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 March 31, 2002.
_____ 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 8,381,224 shares outstanding
as of April 30, 2002
Transitional Small Business Disclosure Format (check one):
Yes _____ No __X__
AQUACELL TECHNOLOGIES, INC.
FORM 1O-QSB
FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
PAGE
Item 1 Financial Statements:
Condensed Consolidated Balance Sheet as of March 31, 2002 ........1
Condensed Consolidated Statements of Operations for
the three and nine month periods ended March 31, 2002 and 2001 ...2
Condensed Consolidated Statements of Cash Flow for
the nine month periods ended March 31, 2002 and 2001 .............3
Notes to Condensed Consolidated Financial Statements .............4
Item 2 Managements Discussion and Analysis: .............................9
Forward-Looking Statements
Overview
Results of Operations
Liquidity and Capital Resources
PART II- OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders .............12
Item 6 Exhibits and Reports on Form 8-K ................................12
Signature ..................................................................12
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2002
(Unaudited)
ASSETS
Current assets:
Cash $ 103,000
Notes receivable, including accrued interest of $ 6,000 674,000
Accounts receivable 72,000
Inventories 177,000
Prepaid expenses and other current assets 267,000
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Total current assets 1,293,000
Property and equipment, net 71,000
Other assets:
Goodwill 1,300,000
Investment in Corbett Water Technologies, Inc. 274,000
Patents, net 127,000
Security deposits 17,000
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$ 3,082,000
-----------
-----------
LIABILITIES
Current liabilities:
Accounts payable $ 564,000
Accrued expenses 121,000
Customer deposits 91,000
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Total current liabilities 776,000
-----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.00l;
10,000,000 shares authorized; no shares issued
Common stock, par value $.001;
40,000,000 shares authorized; 8,463,646 shares issued 8,000
Additional paid-in capital 12,654,000
Accumulated deficit (9,858,000)
-----------
2,804,000
Unamortized deferred compensation (247,000)
Treasury stock, 82,422 shares at cost (251,000)
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2,306,000
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$ 3,082,000
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-----------
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,
2002 2001 2002 2001
----------------------------- -----------------------------
Revenue:
Net sales $ 208,000 $ 53,000 $ 360,000 $ 159,000
Rental income 2,000 - 6,000 -
------------ ------------ ------------ ------------
210,000 53,000 366,000 159,000
Cost of sales 103,000 23,000 166,000 67,000
------------ ------------ ------------ ------------
Gross profit 107,000 30,000 200,000 92,000
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salaries and wages 253,000 165,000 720,000 379,000
Legal, accounting and other
professional expenses 72,000 226,000 339,000 305,000
Stock based compensation 137,000 - 587,000 -
Other 203,000 251,000 720,000 507,000
------------ ------------ ------------ ------------
665,000 642,000 2,366,000 1,191,000
------------ ------------ ------------ ------------
Loss from operations before other
(expense) income and extraordinary item (558,000) (612,000) (2,166,000) (1,099,000)
------------ ------------ ------------ ------------
Other (expense) income:
Impairment loss on investment in Corbett
Water Technologies, Inc. - - (1,226,000) -
Amortization of debt discount - - - (694,000)
Interest expense - (11,000) - (114,000)
Interest income 30,000 17,000 105,000 17,000
Other income - - 100,000 -
------------ ------------ ------------ ------------
30,000 6,000 (1,021,000) (791,000)
------------ ------------ ------------ ------------
Loss before extraordinary item (528,000) (606,000) (3,187,000) (1,890,000)
Accretion of redemption amount of
redeemable common stock - - - 4,000
------------ ------------ ------------ ------------
Loss attributable to common stockholders before
extraordinary item (528,000) (606,000) (3,187,000) (1,894,000)
Extraordinary item - Loss on extinguishment of
debt - - - 159,000
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (528,000) $ (606,000) $ (3,187,000) $ (2,053,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share - basic and diluted:
Loss attributable to common stockholders
