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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark one)
_X_ Quarterly report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2005.
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuers as Specified in its Charter)
Delaware 33-0750453
------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
10410 Trademark Street
Rancho Cucamonga, CA 91730
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(Address of Principal Executive Offices)
(909) 987-0456
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(Issuer's Telephone Number, Including Area Code)
__________________________________
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
Securities under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value
22,916,488 shares outstanding as of November 14, 2005.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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AQUACELL TECHNOLOGIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE
Condensed Consolidated Balance Sheet as of September 30, 2005...... 1
Condensed Consolidated Statements of Operations for the
three-month periods ended September 30, 2005 and 2004.............. 2
Condensed Consolidated Statements of Cash Flow for the
three-month periods ended September 30, 2005 and 2004.............. 3
Notes to Condensed Consolidated Financial Statements............... 4
Item 2. Management's Discussion and Analysis...............................10
Forward-Looking Statements.........................................10
Overview...........................................................10
Critical Accounting Policies.......................................11
Results of Operations..............................................12
Liquidity and Capital Resources....................................12
PART II - OTHER INFORMATION
Item 2(C). Sales of Unregistered Securities...................................14
Item 3. Controls and Procedure.............................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 6. Exhibits and Reports on Form 8-K...................................15
Signature.....................................................................15
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
ASSETS
Current assets:
Cash.......................................................... $ 273,000
Subscription receivable....................................... 77,000
Accounts receivable, net of allowance of $17,000.............. 55,000
Inventories................................................... 20,000
Prepaid expenses and other current assets..................... 25,000
------------
Total current assets..................................... 450,000
------------
Property, equipment and billboard coolers, net..................... 1,262,000
------------
Other assets:
Goodwill...................................................... 750,000
Patents, net.................................................. 49,000
Security deposits............................................. 16,000
------------
Total other assets....................................... 815,000
------------
$ 2,527,000
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 594,000
Accrued liabilities........................................... 1,224,000
Preferred stock dividend payable- Class A..................... 3,000
Customer deposits............................................. 19,000
Current portion of deferred payable........................... 22,000
------------
Total current liabilities................................ 1,862,000
Deferred payable, net of current portion........................... 451,000
------------
Total liabilities........................................ 2,313,000
------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - Class A, par value $.00l;
liquidation preference $47,000;
1,870,000 shares authorized;
70,000 shares issued and outstanding............................ -
Preferred stock - Class B, par value $.00l;
liquidation preference $367,000;
4,000,000 shares authorized;
918,000 shares issued and outstanding........................... 1,000
Preferred stock, par value $.001;
8,130,000 shares authorized;
no shares issued................................................ -
Common stock, par value $.001;
40,000,000 shares authorized;
22,638,643 shares issued and outstanding........................ 23,000
Additional paid-in capital......................................... 22,771,000
Accumulated deficit................................................ (22,569,000)
------------
1,226,000
Unamortized deferred compensation.................................. (1,012,000)
------------
Total stockholders' equity............................... 214,000
------------
$ 2,527,000
------------
------------
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
--------------------------
2005 2004
------------ ------------
Revenue:
Net sales...........................................$ 149,000 $ 199,000
Advertising revenue................................. 20,000 -
------------ ------------
169,000 199,000
------------ ------------
Cost and expenses:
Cost of sales....................................... 128,000 124,000
Salaries and wages.................................. 385,000 288,000
Legal, accounting and other professional expenses... 45,000 52,000
Stock based compensation............................ 214,000 242,000
Other............................................... 486,000 360,000
------------ ------------
1,258,000 1,066,000
------------ ------------
Loss from operations before other expense............. (1,089,000) (867,000)
------------ ------------
Other expense:
Interest expense.................................... 32,000 1,000
------------ ------------
Net loss for the period...............................$(1,121,000) $ (868,000)
------------ ------------
------------ ------------
Weighted average share outstanding-
basic and diluted................................... 19,929,000 14,576,000
------------ ------------
------------ ------------
Loss attributable to common stockholders:
Net loss............................................$(1,121,000) $ (868,000)
Preferred stock dividends........................... 25,000 9,000
------------ ------------
Loss attributable to common stockholders............$(1,146,000) $ (877,000)
------------ ------------
------------ ------------
