UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Delaware 33-0750453
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10410 Trademark Street, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (909) 987-0456
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and will not be contained, to the best of
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
The information required in Part III by Items 9, 10, 11, 12, and 14 is
incorporated by reference to the issuer's proxy statement in connection with the
2004 Annual Meeting of Shareholders, which will be filed by the issuer within
120 days after the close of its fiscal year.
State issuer's revenues for its most recent fiscal year: $837,000.00.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
As of October 5, 2005, the aggregate market value of the issuer's Common
Stock (based on its reported last sale price on the American Stock Exchange)
held by non-affiliates of the issuer was $9,426,042.
At October 5, 2005, 22,638,643 shares of issuer's Common Stock were
outstanding.
PART I
ITEM 1. BUSINESS
AquaCell Technologies, Inc. (the "Company") was incorporated in Delaware on
March 19, 1997. The Company has two operating subsidiaries, AquaCell Media,
Inc., which operates in the out-of-home advertising segment of the advertising
industry, and Aquacell Water Inc. (formerly Water Science Technologies, Inc.),
which is engaged in the manufacture and sale of products for water filtration
and purification, addressing various water treatment applications for municipal,
industrial, commercial, and institutional purposes.
AquaCell Media, Inc.
In 2004, we revised our business model for our patented self-filling water
cooler, transitioning away from merely selling and leasing our patented, self-
filling water coolers. Our focus is now to place the cooler in a retail
location, preferably dealing with large chain operations to secure multiple
locations, and then selling advertising space on the cooler's permanently
attached bottled to third parties.
We install our patented Aquacell Bottled Water Cooler System free of charge
to the various locations and retain ownership of the coolers, generating revenue
through the sale of advertising on the label of the cooler's permanently
attached five-gallon bottle. We are, in effect, creating a water cooler
billboard, whereby advertisers put their targeted message on the bottle. Since
the water cooler is a known congregating location, it is an excellent venue for
advertisers.
Since inception of the program in 2004, we have placed approximately 1,400
"billboard" water coolers into chain drug stores and other locations and have
sold advertising to large household name advertisers. We are presently
negotiating with several chain stores to secure additional locations.
Out-of-Home Advertising Industry
In July 2005, the Wall Street Journal reported that advertising industry
executives see out-of-home as one of the hottest advertising media this year,
according to a recent survey by the American Association of Advertising
Agencies, behind only online and the placement of brands within entertainment
programming.
In September 2005, Advertising Age reported that advertisers' demand for
out-of-home advertising alternatives is surging, as advertisers' concern about
the fragmentation of TV audiences and their tuning out of broadcast messages
increases. Viacom stated that television networks recognize that they can no
longer self-promote with television advertising and are actively promoting their
shows with non-traditional out-of-home advertising.
Out-of-home advertising encompasses all forms of advertising that target
consumers while they're on the go. All areas of out-of home advertising are
growing as advertisers seek to reach consumers closer to the point of purchase.
One sector of out-of-home advertising is "in-store" advertising. According
to Advertising Age, retailers and marketers have transformed retail stores into
a media channel. Although in-store promotions and point-of-purchase displays
have been around for many years, it has only recently been transformed into a
new form of advertising. This transformation may be attributed to marketing
studies conducted by Point-of-purchase Advertising International, (POPAI),
beginning in 2001 which conclusively showed that point-of-purchase advertising
is compatible with other advertising means and can increase sales volumes
significantly. POPAI has found that 50 to 70% of all buying decisions are made
at the point of purchase, and that in-store marketing plays a large role in
changing customer behavior and attitudes.
In-store advertising is primarily dominated by floor and shelf advertising,
which has demonstrated that such advertising increases sales of the advertised
products by 15% to 35%. According to Inc. magazine, revenues
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of FloorGraphics, the pioneer of in-store floor advertising grew 7,500% over a
five-year period from its inception in 1998 to $75 million.
Our Water Cooler Billboard
Our Aquacell Bottled Water Cooler System looks like a traditional
five-gallon bottled water cooler, but it is actually a self-contained water
filtration, bottling and dispensing system in one. The Aquacell cooler is
connected to a standard municipal water supply. The water is filtered and
disinfected through multiple step systems and the treated water then
automatically fills the permanently attached five-gallon bottle on the cooler as
water is dispensed. Our patents pertain to the attachment of the bottle to the
cooler, and the float valve in the bottle, providing the automatic refilling.
The permanently attached five-gallon bottle is significant to our marketing
strategies, as it provides an ideal location for advertisement. And, since the
bottle is permanently attached, there are no bottles to store and employees do
not have to change the bottle allowing customers to always find the bottle full.
We primarily utilize the services of The ICEE Company for installation and
service, and to a lesser extent, Roto-Rooter Plumbers.
Our Advertising Program
Our "billboard" water coolers have been installed into chain drug stores
and other various locations - primarily in Rite Aid nationwide and in New York
based Duane Reade stores. We are in discussions with other national chain
stores, and expect to add a significant number of locations to our network over
the next year.
Since the bottle is permanently attached to the water cooler, the label
remains intact throughout the advertising campaign. Advantages of our cooler
advertising program include: increased sales of advertised products; targeted
advertising; ad gets face-to-face impact; advertisers have exclusivity with no
clutter from competing ads; advertisement of products available for sale in the
store reaches the consumers at the apex of their purchase intent cycle; long
viewing time - since pages can't be turned, there is no channel surfing or mouse
clicking.
Our first advertiser was Unilever, who advertised Dove Cool Moisture on our
water coolers as a part of its initial product launch. Unilever reported an
average 34% sales lift of the product in Duane Reade stores carrying the cooler
ads versus stores without cooler ads. Through the Unilever advertising, we were
approached by CBS to promote its new comedy "Out of Practice" on our coolers
installed in stores in the New York and Los Angeles areas. Advertising is
typically contracted for on a purchase order basis.
We are in discussions with a number of companies and/or their advertising
agencies for future advertising on our billboard coolers. We believe we are
competitively priced with other out-of-home advertising options as measured in
cost-per-thousand, and are priced significantly below television, radio and
print advertising, which should help us capture a share of this growing industry
segment.
Aquacell Water, Inc.
In March 2002 AquaCell Technologies acquired Water Science Technologies
(WST) and in August 2005 we changed its name to Aquacell Water, Inc., at which
time we replaced the president and former owner of that company with a new
management team.
Aquacell Water manufactures custom designed turnkey water purification and
treatment systems for municipal, industrial, commercial and institutional
applications. Depending upon the source of the water - ground water, surface
water or seawater - its content and the required quality of the treated water,
Aquacell Water builds a custom system designed to meet the specifications of the
end user. We engineer and design the systems we produce to ensure that we meet
the needs of our customers, and provide installation, maintenance and training.
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We integrate various technologies - including dealkalization, deionization,
desalination, carbon filtration, multimedia filtration, ozonation, reverse
osmosis, ultrafiltration, ultraviolet light disinfection and water softening-
combined with pumps, valves and control panels to provide the ideal system for
the customer's needs.
We have built and installed systems around the world for a myriad of
applications including water bottling plants, manufacturing facilities,
restaurants and food processing, car washes and many more.
Given the custom nature of our business, we do not have a standard product
line nor do we carry a finished goods inventory and have a limited inventory of
raw materials.
Water Purification Industry Background
Warning of a mounting water crisis, the United Nations designated 2003 as
the "International Year of Freshwater", stating, "Water is likely to become a
growing source of tension and fierce competition between nations if present
trends continue..." The UN has reported that more than half of humanity will be
living with water shortages within 50 years. According to a report from
scientists at the International Water Management Institute, the risk of wars
being fought over water is rising because of explosive global population growth
and widespread complacency. It has been suggested, however, that employing
water purification systems, including desalination plants, in areas of the world
lacking fresh drinking water, could avert such wars.
The highly fragmented water purification industry has thousands of
companies involved in various capacities, including companies which design fully
integrated systems for processing millions of gallons of water for municipal,
industrial, and commercial applications, down to the independent water delivery
route person.
According to an article appearing in The Wall Street Journal, water supply
businesses generate approximately $400 billion in revenue worldwide annually.
Demand for water purification has continued to grow nationally and
internationally due to economic expansion, scarcity of usable water, concern
about water quality and regulatory requirements.
Municipal Water Treatment
In the United States, new federal standards for drinking water are
requiring community water systems to be significantly upgraded. Each year, more
than 50 million people in the United States are exposed to contaminated
municipal water necessitating "boil water alerts" to be issued.
The Safe Drinking Water Act requires municipalities to comply with
federally mandated minimum contaminant levels of a number of impurities. As
awareness of health issues brought about by contaminants in drinking water
increase, the EPA is often forced to lower the allowable levels of certain
contaminants, requiring municipalities to upgrade their systems.
In January 2006, municipalities will be required to be in compliance with a
mandate lowering the allowable level of arsenic in drinking water from 50 parts-
per-billion to 10. Aquacell Water provides a proprietary process for removing
arsenic from drinking water with zero wastewater discharge requiring no onsite
chemical. This process reduces both the capital and operating costs for
municipalities. We anticipate that this same process can be used to treat other
waterborne contaminants.
Additionally, costs for protection stemming from potential terrorism will
cost $450 million for Congressional ordered vulnerability studies, with an
additional $1.6 billion needed for basic security at pumping stations and
treatment plants. The August 12, 2004 Review-Journal of Las Vegas reported that
it had obtained a bulletin issued by the FBI and Department of Homeland Security
reporting that terrorists discussed a plot to recruit employees of water
treatment facilities to poison drinking supplies during the chlorination process
in hopes of causing mass casualties.
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Industrial Water Treatment
Nearly every product manufactured re quires some level of water
purification or wastewater treatment. While some industries only require basic
treatment, such as for cooling towers and boiler feed water, other require
ultra-pure water for specific sensitive processes or products, as in the micro-
chip and pharmaceutical industries.
