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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark one)
_X_ Quarterly report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004.
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuers as Specified in its Charter)
Delaware 33-0750453
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(State of Incorporation) (IRS Employer Identification Number)
10410 Trademark Street
Rancho Cucamonga, CA 91730
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(Address of Principal Executive Offices)
(909) 987-0456
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(Issuer's Telephone Number, Including Area Code)
__________________________________
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
Securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value
15,764,137 shares outstanding as of November 12, 2004.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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AQUACELL TECHNOLOGIES, INC.
FORM 1O-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE
Condensed Consolidated Balance Sheet as of September 30, 2004...... 1
Condensed Consolidated Statements of Operations for the
three-month periods ended September 30, 2004 and 2003.............. 2
Condensed Consolidated Statements of Cash Flow for the
three-month periods ended September 30, 2004 and 2003.............. 3
Notes to Condensed Consolidated Financial Statements............... 4
Item 2. Managements Discussion and Analysis................................ 6
Forward-Looking Statements
Overview
Results of Operations
Liquidity and Capital Resources
Item 3. Controls and Procedure............................................. 8
PART II - OTHER INFORMATION
Item 2(C). Sales of Unregistered Securities................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................ 9
Item 6. Exhibits and Reports on Form 8-K................................... 9
Signature..................................................................... 9
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2004
(Unaudited)
ASSETS
Current assets:
Cash.......................................................... $ 203,000
Subscription receivable....................................... 44,000
Accounts receivable, net of allowance of $42,000.............. 51,000
Inventories................................................... 79,000
Prepaid expenses and other current assets..................... 46,000
------------
Total current assets..................................... 423,000
------------
Property, equipment and billboard coolers, net..................... 877,000
------------
Other assets:
Goodwill...................................................... 824,000
Patents, net.................................................. 75,000
Security deposits............................................. 16,000
------------
Total other assets....................................... 915,000
------------
$ 2,215,000
============
LIABILITIES
Current liabilities:
Accounts payable.............................................. $ 444,000
Accrued expenses.............................................. 665,000
Preferred stock dividend payable.............................. 17,000
Customer deposits............................................. 20,000
Installment note payable...................................... 2,000
Current portion of deferred payable........................... 13,000
------------
Total current liabilities................................ 1,161,000
Deferred payable, net of current portion........................... 460,000
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Total liabilities........................................ 1,621,000
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Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock - Class A, par value $.00l;
1,870,000 shares authorized;
675,000 shares issued and outstanding........................... 1,000
Preferred stock, par value $.001;
8,130,000 shares authorized;
no shares issued................................................ -
Common stock, par value $.001;
40,000,000 shares authorized;
15,048,769 shares issued and outstanding........................ 15,000
Additional paid-in capital......................................... 20,918,000
Accumulated deficit................................................ (18,429,000)
------------
2,505,000
Subscription receivable............................................ (5,000)
Unamortized deferred compensation.................................. (1,906,000)
------------
Total stockholders' equity............................... 594,000
------------
$ 2,215,000
============
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-------------------------------
2004 2003
-------------- --------------
Revenue:
Net sales.................................. $ 199,000 $ 201,000
-------------- --------------
Costs and expenses:
Cost of sales.............................. 124,000 129,000
Salaries and wages......................... 288,000 299,000
Legal, accounting and other
professional expenses.................... 52,000 65,000
Consulting fees and expenses- marketing
research and development................. 24,000 -
Fair value adjustment of derivative........ - 207,000
Stock based compensation................... 242,000 375,000
Other...................................... 337,000 255,000
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1,067,000 1,330,000
-------------- --------------
Loss from operations before
other income (expense):.................... (868,000) (1,129,000)
-------------- --------------
Other income (expense):
Interest income............................ - 1,000
Interest (expense)......................... - -
-------------- --------------
- 1,000
-------------- --------------
Net loss for the period......................... $ (868,000) $ (1,128,000)
============== ==============
Weighted average share outstanding-
basic and diluted.......................... 14,576,000 9,349,000
============== ==============
Loss attributable to common stockholders:
Net loss................................... $ (868,000) $ (1,128,000)
Preferred stock dividends.................. 9,000 16,000
-------------- --------------
Loss attributable to common stockholders... $ (877,000) $ (1,144,000)
============== ==============
Net loss per common share.................. $ (0.06) $ (0.12)
============== ==============
See notes to condensed consolidated financial statements.