before extraordinary item $ (0.06) $ (0.09) $ (0.40) $ (0.32)
Extraordinary item - Loss on extinguishment
of debt - - - (0.03)
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (0.06) $ (0.09) $ (0.40) $ (0.35)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding -
basic and diluted 8,240,000 7,112,000 8,032,000 5,876,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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,
2002 2001
-----------------------------
Cash flows from operating activities:
Net loss $ (3,187,000) $ (2,049,000)
Adjustment to reconcile net loss to net cash used in operating activities;
Impairment loss on investment in Corbett Water Technologies, Inc. 1,226,000 -
Stock based compensation 587,000 -
Interest expense, related to amortization of discount on debt for fair
value of stock warrants issued - 853,000
Depreciation and amortization 41,000 36,000
Changes in:
Accounts receivable (2,000) -
Accrued interest receivable 18,000 -
Prepaid expenses and other current assets 30,000 (305,000)
Inventories (19,000) (28,000)
Security deposits - (2,000)
Accounts payable 304,000 (209,000)
Accrued expenses 270,000 (99,000)
Customer deposits 32,000
Accrued interest payable - (163,000)
------------ ------------
Net cash used in operating activities (700,000) (1,966,000)
------------ ------------
Cash flows from investing activities:
Investments in notes receivable - (1,800,000)
Collections on notes receivable 513,000
Purchase of property and equipment (4,000) (12,000)
------------ ------------
Net cash provided by (used in) investing activities 509,000 (1,812,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of stock in initial public offering - 4,667,000
Proceeds from notes payable-private loan offering - 200,000
Loans and advances from officers, stockholders and others, net (4,000) (5,000)
------------ ------------
Net cash provided by (used in) financing activities (4,000) 4,862,000
------------ ------------
Increase (decrease) in cash $ (195,000) $ 1,084,000
Cash, beginning of period 298,000 2,000
------------ ------------
Cash, end of period $ 103,000 $ 1,086,000
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 234,000
Supplemental schedule of non-cash investing and financing activities:
Note payments of principal and interest made by management with their
shares of the Company's common stock $ 251,000 $ -
Issuance of common stock in connection with investment $ 1,500,000 $ -
Issuance of common stock and warrants for services to the company $ 525,000 $ -
Debt discount arising from issuance of warrants $ - $ 834,000
Contribution of accrued salaries to capital $ 218,000 $ 214,000
Common stock warrants exercised through retirement of notes payable $ - $ 1,295,000
Conversion of note payable into common stock $ - $ 500,000
Reduction of principal payments on notes $ 218,000 $ -
Issuance of common stock to acquire subsidiary $ 1,000,000 $ -
Issuance of common stock to satisfy indebtedness of acquired subsidiary's
vendors $ 189,000 $ -
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001 (Unaudited)
NOTE A - BASIS OF PRESENTATION
AquaCell Technologies, Inc. (the "Company") was incorporated in Delaware
on March 19, 1997. The Company's principal business objective is to operate in
the water purification business.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The accounts
of Water Science Technologies, Inc., acquired March 19,2002, have been included
in the accompanying financial statements for the period of ownership.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with 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 generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the nine months ended March 31, 2002 are not
necessarily indicative of the results to be expected for the full year. Certain
items in these condensed consolidated financial statements have been re-
classified to conform to the current period presentation. For further
information, refer to the Company's annual report filed on Form 10-KSB for the
year ended June 30, 2001.
NOTE B - NOTES RECEIVABLE
At March 31, 2002, the notes receivable consist of $50,000 from a non-
affiliated party and $983,000 from non-director/employee stockholders and
entities owned by them at an annual interest rate of 8%. Notes totaling
$1,750,000 maturing September 16, 2001 were restructured into twelve-month
installment notes with the first installment due October 16, 2001. At the time
of the restructuring, the Company received all interest payments due through
the September restructuring date. As of March 31, 2002 the notes are current.
