiak”), the Company has the right to “put” to Kodiak (the “Put”), from time to time during a defined period, up to $4.0 million in shares of Common Stock, based on a pre-determined formula. Under the Investment Agreement, the Company may not exercise the Put until after the resale of the shares has been registered pursuant to a registration statement filed with the Securities and Exchange Commission. On August 30, 2011, the Company filed such registration statement. On September 19, 2011, and following the receipt of comments from the staff of the SEC, the Company filed a request for withdrawal of such registration statement because the SEC’s accommodation for equity line financing arrangements extends only to companies that are listed on a national securities exchange or quoted on the OTC Bulletin Board. No portion of the Equity Facility has been exercised by the Company to date, and as a result there is no balance due from Kodiak. There can be no assurance that the Company will ever be able to exercise the Put under the Investment Agreement.
Equity Compensation Plan Information
Information regarding equity compensations plans, as of December 31, 2012, is set forth in the table below:
__________________
(1)
Represents shares underlying the 2003 Employee Stock Option Plan.
(2)
Represents shares underlying the individual grant of warrants.
Item 6.
Item 6. Selected Financial Data.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto appearing elsewhere in this report and is qualified in its entirety by the foregoing.
Executive Overview
EnerTeck Corporation (the “Company” or “EnerTeck Parent”), formerly named Gold Bond Mining Company and then Gold Bond Resources, Inc., was incorporated in the State of Washington on July 30, 1935. We acquired EnerTeck Chemical Corp. (“EnerTeck Sub”) as a wholly owned subsidiary on January 9, 2003. As a result of this acquisition, we are now acting as a holding company, with EnerTeck Sub as our primary operating business. Subsequent to this transaction, on November 24, 2003 we changed our domicile from the State of Washington to the State of Delaware and changed our name from Gold Bond Resources, Inc. to EnerTeck Corporation. Unless the context otherwise requires, the terms “we,” “us” or “our” refer to EnerTeck Corporation and its consolidated subsidiary.
EnerTeck Sub, our wholly owned operating subsidiary, was incorporated in the State of Texas on November 29, 2000. It was formed for the purpose of commercializing a diesel fuel specific combustion catalyst known as EnerBurn (TM), as well as other combustion enhancement and emission reduction technologies. Nalco/Exxon Energy Chemicals, L.P. (“Nalco/Exxon L.P.”), a joint venture between Nalco Chemical Corporation and Exxon Corporation commercially introduced EnerBurn in 1998. When Nalco/Exxon L.P. went through an ownership change in 2000, our founder, Dwaine Reese, formed EnerTeck Sub. It acquired the EnerBurn trademark and related assets and took over the Nalco/Exxon L.P. relationship with the EnerBurn formulator and blender, and its supplier, Ruby Cat Technology, LLC (“Ruby Cat”).
We utilize a sales process that includes detailed proprietary customer fleet monitoring protocols in on-road applications that quantify data and assists in managing certain internal combustion diesel engine operating results while utilizing EnerBurn. Test data prepared by Southwest Research Institute and actual customer usage has indicated that the use of EnerBurn in diesel engines improves fuel economy, lowers smoke, and decreases engine wear and the dangerous emissions of both Nitrogen Oxide (NOx) and microscopic airborne solid matter (particulates). Our principal target markets have included the trucking, heavy construction, maritime shipping, railroad and mining industries, as well as federal, state and international government applications. Each of these industries shares certain common financial characteristics, i.e. (i) diesel fuel represents a disproportionate share of operating costs; and (ii) relatively small operating margins are prevalent. Considering these factors, management believes that the use of EnerBurn and the corresponding derived savings in diesel fuel costs can positively effect the operating margins of its customers while contributing to a cleaner environment.
During 2011, we acquired a 40% membership interest in a newly formed entity called EnerTeck Environmental, LLC, which was formed for the purpose of marketing and selling a diesel fuel emission reduction technology with the creators of such specific technology.
Results of Operations
Revenues
We recognized revenues of $126,000 for the year ended December 31, 2012, compared to revenues of $113,000 for the year ended December 31, 2011, an increase in revenues of $13,000. The primary source of revenue for the years ended December 31, 2012 and 2011 is from the sale of EnerBurn to oilfield service, heavy construction and maritime industries. The price levels of product sold in 2012 was relatively comparable to pricing in 2011. This low level in revenues can be traced primarily to a lack of new customers. As testing is either underway or completed with several potential new customers and in new areas with existing customers, more sales should occur. It is expected that sales should show significant increases throughout 2013.
Gross Profit
Gross profit, defined as revenues less cost of goods sold and the results of the onetime sales return discussed above, was $84,000 or 66.7% of sales for the year ended December 31, 2012, compared to $82,000 or 72.9% of sales for the year ended December 31, 2011. In terms of absolute dollars, gross profit remained virtually the same in 2012 compared to 2011. The gross profit percentage decreased 6.2% for the 2012 calendar year compared to the 2011 calendar year due primarily to the mix between chemical and equipment sales, with chemical sales having a slightly higher margin. As our overall volumes increase, we feel confident that there will be an improvement in the gross profit percentage as our manufacturing proficiency continues to improve for our core products.
Cost of goods sold was $42,000 for the 2012 calendar year which represented 33.3% of revenues compared to $31,000 for the 2011 calendar year which represented 27.1% of revenues. The increase in cost of goods sold as a percentage of revenues primarily reflect a slight increase in overall product cost from our initiation of manufacturing of our products and the sale of more dosing equipment. We have owned the EnerBurn technology and associated assets since its purchase in July 2006. Although our actual manufacturing function is performed for us by an unrelated third party under contract to us, we should continue to realize better gross margins through the manufacturing of our product lines, compared to those we achieved in the past when we purchased all of our products from an outside vendor.
Cost and Expenses
Costs and expenses for operations decreased to $1,382,000 for the year ended December 31, 2012 from $2,267,000 for the year ended December 31, 2011, a decrease of $885,000, primarily due to the absence of non-cash compensation and a decrease in professional fees in 2012 as compared to 2011. Costs and expenses in all periods primarily consisted of payroll, professional fees, rent expense, depreciation expense, amortization expense and other general and administrative expenses. While there has been a substantial decrease in costs and expenses for 2012 and 2011 over prior years, it is felt that these increases will lead to a considerable increase in earnings potential in 2013 and future years, though this has not been substantiated to date.
Net Loss
Total net loss for the year ended December 31, 2012, was $1,612,000 as compared to a total net loss of $2,278,000 for the year ended December 31, 2011. This amounts to a decrease in net loss for the year ended December 31, 2012 of $666,000 as compared with the year ended December 31, 2011. Such decrease was primarily due to the lack of non cash compensation in 2012 compared to non-cash compensation of $1,097,000 in 2011 partially offset by an increase in other selling, general and administrative expenses in 2012 compared to 2011.
Net income in the future will be dependent upon our ability to successfully complete testing in our projected new markets and new product lines and to increase revenues faster than we increase our selling, general and administrative expenses, research and development expense and other expenses. Our gross margin resulting from our manufacturing of our products should help us in our ability to hopefully become profitable in the future.
Operations Outlook
The majority of our marketing effort since 2005 has been directed at targeting and gaining a foothold in one of several major target areas, including the inland marine diesel market, trucking, heavy construction and mining. Management has focused virtually all resources at pinpointing and convincing certain large potential customers within these markets, with our diesel fuel additive product lines. While we still believe that this is a valid theory, the results, to date, have been less than we had expected. For example, in 2005, we appointed Custom Fuel Services Inc., a subsidiary of Ingram Barge and which provides dockside and midstream fueling from nine service locations in Louisiana, Kentucky, Illinois, West Virginia, Missouri and Iowa, as our exclusive reseller of EnerBurn and the related technology on the Western Rivers of the United States, meaning the Mississippi River, its tributaries, South Pass, and Southwest Pass, excluding the Intra Coastal Waterway. Since 2006, sales have been sporadic with Custom and we cannot guarantee that we will ever generate meaningful revenues from our relationship with Custom.