2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
-------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss........................................ $ (868,000) $ (1,128,000)
Adjustment to reconcile net loss to net cash
used in operating activities:
Stock based compensation..................... 242,000 375,000
Fair value adjustment of derivative.......... - 207,000
Depreciation and amortization................ 6,000 13,000
Changes in:
Accounts receivable.......................... - 10,000
Accrued interest receivable.................. - 7,000
Prepaid expenses and other current assets.... 7,000 (35,000)
Inventories.................................. 15,000 (150,000)
Accounts payable............................. (138,000) (226,000)
Accrued expenses............................. (41,000) 37,000
Customer deposits............................ (41,000) 6,000
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Net cash used in operating activities...... (818,000) (884,000)
-------------- --------------
Cash flows from investing activities:
Collections on notes receivable.............. - 68,000
Payments on note issued for purchase of
property and equipment..................... (1,000) (1,000)
Capital expenditures......................... (84,000) (1,000)
-------------- --------------
Net cash provided by (used in)
investing activities..................... (85,000) 66,000
-------------- --------------
Cash flows from financing activities:
Proceeds from private placements of
common stock............................... - 2,555,000
Expenses of offerings........................ - (259,000)
Preferred stock dividend paid................ - (12,000)
Exercise of stock options.................... - 27,000
Proceeds (repayments) of loans from
related parties............................ - (25,000)
Proceeds from subscriptions receivable....... 40,000 -
Proceeds from exercise of commons stock
warrants................................... 209,000 -
Expense of warrant exercise.................. (3,000) -
-------------- --------------
Net cash provided by financing activities.. 246,000 2,286,000
-------------- --------------
Increase (decrease) in cash..................... (657,000) 1,468,000
Cash, beginning of period....................... 860,000 32,000
-------------- --------------
Cash, end of period............................. $ 203,000 $ 1,500,000
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ -
Supplemental schedule of non-cash investing
and financing activities:
Issuance of common stock warrants for services
to the company................................ $ 91,000 $ 2,564,000
Subscription receivable for conversion of
warrants...................................... $ 49,000 $ -
Dividends payable on preferred stock............ $ 9,000 $ 16,000
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of AquaCell Technologies, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the three months ended September 30,
2004 are not necessarily indicative of the results to be expected for the full
year. For further information, refer to the Company's annual report filed on
Form 10-KSB for the year ended June 30, 2004.
At September 30, 2004 the Company's ability to continue as a going concern,
for the reasons outlined on the 10-KSB filed for the year ended June 30, 2004,
still existed. During the quarter ended September 30, 2004 the Company
successfully obtained external financing through exercise of warrants and plans
to continue to raise capital through the sale or exercise of equity securities
on a just in time basis.
NOTE B - INVENTORIES
Inventories consist of the following at September 30, 2004:
Raw materials........................................... $ 50,000
Work in progress........................................ 23,000
Finished goods.......................................... 6,000
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$ 79,000
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NOTE C - PROPERTY, EQUIPMENT AND BILLBOARD COOLERS
Property and equipment is summarized as follows at September 30, 2004:
Billboard coolers, including parts...................... $ 853,000
Furniture and fixtures.................................. 36,000
Equipment - office...................................... 102,000
Machinery and equipment................................. 127,000
Rental units............................................ 9,000
Leasehold improvements.................................. 10,000
Truck................................................... 11,000
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1,148,000
Less accumulated depreciation........................... 271,000
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$ 877,000
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4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 (Unaudited)
NOTE D - DEFERRED PAYABLE
At September 30, 2004, the deferred payable represented the balance due to
a private company for the return and cancellation of all exclusive distribution
and marketing rights previously held under a distribution agreement. This amount
is payable solely from 5% of the future revenues to be generated by our Global
Water-Aquacell subsidiary.
NOTE E - EQUITY TRANSACTIONS
During August 2004 the Company amended a February 2004 consulting agreement
to provide for additional compensation of 100,000 common shares. These shares
were valued at $66,000 based upon closing market price at the date of issuance.
