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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 2001
[_] 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
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AQUACELL TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 33-0750453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10410 Trademark Street,
Rancho Cucamonga, CA 91730
(Address of principal executive offices) (Zip Code)
(909) 987-0456
(Issuer's telephone number)
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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
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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 and 12 is
incorporated by reference to the issuer's proxy statement in connection with
the 2001 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: $191,000
As of October 18, 2001, 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 $23,728,830. At October 18, 2001,
8,205,057 shares of issuer's Common Stock were outstanding.
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PART I
Item 1. Business.
Overview
AquaCell Technologies, Inc. recently commenced operations in the water
purification industry. We provide point-of-use drinking water, filtration and
purification products to a variety of customers. Our strategic plan is to grow
rapidly within the fragmented drinking water industry. We are presently
targeting Fortune 500 and other large companies with our patented five-gallon
self-refilling bottle water cooler. The filtration system on our cooler
contains different combinations of systems, which utilize sediment filters,
reverse osmosis, carbon block, multi-media filters and ultra-violet light.
We replace traditional five-gallon bottle water coolers with a permanently
installed convenient alternative where the bottle never needs changing and
water bottles no longer need to be delivered, stored or replaced. In addition,
we replace water fountains where users tend to have greater concerns as to
sanitation and water quality.
Water Purification Industry Background
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 a recent article appearing in The Wall Street Journal, water
supply businesses generate approximately $400 billion in revenue worldwide.
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. One of the fastest growing
segment of the industry is the drinking water segment, including point-of-use
filtration systems for providing purified drinking water and bottled drinking
water.
Drinking Water Market Analysis
While many consumers use water filtration systems and drink bottled water
for improved taste, there are other more important reasons to do so.
Risks of Tap Water. Tap water, regardless of its source, may contain certain
contaminants that can effect one's health. Although municipalities are required
to provide drinking water which complies with the Safe Drinking Water Act, the
water supplied to homes from municipalities may contain startling levels of
chlorine in addition to bacteria, toxins and parasites. Although the water may
be purified upon leaving the treatment facility, impurities may be picked up
from the pipes used to transfer it to the tap. Lead may also leach into the
water from pipes, especially in older construction.
In the United States, water quality is being compromised by pollution, aging
municipal water systems, and contaminated wells and surface water. A USA TODAY
investigation in October 1998 reported that the nation's safe drinking water
laws are failing. This special report, "Drinking Water's Hidden Dangers",
discloses that 58 million people received water that violated testing and
purity standards, and that 25 million people received water that had
"significant" violations posing "serious threats to public health".
The awareness level of consumers of the potential hazards of drinking tap
water is continuously increasing, and we believe that more educated consumers
will be seeking to minimize such potential risks through the purchase of
point-of-use filtration systems.
Risks of Bottled Water. While some people have resorted to drinking bottled
water as a safe alternative to tap water, even bottled water can contain
impurities. In February 1999, the Natural Resources Defense Council
1
released an extensive four year scientific study of bottled water sold in the
United States, titled "BOTTLED WATER: Pure Drink or Pure Hype?" This study
included testing of more than 1000 bottles of 103 brands of bottled water.
One-third of the bottled waters tested were found, in at least one test sample,
to contain levels of contamination that exceeded allowable limits under either
state or bottled water standards. Contaminants found in the bottled waters
included synthetic organic chemicals, bacteria and arsenic. The study further
revealed that, according to government and industry estimates, 25% to 40% of
bottled water is just tap water - sometimes with additional treatment,
sometimes not. The conclusion of the study was that while consumers spend
between 240 to 10,000 times more per gallon for bottled water than they
typically do for tap water, "no one should assume that just because he or she
purchases water in a bottle that it is necessarily any better regulated, purer,
or safer than most tap water".
Business Marketing and Growth Strategy
Our strategic objective is to achieve rapid growth through the expansion of
our business marketing and product lines utilizing a business-to-business
marketing strategy primarily targeted at Fortune 500 and other large companies,
as well as through strategic alliances with marketing partners.
Our initial marketing thrust is to create revenue through the sale and
leasing of our patented Purific(R) water cooler. Our Purific cooler contains an
extensive state-of-the art filtration system with additional features to ensure
maximum reliability for the Fortune 500 level of customer. A strong market
exists for this product because:
. most Fortune 500 companies are using bottled water and are familiar with
its high costs and inconveniences;
. water fountain use is a substantially less popular alternative; and
. our self-refilling cooler can lead to significant savings.
We chose a business-to-business marketing approach over utilization of
distributors in order to allow us to "own the customer" and therefore manage
the relationship. We determined that utilizing in-house sales personnel, as
opposed to manufacturers' representatives, is critical in the implementation of
our marketing plan because in-house sales people are more likely to build
customer relationships, whereas commissioned sales representatives typically
are transaction oriented. Also, many Fortune 500 and other large companies
prefer to deal directly with the manufacturer and not with outside
representatives or distributors.
Our focus is to build interdependent relationships with the decision-makers
of our targeted Fortune 500 customers who have the ability to provide long-term
revenues through sales to their expansive multiple locations, subsidiaries and
operating divisions.
We have established our target customer based upon the following criteria:
. Number of employees
. Number of locations
. Geographical areas
. Industry segment
We firmly believe that the best source for new business is the existing
customer, because it is far less costly to retain and further develop a current
client than it is to acquire a new one.
In order to provide our self-refilling coolers to Fortune 500 and other
major companies with locations throughout the country, we utilize a national
installation group.
2
We have sold our Purific water cooler to the headquarter locations of
several Fortune 500 companies, each of which has significant long-term customer
value. We will continue to build relationships with the decision-makers of
those companies, and we will increase business through incremental sales to our
existing and future customers.
To date, all sales to Fortune 500 clients have been attained through the
efforts of our executive management team. In these situations our Purific water
cooler has replaced conventional water fountains, bottled water programs and
flat-top filtration coolers. Upon completion of this offering, we will hire and
train a sales force to further expand our Fortune 500 client base and to
cultivate each customer for significant future business.
Historically, our leads have been primarily obtained through a targeted
direct-mail campaign. The CEOs of certain Fortune 500 and other identified
companies were sent our "Message in a Bottle" mailing. This mailing included a
full size five-gallon bottle with product literature placed inside. Upon hiring
of sales personnel, additional mailings will be made to the balance of the
Fortune 500 companies and will then be made to other large companies included
in the Fortune 1000 and 2000.
In addition, we provide a national lease financing program for our water
cooler. Lease applications are available to customers through our Internet
website at www.aquacell.com and, in most cases, the review process will be
completed and customers will be notified within hours after an application is
submitted.
Additional marketing strategies that we intend to utilize include:
. Cross Marketing Sales. Cross marketing partners in diverse industries
are being developed to place our Purific water cooler into our
customers' places of business with the bottle band advertising our
partner's company or product. This banding process is interchangeable
and may be used to tie in with other advertising campaigns. Cross
marketing opportunities include: doctor's offices, real estate offices,
travel industry, insurance, Internet, investment banking and many
others.