Net loss per common share...........................$ (0.06) $ (0.06)
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
------------------------------
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss...................................................................$ (1,121,000) $ (868,000)
Adjustment to reconcile net loss to net cash used in operating activities:
Stock based compensation.............................................. 214,000 242,000
Depreciation and amortization......................................... 39,000 6,000
Changes in:
Accounts receivable................................................... 4,000 -
Prepaid expenses and other current assets............................. 15,000 7,000
Inventories........................................................... (7,000) 15,000
Accounts payable...................................................... (205,000) (138,000)
Accrued liabilities................................................... 150,000 (41,000)
Customer deposits..................................................... 2,000 (41,000)
------------- -------------
Net cash used in operating activities............................ (909,000) (818,000)
------------- -------------
Cash flows from investing activities:
Payments on note issued for purchase of property and equipment........ - (1,000)
Capital expenditures.................................................. (85,000) (84,000)
------------- -------------
Net cash used in investing activities............................ (85,000) (85,000)
------------- -------------
Cash flows from financing activities:
Proceeds from private placements of common stock....................... 370,000 -
Expenses of offerings.................................................. (10,000) -
Proceeds from private placements of Class B preferred stock............ 68,000 -
Preferred stock dividends paid- Class B................................ (37,000) -
Repayment of loans from related parties................................ (100,000) -
Proceeds from subscriptions receivable................................. 91,000 40,000
Proceeds from exercise of common stock warrants........................ 813,000 209,000
Expense of warrant exercise............................................ (20,000) (3,000)
------------- -------------
Net cash provided by financing activates......................... 1,175,000 246,000
------------- -------------
Increase (decrease) in cash................................................ 181,000 (657,000)
Cash, beginning of period.................................................. 92,000 860,000
------------- -------------
Cash, end of period........................................................$ 273,000 $ 203,000
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest...........................................$ - $ -
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock warrants for services to the company..............$ - $ 91,000
Subscription receivable for conversion of warrants.........................$ 20,000 $ 49,000
Dividends payable on preferred stock- Class A..............................$ 1,000 $ 9,000
Subscription receivable for private placement of common stock..............$ 57,000 $ -
Deemed dividends on preferred stock........................................$ 24,000 $ -
Expenses of warrant exercises offset against subscription receivable.......$ 57,000 $ -
Expenses of equity raise recorded as accounts payable......................$ 10,000 $ -
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of AquaCell Technologies, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the three months ended September 30,
2005 are not necessarily indicative of the results to be expected for the full
year. For further information, refer to the Company's annual report filed on
Form 10-KSB for the year ended June 30, 2005.
At September 30, 2005 the Company's ability to continue as a going concern,
for the reasons outlined on the 10-KSB filed for the year ended June 30, 2005,
still existed. During the quarter ended September 30, 2005 the Company
successfully obtained external financing through exercise of warrants and plans
to continue to raise capital through the sale or exercise of equity securities
on a just in time basis.
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' equity or cash flow.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment."
This statement is a revision of SFAS No. 123 and supersedes APB 25 and its
related implementation guidance. SFAS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SFAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. This statement is effective for public entities that file as small
business issuers - as of January 1, 2006. The adoption of this pronouncement is
not expected to 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
4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
NOTE A - BASIS OF PRESENTATION-(continued)
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.
NOTE B - SUBSCRIPTIONS RECEIVABLE
At September 30, 2005 the subscriptions receivable consisted of $57,000
resulting from the sale of shares in a private placement of common stock and
$20,000 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.
NOTE C - INVENTORIES
Inventories consist of the following at September 30, 2005:
Raw materials ........................................... $ 12,000
Work in progress ........................................ 8,000
------------
$ 20,000
------------
------------
NOTE D - PROPERTY, EQUIPMENT AND BILLBOARD COOLERS
Property and equipment is summarized as follows at September 30, 2005:
Billboard coolers - on location.......................... $ 737,000
Billboard coolers - not on location...................... 414,000
Billboard cooler parts - not on location................. 166,000
Furniture and fixtures .................................. 36,000
Equipment- office ....................................... 101,000
Machinery and equipment ................................. 133,000
Leasehold improvements .................................. 12,000
Truck ................................................... 11,000
------------
1,610,000
Less accumulated depreciation ........................... 348,000
------------
$ 1,262,000
------------
------------
Depreciation expense was $34,000 and $6,000 for the three months ended
September 30, 2005 and 2004 respectively.