A substantial portion of 2010 was spent redirecting our marketing emphasis for our primary product, EnerBurn, to solidify our major customers and expanding to newer, more innovative areas. As such, we have created marketing alliances domestically and internationally with two new marketing groups, EnerGreen Technologies PTY, based in Australia (“EnerGreen”), and G2 Fuel Technologies, LLC (“G2 Technologies”), a minority owned marketing firm working in both the domestic and foreign markets (see “Sales and Marketing Strategy” below”).
As testing is either underway or has been completed with several potential new customers and in new areas with existing customers, more sales should occur. We have been informed by EnerGreen, our distributor for Australia, that testing has successfully been completed with a new large customer there and that implementation will start shortly. This implementation will require the installation of injection systems on each of the customer vessels which may take through the end of 2013 to fully occur.
In addition, G2 Technologies, our new Certified Minority supplier and distributor, had advised us that several of its customers would start using EnerBurn during 2012. This was delayed by a delay in the crucial test being handled by Auburn University that is required by several Government entities. This test is to complete during the second quarter of 2013 and should open the door for several of their large customers. G2 Technologies now expects that sales should show significant increases during the third and fourth quarters of 2013 and thereafter.
As indicated above, since the first quarter of 2011, we have owned a 40% membership interest in a newly formed entity called EnerTeck Environmental, LLC (“EnerTeck Environmental”), which was formed for the purpose of marketing and selling a diesel fuel emission reduction technology with the creators of such specific technology. EnerTeck Environmental was formed as a joint venture with Indian Nation Technologies, LLC (“Indian Nation”) located in Comanche, Oklahoma for the testing and manufacture of an innovative new type of environmental equipment for the remediation of diesel engine emissions for diesel engines in the marine industry. Indian Nation has filed a patent for this equipment called PEx® (Particle Extraction) and we will hold the exclusive marketing rights for this technology for the various applications within the marine diesel industry. Testing commenced late in the first quarters of 2011 on a towboat located on the Mississippi River. To date the tested engine has logged in more than 10,000 successful hours of operation with no apparent degrading of the effectiveness of the equipment. To comply with regulations of the California Air Quality Control Board (CARB), additional monitoring and warning equipment has been developed and has been mounted on the equipment to supply ongoing emissions information for the crew. As a result of such installation, the PEx Beta unit is in the process of running an additional 1,000 hours to log ongoing results before final testing is completed. It is anticipated that subsequent to the final testing and acceptance of this technology this new technology will open vast new marketing opportunities for us in the coming years.
Liquidity and Capital Resources
On December 31, 2012, we had working capital deficit of ($3,742,000) and stockholders’ deficit of ($3,614,000) compared to working capital deficit of ($1,612,000) and stockholders’ deficit of ($2,181,000) on December 31, 2011. The majority of the decrease in equity stems from poor sales and the issuance of noncash compensation. On December 31, 2012, the Company had $24,000 in cash, total assets of $639,000 and total liabilities of $4,252,000, compared to $374,000 in cash, total assets of $1,075,000 and total liabilities of $3,255,000.
Net cash used in operating activities was $763,000 for the year ended December 31, 2012, which was primarily due to a net loss of ($1,612,000) for the year ended December 31, 2012, other non-cash charges of ($78,400), an increase in inventory of ($64,000) and a decrease in accounts payable of ($198,000), partially offset by depreciation and amortization of $210,000, decrease in accounts receivable of $109,000, and increases in accrued interest payable of $152,000 and accrued liabilities of $561,000. Net cash used in operating activities was $143,000 for the year ended December 31, 2011, which was primarily the result of a net loss of ($2,278,000) for the year ended December 31, 2011 partially offset by non-cash charges for Common Stock, Warrants and Options of $1,097,000 and Depreciation and Amortization of $159,000, and increases in accounts payable of $244,000, accrued interest payable of $115,000 and accrued liabilities of $566,000.
Cash used by investing activities was $6,600 for the year ended December 31, 2012 which was the result of the purchase of assets. Cash used in investing activities was $1,500 for the year ended December 31, 2011 which was also due to the purchase of assets.
Cash provided by financing activities was $420,000 for the year ended December 31, 2012 from the proceeds from the sale of common stock of $100,000 and related party notes and advances of $320,000 compared to cash provided by financing activities of $395,000 for the year ended December 31, 2011 from the proceeds from the sale of common stock of $175,000 and related party notes and advances of $220,000.
On July 13, 2006, we completed the acquisition of the EnerBurn formulas, technology and associated assets pursuant to an Asset Purchase Agreement executed as of the same date (the “EnerBurn Acquisition Agreement”) between the Company and the owner of Ruby Cat (the “Seller”). Pursuant thereto, the Company acquired from the Seller all of its rights with respect to the liquid diesel motor vehicle fuel additives known as EC5805A and EC5931A products (the “Products”) as well as its rights to certain intellectual property and technology associated with the Products (collectively, the “Purchased Assets”). The purchase price for the Purchased Assets was $3.0 million, payable as follows: (i) $1.0 million paid on July 13, 2006 in cash, and (ii) the remaining $2.0 million evidenced by a promissory note (the “Note”) bearing interest each month at a rate of 4.0% per annum, compounded monthly, and which shall be paid in four annual payments of $500,000 plus accumulated interest to that date on each anniversary of the closing until the entire purchase price is paid in full. All payments have been made and, as of July 2010, we have now completed our monetary obligations under the EnerBurn Acquisition Agreement and the Note. Through 2010 this obligation drew significantly on our cash reserves. Starting in 2011 this is no longer the case.
In the past, we have been able to finance our operations primarily from capital which has been raised. To date, sales have not been adequate to finance our operations without investment capital. During 2012, investment capital has provided $420,000 for working capital from the proceeds from sales of common stock, loans and other advances. For the year ended December 31, 2011, cash provided by financing activities was $395,000 also from the proceeds from sales of common stock, loans and other advances made to the Company.
We anticipate, based on currently proposed plans and assumptions relating to our operations, that in addition to our current cash and cash equivalents together with projected cash flows from operations and projected revenues we will require additional investment to satisfy our contemplated cash requirements for the next 12 months. No assurance can be made that we will be able to obtain such investment on terms acceptable to us or at all. We anticipate that our costs and expenses over the next 12 months will be approximately $3.0 million. Our continuation as a going concern is contingent upon our ability to obtain additional financing and to generate revenues and cash flow to meet our obligations on a timely basis. As mentioned above, management acknowledges that sales revenues have been considerably less than earlier anticipated. This was primarily due to a combination of circumstances which have been corrected or are in the process of being corrected and therefore should not reoccur in the future and the general state of the economy. Management expects that sales should show increases late in 2013. No assurances can be made that we will be able to obtain required financial on terms acceptable to us or at all. Our contemplated cash requirements beyond 2013 will depend primarily upon level of sales of our products, inventory levels, product development, sales and marketing expenditures and capital expenditures.
Due to our lack of meaningful revenues, we have been forced to finance our operations primarily from capital which has been raised from third parties and promissory notes and advances from related parties. As of December 31, 2012, such loans and advances from related parties total $1,840,000. While one of such notes is currently due, the other loans mature from 2013 through 2014 or are due on demand. Although the Company does not expect any of such lenders to demand payment until the Company has adequate resources to pay back such loans and advances, there can be no assurance that such will be the case. This presents a significant risk to the Company in that in the event any of such lenders demand payment, the Company may not have the necessary cash to meet such payment obligations, or if it does, such payments may draw significantly on the Company’s cash position. Any of such events will likely have a materially detrimental effect on the Company.
Inflation has not significantly impacted the Company’s operations.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
Significant Accounting Policies
Business and Basis of Presentation
EnerTeck Corporation, formerly Gold Bond Resources, Inc. was incorporated under the laws of the State of Washington on July 30, 1935. On January 9, 2003, the Company acquired EnerTeck Chemical Corp. ("EnerTeck Sub") as its wholly owned operating subsidiary. As a result of the acquisition, the Company is now acting as a holding company, with EnerTeck Sub as its only operating business. Subsequent to this transaction, on November 24, 2003, the Company changed its domicile from the State of Washington to the State of Delaware, changed its name from Gold Bond Resources, Inc. to EnerTeck Corporation.