. Internet. Our Purific water cooler is available for sale or lease on our
web site, www.aquacell.com. Additionally, we are registering with
various business-to-business suppliers to include our Purific cooler on
their web sites.
. General Services Administration. We have submitted extensive
documentation to secure a General Services Administration contract
number. Once this contract number has been awarded, we will begin our
marketing campaign towards government facilities through such means as
the exclusive General Services Administration tradeshow and direct mail
campaigns.
. Marketing Partners. Sales to smaller businesses will be made through our
strategic market partners. Nearly every business, as well as churches,
doctor's offices, hospitals and other establishments have water coolers
to supply bottled water to their employees, members, patients or
visitors. Sales targets include:
.Corporate offices .Retail store employee lounges
.Manufacturing facilities .Lobbies and waiting rooms
.Doctors/dentists/hospitals .Airline club rooms
.School administrative offices .Churches
.Auto dealers .Country clubs
.Banks .Government facilities
Products
Our water purification products are geared towards the drinking water market
that, according to industry studies, is one of the fastest growing sector of
the water purification industry.
3
Our flagship product is our patented self-refilling Purific water cooler.
The cooler is hooked up to a standard municipal tap water supply. The water is
purified and filtered through multiple step systems and the purified water
automatically and continuously fills the permanently attached five-gallon
bottle on our cooler system.
The Purific cooler is available in four models:
. HC-2--Hot/Cold cooler with ProSystem II filtration system
. HC-3--Hot/Cold cooler with ProSystem III filtration system
. RC-2--Room Temp/Cold cooler with ProSystem II filtration system
. RC-3--Room Temp/Cold cooler with ProSystem III filtration system
Our self-refilling Purific cooler has many advantages over standard water
coolers with the replaceable five gallon bottles:
. Saves money. Our self-filling cooler has been proven to save most
companies a considerable amount of money over the costs of bottled water
alternatives.
. No bottles to change. When changing water bottles, most people spill or
splash the water, and often a relatively strong person must be located
to change the bottle. Also, the cleanliness of the hands of the person
changing the bottle is an issue, since anything on their hands will end
up in the water.
. Reduce potential worker's compensation claims. Potential worker's
compensation claims from injuries due to lifting the 40-pound bottle can
be costly. New proposed OSHA regulations will force companies to take
more precautions against potential claims.
. No bottles to store. Replacement water bottles are cumbersome to store,
taking up a lot of valuable space in an office. The higher the rent, the
more it costs to store the water.
. Never run out of water. Since our Purific cooler continuously refills
itself as water is dispensed, the cooler always has water available when
needed.
. No delivery problems. Deliveries of bottled water can disrupt office
operations. Additionally, in large office buildings wait time for
freight elevators can delay bottled water delivery by several hours,
further adding to the inconvenience of bottled water delivery.
. Freshly filtered and purified water. The quality of bottled water varies
greatly depending upon the source and whether or not it is filtered or
purified. Also, water which has been stored in certain areas can absorb
taste and odor through the bottle. The water in our Purific water cooler
maintains its freshness as it is constantly being replenished.
. Air is filtered. The air used to displace water in our self-refilling
cooler is filtered through a 1-micron filter. When water is dispensed
from traditional water coolers, contaminated air from around the cooler
bubbles into the bottle. This air can contain invisible elements from
contaminants such as mold, algae, hair spray, oils, grease, dirt,
pollen, paint and mildew, all of which can taint the water.
All of our Purific water coolers are equipped with state-of-the-art
filtration systems designed to provide high quality filtration and
purification. Our filtration systems are tested and validated by the Water
Quality Association, which is a trade association comprised of 2,600 members in
the household, commercial, industrial and small system water treatment
industry. They are available in two models - ProSystem II or ProSystem III.
Both systems include a shut-off valve, pressure regulator, water monitor,
sediment filter, the AquaCell multi-media filter and a carbon block filter. The
major difference between our filtration systems is that our ProSystem II
utilizes ultraviolet light for disinfection, and our ProSystem III utilizes
reverse osmosis.
4
ProSystem II--Ultraviolet ProSystem III--Reverse Osmosis
------------------------- ------------------------------
Does not require a drain line Requires a drain line
Keeps minerals and salts in water Removes minerals and salts from water
Fills bottle at a rate of .75 gallons per minute Produces 25 gallons of water per day
Produces one gallon of water per one gallon of Produces one gallon of water per four gallons of
tap water tap water
For most customers, the ProSystem II will perfectly suit their needs. Some
customers, however, will prefer reverse osmosis water either because they have
gotten used to drinking water without minerals or because of poor quality
water, such as in areas where the water has a high salt content.
There are, however, certain times when the ProSystem III is not recommended,
such as:
. in offices with high employee concentration due to the fact that in a
typical 8-hour work day, more than eight gallons of water may be
consumed;
. in areas where drain lines are not readily available; and
. where water conservation concerns conflict with high water use.
Replacement Filters
We also sell replacement filters for our Purific water coolers. The
filtration systems on our patented water coolers require replacement after
2,000 gallons of water have passed through the system or after one year from
the date of installation, whichever comes first. The filtration system
automatically shuts off when the threshold for the preset number of gallons is
met, alerting the customer to call for replacement filters. We also contact our
customers on an annual basis to facilitate timely replacement of filters.
Customers with high water usage often stock replacement filters. The revenue
from replacement filters will be significant and will increase from year to
year as we sell more water coolers.
Other products to be offered by us include:
. Filtration systems are available for under-the-sink usage and they may
also be connected to standard water-fountains.
. Our "Traveler" system is a portable compact multi-stage filtration
system that provides drinkable water for campers, international
travelers or for emergency use.
Customers
Our customers currently consist mostly of Fortune 500 companies across a
broad range of industries including investment banking, consumer products,
aerospace, entertainment, banking, brokerage houses, manufacturing and
insurance. Our customers also include professional service providers and
governmental agencies.
Production, Raw Materials and Supplies
Our Products are manufactured in our 10,000 square foot manufacturing
facility located in Rancho Cucamonga, California. This strategically located
facility is located within a 100 mile radius of 95% of our suppliers allowing
for "just-in-time" inventory. Our product has a low cost of manufacturing. Less
than 10% of product cost is in labor, allowing for high gross profit margins
because our operations do not require a large full time employee base and, when
needed, temporary employees are readily available.
Our facility utilizes 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
5
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.
We maintain a controlled low inventory of finished goods. 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, wiring, valves, sediment filters,
reverse osmosis membrane filters 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 drinking water purification industry is fragmented and highly
competitive due to the large number of businesses within certain product areas.
We compete with many companies which have greater market penetration, depth of
product line, resources and access to capital, all of which could be
competitive advantages. Competitors include: bottled water companies such as
Arrowhead, Deer Park, Poland Spring, and Sparkletts; water filtration system
manufacturers such as Culligan, which is owned by US Filter Corporation, Brita,
which is owned by Clorox and Pur, which is owned by Proctor and Gamble; and
flat-top point-of-use water cooler manufacturers such as Oasis,
Cordley-Temprite, and Mutual of Omaha's Innowave product.
