Changes are Blacklined (====)
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB-A
AMENDMENT NO. 3
=
(Mark one)
_X_ Quarterly report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005.
___ 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.
------------------------------------------------------------------
(Exact Name of Small Business Issuers as Specified in its Charter)
Delaware 33-0750453
------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
10410 Trademark Street
Rancho Cucamonga, CA 91730
----------------------------------------
(Address of Principal Executive Offices)
(909) 987-0456
------------------------------------------------
(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
18,880,465 shares outstanding as of May 16, 2005.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
--------------------------------------------------------------------------------
AQUACELL TECHNOLOGIES, INC.
FORM 1O-QSB
FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE
Condensed Consolidated Balance Sheet as of March 31, 2005.......... 1
Condensed Consolidated Statements of Operations for the
three and nine month periods ended March 31, 2005 and 2004......... 2
Condensed Consolidated Statements of Cash Flow for the
nine month periods ended March 31, 2005 and 2004................... 3
Notes to Condensed Consolidated Financial Statements............... 5
Item 2. Management's Discussion and Analysis...............................12
Forward-Looking Statements.........................................12
Overview...........................................................12
Critical Accounting Policies.......................................13
Results of Operations..............................................15
Liquidity and Capital Resources....................................15
PART II - OTHER INFORMATION
Item 2(C). Sales of Unregistered Securities...................................16
Item 3. Controls and Procedure.............................................17
Item 4. Submission of Matters to a Vote of Security Holders................17
Item 6. Exhibits and Reports on Form 8-K...................................17
Signature.....................................................................17
Index to Exhibits.............................................................18
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
ASSETS
Current assets:
Cash.......................................................... $ 80,000
Subscription receivable....................................... 2,000
Accounts receivable, net of allowance of $47,000.............. 93,000
Inventories................................................... 80,000
Prepaid expenses and other current assets..................... 37,000
------------
Total current assets..................................... 292,000
------------
Property, equipment and billboard coolers, net..................... 1,131,000
------------
Other assets:
Goodwill...................................................... 824,000
Patents, net.................................................. 60,000
Security deposits............................................. 16,000
------------
Total other assets....................................... 900,000
------------
$ 2,323,000
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 516,000
Accrued liabilities........................................... 832,000
Preferred stock dividend payable.............................. 1,000
Dividend payable.............................................. 33,000
Customer deposits............................................. 81,000
Unearned income............................................... 10,000
Current portion of deferred payable-derivative................ 24,000
------------
Total current liabilities................................ 1,497,000
Deferred payable-derivative, net of current portion................ 449,000
------------
Total liabilities........................................ 1,946,000
------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - Class A, par value $.00l;
1,870,000 shares authorized;
70,000 shares issued and outstanding............................ -
Preferred stock, par value $.001;
8,130,000 shares authorized;
no shares issued................................................ -
Common stock, par value $.001;
40,000,000 shares authorized;
18,413,464 shares issued and outstanding........................ 18,000
Additional paid-in capital......................................... 22,208,000
Accumulated deficit................................................ (20,156,000)
------------
2,070,000
Subscription receivable............................................ (64,000)
Unamortized deferred compensation.................................. (1,629,000)
------------
Total stockholders' equity............................... 377,000
------------
$ 2,323,000
------------
------------
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue:
Net sales...........................................$ 271,000 $ 117,000 $ 581,000 $ 518,000
Advertising revenue................................. 20,000 - 20,000 -
------------ ------------ ------------ ------------
291,000 117,000 601,000 518,000
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales....................................... 152,000 79,000 356,000 356,000
Salaries and wages.................................. 338,000 318,000 922,000 1,019,000
Legal, accounting and other professional expenses... 72,000 42,000 183,000 142,000
Stock based compensation............................ 262,000 233,000 745,000 835,000
Fair value adjustment of derivative................. - (72,000) - 322,000
Write-off of accrued interest on notes.............. - - - 48,000
Other............................................... 339,000 451,000 990,000 1,087,000
------------ ------------ ------------ ------------
1,163,000 1,051,000 3,196,000 3,809,000
------------ ------------ ------------ ------------
Loss from operations before other income................. (872,000) (934,000) (2,595,000) (3,291,000)
------------ ------------ ------------ ------------
Other income:
Interest income..................................... - 1,000 - 2,000
------------ ------------ ------------ ------------
- 1,000 - 2,000
------------ ------------ ------------ ------------
Net loss for the period..................................$ (872,000) $ (933,000) $(2,595,000) $(3,289,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding-
basic and diluted................................... 17,906,000 12,274,000 16,046,000 10,768,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss attributable to common stockholders:
Net loss............................................$ (872,000) $ (933,000) $(2,595,000) $(3,289,000)
Preferred stock dividends........................... 1,000 9,000 19,000 41,000
------------ ------------ ------------ ------------
Loss attributable to common stockholders............$ (873,000) $ (942,000) $(2,614,000) $(3,330,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share...........................$ (0.05) $ (0.08) $ (0.16) $ (0.31)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements.