Such amount will be amortized to expense over the remaining term of the
agreement. Amortization amounted to $4,000 for the quarter ended September 30,
2004.
During August 2004 the Company issued 50,000 common stock purchase
warrants at a price of $.66 per share in connection with performance under an
existing consulting agreement. These warrants were valued at $25,000
utilizing the Black Scholes valuation method. Such amount will be amortized over
a period of 31 months. Amortization amounted to $2,000 for the quarter ended
September 30, 2004.
During September 2004 the Company issued an aggregate of 457,000 shares of
common stock in connection with the repricing of 457,000 common stock purchase
warrants issued in previously completed private placements. Warrants with
exercise prices of $2.00 and $4.00 were repriced to $.70 and $.56. The Company
realized gross proceeds of $286,000 and expenses were $32,000 in connection with
the repricings. New common stock purchase warrants were issued for 247,000
shares of common stock exercisable at $.90 per share and 210,000 shares of
common stock exercisable at $.95 per share and an additional 210,000 shares of
common stock exercisable at $4.00 per share.
NOTE F - CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of
credit risk consists of cash. Such amounts are in excess of FDIC insurance
limits.
NOTE G - SUBSEQUENT EVENTS
During October and November 2004 the Company issued an aggregate of 693,000
shares in connection with the repricing of outstanding warrants. The Company
realized gross proceeds of $434,000 in connection with the repricing.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with the
Commission, statements identified by the words "believe", "positioned",
"estimate", "project", "target", "continue", "will", "intend", "expect",
"future", "anticipates", and similar expressions express management's present
belief, expectations or intentions regarding the Company's future performance
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on any such forward-looking
statements, each of which speaks only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company has no obligations to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Overview
The following discussions and analysis should be read in conjunction with
the Company's condensed consolidated financial statements and the notes
presented following the condensed consolidated financial statements. The
discussion of results, causes and trends should not be constructed to imply any
conclusion that such results or trends will necessarily continue in the future.
During the quarter ended September 30, 2004, we diligently worked to
finalize agreements for our newly launched "Message On The Bottle" advertising
program through our Aquacell Media subsidiary. Aquacell Media installs our
patented Aquacell 1000 Bottled Water Cooler Systems free of charge into various
locations while retaining ownership of the coolers. Revenue is generated
through the sale of advertising on the band of the cooler's permanently attached
five-gallon bottle, as well as on the cup holder.
Subsequent to the end of the quarter, we signed our first Water Cooler
Placement Agreement with Rite Aid Corporation, the third largest drug chain in
America with more than 3000 stores. Rite Aid conducted an extensive test over
several months on the performance of our coolers in their corporate office as
well as in several stores.
Under an initial term of five years, Rite Aid has agreed that the Aquacell
1000 coolers will be installed on a national basis at no cost to Rite Aid, and
that AquaCell may sell the advertising space on the bottle band. The initial
rollout, expected to be completed by the end of December 2004, will entail
replacing water fountains in approximately half of the stores. Aquacell has
been manufacturing coolers in anticipation of this agreement and is in position
to use current inventory to supply the water coolers for these initial
locations.
We are in negotiations with other retailers including other national chain
drug stores and supermarkets, as well as other national chain retail stores for
installations in these locations, as well. Test units have been installed in
many of these locations and we anticipate the signing of agreements with
additional retailers in the near future.
6
Also subsequent to the end of the quarter, we secured our first advertiser,
Unilever, one of the world's largest consumer products companies. This
inaugural program is for the Dove(R) product line, the timing of which coincides
with the roll out of installations in Rite Aid stores. The program also
includes advertising in other chain drug stores.
The "Message On The Bottle" advertising provides a unique point-of-sale
opportunity for manufacturers to reach the consumer. Advertising on the bottle
gets face-to-face impact reaching the consumers while they are in the store. We
are negotiating with other major manufacturers and providers of health care
related products and/or their agencies, for the advertisement of their products.