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
6
expansion 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 federally registered our
Purific trademark and have pending applications to federally register our
AquaCell and Arctic Fresh marks. We also conduct business in California under
the name Global Water Solutions, Inc. We will seek to improve our patented
technology and obtain additional patent protection where appropriate. As part
of our operating strategy, we intend to focus on establishing brand name
recognition in the consumer and retail market segment of the water purification
and treatment industry with respect to our various product lines. We intend to
seek appropriate additional trademark or servicemark registrations in
connection with our product and service offerings.
Employees
As of June 30, 2001, we had nine employees. None of our employees are
covered under collective bargaining agreements. Management believes we maintain
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 December 31, 2004. That lease
has an average annual base rent of $69,600. We also maintain an approximately
1,000 square foot satellite office in Englewood Cliffs, New Jersey under a
three year lease that commenced on December 1, 1997 and expired on November 30,
2000. That lease has been extended and currently expires on November 30, 2001,
at a base monthly rental of $1,866. We believe that, if necessary, alternative
space is readily available at comparable rates and on comparable terms with
respect to all of our leased properties. We also believe that we can obtain
additional space necessary to support increases in our future operation. We
believe that the properties described above are currently protected by adequate
insurance.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock commenced quotation on the American Stock
Exchange on February 12, 2001 following its initial public offering. The
following table sets forth, for the periods indicated, the last sale prices for
the Common Stock as reported by American Stock Exchange:
Period High ($) Low ($)
------ -------- -------
Fiscal 2002
First Quarter.. 4.70 3.35
10/1-10/18..... 5.20 3.25
Fiscal 2001
Fourth Quarter. 5.00 4.45
Third Quarter.. 5.55 5.00
On October 18, 2001, the last sale price of the Common Stock as reported by
AMEX was $5.00. On October 18, 2001, there were 97 holders of record of the
Company's Common Stock and, the Company believes, over 600 beneficial owners of
the Company's Company Stock.
The Company presently intends to retain all earnings for the Company's
continued growth. Depending upon the Company's capital resources and needs, the
Company may pay cash dividends in the future. The payment of dividends, 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.
Use of Proceeds from Sales of Registered Securities
On February 9, 2001, a registration statement on Form SB-2 (333-41826) was
declared effective by the Securities and Exchange Commission, pursuant to which
1,200,000 shares of our common stock were offered and sold by us at a price of
$5 per share, generating gross offering proceeds of $6 million. The managing
underwriter was Somerset Financial Group. In connection with the offering, we
incurred approximately $.8 million in underwriting discounts and commissions,
and approximately $.6 million in other related expenses. The net proceeds from
the offering, after deducting the foregoing expenses, were approximately $4.6
million.
From the time of receipt through June 30, 2001, we have used the net
proceeds from our initial public offering for marketing and sales, payment of
accrued expenses and funding the general operations of the Company. The net
proceeds of the initial public offering will be used for sales, marketing,
expansion of manufacturing facilities, research and development and general
corporate purposes, including working capital. None of the net proceeds of the
initial public offering were paid directly or indirectly to any director,
officer, general partner of the Company or their associates, persons owning 10%
or more of any class of equity securities of the Company other than $225,000 in
the aggregate to the Company's three executive officers for accrued unpaid
compensation. We expect that our use of proceeds from the offering will conform
to the intended use of proceeds as described in our initial public offering
prospectus dated February 9, 2001.
8
Recent Sales of Unregistered Securities
During the year ended June 30, 2001, the Company made the following sales of
unregistered securities:
Consideration Received
and Description of Exemption
Underwriting or Other from If Option, Warrant or
Title of Number Discounts to Market Price Registration Convertible Security, Terms
Date of Sale Security Sold Afforded to Purchasers Claimed of Exercise or Conversion
------------ ----------- ------- ------------------------- ------------ ------------------------------
5/26/01 Warrants to 200,000 No cash consideration 4(2) Exercisable immediately for a
Purchase received by Company five year period from grant
Common until exercise date of 5/26/01 at exercise
Stock price $4.20 per share
3/15/01 to Option to 70,000 No cash consideration 4(2) Exercisable immediately for a
6/30/01 Purchase received by Company three year period from date of
Common until exercise grant at an exercise price of
Stock $5.35
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, the words or phrases "will likely result," "management expects" or
"the Company expects," "will continue," "is anticipated," "estimated" or
similar expressions are intended to identify "forward-looking statements"
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 speak 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 obligation 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 discussion 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.
Outlook
Through the year ended June 30, 2001 sales were not significant, as we
focused on completing an initial public offering and setting in place the
infrastructure upon which to develop and build the future growth of the
Company.
During July 2001 we hired a Vice President of Sales and Marketing from Coors
Brewing Company with extensive experience in development and implementation of
creative marketing concepts. We anticipate that, through his directed efforts,
we will be able to successfully expand and generate significant revenues
through our program with Roto-Rooter Plumbers, our Government Services contract
which was awarded in March, 2001 and our Fortune 500 marketing strategy.
During September 2001 we announced an expanded relationship with Roto-Rooter
Plumbers, beyond performing installations, to include nationwide marketing of
our Purific(R) Water Cooler. Under this expanded relationship Roto-Rooter
Plumbers will generate leads nationwide for AquaCell's Purific Water Cooler
through the distribution of a specially designed brochure to be disseminated to
Roto-Rooter's substantial customer base. Additionally, a two-minute video clip
describing the Purific Water Cooler will be included on Roto-Rooter's website,
and will also be accessible from our website at www.aquacell.com.
9
During September 2001 we entered into a letter of intent to acquire a
manufacturing firm in the water filtration and purification industry. In the
event that we successfully complete this acquisition, AquaCell will secure
immediate expansion of its manufacturing capabilities to meet expected
production demands, an employee base with several years of experience in the
industry, international expertise and the ability to develop an integrated
system to be used in conjunction with our Purific Water Cooler. This company
designs and builds a diverse range of products, from household water treatment
systems to custom design desalination plants.
During September 2001 we announced the formation of a new subsidiary
exclusively dedicated to the selling of advertising space on the label of the
permanently attached five-gallon bottle on our Purific Water Cooler, an
advertising innovation, whereby we are creating a billboard on a water cooler.
We anticipate that the advertising sales will represent a significant
contribution to the future revenues and profits of the Company.
During October 2001 we entered into distribution joint-venture agreements
with Corbett Water Technologies, Inc. ("Corbett"), a subsidiary of S&B
Technical Products, Inc., for worldwide distribution of its products. S&B
Technical Products, Inc. is the largest manufacturer and supplier of water
gaskets in the world. Under the terms of the agreements we will continue to
work and develop our current marketing programs, including Roto-Rooter Plumbers
and the Government Services Administration, with Corbett being responsible for
all other marketing efforts. The agreements divide domestic marketing and
international marketing into two different structures. Under the terms of the
domestic sales and marketing agreement, Corbett will distribute our products
and the pricing structure will enable our gross profit to be maintained at
approximately 58% while eliminating our incremental sales and marketing
expenses. As part of this agreement we have purchased a 15% interest in Corbett
for $1,500,000 in shares of our common stock providing additional capital for
AquaCell. In addition, we will receive an initial order of $250,000 which, by
itself, generates approximately $60,000 more revenues than were generated for
the fiscal year ended June 30, 2001. Under the terms of the international
agreement, a newly formed joint-venture subsidiary will have both marketing and
manufacturing rights for our products. Products will be manufactured in
countries around the world in which S&B Technical Products, Inc. currently has
operations. We will own 45% of this newly formed venture with the remaining 55%
to be owned by S&B Technical Products, Inc. We will receive a payment of
$100,000 for the foreign marketing and manufacturing rights.