EnerTeck Sub, the Company’s wholly owned operating subsidiary is a Houston-based corporation. It was incorporated in the State of Texas on November 29, 2000 and was formed for the purpose of commercializing a diesel fuel specific combustion catalyst known as EnerBurn (TM), as well as other combustion enhancement and emission reduction technologies for diesel fuel. EnerTeck’s primary product is EnerBurn, and is registered for highway use in all USA diesel applications. The products are used primarily in on-road vehicles, locomotives and diesel marine engines throughout the United States and select foreign markets.
Principles of Consolidation
The consolidated financial statements include the accounts of EnerTeck Corporation and its wholly-owned subsidiary, EnerTeck Chemical Corp. All significant inter-company accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three (3) months or less to be cash and cash equivalents.
Inventory
Inventory consists of market ready EnerBurn plus raw materials required to manufacture the products. Inventory is valued at the lower of cost or market, using the average cost method. As previously stated, on October 3, 2011, a fire broke out at the Magna Blend Chemical plant in Waxahachie, Texas. Magna Blend has been the principal blending plant for our EnerBurn product and was the storage location of our entire stock of raw materials and finished goods inventory. Enerteck was subsequently paid by Magna Blend the full replacement value of our inventory and replacement has been made of both raw materials and finished goods sufficient for us to continue operations. In the interim, to insure that at least some of our new and smaller customers could be serviced, one of our established customers agreed to supply us with several drums of EnerBurn, which were being held in their supply inventory. We will in turn replaced these drums of EnerBurn with new EnerBurn stock, as soon as the required raw material inventories could be acquired, blended and shipped back to their warehouses. This was all accomplished prior to the end of the fourth quarter. We do not expect this incident will have a material adverse effect on our operations.
Also included in inventory were five large Hammonds EnerBurn doser systems amounting to $28,000, which have been returned to Hammonds during the first quarter of 2011 in exchange for more useful equipment. Also included in inventory is a PEx unit amounting to $39,000. This PEx unit has subsequently been reclassified as a test unit, which is a Capital Asset and has been moved to Fixed Assets. It will be written off over the two year life of the test. The Company’s remaining makeup of its inventory was split on approximately a 58/41 basis between raw materials and finished goods at December 31, 2012.
Accounts Receivable
Accounts receivable represent uncollateralized obligations due from customers of the Company and are recorded at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts. The Company calculates this allowance based on historical write-offs, level of past due accounts and relationships with and economic status of the customers. Accounts are written off as bad debts when all collection efforts have failed and the account is deemed uncollectible. Management has provided an allowance for doubtful accounts of $9,863 as of December 31, 2012. There was no allowance for doubtful accounts considered necessary at December 31, 2011.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided for on the straight-line or accelerated method over the estimated useful lives of the assets. The average lives range from five (5) to ten (10) years. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred.
Intangible Assets
The Company follows the provisions of FASB ASC 350, Goodwill and Other Intangible Assets. FASB ASC 350 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Specifically, FASB ASC 350 addresses how intangible assets that are acquired should be accounted for in financial statements upon their acquisition, as well as how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The statement requires the Company to evaluate its intellectual property each reporting period to determine whether events and circumstances continue to support an indefinite life. In addition, the Company tests its intellectual property for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The statement requires intangible assets with finite lives to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable and that a loss shall be recognized if the carrying amount of an intangible exceeds its fair value.
Intellectual property and other intangibles are recorded at cost. Prior to 2009, the Company determined that its intellectual property had an indefinite life because it believed there was no legal, regulatory, contractual, competitive, economic or other factor to limit its useful life, and therefore would not be amortized. For other intangibles, amortization would be computed on the straight-line method over the identifiable lives of the assets.
Management made the decision during 2009 to change the characterization of its intellectual property to a finite-lived asset and to amortize the remaining balance of its intangible assets to the nominal value of $150,000 by the end of 2012, due to its determination that this now represents the scheduled end of its exclusive registration during that year.
As a result of a review by management of its intangible asset and policies related thereto as of December 31, 2010, it was determined that a further impairment was required to be recorded. This impairment serves to reduce its intellectual property to an amount which management believes represents its fair value. This value would be considered a level 3 measurement under FASB ASC 820, Fair Value Measurements and Disclosures, since it is based on significant unobservable inputs. The Company will re-assess the value of this asset in future periods and make adjustments as considered necessary, rather than record additional amortization.
Revenue Recognition
The Company follows the provisions of FASB ASC 605, Revenue Recognition, and recognizes revenues when evidence of a completed transaction and customer acceptance exists, and when title passes, if applicable.
Revenues from sales of product and equipment are recognized at the point when a customer order has been shipped and invoiced.
Income Taxes
The Company will compute income taxes using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on evidence from prior years, may not be realized over the next calendar year or for some years thereafter.
The current and deferred tax provisions in the financial statements include consideration of uncertain tax positions in accordance with FASB ASC 740, Income Taxes. Management believes there are no significant uncertain tax positions, so no adjustments have been reported from adoption of FASB ASC 740. The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions.
Income (Loss) Per Common Share
The basic net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding.
Periodically, EnerTeck enters into stock sales agreements with investors who contributed cash to the Company for shares of common stock. Whether of not the shares have not been issued, they retain the rights associated with the respective class of stock. Accordingly, unissued shares are considered common stock equivalents for purposes of computing basic earnings per share.
Diluted net income (loss) per common share is computed by dividing the net income applicable to common stockholders, adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For 2012 and 2011, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Management Estimates and Assumptions
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instruments
The Company’s financial instruments recorded on the balance sheet include cash and cash equivalents, accounts receivable, accounts payable and note payable. The carrying amounts approximate fair value because of the short-term nature of these items.
Stock Options and Warrants
Effective January 1, 2006, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with FASB ASC 718, Stock Compensation.
Taxes Collected
The Company collects sales taxes assessed by governmental authorities imposed on certain sales to customers. Sales taxes collected are included in revenues; net amounts paid are reported as expenses in the consolidated statement of operations.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 is intended to result in convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. The adoption of the provisions of ASU 2011-04 did not have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income" ("ASU No. 2011-05"), which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income ("OCI") by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently in December 2011, the FASB issued ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income" ("ASU No. 2011-12"), which indefinitely defers the requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The amendments in these standards do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU No. 2011-05 and ASU No. 2011-12 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The Company adopted the provisions of ASU No. 2011-05 and ASU No. 2011-12 for the year ended December 31, 2012; such adoption did not have a material impact on the Company's financial position or results of operations.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test as described in ASC 350, Intangibles-Goodwill and Other . The ASU defines the more-likely-than-not threshold as having a likelihood of more than 50%. Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company adopted the provisions of ASU No. 2011-08 for the year ended December 31, 2012; such adoption did not have a material impact on the Company's financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect that the adoption of ASU 2011-11 will have a significant, if any, impact on the Company’s Financial Statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See the Financial Statements annexed to this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, these disclosure controls and procedures were effective to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no material changes in internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
Based on our evaluation under the frameworks described above, our management has concluded that our internal control over financial reporting was effective as of December 31, 2012.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance.
Set forth below are our present directors and executive officers. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer. Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers serve at the discretion of the Board of Directors.
Set forth below are brief accounts of the business experience during the past five years of each director and executive officer of the Company and each significant employee of the Company.
DWAINE REESE has been the Chairman of the Board and the Company’s Chief Executive Officer of EnerTeck Sub since 2000 and of EnerTeck Parent since 2003. From approximately 1975 to 2000, Mr. Reese held various executive, management, sales and marketing positions in the refining and specialty chemical business with Nalco Chemical Corporation and later Nalco/Exxon Energy Chemicals, LP. In 2000, he founded EnerTeck Chemical Corp., and has been its President and Chief Executive Officer since that time. Mr. Reese has been and will continue to devote his full-time to the Company’s business. Mr. Reese has B.S. degree in Biology and Chemistry from Lamar University and a M.S. degree in Chemistry from Highland New Mexico University.
