UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
ý | QUARTERLY REPORT FILED UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
o | TRANSITIONAL REPORT FILED UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT. |
Commission File No. 0-32863
EESTech, Inc.
(Exact name of small business issuer in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 33-0922627 (I.R.S. Employer Identification Number) |
23011 Moulton Parkway A-10, Laguna Hills, California 92653
(Address of principal executive offices)
(949) 380-4033
(Issuer's telephone number)
Former address and telephone number
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) been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
The number of shares outstanding of the registrant’s common stock, $0.001 par value per share, was 18,277,393 at May 10, 2007.
Transitional Small Business Disclosure Format (check one): Yes o No x
TABLE OF CONTENTS
Page | ||||
PART I FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | ||||
Consolidated Balance Sheets | 3 | |||
Consolidated Statements of Operations | 4 | |||
Consolidated Statements of Stockholders' Equity (Deficit) | 5 | |||
Consolidated Statements of Cash Flows | 7 | |||
Notes to Consolidated Financial Statements | 8 | |||
Item 2. Management's Discussion and Analysis or Plan of Operation | 10 | |||
Item 3. Controls and Procedures | 13 | |||
PART II OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 14 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 14 | |||
Item 3. Defaults Upon Senior Securities | 14 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 14 | |||
Item 5. Other Information | 14 | |||
Item 6. Exhibits | 14 | |||
SIGNATURES | 15 |
2
EESTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 | DECEMBER 31, 2006 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash | $ | 78,240 | $ | 5,517 | |||
Prepaid expenses | 95,222 | 25,375 | |||||
Other receivables | --- | 22,011 | |||||
Total Current Assets | 173,462 | 52,903 | |||||
Property and equipment, net of depreciation | 56,475 | 58,253 | |||||
Intellectual property, net of amortization | 27,690 | 2,687 | |||||
Total Assets | $ | 257,627 | $ | 113,843 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 199,559 | $ | 58,134 | |||
Accrues expenses | 23,510 | 13,228 | |||||
Payroll and payroll taxes payable | 23,650 | 22,210 | |||||
Shareholder loans | 394,329 | 230,723 | |||||
Note payable | 24,326 | 22,513 | |||||
Deferred lease | 38,020 | 46,703 | |||||
Total Current Liabilities | $ | 703,394 | $ | 393,511 | |||
Stockholders' Equity (Deficit): | |||||||
Common stock, $0.001 par value, 20,000,000 shares authorized; | |||||||
18,277,393 and 17,995,428 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively | 18,278 | 17,996 | |||||
Additional paid-in capital | 11,985,022 | 11,863,241 | |||||
Deficit accumulated during development stage | (12,459,422 | ) | (12,197,526 | ) | |||
Accumulated other comprehensive income | 10,355 | 36,621 | |||||
Total Stockholders' Equity (Deficit) | (445,767 | ) | (279,668 | ) | |||
Total Liabilities and Stockholders' Equity (Deficit) | $ | 257,627 | $ | 113,843 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
EESTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, | CUMULATIVE AMOUNTS FROM APRIL 26, 2000 TO MARCH 31, 2007 | |||||||||
2007 | 2006 | |||||||||
Operating Expenses: | ||||||||||
General and administrative | $ | 262,441 | $ | 322,045 | $ | 6,434,107 | ||||
Research and development | — | — | 1,200,466 | |||||||
Impairment loss on intellectual property | — | — | 4,836,373 | |||||||