The mission of management, through utilization of the programs and
agreements outlined above, is to position the Company for long-term profitable
growth and enhanced shareholder value.
Results of Operations
During the year ended June 30, 2001 revenues were minimal because executive
management, which has been responsible for all sales to date, devoted all of
its time to the completion of our initial public offering which was
accomplished on February 9, 2001 and to the creation of an infrastructure upon
which to develop and build the future growth of the Company. On a consolidated
basis we generated revenues of $191,000 for the year ended June 30, 2001 as
compared to $263,000 for the preceding year and gross profit was maintained at
approximately 58%.
Our operating expenses, exclusive of depreciation and amortization and an
adjustment to reflect a reduction in the estimated fair value of notes
receivable in the amount of $365,000, were $1,833,000 for the year ended June
30, 2001 representing an increase of $621,000 or 51% over the year ended June
30, 2000. Of this amount, $242,000 represented nonrecurring costs, $70,000
represented increased salaries and wages due to the expansion of our staff,
$62,000 represented a non cash charge for stock based compensation for warrants
issued in connection with a consulting agreement and $134,000 represented
marketing and consulting agreements put in place after the completion of the
initial public offering, from which we expect to generate profitable growth and
enhance shareholder value. These warrants issued in connection with the
consulting agreement may provide additional capital of up to $840,00 for the
Company if exercised.
The amortization of debt discount, a non-cash non-recurring charge
attributed to warrants issued in connection with notes payable and other issued
warrants, amounted to $695,000 for the year ended June 30, 2001. This amount
represented warrants issued in connection with notes payable that were
exercised during the year ended June 30, 2001 and converted to equity through
the retirement of the note. In addition, $158,000 of
10
amortization of debt discount was reflected as an extraordinary loss on debt
extinguishment for the year ended June 30, 2001. Amortization of debt discount
amounted to $146,000 for the year ended June 30, 2000. Other interest expense,
which will be eliminated on a forward looking basis because of the conversion
of debt to equity was $116,000 for the year ended June 30, 2001 as compared to
$153,000 for the year ended June 30, 2000.
Liquidity and Capital Resources
During the year ended June 30, 2001 we financed our operations through a
private loan offering that generated $200,000, loans received from an outside
shareholder and a director in the aggregate amount of $225,000 and through the
completion of an initial public offering in February, 2001. The $225,000 loans
and a $43,000 note were repaid from the proceeds of the initial public offering
which generated net proceeds in the amount of $4,640,000. A net repayment of
officers' and other loans amounted to $11,000 during the year. During the year
our executive officers contributed $214,000 of their earned, but unpaid,
salaries to the capital of the Company.
Cash used by operations during the year ended June 30, 2001 amounted to
$3,105,000. Net loss of $3,056,000 was reduced by non-cash interest on stock
warrant issuance in the amount of $852,000, a non-cash adjustment to reflect a
reduction in the estimated fair value of notes receivable in the amount of
$365,000, stock based compensation of $62,000 for warrants issued in connection
with a consulting agreement and depreciation and amortization of $54,000. These
warrants issued in connection with the consulting agreement may provide
additional capital of up to $840,000 for the Company if exercised. Cash used by
operations was further increased by prepaid expenses in the amount of $293,000
representing prepayment of marketing, employment, consulting and other fees,
accrued interest receivable on notes in the amount of $55,000 and the decrease
of accounts payable and accrued expenses, including accrued interest, in the
amount of $1,020,000 resulting from use of proceeds from the initial public
offering to eliminate Company debt. Net loss was further increased by net
changes in other operating asset accounts amounting to $14,000.
On February 15, 2001 we closed our initial public offering of 1,200,000
shares of common stock and generated net proceeds of approximately $4,640,000.
As a result of the completion of our initial public offering our financial
position went from a capital deficiency of $2,169,000 and liabilities of
$2,665,000 at the end of June, 2000 to a stockholder's equity of $2,469,000 and
liabilities of only $149,000 at June 30, 2001.
We have granted warrants, subsequent to our initial public offering, in
connection with consulting and marketing agreements that may generate
additional capital of up to approximately $3,400,000 if exercised.
Cash used by investing activities during the year ended June 30, 2001
represented an investment of $1,983,000 of cash not currently required for
operations into short-term notes bearing interest at the rate of 8% per annum
and expenditures for property and equipment in the amount of $20,000.
We intend to use the net proceeds from our initial public offering in the
creation of marketing, advertising and promotional programs for our product
line. Some of these programs have been outlined in the Outlook section of this
Management's Discussion and Analysis.
In connection with the $1,750,000 notes receivable restructured into
twelve-month installment notes the Company received the October and November,
2001 payments of principal and interest.
Management believes that the collections on notes receivable, cash flows
expected to be generated from future operations and anticipated capital to be
generated from future exercise of warrants 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. We
presently have no material commitments for future expenditures.
Item 7. Financial Statements.
See Financial Statements beginning on pg F1.
11
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
See Item 12.
Item 10. Executive Compensation.
See Item 12.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
See Item 12.
Item 12. Certain Relationships and Related Transactions.
The information required by Items 9, 10, 11 and 12 is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the 2001 Annual Meeting of Stockholders.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits Filed.
None.
(b) Reports on Form 8-K.
None.
12
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.
AQUACELL TECHNOLOGIES, INC.
(Registrant)
Dated: October 24, 2001
/s/ JAMES C. WITHAM
By: _________________________________
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 24, 2001
---------------------- and Chief Executive Officer
James C. Witham (Principal Executive Officer)
/s/ KAREN B. LAUSTSEN Director and President October 24, 2001
----------------------
Karen B. Laustsen
/s/ GARY S. WOLFF Director and Chief Financial Officer October 24, 2001
---------------------- (and Principal Accounting
Gary S. Wolff Officer)
/s/ GLENN BERGENFIELD Director October 24, 2001
----------------------
Glenn Bergenfield
/s/ DR. WILLIAM DITURO Director October 24, 2001
----------------------
Dr. William DiTuro
13
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Aquacell Technologies, Inc.
