-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IjpRr4vQnxOqDd/lUrc2S93HsQrFU7k53EtOvXkt5iryL3r0kAqUKJ5RrCK2g6oh tOKYjJ2SVreFqVJ4MalEpQ== 0001108890-05-000608.txt : 20050916 0001108890-05-000608.hdr.sgml : 20050916 20050916134135 ACCESSION NUMBER: 0001108890-05-000608 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050916 DATE AS OF CHANGE: 20050916 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED ENERGY RECOVERY, INC CENTRAL INDEX KEY: 0000823314 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 841069416 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11838 FILM NUMBER: 051088539 BUSINESS ADDRESS: STREET 1: 5799 BROADMOOR STREET 2: SUITE 750 CITY: MISSION STATE: KS ZIP: 66218 BUSINESS PHONE: 9135351072 MAIL ADDRESS: STREET 1: 5799 BROADMOOR STREET 2: SUITE 750 CITY: MISSION STATE: KS ZIP: 66218 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED FINANCIAL INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED MEDICAL DYNAMICS INC DATE OF NAME CHANGE: 19910617 FORMER COMPANY: FORMER CONFORMED NAME: WEINCOR FINANCIAL CORP DATE OF NAME CHANGE: 19890406 10QSB 1 advanced10qsb063005.txt PERIOD ENDED 06-30-05 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 2005 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the Transition Period from To -------- --------------- Commission File No. 0-19485 ADVANCED ENERGY RECOVERY, INC. -------------------------------------------- (Name of small business issuer in its charter) DELAWARE 84-1069416 ------------------------------ ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5799 Broadmoor, Ste 750, Mission, KS 66203 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (913) 535-1072 APPLICABLE ONLY TO CORPORATE ISSUERS As of June 30, 2005, the Issuer had 2,396,503 shares of its common stock outstanding. Transitional Small Business Disclosure Format: Yes No X ----- ----- FORM 10-QSB Part 1 ------ Item 1. Financial Statements -------------------- Page ---- Unaudited Condensed Consolidated Balance Sheet -June 30, 2005 3 Unaudited Condensed Consolidated Statement of Operations for the three months ended June 30, 2004 and 2005 4 Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended June 30, 2004 and 2005 5 Notes to Consolidated Financial Statements 6 Part 1I Items 1-5. 21 2 ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS June 30, 2005 ----------- Cash $ 22,887 Accrued interest receivable 143,448 Other receivables 116,523 Prepaid expenses and other 70,414 ----------- Current Assets 353,272 Property, plant and equipment,net 1,040,898 Deferred project costs and prepaid lease 70,590 ----------- Total Assets $ 1,464,760 =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Accounts payable $ 269,386 Accrued expenses 84,926 Accounts payable - related parties 8,010 Notes payable 361,853 Dividends accrued- preferred stock of subsidiary 138,919 ----------- Current Liabilities 863,094 ----------- Commitments and Contingencies- Minority interest 565,481 ----------- STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred Stocks of Subsidiary- Series A, $10.00 Par Value: 900 shares authorized, 900 shares issued and outstanding 9,000 Paid-in capital, Series A Preferred Stock 891,000 Subscriptions receivable, Series A Preferred Stock (900,000) ----------- -- ----------- Series B, $10.00 Par Value: 595 shares authorized, 466.625 shares issued and outstanding 5,950 Paid-in capital, Series B Preferred Stock 589,050 Subscriptions receivable, Series A Preferred Stock (108,451) ----------- 486,549 ----------- Preferred stock, Series B, $.005 par value; 1,000,000 shares authorized, none issued and outstanding -- ----------- Common stock, $.003 par value; 10,000,000 shares authorized, 2,396,503 issued and outstanding 7,189 Paid-in capital 1,330,503 Accumulated deficit (1,788,056) ----------- (450,364) ----------- Total Stockholders' Equity 36,185 ----------- $ 1,464,760 =========== The accompanying notes are an integral part of these statements. 3 ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Three Months June 30, 2004 June 30, 2005 ----------- ----------- REVENUES Natural gas sales $ -- 25,147 Interest and guaranteed return 33,750 33,750 Other 948 -- ----------- ----------- Total Revenues 34,698 58,897 ----------- ----------- EXPENSES Cost of natural gas purchased -- 13,710 Operating expenses -- 90,239 General and administrative costs 13,015 15,746 Interest 3,740 5,721 Depreciation -- 15,077 ----------- ----------- Total Expenses 16,755 140,493 ----------- ----------- OPERATING INCOME (LOSS) 17,943 (81,596) Gain on Exchange Transaction 1,569,476 -- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,587,419 (81,596) Income taxes -- -- Minority interest -- 45,739 ----------- ----------- NET INCOME (LOSS) 1,587,419 (35,857) Subsidiary preferred stock dividends accrued (22,511) (45,190) ----------- ----------- EARNINGS (LOSS) FOR COMMON STOCK $ 1,564,908 $ (81,047) =========== =========== Weighted-average shares outstanding 1,955,379 2,396,503 =========== =========== Earnings (Loss) Per Common Share $ 0.80 $ (0.03) =========== =========== The accompanying notes are an integral part of these statements. 4
ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Three Months June 30, 2004 June 30, 2005 ----------- ----------- Cash flows from operating activities Net income (loss) $ 1,587,419 $ (35,857) Adjustments to reconcile net loss to net cash used in operating activities Depreciation -- 15,077 Gain on Exchange Transaction (1,569,476) -- Net change in assets and liabilities 1,001 (82,220) ----------- ----------- Net cash provided (used) in operating activities 18,944 (103,000) ----------- ----------- Cash flows from investing activities Interest receivable-Gateway Energy Corporation (33,906) (33,750) Project price upside payments received 26,453 48,044 Acquisitions of property, plant and equipment -- (47,088) Minority interest contributions -- 29,334 Deferred project costs and other -- (18,132) ----------- ----------- Net cash provided by (used in) investing activities (7,453) (21,592) ----------- ----------- Cash flows from financing activities Payments on notes payable (1,350) (4,547) Issuance of subsidary preferred stock -- 99,333 Advances from related parties, net of repayments -- 285 Subsidiary preferred stock dividends paid (16,569) (29,379) ----------- ----------- Net cash provided by financing activities (17,919) 65,692 ----------- ----------- Net increase (decrease) in cash (6,428) (58,900) Cash, beginning of period 6,734 81,787 ----------- ----------- Cash, end of period $ 306 $ 22,887 =========== =========== The accompanying notes are an integral part of these statements. 5