AquaCell has engaged several new marketing partners, including Beau Dietl &
Associates. Through this association, we retained the services of J. DeKama
Associates, through which we have signed consulting agreements with former
Unilever executives who have tapped into the services of Advantage Sales and
Marketing. This network has been instrumental in assisting us in developing a
wide variety of companies for both advertising and for placement of Aquacell
1000 coolers into retail locations. By utilizing these and other individuals
who are responsible for payment of their own expenses, and who will receive cash
compensation only upon the generation of revenues, we do not anticipate
incurring any significant direct sales and marketing expenses in the rollout of
this program.
During the quarter ended September 30, 2004 we incurred non-cash charges
for stock based compensation for warrants issued to consultants, which we
believe is a benefit to the Company and its shareholders for the growth of the
Company.
We are embarking on additional opportunities, including expansion of our
"Message On The Bottle" advertising program into more diverse areas, which we
believe will provide long-term benefits to the Company.
Results of Operations
During the three months ended September 30, 2004 on a consolidated basis,
revenues were $199,000 as compared to $201,000 for the similar period of the
preceding year.
On a consolidated basis cost of sales was 62% for the quarter ended
September 30, 2004 as compared to 64% for the same quarter of the prior year.
Net loss on a consolidated basis, attributable to common stockholders, for
the three months ended September 30, 2004 was $877,000 or $0.06 per share, as
compared to $1,144,000 or $.12 per share for the same period of the prior year.
The decrease in the loss is primarily attributable to the decrease in fair value
adjustment of derivative in the amount of $207,000.
Salaries and wages decreased by $11,000 for the quarter ended September 30,
2004 over the prior year. Legal, accounting and other professional expensed
decreased by approximately $13,000 for the quarter ended September 30, 2004.
Stock based compensation decreased by $133,000 to $242,000 for the quarter ended
September 30, 2004. Other selling, general and administrative expenses,
consisting primarily of rent - $49,000, telephone and utilities- $17,000,
travel- $21,000, business promotion- $22,000, insurance- $37,000, and vehicle
expenses-$25,000 increased by approximately $82,000 to $337,000 for the quarter
ended September 30, 2004.
7
Liquidity and Capital Resources
During the three months ended September 30, 2004 we raised, through the
repricing of warrants to purchase common shares, net equity of approximately
$209,000.
Cash used by operations during the three months ended September 30, 2004
amounted to $818,000. Net loss of $868,000 was reduced by non-cash stock based
compensation in the amount of $242,000, and depreciation and amortization of
$6,000. Cash used by operations was further increased by decreases in accounts
payable of $138,000, accrued expenses of $41,000, and customer deposits in the
amount of $41,000. Net loss was further decreased by net changes in inventories
and prepaid expenses aggregating $22,000.
Cash used by investing activities during the three months ended September
30, 2004 represented capital expenditures in the amount of $84,000 increased by
payments on a note issued for the purchase of equipment in the amount of $1,000.
Cash provided by financing activities was approximately $246,000. Proceeds
from sales of common stock purchase warrants amounted to $209,000 and expenses
of warrant exercises amounted to $3,000. Proceeds from subscriptions receivable
were $40,000.
We have granted warrants, subsequent to our initial public offering in
connection with private placements, consulting, marketing and financing
agreements that remain outstanding at the date of this filing and may generate
additional capital of up to approximately $13,800,000 if exercised. There is no
assurance however, that any of the warrants will be exercised.
Management believes that its present cash position combined with subsequent
equity raises and conversion of warrants, and cash flows expected to be
generated from future operations will be sufficient to meet presently
anticipated needs for working capital and capital expenditures through at least
the next 12 months; however, there can be no assurance in that regard. The
Company presently has no material commitments for future capital expenditures.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 adopted under the
Securities Exchange Act of 1934. Based upon that evaluation, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
8
PART II. OTHER INFORMATION
ITEM 2(C). SALES OF UNREGISTERED SECURITIES
During September 2004 the Registrant repriced and sold 222,300 Common
Stock Purchase Warrants to 4 accredited investors pursuant to the exemption
provided by Regulation D, Rule 505, and Section 4(2) of the Securities Act of
1933, as amended. New Common Stock Purchase Warrants were issued to the
investors at prices ranging from $.90 to $4.00.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 CEO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
31.2 CFO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
32 Certification Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
None
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AquaCell Technologies, Inc.
-----------------------------------
Registrant
Date: November 15, 2004 /s/ Gary S. Wolff
-----------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
9