Rancho Cucamonga, California
We have audited the accompanying consolidated balance sheet of Aquacell
Technologies, Inc. and subsidiary (the "Company") as of June 30, 2001 and the
related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the years in the two-year period then
ended. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 enumerated above present fairly, in
all material respects, the consolidated financial position of Aquacell
Technologies, Inc. and subsidiary as of June 30, 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the two-year period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Richard A. Eisner & Company, LLP
New York, New York
July 24, 2001
With respect to Note E,
September 16, 2001
With respect to Note L,
October 9, 2001
F-1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 2001
ASSETS
------
Current assets:
Cash................................................................................. $ 298,000
Notes receivable, including accrued interest of $55,000.............................. 1,235,000
Accounts receivable.................................................................. 31,000
Inventories.......................................................................... 88,000
Prepaid expenses and other current assets............................................ 294,000
-----------
Total current assets............................................................. 1,946,000
Property and equipment, net............................................................. 79,000
Other assets:
Patents, net......................................................................... 143,000
Note receivable, non-current portion................................................. 438,000
Security deposits.................................................................... 12,000
-----------
$ 2,618,000
===========
LIABILITIES
-----------
Current liabilities:
Accounts payable..................................................................... $ 100,000
Accrued expenses..................................................................... 45,000
Advances payable to officer/stockholder.............................................. 4,000
-----------
Total current liabilities........................................................ 149,000
-----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, par value $.001; 10,000,000 shares authorized; no shares issued........
Common stock, par value $.001; 40,000,000 shares authorized; 7,733,250 shares issued and
outstanding........................................................................... 7,000
Additional paid-in capital.............................................................. 9,441,000
Accumulated deficit..................................................................... (6,671,000)
-----------
2,777,000
Unamortized deferred compensation....................................................... (308,000)
-----------
2,469,000
-----------
$ 2,618,000
===========
See independent auditors' report and notes to financial statements
F-2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
------------------------
2001 2000
----------- -----------
Revenue:
Net sales.............................................................. $ 185,000 $ 263,000
Rental income.......................................................... 6,000
----------- -----------
191,000 263,000
Cost of sales............................................................. 82,000 109,000
----------- -----------
Gross profit.............................................................. 109,000 154,000
----------- -----------
Selling, general and administrative expenses:
Salaries and wages..................................................... 602,000 537,000
Legal, accounting and other professional expenses...................... 521,000 150,000
Other.................................................................. 764,000 573,000
Reduction of notes receivable carrying amount to fair value............ 365,000
----------- -----------
2,252,000 1,260,000
----------- -----------
Loss before interest expense.............................................. (2,143,000) (1,106,000)
----------- -----------
Other income (expense):
Amortization of debt discount.......................................... (695,000) (146,000)
Interest expense....................................................... (116,000) (153,000)
Interest income........................................................ 56,000
----------- -----------
(755,000) (299,000)
----------- -----------
Net loss before extraordinary item........................................ (2,898,000) (1,405,000)
Accretion of redemption amount of redeemable common stock................. 5,000 9,000
----------- -----------
Net loss attributable to common stockholders before extraordinary item.... (2,903,000) (1,414,000)
Extraordinary item--Loss on extinguishment of debt........................ (158,000)
----------- -----------
Net loss attributable to common stockholders.............................. $(3,061,000) $(1,414,000)
=========== ===========
Net loss per common share--basic and diluted
Net loss attributable to common stockholders before extraordinary item. $ (0.46) $ (0.28)
Extraordinary item--Loss on extinguishment of debt..................... (0.02)
----------- -----------
Net loss attributable to common stockholders........................... $ (0.48) $ (0.28)
=========== ===========
Weighted average number of common shares outstanding--basic and diluted... 6,339,000 4,975,000
=========== ===========
See independent auditors' report and notes to financial statements
F-3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock Unamortized
---------------- Additional Deferred
Number Par Paid-In Costs/Deferred Accumulated
of Shares Value Capital Compensation Deficit Total
--------- ------ ---------- -------------- ----------- -----------
Balances--July 1, 1999.................... 4,803,250 $5,000 $ 895,000 $(2,196,000) $(1,296,000)
Sale of common stock in connection with
private placement........................ 200,000 200,000 200,000
Issuance of 570,000 common stock
warrants in connection with private loan
offering................................. 95,000 95,000
Reduction of warrant exercise price from
$2.00 to $1.00 per share................. 16,000 16,000
Issuance of 50,000 common stock
warrants to ULLICO to extend note
maturity................................. 39,000 39,000
Accrued officers'/stockholders' salaries
contributed to additional paid-in capital 191,000 191,000
Accretion of redemption amount of
redeemable common stock.................. (9,000) (9,000)
Net loss for the year ended June 30, 2000. (1,405,000) (1,405,000)
--------- ------ ---------- ----------- -----------
Balances--June 30, 2000................... 5,003,250 5,000 1,436,000 (3,610,000) (2,169,000)
Issuance of 200,000 common stock
warrants in connection with private loan
offering................................. 834,000 $(634,000) 200,000
Exercise of warrants to purchase common
stock through retirement of notes
payable--private loan offering........... 1,295,000 1,000 1,294,000 1,295,000
Return of redeemable common stock to
stockholders' equity..................... 135,000 154,000 154,000
Conversion of $500,000 note payable into
shares of common stock................... 100,000 500,000 500,000
Accrued officers'/stockholders' salaries
contributed to additional paid-in capital 214,000 214,000
Sale of common stock in initial public
offering, net of costs of $1,360,000..... 1,200,000 1,000 4,639,000 4,640,000
Issuance of common stock warrants for
services to the Company.................. 370,000 (370,000) 0
Amortization of deffered costs............ 696,000 696,000
Accretion of redemption amount of
redeemable common stock.................. (5,000) (5,000)
Net loss for the year ended June 30, 2001. (3,056,000) (3,056,000)
--------- ------ ---------- --------- ----------- -----------
Balances--June 30, 2001................... 7,733,250 $7,000 $9,441,000 $(308,000) $(6,671,000) $ 2,469,000
========= ====== ========== ========= =========== ===========
See independent auditors' report and notes to financial statements
F-4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss....................................................................................... $(3,056,000) $(1,405,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation.................................................................... 62,000
Reduction of notes receivable carrying amount to fair value................................. 365,000
Interest expense, including extraordinary expense of $158,000, related to amortization
of discount on debt for fair value of stock warrants issued................................ 852,000 146,000
Depreciation and amortization............................................................... 54,000 48,000
Changes in:
Accounts receivable...................................................................... 5,000 (30,000)
Accrued interest receivable.............................................................. (55,000)
Prepaid expenses and other current assets................................................ (293,000) 2,000
Inventories.............................................................................. (17,000) (24,000)
Security deposits........................................................................ (2,000) 1,000
Accounts payable......................................................................... (556,000) 126,000
Accrued expenses......................................................................... (347,000) 335,000
Accrued interest payable................................................................. (117,000) 140,000
----------- -----------
Net cash used in operating activities................................................. (3,105,000) (661,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............................................................. (20,000) (3,000)
Investment in notes receivable................................................................. (1,983,000)
----------- -----------
Net cash used in investing activities................................................. (2,003,000) (3,000)
----------- -----------
Cash flows from financing activities:
Sales of common stock.......................................................................... 6,000,000 200,000
Offering costs paid............................................................................ (742,000) (25,000)
(Payment of) proceeds from notes payable....................................................... (1,000)
Proceeds from notes payable--private loan offering............................................. 200,000 310,000
Payment of notes payable--Union Labor Life Insurance Co........................................ (43,000)
(Payment of) proceeds from loans from officers and others...................................... (10,000) 163,000
----------- -----------
Net cash provided by financing activities............................................. 5,404,000 648,000
----------- -----------
Increase (decrease) in cash........................................................................ 296,000 (16,000)
Cash--beginning of year............................................................................ 2,000 18,000
----------- -----------
Cash--end of year.................................................................................. $ 298,000 $ 2,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................................... $ 226,000 $ 9,000
Supplemental disclosures of noncash investing and financing activities:
Accrual of offering costs deferred............................................................. $ 88,000
Contribution to capital of accrued officers'/stockholders' compensation........................ $ 214,000 $ 191,000
Conversion of note payable to common stock..................................................... $ 500,000 $ 43,000
Exercise of warrants to purchase common stock by exchange of notes payable..................... $ 1,295,000
Issuance of warrants for services to the Company............................................... $ 370,000 $ 260,000
Debt discount arising from re pricing and issuance of warrants................................. $ 834,000 $ 150,000
Application of deferred offering costs against proceeds of offering............................ $ 618,000
Conversion of redeemable common stock into equity.............................................. $ 154,000
See independent auditors' report and notes to financial statements
F-5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
June 30, 2001
Note A--Description of Business
Aquacell Technologies, Inc. (the "Company") was incorporated in Delaware on
March 19, 1997 and its principal business activity is the sale of water
purification equipment.