Total Operating Expenses | 262,441 | 322,045 | 12,470,946 | |||||||
Loss from operations | (262,441 | ) | (322,045 | ) | (12,470,946 | ) | ||||
Other income (expense) | ||||||||||
Interest income | 545 | 124 | 35,558 | |||||||
Interest expense | — | — | (4,165 | ) | ||||||
Gain (loss) on disposition of assets | — | 15,210 | (18,700 | ) | ||||||
Provision for taxes | — | (294 | ) | (1,169 | ) | |||||
Net loss | $ | (261,896 | ) | $ | (307,005 | ) | $ | (12,459,422 | ) | |
Loss per share | $ | (0.01 | ) | $ | (0.02 | ) | ||||
Weighted average number of common shares outstanding | 18,154,674 | 14,711,967 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
EESTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock | ||||||||||||||||||||||
Shares issued Par | Par Value $0.001 | Additional paid-in capital | Shares subscribed | Deficit accumulated during development stage | Comprehensive income | Total Stockholders' equity (deficit) | ||||||||||||||||
Balance at inception- April 26, 2000 | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Issuance of stock for | ||||||||||||||||||||||
intellectual property | 4,000,000 | 4,000 | — | — | — | — | 4,000 | |||||||||||||||
Issuance of stock to directors | 650,000 | 650 | — | — | — | — | 650 | |||||||||||||||
Net loss | — | — | — | — | (18,973 | ) | — | (18,973 | ) | |||||||||||||
Balance December 31, 2000 | 4,650,000 | 4,650 | — | — | (18,973 | ) | — | (14,323 | ) | |||||||||||||
Issuance of stock for cash | 997,000 | 997 | 996,003 | — | — | — | 997,000 | |||||||||||||||
Issuance of stock for | ||||||||||||||||||||||
intellectual property | 1,000,000 | 1,000 | 999,000 | — | — | — | 1,000,000 | |||||||||||||||
Net loss | — | — | — | — | (1,638,743 | ) | — | (1,638,743 | ) | |||||||||||||
Balance December 31, 2001 | 6,647,000 | 6,647 | 1,995,003 | — | (1,657,716 | ) | — | 343,934 | ||||||||||||||
Issuance of stock for cash | 585,000 | 585 | 584,415 | — | — | — | 585,000 | |||||||||||||||
Net loss | — | — | — | — | (662,710 | ) | — | (662,710 | ) | |||||||||||||
Balance December 31, 2002 | 7,232,000 | 7,232 | 2,579,418 | — | (2,320,426 | ) | — | 266,224 | ||||||||||||||
Issuance of stock for cash | 583,985 | 584 | 875,470 | — | — | — | 876,054 | |||||||||||||||
Issuance of stock for services | 50,000 | 50 | 189,950 | — | — | — | 190,000 | |||||||||||||||
Common stock subscribed | — | — | — | 44,097 | — | — | 44,097 | |||||||||||||||
Net loss | — | — | — | — | (1,106,906 | ) | — | (1,106,906 | ) | |||||||||||||
Adjust for foreign | ||||||||||||||||||||||
currency translation | — | — | — | — | — | 23,637 | 23,637 | |||||||||||||||
Comprehensive loss | — | — | — | — | — | — | (1,083,269 | ) | ||||||||||||||
Balance December 31, 2003 | 7,865,985 | 7,866 | 3,644,838 | 44,097 | (3,427,332 | ) | 23,637 | 293,106 | ||||||||||||||
Issuance of stock for | ||||||||||||||||||||||
intellectual property | 1,000,000 | 1,000 | 3,299,000 | — | — | — | 3,300,000 | |||||||||||||||
Stock subscribed issued | 29,398 | 29 | 44,068 | (44,097 | ) | — | — | — | ||||||||||||||
Issuance of stock for cash | 978,370 | 978 | 616,149 | — | — | — | 617,127 | |||||||||||||||
Issuance of stock for services | 30,000 | 30 | 37,470 | — | — | — | 37,500 | |||||||||||||||
Common stock subscribed | — | — | — | 890,230 | — | — | 890,230 | |||||||||||||||
Net loss | — | — | — | — | (5,159,117 | ) | — | (5,159,117 | ) | |||||||||||||
Adjustment for foreign | ||||||||||||||||||||||
currency translation | — | — | — | — | — | 135,903 | 135,903 | |||||||||||||||