Aquacell Water has custom designed water treatment systems to meet the
needs of numerous manufacturers including textile manufacturing, manufacturers,
food processing, beverage manufacturer/bottlers and many others.
Commercial Water Treatment
Water treatment systems designed for commercial applications range from
simple treatment systems designed to protect equipment to purifying water for
consumption.
Aquacell Water manufactures water treatment systems to address various
commercial applications including car washes, aqua farming, resorts,
restaurants, water bottlers and water stores and more.
Institutional Water Treatment
Institutions have varying needs for different levels of water treatment and
purification. These needs range from treated water for boilers, laundry
services and food/beverage serves, to purified water for medical procedures.
Exposure to microbial waterborne contaminants can cause serious illness and
potential death in individuals with immune system deficiencies, such as those
with AIDS, cancer patients and organ transplant recipients. In addition, the
elderly and very young children can be at risk if they consume contaminated
water.
Aquacell Water designs and builds water treatment systems for institutional
applications such as hospitals, nursing homes, prisons and schools.
Customers
Our AquaCell Media subsidiary customers include any company seeking to
advertise its products or services and/or the agencies that represent them, for
the purchase of advertising on our Aquacell Bottled Water Cooler Systems
installed in retail and other strategic locations. To date, advertisers include
Unilever and CBS Television.
Our Aquacell Water customers include a broad range of industries including
municipalities, manufacturers, various commercial clients such as water bottlers
and car washes and institutions such as hospitals. We have built systems for
companies including Allied Signal, Intel, National Semiconductor, Motorola,
General Motors, Boeing, Russell Athletic, Safeway Foods and many other
international corporate customers as well as the Canadian and US Federal
governments and local governments.
Production, Raw Materials and Supplies
Our products are manufactured in our 10,000 square foot manufacturing
facility located in Rancho Cucamonga, California, and the Aquacell Water
8,300 square foot facility located in Tempe, Arizona. Our California plant is
located within a 100-mile radius of 95% of our suppliers allowing for just-in-
time inventory.
Our facilities utilize manufacturing processes that follow the guidelines
of the Water Quality Association. The manufacturing process of our various
products includes utilization of injection-molded parts, for which we own the
molds. Multiple vendors have been identified as sources for parts and supplies
for our products and we do not anticipate any shortages of such materials.
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Upon completion of manufacture, each product undergoes quality assurance
testing prior to shipping and installation. The raw materials and components
used in these products are commonly available commodities such as off the shelf
water coolers, water bottles, various fittings, plastic tubing, piping, wiring,
valves, sediment filters, reverse osmosis membrane filters, tanks, various
filtration media and ultra-violet lights. Our products are fabricated from
these materials and assembled together with products bought from other companies
to form an integrated product. We do not depend on any single supplier. If any
supplier were to become unable to perform, we believe we could readily find a
substitute source. We are not a party to any material long-term fixed price
supply contracts.
Government Regulation
Federal, state, local and foreign environmental laws and regulations
require substantial expenditures and compliance with water quality standards and
impose liabilities for noncompliance. We believe that environmental laws and
regulations and their enforcement are, and will continue to be, a significant
factor affecting the marketability of our products. The treatment of drinking
water in the United States is governed by the Safe Drinking Water Act. The 1996
amendments to the Act emphasize risk-based standards for contaminants in
drinking water, afford small water supply systems operational flexibility and
provide assistance to water system infrastructures through a multi- billion-
dollar Drinking Water State Revolving Fund. The Fund program assists public
water systems with the financing of the costs of drinking infrastructure that is
necessary to achieve or maintain compliance with the Safe Drinking Water Act
requirements and to protect public health. The Fund, patterned after the State
Revolving Fund contained in the Clean Water Act, provides funding to the states
to establish a renewable source of financing for drinking water infrastructure
projects. The Fund program is designed to ensure that the drinking water
supplies in the United States remain safe and affordable, and that systems that
receive funding will be properly operated and maintained. Regulations under the
Safe Water Drinking Act also established maximum containment levels for a wide
variety of chemicals that may be present in drinking water treatment to meet
applicable standards.
Any changes in applicable regulations or their enforcement may affect our
operations by imposing additional regulatory compliance costs on our customers,
requiring modification of our products or affecting the market for our products.
To the extent that demand for our products are created by the need to comply
with such enhanced standards or their enforcement, any modification of the
standards or their enforcement may reduce demand, thereby adversely affecting
our business, financial condition or results of operations. The relaxation or
repeal of any such laws or regulations or the strict enforcement thereof could
also adversely affect our business and prospects. Conversely, changes in
applicable environmental requirements imposing additional regulatory compliance
requirements or causing stricter enforcement of these laws or regulations could
increase the demand for our products.
Competition
The water purification industry is fragmented and highly competitive due to
the large number of businesses within certain product areas. We compete with
many companies that have greater market penetration, depth of product line,
resources and access to capital, all of which could be competitive advantages.
Competitors of our Aquacell Water subsidiary include water filtration systems
manufacturers such as General Electric and US Filter.
The out-of-home advertising industry is highly competitive. We compete
with many companies that have greater market penetration, depth of product
offering, resources and access to capital, all of which could be competitive
advantages. Competitors in the out-of-home advertising industry include Viacom
and Clear Channel, while more specific in-store advertising competitors include
News Corp's News America/Smart Source and FloorGraphics, Inc.
While we believe that we can deliver our products on an economically
competitive basis, there can be no assurance in that regard. In addition, many
competitors have greater financial resources than us to finance their expansion
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and internal growth opportunities. Consequently, we may encounter significant
competition in our efforts to achieve our strategic goals. There can be no
assurance that our competitors will not develop products that are superior to
ours or achieve greater market acceptance than our products. Competition could
have a material adverse effect on our ability to consummate arrangements with
customers or enter into strategic business alliances. Moreover, in response to
changes in the competitive environment, we may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on our business, financial condition and results of
operations.
Intellectual Property
We own a United States and Canadian patent on our automatic-refilling
purified bottle water cooler. These patents do not expire until November 20,
2006 and October 2, 2009, respectively. We have filed for two patents with the
US Patent and Trademark office, which if granted, would provide exclusive rights
for utilizing the water cooler bottle as an advertising mechanism. We have
pending applications to federally register our "Never Change Another Bottle"
logo and AquaCell marks. We also conduct business in California under the name
Global Water Solutions, Inc. We intend to seek appropriate additional trademark
or service mark registrations in connection with our product and service
offerings.
Employees
As of June 30, 2005 we had 20 employees. None of our employees are covered
under collective bargaining agreements although we do have employment agreements
with certain executives. Management believes we maintain a good relationship
with our employees.
ITEM 2. PROPERTIES
Our principal executive office and our 10,000 square foot manufacturing
facility are located in Rancho Cucamonga, California under a five-year lease
that commenced on January 1, 1999 and expires on April 30, 2006, following two
extensions. That lease has an annual base rent of $76,800. We also maintain
a 7,000 square foot warehouse in Rancho Cucamonga, California under a one-year
lease expiring in April 2006. That lease has an annual rent of $40,800.
We also maintain an 8,300 square foot Aquacell Water manufacturing facility in
Tempe, Arizona under a five (5) year lease that commenced on November 1, 2001
and expires on October 31, 2006. That lease has an average annual base rent of
$55,900. We believe that, if necessary, alternative space is readily available
at comparable rates and on comparable terms with respect to all of our leased
properties. We also believe that we can obtain additional space necessary to
support increases in our future operation. We believe that the properties
described above are currently protected by adequate insurance.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced quotation on the American Stock
Exchange on February 12, 2001 following its initial public offering. The
following table sets forth, for the periods indicated, the last sale prices for
the Common Stock as reported by American Stock Exchange:
Period High ($) Low ($)
------ -------- -------
Fiscal 2006
10/1/05 - 10/10/05................ $ 0.53 $ 0.50
First Quarter..................... 0.68 0.36
Fiscal 2005
Fourth Quarter.................... $ 0.44 $ 0.33
Third Quarter..................... 0.66 0.35
Second Quarter.................... 0.91 0.38
First Quarter..................... 0.90 0.58
Fiscal 2004
Fourth Quarter.................... $ 1.72 $ 0.82
Third Quarter..................... 1.92 1.20
Second Quarter.................... 2.84 1.20
First Quarter..................... 3.05 2.06
On October 10, 2005, the last sale price of the Common Stock as reported by
AMEX was $0.52. On September 30, 2005, there were approximately 170 holders
of record of the Company's Common Stock and, the Company believes, over 1,600
beneficial owners of the Company's Common Stock.
Depending upon the Company's capital resources and needs, the Company has
no present plans to pay cash dividends in the future. The payment of dividends
on common stock, if any, in the future is within the discretion of the Board of
Directors and will depend upon the Company's earnings, its capital requirements
and financial condition, and other relevant factors, although this may change
based upon the foregoing factors.
8
Recent Sales of Unregistered Securities
During the year ended June 30, 2005, the Company made the following sales
of unregistered securities:
Exemption
Consideration Received and Description of From If Option, Warrant or
Date Title of Number Underwriting or Other Discounts to Registration Convertible Security,
of Sale Security Sold Market Price Afforded to Purchasers Claimed Terms of Exercise or Conversion
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
4/7/05 Common Stock 50,334 Issued upon exercise of warrants. 4(2);
4(6)
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4/7/05 Warrants to 50,334 Issued in connection with repricing of 4(2); All exercisable at $0.75 per share.
Purchase certain warrants issued on 6/30/04 to $0.32- 4(6)
Common Stock no cash until exercise.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
4/19 & Common Stock 416,667 Issued in connection with private placement 4(2);
4/24/05 at $0.30 per share. 4(6)
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4/19 & Warrants to 416,667 Issued in connection with private placement- 4(2); All exercisable at $0.75 per share.