As shown in the accompanying financial statements, the Company has incurred
substantial net losses since inception and utilized substantial cash in
operating activities. Management has devoted substantially all of its time to
completion of its initial public offering (''IPO".) With the completion of the
IPO, management anticipates it will be able to devote the necessary time to the
development of the Company's operations. The Company expects the net proceeds
remaining from its IPO, now substantially invested in installment notes
receivable, will provide sufficient cash flows to fund its operations through
June 30, 2002. However, there is no assurance that profitable operations will
ever be attained or that the Company will ever attain positive operating cash
flow.
Note B--Summary of Significant Accounting Policies
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Such subsidiaries are Global
Water Holdings, Inc. and Global Water--Aquacell, Inc., both of which were
incorporated December 21, 1998. Global Water Holdings, Inc. had no activity and
was dissolved during the year ended June 30, 2000. All significant intercompany
accounts and transactions have been eliminated in consolidation.
[2] Inventories:
Inventories are carried at the lower of cost, determined using the FIFO
(first-in, first-out) method or market.
[3] Property and equipment:
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 of five years.
[4] Patents:
The value of patents is amortized over nine years, their remaining useful
lives, using the straight-line method. Patents at June 30, 2001 are stated net
of accumulated amortization of approximately $55,000.
[5] 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. Rental income is recognized on a straight-line basis over the
term of the rental agreement.
[6] 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.
F-6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note B--Summary of Significant Accounting Policies--(continued)
[7] Income taxes:
The Company accounts for income taxes using the asset and liability method
described in 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.
[8] Net loss per common share:
Loss per common share is based upon the weighted average number of common
shares outstanding during the year including redeemable common stock. Diluted
loss per common share is the same as basic loss per share, as the effects of
potentially dilutive securities (see Notes I[5] and I[6]) are antidilutive.
[9] Long-lived assets:
The Company accounts for the impairment and disposition of long-lived assets
in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". In accordance with SFAS
No.121, 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, 2001 and 2000, there was no impairment.
[10] Concentrations:
The Company utilizes a limited number of suppliers for certain components
used in its products but has no long-term supply contracts with them. Due to
the competitive conditions in the industry, there can be no assurance that the
Company will not experience difficulties in meeting its supply requirements in
the future.
[11] Financial instruments:
The carrying amounts of the Company's cash, notes receivable, accounts
receivable and accounts payable approximate fair value. The fair value of
certain loans to officer/stockholders are not readily determinable due to the
related party nature of those instruments.
[12] Reclassifications:
Certain reclassifications have been made to the 2000 financial statements in
order to conform to the current year presentation.
[13] New accounting pronouncements:
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill.
F-7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note B--Summary of Significant Accounting Policies--(continued)
SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121.
The Company will be required to adopt SFAS No. 142 effective July 1, 2002,
but may elect early adoption. Pursuant to SFAS No. 142, business combinations
completed prior to July 31, 2001 will continue to be amortized through December
31, 2001. SFAS No. 141 will require, upon the adoption of SFAS No. 142, that
management evaluate existing intangible assets and goodwill that were acquired
in prior purchase business combinations and to make necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in business combinations and make any necessary amortization adjustments.
The Company does not expect that the adoption of SFAS No. 141 and SFAS No.
142, will have a material effect on the Company as currently constituted.
Note C--Inventories
Inventories consist of the following at June 30, 2001:
Raw materials.................................... $50,000
Work in progress................................. 15,000
Completed product................................ 23,000
-------
$88,000
=======
Note D--Property and Equipment
Property and equipment is summarized as follows at June 30, 2001:
Furniture and fixtures........................... $ 34,000
Equipment--office................................ 34,000
Machinery and equipment.......................... 71,000
Leasehold improvements........................... 10,000
Rental units..................................... 9,000
--------
158,000
Less accumulated depreciation.................... (79,000)
--------
$ 79,000
========
Note E--Notes Receivable
At June 30, 2001, the notes receivable consist of $50,000 from a
non-affiliated party and $1,933,000 from non-director/employee stockholders and
entities owned by them at an annual interest rate of 8%. Notes totaling
F-8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note E--Notes Receivable--(continued)
$1,750,000 maturing August 16, 2001 were extended to September 16, 2001. At
September 16, 2001 the notes were restructured into twelve-month installment
notes collateralized by marketable securities with the first installment due
October 16, 2001. Officer/stockholders of Aquacell have personally guaranteed
up to $1,750,000 of the notes and have offered as collateral designated assets.
The Company has recorded an adjustment to reflect a reduction in the estimated
fair value offer on these notes of $365,000. The balance of the notes are
unsecured and mature between October 2001 and March 2002. Interest receivable
at June 30, 2001 amounted to $1,000 from a non-affiliated party and $54,000
from non-director/employee stockholders and entities owned by them and is due
at maturity.
Note F--Advances Payable to Officer/Stockholder
Advances payable to officer/stockholder consist of unsecured demand interest
free loans of $4,000 at June 30, 2001.
Note G--Notes Payable--Private Loan Offerings
Notes payable-private loan offerings represented the proceeds from the sale
of units in four private loan offerings. The first loan offering commenced in
November 1998 and was terminated September 1, 1999. The offering consisted of
thirty units, each unit consisting of a $25,000 six-month promissory note with
interest at 10% per annum and three-year warrants to purchase 25,000 shares of
the Company's common stock at exercise prices of $1.00 and $2.00 per share. A
total of twenty-one units were sold yielding gross proceeds of $525,000 through
June 30, 1999, seventeen with warrants at $1.00 per share and four with
warrants at $2.00 per share. The Company recorded a debt discount based upon
the estimated value of the warrants totaling $56,000. The warrants were valued
using the Black-Scholes valuation method using the following assumptions:
risk-free interest rates ranging from 4.43% to 5.09%, volatility of 1%, and a
term of three years. On September 1, 1999, the warrants exercisable at $2.00
per share were repriced to $1.00 per share. In connection with the repricing,
the Company recorded an additional debt discount based upon the estimated value
of the warrants totaling $16,000. The warrants were valued utilizing the
Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 5.82%, volatility of 1% and a term of three years.