Advanced Energy Recovery, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. 1. Organization and Principles of Consolidation Advanced Energy Recovery, Inc. (Formerly known as Advanced Financial, Inc.) (the "Company" or "AER") is a Delaware corporation formed in September 1986. Advanced Financial, Inc. operated in the financial services sector through March 31, 2004. Through its two wholly owned subsidiaries, AIH Receivable Management Services and AIH Early Recovery Systems ("AIH"), the Company collected debts for others for a fee and purchased charged-off credit card debt to collect at a profit from debtors located throughout the United States. Through AIH, the Company was also engaged in the business of collecting nonperforming receivables on behalf of third parties. During the year 2004, the Company changed its focus and growth efforts to the energy industry with its primary emphasis on natural gas. Advanced Energy Recovery, Inc., currently owns 100% of Allen Drilling Acquisition Company ("ADAC"). In addition, as of October 14, 2004, through ADAC, the Company owns 52.5% of Elgin Holdings, LLC ("Elgin"). ADAC and Elgin are engaged in operations in the energy industry. Under date of February 27, 2004, the Company, through an Information Statement pursuant to Section 14 (c) of the Securities Exchange Act and Regulation 14A, solicited the consents of the common stockholders (the "Solicitation") to effect several transactions in an effort, among other things, to restructure the Company, to dispose of the financial service operations which have accumulated significant losses and to change its focus and growth efforts to the energy industry with its primary emphasis on natural gas. The consents solicited included the following: 1. To adopt an amendment to the Company's Certificate of Incorporation to; (i) change the name of the corporation to "Advanced Energy Recovery, Inc."; (ii) effect a 1 for three reverse split of the outstanding Common Stock of the Company; and (iii) set the authorized Common Stock of the Company at 10,000,000 common shares. 2. To obtain Stockholders' consent to an exchange of 100% of the outstanding stock of AIH Receivable Management Services, Inc. ("AIH") (a wholly owned subsidiary of the Company) for an assumption by the primary secured lender of the Company of all of the AIH liabilities ("the Exchange Transaction"). 6
3. To obtain Stockholders' consent and ratification of the engagement by the Board of Directors of Weaver and Martin L.P. as the Company's independent public accountants. 4. To obtain Stockholders' consent and ratification of the appointment by the Board of Directors of two directors to fill two vacancies created by resignations. Such directors will serve until the next annual meeting of Stockholders. On March 24, 2004, the Company, under a Form 8-K under date thereof, announced that it had received the requisite affirmative consent votes from the common shareholders to effect the four proposals set forth in the February 27, 2004 Solicitation. The Exchange Transaction was completed in August, but was effective as of 12:01 AM April 1, 2004. 2. The Exchange Transaction The AIH operations had resulted in significant losses despite the efforts by the Company to restructure and reorganize various AIH segment operations. These losses were funded by ARGUS. The following sets forth in summary form the consolidated results of operations for five years: Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Financial Position 03/31/00 03/31/01 03/31/02 03/31/03 03/31/04 ----------- ----------- ----------- ----------- ----------- Total assets $ 1,139,576 $ 742,348 $ 562,750 $ 435,032 $ 332,697 Total liabilities 1,027,060 1,272,620 1,589,521 1,873,184 2,234,107 Stockholders' equity $ 112,516 $ (530,272) $(1,026,771) $(1,438,152) $(1,901,410) Amounts due to ARGUS $ 560,000 $ 765,840 $ 1,129,772 $ 1,318,709 $ 1,442,618 Operations Total revenues $ 977,439 $ 1,423,153 $ 1,152,171 $ 1,128,441 $ 987,819 Total expenses 1,898,423 2,119,914 1,648,669 1,539,822 1,361,077 Net loss $ (920,984) $ (696,761) $ (496,498) $ (411,381) $ (373,258) The consolidated operations for the fiscal year ended March 31, 2004, included amounts with respect to the Company's wholly owned subsidiary's, (ADAC) participation in the Madisonville Project as described in Note C herein. For the fiscal year then ended, ADAC reported net income of $105,616. As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point where the Company could no longer service this outstanding debt given the downsizing of the Company that was the result of the reorganization and restructuring of the various AIH segment operations. Also during these years, and to the current date, the current President and Treasurer of the Company did 7
not draw a salary, nor were any amounts accrued with respect thereto. With the completion of the Madisonville Project investment, and the joint venture with GulfWest Energy Inc. as discussed later, the Company had determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (AIH) were sold and the Company concentrated its growth efforts in the energy industry, focusing primarily on natural gas. In accordance with this business strategy, an agreement was entered into with ARGUS, subject to common shareholder approval, wherein the common shares of AIH would be exchanged for an assumption by ARGUS of all of the AIH liabilities (the "Exchange Transaction"). The Board of Directors engaged an investment banking firm (Morgan Stanley) to determine the fair market value of the AIH operations on a going concern basis. Morgan Stanley, through its SPARDATA affiliate, determined such value to be $345,000. On March 24, 2004, the Company received the requisite affirmative consent votes from the common shareholders to effect the Exchange Transaction. The Exchange Transaction was effective at the beginning of business on April 1, 2004. The following sets forth the opening consolidated balance sheet on April 1, 2004, reflecting the Exchange Transaction : Condensed Consolidated Balance Sheet March 