Comprehensive loss | — | — | — | — | — | — | (5,023,214 | ) | ||||||||||||||
Balance December 31, 2004 | 9,903,753 | 9,903 | 7,641,525 | 890,230 | (8,586,449 | ) | 159,540 | 114,749 | ||||||||||||||
Issuance of stock for cash | 3,845,638 | 3,845 | 1,853,673 | (890,230 | ) | — | — | 967,288 | ||||||||||||||
Issuance of stock for note | 588,235 | 588 | 299,412 | — | — | — | 300,000 | |||||||||||||||
Issuance of stock for services | 78,784 | 79 | 97,759 | — | — | — | 97,838 | |||||||||||||||
Common stock subscribed | ||||||||||||||||||||||
(62,500 shares) | — | — | — | 50,000 | — | — | 50,000 | |||||||||||||||
Net loss | — | — | — | — | (1,737,846 | ) | — | (1,737,846 | ) |
5
Common Stock | ||||||||||||||||||||||
Shares issued Par | Par Value $0.001 | Additional paid-in capital | Shares subscribed | Deficit accumulated during development stage | Comprehensive income | Total Stockholders' equity (deficit) | ||||||||||||||||
Adjustment for foreign | ||||||||||||||||||||||
currency translation | — | — | — | — | — | (148,541 | ) | (148,541 | ) | |||||||||||||
Comprehensive loss | — | — | — | — | — | — | (1,886,387 | ) | ||||||||||||||
Balance December 31, 2005 | 14,416,410 | 14,415 | 9,892,369 | 50,000 | (10,324,295 | ) | 10,999 | (356,512 | ) | |||||||||||||
Issuance of stock for cash | 2,192,691 | 2,194 | 934,629 | (50,000 | ) | — | — | 886,823 | ||||||||||||||
Issuance of stock for acquisition of Methgen Inc | 763,700 | 764 | 495,641 | — | — | — | 496,405 | |||||||||||||||
Issuance of stock for services | 622,627 | 623 | 540,602 | — | — | — | 541,225 | |||||||||||||||
Net loss | — | — | — | — | (1,873,231 | ) | — | (1,873,231 | ) | |||||||||||||
Adjustment for foreign currency | ||||||||||||||||||||||
translation | — | — | — | — | — | 25,622 | 25,622 | |||||||||||||||
Comprehensive loss | — | — | — | — | — | — | (1,847,609 | ) | ||||||||||||||
Balance December 31, 2006 | 17,995,428 | 17,996 | 11,863,241 | — | (12,197,526 | ) | 36,621 | (279,668 | ) | |||||||||||||
Issuance of stock for cash | 250,000 | 250 | 99,750 | — | — | — | 100,000 | |||||||||||||||
Issuance of stock for services | 31,965 | 32 | 22,031 | — | — | — | 22,063 | |||||||||||||||
Net Loss | — | — | — | — | (261,896 | ) | — | (261,896 | ) | |||||||||||||
Adjustment for foreign currency translation | — | — | — | — | — | (26,266 | ) | (26,266 | ) | |||||||||||||
Comprehensive Loss | — | — | — | — | — | — | (288,162 | ) | ||||||||||||||
Balance March 31, 2007 (unaudited) | 18,277,393 | $ | 18,278 | $ | 11,985,022 | — | $ | (12,459,422 | ) | $ | 10,355 | $ | (445,767 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
EESTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, | CUMULATIVE AMOUNTS FROM INCEPTION (APRIL 26, 2000) THROUGH MARCH 31, | |||||||||
2007 | 2006 | 2007 | ||||||||
Cash flows from operating activities: | ||||||||||
Net loss | $ | (261,896 | ) | $ | (307,005 | ) | $ | (12,459,422 | ) | |
Adjustments to reconcile net loss to net cash | ||||||||||
used in operating activities: | ||||||||||
Amortization and depreciation | 3,712 | 3,532 | 51,332 | |||||||
Impairment of intellectual property | — | — | 4,836,373 | |||||||
Shares issued for services | 22,063 | 140,170 | 889,276 | |||||||
Disposition of property | — | — | 18,700 | |||||||
Changes in assets and liabilities: | ||||||||||
Decrease (increase) in prepaid expenses | (67,244 | ) | 9,150 | (95,222 | ) | |||||
Decrease in other receivables | 22,011 | — | — | |||||||
Increase (decrease) in accounts payable | 135,995 | (60,497 | ) | 194,129 | ||||||
Accrued liabilities | — | 13,228 | ||||||||