4/24/05 Purchase no cash until exercise. 4(6)
Common Stock
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
6/30/05 Class B 718,000 Issued in connection with private placement 4(2);
Preferred of Class B Preferred stock. 4(6)
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
6/30/05 Warrants to 304,391 Issued in connection with private placement 4(2); All exercisable at $0.50 per share.
Purchase of Class B Preferred stock including 24,891 4(6)
Common Stock to placement agent- no cash until exercise.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-KSB 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 consolidated financial statements and the notes presented
following the 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.
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AquaCell Technologies, Inc. has two subsidiaries operating in two separate
industries. Our AquaCell Media, Inc. subsidiary addresses the out-of-home
segment of the advertising industry through the sale of advertising on our
patented self-filling water cooler, the Aquacell Bottled Water Cooler System.
This business model was launched in 2004, designed to provide us with an on-
going revenue model in comparison to selling the coolers, as we had previously
done. We install our "billboard" water coolers into retail and other strategic
locations free of charge to these locations under five-year contracts, and
retain ownership of the cooler. We currently have approximately 1400 coolers
installed in Rite Aid and Duane Reade drug stores, and have test programs
underway in CVS, Kmart/Sears and Winn Dixie. Advertisers to date have been
CBS Television and Unilever, who reported a 34% sales lift of its advertised
Dove Cool Moisture in stores carrying the cooler ads.
Our Aquacell Water, Inc. subsidiary addresses the municipal, industrial,
commercial and institutional sectors of the water treatment and purification
industry. We design, manufacture, install and service custom designed turnkey
systems that treat from hundreds to millions of gallons of water per day for a
variety of applications, including treatment of process water for manufacturing,
purification of water for bottling plants and food service, and removal of
contaminants from municipal drinking water systems. Our customers range from
manufacturers of micro-chips, textiles and food and beverage service, to health
care providers, defense contractors and the military. The management team of
our Aquacell Water subsidiary has over 50 years combined experience in the water
treatment industry.
Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our 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
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 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 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". 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. Impairment changes were $74,000 and
$218,000 for the years ended June 30, 2005 and 2004.
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.
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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,
2005 that impairment, where appropriate, was recorded in the financial
statements.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-
Based Payment." SFAS 123( R ) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments. SFAS 123 ( R ) requires
an entity to recognize the grant-date fair-value of stock options and other
equity-based compensation issued to employees in the income statement. The
revised statement generally requires that an entity account for those
transactions using the fair-value-based method, and eliminates the intrinsic
value method of accounting in APB 25, which was permitted under SFAS No. 123, as
originally issued.
The revised statement requires entities to disclose information about the
nature of the share-based payment transactions and the effects of those
transactions on the financial statements.
SFAS No. 123 ( R ) is effective for small business issuer's financial
statements for the first interim or annual reporting period that begins after
December 15, 2005, with early adoption encouraged.
The Company is currently evaluating the impact that this statement will
have on its financial condition or results of operations.
Results of Operations
For the year ended June 30, 2005 on a consolidated basis, revenues were
$837,000, representing an increase of $108,000, or 15%, over the preceding year,
resulting primarily from our initial advertising revenues of $30,000 and an
increase in sales by our Aquacell Water subsidiary of $83,000. Cost of sales was
66% for the year ended June 30, 2005 as compared to 74% for the prior year. The
decrease in cost of sales percentage resulted from spreading manufacturing cost
over an increased sales volume from our Aquacell Water subsidiary.
Net loss on a consolidated basis, attributable to common stockholders, for
the year ended June 30, 2005 decreased to $4,001,000 or $0.24 per share, as
compared to $4,562,000 or $.40 per share, for the prior year representing a 12%
reduction of net loss. The decrease in the loss is primarily attributable to
the decrease in impairment loss on goodwill of $144,000, a fair value adjustment
of a derivative in the amount of $333,000, and write-off of accrued interest on
notes receivable in the amount of $48,000.
Salaries and wages decreased by $20,000 for the year ended June 30, 2005
over the prior year resulting primarily from bonuses paid in the prior year.
Legal, accounting and other professional expenses increased by approximately
$60,000 for the year ended June 30, 2005 resulting primarily from independent
consulting services. Stock based compensation increased by $101,000 to
$1,173,000 for the year ended June 30, 2005 resulting from a write-off of
warrants, related to certain consulting agreements, issued during prior years.
Other costs and expenses decreased by approximately $109,000, or 6% to
$1,593,000 for the year ended June 30, 2005. Current period expenses consisted
primarily of manufacturing costs- billboard coolers-$481,000; rent-$100,000;
telephone and utilities-$46,000; travel-$81,000; business promotion-$102,000;
insurance- $91,000; and vehicle expenses-$84,000.
11
Liquidity and Capital Resources
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 $1,549,000
through the exercise of warrants to purchase common shares and private
placements of common shares and Series B Convertible Preferred stock during the
year ended June 30, 2005. The Company has continued to pursue the placement of
its 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.
Cash used by operations during the year ended June 30, 2005 amounted to
$1,947,000. Net loss of $3,888,000 was reduced by impairment loss on goodwill
of $74,000, non-cash stock based compensation in the amount of $1,173,000,
depreciation and amortization of $79,000 and a bad debt provision of $15,000.
Net loss was further decreased by increases in accounts payable of $205,000,
accrued liabilities of $368,000 and by net changes in prepaid expenses, customer
deposits, accounts receivable and inventories aggregating $27,000.
Cash used by investing activities during the year ended June 30, 2005
represented capital expenditures in the amount of $471,000 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 $1,653,000.
Proceeds from private placements of common and Preferred B stock amounted to
$448,000 and expenses were $24,000. Proceeds from exercises of common stock
purchase warrants amounted to $1,269,000 and expenses amounted to $144,000.
Proceeds from subscriptions receivable were $40,000. Loans from related parties
amounted to $100,000 and the Company paid dividends of Series B Preferred stock
in the amount of $36,000.
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 $12,392,000 if exercised. As of
June 30, 2005, 250,000 warrants generating $39,000 were in the money and
7,946,000 warrants generating $12,353,000 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.
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.
During December 2004, the Company announced the spin-off of its inactive
Aquacell Water subsidiary to its common stockholders on a share for share basis.
It was anticipated that Aquacell Water might acquire our Water Science
Technologies, Inc. subsidiary. On July 19, 2005 the Board of Directors approved
that, in place of the Company's spin-off of its inactive Aquacell Water
subsidiary, management reincorporate its Water Science Technologies subsidiary
in Delaware and change its name to Aquacell Water, Inc. Furthermore, this
subsidiary will file a Form 10 registration statement with the possibility of
spinning this company off to the AquaCell Technologies, Inc.'s common
stockholders on a share for share basis. However, there is no assurance that
this spin-off will occur.
At June 30, 2005 five tax liens have been filed; two Federal tax liens
against the Company in the amount of $98,000, a Federal tax lien against an
inactive subsidiary in the amount of $76,000, a Federal tax lien against another
subsidiary in the amount of $118,000 and a state tax lien against the inactive
subsidiary in the amount of $26,000. We are in negotiations to reach settlement
agreements with the appropriate tax agencies. There are no
12
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 and
internally generated cash flows expected from future operations.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. 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.
ITEM 8B. OTHER INFORMATION
None.
13
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 14.
ITEM 10. EXECUTIVE COMPENSATION
See Item 14.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 14.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 14.
ITEM 13. EXHIBITS
See Exhibit Index.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Items 9, 10, 11, 12, and 14 is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the 2004 Annual Meeting of Stockholders.
14
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 11, 1005 AQUACELL TECHNOLOGIES, INC.
(Registrant)
By: /s/ JAMES C. WITHAM
-------------------------------
Name: James C. Witham
Title: Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ James C. Witham Chairman of the Board of Directors October 11, 1005
---------------------- and Chief Executive Officer
James C. Witham (Principal Executive Officer)
/s/ Karen B. Laustsen Director and President October 11, 1005
----------------------
Karen B. Laustsen
/s/ Gary S. Wolff Director and Chief Financial Officer October 11, 1005
---------------------- (and Principal Accounting Officer)
Gary S. Wolff
/s/ Glenn Bergenfield Director October 11, 1005
----------------------
Glenn Bergenfield
/s/ Dr. William DiTuro Director October 11, 1005
----------------------
Dr. William DiTuro
/s/ James Barton Director October 11, 1005
----------------------
James Barton
15
EXHIBIT INDEX
Exhibit
Number Description
--------- -------------------------------------------------------------------
31.1 Chief Executive Officer's Certification Pursuant to Rule 13A-14 and
15D-14 Under the Securities Exchange Act of 1934, As Amended
31.2 Chief Financial Officer's Certification Pursuant to Rule 13A-14 and
15D-14 Under the Securities Exchange Act of 1934, As Amended
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
16
AQUACELL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................ F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet, June 30, 2005.............................. F-2
Consolidated Statements of Operations for the years ended
June 30, 2005 and 2004.......................................... F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended June 30, 2005 and 2004...................... F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2005 and 2004.......................................... F-6
Notes to Consolidated Financial Statements............................. F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of
AquaCell Technologies, Inc.
We have audited the accompanying consolidated balance sheet of AquaCell
Technologies, Inc. and Subsidiaries ("the Company") as of June 30, 2005 and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the two years in the period ended
June 30, 2005 These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. Also, an audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AquaCell
Technologies, Inc. and Subsidiaries as of June 30, 2005, and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2005 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has incurred significant
operating losses for the years ended June 30, 2005 and 2004, and as of June 30,
2005 has a significant working capital deficiency and a stockholders' deficiency
that raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are also described in Note A. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ WOLINETZ, LAFAZAN & COMPANY, P.C.
--------------------------------------
WOLINETZ, LAFAZAN & COMPANY, P.C.
