Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30,
2009
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
|
000-51807
(Commission
File No.)
EAU
TECHNOLOGIES, INC.
(exact name of registrant as specified in its charter)
Delaware
|
|
87-0654478
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
1890 Cobb
International Blvd, Suite A, Kennesaw Georgia
|
|
30152
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Issuer’s
telephone number: (678)
388-9492
Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a small reporting company. See definitions of "large accelerated
filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of
the Exchange Act. (Check one):
Large
accelerated filer o |
|
Accelerated filer
o |
Non-accelerated
filer o |
|
Smaller reporting
company x |
(Do not check
if a smaller reporting company) |
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of August 13, 2009, the Registrant
had 19,661,168 shares of Common Stock, $0.0001 par value
outstanding.
EAU
TECHNOLOGIES, INC.
QUARTERLY
REPORT ON FORM 10-Q
June 30,
2009
INDEX
|
|
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|
Page
|
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|
|
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|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
ITEM
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
Balance
Sheets – June 30, 2009 and December 31, 2008
|
|
3
|
|
|
|
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|
|
|
Statements
of Operations – Three and Six months ended June 30, 2009 and
2008
|
|
5
|
|
|
|
|
|
|
|
Statement
of Stockholders’ Equity (Deficit)
|
|
6
|
|
|
|
|
|
|
|
Statements
of Cash Flows – Six months ended June 30, 2009 and 2008
|
|
7
|
|
|
|
|
|
|
|
Notes
to Financial Statements
|
|
9
|
|
|
|
|
|
ITEM
2.
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
17
|
|
|
|
|
|
ITEM
3.
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
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24
|
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|
|
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|
ITEM
4T.
|
|
Controls
and Procedures
|
|
24
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|
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
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|
ITEM
1.
|
|
Legal
Proceedings
|
|
24
|
|
|
|
|
|
ITEM
1A.
|
|
Risk
Factors
|
|
24
|
|
|
|
|
|
ITEM
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
24
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|
|
|
|
|
ITEM
3.
|
|
Defaults
Upon Senior Securities
|
|
24
|
|
|
|
|
|
ITEM
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
24
|
|
|
|
|
|
ITEM
5.
|
|
Other
Information
|
|
25
|
|
|
|
|
|
ITEM
6.
|
|
Exhibits
|
|
25
|
|
|
|
|
|
|
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|
|
|
SIGNATURES
|
|
|
|
26
|
PART I -
FINANCIAL INFORMATION
EAU
TECHNOLOGIES, INC.
BALANCE
SHEETS
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
CURRENT
ASSETS
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Cash and cash
equivalents
|
|
$ |
298,175 |
|
|
$ |
494,612 |
|
Accounts
receivable, net
|
|
|
22,635 |
|
|
|
8,710 |
|
Accounts
receivable – related party, net
|
|
|
355,656 |
|
|
|
358,656 |
|
Accrued
interest
|
|
|
9,375 |
|
|
|
1,875 |
|
Pre-paid
expense
|
|
|
56,858 |
|
|
|
52,468 |
|
Note
receivable, current portion
|
|
|
150,000 |
|
|
|
150,000 |
|
Inventory,
net
|
|
|
2,227,900 |
|
|
|
3,014,503 |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
3,120,599 |
|
|
|
4,080,824 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net of
|
|
|
|
|
|
|
|
|
accumulated depreciation of
$125,013 and $113,359
|
|
|
34,991 |
|
|
|
46,644 |
|
|
|
|
|
|
|
|
|
|
LEASED
EQUIPMENT, net of
|
|
|
|
|
|
|
|
|
accumulated depreciation of
$76,981 and $15,156
|
|
|
1,051,192 |
|
|
|
200,253 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,969 |
|
|
|
10,496 |
|
Restricted
cash
|
|
|
240,000 |
|
|
|
240,000 |
|
Intellectual
property
|
|
|
93,167 |
|
|
|
87,561 |
|
|
|
|
|
|
|
|
|
|
Total other
assets
|
|
|
350,136 |
|
|
|
338,057 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
4,556,918 |
|
|
$ |
4,665,778 |
|
See notes
to financial statements.
EAU
TECHNOLOGIES, INC.
BALANCE
SHEETS (Continued)
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
CURRENT
LIABILITIES
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Accounts payable
|
|
$ |
367,653 |
|
|
$ |
373,206 |
|
Accrued expenses
|
|
|
786,063 |
|
|
|
658,608 |
|
Warranty reserve
|
|
|
95,015 |
|
|
|
100,000 |
|
Current portion of deferred
licensing revenue – related party
|
|
|
200,000 |
|
|
|
200,000 |
|
Advance
deposits on machine orders – related party
|
|
|
697,500 |
|
|
|
697,500 |
|
Current portion of long-term
debt
|
|
|
32,231 |
|
|
|
23,581 |
|
Senior convertible note payable –
related party, current portion net
of
discounts of $0 and $76,754
|
|
|
3,000,000 |
|
|
|
2,923,246 |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
5,178,462 |
|
|
|
4,976,141 |
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current
portion
|
|
|
22,609 |
|
|
|
39,150 |
|
Deferred licensing revenue –
related party
|
|
|
41,667 |
|
|
|
141,667 |
|
Derivative liability – related
party
|
|
|
10,451,283 |
|
|
|
8,621,940 |
|
|
|
|
|
|
|
|
|
|
Total long term
liabilities
|
|
|
10,515,559 |
|
|
|
8,802,757 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,694,021 |
|
|
|
13,778,898 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value;
50,000,000 shares authorized;
19,511,168 and
18,285,918 issued and outstanding, respectively
|
|
|
1,952 |
|
|
|
1,829 |
|
Additional paid in
capital
|
|
|
41,010,924 |
|
|
|
39,594,894 |
|
Accumulated
deficit
|
|
|
(52,149,979 |
) |
|
|
(48,709,843 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
(deficit)
|
|
|
(11,137,103 |
) |
|
|
(9,113,120 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders’ equity (deficit)
|
|
$ |
4,556,918 |
|
|
$ |
4,665,778 |
|
See notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENTS OF OPERATIONS
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30, |
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
NET
SALES – RELATED PARTY
|
|
$ |
50,000 |
|
|
$ |
75,475 |
|
|
$ |
100,000 |
|
|
$ |
125,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
|
153,975 |
|
|
|
62,381 |
|
|
|
258,625 |
|
|
|