Increase (decrease) in accrued payroll taxes | 9,506 | (7,055 | ) | 31,716 | ||||||
Net cash used in operations | (135,747 | ) | (221,705 | ) | (6,519,279 | ) | ||||
Cash flows used by investing activities: | ||||||||||
Acquisition of fixed assets | — | — | (123,260 | ) | ||||||
Acquisition of intangible asset- license | (7,500 | ) | — | (7,500 | ) | |||||
Net cash used in investing activities | (7,500 | ) | — | (130,760 | ) | |||||
Cash flows from financing activities: | ||||||||||
Issuance of common stock | 100,000 | 155,964 | 6,313,619 | |||||||
Loan from shareholder | 114,226 | (3,582 | ) | 367,462 | ||||||
Deferred lease | — | — | 46,703 | |||||||
Overdraft | — | 4,233 | — | |||||||
Net cash from financing activities | 214,226 | 156,615 | 6,727,784 | |||||||
Effects of foreign currency translation on cash | 1,744 | 63,262 | 495 | |||||||
Net increase (decrease) in cash | 72,723 | (1,828 | ) | 78,240 | ||||||
Cash, beginning of period | 5,517 | 1,828 | — | |||||||
Cash, end of period | $ | 78,240 | $ | — | $ | 78,240 | ||||
Supplemental Disclosure of non-cash | ||||||||||
Investing and financing activities: | ||||||||||
Issuance of stock for intellectual property | $ | — | $ | — | $ | 4,836,373 | ||||
Issuance of stock for services | $ | 22,063 | $ | 140,170 | $ | 889,276 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
EESTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
AND CUMULATIVE FROM INCEPTION APRIL 26, 2000 TO MARCH 31, 2007
(UNAUDITED)
1. INTERIM FINANCIAL INFORMATION
The consolidated financial statements of EESTech, Inc. (the “Company”), and its wholly-owned subsidiaries EESTech Australia Pty Ltd., Methgen, Inc. and Methgen Limited, as of March 31, 2007 and related footnote information are unaudited. All adjustments (consisting only of normal recurring adjustments) have been made which, in the opinion of management, are necessary for a fair presentation. Results of operations for the three months ended March 31, 2007 and 2006 are not necessarily indicative of the results that may be expected for any future period. The balance sheet at December 31, 2006 was derived from audited financial statements.
The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United Sates for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes for the fiscal year ended December 31, 2006 included in the Company's Annual Report on Form 10-KSB.
2. ISSUE OF COMMON STOCK FOR INTELLECTUAL PROPERTY
The Company acquired the JetWater System in its final stages of prototype development from Global Power & Water, Inc. (“Global”) in fiscal year 2000 in exchange for issuance to Global of 6,000,000 shares of common stock. 4,000,000 shares of the Company’s common stock were issued on the date of such acquisition, 1,000,000 shares were issued following the successful testing of the system and another 1,000,000 shares are to be issued upon the successful demonstration that the JetWater System is ready for large scale production and deployment in commercial operations.
During the fiscal year ended December 31, 2004, the Company issued 1,000,000 shares of common stock in payment for the intellectual property of the JetWater System. Since the fair market value of the stock on the date issued was $3.30, the Company was required to value the intellectual property acquired at $3,300,000 and the Company was not able to substantiate that it would be able to realize revenues to recover the investment. Therefore, the Company was required to recognize an impairment of long-lived asset of $3,300,000.