5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
NOTE E - ACCRUED LIABILITIES
At September 30, 2005 the accrued liabilities consisted of officers'
salaries of $360,000, payroll taxes withheld of $428,000, accrued payroll taxes
of $148,000, accrued penalties and interest on taxes payable of $207,000 and
other accrued liabilities of $81,000. As of September 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 F - DEFERRED PAYABLE
At September 30, 2005, the deferred payable in the amount of $473,000
represented the balance due to a private company for the return and cancellation
of all exclusive distribution and marketing rights previously held under a
distribution agreement. This amount is payable solely from 5% of the future
revenues to be generated by our Global Water-Aquacell subsidiary.
NOTE G - 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 price 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 he
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.
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.
6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
NOTE G - EQUITY TRANSACTIONS-(continued)
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 warrants 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.
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.
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
75,000,000 shares of common stock.
This amendment is subject to stockholder approval.
NOTE H - SPIN-OFF OF SUBSIDIARY
On July 19, 2005 the Board of Directors approved that 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.
7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
NOTE I - OTHER COSTS AND EXPENSES:
Other costs and expenses consisted of the following:
Three Months Ended
September 30,
--------------------------
2005 2004
------------ ------------
Manufacturing expenses - billboard coolers......... $ 121,000 $ 122,000
Rent............................................... 31,000 30,000
Telephone and utilities............................ 17,000 14,000
Travel............................................. 20,000 21,000
Business promotion........ ........................ 24,000 25,000
Consulting, service fees, commissions and expenses. 92,000 24,000
Insurance.......................................... 27,000 24,000
Vehicle expenses................................... 19,000 22,000
Listing fees....................................... - 28,000
Exchange fees, transfer agent fees and
investor fees and expenses.............. 39,000 10,000
Office expenses, postage and supplies.............. 14,000 10,000
Depreciation and amortization...................... 38,000 6,000
Other expenses..................................... 44,000 24,000
------------ ------------
$ 486,000 $ 360,000
------------ ------------
------------ ------------
NOTE J - INTEREST EXPENSE:
Included in interest expense is penalties and interest on delinquent
payroll taxes payable in the amount of $17,000 for the three months ended
September 30, 2005 and -0- for the three months ended September 30, 2004.
NOTE K - 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 three months ended September 30, 2005:
Water Systems and
Related Products Advertising Total
----------------- ----------- ------------
Net revenue.................... $ 149,000 $ 20,000 $ 169,000
Loss from operations........... $(297,000) $ (792,000) $(1,089,000)
Stock based compensation....... $ 10,000 $ 204,000 $ 214,000
Depreciation and amortization.. $ - $ 39,000 $ 39,000
Identifiable assets............ $ 804,000 $1,723,000 $ 2,527,000
Segment accounting was not in effect for the three months ended September 30,
2005.
8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
NOTE L - SUBSEQUENT EVENTS
During November 2005 the Company issued an aggregate of 277,845 shares of
common stock in connection with the exercise of 277,845 common stock warrants.
Warrants with an exercise price of $.70 were repriced to $.40. The Company
realized gross proceeds of $111,000 and expenses were $11,000 in connection with
the exercises. New common stock purchase warrants were issued for 277,845 shares
of common stock exercisable at $.60 per share.
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 amendment is subject to stockholder approval.
Employment Contracts
--------------------
On November 1, 2005 the Company entered into five year employment
agreements with three executives of the Company. These agreements provide for
aggregate minimum annual salaries of $284,000.
On November 1, 2005 a subsidiary of the company entered into five year
employment agreements with these three executive which provide for aggregate
minimum annual salaries of $366,000.
Filing of Form 10-SB
--------------------
On November 8, 2005 the Company filed a Form 10-SB on behalf of its
Aquacell Water subsidiary in connection with the proposed spin-off discussed in
Note G. There is no assurance that the Form 10-SB will be declared effective or
that the contemplated spin-off will be effectuated.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
--------------------------
When used in this Form 10-QSB and in future filings by the Company with the
Commission, statements identified by the words "believe", "positioned",
"estimate", "project", "target", "continue", "will", "intend", "expect",
"future", "anticipates", and similar expressions express management's present
belief, expectations or intentions regarding the Company's future performance
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on any such forward-looking
statements, each of which speaks only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company has no obligations to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Overview
--------
The following discussions and analysis should be read in conjunction with
the Company's 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.