108,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SALES
|
|
|
203,975 |
|
|
|
137,856 |
|
|
|
358,625 |
|
|
|
233,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
36,345 |
|
|
|
41,411 |
|
|
|
61,825 |
|
|
|
67,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
167,630 |
|
|
|
96,445 |
|
|
|
296,800 |
|
|
|
166,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
4,778 |
|
|
|
21,099 |
|
|
|
11,802 |
|
|
|
42,423 |
|
Research and
development
|
|
|
42,938 |
|
|
|
20,387 |
|
|
|
117,005 |
|
|
|
30,789 |
|
General and
administrative
|
|
|
848,598 |
|
|
|
1,055,059 |
|
|
|
1,598,629 |
|
|
|
2,137,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
896,314 |
|
|
|
1,096,545 |
|
|
|
1,727,436 |
|
|
|
2,210,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
|
|
(728,684 |
) |
|
|
(1,000,100 |
) |
|
|
(1,430,636 |
) |
|
|
(2,044,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(76,184 |
) |
|
|
(228,474 |
) |
|
|
(187,802 |
) |
|
|
(505,619 |
) |
Interest
income
|
|
|
3,840 |
|
|
|
3,351 |
|
|
|
7,645 |
|
|
|
11,481 |
|
Gain
(Loss) on derivative liability
|
|
|
430,477 |
|
|
|
(257,549 |
) |
|
|
(1,829,343 |
) |
|
|
(171,796 |
) |
Other
income (expense)
|
|
|
- |
|
|
|
140 |
|
|
|
- |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense)
|
|
|
358,133 |
|
|
|
(482,532 |
) |
|
|
(2,009,500 |
) |
|
|
(665,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION
FOR
INCOME TAXES
|
|
|
(370,551 |
) |
|
|
(1,482,632 |
) |
|
|
(3,440,136 |
) |
|
|
(2,710,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(370,551 |
) |
|
$ |
(1,482,632 |
) |
|
$ |
(3,440,136 |
) |
|
$ |
(2,710,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE
|
|
$ |
(0.02 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE OF
SHARES
OUTSTANDING
|
|
|
19,126,553 |
|
|
|
16,486,418 |
|
|
|
18,796,483 |
|
|
|
15,440,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
COMMON STOCK
|
|
|
|
ADDITIONAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID
IN
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
|
SHARES
|
|
|
|
AMOUNT
|
|
|
|
CAPITAL
|
|
|
|
DEFICIT
|
|
|
|
TOTAL
|
|
Balance,
December 31, 2008 (Audited)
|
|
|
18,285,918 |
|
|
$ |
1,829 |
|
|
$ |
39,594,894 |
|
|
$ |
(48,709,843 |
) |
|
$ |
(9,113,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for cash at $1.00 per share, to Water Science, a related
party.
|
|
|
1,250,000 |
|
|
|
125 |
|
|
|
1,249,875 |
|
|
|
- |
|
|
|
1,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
and vesting of options and warrants for services
|
|
|
- |
|
|
|
- |
|
|
|
166,153 |
|
|
|
- |
|
|
|
166,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares
|
|
|
(24,750 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the six months ended June 30, 2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,440,136 |
) |
|
|
(3,440,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2009
|
|
|
19,511,168 |
|
|
$ |
1,952 |
|
|
$ |
41,010,924 |
|
|
$ |
(52,149,979 |
) |
|
$ |
(11,137,103 |
) |
See notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENTS OF CASH FLOWS
|
|
For
the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$ |
(3,440,136 |
) |
|
$ |
(2,710,005 |
) |
Adjustments to reconcile net loss
to net cash
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
73,626 |
|
|
|
42,423 |
|
Bad debt
expense
|
|
|
15,000 |
|
|
|
5,092 |
|
Shares issued for
services
|
|
|
- |
|
|
|
103,334 |
|
Warrants and options issued for
services
|
|
|
166,153 |
|
|
|
325,940 |
|
Discount
of note payable
|
|
|
76,754 |
|
|
|
447,368 |
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts
receivable
|
|
|
(28,925 |
) |
|
|
13,019 |
|
(Increase) decrease in accounts
receivable – related party
|
|
|
3,000 |
|
|
|
(182 |
) |
(Increase) in pre-paid
expense
|
|
|
(4,390 |
) |
|
|
(3,494 |
) |
(Increase) in accrued
interest
|
|
|
(7,500 |
) |
|
|
- |
|
(Increase) decrease in
inventory
|
|
|
(18,581 |
) |
|
|
(60,425 |
) |
(Increase) decrease in
deposits
|
|
|
(6,473 |
) |
|
|
1,162 |
|
Increase (decrease) in accounts
payable
|
|
|
(5,553 |
) |
|
|
(61,464 |
) |
Increase (decrease) in warranty
reserve
|
|
|
(4,985 |
) |
|
|
(8,000 |
) |
Increase in accrued
expenses
|
|
|
127,455 |
|
|
|
7,096 |
|
(Decrease)
in deferred revenue
|
|
|
(100,000 |
) |
|
|
(100,000 |
) |
Increase
(decrease) in derivative liability
|
|
|
1,829,343 |
|
|
|
171,796 |
|
Net cash (used) in operating
activities
|
|
|
(1,325,212 |
) |
|
|
(1,826,340 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(107,580 |
) |
|
|
- |
|
Intellectual
property disbursements
|
|
|
(5,754 |
) |
|
|
(7,746 |
) |
Net cash (used) in investing
activities
|
|
|
(113,334 |
) |
|
|
(7,746 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
on notes payable
|
|
|
(7,891 |
) |
|
|
(4,750 |
) |
Proceeds
from issuance of common stock – related party
|
|
|
1,250,000 |
|
|
|
1,101,500 |
|
Net cash provided by financing
activities
|
|
|
1,242,109 |
|
|
|
1,096,750 |
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(196,437 |
) |
|
|
(737,336 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
494,612 |
|
|
|
1,413,744 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
298,175 |
|
|
$ |
676,408 |
|
See
notes to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED STATEMENTS OF CASH
FLOWS
(Continued)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
3,613 |
|
|
$ |
13,251 |
|
Income
Taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Non-cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
$ |
- |
|
|
$ |
103,334 |
|
Reclass
inventory to Property and Equipment
|
|
$ |
805,184 |
|
|
$ |
- |
|
See notes
to financial statements.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION
The
accompanying condensed financial statements were prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In
management’s opinion all necessary adjustments, which consist primarily of
normal recurring adjustments, to the financial statements have been made to
present fairly the financial position and results of operations and cash
flows. The results of operations for the respective periods presented
are not necessarily indicative of the results for the respective complete
years. The financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2008
Certain
prior period amounts have been reclassified in the condensed financial
statements to conform to current period presentation.