3. SHARE BASED PAYMENTS
Prior to January 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method supplemented by pro forma disclosures in accordance with APB 25 and SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Under the intrinsic value method, the Company has recognized stock-based compensation common stock on the date of grant.
Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective approach; accordingly, prior periods have not been restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted prior to its adoption will be expensed over the remaining portion of their vesting period. These awards will be expensed under the straight line amortization method using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS 123. For stock-based awards granted on or after January 1, 2006, the Company will amortize stock-based compensation expense on a straight-line basis over the requisite service period, which is generally a five-year vesting period.
8
SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the quarter ended March 31, 2006 such that expense was recorded only for those stock-based awards that are expected to vest. Previously under APB 25, to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture.
If the fair value based method under SFAS 123 had been applied in measuring stock-based compensation expense for the quarter ended March 31, 2005, there would still have been no compensation expense recorded, thus the pro-forma net loss and pro-forma basic and diluted loss per share will equal the amounts as reported.
4. SEGMENTED INFORMATION
The Company’s marketing and research and development activity is administered in two operating segments: United States and Australia.
United States | Australia | |||||||||
Net Loss, three months ended March 31, | 2007 | $ | 114,529 | $ | 147,367 | |||||
2006 | $ | 159,946 | $ | 147,059 | ||||||
Long-lived assets (net) March 31, | 2007 | $ | — | $ | 56,475 | |||||
2006 | $ | — | $ | 30,607 |
5. SHAREHOLDER LOANS
During the fiscal year ended December 31, 2005, the Company converted a shareholder loan of $300,000 into shares of the Company’s common stock. The conversion ratio was the principal balance of the loan divided by the current market price of the Company’s common stock on the conversion date.
During the fiscal year ended December 31, 2005, additional shareholder loans were received in the amount of $245,249. The loans bear no interest and are due on demand.
During the quarter ended March 31, 2007, additional shareholder loans were received in the amount of $163,606. These loans bear no interest and are due on demand.
6. NOTES PAYABLE
During the fiscal year ended December 31, 2006, an amount of $22,513 was received and the Company issued a note. The note does not bear any interest and is due on demand.
7. EQUITY TRANSACTIONS
Please see the information contained in Item 2 on page 14.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In October 2006, the Emerging Issues Task Force (“Task Force”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation)” to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006 (the first quarter of the Company’s fiscal year 2007). The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects on each of the company’s balance sheets, statements of operations and related financial statement disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employer’s accounting for Defined Benefit Pension and Other Post Retirement Plans.” SFAS No. 158 requires employers to recognize in its statement of financial position an asset or liability based on the retirement plan’s over or under funded status. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Issues No. 157, “Fair Value Measurements” (“SFAS 157”), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that the Company has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. The Company does not believe that this pronouncement will have impact or effect on the Company’s financial statements.
9. GOING CONCERN
The accompanying financial statements, which have been prepared in conformity with accounting principles generally accepted by the United States of America, contemplates the continuation of the Company as a going concern. However, the Company has been in the development stage sine its inception (April 26, 2000), sustained significant losses and has used capital raised through the issuance of stock to fund its activities. Continuation of the Company as a going concern is contingent upon establishing and achieving profitable operations. Such operations will require management to secure additional financing for the Company in the form of debt or equity.
Management believes that actions currently being taken to satisfy the Company’s funding requirements will allow the Company to continue its development stage operations. However, there is no assurance that the necessary funds will be realized by securing debt or through stock offerings.
9
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
All forward-looking statements contained herein are deemed by the Company to be covered by and to quality for the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "project," "expect," "believe," "estimate," "anticipate," "intends," "continue", "potential," "opportunity" or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Shareholders and prospective shareholders should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based upon actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. See the Company's Annual Report on Form 10-KSB for fiscal year ended December 31, 2006 for a description of certain of the known risks and uncertainties of the Company.