The October through December, 2001 payments of principal and interest were paid
in cash. The January through March 2002 payments were made by management of
the Company under their personal guarantees, by returning as payment on the
notes 82,422 of their shares of Company common stock valued at $251,000.
Such shares have been recorded as treasury stock at March 31, 2002.
Additionally, the Audit Committee of the Board of Directors resolved to reduce
$218,000 of principal payments under management's guarantees, in an amount equal
to accrued and unpaid salaries contributed by management to the capital of the
Company. The Company has recorded an adjustment, during the year ended June 30,
2001, to reflect a reduction in the estimated fair value of these notes of
$365,000. An unsecured note, in the amount of $175,000, maturing on October 25,
2001 was extended to January 24, 2002 after payment of interest due and a
principal payment in the amount of $18,000. The note was further extended to
July 22, 2002 after payment of interest due and a principal payment in the
amount of $50,000. The remaining note, in the amount of $50,000, is unsecured
and matured in March 2002. Interest receivable at March 31, 2002 amounted to
$4,000 from a non-affiliated party and $2,000 from a non-director/employee
stockholder.
NOTE C - INVENTORIES
Inventories consist of the following:
Raw materials $ 158,000
Work in progress 13,000
Completed product 6,000
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$ 177,000
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4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001 (Unaudited)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Furniture and fixtures $ 35,000
Equipment - office 94,000
Machinery and equipment 120,000
Rental units 10,000
Leasehold improvements 10,000
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269,000
Less accumulated depreciation 198,000
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$ 71,000
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NOTE E - NOTES PAYABLE-PRIVATE LOAN OFFERINGS
On December 11, 2000 the holders of private loan offering warrants
agreed to exercise all of their 1,295,000 warrants upon the effectiveness of
the initial public offering. The offering was declared effective, although not
traded, on December 13, 2000. The settlement of the exercise price was realized
through the retirement of all $1,295,000 of the notes payable-private loan
offering.
Interest expense (excluding amortization of debt discount) during the
nine months ended March 31, 2002 and 2001 amounted to $-0- and $57,000
respectively. During the nine months ended March 31, 2001, amortization of the
debt discount amounted to $681,000. The remaining unamortized debt discount at
December 13, 2000, in the amount of $159,000, was treated as an extraordinary
loss from extinguishment of debt.
NOTE F - NOTE PAYABLE-UNION LABOR LIFE INSURANCE COMPANY
On January 11, 1999, the Company closed a $500,000 note and warrant
purchase agreement with the Union Labor life Insurance Co. ("ULLICO"). Under
the terms of the agreement, the Company issued a six-month senior note, with
interest at the rate of 10% per annum and a warrant to purchase 500,000 shares
of the Company's common stock to be exercisable for a four-year period at $1.00
per share. The maturity date was subsequently extended to April 30, 2000. The
Company estimated the fair value of these warrants to be $86,000, using the
Black-Scholes valuation method. Such amount was amortized to interest expense
over the six-month term of the note. At January 1, 2000, interest accrued at
December 31, 1999 in the amount of $17,000 was added to principal on the note
and the rate was changed to 15% per annum from January 1, 2000. On May 4, 2000
the note was extended to July 30, 2000 and accrued interest at April 30, 2000
in the amount of $26,000, was added to principal on the note. In connection
with the note extension, the Company issued 50,000 warrants to ULLICO at an
exercise price of $5.00 per share and expiring on January 11, 2003. The Company
recorded debt discount based upon the estimated value of the warrants totaling
$39,000. The Warrants were valued utilizing the Black-Scholes valuation method.
On July 27, 2000, the note's maturity was extended to October 31, 2000 and was
subsequently extended to March 31, 2001. During the nine months ended March 31,
2001 amortization of the debt discount amounted to $13,000. Interest expense
(excluding amortization of debt discount) in relation to this loan amounted to
$-0- and $53,000 during the nine months ended March 31, 2002 and 2001
respectively.