NOTE
2 – RESTRICTED CASH
In
November 2006 the Company entered into an employment agreement with Wade
Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited
$240,000 with an escrow agent in January 2007. The Company has recognized this
amount as restricted cash on the Company’s financial statements.
NOTE
3 - INVENTORIES
The
composition of inventories is as follows at:
|
|
June
30,
2009
|
|
|
December
31,
2008
|
|
Finished
goods
|
|
$ |
986,161 |
|
|
$ |
1,828,984 |
|
Raw
materials
|
|
|
1,641,739 |
|
|
|
1,585,519 |
|
Allowance
for obsolete inventory
|
|
|
(400,000 |
) |
|
|
(400,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,227,900 |
|
|
$ |
3,014,503 |
|
NOTE
4 – WARRANTY RESERVE
The
Company warrants its products against defects in materials and workmanship for a
period of three years. The Company reviews the historical experience
of failure rates and estimates the rate of warranty claims that will be made and
has accrued a warranty reserve for these anticipated future warranty
costs. If actual results differ from the estimates, the Company would
adjust the estimated warranty liability. Changes in the warranty
reserve for the six months ended June 30, 2009 are as follows:
Warranty
reserve at beginning of period
|
|
$ |
100,000 |
|
Costs
accrued for additional warranties
|
|
|
- |
|
Service
obligations honored
|
|
|
(4,985 |
) |
|
|
|
|
Warranty
reserve at end of period
|
|
$ |
95,015 |
|
|
|
_______________
|
|
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
5 - SENIOR CONVERTIBLE DEBT
In
September 2005, the Company entered into a Senior Convertible Note (the “Note”)
with Water Science, a related party, in exchange for $3,000,000. Pursuant to the
debt agreement, the Note accrues interest at the rate of 3% per annum and was
initially due, principal and interest together, on September 16,
2008. In June 2008, Water Science agreed to extend the maturity date
of the Note to March 16, 2009. In March 2009, the Company and Water
Science agreed to extend the maturity date to September 16, 2009 and increase
the interest rate to 10%. No principal or interest payments need to
be paid during the loan period. In October 2008, as part of a new
financing agreement, the Company amended the Note and changed the conversion
rate from $3.00 per share to $1.00 per share. The Note may be
converted into 3,000,000 shares of the Company’s $0.0001 par value common stock
prior to the maturity date, and at any time, by the holder at a price per share
equal to $1.00 per share, subject to certain other conversion
adjustments. The Company granted a security interest in all of the
Company’s assets as collateral for the loan. In connection with the
original issuance of the Note, the Company granted a three year warrant to
purchase up to two million shares of the Company’s $0.0001 par value common
stock with an exercise price of $2.76 per share.
In May
2007, the Company entered into a termination agreement related to the
cancellation and reissuance of the existing warrants (“Original Warrants”) to
purchase a total of 8.4 million shares of $0.0001 par value common stock of the
Company, at a price of $2.76 per share, held by Water Science. The
Company granted to Water Science replacement warrants to purchase 8.4 million
shares of common stock at a price of $1.30 per share, with an expiration date of
May 9, 2010. The Company had a right to require Water Science to
exercise warrants for up to 3,230,769 shares. During the year ended
2008, the Company required Water Science to exercise all of the options under
the put rights.
The
remaining warrants contain “round down” provisions where the exercise price is
to be adjusted if the Company should issue stock for less than the original
exercise price. Due to this feature, and pursuant to SEC guidance,
the Company accounts for the warrants and convertible feature as a derivative
liability with changes in fair value being recorded in the income
statement. As of June 30, 2009 and December 31, 2008, the value of
the derivative liability was $10,451,283 and $8,621,940,
respectively. The Company recorded a loss of $1,829,343 and $171,796
in the change of the derivative liability to fair market value for the six month
period ended June 30, 2009 and 2008, respectively.
NOTE
6 - RELATED PARTY TRANSACTIONS
Sales to
Affiliates – In September 2005, Water Science, a related party, paid to
the Company $1,000,000 for the exclusive rights to sell our products in South
America and Mexico. The agreement allows for a pro-rated refund
during the first 5 years under certain circumstances. The Company
recognizes income from this agreement over the first 5 years of the
agreement. The Company recognized $100,000 in each of the periods
ended June 30, 2009 and 2008. This agreement also gives Water Science
the rights to purchase machinery from the Company at cost plus 25
percent. The Company did not have any sales to Water Science during
the six months ended June 30, 2009 and had sales of $25,475 for the same period
in 2008. The Company has received and recorded $697,500 in advance
deposits from Water Science on machine orders at June 30, 2009 and
2008. In connection with the sales of the machines and products, the
Company has recorded approximately $350,156 in accounts receivable at June 30,
2009.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
6 – RELATED PARTY TRANSACTIONS – (Continued)
Senior Note
Payable - In September 2005, the Company entered into a Senior
Convertible Note with Water Science in exchange for $3,000,000 (see Note
5). The Company accounts for the warrants and convertible debt
feature as a derivative liability with changes in fair value being recorded in
the income statement. The Company recorded a loss of $1,829,343 and
$171,796 due to the change in the fair market value for the six months ended
June 30, 2009 and 2008, respectfully.
Licensing Fee
–In September 2005, the Company received $1,000,000 in exchange for
providing Water Science exclusive licensing and distribution rights for a
five-year term for a specified market area. The agreement provides termination
rights by Water Sciences and a pro rata refund of the fee. The Company
recognizes the fee on a pro rata basis over the life of the agreement. The
Company recognized $100,000 in each of the six months ended June 30, 2009 and
2008.
Escrow
Arrangement with Chief Executive Officer – In October 2006, the
Company entered into an escrow agreement with the Chief Executive Officer.
Pursuant to the escrow agreement, to secure the Company’s obligation to make the
Severance Payment, the Company is required to deposit, at its election, either
(1) cash in the amount of $240,000 or (2) an irrevocable letter of credit with a
face amount of $240,000, with an agreed upon escrow agent who shall hold such
funds (or letter of credit) in escrow. In January 2007, the Company deposited
$240,000 in cash with an escrow agent.
Advances –
Periodically throughout the year, the Company advances employees cash for
certain reimbursable expenses. As of June 30, 2009 and 2008, the
Company had advances to employees in the amount of $5,500 and $8,500,
respectively.
Employee Options
– In December 2007, the Company granted 480,260 options to various
employees. The options are for a term of ten (10) years and have an
exercise price of $1.30 per share. The options vest over a period of
four (4) years. The options were valued using the Black-Scholes
model with the following assumptions: risk free rate of 4.64%,
volatility at 87.06% and the stock price at $1.30. The value of each
warrant is approximately $1.13 per warrant. The Company recognized
$68,777 in stock option expense related to the options for the six months ended
June 30, 2009.