2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31,
------------------------------
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss...................................................................$ (2,595,000) $ (3,289,000)
Adjustment to reconcile net loss to net cash used in operating activities:
Write-off of accrued interest on notes receivable..................... - 48,000
Fair value adjustment of derivative................................... - 322,000
Stock based compensation.............................................. 745,000 835,000
Depreciation and amortization......................................... 41,000 42,000
Bad debt provision.................................................... 4,000 -
Changes in:
Accounts receivable................................................... (46,000) 30,000
Accrued interest receivable........................................... - 19,000
Prepaid expenses and other current assets............................. 16,000 85,000
Inventories........................................................... 14,000 (467,000)
Accounts payable...................................................... (72,000) (397,000)
Accrued liabilities................................................... 126,000 71,000
Customer deposits..................................................... 20,000 15,000
Unearned income....................................................... 10,000 -
Other................................................................. (1,000) 4,000
------------- -------------
Net cash used in operating activities............................ (1,738,000) (2,682,000)
------------- -------------
Cash flows from investing activities:
Payments on note issued for purchase of property and equipment........ (3,000) (3,000)
Collections on notes receivable....................................... - 68,000
Capital expenditures.................................................. (359,000) (10,000)
------------- -------------
Net cash provided by (used in) investing activities.............. (362,000) 55,000
------------- -------------
Cash flows from financing activities:
Proceeds from private placements of common stock....................... 170,000 3,205,000
Expenses of offerings.................................................. - (305,000)
Preferred stock dividends paid......................................... - (44,000)
Exercise of stock options.............................................. - 44,000
Proceeds from subscriptions receivable................................. 40,000 -
Proceeds from exercise of common stock warrants........................ 1,113,000 -
Expense of warrant exercise............................................ (3,000) -
Proceeds (repayments) of loans from related parties.................... - (80,000)
------------- -------------
Net cash provided by financing activates......................... 1,320,000 2,820,000
------------- -------------
Increase (decrease) in cash................................................ (780,000) 193,000
Cash, beginning of period.................................................. 860,000 32,000
------------- -------------
Cash, end of period........................................................$ 80,000 $ 225,000
------------- -------------
------------- -------------
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- (CONTINUED)
(Unaudited)
Nine Months Ended March 31,
------------------------------
2005 2004
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................................$ - $ -
Supplemental schedule of non-cash investing and financing activities:
Conversion of inventory to depreciable assets for advertising program......$ - $ 6,000
Issuance of common stock and warrants for services to the company..........$ 294,000 $ 2,707,000
Dividends payable on preferred stock.......................................$ 19,000 $ 9,000
Subscriptions receivable for exercise of warrants..........................$ 66,000 $ -
Write-off of notes receivable against reserve..............................$ - $ 177,000
Issuance of common stock in payment of dividends on preferred stock........$ 26,000 $ -
Issuance of common stock for legal fee in connection with stock offering...$ 24,000 $ -
Expense of warrant exercise offset against subscription receivable.........$ 134,000 $ -
Dividend of subsidiary common stock to the Company's common stockholders...$ 33,000 $ -
Accrued legal fees paid as consideration for warrant exercise..............$ - $ 33,000
Legal fees prepaid as consideration for warrant exercise...................$ - $ 19,000
Conversion of 605,000 shares of Class A preferred stock into
605,000 shares of common stock..........................................$ 1,000 $ -
See notes to condensed consolidated financial statements.