5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001 (Unaudited)
NOTE G - EQUITY TRANSACTIONS
In connection with the purchase of certain assets (consideration for
which included 200,000 shares of the Company's common stock), an option was
granted to the holder of 135,000 shares of common stock to put the stock back
to the Company at a price of $1.00 per share plus interest at 7% per annum if
the Company had not registered its common stock by December 21, 2000. The
Company's common stock became registered on December 13, 2000 and the shares,
including interest, were returned to stockholders' equity upon completion of
the IPO.
In connection with a financial consulting agreement, on June 30, 2001 the
Company issued a warrant to purchase 200,000 shares of the Company's common
stock to be exercisable for a five-year period at $4.20 per share. The Company
estimated the fair value of these warrants to be $370,000. As a result of the
cancellation and non-refundable provisions the value of these warrants is being
amortized over the six-month period beginning June 1, 2001. Amortization
amounted to $309,000 during the nine months ended March 31, 2002.
On August 16, 2001, the Company entered into a consulting agreement for
nonexclusive services related to corporate strategies and other matters. The
agreement is for a three-year term. As compensation under the agreement, the
Company granted warrants to purchase 75,000 shares of common stock at an
exercise price of $4.40 per share, whose total fair value is estimated at
approximately $110,000. Amortization amounted to $23,000 for the nine months
ended March 31, 2002.
On September 26, 2001, the Company entered into a consulting agreement
for nonexclusive services related to corporate strategies and other matters.
The agreement is for a six month term. As compensation under this agreement,
the Company issued 10,000 shares of common stock, valued at $34,000, and
warrants (50,000 and 50,000 at exercise prices of $4.50 and $5.50,
respectively), whose fair value is estimated at approximately $79,000.
Amortization of the stock and warrants amounted to $113,000 for the nine months
ended March 31, 2002.
On October 9, 2001 the Company entered into distribution and joint
venture agreements with two privately held companies. In connection with the
distribution agreement, which grants exclusive North American distribution and
marketing rights, excluding existing customers and existing distribution
agreements, the Company acquired 15% of a privately held company in exchange for
451,807 shares of common stock of the Company valued at $1,500,000, adjusted for
a one time impairment loss of $1,226,000. The Company applies the cost method
to accounting in connection with this 15% investment. The Company granted
warrants (100,000, 100,000, and 100,000 at exercises prices of $5.00, $6.00, and
$7.00 per share respectively) in connection with the distribution agreement
valued at approximately $177,000. Amortization of the warrants amounted to
$18,000 for the nine months ended March 31, 2002. In connection with the joint-
venture agreement, the agreement was modified and Aquacell's initial ownership
of 45% was reduced to 19% ownership of all net profits, with no responsibility
for funding any of the manufacturing or marketing costs, with the remaining 81%
owned by the other privately held company.
On October 9, 2001 the Company entered into a consulting agreement for
nonexclusive services related to corporate strategies and other matters. The
agreement is for a six-month term. As compensation under this agreement, the
Company issued 10,000 shares of common stock and 100,000 warrants (50,000 and
50,000 at exercise prices of $4.50 and $5.50, respectively), whose value is
estimated at approximately $125,000. Amortization of the stock and warrants
amounted to $125,000 for the nine months ended March 31, 2002.
All of the warrants issued in connection with the transactions described
above contain a callable provision.
6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001 (Unaudited)
NOTE G - EQUITY TRANSACTIONS (Continued)
On March 19, 2002, in connection with its acquisition of Water Science
Technologies, Inc. (WST), the Company issued to the shareholders of WST
$1,000,000 of the Company's common stock, or 203,252 shares at a price of $4.92,
as calculated by taking the average closing price of AquaCell common stock on
the five business days immediately preceding the signing of the agreement on
October 23, 2001. In addition, the Company agreed to accept consents
representing approximately 55% of the aggregate vendor debt in stock. The
Company issued 55,337 shares of its common stock as calculated taking the
average closing price of AquaCell common stock for five days immediately
preceding the closing on March 19, 2002 of $3.43. The Company recorded goodwill
in the amount of $1,300,000 from this transaction and in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets", has recorded no amortization.