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
Cooler 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 customer 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.
We have restructured our Aquacell Water subsidiary and brought in a new
operational management team. As a result of focusing our efforts on the
restructuring process, sales for the quarter declined; however, subsequent to
the end of the quarter we have received orders and currently have a backlog, as
discussed in the Liquidity and Capital Resources section of this discussion.
10
Critical Accounting Policies
----------------------------
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP"). The preparation
of these condensed consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosure of contingent assets and
liabilities. These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. We base our estimates and judgments on historical experience and
all available information. However, future events are subject to change, and the
best estimates and judgments routinely require adjustment. US GAAP requires us
to make estimates and judgments in several areas, including those related to
recording various accruals, income taxes, the useful lives of long-lived assets,
such as property and equipment and intangible assets, and potential losses from
contingencies and litigation. We believe the policies discussed below are the
most critical to our condensed consolidated financial statements because they
are affected significantly by management's judgments, assumptions and estimates.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of
net assets of a business acquired. The Company has adopted Statements of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets". The Company operates as a single integrated business, and as
such has one operating segment which is also the reportable unit. Fair value of
the reporting unit is determined by comparing the fair value of the unit with
its carrying value, including goodwill. Impairment tests are performed using
discounted cash flow analysis and estimates of sales proceeds. The annual
evaluation of goodwill is performed at June 30th, the end of the Company's
fiscal year.
Income taxes:
The Company accounts for income taxes using the asset and liability method
described on SFAS No. 109, "Accounting For Income Taxes", the objective of which
is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting and the tax bases of the Company's
assets and liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled. A valuation allowance related to deferred tax
assets is recorded when it is more likely than no that some portion or all of
the deferred tax assets will not be realized.
Long-lived assets:
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." In accordance with SFAS No. 144, long-lived
assets to be held are reviewed whenever events or changes in circumstances
indicate that their carrying value may not recoverable. The Company periodically
reviews the carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred, and has determined that as of June 30,
2004 that impairment, where appropriate, was recorded in the financial
statements.
11
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS NO. 123R, "Share Based Payment."
This statement is a revision of SFAS No. 123 and supersedes APB 25 and its
related implementation guidance. SFAS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SFAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. This statement is effective for public entities that file as small
business issuers - as of January 1, 2006. The adoption of this pronouncement in
not expected to have a material effect on the Company's financial statements.
Results of Operations
---------------------
During the three months ended September 30, 2005 on a consolidated basis,
revenues were $169,000 as compared to $199,000 for the similar period of the
preceding year, and cost of sales was 76% for the three months ended September
30, 2005 as compared to 62% for the same period of the prior year. The decrease
in sales is primarily attributable to the restructuring of our Aquacell Water
subsidiary during the quarter, putting a new management team in place. The
increase in cost of sales percentage resulted from spreading manufacturing cost
over a decreased sales volume.
Net loss on a consolidated basis, attributable to common stockholders, for
the three months ended September 30, 2005 increased to $1,146,000 as compared to
$877,000 for the same period of the prior year.
Salaries and wages increased by $97,000 for the three months ended
September 30, 2005 over the prior year resulting primarily from severance pay to
a former executive of Aquacell Water in the amount of $25,000 and the increase
in payroll resulting from hiring a new management team for the Aquacell Water
subsidiary in the approximate amount of $65,000 for the three months ended
September 30, 2005. Legal, accounting and other professional expenses decreased
by approximately $7,000 for the three months ended September 30, 2005. Stock
based compensation decreased by $28,000 to $214,000 for the three months ended
September 30, 2005 resulting from a direct write-off of certain warrants at the
end of the prior year. Other selling, general and administrative expenses,
increased by approximately $126,000 to $486,000 for the three months ended
September 30, 2005. Current period expenses consisted primarily of manufacturing
expenses-billboard coolers- $121,000, rent- $31,000, telephone and utilities-
$17,000, travel- $20,000, business promotion- $24,000, consulting and service
fees, commissions and expenses- $92,000, insurance- $27,000, and vehicle
expenses- $19,000.