4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (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 nine months ended March 31, 2005 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 March 31, 2005 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 nine months ended March 31, 2005 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.
Advertising Revenues:
Revenues from advertising on billboard coolers are recognized during the
periods for which the advertisements are placed. Unearned advertising revenues
reflect that portion of revenues billed but not earned in the period.
Reclassifications:
Certain items in these financial statements have been reclassified to
conform to the current period presentation.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS NO. 123R, "Share Based Payment."
This statement is a revision of SFAS No. 123 and supersedes APB 25 and its
related implementation guidance. SFAS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciations rights. Under
SFAS 123R, SBP awards result in a cost that will be measured at fair value on
the awards' grant date, based on the estimated number of awards that are
expected to vest. This statement is effective for public entities that file as
small business issuers - as of January 1, 2006. The adoption of this
pronouncement is not expected to have a material effect on the Company's
financial statements.
5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)
NOTE B - SUBSCRIPTIONS RECEIVABLE
At March 31, 2005 a part of subscriptions receivable in the amount of
$2,000 is reported as a current asset since such amount represented a receivable
for exercise of warrants that has been subsequently collected prior to the
issuance of the financial statements.
NOTE C - INVENTORIES
Inventories consist of the following at March 31, 2005:
Raw materials ........................................... $ 55,000
Work in progress ........................................ 25,000
------------
$ 80,000
------------
------------
NOTE D - PROPERTY, EQUIPMENT, AND BILLBOARD COOLERS
Property, equipment, and billboard coolers is summarized as follows at
March 31, 2005:
Billboard coolers, including parts....................... $ 1,123,000
Furniture and fixtures .................................. 36,000
Equipment- office ....................................... 102,000
Machinery and equipment ................................. 130,000
Rental units ............................................ 9,000
Leasehold improvements .................................. 12,000
Truck ................................................... 11,000
------------
1,423,000
Less accumulated depreciation ........................... 292,000
------------
$ 1,131,000
------------
------------
Depreciation expense was $25,000 and $26,000 for the nine months ended
March 31, 2005 and 2004 respectively.
NOTE E - ACCRUED LIABILITIES
At March 31, 2005 the accrued liabilities consisted of unpaid officers'
salaries of $118,000, payroll taxes withheld by the Company of $142,000 and by
the subsidiaries of $237,000, accrued payroll taxes of $28,000 owed by the
Company and $100,000 owed by the subsidiaries and other accrued liabilities of
$207,000. At March 31, 2005 two tax liens have been filed; one Federal tax lien
against the Company in the amount of $53,000 and a state tax lien against an
inactive subsidiary in the amount of $26,000.
NOTE F - UNEARNED INCOME
At March 31, 2005 the unearned income of $10,000 represented the portion of
our advertising revenue that was attributable to a period subsequent to the date
of the financial statements.
6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)
NOTE G - DEFERRED PAYABLE
At March 31, 2005 the deferred payable in the amount of $473,000
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 H - COMMITMENTS AND CONTINGENCIES
1). Employment Agreement
--------------------
During December 2004 the Company entered into a three year employment
contract, effective January 2005, with an officer of the Company's Aquacell
Media, Inc. subsidiary. The contract calls for a signing bonus of 50,000 shares
of common stock of the Company, valued at $20,000, and a minimum annual salary
of $125,000.