GARY B. AMAN has been a director of the Company since March 2005 and President since March 2009. He has been employed with Nalco Company since 1994, most recently serving as General Manager of ADOMITE Subsurface Chemicals, a Nalco division, since 1999. ADOMITE is recognized as a technology leader in energy exploration additives including drilling fluids, cementing, fracturing and well stimulation additives. Mr. Aman retired from Nalco effective October 31, 2008. Mr. Aman received a Bachelor of Science degree in Mathematics from the University of South Dakota in 1970.
JACK D. COWLES has been a director of the Company since March 2005. He has been a Managing Director of JDC Consulting, a management consulting firm, since 1997. JDC, headquartered in New York City, provides a broad range of senior level management consulting services including strategy, business process improvement and implementation, change management, financial management, due diligence and merger integration. Mr. Cowles received a Bachelor of Arts, Economics degree; Phi Beta Kappa, from the University of Michigan in 1983 and a Masters of Business Administration degree for the University of Pennsylvania, Wharton School of Business in 1994.
THOMAS F. DONINO has been a director of the Company since December 2005. Since August 1997, he has been a partner at First New York Securities (FNY) in New York, New York. FNY is an investment management company with assets over $250 million dollars. Mr. Donino is also the General Partner of BATL Management LP, a family Limited Partnership, and President of BATL Bioenergy LLC.
RICHARD B. DICKS has been Chief Financial Officer of the Company since December 2005. Mr. Dicks is a certified public accountant and since January 1985 has had his own accounting practice focusing on tax, financial, cash management and MAS services. In addition, from July 1993 to December 2001, Mr. Dicks was President and Chief Executive Officer of Combustion Process Manufacturing Corporation, located in Houston, Texas. Mr. Dicks received a Bachelor’s Degree from Oklahoma State University in 1969.
None of the directors and officers is related to any other director or officer of the Company.
To the knowledge of the Company, none of the officers or directors has been personally involved in any bankruptcy or insolvency proceedings. To the knowledge of the Company, none of the directors or officers have been convicted in any criminal proceedings (excluding traffic violations and other minor offenses) or are the subject of a criminal proceeding which is presently pending, nor have such persons been the subject of any order, judgment, or decree of any court of competent jurisdiction, permanently or temporarily enjoining them from acting as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or insurance company, or from engaging in or continuing in any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security, nor were any of such persons the subject of a federal or state authority barring or suspending, for more than 60 days, the right of such person to be engaged in any such activity, which order has not been reversed or suspended.
Audit Committee Financial Expert
We do not have an audit committee financial expert, as such term is defined in Item 407(d)(5) of Regulation S-K, serving on our audit committee because we have no audit committee and are not required to have an audit committee because we are not a listed security.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than ten percent of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of Common Stock of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company’s review of such forms received by it, or written representations from certain of such persons, the Company believes that, with respect to the year ended December 31, 2012, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.
Code of Ethics
The Board of Directors has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, which is designed to promote honest and ethical conduct; full, fair, accurate, timely and understandable disclosure; and compliance with applicable laws, rules and regulations. A copy of the Code of Ethics will be provided to any person without charge upon written request to the Company at its executive offices, 10701 Corporate Drive, Suite 150, Stafford, Texas 77477.
Item 11.
Item 11. Executive Compensation.
The following summary compensation tables set forth information concerning the annual and long-term compensation for services in all capacities to the Company for the years ended December 31, 2012 and December 31, 2011, of those persons who were, (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company, whose annual base salary and bonus compensation was in excess of $100,000 (the named executive officers):
Summary Compensation Table
___________
(1)
Represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with ASC 718 in connection with options and warrants granted as compensation. Does not include information with respect to warrants granted to Mr. Aman as and for additional consideration for previous loans made to the Company.
Equity Awards
The following table provides certain information concerning equity awards held by the named executive officers as of December 31, 2012.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
(1)
Represents warrants which were issued during 2011 as compensation. Does not include information with respect to warrants granted to Mr. Aman as and for additional consideration for previous loans made to the Company.
2003 Stock Option Plan
In September 2003, our shareholders approved an employee stock option plan (the “2003 Option Plan”) authorizing the issuance of options to purchase up to 1,000,000 shares of our common stock. This plan is intended to give us greater ability to attract, retain, and motivate officers, key employees, directors and consultants; and is intended to provide us with the ability to provide incentives more directly linked to the success of our business and increases in shareholder value. As of December 31, 2007, no options have been issued under the 2003 Option Plan. During the first quarter of 2008, options to acquire 64,200 shares at an exercise price of $0.80 per share were issued under the 2003 Option Plan to five employees, and during the third quarter of 2009, options to acquire 64,000 shares at an exercise price of $0.55 per share were issued under the 2003 Option Plan to five employees. In August 2011, options to acquire 225,001 shares at an exercise price of $0.60 per share were issued under our 2003 Stock Option Plan to four employees. All of such options are immediately exercisable as of the issue date and expire five years thereafter.
2005 Stock Compensation Plan
In June 2005, the Board of Directors adopted the 2005 Stock Compensation Plan (the “2005 Stock Plan”) authorizing the issuance of up to 2,500,000 shares of common stock. Pursuant to the 2005 Stock Plan, employees, directors, officers or individuals who are consultants or advisors of the Company or any subsidiary may be awarded shares under the 2005 Stock Plan. The 2005 Stock Plan is intended to offer those employees, directors, officers, or consultants or advisors of the Company or any subsidiary who assist in the development and success of the business of the Company or any subsidiary, the opportunity to participate in a compensation plan designed to reward them for their services and to encourage them to continue to provide services to the Company or any subsidiary. In 2005, 2,000,000 shares were awarded under the 2005 Stock Plan, 500,000 of which were returned to the Company in December 2005, and 50,000 shares were awarded in 2006. Since then, no additional awards have been granted under the 2005 Stock Plan.
Other Options, Warrants or Rights
We have no other outstanding options or rights to purchase any of our securities. However, as of December 31, 2012, we do have outstanding warrants to purchase up to 4,256,714.5 shares of our common stock. In addition, we do have outstanding convertible notes which are convertible into shares of our common stock under certain conditions.
Employment Agreements - Executive Officers and Certain Significant Employees
On March 27, 2009, the Company entered into an employment agreement with Gary B. Aman, effective as of January 1, 2009, pursuant to which Mr. Aman agreed to be employed by the Company as President for a period of two years expiring December 31, 2010. During the period of employment, Mr. Aman shall receive an annual base salary equal to $200,000, subject to review each year for possible increases, provided, however, that Mr. Aman has agreed to accrual of said salary until the earlier of (i) such time that the Company’s financial condition improves so that payment of said salary does not cause undue financial burden to the Company which shall be determined by the Board of Directors at its sole discretion, or (ii) January 1, 2010. Mr. Aman shall also be entitled to participate in any long term and annual incentive plans and arrangements presently existing or as may be adopted from time to time and other employee benefits plans and programs on the same basis generally as other employees of the Company.
Pursuant to the employment agreement, the Company also agreed to grant Mr. Aman an option to purchase 200,000 shares of Common Stock of the Company at an exercise price of $1.00 per share which option shall be 25% vested as of the date of grant (March 27, 2009), shall become 100% vested on January 1, 2010 and shall expire March 27, 2014.
As of December 31, 2012, none of our other officers and key employees are bound by employment agreements.
We do not have any termination or change in control arrangements with any of our named executive officers.
Compensation of Directors
At the present time, directors receive no cash compensation for serving on the Board of Directors, other than reimbursement of reasonable expenses incurred in attending meetings.
The following table provides certain summary information concerning the compensation paid to the Company’s non-employee directors during fiscal 2012 for their services as such. All compensation paid to Mr. Reese and Mr. Aman is set forth in the Summary Compensation table above.