31,2004 Assets Actual Transaction April 1,2004 ----------- ----------- ----------- Cash (overdrafts) $ (112,489) $ 119,223 $ 6,734 Receivables and other 65,927 (40,791) 25,136 Accrued interest receivable 96,095 96,095 Property, net 36,063 (36,063) 0 Customer lists, net 134,612 (134,612) 0 Escrow deposit 75,000 75,000 Escrow depost reserve (75,000) (75,000) ----------- ----------- $ 220,208 $ 127,965 =========== =========== Liabilities Payables and accrued expenses $ 396,742 (352,861) 43,881 Payables to related parties 52,815 A 52,815 Notes payable 1,594,658 B (1,308,858) 285,800 Preferred stock dividends accrued 77,403 77,403 ----------- ----------- Total 2,121,618 459,899 ----------- ----------- Stockholders Equity (Deficiency) Subsidary preferred stock 900,000 900,000 Subscriptions receivable (900,000) (900,000) Series B Preferred stock 0 0 Common stock and paid in capital 1,259,126 1,259,126 Accumulated deficit (3,160,536) C 1,569,476 (1,591,060) ----------- ----------- Total (1,901,410) (331,934) ----------- ----------- $ 220,208 $ 127,965 =========== =========== 8 Notes to Condensed Consolidated Balance Sheet: (A) At March 31, 2004, the amounts due to related parties consisted of $52,815 due to AFI Capital Corporation. In August, 2004, the $52,815 was settled by the issuance of common stock of the Company. (B) Notes payable at March 31, 2004, consisted of the following: Due ARGUS, $1,442,618, interest at prime, due on demand, secured by substantially all of the Company's assets. Due AFI Capital Corporation, $75,000, interest at 8%, unsecured, due on demand. Due bank, $77,040 under a $100,000 Line of Credit, interest at 2% over prime, unsecured, due March 31, 2004, guaranteed by a director of the Company. The ARGUS note payable included $185,900 which was used to fund general Company corporate operations since the Company's emergence from its Chapter XI filing in 1999. A new prime interest rate demand note (accrued interest of $33,381 with respect to such note is included in accrued expenses above) was issued to ARGUS. The balance ($1,308,858) related to the funding of the AIH operations and was included in the Exchange Transaction. The AFI Capital Corporation note payable consists of two advances to ADAC in connection with a proposed acquisition transaction The bank note payable relates to the operations of AIH and was included in the Exchange Transaction. (C) The gain to the Company on the Exchange Transaction. Such gain was the difference between the ARGUS obligations cancelled and the AIH operation's net assets (assets less liabilities assumed by ARGUS). During the quarter ended December 31, 2004, this gain was reduced by $59,925 as a result of a final settlement of certain payables and certain additional costs related to the Exchange Transaction. 3. Property, Plant and Equipment At June 30, 2005, property, plant and equipment, all of which is held in Elgin, consisted of approximately $520,000 related to a pipeline and natural gas treating facilities located in Hardin County, Texas, and $538,000 of acreage and related costs for oil and gas properties located in Madison County, Texas. The properties are stated at cost in the case of assets acquired within Elgin and at fair market value in the case of assets contributed to Elgin by the members. Property and Equipment - ---------------------- All property, furniture, and equipment as of March 31, 2004 was owned by AIH and accordingly included in the Exchange Transaction and the determination of the gain thereon. Depreciation is provided on pipelines and treating facilities using the straight-line method over an estimated useful life of 10 years. Oil And Gas Properties - ---------------------- The Company has elected to use the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, 9 and to drill and equip development wells, will be capitalized. Costs to drill exploratory wells that do not find proved reserves, and geological and geophysical costs will be expensed. As the Company acquires significant oil and gas properties, any unproved property that is considered individually significant will be periodically assessed for impairment of value, and a loss will be recognized at the time of impairment by providing an impairment allowance. Capitalized costs of producing oil and gas properties and support equipment, after considering estimated dismantlement and abandonment costs and salvage values, will be depreciated and depleted by the unit-of-production method. In the event of the sale of an entire interest in an unproved property, the gain or loss on the sale will be recognized, taking into consideration the amount of any recorded impairment if the property has been assessed individually. In the case of a sale of a partial interest in a proved property, the gain or loss will be recognized, based upon the fair values of the interests sold and retained. 4. Income Taxes The Company accounts for income taxes under the asset and liability method where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized to the extent management believes that it is more likely than not that they will be realized. 5. Income (Loss) Per Common Share Income (Loss) per common share is based on the weighted average number of common shares outstanding during the periods presented 6. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Stock-Based Compensation 10 7. Accounting Pronouncements and Recent Regulatory Developments In January 2003, the SEC adopted rules implementing Sections 406 and 407 of the Act. Section 406 of the Act requires public companies to annually disclose whether the company has adopted a code of ethics for its principal executive and financial officers, and if it has not, to explain why it has not. Additionally, the rules will require disclosure on a Form 8-K filing any amendments to or waivers from the code of ethics relating to those officers. Section 407 of the Act required public companies to disclose annually whether it has at least one "audit committee financial expert", as defined in the rules, on the Company's audit committee, and if so, the name of the audit committee financial expert and whether the expert is independent of management. A company that does not have an audit committee financial expert will be required to disclose this fact and explain why it has no such expert. Both rules are effective for small business issuers' annual reports for fiscal years ending on or after December 15, 2003. As of June 30, 2005, because of its recent restructuring and small size of the Board, the Company did not have on its Board of Directors a member who could meet the qualifications as defined in the rules for serving on an audit committee, or a member who could meet the qualifications of an audit committee financial expert. 8. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - GOING CONCERN At March 31, 2005, the Company's financial statements were subject to "Going Concern" issues, and the consolidated financial statements with respect thereto were prepared on going concern basis, which contemplated the Company's continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. Those statements, however, did not reflect adjustments that might result if the Company were unable to continue as a going concern. To address those issues, early in fiscal year 2004, management of the Company developed a plan to restructure the Company and to change its focus and business strategy as later described herein. The plan was implemented throughout the year, and culminated in the Exchange Transaction in August 2004, which transaction was effective on April 1, 2004. NOTE C -AGREEMENTS 1. AFI Capital Corporation Agreement In July, 2001, the Company entered into a four year Agreement with AFI Capital Corporation ("Capital") a Nebraska corporation. Pursuant to the agreement, Capital provided financial, acquisition, and general public company business consulting services in other than the financial services industry. Compensation for such services was based on a "successful efforts" basis and primarily consisted of the Company's common equity and cash performance fees as earned. At March 31, 2004, $52,815 was due to Capital under the compensation portion of the 11 Agreement, which amount was converted to 337,500 shares of Common Stock (post reverse split basis) subsequent to March 31, 2004, in accordance with the provisions of the Agreement. Upon issuance of the shares, the Agreement was terminated and all parties released from any obligations arising there from. Larry J. Horbach, who was appointed assistant secretary of the Company, and appointed to fill a vacant Company director position in March, 2003, is the president and a director of AFI Capital Corporation. Mr. Holtgraves is a founding director and an officer of Capital. Upon issuance of the shares, Mr. Holtgraves resigned as a director and officer of Capital and his Capital shares were redeemed by Capital. 1. The Gateway Energy/Madisonville Project Agreement On March 6, 2003, the Company executed an Agreement which was closed on April 30, 2003, with Gateway Energy Corporation and certain of its subsidiaries of Houston, Texas ("Gateway") under which it provided, through the Company's wholly-owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), $900,000 of credit enhancements in the form of Letters of Credit. These credit enhancements enabled Gateway to obtain additional financing, in the form of a three year Balloon Note from a Houston bank to complete the construction of certain natural gas pipeline facilities ("Pipeline Facilities") located in Madison County, Texas, (The "Madisonville Project"). ADAC secured the Letters of Credit through the private placement of a new series of participating preferred stock (the "Series A"), to two investor groups. The Certificate of Designation for the Series A provides, among other things, for dividend payments to the named holders thereof, equal to sixty-six and two thirds, (66.67%) of cash distributions received by ADAC from Gateway, and an unanimous vote of the Series A to exercise the Equity Participation Option as further described below. The Agreement provides, among other things, that ADAC will receive, during the term of the additional financing, one-half (50%) of the price upside portion only, if any, of the monthly fee to be received by Gateway from the Madisonville Project. The Agreement also provides that ADAC will have the option to either: (i) receive at the end of the Balloon Note term a lump-sum payment, which when added to the payments received, if any, for the price upside portion, will result in a 15% pre-tax internal rate of return on the $900,000, or (ii) to exercise the Equity Participation Option by paying off the Balloon Note on or before the end of the Balloon Note term in exchange for a thirty-three and one-third (33.33%) ownership interest in the Pipeline Facilities from that date forward. Gateway is obligated to pay the periodic interest payments on the Balloon Note during the three year term of the Balloon Note. Further, Gateway has granted liens to ADAC, subordinate to its banks, on its economic interest in the Madisonville Project and certain other natural gas operating systems and natural gas operating assets. The Agreement contains cross collateral and cross default provisions linking it to an additional Gateway term note at the same bank, the proceeds of which were used by Gateway to fund the Madisonville Project. The Madisonville Project is operated under a long-term agreement between Gateway, Hanover Compression Limited Partnership, and Redwood Energy Production, L. P. and is designed to treat gas to remove impurities from the gas to enable the gas to meet pipeline sales quality specifications. The Madisonville Project employs the state-of-the-art, patented, absorption based technology developed by Advanced Extraction Technologies, Inc., for which Gateway has the exclusive U. S. license, to remove nitrogen from the gas. During the quarter ended June 30, 2005, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the minimum guaranteed return and received $44,044 in price upside payments. These payments were offset to the accrued minimum guaranteed return. During the quarter ADAC also accrued Series A Preferred Stock 12 dividends payable of $22,500, representing 66-2/3% of such minimum guaranteed return and paid cash dividends of $29,379. The dividends are not payable until such time as ADAC receives project cash distributions from Gateway. The plant was deemed to be in service on October 1, 2003, which is the date that the price up side provisions of the agreement became effective. To implement the provisions, terms and conditions of the various agreements