Rockville Centre, New York
October 3, 2005
(Except for Note Q (3), as to which the date is October 10, 2005)
F-1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2005
ASSETS
Current assets:
Cash.......................................................... $ 92,000
Subscription receivable....................................... 148,000
Accounts receivable, net of allowance of $17,000.............. 59,000
Inventories................................................... 13,000
Prepaid expenses and other current assets..................... 40,000
-------------
Total current assets....................................... 352,000
-------------
Property, equipment, and billboard coolers, net.................. 1,211,000
-------------
Other assets:
Goodwill...................................................... 750,000
Patents, net.................................................. 54,000
Security deposits............................................. 16,000
-------------
Total other assets......................................... 820,000
-------------
$ 2,383,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 787,000
Accrued liabilities........................................... 1,074,000
Preferred stock dividend payable- Class A..................... 2,000
Preferred stock dividend payable- Class B..................... 21,000
Customer deposits............................................. 17,000
Loan payable - related party.................................. 100,000
Current portion of deferred payable........................... 22,000
-------------
Total current liabilities.................................. 2,023,000
Deferred payable, net of current portion......................... 451,000
-------------
Total liabilities.......................................... 2,474,000
-------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock - Class A, par value $.001;
liquidation preference $46,000; 1,870,000 shares authorized;
70,000 issued and outstanding................................ -
Preferred stock - Class B, par value $.001;
liquidation preference $308,000; 4,000,000 shares authorized;
718,000 issued and outstanding................................ 1,000
Preferred stock, par value $.00l;
4,130,000 shares authorized; no shares issued................. -
Common stock, par value $.001; 40,000,000 shares authorized;
18,880,465 shares issued and outstanding...................... 19,000
Additional paid-in capital....................................... 22,566,000
Accumulated deficit.............................................. (21,449,000)
-------------
1,137,000
Unamortized deferred compensation................................ (1,228,000)
-------------
Total stockholders' deficiency............................. (91,000)
-------------
$ 2,383,000
=============
The accompanying notes are an integral part of these financial statements.
F-2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------
2005 2004
Revenue: ------------- -------------
Net sales ...................................... $ 807,000 $ 729,000
Advertising revenue ............................ 30,000 -
------------- -------------
837,000 729,000
------------- -------------
Costs and expenses:
Cost of sales................................... 532,000 542,000
Salaries and wages.............................. 1,004,000 1,024,000
Legal, accounting and other
professional expenses......................... 258,000 198,000
Stock based compensation........................ 1,173,000 1,072,000
Other........................................... 1,593,000 1,702,000
Impairment loss on goodwill..................... 74,000 218,000
Write-off of notes receivable and
accrued interest.............................. - 48,000
Fair value adjustment of deferred payable -
derivative.................................... - 333,000
------------- -------------
4,634,000 5,137,000
------------- -------------
Loss from operations before other income (expense) (3,797,000) (4,408,000)
------------- -------------
Other income (expense):
Interest expense................................ (91,000) (106,000)
Interest income................................. - 2,000
------------- -------------
(91,000) (104,000)
------------- -------------
Net loss for the year............................. $ (3,888,000) $ (4,512,000)
============= =============
Weighted average common shares outstanding -
basic and diluted............................... 16,724,000 11,396,000
============= =============
Loss attributable to common stockholders:
Net loss........................................ $ (3,888,000) $ (4,512,000)
Preferred stock dividends....................... 113,000 50,000
------------- -------------
Loss attributable to common stockholders........ $ (4,001,000) $ (4,562,000)
============= =============
Net loss per common share....................... $ (0.24) $ (0.40)
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock- Preferred Stock-
Class A Class B Common Stock
---------------- ---------------- ------------------ Additional Unamortized
Number Par Number Par Number Par Paid-in Accumulated Deferred
of Shares Value of Shares Value of Shares Value Capital Deficit Compensation Total
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Balances-
July 1, 2003......... 1,185,000 $1,000 - $ - 8,726,224 $ 9,000 $13,544,000 $(13,049,000) $ (339,000) $ 166,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Sale of 3,005,204
shares of common
stock in
connection with
private placements,
net of costs of
$468,000............. 3,005,204 3,000 3,483,000 3,486,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 1,400,000
common stock warrants
in connection with
consulting
agreements........... 2,707,000 (2,707,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Amortization of
deferred costs....... 1,072,000 1,072,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Conversion of 510,000
shares of Class A
preferred stock to
510,000 shares of
common stock......... (510,000) - 510,000 - 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Dividends on Class A
preferred stock...... (50,000) (50,000)
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 100,000
shares of common
stock in connection
with service
agreement............ 100,000 - 82,000 (82,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 2,114,867
shares of common
stock upon exercise
of common stock
warrants, net of
expenses of $79,000.. 2,114,867 2,000 783,000 (3,000) 782,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 35,000
shares of common
stock upon
exercise of
stock options........ 35,000 - 33,000 33,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Net loss for the
year ended
June 30, 2004........ (4,512,000) (4,512,000)
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Balances-
June 30, 2004........ 675,000 1,000 - - 14,491,295 14,000 20,582,000 (17,561,000) (2,059,000) 977,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 400,000
shares of common
stock in connection
with amendment of
consulting
agreements........... 400,000 1,000 242,000 (243,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 150,000
common stock
warrants in
connection with
consulting
agreements........... 55,000 (55,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 225,000
common stock
warrants in
connection with
amendment of a
nonexclusive 143,000
finders agreement.... (143,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 40,000
shares of common
stock as payment
of legal fees
for filing of a
registration 24,000 (24,000) 0
statement............ 40,000 - (24,000) 24,000 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Amortization of
deferred costs....... 1,173,000 1,173,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Conversion of 605,000
shares of Class A
preferred stock to
605,000 shares of
common stock......... (605,000) (1,000) 605,000 1,000 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Balances forward to F-5 70,000 $ - - $ - 15,536,295 $16,000 $20,879,000 $(17,561,000) $ (1,184,000) $ 2,150,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
The accompanying notes are an integral part of these financial statements.
F-4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)-Continued
Preferred Stock- Preferred Stock-
Class A Class B Common Stock
---------------- ---------------- ------------------ Additional Unamortized
Number Par Number Par Number Par Paid-in Accumulated Deferred
of Shares Value of Shares Value of Shares Value Capital Deficit Compensation Total
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Balances
forward from F-4 70,000 $ - - $ - 15,536,295 $16,000 $20,879,000 $(17,561,000) $ (1,184,000) $ 2,150,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 2,275,751
shares of common
stock upon exercise
of common stock
warrants net of
expenses of $144,000. 2,275,751 2,000 1,180,000 1,182,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Sale of 983,334 shares
of common stock in
connection with
private placements... 983,334 1,000 294,000 295,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 35,085
shares of common
stock as
payment of dividends
on Class A
preferred stock...... 35,085 - 26,000 26,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Deemed dividends on
beneficial
conversion
feature of
preferred stock 36,000
offering............. (36,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 50,000
shares of common
stock in
connection with an
employment agreement. 50,000 - 20,000 (20,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 25,000
common stock warrants
as loan consideration
in connection with a
loan from a related
party................ 5,000 (5,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Issuance of 100,000
common stock
warrants in
connection with an
investor relations
agreement............ 19,000 (19,000) 0
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Sale of 718,000 shares
of Class B preferred
stock, net of
expenses of $24,000.. 718,000 1,000 - - 219,000 220,000
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Dividends on
Class A
preferred stock...... (19,000) (19,000)
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Dividends on
Class B
preferred stock...... (57,000) (57,000)
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Net loss for the
year ended
June 30, 2005........ (3,888,000) (3,888,000)
------------------------ --------- ------ --------- ------ ---------- ------- ------------ ------------- ------------- ------------
Balances- June 30, 2005 70,000 $ - 718,000 $1,000 18,880,465 $19,000 $22,566,000 $(21,449,000) $ (1,228,000) $ (91,000)
======================== ========= ====== ========= ====== ========== ======= ============ ============= ============= ============
The accompanying notes are an integral part of these financial statements.
F-5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-----------------------------
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss.......................................... $ (3,888,000) $ (4,512,000)
Adjustment to reconcile net loss to net cash used
in operating activities:
Fair value adjustment of deferred payable....... - 333,000
Impairment loss on goodwill..................... 74,000 218,000
Write-off of notes receivable and
accrued interest.............................. - 48,000
Stock based compensation........................ 1,173,000 1,072,000
Provision for bad debts......................... 15,000 17,000
Depreciation and amortization................... 79,000 45,000
Changes in:
Accounts receivable............................. (23,000) 6,000
Accrued interest receivable..................... - 21,000
Prepaid expenses and other current assets....... 13,000 70,000
Inventories..................................... 81,000 (10,000)
Security deposits............................... - (2,000)
Accounts payable................................ 205,000 (195,000)
Accrued liabilities............................. 368,000 203,000
Customer deposits............................... (44,000) 38,000
------------- -------------
Net cash used in operating activities..... (1,947,000) (2,648,000)
------------- -------------
Cash flows from investing activities:
Payments on notes issued for purchase of
property and equipment........................ (3,000) (4,000)
Collections on notes receivable................. - 91,000
Capital expenditures............................ (471,000) (782,000)
------------- -------------
Net cash used in investing activities..... (474,000) (695,000)
------------- -------------
Cash flows from financing activities:
Proceeds (repayments) of loans from related
parties....................................... 100,000 (80,000)
Proceeds from private placements of Class B
preferred stock............................... 153,000 -
Proceeds from private placements of
common stock.................................. 295,000 3,954,000
Expenses of stock offerings..................... (24,000) (468,000)
Preferred stock dividends paid- Class A......... - (53,000)
Preferred stock dividends paid- Class B......... (36,000) -
Proceeds from subscriptions receivable.......... 40,000 -
Proceeds from exercise of stock options......... - 33,000
Proceeds from exercise of common stock warrants. 1,269,000 864,000
Expense of warrant exercise..................... (144,000) (79,000)
------------- -------------
Net cash provided by financing activities. 1,653,000 4,171,000
------------- -------------
Increase (decrease) in cash....................... (768,000) 828,000
Cash, beginning of year........................... 860,000 32,000
------------- -------------
Cash, end of year................................. $ 92,000 $ 860,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended June 30,
-----------------------------
2005 2004
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ - $ -
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock and warrants for
services...................................... $ 342,000 $ 2,789,000
Dividends payable on preferred stock............ $ 23,000 $ 9,000
Deemed dividends on preferred stock............. $ 36,000 $ -
Conversion of 605,000 shares of preferred stock
to 605,000 shares of common stock............. $ 1,000 $ -
Accrued legal fees paid as consideration for
warrant exercise.............................. $ - $ 49,000
Legal fees prepaid as consideration for
warrant exercise.............................. $ - $ 3,000
Write-off of notes receivable against reserve... $ - $ 177,000
Subscription receivable for conversion of
warrants...................................... $ 57,000 $ 40,000
Issuance of common stock in payment of
dividends on preferred A stock................ $ 26,000 $ -
Issuance of common stock for legal fee in
connection with stock offering................ $ 24,000 $ -
Subscription receivable for purchase of Class B
preferred shares.............................. $ 91,000 $ -
The accompanying notes are an integral part of these financial statements.