2). Consulting Agreement
--------------------
During January 2005 the Company entered into a three year consulting
agreement with a company owned by an officer of the Company's Aquacell Media,
Inc. subsidiary. This officer also has an employment agreement with the Company
(see Note H1). The agreement calls for payment of cash compensation for water
cooler placements and/or for securing advertisers. Such commissions will be paid
from advertising revenues collected. In addition the consultant may earn up to
150,000 warrants for securing new locations for coolers.
3). Other
-----
During December 2004 the Company announced that it would spinoff of its
Aquacell Water, Inc. subsidiary, an inactive company, to its common stockholders
on a share for share basis. In connection with the spinoff it is anticipated
that Aquacell Water will acquire Water Science Technologies, Inc., a wholly
owned subsidiary of the Company.
NOTE I - 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 $17,000 for the nine months ended March 31,
2005.
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 $6,000 for the nine months ended March 31,
2005.
7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)
NOTE I - EQUITY TRANSACTIONS -(continued)
During September 2004 the Company issued an aggregate of 457,000 shares of
common stock in connection with the exercise 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 exercise. 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.
During October and November 2004 the Company issued an aggregate of 693,000
shares of common stock in connection with the exercise of 693,000 common stock
purchase warrants issued in previously completed private placements. Warrants
with exercise prices ranging from $.80 to $4.00 were repriced to prices ranging
from $.55 to $.68. The Company realized gross proceeds of $434,000 and expenses
were $43,000 in connection with the exercise. New common stock purchase warrants
were issued for 600,000 shares of common stock exercisable at $.80 per share and
93,000 shares of common stock exercisable at $.90 per share.
During November 2004 the Company amended an August 2003 consulting
agreement to provide for additional compensation of 300,000 common shares. These
shares were valued at $177,000 bases upon closing market price at the date of
issuance. The original agreement was extended for a two year period and the
remaining aggregate deferred compensation in the amount of $410,632 will be
amortized to expense over the remaining term of the agreement. Amortization
amounted to $51,000 for the nine months ended March 31, 2005.
During November 2004 the Company amended an August 2003 nonexclusive
finders arrangement to provide for the issuance of 225,000 common stock purchase
warrants at an exercise price of $.85 per share. These warrants were valued at
$143,000 utilizing the Black-Scholes valuation method and have been charged to
Additional Paid-In Capital as a cost of raising capital.
During November 2004 the Company issued 40,000 shares of common stock in
payment of legal fees in connection with the January 2005 filing of a
registration statement. The shares were valued at $24,000 based upon the closing
market price at the date of issuance.
During December 2004 the Company issued an aggregate of 974,000 shares of
common stock in connection with the exercise of 974,000 common stock purchase
warrants issued in previously completed private placements. Warrants with
exercise prices ranging from $1.75 to $4.00 were repriced to $.55. The Company
realized gross proceeds of $536,000 and expenses were $54,000 in connection with
the exercise. New common stock purchase warrants were issued for 974,000 shares
of common stock exercisable at $.75. In connection with the transaction 301,000
warrants were repriced from $2.00 and $4.00 to $1.00.
During December 2004 605,000 shares of class A preferred stock were
converted into 605,000 shares of common stock.
8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)
NOTE I - EQUITY TRANSACTIONS -(continued)
During December 2004 the Company issued an aggregate of 35,000 shares of
common stock in payment of dividends on preferred stock in the amount of $26,000
for the quarters ended June 2004, September 2004 and December 2004.
During December 2004 the Company issued 50,000 shares of common stock in
connection with an employment agreement. These shares were valued at $20,000
based upon the closing market price at the date of issuance. Such amount was
charged to operations in the current period.
During December 2004 the Company issued 100,000 common stock purchase
warrants at a price of $.40 per share in connection with two consulting
agreements. These warrants were valued at $30,000 utilizing the Black Scholes
valuation method. Such amount will be amortized over a five year period.
Amortization of $2,000 was recorded during the nine months ended March 31, 2005.