In
November 2007, the Company granted 530,000 options to Douglas Kindred, in
connection with the appointment of Mr. Kindred as Chief Technology
Officer. The options are for a term of ten (10) years and have an
exercise price of $1.30 per share. The options vest over a period of
four (4) years. The warrants were valued using the
Black-Scholes model with the following assumptions: risk free rate of
4.28%, volatility at 85.99% and the stock price at $1.01. The value
of each warrant is approximately $0.85 per warrant. The Company
recognized $61,005 during the period ended June 30, 2009.
NOTE
7 – CAPITAL STOCK
In
November 2008, Theodore Jacoby, a director of the Company, purchased 100,000
shares of common stock of the Company for $100,000 at a price of $1.00 per
share.
In
October 2008, the Board of Directors approved a transaction with Water Science,
LLC (“WS”), a related party, pursuant to (1) a Stock Purchase Agreement (the
“Purchase Agreement”) and (2) a Second Amended and Restated Senior Secured
Convertible Promissory Note (the “Second Amended Convertible Note”). The
Purchase Agreement provides for the purchase of 2.5 million shares of common
stock of the Company at a price of $1.00 per share and the amendment of the
original Amended and Restated Senior Secured Convertible Promissory Note dated
as of May 8, 2008, to change the conversion rate from $3.00 per share to $1.00
per share, as reflected in the Second Amended Convertible Note. The purchase of
the common stock was to occur in six monthly installments of $350,000 beginning
October 14, 2008 plus a final installment of $400,000 on April 15, 2009. As of
December 31, 2008, the Company had received $1,050,000 under the
agreement. As of March 2009, the Company received an additional
$500,000.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
7 – CAPITAL STOCK –
(Continued)
In March
2009, the Company and Water Science amended the payment schedule of the Purchase
Agreement on the final $950,000. The purchase of the common stock was
scheduled to occur in four monthly installments of $250,000 on April 15, 2009,
$250,000 on May 15, $250,000 on June 15 and a final installment of $200,000 on
July 15, 2009. As of the date of this report, the Company has
received payment of all of these installments except $75,000 of the final
installment. We expect to receive that last amount before the end of
August 2009. The Second Amended Convertible Note included an interest
rate of 3% and a maturity date of March 16, 2009. In March 2009, the Company and
Water Science agreed to extend the maturity date to September 16, 2009 and
increase the interest rate to 10%. WS is controlled by Peter Ullrich,
a member of the Board of Directors of the Company.
In
February 2008, the Compensation Committee of the Board of Directors of the
Company granted $30,000 to each board member in the form of 23,077 shares of
restricted stock for each director, effective on February 27, 2008. The
restricted stock will vest ratably over a period of two years from the date of
grant. These grants were made pursuant to the annual directors’ compensation
program approved by the Board in December 2007. The amount of
compensation was based on recommendations from a non-related human resource
consulting firm. The Compensation Committee also granted 49,500
shares of restricted stock to various employees, which will vest one year from
the date of grant.
In
January 2008, an officer of the Company exercised 150,000 options for $1,500 or
$0.01 per share. The options were granted in 2003 for
services.
NOTE
8 – GOING CONCERN
The
Company has incurred significant losses and has had negative cash flows from
operations. As a result, at June 30, 2009, the Company has had a high
level of equity financing transactions and additional financing will be required
by the Company to fund its future activities and to support its
operations. We currently do not have sufficient funds to operate our
business without additional funding. The Company is currently in
negotiations to obtain additional short-term funding to provide liquidity
through the end of 2009. We expect to finalize an agreement in
August. Management will continue to seek to obtain sufficient funding
for its operations through either debt or equity financing. However,
there is no assurance that the Company will be able to obtain additional
financing. Furthermore, there is no assurance that rapid
technological changes, changing customer needs and evolving industry standards
will enable the Company to introduce new products and services on a continual
and timely basis so that profitable operations can be attained. The
Company’s ability to achieve and maintain profitability and positive cash flows
is dependent upon its ability to achieve positive sales and profit margins and
control operating expenses.
The
Company estimates that it will need approximately $2,000,000 for the upcoming
twelve months to execute our business plan and an additional $3,000,000, plus
interest, in order to satisfy our senior note payable with Water Science, which
becomes due in September 2009, if the note is not converted into common
stock. Management plans to mitigate its losses in the near term
through the further development and marketing of its trademarks, brand and
product offerings.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our
auditors have issued their Independent Registered Public Accountants’ Report on
the Company's financial statements for the fiscal year ended December 31, 2008
with an explanatory paragraph regarding the Company's ability to continue as a
going concern. The financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. However, as a
result of recurring operating losses, such realization of assets and
satisfaction of liabilities are subject to uncertainty, which raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Stock
Based-Compensation Expense
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires
the measurement and recognition of compensation expense for all share-based
payments to employees and directors including employee stock options and
stock purchases related to the Company’s employee stock option and award plans
based on estimated fair values. SFAS 123(R) supersedes the Company’s previous
accounting under Accounting Principles Board Option No. 25, “Accounting for
Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In
March 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied
the provisions of SAB 107 in its adoption of SFAS 123(R).
The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006,
the first day of the Company’s fiscal year 2006. The Company’s financial
statements as of and for the three month period ended June 30, 2008 reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, the Company’s financial statements for the prior year have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based
compensation expense recognized under SFAS 123(R) for the three month period
ended June 30, 2009 and 2008 was $83,535 and $162,970, respectively, related to
employee stock options issued and vesting during the period.
Basic and
Fully Diluted Loss Per Share
Basic and
Fully Diluted net loss per share is computed using the weighted-average number
of common shares outstanding during the period.