F-7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Note A - Description of Business and Basis of Presentation
Description of Business:
AquaCell Technologies, Inc. was incorporated in Delaware on March 19,
1997 and its principal business activity is the manufacture and sale of products
for water filtration and purification through its operating subsidiaries
Aquacell Water, Inc. (formerly Water Science Technologies, Inc.) and to a lesser
extent, Global Water-Aquacell Inc., currently an inactive company. Its Aquacell
Media, Inc. subsidiary places coolers into various locations and sells targeted
advertising on the bottle band of the permanently attached five-gallon bottle.
AquaCell Technologies, Inc. and its wholly owned subsidiaries (the "Company")
conduct substantially all of its business in the United States.
Going Concern:
The Company incurred net losses of $3,888,000 and $4,512,000 during the
years ended June 30, 2005 and 2004, respectively. In addition, the Company had a
working capital deficiency of $1,671,000 and a stockholders' deficiency of
$91,000 at June 30, 2005. These factors, amongst others, raise substantial doubt
about the Company's ability to continue as a going concern.
There can be no assurance that sufficient funds required during the next
year or thereafter will be generated from operations or that funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the inability
to generate cash flow from operations or to raise capital from external sources
would force the Company to substantially curtail or cease operations and would,
therefore, have a material adverse effect on its business. Further, there can be
no assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significant dilutive effect on the
Company's existing stockholders.
The accompanying consolidated financial statements do not include any
adjustments related to the recoverability or classification of asset carrying
amounts or the amounts and classification of liabilities that may result should
the Company be unable to continue as a going concern.
During the year ended June 30, 2005, the Company had successfully
obtained external financing through private placements of equity securities and
exercise of warrants.
The Company has developed a plan to address liquidity in several ways,
namely:
. Continue to raise capital through the sale or exercise of equity
securities.
. Continue to pursue the placement of our water cooler billboards in
various locations.
. Increase revenue through the sale of advertising on the band of the
cooler's permanently attached five-gallon bottle.
. Increase revenue through the sale of water systems and related
products.
Note B - Summary of Significant Accounting Policies
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of AquaCell Technologies, Inc., and its wholly owned subsidiaries. Such
subsidiaries are Global Water Aquacell, Inc., currently an inactive company,
incorporated December 21, 1998, Aquacell Water, Inc. (formerly Water Science
Technologies, Inc.) acquired on March 19, 2002, and AquaCell Media, Inc., formed
on September 10, 2001. Aquacell Media, Inc. had minimal revenues through June
30, 2005. All significant intercompany accounts and transactions have been
eliminated in consolidation.
[2] Inventories:
Inventories are carried at the lower of cost or market, using the FIFO
(first-in, first-out) method.
[3] Property and equipment and billboard coolers:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets which approximates three to five years.
Billboard coolers, manufactured by the Company, are stated at cost.
Depreciation is computed using the straight-line method over their estimated
useful life of five years, commencing with the date placed on location.
F-8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note B - Summary of Significant Accounting Policies-(continued)
[4] Goodwill:
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired in connection with our acquisition of Water Science
Technologies, Inc. The Company has adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets". 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 as of June 30, the end of the Company's
fiscal year. Impairment charges were $74,000 and $218,000 for the years ended
June 30, 2005 and 2004, respectively.
[5] Patents:
The value of patents is amortized over nine years, their remaining useful
lives at date of acquisition, using the straight-line method. Patents at June
30, 2005, are stated net of accumulated amortization of approximately $143,000.
Amortization expense was approximately $22,000 for each of the years ended
June 30, 2005 and 2004.
[6] Revenue recognition:
Revenues are recorded at the time our products are shipped unless we
agreed to install the products, in which case we recognize revenue at the time
of installation. Advertising revenues are recognized on a straight-line basis
over the term of the advertising contract.
[7] Advertising:
Advertising costs are expensed as incurred. Advertising expense for the
years ended June 30, 2005 and 2004, was approximately $0 and $119,000,
respectively.
[8] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
[9] 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 not that some portion or all of
the deferred tax assets will not be realized.
[10] Net loss per common share:
Loss per common share is based upon the weighted average number of common
shares outstanding during the year. Diluted loss per common share is the same
as basic loss per share, as the effects of potentially dilutive securities (see
Notes I (3) and I (5)) are antidilutive. Losses attributable to common stock
have been adjusted for the preferred stock dividends.
F-9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note B - Summary of Significant Accounting Policies-(continued)
[11] 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 be 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, 2005, that impairment, where appropriate, was recorded in the
financial statements.
[12] Concentrations of credit risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company performs ongoing credit evaluations of its customers'
financial condition, but does not require collateral to support such
receivables.
The Company utilizes a limited number of suppliers for certain components
used in its products but has no long-term supply contracts with them.
[13] Financial instruments:
The carrying amounts of the Company's cash, accounts receivable, accounts
payable, and customer deposits, approximate fair value because of the immediate
or short-term maturity of these financial instruments.
[14] Stock based compensation:
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting standards for
stock-based employee compensation plans. This statement allows companies to
choose between the fair value-based method of accounting as defined in this
statement and the intrinsic value-based method of accounting as prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees."
The Company has elected to continue to follow the accounting guidance
provided by APB 25, as permitted for stock-based compensation relative to the
Company's employees. Stock, warrants and options granted to other parties in
connection with providing goods and services to the Company are accounted for
under the fair value method as prescribed by SFAS No. 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of SFAS Statement No. 123". This statement amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value-based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. The provisions of SFAS No. 148 are effective for
financial statements for the year ended June 30, 2003. SFAS No. 148 did not have
a material impact on the Company's consolidated financial statements as the
adoption of this standard does not require the Company to change and the Company
does not plan to change to the fair value based method of accounting for stock-
based compensation.
F-10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note B - Summary of Significant Accounting Policies-(continued)
[14] Stock based compensation: (continued)
For the Year
Ended June 30,
---------------------------
2005 2004
------------ ------------
Net loss applicable to common stockholders, as reported....... $(4,001,000) $(4,562,000)
Add: stock-based employee compensation expense
included in reported net loss applicable to
common stockholders.............................. - -
Less: total stock-based employee compensation
expense determined under the fair value-based
method of all awards............................. (416,000) (672,000)
------------ ------------
Proforma Net Loss Applicable to Common Stockholders........... $(4,417,000) $(5,234,000)
============ ============
Basic and Diluted Net Loss Applicable to Common Stockholders:
As reported.............................................. $ (.24) $ (.40)
============ ============
Proforma................................................. $ (.26) $ (.46)
============ ============
The fair value during the year ended June 30, 2005 was estimated at the
date of grant using the Black-Scholes option-pricing using the following
weighted-average assumptions:
Assumptions 2005
----------- ---------
Risk-free rate 3.1 %
Annual rate of dividends 0
Volatility 88 %
Average Life 7.2 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Our employee stock options have characteristics significantly
different from those of traded options and changes in the subjective input
assumptions can materially affect the fair value estimate. During 2005, the
estimated fair value of the options granted was $0.42 per unit.
[15] Shipping and handling fees and costs:
Shipping and handling fees and costs of approximately $42,000 and $21,000
for the years ended June 30, 2005 and 2004, respectively, are included in other
expenses.
[16] Derivatives:
The Company recognizes all speculative derivatives on the balance sheet
at fair value on the date the derivative instrument is entered into, with a
corresponding charge to income (loss) from operations in accordance with
SFAS-133. Subsequent changes to fair value are reflected in income (loss) from
operations. Fair value is estimated at each balance sheet date using a Black-
Scholes pricing model.
F-11
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note B - Summary of Significant Accounting Policies-(continued)
[17] New accounting pronouncements:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-
Based Payment." SFAS 123( R ) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments. SFAS 123 ( R ) requires
an entity to recognize the grant-date fair-value of stock options and other
equity-based compensation issued to employees in the income statement. The
revised statement generally requires that an entity account for those
transactions using the fair-value-based method, and eliminates the intrinsic
value method of accounting in APB 25, which was permitted under SFAS No. 123, as
originally issued.
The revised statement requires entities to disclose information about the
nature of the share-based payment transactions and the effects of those
transactions on the financial statements.
SFAS No. 123 ( R ) is effective for small business issuer's financial
statements for the first interim or annual reporting period that begins after
December 15, 2005, with early adoption encouraged.
The Company is currently evaluating the impact that this statement will
have on its financial condition or results of operations.