including the Certificate of Designation for the ADAC Series A Preferred Stock: (i) Larry J. Horbach and Christopher D. Davis were appointed to the Board of Directors of the Registrant to fill the vacancies created by the resignation of two directors following the Registrant's emergence from it's Chapter XI Reorganization, serving until elected at the next meeting of shareholders; and (ii) Mr. Horbach resigned as a director of ADAC, with that position then being filled by Mr. Davis. The Registrant, as the sole shareholder of ADAC, effected such ADAC director changes and entered into an agreement to amend the ADAC By-laws to provide that the number of ADAC directors shall be fixed at three as long as any Series A Preferred Shares remain outstanding. In addition, Mr. Davis as well as the Registrant's President, Charles Holtgraves, were elected to the ADAC board of directors. Mr. Holtgraves is currently a director of Gateway. Mr. Horbach, who was a director of Gateway for several years, resigned his directorship on August 27, 2004. Mr. Davis has no affiliation with Gateway. Mr. Holtgraves owns 14.65% of an entity that owns 55.56% of the ADAC Series A Preferred Stock. Mr. Davis serves as the Trustee of the Davis Investment Management Trust for the Davis Investments VI LP, which LP owns 44.44% of the ADAC Series A Preferred Stock. Mr. Horbach owns no ADAC common stock or Series A Preferred Stock. Reference is made to the Subsequent Event footnote herein for additional information concerning this agreement GulfWest Energy Inc. Joint Venture On July 21, 2004, the Company entered into a Letter of Intent, subject to the execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located in Houston, Texas, under which the Company and GWEI, through one or more Joint Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes and Madison County, Texas. Certain of the Madison County reserves, if developed and produced, are expected to require treatment similar to that as earlier described in the Madisonville Project. On October 14, 2004, the Company, through ADAC, became a member of a Texas LLC (Elgin Holdings, LLC) (the "LLC") ("Elgin") with GWEI for the purpose of initially developing certain portions of the GWEI oil and gas asset bases in Madison County and Hardin County, Texas. Participation in the development of the Grimes County asset base by ADAC was deferred and will not be a part of this LLC. GWEI contributed certain assets valued at approximately $540,000, and the Company committed to provide up to $595,000 in initial capital funding to the LLC as provided for in the LLC's Regulations. Through March 31, 2005 the Company had funded $485,000, leaving a balance of $110,000 remaining to be funded in the current fiscal year. The capital funding is being raised by ADAC through a private placement of a new series (Series B) of participating preferred stock. The various agreement transaction requirements were completed on November 15, 2004. The transaction agreements included among other items, an operating and management agreement with a wholly-owned subsidiary of GWEI and a gas purchase agreement with a wholly-owned subsidiary of GWEI. The Company owns 52.5% of the LLC, and holds two of the three manager positions, such positions filled by Charles A. Holtgraves and Larry J. Horbach, directors and officers of the Registrant. 13 The initial capital funding was raised by ADAC through a private placement of 595 shares of a new series preferred stock. The Senior Series B Preferred Stock, Stated Value $1,000 per share provides, among other things, for a preferential dividend right based on the Company's proportionate interest in the operations and cash flow from Elgin, and a preferential liquidation right consisting of a proportionate share of the Company's Capital Account in Elgin. Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr. Horbach are officers of the Registrant. Entities in which these individuals either control or have an interest in, have subscribed for 577 of the 595 authorized shares. AER/Elgin and Gateway Energy Corporation Agreement On November 15, 2004, AER and Elgin entered into a LICENSE AGREEMENT (the "Agreement") with Gateway Energy Corporation and certain of its subsidiaries. The Agreement, provides, among other things, for the granting of a sublicense to AER and Elgin to enable Elgin to treat the gas produced from the leasehold interests owned by Elgin in Madison County, Texas, which interests fall within a defined Area of Mutual Interest, ("AMI"). The AMI is described in certain agreements with respect to the "The Gateway Energy/Madisonville Project Agreement" discussed above. In addition, the Agreement provides that AER and Elgin will dedicate the gas produced from its interests in the AMI to the Madisonville Project plant and will advance up to $91,250 to Gateway, $30,413 of which will represent a prepayment by the Company of the license and other fees due Advanced Extraction Technologies ("AET") for the processing of a minimum of 5,000 Mcf per day. The balance of the advance ($60,837) will be repaid by Gateway from Gateway's share of the initial project cash flows. The funds were advanced in December 2004. The Agreement further grants to AER or its designees, an option to participate pari passu with Gateway, subject to certain limitations, interests in future projects which require the treatment of natural gas containing high nitrogen, which projects utilize the AET license held by Gateway. NOTE D - NOTES PAYABLE The following summarizes the Company's notes payable at June 30, 2005: Due ARGUS, interest at prime, due on demand, secured by substantially all of the assets of AER $199,950 Due to two officers and directors of the Company, under an assignment by AFI Capital Corporation, interest at 8%, unsecured, due on demand 75,000 Due to bank, interest at prime, due December 20, 2005, with renewable terms, guaranteed by Mr. Horbach and Mr. Holtgraves, officers and directors of the Company 86,903 ------ Notes Payable, All Current $361,853 -------- 14 NOTE E - ACCOUNTS PAYABLE - RELATED PARTY At June 30, 2005 accounts payable related parties, consisted of amounts due and officer and director (Mr. Horbach) of the Company for un-reimbursed travel expenses. NOTE G - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at: June 30, June 30, 2005 2004 ----------- ----------- Non