On the basis of a proforma consolidation of the results of operations as
if the acquisition had taken place at July 1, 2000, unaudited consolidated net
revenues, net loss, and loss per share for the three months and nine months
ended March 31, 2002 would have been approximately $322,000, $570,000, and $.07,
and approximately $712,000, $3,327,000 and $.40 respectively; and for the three
months and nine months ended March 31, 2001 would have been approximately
$401,000, $584,000, and $.08, and approximately $1,058,000, $2,037,000 and $.33,
respectively.
On March 31, 2002 three officers/stockholders contributed $218,000 of
accrued salaries to additional paid-in capital.
On March 31, 2002 three officers/stockholders of the Company returned
82,422 shares of their AquaCell common stock, valued at $251,000 to make
payments, under personal guarantees in connection with installment notes
receivable. Such shares have been recorded as treasury stock at March 31, 2002.
In addition, the Audit Committee of the Board of Directors resolved to reduce
note payments guaranteed by the officers in the amount of $218,000, the cash
equivalent of the accrued and unpaid salaries contributed by the officers to
the capital of the Company.
NOTE H - COMMITMENTS AND CONTINGENCIES
Upon the closing of the IPO, the Company entered into a one-year
financial consulting agreement for a total fee of $60,000, commencing February
16, 2001, paid in advance.
The Company entered into a two-year consulting agreement with a
firm to work on the development of a global marketing strategy to address
opportunities worldwide for the Company's products. The agreement commenced
April 1, 2001 and requires monthly payments of $12,500. A payment of $150,000
was made upon signing.
On June 1, 2001, the Company entered into a financial consulting
agreement with a registered broker-dealer. The agreement provides for a fee
consisting of $1,000 per month over a five-year period and the grant of warrants
(see Note G). The agreement also provides the option to prepay all or a portion
of the fee on a non-refundable basis and either party may terminate the
agreement after six months upon written notice. The Company has prepaid $20,000
of the fee for the entire five-year period. As a result of the cancellation and
non-refundable provisions, the value of these warrants was amortized over the
six-month period beginning June 1, 2001.
In connection with the acquisition of WST, the Company entered
into a five-year lease for the rental of space in Tempe, Arizona at a minimum
annual rental of $45,000.
The Company entered into a five-year employment contract with
one of the officers of WST. The contract calls for a minimum annual salary of
$100,000 to take effect July 1, 2002.
7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001 (Unaudited)
NOTE I - IMPAIRMENT LOSS ON INVESTMENT IN CORBETT WATER TECHNOLOGIES, INC.
In connection with our 15% investment in Corbett Water Technologies, Inc.,
the Company was required to take a one-time impairment loss of $1,226,000 in
accordance with generally accepted accounting principles (GAAP), as contained in
the provisions of SFAS-121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of".
NOTE J - OTHER INCOME
Other income represents fees earned for an extensive training seminar in
connection with the Company's products, presented to our marketing partner
Corbett Water Technologies, Inc.
8
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 construed to imply any
conclusion that such results or trends will necessarily continue in the future.
For the nine-months ended March 31, 2002, we have seen significant
incremental growth from quarter-to-quarter, as well as a significant increase in
revenue in comparison to the corresponding quarters from the previous year.
AquaCell revenue, exclusive of Water Science Technologies, for the nine-month
period increased by 118% over the nine-month period ended March 31, 2001, while
revenue for the quarter-ended March 31, 2002 reflected an increase of 262% in
comparison to revenue for the same period last year.
This increase in revenues is attributed to the marketing programs
implemented by AquaCell following the completion of its initial public offering,
and is primarily attributable to the Purific Water Cooler sales efforts of our
partner, Corbett Water Technologies (Corbett Water). Corbett Water has hired
the top-producing salesmen from the nation's leading bottled water suppliers in
key markets for sales of the Purific system. Corbett Water's ability to hire
these top-level sales persons is directly related to the strength of AquaCell's
patented product, providing a permanently attached five-gallon bottle on the top
of a water cooler that automatically refills itself with freshly purified water.