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 $1,221,000
through the exercise of warrants to purchase common shares and private
placements of its common and preferred B shares during the three months ended
September 30, 2005. The Company has continued to pursue the placement of our
water cooler billboards in various locations and the Company is seeking to
increase its revenues through the sale of advertising on the band of the
cooler's permanently attached five-gallon. The Company has brought in new
management to our Aquacell Water subsidiary and they are expanding the business
with a current backlog of approximately $439,000.
12
Cash used by operations during the three months ended September 30, 2005
amounted to $909,000. Net loss of $1,121,000 was reduced by non-cash stock
based compensation in the amount of $214,000 and depreciation and amortization
of $39,000. Cash used by operations was further increased by a decrease in
accounts payable in the amount of $205,000. Net loss was further decreased by an
increase in accrued liabilities of $150,000 and by net changes in prepaid
expenses, accounts receivable, customer deposits, and inventories aggregating
$14,000.
Cash used by investing activities during the three months ended September
30, 2005 represented capital expenditures in the amount of $85,000 primarily for
billboard coolers.
Cash provided by financing activities was approximately $1,175,000.
Proceeds from private placements of common and preferred B stock amounted to
$438,000. Proceeds from exercise of common stock purchase warrants amounted to
$813,000. Proceeds from subscriptions receivable were $91,000. Expenses of our
equity raises amount to $30,000, a loan was repaid to a related party in the
amount of $100,000 and dividends were paid on the Class B preferred stock in the
amount of $37,000.
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 $12,569,000 if exercised. As of
September 30, 2005 424,000 warrants generating $613,000 were in the money and
7,768,000 warrants generating $11,956,000 were out of the money. Historically,
the Company has repriced out of the money warrants issued in connection with
equity placements to generate additional capital. There is no assurance however,
that any of the warrants will be exercised.
At September 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 against another
subsidiary in the amount of $118,000 and a state tax lien against an inactive
subsidiary in the amount of $26,000. We are in negotiations to reach settlement
agreements with the appropriate tax agencies. There are no assurances that these
negotiations will result in successful agreements and the Company's assets could
be subject to enforcement action.
Management believes that its present cash position combined with subsequent
equity raises and conversion of warrants and cash flows expected to be generated
from future operations will be sufficient to meet presently anticipated needs
for working capital and capital expenditures through at least the next 12
months; however, there can be no assurance in that regard. The Company
presently has no material commitments for future capital expenditures.
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PART II - OTHER INFORMATION
ITEM 2 (C). SALES OF UNREGISTERED SECURITIES
During the quarter ended September 2005 the Registrant sold 900,000 shares
of common stock in a Private Placement to 4 accredited investors pursuant to the
exemption provided by Regulation D, Rule 505, and Section 4(2) of the Securities
Act of 1933, as amended. Common Stock Purchase Warrants were issued to the
investors at an exercise price of $.60. In addition the Registrant sold 333,333
shares of common stock in a private placement to 1 accredited investor pursuant
to the exemption provided by Regulation D, Rule 505, and Section 4(2) of the
Securities Act of 1933, as amended. Common Stock Purchase Warrants were issued
to the investors at an exercise price of $.50 per share. In addition the
Registrant sold 150,000 shares of common stock to 1 accredited investor pursuant
to the exemption provided by Regulation D, Rule 505, and Section 4(2) of the
Securities Act of 1933, as amended. Common Stock Purchase Warrants were issued
to the investor at an exercise price of $.75. In addition the Registrant sold
200,000 shares of Class B Preferred stock in a Private Placement to 1 accredited
investor pursuant to the exemption provided by Regulation D, Rule 505, and
Section 4(2) of the Securities Act of 1933, as amended. Class B Common Stock
Purchase Warrants were issued to the investor at an exercise price of $.50. In
addition, the Registrant sold 2,374,845 shares of common stock upon exercise of
Common Stock Purchase Warrants to 9 accredited investors pursuant to the
exemption provided by Regulation D, Rule 505, and Section 4(2) of the Securities
Act of 1933 as amended. New Common Stock Purchase Warrants were issued to the
investors at exercise prices ranging from $.50 to $.70.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 adopted under the
Securities Exchange Act of 1934. Based upon that evaluation, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits.
31.1 CEO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
31.2 CFO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
32.0 Certification Pursuant to 18 U.S.C. Section 1350
B. Reports on Form 8-K.
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AquaCell Technologies, Inc.
-------------------------------
Registrant
Date: November 14, 2005
/s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
15