evaluated, non producing leaseholds $ 537,563 $ -- Plant and equipment 520,145 -- ----------- ----------- $ 1,057,708 $ -- Accumulated depreciation (16,810) -- ----------- ----------- $ 1,040,898 $ -- =========== =========== Depreciation provided $ 15,077 $ -- =========== =========== Office Lease On August 31, 2004, the Company entered into a month to month lease for office space and equipment located at 5799 Broadmoor, Suite 750, Mission, KS, 66203, at a cost of $1,000 per month with a former subsidiary of the Company. NOTE H- RELATED PARTIES Larry J. Horbach who was appointed to fill a vacant director's position in May 2003, and Charles A. Holtgraves, the Chairman of the Board and President of the Registrant are also directors of Gateway Energy Corporation. Mr. Horbach resigned as a director from Gateway on August 27, 2004. Mr. Horbach is the President and Chairman of the Board of AFI Capital Corporation. Mr. Holtgraves is a director of AFI Capital Corporation. Mr. Holtgraves resigned as a director of AFI Capital Corporation on August 27, 2004. Argus Investment Group, Inc. ("ARGUS ") is a family owned corporation involved in venture capital lending and financing. The stock of ARGUS is 100% owned by the Philip J. Holtgraves Irrevocable Trust DTD 9/20/93. Philip J. Holtgraves is the Chairman of ARGUS , a Director of the Registrant and the father of Charles A. Holtgraves. Charles A. Holtgraves is the President of ARGUS and Chairman, President and Director of the Registrant. 15 Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr. Horbach are officers of the Registrant. Entities in which these individuals either control or have an interest in, have subscribed for 577 of the 595 authorized ADAC Series B Preferred Stock shares being issued in connection with the Elgin Holdings, LLC joint venture. Mr. Holtgraves owns 14.65% of an entity that owns 55.56% of the ADAC Series A Preferred Stock. Mr. Davis serves as the Trustee of the Davis Investment Management Trust for the Davis Investments VI LP, which LP owns 44.44% of the ADAC Series A Preferred Stock. Mr. Horbach owns no ADAC common stock or Series A Preferred Stock. In December, 2004, 103,000 shares of the Company's common stock were issued to Mr. Horbach for services rendered in connection with the completion of the restructuring and recapitalization of the Company. NOTE I- SUBSEQUENT EVENT On July 26, 2005, ADAC executed an "Amendment To Agreement" (the "Amendment"), which Amendment modified certain provisions of the March 6, 2003, agreement between ADAC and Gateway Energy Corporation as related to the Madisonville Project Pipeline Facilities. The Amendment was necessary to enable Gateway to sell certain of the Pipeline Facilities. The Amendment provides among other things for; (a) a waiver of the notification by ADAC of it's election to pay off the $900,000 Term Note and exercise of the Equity Participation Option; (b) receipt by ADAC of certain consideration pursuant to a May 7, 2004 amendment to the 2003 agreement, and; (c) the transfer to a newly formed LLC, which LLC will be owned by ADAC (33.33%) and by Gateway (66.67%), of the 10" Transportation System along with certain ancillary equipment, and a Transportation Agreement between Gateway and the purchaser of the Pipeline Facilities. The transactions were closed and funded on August 30, 2005. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. GENERAL - ------- Effective April 1, 2004, the Company completed a restructuring and changed its business focus to the energy industry, having disposed of all of its financial service related operations. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report particularly those dealing with the Exchange Transaction and the Subsequent Events footnote. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in any forward-looking statements included herein. In addition, because of the change to a new business strategy, the Company will be subject to all of the energy industry common and traditional risks associated with the economic production of hydrocarbons including, but not limited to, acquisition of reserves that can produce adequate returns to attract the necessary investment capital to develop such reserves, the petroleum engineering of underground oil and gas reserves, drilling of the wells, and the fluctuation of hydrocarbon prices. The Company has limited capital resources and management has somewhat limited experience with respect to this segment of the energy industry. Accordingly, the Company is utilizing the joint venture approach to mitigate these risks. RESULTS OF OPERATIONS - --------------------- Three Month's Ended June 30, 2004 - --------------------------------- Liquidity and Capital Resources - ------------------------------- As of December 31, 2003, the accumulation of debt to ARGUS had grown to a point where the Company could no longer service this outstanding debt given the downsizing of the Company that was the result of the reorganization and restructuring of the various AIH segment operations. Also during these years, and to the current date, the current President and Treasurer of the Company did not draw a salary, nor were any amounts accrued with respect thereto. With the completion of the Madisonville Project investment, and the joint venture with GulfWest Energy Inc. as discussed later, the Company had determined that the ability to generate long-term value for the common shareholders could be enhanced if the present Company operations, (AIH) were sold and the Company concentrated its growth efforts in the energy industry, focusing primarily on natural gas. In accordance with this business strategy, an agreement was entered into with ARGUS, subject to common shareholder approval, wherein the common shares of AIH would be exchanged for an assumption by ARGUS of all of the AIH liabilities (the "Exchange Transaction"). The Board of Directors engaged an 17 investment banking firm (Morgan Stanley) to determine the fair market value of the AIH operations on a going concern basis. Morgan Stanley, through its SPARDATA affiliate, determined such value to be $345,000. On March 24, 2004, the Company received the requisite affirmative consent votes from the common shareholders to effect the Exchange Transaction. The Exchange Transaction was effective at the beginning of business on April 