Corbett Water, which only sells and distributes our systems, will continue to
roll out its strategic plan and open up additional key markets as they hire
individuals who meet their stringent criteria.
Under our sales and marketing agreement, our incremental sales and
marketing expenses are eliminated and we will receive 15% of the net income of
Corbett Water.
In accordance with generally accepted accounting principles (GAAP), as
contained in SFAS-121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", because Corbett Water was a newly
formed company and since no appraisal had been done, we had no way of
determining appraised value for our 15% investment in Corbett Water.
Accordingly, during the nine-month period we were required to recognize a one-
time impairment loss in the amount of $1,226,000. We have already begun to see
the benefits of our strategic partnership with Corbett Water, and believe that
our agreement places AquaCell in a unique and strong position for future growth
and enhancement of shareholder value. We are of the opinion that future
revenues and our 15% share of the net income of Corbett Water will benefit
AquaCell and validate the decision of management in making this investment,
despite the fact that we were forced to recognize the impairment.
In accordance with our agreement with Corbett Water, we will continue to
directly sell to government entities through our GSA contract, our Roto-Rooter
program and certain retailers, as well as continue to sell to and support our
current customers, including Morgan Stanley, Bear Stearns, Merrill Lynch,
Lockheed Martin, United Technologies, Honeywell, Household Finance, Philip
Morris, Kraft Foods, Xerox, Duke Energy, Pacific Gas and Electric and other
smaller companies.
9
At March 31, 2002 the Company's backlog amounted to $381,000. Additional
orders received subsequent to March 31, 2002 amounted to $685,000.
In maintaining our "just in time" inventory policy, the Company's Global
Water AquaCell subsidiary turned its inventory one time during the three months
ended March 31, 2002 and maintained an inventory of approximately $100,000.
On October 23, 2001 we signed an agreement to acquire Arizona based Water
Science Technologies, Inc. (WST) for consideration consisting solely of common
stock with a value of $1,000,000 and closed this transaction on March 19, 2002
AquaCell's management believes that the water industry's rapid growth is going
to continue and that the acquisition of WST puts us in a position to capitalize
on and increase our presence in the water industry, having now expanded our
product base and allowing us to no longer be a one product company. We believe
this acquisition will increase shareholder value as we streamline the product
offerings and begin to implement plans for WST's growth.
WST provides a wide range of products and services for water purification
and treatment, through systems capable of treating from ten, to millions of
gallons of water per day to address industrial, commercial, institutional and
residential needs. WST has designed and manufactured systems installed around
the world for a broad-range of applications and companies such as Intel,
Motorola, National Semiconductors, General Motors, Nissan, Honeywell, and
Smith Foods.
Results of Operations
During the three months ended March 31, 2002 we began implementing our
marketing strategies with Corbett Water. For the three months ended March 31,
2002 consolidated revenues, excluding WST, were $192,000 representing an
increase of 262% over the comparable period of the prior year. For the nine
months ended March 31, 2002 consolidated revenues were $348,000, excluding WST,
representing an increase of 119% over the comparable period of the prior year.
Gross profit, excluding WST, was 57% for the nine months ended March 31, 2002
as compared to 58 % for the same period of the prior year as a result of
anticipation taken by Corbett Water.
Net loss for the three months ended March 31, 2002 decreased to $528,000
or $.06 per share as compared to $606,000 or $.09 per share for the same period
of the prior year despite an increase in staff and other operating expenses.