During January 2005 the Company issued an aggregate of 100,000 shares of
common stock in connection with the exercise of 100,000 common stock purchase
warrants issued in previously completed private placements. Warrants with an
exercise price of $.80 were repriced to $.55. The Company realized gross
proceeds of $55,000 and expenses were $5,000 in connection with the exercise.
New common stock purchase warrants were issued for 100,000 shares of common
stock exercisable at $.75.
During March 2005 the Company completed a private placement of 566,667
shares of its common stock. The offering consisted of one share of common stock
at a price of $.30 and one common stock purchase warrant exercisable at $.75 per
share. The warrant contains a call feature. The Company received proceeds of
$175,000 and there were no expenses incurred.
NOTE J - OMITTED
=======
9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)
NOTE K - OTHER COSTS AND EXPENSES
Other costs and expenses consisted of the following:
Nine Months Ended March 31,
------------------------------
2005 2004
------------ ------------
Rent.................................... $ 153,000 $ 126,000
Telephone and utilities................. 47,000 50,000
Travel.................................. 57,000 46,000
Business promotion........ ............. 78,000 184,000
Consulting fees and expenses............ 50,000 100,000
Insurance............................... 90,000 77,000
Vehicle expenses........................ 71,000 78,000
Listing fees............................ 28,000 23,000
Exchange fees, transfer agent fees and
investor fees and expenses.......... 47,000 43,000
Office expenses, postage and supplies... 92,000 72,000
Other expenses.......................... 277,000 288,000
------------ ------------
$ 990,000 $ 1,087,000
------------ ------------
------------ ------------
NOTE L - SEGMENT DATA
The Company has two reportable segments; water systems and related products
and advertising.
The following table presents information about the Company's business
segments as of and for the three and nine months ended March 31, 2005:
Three Months Ended Nine Months Ended
March 31, 2005 March 31, 2005
-------------------------- --------------------------
Water Systems Water Systems
and Related and Related
Products Advertising Total Products Advertising Total
------------- ----------- ----------- ------------- ----------- ------------
Net revenue....................$ 271,000 $ 20,000 $ 291,000 $ 581,000 $ 20,000 $ 601,000
Loss from operations...........$ (493,000) $ (379,000) $ (872,000) $ (1,604,000) $ (991,000) $(2,595,000)
Stock based compensation.......$ 217,000 $ 45,000 $ 262,000 $ 653,000 $ 92,000 $ 745,000
Depreciation and amortization..$ 3,000 $ 16,000 $ 19,000 $ 18,000 $ 23,000 $ 41,000
Identifiable assets............$ 1,052,000 $1,271,000 $2,323,000 $ 1,052,000 $1,271,000 $ 2,323,000
Segment accounting was not applicable to the year ended June 30, 2004.
10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)
NOTE M - SUBSEQUENT EVENTS
During April 2005 the Company completed a private placement of 416,667
shares of its common stock. The offering consisted of one share of common stock
at a price of $.30 and one common stock purchase warrant exercisable at $.75 per
share. The Company received proceeds of $125,000 and there were no expenses
incurred.
During April 2005 the Company issued 50,000 shares of common stock in
connection with the exercise of 50,000 common stock warrants. Warrants with an
exercise price of $.90 were repriced to $.32. The Company realized gross
proceeds of $16,000 and expenses were $2,000 in connection with the exercise.
New common stock purchase warrants were issued for 50,000 shares of common stock
exercisable at $.75 per share.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 that 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 nine months ended March 31, 2005 the Company raised net equity
of $1,320,000 to enable the Company to move forward with the "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.
During the nine months ended March 31, 2005, we commenced the initial
rollout of installations in Rite Aid stores, the nation's third largest drug
store chain with more than 3000 locations. Under the five-year agreement,
signed in October 2004 the Company installs its Aquacell 1000 coolers at no cost
to Rite Aid, and sells the advertising space on the bottle band.