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
Loss (numerator)
|
|
$ |
(370,551 |
) |
|
$ |
(1,482,632 |
) |
|
$ |
(3,440,136 |
) |
|
$ |
(2,710,005 |
) |
Shares
(denominator)
|
|
|
19,126,553 |
|
|
|
16,486,418 |
|
|
|
18,796,483 |
|
|
|
15,440,794 |
|
Per
share amount
|
|
$ |
(0.02 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.18 |
) |
The
Company’s outstanding stock options have been excluded from the basic net loss
per share calculation for the three month period ended June 30, 2009 and 2008,
because they are anti-dilutive.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued
The
following table is a summary of the status of the warrants and options granted
and outstanding for the three months ended June 30, 2009:
|
|
Number
of
Options
and
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at beginning of period
|
|
|
8,387,867 |
|
|
$ |
1.60 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Expired
|
|
|
(130,210 |
) |
|
|
1.17 |
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
8,257,657 |
|
|
$ |
1.61 |
|
|
|
|
Warrants
Outstanding |
|
|
Warrants
Exercisable
|
|
Range
of
Exercise
Prices
|
|
|
Number
Outstanding
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Weighted-Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted-Average
Exercise
Price
|
|
$ |
.01-.50 |
|
|
|
210,000 |
|
0.9
years
|
|
$ |
0.06 |
|
|
$ |
210,000 |
|
|
|
0.06 |
|
|
1.00-1.99 |
|
|
|
6,724,491 |
|
2.3
years
|
|
|
1.30 |
|
|
|
5,766,796 |
|
|
|
1.30 |
|
|
2.00-2.99 |
|
|
|
720,000 |
|
5.4
years
|
|
|
2.56 |
|
|
|
720,000 |
|
|
|
2.56 |
|
|
3.00-3.99 |
|
|
|
115,000 |
|
5.8
years
|
|
|
3.46 |
|
|
|
115,000 |
|
|
|
3.46 |
|
|
4.00-4.99 |
|
|
|
255,000 |
|
0.5
years
|
|
|
4.00 |
|
|
|
255,000 |
|
|
|
4.00 |
|
|
5.00-5.50 |
|
|
|
233,166 |
|
0.8
years
|
|
|
5.17 |
|
|
|
233,166 |
|
|
|
5.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
.01-5.50 |
|
|
|
8,257,657 |
|
2.3
years
|
|
$ |
1.61 |
|
|
$ |
7,299,962 |
|
|
|
1.64 |
|
The fair
value of each warrant granted is estimated on the date granted using the
Black-Scholes pricing model, with the following assumptions for warrants issued
in 2007: risk-free interest rate of between 4.6% and 4.99%, expected dividend
yield of zero, expected lives of 3 and 5 years and expected volatility of
between 59.76% and 89.54%. No options were granted in 2008 or
2009.
NOTE
10 – SUBSEQUENT EVENTS
Management
evaluated the subsequent events disclosed below as of August 13, 2009, noting
the following:
As of the
date of this report the Company received $125,000 from Water Science in partial
satisfaction of the final installment of the Stock Purchase Agreement as
discussed in Note 7 and expects to receive the remaining $75,000 in
August. Under the terms of the agreement, the Company has the right
to adjust the exercise price of the warrants held by WS from $1.00 per share to
$3.00 per share if WS defaults in its payments. The Company intends
to waive any right to such an adjustment upon receipt of the final amount in
August.
In July
2009, the Company granted 25,000 shares of EAU common stock to Larry Earle, a
consultant to the Company, pursuant to the Company’s 2007 Stock Incentive
Plan.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis provides information, which management
believes is relevant to an assessment and understanding of the Company’s
condensed results of operations and financial condition. The discussion should
be read in conjunction with the financial statements included in our annual
report on Form 10-K, and notes thereto.
Overview
EAU
TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc.
(referred to herein sometimes as “EAU,” “we,” “us,” or the
“Company”), is in the business of developing, manufacturing and marketing
equipment that uses water electrolysis to create non-toxic cleaning and
disinfecting fluids. These fluids have various commercial applications and may
be used in commercial food processing and organic or non-organic agricultural
products that clean, disinfect, remediate, hydrate and moisturize. The processes
for which these fluids may be used are referred to in this Report (the “Report”)
as the “EW Technology.” For example, we believe that our food and
agricultural treatment products potentially may be used to systemically treat
all facets and phases of the food chain, from soil to animal feed to meat
processing, by eliminating dangerous and unhealthy pathogens from the food chain
with organically based and highly effective solutions. We make the claim that
our products are “non-toxic”. We can do this because at the levels we employ our
technology, our studies both internal as well as through third parties show no
toxicity. Further studies are in progress to make more specific
claims. At the levels employed, the fluids and products are
environmentally safe and non-toxic and do not contain or leave harmful residues
associated with chemical-based supplements or disinfecting and cleaning agents.
The electrolyzed water fluids created by the EW Technology (referred to herein
sometimes as the “EW Fluids” or “Empowered WaterTM”)
generated by our specialized equipment can be used in place of many of the
traditional products used in commercial, industrial and residential disinfecting
and cleaning.
Our focus
is on our three core competencies which are, producing high volumes of
electrolyzed water, controlling the properties of the water and using our
application knowledge. Because of our ability to produce high volumes
of water and control the water properties, our target market is in commercial
applications where we believe we can add value by generating measurable
productivity and efficiency gains. We will continue to use a
disciplined stage gate development process that drives ideas to commercial test
installations that turn into revenues. Once we have developed an
application we will attempt to find a strategic partner that would be able to
assist us with a large scale commercial roll-out of the
technology. Our goal is to generate streams of revenues through
pricing contracts that let us participate in the on-going added
value.
We have
identified the following industries for early stage sales and marketing focus:
1) dairy production and processing, 2) meat and poultry processing, 3) clean in
place (“CIP”) for food and beverage processing and 4) agricultural grow-out
and processing (“Primary Markets”). As of the date of this Report,
the Company was focused on these markets because we believe that for each of
these markets we have a competitive advantage, a leading strategic industry
partner, or we can provide an attractive value-added proposition. To
penetrate these markets, EAU is conducting trials and completing commercial
installations that will lead to partnerships with industry leaders who can
assist in rolling the technology out on a large scale.
Dairy Cattle. The
Company commenced hydration and production tests on dairy cattle in
2006. Initial results indicate an increase in milk production and
milk fat while maintaining the protein content. In August 2008, we
reached an agreement with a dairy located in Georgia to begin paying for the use
of our equipment. During the first quarter of 2009, the
Company installed a second unit at the dairy located in Georgia to provide our
fluids to all of the cows on the dairy. EAU is currently receiving
minimal revenues in a commercial capacity. We will continue to do
more clinical research and field testing in the dairy market in order to support
a full industry rollout. We recently engaged the University of
Georgia to perform additional tests on dairy cows.
Poultry. In 2005,
we began testing of our EW Technology and EW Fluids (the “EW System”) in Tyson Food’s
Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EW System
trial was completed. The trial yielded significant results in
killing salmonella on the processed poultry. Independent testing analysis
conducted by ABC Research, Inc., in Gainesville, Florida, revealed
pre-chill microbial reduction was significantly below the Food Safety Inspection
Service (the enforcement arm of the USDA; “FSIS”) allowable limit.