Amortization of the debt discount for the year ended June 30, 2000 totaled
$26,000.
The Company sold five units in the second loan offering commenced in October
1999 and completed in February 2000. Each unit consisted of a $100,000
six-month promissory note with interest at 10% per annum and three-year
warrants to purchase 100,000 shares of the Company's common stock at an
exercise price of $1.00 per share. The Company recorded a debt discount based
upon the estimated value of the warrants totaling $83,000. The warrants were
valued utilizing the Black-Scholes valuation method using the following
assumptions: risk-free interest rates ranging from 6.01% to 6.71%, volatility
of 1%, and a term of three years. During the year ended June 30, 2000
amortization of the debt discount amounted to $83,000.
The Company sold two units in the third loan offering commenced in February
2000 and terminated on March 25, 2000 raising gross proceeds of $70,000. Each
unit consisted of a $35,000 six-month promissory note with interest at 10% per
annum and three-year warrants to purchase 35,000 shares of the Company's common
stock at an exercise price of $1.00 per share. The Company recorded a debt
discount based upon the estimated value of the warrants totaling $12,000. The
warrants were valued utilizing the Black-Scholes valuation method using the
following assumptions: risk-free interest rates ranging from 6.50% to 6.57%,
volatility of 1% and a
F-9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note G--Notes Payable--Private Loan Offerings--(continued)
term of three years. During the years ended June 30, 2001 and 2000 amortization
of the debt discount amounted to $6,000 and $6,000, respectively.
The Company sold two units in the fourth loan offering commenced July 1,
2000 and completed July 17, 2000 raising gross proceeds of $200,000. Each unit
consisted of a $100,000 six-month promissory note with interest at 10% per
annum and three-year warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $1.00 per share. The Company recorded a
debt discount based upon the estimated value of the warrants totaling $834,000.
The warrants were valued utilizing the Black-Scholes valuation method using the
following assumptions: risk-free interest rate of 6.30%, volatility of 1% and a
term of three years. During the year ended June 30, 2001, amortization of the
debt discount amounted to $676,000.
On December 11, 2000 the holders of private loan offering warrants agreed to
exercise 1,295,000 warrants upon the effectiveness of the IPO (Note I [3]). The
offering was declared effective, although not traded, on December 13, 2000. The
settlement of the exercise price was realized through the retirement of the
balance of $1,295,000 of the notes payable-private loan offerings. The
unamortized debt discount at this date, in the amount of $158,000, was
reflected as an extraordinary loss on extinguishment of debt in the
accompanying consolidated statement of operations.
At December 13, 2000, interest accrued on these notes amounted to $162,000.
The accrued interest was paid during March 2001 utilizing proceeds from the
IPO. Interest expense (excluding amortization of debt discount) during the
years ended June 30, 2001 and 2000 amounted to $57,000 and $83,000
respectively.
Note H--Note Payable--Union Labor Life Insurance Company
On January 11, 1999, the Company closed a $500,000 note and warrant purchase
agreement with the Union Labor Life Insurance Co. ("ULLICO"). Under the terms
of the agreement, the Company issued a six-month senior note, with interest at
the rate of 10% per annum and a warrant to purchase 500,000 shares of the
Company's common stock to be exercisable for a four-year period at $1.00 per
share. The maturity date was subsequently extended to April 30, 2000. The
Company estimated the fair value of these warrants to be $86,000, utilizing the
Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 4.76%, volatility of 1% and a term of four years. Such amount
was amortized to interest expense over the six-month term of the note.
Amortization amounted to $5,000 and $81,000 during the years ended June 30,
2001 and 2000, respectively. At January 1, 2000, interest accrued at December
31, 1999 in the amount of $17,000 was added to principal on the note and the
rate was changed to 15% per annum from January 1, 2000. On May 4, 2000 the note
was extended to July 30, 2000 and accrued interest at April 30, 2000 in the
amount of $26,000 was added to principal on the note. In connection with the
note extension, the Company issued 50,000 warrants to ULLICO at an exercise
price of $5.00 per share and expiring on January 11, 2003. The Company recorded
a debt discount based upon the estimated value of the warrants totaling
$39,000. The warrants were valued utilizing the Black-Scholes valuation method
using the following assumptions: a risk-free interest rate of 6.74%, volatility
of 1% and a term of 2.58 years. Subsequently, the note's maturity was extended
to October 31, 2000, then to March 31, 2001. During the years ended June 30,
2001 and 2000, amortization of the debt discount amounted to $13,000 and
$26,000, respectively. Interest expense (excluding amortization of debt
discount) in relation to this loan amounted to $50,000 and $65,000 during the
years ended June 30, 2001 and 2000, respectively. On February 12, 2001 Union
Labor Life Insurance Company converted $500,000 of the $543,000 balance of the
note into 100,000 shares of common stock at $5.00 per share. The balance of the
note and the accrued interest were paid during March 2001 utilizing the
proceeds from the IPO.
F-10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note I--Equity Transactions
[1] Contribution to capital:
On September 30, 1999 and February 9, 2001, three officers/stockholders and
directors agreed to contribute to capital accrued salaries totaling $191,000
and $214,000, respectively.
[2] Private placement:
During April 2000 the Company completed a private placement of 200,000
shares of its common stock at $1.00 per share.
[3] Initial public offering:
On February 9, 2001, the Company completed its IPO, selling 1,200,000 shares
of common stock at $5.00 per share, raising proceeds, net of costs, of
$4,640,000. In connection with the IPO the Company sold to the underwriter, for
consideration of $100, warrants to purchase an aggregate of 120,000 shares of
common stock at an exercise price of $8.25 per share. The warrants will be
exercisable for a four-year period commencing February 9, 2002.
[4] Redeemable common stock:
In connection with the purchase of selected assets of KABB, Inc./Aquacell
International, Inc. (consideration for which included 200,000 shares of the
Company's common stock), an option was granted to the holder of 135,000 shares
of common stock to put the stock back to the Company at a price of $1.00 per
share plus interest at 7% per annum if the Company had not registered its
common stock in an IPO by December 21, 2000. Through December 13, 2000 (the
date of registration), interest had been accrued in the amount of $19,000, and
the shares (which had previously been excluded from stockholders' equity) were
returned to stockholders' equity upon the completion of the IPO.
[5] Stock option plan:
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 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.