Emerging Issue Task Force (EITF) Issue 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share." The EITF reached a
consensus that contingently convertible instruments, such as contingently
convertible debt, contingently convertible preferred stock, and other such
securities should be included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has been met. The consensus is
effective for reporting periods ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB
Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Consequently, the Company will adopt the provisions of SFAS 154 for its fiscal
year beginning July 1, 2006. Management currently believes that adoption of the
provisions of SFAS No. 154 will not have a material impact on the Company's
consolidated financial statements.
[18] Reclassifications:
Certain items in these financial statements have been reclassified to
conform to the current period presentation. These reclassifications had no
impact on our results of operations, stockholders' deficiency or cash flows.
Note C - Subscriptions Receivable:
At June 30, 2005 the subscriptions receivable consisted of $91,000
resulting from the sale of shares in the Class B Preferred Stock private
placement and $57,000 from the exercise of common stock purchase warrants. All
of the subscriptions receivable were paid prior to the issuance of the financial
statements and, accordingly, are classified as current assets.
F-12
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note D - Inventories:
Inventories consist of the following at June 30, 2005:
Raw materials.................................... $ 12,000
Work in progress................................. 1,000
------------
$ 13,000
============
Note E - Property and Equipment and Billboard Coolers:
Property and equipment is summarized as follows at June 30, 2005:
Billboard coolers- on location................... $ 539,000
Billboard coolers- not on location............... 538,000
Billboard coolers parts- not on location......... 157,000
Furniture and fixtures........................... 36,000
Equipment - office............................... 101,000
Machinery and equipment.......................... 131,000
Leasehold improvements........................... 12,000
Truck............................................ 11,000
------------
1,525,000
314,000
------------
Less accumulated depreciation.................... $ 1,211,000
============
Depreciation expense was approximately $57,000 and $23,000 for the year
ended June 30, 2005 and 2004, respectively.
Note F - Accrued Liabilities
At June 30, 2005 the accrued liabilities consisted of officers' salaries
of $260,000, payroll taxes withheld of $390,000, accrued payroll taxes of
$134,000, accrued penalties and interest on taxes payable of $191,000 and other
accrued liabilities of $99,000. As of June 30, 2005 five tax liens have been
filed; four Federal tax liens of approximately $292,000 and one state tax lien
of approximately $26,000.
Note G - Loan Payable- Related Party
At June 30, 2005 loan payable to a related party consisted of an
unsecured demand loan of $100,000, from a director of the Company, with interest
at the rate of 8% per annum. In connection with the loan the lender received
25,000 common stock purchase warrants (See Note I (5)).
Note H - Deferred Payable
At June 30, 2005, the deferred payable represented the unpaid balance due
to a private company for the return and cancellation of all exclusive
distribution and marketing rights previously held under a distribution
agreement. The unpaid balance of $473,000, of which $22,000 is classified as a
current liability, represented a return to the private company of $1,339,000
reduced by $866,000 received from the sales of 451,807 shares of AquaCell common
stock that it owned (See Note N (2)). This amount is payable solely from 5% of
the future revenues to generated by our Global Water-Aquacell subsidiary. The
Company recognized a $333,000 fair value adjustment of this payable during the
year ended June 30, 2004.
Note I - Equity Transactions
[1] Series A Convertible Preferred Stock:
During the years ended June 30, 2005 and 2004, 605,000 and 510,000
shares, respectively, of Series A Convertible Preferred Stock were converted
into 605,000 and 510,000 shares of Common Stock of the Company, respectively.
F-13
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note I - Equity Transactions-(continued)
[2] Series B Convertible Preferred Stock:
During June 2005 the Company completed a private placement of 718,000
shares of its newly designated Series B Convertible Preferred Stock. The
offering consisted of 718,000 shares of class B convertible preferred stock at a
price of $0.34 per share and 279,500 Class B common stock purchase warrants
exercisable at $0.50 per share. The Series B Convertible Preferred Stock carries
an $.08 per share annual dividend and is convertble into the Company's common
stock on a one for one basis. The first year's dividend was prepaid in full at
the time of the sale. Based on the effective conversion price of the preferred
stock using a relative fair value of $39,000 attributable to the warrants the
Company recognized a beneficial conversion feature of $36,000 as a deemed
dividend to the holders of the convertible preferred stock. In connection with
this offering the Company received net proceeds of $168,000 after dividends paid
of $57,000 and expenses of $19,000. In addition the Company issued 24,891 Class
B common stock purchase warrants exercisable at $0.50 per share to the placement
agent.
[3] Stock option plans:
During August 1998, the Company adopted the 1998 Incentive Stock Plan
(the "Plan") under which options (either incentive or nonqualified), stock
appreciation rights, stock and other awards, covering an aggregate amount of
1,000,000 shares of common stock, may be granted to officers, directors,
employees and consultants of the Company. The exercise price established for
any awards granted under the Plan, shall be determined by a Compensation
Committee appointed by the Company's Board of Directors. The exercise price of
incentive stock options cannot be less than 100% (110% for 10% or greater
shareholder employees) of the fair market value ("FMV") at the date of grant and
the exercise price of nonqualified options cannot be less than 85% of the FMV at
the date of grant. The exercise period of incentive options cannot extend
beyond 10 years from the date of grant and nonqualified options cannot extend
beyond 15 years from the date of grant. At the December 2, 2003 annual meeting
the shareholders approved the increase in issuable shares from 1,000,000 to
2,000,000 in the plan.
During January 2002, the Board of Directors adopted a Director's Option
Plan covering an aggregate amount of 500,000 shares of common stock. As of June
30, 2005, 360,000 options have been granted under this plan.
A summary of stock option activity under both plans is as follows:
Year Ended June 30,
--------------------------------------------
2005 2004
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- ---------- --------
Balance July 1.................. 1,066,000 $1.10 506,000 $0.90
Options granted.............. 985,000 0.51 620,000 1.26
Options cancelled............ (115,500) 1.06 (25,000) 1.02
Options exercised............ 0 - (35,000) 0.94
---------- -------- ---------- --------
Balance, June 30................ 1,935,500 $0.80 1,066,000 $1.10
========== ==========
Exercisable, June 30............ 562,000 $1.01 377,000 $1.07
========== ==========
During the year ended June 30, 2004 options were exercised for 35,000
shares and the Company received proceeds of $33,000. No options were exercised
during the year ended June 30, 2005.
F-14
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[3] Stock option plans (continued)
The following table presents information relating to stock options
outstanding at June 30, 2005:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Exercise Life in Exercise
Price Shares Price Years Shares Price
-------- --------- --------- --------- -------- ----------
0.37 35,000 7.0 -
0.40 190,000 7.2 40,000
0.41 42,500 6.8 -
0.55 717,500 6.7 40,000
0.60 140,500 4.5 56,000
0.65 30,000 7.6 30,000
1.00 60,000 9.2 60,000
1.15 85,000 7.0 73,000
1.16 70,000 3.9 42,000
1.24 515,000 6.0 171,000
1.45 50,000 8.8 50,000
--------- --------- --------
1,935,500 $0.80 6.5 562,000 $1.01
========= ========= ========
If the options had been accounted for under SFAS 123, net loss
attributable to common stockholders for the years ended June 30, 2005 and 2004,
would have been $(4,417,000) or $(0.26) per common share, and $(5,234,000) or
$(0.46) per common share, respectively. The fair value of options granted
during the years ended June 30, 2005 and June 30, 2004, was $0.42 and $0.27 per
share on the date of grant, respectively. The options were valued utilizing the
Black-Scholes valuation method using the following assumptions: risk-free
interest rate of 3.1% and 4.99%, volatility of 88% and 42% and expected lives of
five and three years, respectively.
[4] Issuances of common stock:
Between July and September 2003 the Company completed a private placement
of 1,703,000 shares of its common stock. The offering consisted of one share of
common stock at $1.50 per share and one common stock purchase warrant
exercisable at $4.00 per share. The Company received gross proceeds from the
offering of $2,555,000 and expenses of the offering were $259,000. In connection
with the offering the placement agent received 341,000 common stock purchase
warrants exercisable at $4.00 per share.
During February 2004 the Company completed a private placement of 650,000
shares of its common stock. The offering consisted of one share of common stock
at $1.00 per share and one common stock purchase warrant exercisable at $1.75
per share. The Company received gross proceeds from the offering of $649,000 and
expenses of the offering were $79,000. In connection with the offering the
placement agent received 87,000 common stock purchase warrants exercisable at
$1.75 per share.
During the year ended June 30, 2004 the Company issued 35,000 shares of
common stock in connection with the exercise of employee stock options. The
Company received proceeds of $33,000.
During December 2003 the Company issued 1,100,000 shares of common stock
in connection with the exercise of 1,100,000 common stock purchase warrants
issued for marketing and consulting agreements (see Note N(2)). The Company
received proceeds of $11,000.
F-15
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[4] Issuances of common stock: (continued)
During April 2004 the Company completed a private placement of 652,000
shares of its common stock. The offering consisted of one share of common stock
at $1.15 per share and one common stock purchase warrant exercisable at $1.90
per share. The Company received gross proceeds from the offering of $760,000 and
expenses of the offering were $85,000. In connection with the offering the
placement agent received 100,000 common stock purchase warrants exercisable at
$1.90 per share.
During June 2004 the Company issued 965,000 shares of common stock in
connection with the repricing of 965,000 common stock purchase warrants issued
in a private placement completed during July - September 2003 (See Note H(5)).
The $4.00 warrants were repriced to $0.83. The Company received gross proceeds
of $812,000 from the warrant exercise and expenses were $79,000. In connection
with the exercise the Company issued new common stock purchase warrants for
383,000 shares of its common stock exercisable at $4.00 per share and 582,000
shares of its common stock exercisable at $2.00 per share and repriced an
additional 401,000 existing warrants from an exercise price of $4.00 to an
exercise price of $2.00 per share.