1, 2004. In the Exchange Transaction, ARGUS assumed $1,661,719 of liabilities, (including $1,308,858 of notes payable, substantially all of which carried a prime interest rate), resulting in a gain to the Company on the exchange of $1,569,476 Subsequent to June 30, 2004 the Company entered into two transactions which significantly impacted the Company- GulfWest Energy Inc. Joint Venture On July 21, 2004, the Company entered into a Letter of Intent, subject to the execution of definitive agreements, with GulfWest Energy Inc. ("GWEI") located in Houston, Texas, under which the Company and GWEI, through one or more Joint Venture LLCs, would develop certain oil and gas assets owned by GWEI in Grimes and Madison County, Texas. Certain of the Madison County reserves, if developed and produced, are expected to require treatment similar to that described in the Madisonville Project as discussed earlier under the April 30, 2003 Gateway Energy Corporation Agreement. On October 14, 2004, the Company, through its wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a member of a Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI for the purpose of initially developing certain portions of the GWEI oil and gas asset bases in Madison County and Hardin County, Texas. Participation in the development of the Grimes County asset base by ADAC was deferred and will not be a part of this LLC. GWEI contributed certain assets valued at approximately $540,000, and the Company committed to provide up to $595,000 in initial capital funding to the LLC. The Company owns 52.5% of the LLC, and hold two of the three manager positions, such positions filled by Charles A. Holtgraves and Larry J. Horbach, directors and officers of the Registrant. The various agreement transaction requirements were completed on November 15, 2004, including the required cash initial capital funding requirements. The transaction agreements included among other items, an operating and management agreement with a wholly-owned subsidiary of GWEI and a gas purchase agreement with a wholly-owned subsidiary of GWEI. The initial capital funding was raised by ADAC through a private placement of 595 shares of a new series preferred stock. The Senior Series B Preferred Stock, Stated Value $1,000 per share provides, among other things, for a preferential dividend right based on the Company's proportionate interest in the operations and cash flow from Elgin, and a preferential liquidation right consisting of a proportionate share of the Company's Capital Account in Elgin. Charles Holtgraves, Philip Holtgraves, Larry Horbach and Christopher Davis are directors of the Registrant. Charles Holtgraves, Philip Holtgraves and Mr. Horbach are officers of the Registrant. Entities in which these individuals either control or have an interest in, have subscribed for 577 of the 595 authorized shares. 18 The Company/Elgin and Gateway Energy Corporation Agreement On November 15, 2004, the Company and Elgin entered into a LICENSE AGREEMENT (the "Agreement") with Gateway Energy Corporation and certain of its subsidiaries. The Agreement, provides, among other things, for the granting of a sublicense to the Company and Elgin to enable Elgin to treat the gas produced from the leasehold interests owned by Elgin in Madison County, Texas, which interests fall within a defined Area of Mutual Interest, ("AMI"). In addition, the Agreement provides that the Company and Elgin will dedicate the gas produced from its interests in the AMI to the Madisonville Project plant and will advance up to $91,250 to Gateway, in the form of a prepayment, the license and other fees due Advanced Extraction Technologies ("AET") for the processing of a minimum of 5,000 Mcf per day. The Agreement further grants to the Company or its designees, an option to participate pari passu with Gateway, subject to certain limitations, in future projects which require the treatment of natural gas containing high nitrogen, which projects utilize the AET license held by Gateway. Operations - ---------- The revenues for the three months ended June 30, 2004 consisted of the interest and guaranteed return from the Madisonville Project. During the quarter ended June 30, 2004, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the minimum guaranteed return and received $26,453 in price upside payments. These payments were offset to the accrued minimum guaranteed return. During the quarter ended June 30, 2004, ADAC also accrued Series A Preferred Stock dividends payable of $22,511, representing 66-2/3% of such minimum guaranteed return and paid cash dividends of $16,569. The dividends are not payable until such time as ADAC receives project cash distributions from Gateway. The plant was deemed to be in service on October 1, 2003, which is the date that the price up side provisions of the agreement became effective. Operating income was $17,943 after general and administrative costs of $13,015 and interest of $3,740, generating net positive cash flow of $18,944. Such general and administrative costs are not indicative of future operations as the sole three employees/officers of the Company (Charles Holtgraves, Philip Holtgraves and Larry Horbach) have waived current compensation in order to preserve cash flow for Company investment in on going projects. For such waiver of current compensation, these individuals have been given the right to invest on a pari-passu basis in these initial high risk capital projects along side the Company and other outside accredited investors. To date, entities in which these individuals either control or have an interest in, have provided a majority of all of the capital invested in the initial energy projects described above. During the quarter ended June 30, 2004, the Company recognized a gain on the Exchange Transaction of $1,569,476. Such gain was the difference between the ARGUS obligations cancelled and the AIH operation's net assets (assets less liabilities assumed by ARGUS). 