Director Compensation
Indebtedness of Management
No member of management was indebted to the Company during its last fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of December 31, 2012, certain information with regard to the record and beneficial ownership of the Company’s Common Stock by (i) each stockholder owning of record or beneficially 5% or more of the Company’s Common Stock, (ii) each director of the Company, (iii) the Company’s Chief Executive Officer and other executive officers, if any, of the Company whose total compensation was in excess of $100,000 (the “named executive officers”), and (iv) all executive officers and directors of the Company as a group:
______________________________
*
Less than 1%.
(1)
Based upon 23,224,516 shares of common stock outstanding as of December 31, 2012.
(2)
Consists of 3,565,000 shares held by Mr. Reese, 133,334 shares underlying options granted to him and 250,000 shares underlying warrants held by Mr. Reese. The address for Mr. Reese is 10701 Corporate Drive, Suite 150, Stafford, Texas.
(3)
Consists of 2,450,000 shares held by BATL Bioenergy LLC (“BATL”) and 1,510,000 shares underlying warrants held by BATL. This information is based solely upon information reported in filings made to the SEC on behalf of BATL. The address for BATL is 7 Lakeside Drive, Rye, New York.
(4)
Consists of 2,113,404 shares held by Mr. Donino, 2,450,000 shares held by BATL, 435,700 shares held by BATL Management LP (“BATL Management”), 1,510,000 shares underlying warrants held by BATL, 275,000 shares underlying warrants held by BATL Management and 967,785 shares underlying warrants held by Mr. Donino. Does not include shares which may be acquired upon conversion of convertible promissory notes held by Mr. Donino and BATL. See “Certain Relationships and Transactions and Corporate Governance”. As the president and managing member of BATL and the sole officer, director and shareholder of BATL Management’s general partner, Mr. Donino may be deemed to be the beneficial owner of shares owned by BATL and BATL Management. BATL Management is a family limited partnership whose members are certain relatives and trusts for the benefit of certain relatives of Mr. Donino. This information is based solely upon information reported in filings made to the SEC on behalf of Thomas Donino, BATL and BATL Management. The address for Mr. Donino is 7 Lakeside Drive, Rye, New York.
(5)
Consists of 670,000 shares held by Mr. Aman, 266,667 shares underlying options granted to him and 350,000 shares underlying warrants held by Mr. Aman. The address for Mr. Aman is 10701 Corporate Drive, Suite 150, Stafford, Texas.
(6)
Consists of 398,550 shares held by Mr. Cowles and 250,000 shares underlying warrants held by him. The address for Mr. Cowles is 30 Lansdowne Drive, Larchmont, New York.
(7)
Consists of 78,400 shares underlying options and 100,000 shares underlying warrants held by him. The address for Mr. Dicks is 10701 Corporate Drive, Suite 150, Stafford, Texas.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On July 7, 2009, the Company entered into a $100,000 unsecured promissory note with Gary B. Aman, the Company’s President and a director, due on demand. Interest is payable at 12% per annum.
On December 11, 2009, the Company entered into a $50,000 note with Thomas Donino, a director. Interest is 5% per annum. The principal balance of the note is due on the earlier of December 11, 2012, or upon completion by the Company of equity financing in excess of $1.0 million in gross proceeds. Interest on the loan is payable on the maturity date at the rate of 5% per annum. This note is now overdue for payment.
On June 1, 2010, the Company entered into a $50,000 convertible promissory note with Mr. Donino which shall be due and payable on June 1, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. The assignment of the conversion feature of the note resulted in a loan discount being recorded. The discount amount of $36,207 is being amortized over the original thirty-six month term of the debt as additional interest expense. Amortization for this loan was $12,069 and $7,000 for the years ended December 31, 2012 and 2011.
On June 1, 2010, the Company entered into a $300,000 convertible promissory note with Mr. Donino which shall be due and payable on June 1, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On July 20, 2010, the Company entered into $400,000 of convertible promissory notes with Mr. Donino and his affiliates which shall be due and payable on July 20, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On December 10, 2010, the Company entered into $150,000 of convertible promissory notes with Mr. Donino and his affiliates which shall be due and payable on December 10, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On October 20, 2011, the Company entered into a $70,000 convertible promissory note with Mr. Donino which shall be due and payable on October 20, 2014 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
In addition, during 2010, 2011 and 2012 Mr. Donino and his affiliates advanced the Company $150,000, $150,000 and $320,000 respectively. Such advances are due on demand and bear interest at 5%, 8% and 8% per annum respectively, and may be converted at any time into shares of common stock.
During the first quarter of 2013, Mr. Donino purchased in a private placement offering of the Company 285,700 units at $0.70 per unit or $200,000 cash in the aggregate with each unit consisting of two shares of common stock of the Company.
Other than the foregoing, since January 1, 2012, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: (i) in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last three completed fiscal years; and (ii) in which any director, executive officer, shareholder who beneficially owns 5% or more of our common stock or any member of their immediate family had or will have a direct or indirect material interest.
Director Independence
Our board of directors currently consists of four members. They are Dwaine Reese, Gary B. Aman, Jack D. Cowles and Thomas F. Donino. Mr. Reese is the Company’s Chairman of the Board and Chief Executive Officer, and Mr. Aman is the Company’s President. Messrs. Cowles and Donino are independent directors. We have determined their independence using the general independence criteria set forth in the Nasdaq Marketplace Rules.
Item 14.
Item 14. Principal Accountant Fees and Services.
The following is a summary of the fees billed to us by the principal accountants to the Company for professional services rendered for the fiscal years ended December 31, 2012 and December 31, 2011:
Audit Fees. Consists of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by the principal accountants in connection with statutory and regulatory filings or engagements.
Audit Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include preparation of federal and state income tax returns.
All Other Fees. Consists of fees for product and services other than the services reported above.
Pre-Approval Policies and Procedures
Prior to engaging its accountants to perform a particular service, the Company’s Board of Directors obtains an estimate for the service to be performed. All of the services described above were approved by the Board of Directors in accordance with its procedures.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Financial Statements
Financial Statements are annexed to this report.
(2) Financial Statement Schedules
No financial statement schedules are included because such schedules are not applicable, are not required, or because required information is included in the financial statements or notes thereto.
(3) Exhibits
*
Filed herewith.
**
In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this annual report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
(1)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 23, 2003, and incorporated by reference herein.
(2)
Filed as an exhibit to the Company’s Registration Statement on Form SB-2, File No. 333-108872, and incorporated by reference herein.
(3)
Filed as an exhibit to the Company’s Schedule 14A filed on August 12, 2003, and incorporated by reference herein.
(4)
Filed as an exhibit to the Company’s Registration Statement on Form S-8, File No. 333-1258814, and incorporated by reference herein.
(5)
Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, and incorporated by reference herein.
(6)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 12, 2005, and incorporated by reference herein.
(7)
Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006, and incorporated by reference herein.
(8)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 19, 2006, and incorporated by reference herein.
(9)
Filed as an exhibit to Amendment No. 3 to the Company’s Registration Statement on Form SB-2 filed as Form S-1/A on March 25, 2008, File No. 333-133651, and incorporated by reference herein.
(10)
Files as an exhibit to the Company’s Current Report on Form 8-K filed on April 2, 2009, and incorporated by reference herein.
(11)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and incorporated by reference herein.
(12)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and incorporated by reference herein.
(13)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 20, 2011, and incorporated by reference herein.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities and on the dates indicated:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
EnerTeck Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of EnerTeck Corporation and subsidiary as of December 31, 2012 and 2011, and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows for each of the years in the two-year period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EnerTeck Corporation and subsidiary as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ Philip Vogel & Co. PC
PHILIP VOGEL & CO. PC
Certified Public Accountants
Dallas, Texas
April 12, 2013
.ENERTECK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2012 and 2011
See accompanying summary of accounting policies and notes to financial statements.
ENERTECK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2012 and 2011
See accompanying summary of accounting policies and notes to financial statements.
ENERTECK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2012 and 2011
See accompanying summary of accounting policies and notes to financial statements.