In connection with a three-year service agreement (see Note N (2)) the
Company issued 100,000 shares of its common stock valued at $82,000. There was
no amortization during the year ended June 30, 2004. Amortization amounted to
$16,000 for the year ended June 30, 2005.
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 year ended June 30,
2005.
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 693,00 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 process 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 based 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 $70,000 for the year ended June 30, 2005.
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.
F-16
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[4] Issuances of common stock: (continued)
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.
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 for the year ended June 30, 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
$170,000 and there were no expenses incurred.
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 50,334 shares of common stock in
connection with the exercise of 50,334 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 $3,000 in connection with the exercise.
New common stock purchase warrants were issued for 100,668 shares of common
stock exercisable at $.75 per share.
[5] Issuances of common stock purchase warrants:
In connection with a distribution agreement (See Note N (2)), the Company
issued warrants to purchase 300,000 shares of the Company's common stock to be
exercisable for a five-year period (100,000, 100,000, and 100,000 at exercise
prices of $5.00, $6.00, and $7.00, per share respectively). The Company
estimated the fair value of these warrants to be $283,000, utilizing the Black-
Scholes valuation method using the following assumptions: a risk-free interest
rate of 3.1%, volatility of 33.33%, and a term of five years. Such amount is
being amortized over five years. During the year ended June 30, 2003 the
agreement was amended and the 100,000 warrants exercisable at $6.00 per share
and the 100,000 warrants exercisable at $7.00 per share were returned to the
Company. The unamortized portion of these warrants, in the amount of $110,000,
was written off to additional paid in capital. Amortization amounted to $54,000
for the year ended June 30, 2005 and $24,000 for the year ended June 30, 2004.
F-17
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[5] Issuances of common stock purchase warrants: (continued)
In connection with a one-year credit facility agreement, entered into in
August 2002, the Company issued warrants to purchase 160,000 shares of common
stock to be exercisable for a five-year period at $.78 per share. The Company
estimated the fair value of these warrants to be $43,000 utilizing the Black-
Scholes valuation method using the following assumptions: a risk-free interest
rate of 3.1%, volatility of 33.33% and a term of five years. Such amount is
being amortized to expense over one year. Amortization amounted to $7,000 during
the year ended June 30, 2004.
In connection with a one-year consulting agreement, entered into in March
2003, the Company issued a warrant to purchase 150,000 shares of common stock to
be exercisable for a two-year period at $1.00 per share. The Company estimated
the fair value of this warrant to be $12,000 utilizing the Black-Scholes
valuation method using the following assumptions: a risk-free interest rate of
3.1%, volatility of 33.33% and a term of two years. Such amount is being
amortized to expense over one year. Amortization amounted to $9,000 during the
year ended June 30, 2004.
In connection with marketing and consulting agreements with five separate
entities, entered into in August 2003, the Company issued warrants to purchase
1,250,000 shares of common stock to be exercisable at $ .01 per share. The
Company estimated the fair value of these warrants to be $2,564,000 utilizing
the Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 3.1%, volatility of 33.33% and a term of five years. Such
amount is being amortized to expense over three years. Amortization for the
years ended June 30, 2005 and 2004 amounted to $651,000 and $926,000,
respectively.
In connection with a three year consulting agreement, entered into in
February 2004, the Company issued a warrant to purchase 150,000 shares of common
stock to be exercisable for a five-year period at $1.22 per share. The Company
estimated the fair value of this warrant to be $143,000 utilizing the Black-
Scholes valuation method using the following assumptions: a risk free interest
rate of 3.1%, volatility of 106.9 % and a term of five years. Such amount is
being amortized to expense over three years. Amortization amounted to $48,000
for the year ended June 30, 2005 and $17,000 for the year ended June 30, 2004.
In connection with a warrant repricing, completed in June 2004, the
Company issued common stock purchase warrants for 383,000 shares of its common
stock exercisable at $4.00 per share and for 582,000 shares of its common stock
exercisable at $2.00 per share (See Note I(4)).
During June 2004 an aggregate of 965,000 common stock purchase warrants
previously issued in a July through September 2003 private placement were
repriced from an exercise price of $4.00 per share to an exercise price of $0.83
per share. The Company realized gross proceeds of $812,000 and expenses were
$79,000 in connection with the repricing. New common stock purchase warrants
were issued for 383,000 shares of common stock exercisable at $4.00 per share
and 582,000 shares of common stock exercisable at $2.00 per share and an
additional 401,000 existing warrants were repricied from an exercise price of
$4.00 per share to an exercise price of $2.00 per share.
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
exsisting consulting agreement. The Company estimated the fair value of these
warrants to be $25,000 utilizing the Black-Scholes valuation method using the
following assumptions; a risk-free interest rate of 3.1%, volatility of 98.71%
and a term of five years. Such amount will be amortized over a period of 31
months. Amortization amounted to $9,000 for the year ended June 30, 2005.
In connection with a warrant repricing, completed in September 2004, the
Company issued common stock purchase warrants for 247,000 shares of its common
stock exercisable at $.95 per share and for 210,000 shares of its common stock
exercisable at $4.00 per share.
In connection with a warrant repricing, completed in November 2004, the
Company issued common stock purchase warrants for 600,000 shares of its common
stock exercisable at $.80 per share and 93,000 shares of its common stock
exercisable at $.90 per share.
F-18
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[5] Issuances of common stock purchase warrants: (continued)
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. The Company estimated the fair
value of these warrants to be $143,000 utilizing the Black-Scholes valuation
method using the following assumptions; a risk-free interest rate of 3.1%,
volatility of 98.71% and a term of 5 years. The amount has been charged to
Additional Paid-In Capital as a cost of raising capital.
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. The Company estimated the fair value of these warrants to be $30,000
utilizing the Black Scholes valuation method using the following assumptions; a
risk-free interest rate of 3.1%, volatility of 98.71% and a term of 5 years.
Such amount will be amortized over a five year period. Amortization of $2,000
was recorded during the year ended June 30, 2005.
In connection with a warrant repricing, completed in December 2004, the
Company issued common stock purchase warrants for 974,000 shares of its common
stock exercisable at $.75 per share.
In connection with a warrant repricing, completed in January 2005, the
Company issued common stock purchase warrants for 100,000 shares of its common
stock exercisable at $.75 per share.
In connection with a private placement of common stock, completed in
March 2005, the Company issued common stock purchase warrants for 566,667 shares
of its common stock exercisable at $.75 per share.
In connection with a private placement of common stock, completed in
April 2005, the Company issued common stock purchase warrants for 416,667 shares
of its common stock exercisable at $.75 per share.
In connection with a warrant repricing, completed in April 2005, the
Company issued common stock purchase warrants for 100,000 shares of its common
stock exercisable at $.75 per share.
During June 2005 the Company issued 25,000 common stock purchase warrants
at a price of $.40 per share to a director of the Company in connection with a
$100,000 loan to the Company. The Company estimated the fair value of these
warrants to be $5,000 utilizing the Black-Scholes valuation method using the
following assumptions; a risk-free interest rate of 3.1%, volatility of 50.06%
and a term of 5 years. This amount was charged to operations during the year
ended June 30, 2005 (See Note G).
During June 2005 the Company issued 100,000 common stock purchase
warrants at a price of $.37 per share in connection with an investor relations
agreement. The Company estimated the fair value of these warrants to be $19,000
utilizing the Black-Scholes valuation method using the following assumptions; a
risk-free interest rate of 3.1%, volatility of 50.06% and a term of 5 years.
There was no amortization taken during the year ended June 30, 2005 since the
agreement became effective on July 1, 2005 (See Note O(2)).
In connection with a private placement of Class B preferred stock,
completed in June 2005, the Company issued Class B common stock purchase
warrants for 279,500 shares of its common stock exercisable at $.50 per share
and an additional 24,891 shares of its common stock exercisable at $.50 per
share to the placement agent.
All warrants issued in connection with private placements and warrant
repricings were issued to non-employees of the Company.
F-19
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[5] Issuances of common stock purchase warrants: (continued)
At June 30, 2005, the Company had warrants outstanding as follows:
Exercise Price Shares Expiration Date
-------------- --------- ---------------
$ 0.01 150,000 August 2008
0.37 100,000 June 2010
0.40 100,000 December 2009
0.40 25,000 June 2010
0.50 150,000 March 2007
0.50 304,391 June 2010
0.66 50,000 August 2009
0.75 974,465 December 2009
0.75 100,000 January 2010
0.75 566,667 March 2010
0.75 517,336 April 2010
0.78 160,000 August 2007
0.80 150,000 October 2009
0.80 200,000 November 2009
0.85 225,000 September 2009
0.90 147,000 September 2009
0.90 93,478 October 2009
0.95 110,140 September 2009
1.00 300,667 December 2009
1.16 685,000 March 2008
1.22 150,000 February 2009
1.60 500,000 May 2008
1.75 600,000 February 2009
1.90 608,695 April 2009
2.00 134,033 June 2009
2.00 50,334 September 2008
3.00 100,000 June 2007
3.30 100,000 May 2007
4.00 20,000 September 2008
4.00 93,473 September 2009
4.00 110,000 June 2009
4.20 200,000 May 2006
4.50 50,000 October 2006
5.00 100,000 October 2006
5.00 100,000 June 2007
5.50 50,000 October 2006
8.25 120,000 February 2006
---------
8,195,679
=========
At June 30, 2005, the weighted average exercise price of the outstanding
warrants was $1.51 and the weighted average remaining contractual life of the
warrants was 3.71 years.
F-20
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note I - Equity Transactions-(continued)
[6] Shares reserved:
At June 30, 2005, the Company has reserved 10,919,000 shares of common
stock for issuance upon conversion of preferred stock and exercise of options
and warrants.
Note J - Spin-off of Subsidiary
During December 2004 the Company announced the spin-off of its inactive
Aquacell Water subsidiary to its common stockholders on a share for share basis.