From
these results we successfully completed Phase I of our USDA Online Reprocessing
(“OLR”) Certification. The EAU Technologies OLR intervention also tested well
showing a statistically significant difference between control and test
groups. EAU is currently having results obtained from its
installation in upstate New York statistically analyzed for OLR Certification to
the USDA. On April 29, 2009, EAU received a letter of “no objection” from the
USDA for our installation at Fieldale Farms to be our Phase II facility.
Assuming that we are able to duplicate earlier results, which is not guaranteed,
we expect to receive approval for full commercialization of Empowered Water™ as
an OLR option. With this approval there will be no limitations to leasing our
technology as an OLR agent.
The
Company has experienced some sales resistance from the multiple industries
including the poultry industry, because operators did not have sufficient
incentives to invest in new technologies to improve the safety and cleanliness
of food products. In February 2008, a regulatory change occurred that
may increase those incentives. The Food Safety Inspection Service
(“FSIS”), a division of the USDA, sets the public heath performance standards
for all raw and processed meat, poultry and egg processing standard for the
United States. The FSIS has implemented a process called the “Public
Health Risk Based Inspection” platform to regulate these industries based on the
relative risk a processing facility imposes to the human health
index. The new system allows the FSIS to allocate and prioritize its
resources at processing plants based on the risk each plant presents. The new
categorization platform lists processors in three categories, Category 1: 10%
positive and below; Category 2: 10%-20% positive for Salmonella and other
pathogens; Category 3: 20%-22% positive for Salmonella and other pathogens. For
processors with strong processes and intervention systems meeting the Category 1
criteria, there would be far less FSIS inspectors on site, thus reducing the
cost incurred by the plant. We believe that with the success that we have
achieved in field trials and commercial installations, in conjunction with the
new FSIS policies and regulations, will make EAU’s products appealing to the
industry. While it will take time for the poultry industry to fall into
compliance with this new rating system, EAU now has a tangible reason for
poultry plants to seriously consider our EW technology for its pathogen
remediation process.
In 2008,
EAU signed an agreement with Fieldale Farms, a large poultry producer in
northern Georgia, to install our equipment at their facility. We
began receiving revenues of approximately $27,500 per month from this facility
in February 2009. On April 29, 2009, EAU received a letter of “no
objection” from the USDA for our installation at Fieldale Farms to be our Phase
II facility. We have completed the OLR data gathering stage and will
submit our findings to the USDA in the next month for full OLR
approval.
Clean-in-Place. In
the third quarter of 2008 we installed our equipment to test a clean-in-place
(CIP) application with an international beverage bottling company for use with
cold beverages. This test is complete and was a success. There were
three stages of this trial that were conducted simultaneously: 1) Syrup tanks;
2) Bag in box; 3) Bottling. The purpose of the trial was to identify whether
EAU’s non-toxic ambient temperature Empowered Waters could replace current 3-5
step CIP processes. In order to become an approved technology as well as an
approved vendor for this bottling company, EAU had to show good antimicrobial
efficacy, water savings, and improved CIP efficiency. At this time, this
installation does not generate any revenues. With the positive
results of all phases of the tests being completed for carbonated beverages, EAU
is now in a position to begin marketing our systems within the bottling
company. We are expanding our CIP capabilities and are working with
the bottling company on a hot fill application for pasteurized
beverages. EAU will continue to test other CIP applications to manage
all beverage and food products as the technology is introduced.
We have
obtained patent protection on three separate uses of electrolyzed fluids
(cleaning and disinfecting eggs, carpet cleaning and mold
remediation). Those uses are how the fluids are used and how they are
stabilized for use in different applications. Additionally, we have a patent
pending on the electrolysis equipment and several provisional patent pending
applications filed to protect new processes and products, as described
herein.
Our
operations are currently funded by a combination of revenues and capital
funding.
Financial Position and
Results of Operations
The
following discussion should be read in conjunction with selected financial data
and the financial statements and notes to financial statements.
Financial
Position
The
Company had $298,175 in cash as of June 30, 2009, compared to $494,612 at
December 31, 2008. We also had $240,000 in restricted cash related to
an escrow agreement. The Company has received and recorded $697,500
in advance deposits from Water Science on machine orders at June 30,
2009. This will be reduced as the Company delivers machines on order
to Water Science, a related party. Water Science, who has exclusive
rights to sell our products in Central and South America, is also an affiliate
of the Company, and by agreement may purchase machinery from us at cost plus 25
percent. Long term debt decreased
slightly from $39,150 at December 31, 2008 to $22,609 at June 30,
2009. At June 30, 2009, our stockholders’ deficit was
$11,088,653.
Results of
Operations for
the Three months ended June 30, 2009 and 2008
Revenues
and Net Income
The
Company had total revenues of $203,975 for the three months ended June 30, 2009,
which represents an increase of 48% from the $137,856 in total revenues for the
same period one year earlier. The increase is due to the increased
fees the Company is collecting on its leased systems and maintenance fees from
previously sold machines. In an effort to streamline our corporate
focus and our business plan, the Company is no longer marketing products that
are not directly related to its core competencies, which is the development of
Empowered Water™ technologies.
Net loss
from continuing operations for the three months ended June 30, 2009 was
$370,551, or a loss of $0.02 per share, compared with a net loss from continuing
operations of $1,482,632, or $0.09 per share for the same period in
2008. The majority of the increased net loss is due to the recording
of the derivative liability to fair market value, which is based on calculating
the Black Scholes value for the liability. For the three months ended
June 30, 2009, the Company recognized a gain of $430,477 as compared to a loss
of $257,549 for the three months ended June 30, 2008. The current
quarter net loss includes $76,184 in interest expense, compared to $228,474 in
2008. This is due to interest expense related to the senior note
payable entered into in September 2005. During the current quarter
the discount of the note was fully expensed.
General
and Administrative Expenses
The
Company’s general and administrative expenses totaled $848,598 during the three
months ended June 30, 2009, compared to $1,055,059 during the three months ended
June 30, 2008, for a decrease of $206,461. General and administrative
expense for 2009 consists primarily of payroll and other compensation expense
($349,380), legal and professional fees ($125,654), expense related to granting
of stock and options ($82,618) and insurance expenses ($50,102).
Research
and Development
Research
and development expenses incurred during the three month period ended June 30,
2009 increased $22,551, from $20,387 in 2008 to $42,938 in
2009. While the Company will continue to conduct research to improve
its products and their performance, it believes it has developed proven products
that have commercial value in its targeted markets.