ENERTECK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2012 and 2011
See accompanying summary of accounting policies and notes to financial statements.
ENERTECK CORPORATION and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
EnerTeck Corporation, formerly Gold Bond Resources, Inc. was incorporated under the laws of the State of Washington on July 30, 1935. On January 9, 2003, the Company acquired EnerTeck Chemical Corp. ("EnerTeck Sub") as its wholly owned operating subsidiary. As a result of the acquisition, the Company is now acting as a holding company, with EnerTeck Sub as its only operating business. Subsequent to this transaction, on November 24, 2003, the Company changed its domicile from the State of Washington to the State of Delaware, changed its name from Gold Bond Resources, Inc. to EnerTeck Corporation.
EnerTeck Sub, the Company's wholly owned operating subsidiary is a Houston-based corporation. It was incorporated in the State of Texas on November 29, 2000 and was formed for the purpose of commercializing a diesel fuel specific combustion catalyst known as EnerBurn (TM), as well as other combustion enhancement and emission reduction technologies for diesel fuel. EnerTeck's primary product is EnerBurn, and is registered for highway use in all USA diesel applications. The products are used primarily in on-road vehicles, locomotives and diesel marine engines throughout the United States and select foreign markets.
During 2011, EnerTeck acquired a 40% membership interest in EnerTeck Environmental, LLC (Environmental). Environmental was formed for the purpose of marketing and selling diesel fuel emission reduction technology with the creators of such specific technology. Environmental is working with Ingram Barge and is in the process of testing the prototype of the patent pending PEx technology for marine diesel engines. It is projected that this testing will be completed during the second quarter of 2013 and which time Enerteck will be moving forward on the obtaining of California Air Resources Board approval for sale of this equipment in California and eventually throughout the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of EnerTeck Corporation and its wholly-owned subsidiary, EnerTeck Chemical Corp. All significant inter-company accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three (3) months or less to be cash and cash equivalents.
Inventory
Inventory primarily consists of market ready EnerBurn plus raw materials required to manufacture the products. Inventory has been valued at the lower of cost or market, using the average cost method. Subsequent to the end of the third quarter closing on October 3, 2011, there was a major fire at the Waxahachie, Texas facilities of our then primary chemical blending agent, Magna Blend. While our products and raw materials were not directly the cause of the fire, all of our raw materials for the production of our principal product, EnerBurn, and our entire finished goods inventory of EnerBurn were lost. We were subsequently paid by Magna Blend all costs related to the replacement of our raw materials and finished goods inventory and have been made whole on this loss. Included in other income in our statement of operations for the year ended December 31, 2011, are net gains of approximately $170,000 relating to compensation for the lost inventory. Replacement raw materials were ordered, and in December 2011 we were back in full production at ChemJet Chemical Specialties and Services, a new vendor facility located in Conroe, Texas. Arrangements have been made with the new blending agent, Chemjet, to take over production.
In addition, in the interim between the fire and the move to Chemjet, one of our existing customers agreed to do a like kind exchange of several drums of EnerBurn to allow us to service some of our new and smaller customers until new product could be produced. This chemical has subsequently been replaced out of new production. Upon replacement of the raw material inventory we returned to using the average cost method for accounting for our new and future inventory.
Included in inventory at December 31, 2010, were three large Hammonds EnerBurn doser systems amounting to $57,000 which were projected to be transferred to marine customers during 2010, but in 2011 were traded for injection units which are more universally adaptable to other customers. Included in inventory at December 31, 2011, are various injector units and R & D Equipment amounting to $66,000. Testing of our newly developed Marine PEX beta unit with a cost of $38,606, which was included in inventory at December 31, 2011, was originally scheduled to occur prior to the end of the second quarter of 2012. This was delayed due to monitoring equipment requirements requested by the California Air Resources Board regulations and are now scheduled for the late first quarter of 2013. Based on the outcome of testing, it is fully expected that the company will be able to expand its marketing efforts to the environmental equipment market in a significant way. This beta unit was transferred to property and equipment during 2012 to reflect its changed use to testing equipment and not held for sale. Also, during 2012, the Company acquired additional injector system components amounting to approximately $50,000.
Finished product amounted to approximately $94,700 and $47,300 at December 31, 2012 and 2011, respectively. Raw materials amounted to approximately $134,700 and $168,600 at December 31, 2012 and 2011, respectively. The remaining inventory comprises injector system components.
Accounts Receivable
Accounts receivable represent uncollateralized obligations due from customers of the Company and are recorded at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts. The Company calculates this allowance based on historical write-offs, level of past due accounts and relationships with and economic status of the customers. Accounts are written off as bad debts when all collection efforts have failed and the account is deemed uncollectible. Management has provided an allowance for doubtful accounts of $9,863 as of December 31, 2012. There was no allowance for doubtful accounts considered necessary at December 31, 2011.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided for on the straight-line or accelerated method over the estimated useful lives of the assets. The average lives range from five (5) to ten (10) years. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Depreciation expense totaled $47,742 and $33,304 for the years ended December 31, 2012 and 2011, respectively.
Intangible Assets
The Company follows the provisions of FASB ASC 350, Goodwill and Other Intangible Assets. FASB ASC 350 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Specifically, FASB ASC 350 addresses how intangible assets that are acquired should be accounted for in financial statements upon their acquisition, as well as how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The statement requires the Company to evaluate its intellectual property each reporting period to determine whether events and circumstances continue to support an indefinite life. In addition, the Company tests its intellectual property for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The statement requires intangible assets with finite lives to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable and that a loss shall be recognized if the carrying amount of an intangible exceeds its fair value.
Intellectual property and other intangibles are recorded at cost. Prior to 2009, the Company determined that its intellectual property had an indefinite life because it believed there was no legal, regulatory, contractual, competitive, economic or other factor to limit its useful life, and therefore would not be amortized. For other intangibles, amortization would be computed on the straight-line method over the identifiable lives of the assets. Management made the decision during 2009 to change the characterization of its intellectual property to a finite-lived asset and to amortize the remaining balance of its intangible assets to the nominal value of $150,000 by the end of 2012, due to its determination that this now represented the scheduled end of its exclusive registration during that year.
As a result of a review by management of its intangible asset and policies related thereto as of December 31, 2010, it was determined that a further impairment was required to be recorded. This impairment served to reduce its intellectual property to an amount which management believes represents its fair value. This value would be considered a level 3 measurement under FASB ASC 820, Fair Value Measurements and Disclosures, since it is based on significant unobservable inputs. The Company will re-assess the value of this asset in future periods and make adjustments as considered necessary, rather than record additional amortization. No adjustment was considered necessary during the years ended December 31, 2011 or 2012.
Revenue Recognition
The Company follows the provisions of FASB ASC 605, Revenue Recognition, and recognizes revenues when evidence of a completed transaction and customer acceptance exists, and when title passes, if applicable.
Revenues from sales of product and equipment are recognized at the point when a customer order has been shipped and invoiced.
Income Taxes
EnerTeck will compute income taxes using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on evidence from prior years, may not be realized over the next calendar year or for some years thereafter.
The current and deferred tax provisions in the financial statements include consideration of uncertain tax positions in accordance with FASB ASC 740, Income Taxes. Management believes there are no significant uncertain tax positions, so no adjustments have been reported from adoption of FASB ASC 740. The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. The Company is no longer subject to income tax examinations by the Internal Revenue Service for years prior to 2009. For state tax jurisdictions, the Company is no longer subject to income tax examinations for years prior to 2008.
Income (Loss) Per Common Share
The basic net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding.
During the year ended December 31, 2011, EnerTeck entered into stock sales agreements with investors who contributed $175,000 in cash to the Company for 350,000 shares of common stock. The shares had not been issued as of December 31, 2011 but retained the rights associated with the respective class of stock. Accordingly, these shares were considered common stock equivalents for purposes of computing basic earnings per share. 275,000 of these shares were issued during 2012.