It was anticipated that Aquacell Water might acquire our Water Science
Technologies, Inc. subsidiary. In July 2005 the Board of Directors changed the
structure of the anticipated spin-off. (See Note Q (4)). Aquacell Water has no
assets, liabilities or operations and, accordingly, the spin-off would have no
material effect on our financial statements.
Note K - Income Taxes:
At June 30, 2005, the Company had available federal net operating loss
caryyforwards to reduce future taxable income, if any, of approximately
$13,450,000. The net operating loss carryforwards expire at various dates
through 2025.
At June 30, 2005, the Company has a deferred tax asset of approximately
$5,783,000, representing the benefit of its net operating loss carryforwards.
The Company has not recorded a tax benefit because realization of the benefit is
uncertain and therefore a valuation allowance has been fully provided against
the deferred tax asset. The difference between the federal statutory rate of
34% and the Company's effective tax rate of 0% is due to an increase in the
valuation allowance of $1,139,000 and $1,118,000 in 2005 and 2004, respectively.
Note L - Other Costs and Expenses
Other costs and expenses consisted of the following:
Year Ended June 30,
--------------------------
2005 2004
----------- -----------
Manufacturing expenses - billboard coolers......................... $ 481,000 $ 482,000
Rent............................................................... 100,000 119,000
Telephone and utilities............................................ 46,000 56,000
Travel............................................................. 81,000 67,000
Business promotion................................................. 102,000 181,000
Consulting and service fees and expenses........................... 50,000 123,000
Insurance.......................................................... 91,000 75,000
Vehicle expenses................................................... 84,000 105,000
Listing fees....................................................... 88,000 50,000
Exchange fees, transfer agent fees and investor fees and expenses.. 58,000 40,000
Office expenses, postage and supplies.............................. 108,000 96,000
Depreciation and amortization...................................... 73,000 30,000
Other expenses..................................................... 231,000 278,000
----------- -----------
$1,593,000 $ 1,702,000
=========== ===========
Note M - Interest Expense:
Included in interest expense is penalties and interest on delinquent
payroll taxes payable in the amount of $78,000 and $96,000 for the years ended
June 30, 2005 and 2004, respectively.
F-21
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note N - 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 for the year ended June 30, 2005:
Water Systems and
Related Products Advertising Total
----------------- ------------- -------------
Net revenue.......................... $ 807,000 $ 30,000 $ 837,000
Loss from operations................. $ (1,602,000) $ (2,195,000) $ (3,797,000)
Stock based compensation............. $ 369,000 $ 804,000 $ 1,173,000
Depreciation and amortization........ $ 11,000 $ 68,000 $ 79,000
Identifiable assets.................. $ 1,149,000 $ 1,234,000 $ 2,383,000
Segment accounting was not applicable to the year ended June 30, 2004.
Note O - Commitments and Contingencies
[1] Lease commitments:
The Company occupies manufacturing office space in California and
Arizona, under noncancellable operating leases. The leases in California have
been extended to April 30, 2006. As of June 30, 2005, future minimum commitments
under office and equipment operating leases are as follows:
Year Ending June 30,
--------------------
2006 $ 165,000
2007 20,000
-----------
$ 185,000
===========
Rent expense under office and equipment leases amounted to approximately
$198,000 and $176,000 for the years ended June 30, 2005 and 2004, respectively.
[2] Consulting agreements:
On May 30, 2003 the Company negotiated the return and cancellation of all
exclusive distribution and marketing rights under the distribution agreement and
joint venture agreement, with a private company, the return of 100,000 warrants
exercisable at $6.00 per share and the return of 100,000 warrants exercisable at
$7.00 per share. In exchange AquaCell granted the private company the right to
continue to sell Global Water-Aquacell's products on a non-exclusive basis in
those areas in which it retains salesmen. It was agreed that the private company
would realize a return of $1,339,000 from sales of the 451,807 shares of
AquaCell common stock that it owns and, if required, from 5% of future revenues
to be generated by our Global Water-Aquacell subsidiary (See Note H).
During August 2003 the Company entered into marketing and consulting
agreements with five separate entities. Consideration for one of these
agreements included cash fees of $45,000 paid over a three-month period. In
addition, 1,250,000 warrants to purchase common stock of the Company exercisable
for five years at a price of $ .01 per share, were issued for all these
agreements.
During February 2004 the Company entered into a three year consulting
agreement. Consideration for this agreement was 150,000 warrants to purchase
shares of common stock of the Company exercisable for five years at a price of
$1.22 per share (See Note I(4)).
During June 2004 the Company entered into a three-year service agreement.
The agreement calls for a cash payment of $6,000 per month over the term of the
agreement, and the issuance of 100,000 shares of the Company's common stock
(See Note I(3)).
F-22
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note O - Commitments and Contingencies-(continued)
[2] Consulting agreements: (continued)
During December 2004 the Company entered into five year consulting
agreements with two separate entities. Consideration for these agreements was
100,000 warrants to purchase shares of common stock of the Company exercisable
for five years at a price of $.40 per share (See Note I(5)).
During June 2005 the Company entered into a month-to-month investor
relations agreement, effective July 1, 2005. Consideration for the agreement
was $5,500 per month and 100,000 warrants to purchase shares of common stock of
the Company exercisable for five years at a price of $.37 per share (See Note I
(5)). The agreement will automatically renew on a monthly basis, unless
terminated by either party in writing upon 30 days notice.
[3] Employment agreements
The Company has employment agreements with various executives and
employees of the Company which expire at various dates through January, 2008.
These agreements provide for aggregate minimum salaries of $501,000 for the year
ending June 30, 2006. The agreements also provide for incentive bonuses based
upon achievement of certain milestones
Effective July 2002 the Company entered into a five-year employment
contract with an officer of Aquacell Water. The contract called for a minimum
annual salary of $100,000. The contract was terminated in April 2005 in
accordance with the provisions of the agreement and the Company will pay $33,000
during the year ending June 30, 2006.
[4] Legal Proceedings
From time to time, the Company is named in legal actions in the normal
course of business. In the opinion of management, the outcome of these matters,
if any, will not have a material impact on the financial condition or results of
operations of the Company.
Note P - Major Customers and Suppliers
During the year ended June 30, 2005 the Company derived approximately 33%
of its revenues from two customers and purchased approximately 12% of its
materials from one vendor.
Note Q - Subsequent Events
[1] Equity Transactions
During July 2005 the Company issued 533,333 shares of its common stock in
connection with the exercise of 533,333 common stock warrants. Warrants with
exercise prices ranging from $.75 to $1.00 were repriced to $.30. The Company
realized gross proceeds of $160,000 and expenses were $16,000 in connection with
the exercise. New common stock purchase warrants were issued for 533,333 shares
of common stock exercisable at $.50 per share.
During August 2005 the Company completed a private placement of 900,000
shares of its common stock. The offering consisted of one share of common stock
at a price of $.30 per share and one-half common stock purchase warrant
exercisable at $.60 per share. The Company received proceeds of $270,000 and
there were no expenses incurred.
During August 2005 the Company completed a private placement of 200,000
shares of Series B Convertible Preferred Stock. The offering consisted of
200,000 shares of Class B convertible preferred stock exercisable at $.34 and
50,000 Class B common stock purchase warrants exercisable at $.50 per share. The
first year annual dividend of $.08 per share was prepaid in full at the time of
the placement. The Series B convertible preferred stock is convertible into the
Company's common stock on a share for share basis. In connection with this
offering the Company received net proceeds of $52,000 after dividends paid of
$16,000. There were no expenses in connection with this offering.
F-23
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2005
Note Q - Subsequent Events-(continued)
[1] Equity Transactions (continued)
During September 2005 the Company issued an aggregate of 1,841,512 shares
of common stock in connection with the exercise of 1,841,512 common stock
warrants. Warrants with exercise prices ranging from $.50 to $2.00 were
repriced to prices ranging from $.30 to $.45. The Company realized gross
proceeds of $653,000 and expenses were $65,000 in connection with the exercises.
New common stock purchase warrants were issued for 524,512 shares of common
stock exercisable at $.70 per share, 868,333 exercisable at $.50 per share,
365,000 exercisable at $.55 per share and 83,667 exercisable at $.65 per share.
During September 2005 the Company completed a private placement for
333,333 shares of its common stock. The offering consisted of one share of
common stock at a price of $.30 per share and one common stock purchase warrant
exercisable at $.50 per share. The Company realized gross proceeds of $100,000
and expenses of the offering amounted to $10,000. In addition the Company issued
13,333 common stock purchase warrants, exercisable at $.50 per share, to the
placement agent. The Company has committed to file a registration statement to
include these shares by October 17, 2005 and will incur a monthly penalty of
$10,000 for failure to file.
During September 2005 the Company completed a private placement for
150,000 shares of its common stock. The offering consisted of one share of
common stock at a price of $.38 per share and one common stock purchase warrant
exercisable at $.75. The Company realized gross proceeds of $57,000 and there
were no offering expenses.
[2] Increase in Authorized Capitalization
On July 19, 2005 the Board of Directors approved an amendment to the
Company's Certificate of Incorporation to permit the Company to issue up to
100,000,000 shares of common stock.
[3] Amendment to 1998 Incentive Stock Plan
On October 10, 2005 the Board of Directors approved an increase in the
1998 Incentive Stock Plan's shares reserved for issuance from 2,000,000 to
3,000,000.
The resolutions approved by the Board of Directors in [2] and [3] above
are subject to stockholder approval.
[4] Spin-off of Subsidiary
On July 19, 2005 the Board of Directors approved that in place of the
Company's spin-off of its inactive Aquacell Water subsidiary (See Note J)
management reincorporate its Water Science Technologies subsidiary in Delaware
and change its name to Aquacell Water, Inc. Furthermore, this subsidiary will
undertake to file a Form 10 registration statement with the possibility of
spinning this company off to its common stockholders on a share for share basis.
However, there is no assurance that this spin-off will occur.
F-24