During the quarter ended March 31, 2005 we generated our first advertising
revenues with an inaugural promotion for Unilever's Dove(R) Cool Moisture body
wash and bar soap. The Dove Cool Moisture advertising was displayed on our
coolers in select Rite Aid stores nationwide, as well as on coolers installed in
Duane Reade drug stores in the New York Metropolitan area. In a report the
Company received from Unilever, the cooler advertising provided a 34% sales lift
for the Dove Cool Moisture products, validating the value of the "Message on the
Bottle" advertising. The test compared sales of Dove Cool Moisture in the 100
Duane Reade stores in the greater NY area that have our water coolers installed
with a Dove Cool Moisture advertising band on the permanently attached five-
gallon bottle, to all other Duane Reade stores without cooler advertising. The
data was gathered over a four-week period from Duane Reade's cash register
scanners. Sales of Dove Cool Moisture increased steadily in all stores; however,
the stores with "Message on the Bottle" advertising had consistently higher
sales of both bar soap and body wash, averaging 34% higher than stores without
cooler advertising. The cooler advertising was the only variable in the test.
12
While securing advertisers is important to the success of our advertising
program, as it is the source of revenue generation, securing locations, or "real
estate", for the coolers is a critical first-step. Unlike other in-store
advertising mechanisms, we actually own a piece of "real estate" in the stores
for a five-year period, the intrinsic value of which cannot be measured.
Aquacell Media has installed Aquacell 1000 systems on a test basis into
other stores including the nationwide drug chain CVS and Winn Dixie
supermarkets, as well as smaller regional drug and grocery chain stores. We
anticipate finalizing agreements with these and other chain retailers in the
near future.
In January 2005, we announced the hiring of Michael Dougherty as President
of our AquaCell Media subsidiary. Mr. Dougherty spent over 30 years with
Unilever, where he established programs with Advantage Sales and Marketing, the
nation's leading sales and marketing agency for suppliers of food products and
consumer goods. Mr. Dougherty will leverage his experience and relationship
with Advantage, to facilitate both location placements and advertisers for our
"Message On The Bottle" program.
In December 2004, we were notified by the American Stock Exchange that the
Amex accepted the Company's 18-month plan (the "Plan") for continued listing, in
connection with the Amex's listing requirements, following receipt of
notification of non-compliance with the Amex's minimum stockholder equity
requirement. The Plan was evaluated and accepted by the Amex, indicating that
the Company made a reasonable demonstration of an ability to regain compliance
with the continued listing standards within the allotted time frame.
In December 2004, the Company announced it was spinning off its Aquacell
Water subsidiary to AquaCell Technologies stockholders, who will receive one
share of common stock in Aquacell Water for every share of common stock held in
AquaCell Technologies. Aquacell Water is currently an inactive company without
assets, liabilities or operations. Aquacell Water will operate as a holding
company to acquire companies in the water industry with the first acquisition
expected to be Water Science Technologies, Inc. (WST), currently a wholly owned
subsidiary of AquaCell Technologies. If the acquisition were to be completed,
========================================
the Company's net sales, as reported herein, would decrease by approximately
============================================================================
72%. Furthermore, assets of approximately $100,000 consisting primarily of
===========================================================================
cash, accounts receivable and inventory and liabilities of approximately
========================================================================
$900,000 consisting of accounts payable and accrued expenses would be
=====================================================================
eliminated from the consolidated balance sheet. The pay date for the shares
===============================================
will coincide with the effectiveness of the Aquacell Water registration
statement, which we intend to file with the Securities and Exchange
Commission no later than the first quarter of our fiscal year.
During the nine months ended March 31, 2005 we continued to incur non-cash
charges for stock based compensation for warrants issued to consultants, which
we believe is a continuing benefit to the Company and its stockholders for the
future growth of the Company. Such charges were $745,000 for the nine months.
Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP"). The preparation
of these condensed consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosure of contingent assets and
liabilities. These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
13
other sources. We base our estimates and judgments on historical experience and
all available information. However, future events are subject to change, and the
best estimates and judgments routinely require adjustment. US GAAP requires us
to make estimates and judgments in several areas, including those related to
recording various accruals, income taxes, the useful lives of long-lived assets,
such as property and equipment and intangible assets, and potential losses from
contingencies and litigation. We believe the policies discussed below are the
most critical to our condensed consolidated financial statements because they
are affected significantly by management's judgments, assumptions and estimates.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of
net assets of a business acquired. The Company has adopted Statements of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets". The Company operates as a single integrated business, and as
such has one operating segment which is also the reportable unit. Fair value of
the reporting unit is determined by comparing the fair value of the unit with
its carrying value, including goodwill. Impairment tests are performed using
discounted cash flow analysis and estimates of sales proceeds. The annual
evaluation of goodwill is performed at June 30th, the end of the Company's
fiscal year.
Income taxes:
The Company accounts for income taxes using the asset and liability method
described on SFAS No. 109, "Accounting For Income Taxes", the objective of which
is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting and the tax bases of the Company's
assets and liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled. A valuation allowance related to deferred tax
assets is recorded when it is more likely than no that some portion or all of
the deferred tax assets will not be realized.
Long-lived assets:
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." In accordance with SFAS No. 144, long-lived
assets to be held are reviewed whenever events or changes in circumstances
indicate that their carrying value may not recoverable. The Company periodically
reviews the carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred, and has determined that as of June 30,
2004 that impairment, where appropriate, was recorded in the financial
statements.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS NO. 123R, "Share Based Payment."
This statement is a revision of SFAS No. 123 and supersedes APB 25 and its
related implementation guidance. SFAS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SFAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. This statement is effective for public entities that file as small
business issuers - as of January 1, 2006. The adoption of this pronouncement in
not expected to have a material effect on the Company's financial statements.
14
Results of Operations
During the nine months ended March 31, 2005 on a consolidated basis,
revenues were $601,000 as compared to $518,000 for the similar period of the
preceding year, resulting primarily from our initial advertising revenues of
$20,000 and an increase in sales by our WST subsidiary of $83,000, and cost of
sales was 59% for the nine months ended March 31, 2005 as compared to 69% for
the same period of the prior year. The decrease in cost of sales percentage
resulted from spreading manufacturing cost over an increased sales volume from
our WST subsidiary.
Net loss on a consolidated basis, attributable to common stockholders, for
the nine months ended March 31, 2005 decreased to $2,614,000 or $0.16 per share,
as compared to $3,330,000 or $.31 per share for the same period of the prior
year. The decrease in the loss is primarily attributable to the decrease in
stock based compensation in the amount of $90,000, a fair value adjustment of a
derivative in the amount of $322,000, and write-off of accrued interest on notes
receivable in the amount of $48,000.
Salaries and wages decreased by $97,000 for the nine months ended March 31,
2005 over the prior year resulting primarily from bonuses paid in the prior
year. Legal, accounting and other professional expenses increased by
approximately $41,000 for the nine months ended March 31, 2005 resulting
primarily from independent consulting services. Stock based compensation
decreased by $90,000 to $745,000 for the nine months ended March 31, 2005
resulting from a direct write-off of certain warrants issued during the prior
year. Other selling, general and administrative expenses, decreased by
approximately $97,000 to $990,000 for the nine months ended March 31, 2005.
Current period expenses consisted primarily of rent - $153,000, telephone and
utilities- $47,000, travel- $57,000, business promotion- $78,000, insurance-
$90,000, and vehicle expenses-$71,000.
Liquidity and Capital Resources
During the nine months ended March 31, 2005 the Company incurred a net loss
of $872,000 and has aggregate net losses of $20,000,000 since inception of which
non-cash losses amounted to approximately $6,500,000. As of March 31, 2005 we
had a cash balance of $80,000 and a working capital deficiency of $1,205,000.
The Company presently has in excess of 7,000,000 warrants, at prices ranging
from $.75 to $8.25, which if exercised would generate approximately $10,750,000.
As of March 31, 2005, 250,000 warrants generating $42,000 were in the money. We
could reprice warrants and complete private placements to raise necessary equity
to fund continued placement of our billboard coolers and generate additional
advertising revenues from those coolers.