F-11
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note I--Equity Transactions--(continued)
Transactions under the Plan are as follows:
Year Ended June 30,
---------------------------------------------------
2001 2000
-------------------------- ------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------- ---------------- ------- ----------------
Balance, July 1...... 305,000 $1.00
Options granted... 70,000 5.35 305,000 $1.00
Options cancelled. (227,000) 1.00
-------- -------
Balance, June 30..... 148,000 $3.06 305,000 $1.00
======== =======
Exercisable, June 30. 136,000 $3.24 125,000 $1.00
======== =======
The following table presents information relating to stock options
outstanding at June 30, 2001:
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
Weighted- Average
Average Remaining Weighted-Average
Exercise Price Shares Exercise Price Life in Years Shares Exercise Price
-------------- ------- -------------- ------------- ------- ----------------
$1.00.... 78,000 3.2 66,000
5.35.... 70,000 2.7 70,000
------- -------
148,000 $3.06 2.9 136,000 $3.24
======= =======
If the options had been accounted for under SFAS 123, net loss attributable
to common stockholders for the years ended June 30, 2001 and 2000 would have
been $(3,188,000) or $(0.51) per common share, and $(1,448,000) or $(0.29) per
common share, respectively. The fair value of options granted during the years
ended June 30, 2001 and 2000 was $1.81 and $.20 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 4.99% and
5.76%, volatility of 42% and 1% and expected lives of three and four years,
respectively. During the year ended June 30, 2000, the Company had contingently
issued 40,000 options in connection with incentive clauses of a sales
representation agreement. As of June 30, 2000, the required sales levels were
not achieved and the options were forfeited.
[6] Warrants:
In connection with a financial consulting agreement, the Company issued a
warrant to purchase 200,000 shares of the Company's common stock to be
exercisable for a five-year period at $4.20 per share. The Company estimated
the fair value of these warrants to be $370,000, utilizing the Black-Scholes
valuation method using the following assumptions: a risk-free interest rate of
4.99%, volatility of 42% and a term of five years. Such amount is being
amortized to consulting expense over six months. Amortization amounted to
$62,000 during the year ended June 30, 2001.
F-12
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note I--Equity Transactions--(continued)
At June 30, 2001, the Company had warrants outstanding as follows:
Exercise Price Shares Expiration Date
-------------- ------- ---------------
$1.00.... 500,000 January 2003
5.00.... 50,000 January 2003
4.20.... 200,000 May 2006
8.25.... 120,000 February 2006
-------
870,000
=======
At June 30, 2001, the weighted average exercise price of the outstanding
warrants was $2.97 and the weighted average remaining contractual life of the
warrants was 2.78 years.
[7] Shares reserved:
At June 30, 2001, the Company has reserved 1,870,000 shares for issuance
upon exercise of options and warrants.
Note J--Income Taxes
At June 30, 2001, the Company had available federal net operating loss
carryforwards to reduce future taxable income, if any, of approximately
$4,900,000. The net operating loss carryforwards expire at various dates
through 2021.
At June 30, 2001, the Company has a deferred tax asset of approximately
$2,120,000, representing the benefit of its net operating loss carryforwards,
adjustments to fair value and certain start-up costs capitalized for tax
purposes. 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 $680,000 and $560,000 in 2001 and 2000,
respectively.
Note K--Commitments and Contingencies
[1] Lease commitments:
The Company occupies office space in California and New Jersey. As of June
30, 2001, future minimum commitments under office and equipment leases are as
follows:
Year Ending June 30,
--------------------
2002 $ 83,000
2003 74,000
2004 38,000
--------
$195,000
========
Rent expense amounted to $89,000 and $86,000 for the years ended June 30,
2001 and 2000, respectively.
F-13
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note K--Commitments and Contingencies--(continued)
[2] Consulting agreement:
Upon the closing of the IPO, the Company entered into a one-year financial
consulting agreement for a total fee of $60,000, commencing February 16, 2001,
paid in advance.
The Company entered into a two-year consulting agreement with a firm to work
on the development of a global marketing strategy to address opportunities
worldwide for the Company's products. The agreement commenced April 1, 2001 and
requires monthly payments of $12,500. A payment of $150,000 was made upon
signing.
The Company entered into a six-month consulting agreement with a firm to
provide consulting services for public relations and business development. The
agreement commenced April 1, 2001 and requires monthly payments of $10,000.
The Company entered into a six-month consulting agreement with a firm to
provide consulting services concerning the State and City of New York. The
agreement commenced April 1, 2001 and requires monthly payments of $5,000.
On June 1, 2001, the Company entered into a financial consulting agreement
with a registered broker-dealer. The agreement provides for a fee consisting of
$1,000 per month over a five-year period and the grant of warrants (see Note
I[6].) The agreement also provides the option to prepay all or a portion of the
fee on a non-refundable basis and either party may terminate the agreement
after six months upon written notice. The Company has elected to pay the fee
for the entire five-year period in six monthly installments of $10,000
beginning June 2001. As a result of the cancellation and non-refundable
provisions, the amounts paid are being amortized over the six-month period
beginning June 1, 2001.
F-14
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 30, 2001
Note L--Subsequent Events
(1) On August 16, 2001, the Company entered into a consulting agreement for
non-exclusive services related to corporate strategies and other matters.
The agreement is for a three-year term. As compensation under the
agreement, the Company granted warrants to purchase 75,000 shares of common
stock at an exercise price of $4.40 per share, whose total value is
estimated at approximately $110,000.
(2) On September 17 2001, the Company signed a letter of intent to acquire a
privately held company, for consideration consisting of common stock with a
value of approximately $1,000,000. The Company expects to record
intangibles from this transaction of approximately $700,000. There can be
no assurance that such a transaction will be completed.
(3) On September 26, 2001, the Company entered into a consulting agreement for
non-exclusive services related to corporate strategies and other matters.
The agreement is for a six-month term. As compensation under this
agreement, the Company will pay a $2,500 monthly fee, as well as 10,000
shares of common stock and warrants (50,000 and 50,000 at exercise prices
of $4.50 and $5.50, respectively), whose value is estimated at
approximately $115,000.
(4) On October 2, 2001 the Company entered into a letter of intent with regard
to distribution and joint-venture agreements with a privately held company.
In connection with the distribution agreement, which grants exclusive North
American distribution and marketing rights, excluding existing customers
and existing distribution agreements, the Company will acquire 15% of the
privately held company in exchange for 451,807 shares of common stock of
the Company valued at $1,500,000. The Company will grant warrants (100,000,
100,000 and 100,000 at exercise prices of $5.00, $6.00 and $7.00 per share,
respectively) in connection with the distribution agreement valued at
approximately $150,000. In connection with the joint-venture agreement, the
Company would receive, in return for the grant of foreign marketing,
distribution and manufacturing rights, $100,000 and a 45% share of a newly
formed subsidiary of the privately held company.
(5) On October 9, 2001, the Company entered into a consulting agreement for
non-exclusive services related to corporate strategies and other matters.
The agreement is for a six-month term. As compensation under this
agreement, the Company will pay a $2,500 monthly fee, as well as 10,000
shares of common stock and warrants (50,000 and 50,000 at exercise prices
of $4.50 and $5.50, respectively), whose value is estimated at
approximately $79,000.
F-15