Diluted net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For 2012 and 2011, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Management Estimates and Assumptions
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instruments
The Company’s financial instruments recorded on the balance sheet include cash and cash equivalents, accounts receivable, accounts payable and notes payable. The carrying amounts approximate fair value because of the short-term nature of these items.
Stock Options and Warrants
Effective January 1, 2006, EnerTeck began recording compensation expense associated with stock options and other forms of equity compensation in accordance with FASB ASC 718, Stock Compensation
Taxes Collected
The Company collects sales taxes assessed by governmental authorities imposed on certain sales to customers. Sales taxes collected are included in revenues; net amounts paid are reported as expenses in the consolidated statement of operations.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 is intended to result in convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. Early application was not permitted. The adoption of the provisions of ASU 2011-04 did not have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income" ("ASU No. 2011-05"), which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income ("OCI") by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently in December 2011, the FASB issued ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income" ("ASU No. 2011-12"), which indefinitely defers the requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The amendments in these standards do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU No. 2011-05 and ASU No. 2011-12 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The Company adopted the provisions of ASU No. 2011-05 and ASU No. 2011-12 for the year ended December 31, 2012; such adoption did not have a material impact on the Company's financial position or results of operations.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test as described in ASC 350, Intangibles-Goodwill and Other . The ASU defines the more-likely-than-not threshold as having a likelihood of more than 50%. Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The Company adopted the provisions of ASU No. 2011-08 for the year ended December 31, 2012; such adoption did not have a material impact on the Company's financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect that the adoption of ASU 2011-11 will have a significant, if any, impact on the Company’s Financial Statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
At December 31, 2012 and 2011 property and equipment consisted of the following:
NOTE 3 - INTELLECTUAL PROPERTY
In July 2006, EnerTeck acquired the EnerBurn technology. The purchase price for the EnerBurn technology is as follows: (i) $1.0 million cash paid on July 13, 2006, and (ii) a promissory note for $2.0 million. In May of 2007, we made the initial payment of $500,000 plus interest against the loan. Prior to 2009 EnerTeck had determined that the life of the intellectual property was indefinite; therefore, the asset was not amortized. The Company tested its intangible assets for impairment as of December 31, 2008. As a result of an independent examination based on sales for the year ended December 31, 2008, the Company determined that an impairment of the asset in the amount of $825,000 was required to be recorded.
Management made the decision during 2009 to change the characterization of its intellectual property to a finite-lived asset and to amortize the remaining balance of its intangible assets to the nominal value of $150,000 by the end of 2012, due to its determination that this now represents the scheduled end of its exclusive registration during that period. As a result, amortization expense of approximately $579,000 was recorded for the years ended December 31, 2010 and zero for 2011 and 2012.
Management made the decision effective December 31, 2010 to record an additional impairment of the asset in the amount of $868,000 as a result of the Company’s inability to generate sufficient sales to support its previously recorded amount. This impairment adjustment results in a value of $150,000 being placed on the Company's intellectual property, which management believes is adequately supported by existing levels of sales and market data.
NOTE 4 - INCOME TAXES
EnerTeck has incurred net losses since the merger with Gold Bond and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative operating loss carry-forward is approximately $16,054,000 at December 31, 2012, and expire beginning in 2025.
Deferred income taxes consist of the following at December 31, 2012 and 2011:
The change in the valuation allowance for the years ended December 31, 2012 and 2011, was $645,000 and $482,500, respectively.
NOTE 5 - STOCKHOLDERS' EQUITY
During the second quarter of 2011, the Company issued 60,000 shares of common stock, at $.50 per share, to an investor in connection with proceeds of $30,000 which had been advanced by such investor during the second quarter of 2009. In March 2011, such investor signed the subscription agreement and was issued the 60,000 shares of common stock in April 2011. These securities were sold directly by the Company, without engaging in any advertising or general solicitation of any kind, and without payment of underwriting discounts or commissions to any person.
During the first three quarters of 2011, the Company issued 377,077 shares of its common stock to an investor related to the conversion of convertible notes and accrued interest with a total value of $67,000. The Company also issued warrants resulting in recording an amortizable debt discount of $380,000, and issued common stock options and warrants for services rendered with a total Black-Scholes valuation of $1,096,000, which has been reported as non-cash compensation in the accompanying statement of operations for the year ended December 31, 2011.
During the first quarter of 2011, the Company received an advance of $125,000 in gross proceeds for 250,000 shares of common stock at $.50 per share from three investors in a private placement offering to accredited investors only. Such shares were not issued during 2011. This amount has been reported as common stock subscribed in the accompanying balance sheet at December 31, 2011 pending completion of the subscription agreements and/or issuance of the shares. During the first quarter of 2012, the Company issued 175,000 shares to two of such investors in connection with gross proceeds of $87,500. Pending completion of the subscription agreement from the third investor, the balance of 75,000 shares will be issued in connection with the remaining gross proceeds of $37,500.
During the third quarter of 2011, the Company sold to one accredited investor in a private placement offering 100,000 units at $0.50 per unit with each unit consisting of one share of our common stock and one common stock purchase warrant. Each warrant is exercisable into one share of common stock at $0.75 per share. The proceeds received of $50,000 has been reported as common stock subscribed in the accompanying balance sheet at December 31, 2011 pending issuance of the shares. During the first quarter of 2012, the Company issued the 100,000 shares in connection therewith.
During the first quarter of 2012, the Company sold to one accredited investor in a private placement offering 166,667 units at $0.60 per unit with each unit consisting of two shares of common stock and one common stock purchase warrant. Each warrant is exercisable into one share of common stock at $0.50 per share.
During the third quarter of 2012, the Company sold 196,500 shares of common stock to an unrelated third party for $196.50 in cash which shares were issued pursuant to the terms of a consulting agreement entered into as of June 1, 2012. The value of the consulting services was determined to be $78,600, which amount was expensed upon issuance in September 2012.
NOTE 6 - STOCK WARRANTS AND OPTIONS
Stock Warrants
During the second quarter of 2011, the Board of Directors granted 1,000,000 and 100,000 warrants with values of $399,822 and $39,982, respectfully, as non-cash compensation to Mr. Thomas Donino and to Mr. Richard Dicks. These warrants were issued to replace the same number of warrants which expired in the fourth quarter of 2010. These warrants have an exercise price of $0.60 per share and will expire in May 2016. An additional 950,000 warrants with the same exercise price and a value of $379,830 were also issued in the second quarter of 2011 to certain lenders as and for additional consideration for their loans to the Company which were made in 2010. These warrants were fully vested when issued.
During the third quarter of 2011, the Company granted 540,000 warrants to a director and his designee, 30,000 of which were issued in replacement of 30,000 warrants which expired in the second quarter of 2011 and 510,000 of which were issued in replacement of 510,000 warrants exercisable at $2.00 per share which were to expire in October 2012 and have been cancelled. All of the new warrants have an exercise price of $0.60 per share. An additional 250,000 warrants with the same exercise price were issued during the third quarter of 2011 to such director and another officer/director of the Company as and for additional consideration for previous loans to the Company. Also, during the third quarter of 2011, three of the four directors of the Company were each granted 250,000 warrants for services rendered which warrants are exercisable at $0.60 per share. All of the warrants have a term of five years and were fully vested when issued. Non-cash compensation recognized for these issuances totaled $549,291for the year ended December 31, 2011.
During the third quarter of 2011, and in connection with a private placement offering with one accredited investor, we issued a total of 100,000 warrants exercisable at $0.75 per share. Such warrants have a term of five years.
During the first quarter of 2012, the Company issued to one accredited investor 166,667 warrants in connection with a private placement offering of 166,667 units at $0.60 per unit with each unit consisting of two shares of common stock and one common stock purchase warrant. Each warrant is exercisable into one share of common stock at $0.50 per share.
Other than the foregoing, there were no other warrants granted or exercised for the years ended December 31, 2012 and 2011. A total of zero and 540,000 warrants expired for the years ended December 31, 2012 and 2011, respectively. A total of 166,667 and 3,690,000 warrants were issued during the years ended December 31, 2012 and December 31, 2011, respectively.