The financial difficulties of the Company were created when the Company
discontinued its original marketing plan of selling coolers and embarked upon a
long term goal of creating an on-going revenue model with short-term cash flow
ramifications, by installing our "billboard water coolers" free of charge into
targeted locations. Amortizing the cost of the coolers and installation costs
over a five-year period will allow the company to reach a break-even point in
a relatively short time frame as advertising revenues are generated.
Until we reach a mass of coolers in place to create a positive cash
flow, the Company will continue to finance itself through private placements
to accredited investors and/or warrant conversion as we have done in the past.
There are no disclosures of any known demand, commitments or uncertainties
that will result in our liquidity increasing or decreasing in any material way.
The Company has developed a plan to address liquidity, in connection with
its ability to continue as a going concern, in several ways. It intends to
continue to raise capital through the sale or exercise of equity securities.
Toward that end the Company raised net equity of approximately $1,320,000
through the exercise of warrants to purchase common shares and a private
placement of common shares during the nine months ended March 31, 2005. The
Company has continued to pursue the placement of our water cooler billboards in
various locations and the Company is seeking to increase its revenues through
the sale of advertising on the band of the cooler's permanently attached five-
gallon bottle as outlined in the Overview section of Management's Discussion.
The spinoff of our Aquacell Water, Inc. subsidiary will have no material
effect on the financial statements because this is an inactive company without
assets, liabilities or operations.
Cash used by operations during the nine months ended March 31, 2005
amounted to $1,738,000. Net loss of $2,595,000 was reduced by non-cash stock
based compensation in the amount of $745,000, depreciation and amortization of
$41,000 and a bad debt provision of $4,000. Cash used by operations was further
increased by a decrease in accounts payable in the amount of $72,000 and an
increase in accounts receivable of $46,000. Net loss was further decreased by an
increase in accrued liabilities of $126,000 and by net changes in prepaid
expenses, accrued liabilities, customer deposits, unearned income and
inventories aggregating $59,000.
15
Cash used by investing activities during the nine months ended March 31,
2005 represented capital expenditures in the amount of $359,000 primarily for
billboard coolers and by payments on notes issued for the purchase of equipment
in the amount of $3,000.
Cash provided by financing activities was approximately $1,320,000.
Proceeds from a private placement of common stock amounted to $170,000. Proceeds
from sales of common stock purchase warrants amounted to $1,113,000 and expenses
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 $10,750,000 if exercised. As of March
31, 2005 250,000 warrants generating $42,000 were in the money and 6,879,000
warrants generating $10,793,000 were out of the money. Historically, the Company
has repriced out of the money warrants issued in connection with equity
placements to generate additional capital. There is no assurance however, that
any of the warrants will be exercised.
At March 31, 2005 two tax liens have been filed; one Federal tax lien
against the Company in the amount of $53,000 and a state tax lien against an
inactive subsidiary in the amount of $26,000. We are in negotiations to reach
settlement agreements with the appropriate tax agencies. There are no assurances
that these negotiations will result in successful agreements and the Company's
assets could be subject to enforcement action.
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
As of the end of the period covered by 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 Rules 13a-15(e) and 15d-15(e)
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 as of the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 2 (C). SALES OF UNREGISTERED SECURITIES
During the quarter ended March 2005 the Registrant sold 566,667 shares of
common stock in a Private Placement to 3 accredited investors pursuant to the
exemption provided by Regulation D, Rule 505, and Section 4(2) of the Securities
Act of 1933, as amended. Common Stock Purchase Warrants were issued to the
investors at an exercise price of $.75. In addition, the Registrant sold 100,000
shares of common stock upon exercise of Common Stock Purchase Warrants to 1
accredited investor 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 investor at an exercise price of $.75.
16
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)
32.0 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: August 12, 2005
== /s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
17
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
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)
32.0 Certification Pursuant to 18 U.S.C. Section 1350
18