Results of
Operations for
the Six months ended June 30, 2009 and 2008
Revenues
and Net Income
The
Company had total revenues of $358,625 for the six months ended June 30, 2009,
which represents an increase of 54% from the $233,511 in total revenues for the
same period one year earlier. The increase is due to the increased
fees the Company is collecting on its leased systems and maintenance fees from
previously sold machines. In an effort to streamline our corporate
focus and our business plan, the Company is no longer marketing products that
are not directly related to its core competencies, which is the development of
Empowered Water™ technologies.
Net loss
from continuing operations for the six months ended June 30, 2009 was
$3,440,136, or a loss of $0.18 per share, compared with a net loss from
continuing operations of $2,710,005, or $0.18 per share for the same period in
2008. The majority of the increased net loss is due to the recording
of the derivative liability to fair market value, which is based on calculating
the Black Scholes value for the liability. For the six months ended
June 30, 2009, the Company recognized a loss of $1,829,343 as compared to a loss
of $171,796 for the six months ended June 30, 2008. Excluding the
loss on the derivative liability the Company had a net loss of $1,562,343, or
$0.08 per share. The current quarter net loss includes $187,802 in
interest expense, compared to $505,619 in 2008. This is due to
interest expense related to the senior note payable entered into in September
2005. During the current quarter the discount of the note was fully
expensed.
General
and Administrative Expenses
The
Company’s general and administrative expenses totaled $1,598,629 during the six
months ended June 30, 2009, compared to $2,137,442 during the six months ended
June 30, 2008, for a decrease of $587,263. General and administrative
expense for 2009 consists primarily of payroll and other compensation expense
($706,075), legal and professional fees ($273,492), expense related to granting
of stock and options ($166,153) and insurance expenses ($145,713).
Research
and Development
Research
and development expenses incurred during the six month period ended June 30,
2009 increased $86,216, from $30,789 in 2008 to $117,005 in
2009. While the Company will continue to conduct research to improve
its products and their performance, it believes it has developed proven products
that have commercial value in its targeted markets.
Liquidity and Capital
Resources
The
Company had $298,175 in cash as of June 30, 2009, compared to $494,612 at
December 31, 2008. We have had continuing operating losses of
$3,440,136 for the six months ended June 30, 2009, compared with operating
losses of $2,710,005 for the six months ended June 30, 2008. The net
loss per share for the first six months of 2009 and 2008 was $0.18 per
share. The majority of the decrease is attributable to the recording
of the derivative liability to fair market value as described
above.
Net cash
used in operating activities in the six month period ended June 30, 2009 was
$1,325,212, a 27% decrease, compared to $1,826,340 for the same period in
2008. The
majority of the cash used was for normal operating expenses. The
Company used $18,581 to increase inventories as compared to $60,425 during the
comparable period in 2008. The majority of the remaining changes were
non-cash changes, such as a decrease in deferred revenue, increase in accounts
receivable and the recognition of expenses related to stock
options.
At June
30, 2009, the Company’s net inventory was $2,227,900, representing a decrease of
approximately $787,000, or 26% from the $3,014,503 on hand at December 31,
2008. The Company is in multiple tests of our equipment and has
included the machines in inventory until they are sold and begin producing
revenues. During the first six months of 2009 we completed the
installation of a poultry system and a dairy system and have removed the systems
from inventory and included them in property and equipment.
The
operating outflow of cash was reduced by the Company issuing warrants and stock
options in lieu of cash during the quarter of $166,153. The Company
recognized a non-cash increase from the discounting of the Company’s note
payable to Water Science, LLC of $76,754. (See Note 5 to the
Company’s financial statements.) Further, the Company recognized a
non-cash increase in the derivative liability of $1,829,343, due to changes in
the Black-Scholes value of the liability.
The
Company used $113,334 in cash flows from investing activities during the period
ended June 30, 2009 as compared to $7,746 used in the same period in
2008. The cash flows from investing activities consisted of
expenditures made for purchase of equipment ($107,580) and expense related to
intellectual property ($5,754).
Cash
flows from financing activities provided the Company $1,242,109 for the period
ended June 30, 2009 compared with $1,096,750 provided the Company during the
same period in 2008. The Company received proceeds of $1,250,000 from
the issuance of stock during the six months ended June 30, 2009.
We
currently do not have sufficient funds to operate our business without
additional funding. The Company is currently in negotiations to
obtain additional short term funding to provide liquidity through the end of
2009. We expect to finalize an agreement in August. Our
working capital requirements for the foreseeable future will vary based upon a
number of factors, including, our timing in the implementation of our business
plan, our growth rate and the level of our revenues. Our current
assets, along with cash generated from anticipated revenues, will not provide us
with sufficient funding for the next twelve months. Our senior
convertible note payable with Water Science, which was extended in March 2009,
will become due in September 2009, which will require cash of $3,000,000, plus
interest, in order to satisfy the debt, if the note is not converted into common
stock. We anticipate that we may need an additional $2,000,000 or
more in future funding to execute our business plan over the next twelve months.
Moreover, if we able to expand our sale of EW machines as anticipated, we may
need significant additional working capital to fund that
expansion. We do not have arrangements in place to provide us with
this funding or any additional funding. In light of these circumstances, the
ability of the Company to continue as a going concern is in substantial
doubt.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Critical Accounting
Policies
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles and our discussion and analysis of
our financial condition and results of operations require us to make judgments,
assumptions and estimates that affect the amounts reported in our financial
statements and accompanying notes. Note 1 of the notes to consolidated
financial statements in Part II, Item 7 of the Company’s Annual Report on
Form 10-K, dated December 31, 2008, describes the significant accounting
policies and methods used in preparation of our consolidated financial
statements. We base our estimates on historical experience, current
trends, future projections, and on various other assumptions we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates. There were no
material changes in our judgments or estimates during the first quarter of
2009.
Recent Accounting
Pronouncements
In May
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165,
Subsequent Events, which established general accounting standards and disclosure
for subsequent events. The Company adopted SFAS No. 165 during the
second quarter of 2009. In accordance with SFAS No. 165, the Company has
evaluated subsequent events through the date and time the financial statements
were issued on August 13, 2009. See Note 10 of the Company’s
financial statements for the related disclosure. The adoption of FAS 165
did not have a material impact on our financial statements.
In
March 2008, the Financial Accounting Standards Board (FASB) issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about how and why an
entity uses derivative instruments, how the instruments are accounted for under
SFAS No. 133 and its related interpretations, and how the instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. The guidance in SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (fiscal year 2009 for the Company). The Company is
currently evaluating the potential impact of the adoption of SFAS No. 161
on its disclosures in the Company's financial statements.
In May of
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies literature
established by the FASB as the source for accounting principles to be applied by
entities which prepare financial statements presented in conformity with
generally accepted accounting principles (GAAP) in the United States. This
statement is effective 60 days following approval by the SEC of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” This
statement will require no changes in the Company’s financial reporting
practices.