19 RESULTS OF OPERATIONS - --------------------- Three Month's Ended June 30, 2005 - --------------------------------- Liquidity and Capital Resources - ------------------------------- At June 30, 2005, the Company had an excess of current liabilities over current assets of $509,822. Included, however, in the current liabilities are approximately $343,000 of obligations due to related parties, (officers and directors of the Company or entities controlled by such officers and directors), and approximately $139,000 of subsidiary accrued preferred stock dividends, substantially all of which actual dividend payments are subject to and based on cash distributions from projects. The Company has not yet called the final Series B Preferred Stock subscription of $108,450, which subscription is not shown in current assets. The Company intends to call this subscription at the beginning of the third quarter. The Company believes that with the above matters and the subsequent event described below, that it will be able to meet its obligations. SUBSEQUENT EVENT In July 26, 2005, ADAC executed an "Amendment To Agreement" (the "Amendment"), which Amendment modified certain provisions of the March 6, 2003, agreement between ADAC and Gateway Energy Corporation as related to the Madisonville Project Pipeline Facilities. The Amendment was necessary to enable Gateway to sell certain of the Pipeline Facilities. The Amendment provides among other things for; (a) a waiver of the notification by ADAC of it's election to pay off the $900,000 Term Note and exercise of the Equity Participation Option; (b) receipt by ADAC of certain consideration pursuant to a May 7, 2004 amendment to the 2003 agreement, and; (c) the transfer to a newly formed LLC, which LLC will be owned by ADAC (33.33%) and by Gateway (66.67%), of the 10" Transportation System along with certain ancillary equipment, and a Transportation Agreement between Gateway and the purchaser of the Pipeline Facilities. The transactions were closed and funded on August 30, 2005. On August 30, 2005, Operations - ---------- The revenues for the quarter ended June 30, 2005 consisted of the interest and guaranteed return from the Madisonville Project and a limited amount of revenue from sales of gas from the Saratoga Project. During the quarter ended June 30, 2005, the Company's wholly owned subsidiary (ADAC) accrued $33,750, the minimum guaranteed return and received $44,044 in price upside payments. These payments were offset to the accrued minimum guaranteed return. During the quarter ADAC accrued Series A Preferred Stock dividends payable of $22,500, representing 66-2/3% of such minimum guaranteed return and paid cash dividends of $29,379. ADAC also began accruing dividends at the stated 10% rate on the Series B Preferred Stock. The dividends are not payable until such time as ADAC receives project cash distributions from Gateway and Elgin. The operations for the quarter resulted in a loss of $81,596 substantially all of which was the result of the start up of the Hardin County operations (Saratoga Project), which start up was initiated in late March of 2005. 20 Operating expenses including depreciation, direct general and administrative expenses, and the cost of gas purchased for processing totaled approximately $121,440, while the revenues were approximately $25,150 (only sales of natural gas, with no liquids sales) resulting in an operating loss within Elgin of $96,292. The minority interest in Elgin reduced this loss to the Company's common shareholders by $45,739. During August, 2005, substantial changes were made in the basic processing system, including the return of several leased equipment items to the suppliers in an effort to lower the operating costs. The operating loss includes general and administrative costs of $15,746 and interest of $5,721. Such general and administrative costs are not indicative of future operations as the sole three employees/officers of the Company (Charles Holtgraves, Philip Holtgraves and Larry Horbach) have waived current compensation in order to preserve cash flow for Company investment in on going projects. For such waiver of current compensation, these individuals have been given the right to invest on a pari-passu basis in these initial high risk capital projects along side the Company and other outside accredited investors. To date, entities in which these individuals either control or have an interest in, have provided a majority of all of the capital invested in the initial energy projects described above. The interest expense results from bank borrowings related to the License Agreement described earlier, and certain carryover debt from the Exchange Transaction. Part II Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Exhibits and Reports on Form 8-K On August 1, 2005, the Registrant filed a Form 8-K reporting under Item 1.01--ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. Exhibit 31.1 - Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 - Certification of CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADVANCED ENERGY RECOVERY, INC. (Registrant) Dated: 09/14/2005 By: /s/ Charles A. Holtgraves -------------------------------- Charles A. Holtgraves Chairman, President, and Treasurer 22 EX-31.1 2 advancedexhib311-063005.txt CERTIFICATION OF CEO PER SECTION 302 EXHIBIT 31.1 CERTIFICATION ------------- Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. I, Charles A. Holtgraves, Chief Executive Officer of Advanced Energy Recovery, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Advanced Energy Recovery, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred in this most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: 09/14/2005 /s/ Charles A. Holtgraves ---------- ------------------------------- Charles A. Holtgraves Chief Executive Office EX-32.1 3 advancedexhib321-063005.txt CERTIFICATION OF CEO & CFO PER SECTION 906 EXHIBIT 32.1 ADVANCED ENERGY RECOVERY, INC. AND SUBSIDIARIES Section 906 Certification of Principal Executive Officer and Chief Executive Officer I, Charles A. Holtgraves, Chief Executive officer (Principal Executive Officer and Chief Financial Officer), certify that this quarterly report on Form 10-QSB for the quarterly period ended (June 30, 2005) fully complies with the requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934, and that the information contained herein fairly presents, in all material respects, the financial condition and results of operations of Advanced Energy Recovery, Inc. and its subsidiaries for the periods presented. Date: 09/14/2005 /s/ Charles A. Holtgraves ----------------------------------- Charles A. Holtgraves Chief Executive Officer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----