Net loss for the nine months ended March 31, 2002, including WST, was
$3,187,000 or $.40 per share as compared to $2,053,000 or $.35 per share for the
same period of the prior year. As discussed in the Overview section of this
Management Discussion and Analysis, for the nine months ended March 31,2002 GAAP
rules compelled the Company to record a one-time impairment loss on investment
in the amount of $1,226,000 or $.15 per share for its investment in Corbett
Water. Absent this one time charge, the loss for the nine months ended March
31, 2001 would have been $1,961,000, or $.25 per share. Of this amount,
operating expenses consisting of salaries and wages and other selling, general
and administrative expenses, exclusive of depreciation and amortization of
$41,000 were $1,399,000 $.17 per share for the nine months ended March 31, 2002
as compared to $850,000 or $.15 per share for the comparable nine months of the
prior year. Of the current period operating expenses, $467,000 or $.06 per
share represented the cost of increased staff, primarily in manufacturing, sales
and marketing, $48,000 or $.01 per share represented expenses directly related
to functions of being a public company which we did not incur in the previous
year and $18,000 represented the amortization of warrants issued in connection
with the distribution agreement with Corbett Water.
Also included in the loss was $339,000 or $.04 per share representing
legal, accounting and other professional expenses for the nine months ended
March 31, 2002 compared to $305,000 or $.05 per share for the nine months ended
March 31, 2001. The loss also included $587,000 or $.07 per share of stock
based compensation representing the amortization of common shares and warrants
issued in connection with consulting agreements, primarily for investment
banking purposes. Of the $587,000, $511,000 represents amortization in
connection with warrants. If exercised, these warrants could provide additional
capital of up to $3,970,000 to the
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Company. The increase in legal, accounting and other professional expenses also
includes $236,000 or $.03 per share attributed to the issuance of marketing and
consulting agreements primarily for the operating subsidiary put in place after
the completion of the initial public offering.
There was no amortization of debt discount for the nine-month period
ended March 31, 2002 because the warrants issued in connection with the notes
payable were exercised and converted to equity through the retirement of the
notes in December, 2000, as compared to $853,000 for the nine months ended March
31, 2001 including $159,000 written off as a loss on extinguishment of debt.
The Company incurred no interest expense during the nine-month period ended
March 31, 2002 as compared to $114,000 for the nine months ended March 31, 2001,
and recognized interest income of $105,000 on notes receivable for the nine
months ended March 31, 2002.
Liquidity and Capital Resources
During the nine months ended March 31, 2002 we financed our operations
from the proceeds of the initial public offering and the receipt of principal
and interest totaling $596,000 received from collection on notes receivable. A
net repayment of officer loans amounted to $4,000 during the period.
Cash used by operations during the nine months ended March 31, 2002
amounted to $700,000. Net loss of $3,187,000 was reduced by a non-cash one-time
impairment loss on investment for our investment in Corbett Water, as discussed
in the Overview section of this Management Discussion and Analysis, in the
amount of $1,226,0000, non-cash stock based compensation in the amount of
$587,000 and depreciation and amortization of $41,000. Cash used by operations
was further decreased by accounts payable, accrued expenses and customer
deposits in the amount of $606,000. Net loss was further decreased by net
changes in accounts recievable, accrued interest receivable, prepaid expenses
and inventories amounting to $27,000.
We have granted warrants, subsequent to our initial public offering in
connection with consulting and marketing agreements that may generate additional
capital of up to approximately $5,700,000 if exercised.
Cash provided from investing activities during the nine months ended
March 31, 2002 represented principal collections on notes receivable of $513,000
reduced by expenditures for property and equipment in the amount of $4,000.
All payments of principal and interest through March 31, 2002 have been
made on the $1,750,000 notes receivable that were restructured into installment
notes.
Management believes that the future collections on notes receivable 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.
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Part II. Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the period covered by this Report on Form 10-QSB the following
reports on Form 8-K were filed:
February 5, 2002 - Changes in Registrant's Certifying Accountant
March 19, 2002 - Acquisition of Water Science Technologies, Inc.
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: May 14, 2002 /s/ Gary S. Wolff
------------------------------
Gary S. Wolff
Chief Financial Officer
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