In May of
2008 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 163, “Accounting for Financial Guarantee
Insurance – an interpretation of FASB Statement No. 60, Accounting and Reporting
by Insurance Enterprises”. This statement requires that an
insurance enterprise recognize a claim liability prior to an event of default
(insured event) when there is evidence that credit deterioration has occurred in
an insured financial obligation. This statement also clarifies how
Statement 60 applies to financial guarantee insurance contracts. This
statement is effective for fiscal years beginning after December 15, 2008.
This statement has no effect on the Company’s financial reporting at this
time.
In April
2009, the FASB issued Staff Position ("FSP") FAS 157-4, "Determining Fair Value When the
Volume or Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly" ("FSP FAS
157-4"). FSP FAS 157-4 provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset
or liability have significantly decreased and requires that companies provide
interim and annual disclosures of the inputs and valuation technique(s) used to
measure fair value. FSP FAS 157-4 is effective for interim and annual reporting
periods ending after June 15, 2009 and is to be applied prospectively. We do not
expect the adoption of FSP FAS 157-4 to have a significant impact on our
financial statements.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments." FSP FAS 115-2 and FAS 124-2 amends the
other-than-temporary impairment guidance to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. FSP FAS 115-2 and FAS 124-2 is effective for interim
and annual reporting periods ending after June 15, 2009. We do not expect the
adoption of FSP FAS 115-2 and FAS 124-2 to have a significant impact on our
financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value
of Financial Instruments." FSP FAS 107-1 and APB 28-1 requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
FSP FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 will have no
impact on our financial statements.
Inflation
We do not
expect the impact of inflation on operations to be significant.
Precious
Metals
Raw
materials used by the Company in the EW Machines include a number of precious
metals and minerals. Prices of these materials can be volatile
and the Company has no fixed price contracts or arrangements. The
Company ordinarily does not attempt to hedge the price risk of its raw
materials. Commercial deposits of certain metals that are required
for the alloys used in the EW Machines are found in only a few parts of the
world, and for certain materials only single sources are readily
available. The availability and prices of these
metals and other materials may be influenced by private
or governmental cartels, changes in world politics, unstable
governments in exporting
nations, production interruptions, inflation
and other factors. Although the Company has not experienced
significant shortages of its supplies and raw materials, there can be no
assurance that such shortages will not occur in the future. Any such
shortages or prices fluctuations could have a material adverse effect on the
Company.
Forward-Looking
Statements
All
forward-looking statements contained herein are deemed by the Company to be
covered by and to qualify for the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995. Prospective shareholders should
understand that several factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected
herein. Forward-looking statements, which
involve assumptions and describe our future plans, strategies and expectations,
are generally identifiable by use of the words “may,” “will,” “should,”
“expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the
negative of these words or other variations on these words or comparable
terminology. These forward-looking statements include our
expectations regarding working capital requirements and future funding, our expectations regarding our internal
controls, expectations
regarding funding commitments, our expectations regarding reductions
in deposits from Water Science, future inventory levels, future test results,
and plans and objectives of management for future operations, including
plans and objectives relating to the products and the future economic
performance of the Company. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions, future business decisions, and the time and
money required to successfully complete development projects, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of those assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in any of the forward-looking statements
contained herein will be realized. Forward-looking information is
inherently subject to risks and uncertainties, and actual results could differ
materially from those currently anticipated due to a number of factors, which
include, but are not limited to, risks associated with successfully developing
our business in evolving markets, our need for additional capital, our
continuing operating losses, the ability of our management to conduct
distribution activities and sell products, possible failure to successfully
develop new products, vulnerability to competitors due to lack of patents on our
products, and other risk factors listed in our annual report on Form 10-K for
the year ended December 31, 2008 and our other SEC reports. Based on actual
experience and business development, the Company may alter its marketing,
capital expenditure plans or other budgets, which may in turn affect the results
of operations. In light of the significant uncertainties inherent in the
forward-looking statements included therein, the inclusion of any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans will be achieved.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
A smaller reporting company is not
required to provide the information required by this Item.
Item
4T. Controls and
Procedures
Disclosure Controls and
Procedures
The
Company has evaluated, with the participation of the Company’s principal
executive and principal financial officers, the effectiveness of the issuer’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2009,
pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the
principal executive and financial officers concluded that the Company’s
disclosure controls and procedures were effective at the reasonable assurance
level.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been or will be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdown can occur because of simple error or
mistake.
Changes to Internal Control Over
Financial Reporting
There
have been no significant changes in our internal control over financial
reporting that occurred during our most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, or other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
None
Item
1A. Risk Factors
As a
smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), we are not required to provide the
information required by this item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of stockholders during the first quarter of
2009.
Item
5. Other Information
In March
2009, the Company and Water Science amended the payment schedule of the Stock
Purchase Agreement. The purchase of the common stock was scheduled to
occur in four monthly installments of $250,000 on April 15, 2009, $250,000 on
May 15, $250,000 on June 15 and a final installment of $200,000 on July 15,
2009. As of the date of this report, the Company has received payment
of all of these installments except $75,000 of the final
installment. We expect to receive that last amount before the end of
August 2009. Under the terms of the
agreement, the Company has the right to adjust the exercise price of the
warrants held by WS from $1.00 per share to $3.00 per share if WS defaults in
its payments. The Company intends to waive any right to such an
adjustment upon receipt of the final amount in August.
Item
6. Exhibits
EXHIBIT NO.
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DESCRIPTION OF EXHIBIT
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3(i).1
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Certificate
of Incorporation (Incorporated by reference from registration statement on
Form SB-1 filed with the SEC on July 29, 2002 (File No. 333-86830)
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3(i).2
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Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from registration statement on Form SB-1 filed with the Securities and
Exchange Commission on July 29, 2002 (File No. 333-86830)
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3(i).3
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Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from current report on Form 8-K filed with the Securities and Exchange
Commission on January 17, 2007)
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3(ii).1
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Amended
and Bylaws (Incorporated by reference from registration statement on
current report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
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31.1
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Certification
by Wade R. Bradley under Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification
by Brian D. Heinhold under Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1
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Certification
of Wade R. Bradley pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification
of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant cause this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
August 13, 2009
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EAU
TECHNOLOGIES, INC.
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By:
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/s/
Wade R. Bradley |
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Wade
R. Bradley
Chief
Executive Officer
(Principal
Executive Officer)
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By:
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/s/
Brian D. Heinhold |
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Brian
D. Heinhold
Chief
Financial Officer
(Principal
Financial Officer)
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