Warrants outstanding and exercisable as of December 31, 2012:
Stock Options
In September 2003, shareholders of the Company approved an employee stock option plan (the “2003 Option Plan”) authorizing the issuance of options to purchase up to 1,000,000 shares of common stock. The 2003 Option Plan is intended to give the Company greater ability to attract, retain, and motivate officers, key employees, directors and consultants; and is intended to provide the Company with the ability to provide incentives more directly linked to the success of the Company’s business and increases in shareholder value.
During the third quarter of 2011, options to acquire 225,001 shares were issued under our 2003 Stock Option Plan to four employees, which options are immediately exercisable. These options have an exercise price of $0.60 per share and expire in five years from their issue date.
The fair value of options at the date of grant was $107,823 and was recognized as non-cash compensation for the year ended December 31, 2011, as estimated using the Black-Scholes Model with the following weighted average assumptions for fiscal year 2011:
The expected term of the options represents the estimated period of time until exercise and is based on the Company’s historical experience of similar option grants, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For fiscal 2011, expected stock price volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury bill rate in effect at the time of grant with an equivalent expected term or life. The Company has not paid dividends in the past and does not currently plan to pay any dividends in the future.
Information regarding activity for stock options under our plan is as follows:
NOTE 7 - NOTE PAYABLE
The Company had a note payable in connection with its acquisition of intellectual property. The note required four annual payments of $500,000 plus interest at 4% compounded on a monthly basis, starting July 2007. The note was secured by the intellectual property. All payments were made prior to January 1, 2011.
NOTE 8 - RELATED PARTY NOTES AND ADVANCES
On July 7, 2009, the Company entered into a $100,000 unsecured promissory note with an officer, due on demand. Interest is payable at 12% per annum. Also, on December 11, 2009, the Company entered into a $50,000 note with a shareholder/director. Interest is 5% per annum. The principal balance of the note is due on the earlier of December 11, 2012, or upon completion by the Company of equity financing in excess of $1.0 million in gross proceeds. Interest on the loan is payable on the maturity date at the rate of 5% per annum. This note is now overdue for payment.
On June 1, 2010, the Company entered into a $50,000 convertible promissory note with a shareholder/director which shall be due and payable on June 1, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock. The assignment of the conversion feature of the note resulted in a loan discount being recorded. The discount amount of $36,207 is being amortized over the original thirty-six month term of the debt as additional interest expense. Amortization for this loan was $12,069 and $12,069 for the years ended December 31, 2012 and 2011.
On June 1, 2010, the Company entered into $300,000 of convertible promissory notes with a shareholder/director which shall be due and payable on June 1, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On July 20, 2010, the Company entered into a $200,000 convertible promissory note with a shareholder/director which shall be due and payable on July 20, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On July 20, 2010, the Company entered into $300,000 of convertible promissory notes with shareholders/director which shall be due and payable on July 20, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On December 10, 2010, the Company entered into $150,000 of convertible promissory notes with shareholders/director which shall be due and payable on December 10, 2013 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
On October 20, 2011, the Company entered into a $70,000 convertible promissory note with a shareholder/director which shall be due and payable on October 20, 2014 and accrue interest at 8.0% per annum payable at maturity and which may be converted at any time into shares of common stock.
During 2010, 2011 and 2012 such shareholder/director advanced the Company $150,000, $150,000 and $320,000 respectively. Such advances are due on demand and bear interest at 5%, 8% and 8% per annum respectively, and may be converted at any time into shares of common stock. The following represents the stated maturities of these notes:
Discounts representing additional interest expense have been recorded on the issuance of warrants related to certain notes. Such discounts are being amortized over the terms of the respective notes on a straight-line basis and are netted with those notes for purposes of balance sheet presentation. Interest expense resulting from the amortization of discounts amounted to approximately $162,000 and $126,000, for the years ended December 31, 2012 and 2011, respectively. Amortization of discounts is expected to be $142,018 for 2013.
NOTE 9 - CONVERTIBLE NOTES PAYABLE
On June 7, 2010, the Company entered into a $55,000 convertible promissory note with Asher Enterprises, Inc. due on December 8, 2011. Interest is payable at 8% per annum. At any time during the period beginning 120 days following the date of the promissory note until maturity, Asher Enterprises, Inc. had the right to convert any unpaid portion of the note into shares of common stock. The assignment of the conversion feature of the note resulted in a loan discount being recorded. The discount amount of $35,164 was being amortized over the original eighteen month term of the debt as additional interest expense. Amortization was $13,675 for the year ended December 31, 2010. In the first quarter of 2011 Asher Enterprises converted the entire principal and accrued interest due on such note into 215,235 shares of common stock. Amortization expense of $1,439 was recorded for the first quarter of 2011 prior to conversion.
On December 3, 2010, the Company entered into a $33,000 convertible promissory note with Asher Enterprises, Inc. due on September 3, 2011. Interest is payable at 8% per annum. At any time during the period beginning 120 days following the date of the promissory note until maturity, Asher Enterprises, Inc. had the right to convert any unpaid portion of the note into shares of common stock. The assignment of the conversion feature of the note resulted in a loan discount being recorded. The discount amount of $27,000 was amortized over the original nine month term of the debt as additional interest expense. Amortization was $3,000 for the year ended December 31, 2010. In the second quarter of 2011 Asher Enterprises converted $15,000 of the principal due on such note into 68,182 shares of common stock. In the third quarter of 2011, Asher Enterprises converted the remaining $18,000 balance of such note and accrued interest of $1,320 into 93,650 shares of common stock. Amortization expense of $19,636 was recorded in 2011 prior to conversion.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Office Lease -
EnerTeck leases office space under a non-cancelable operating lease. Future minimum rentals due under non-cancelable operating leases with an original maturity of at least one-year are approximately as follow:
This lease provides for a rent-free period as well as increasing rental payments. In accordance with generally accepted accounting principles, rent expense for financial statement purposes is being recognized on a straight-line basis over the lease term. A deferred lease liability arises from the timing difference in the recognition of rent expense and the actual payment of rent.
Rent expense for the years ended December 31, 2012 and December 31, 2011 totaled $47,464 and $49,368, respectively. The current lease was recently negotiated for a renewal for an additional three years and expires August 31, 2014. The company has an option to renew for an additional two years at that time.
Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the years ended December 31, 2012 and 2011, the Company incurred recurring net losses of $1,611,000 and $2,279,000, respectively. In addition, at December 31, 2012, the Company has an accumulated deficit of $28,108,000. Further, notes totaling $1,770,000 are either past due or will become due and payable in 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s continuation as a going concern is contingent upon its ability to obtain additional financing or refinance existing debt and to generate revenues and cash flow to meet its obligations on a timely basis. Management believes that sales revenues for 2012 and 2011 were considerably less than earlier anticipated primarily due to circumstances which have been corrected or are in the process of being corrected. Management expects that marine, railroad and trucking sales should show significant increases in 2013 over what has been generated in the past, as a result of the successful outcome of long term client demonstrations from several extremely large new clients that took place during 2012 and are taking place during 2013.
The Company has been able to generate working capital in the past through private placements and issuing promissory notes and believes that these avenues will remain available to the Company if additional financing is necessary. Management also believes it will be able to modify the terms of its current debt should the need arise. No assurance can be made that any of these efforts will be successful.
NOTE 11 - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject EnerTeck to concentration of credit risk are accounts receivable. Currently all Accounts Receivable are considered collectible. EnerTeck performs ongoing credit evaluations as to the financial condition of its customers. Generally, no collateral is required.
EnerTeck at times has cash in bank in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2012, EnerTeck had $53,000 in cash which is not insured.
NOTE 12 - SUBSEQUENT EVENTS
During the first quarter of 2013, the Company agreed to issue 57,142 shares of common stock for prior legal services rendered in the amount of $20,000.
During the first quarter of 2013, the Company sold to three accredited investors in a private placement offering 571,414 units at $0.70 per unit or $400,000 cash in the aggregate with each unit consisting of two shares of common stock of the Company.