Company Overview
EESTech, Inc. is in the business of providing solutions utilizing Economically and Environmentally Sustainable Technologies, or EEST. The Company does not manufacture or fabricate any products. The Company’s core business model is to provide engineering advice for solution solving, including the identification of appropriate equipment. The Company may identify the appropriate equipment through its own products, other compatible products from direct purchase, licenses, alliances with other companies, design customization, engagement of suppliers and management of quality assurance, sales of selected primary and secondary equipment and the management and appointment of professionals involved in the construction and project management function.
The Company primarily generates revenue through the engagement of suppliers and management of quality assurance for each project, selling selected primary and secondary equipment for each project, managing the appointment of professionals involved in the construction and project management, providing engineering expertise for commissioning of projects and management of “after sales” services.
Recent Acquisitions
Methgen, Inc.
On July 3, 2006, the Company completed the acquisition of Methgen Inc. (“Methgen”) by acquiring 100% of the issued and outstanding shares of common stock of Methgen. Pursuant to the transaction, the Company issued 763,700 shares of its common stock to eight shareholders of Methgen. In exchange, the Company received 763,700 shares of common stock of Methgen. Methgen holds a license for the marketing and production rights to the Hybrid Coal Gas Turbine (HCGT) intellectual property in the United States.
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Liquatech Pty Ltd.
On July 3, 2006, the Company entered into a Share Sale Agreement with Global Power and Water, Inc. and Liquatech Pty Ltd. and a Share Sale Agreement with Gregory Paxton and Liquatech Pty Ltd. Under the agreements, the Company will acquire a 58% interest in Liquatech Pty Ltd. In accordance with the terms and conditions of the agreements, the Company will issue 999,268 shares of its common stock to Greg Paxton, a consultant to the Company’s Research & Development Division, and 552 shares of its common stock to Global Power and Water, Inc. In exchange, the Company will receive 999,820 shares of common stock of Liquatech Pty Ltd. The Company expects to complete the transaction in the second quarter of 2007.
Liquatech Pty Ltd. is a holding company that operates its business through its wholly-owned subsidiary, Liquatech Turbine Pty Ltd. Liquatech Turbine Pty Ltd. and the Australian Government Research Agency Commonwealth Scientific and Industrial Research Organization each own 50% of a joint venture known as ComEnergy Pty Ltd. ComEnergy Pty Ltd. holds the exclusive international marketing and production rights to the HCGT intellectual property.
The HCGT technology involves the burning of vented air methane and/or coal mine methane along with waste coal to drive a gas or steam turbine. The technology also enables the burning of a range of biomass products. We believe there are opportunities for synergy between the HCGT technology and the JetWater System by operating as a “closed circuit” to produce electricity and use desalinated ground water for turbine cooling.
Product and Technology Solutions
The Company is currently engaged in promoting the commercialization of its two primary products: the JetWater System, a waste water purification system; and the Hybrid Coal and Gas Turbine, or HCGT, power plant, to markets in Australia, China, South America, the United Arab Emirates and the United States. The JetWater System and the HCGT technology provide two different but compatible benefits, or value propositions, to customers.
JetWater System
The first technology we acquired was the JetWater System, an evaporation-based technology for water purification. The JetWater technology is used for the recovery of near ultra pure quality water (i.e., distilled water) from a range of water and wastewater sources. The JetWater System purifies and desalinates seawater, brackish groundwater, treated sewage effluent and other types of wastewater to produce near ultra-pure quality fresh water. The JetWater System is based on mechanical vapour compression (MVC) technology. The JetWater System seeks to replicate nature’s own water purification process - evaporation and condensation to produce fresh water.
Following the acquisition of the patent rights and complete ownership of this technology, we commenced testing the JetWater System. After completion of the independent testing of the process, we designed, constructed and commissioned a pilot unit with a capacity of 0.5Ml/d. JetWater has been used to demonstrate the technology’s capabilities to potential customers who provide us with samples of their water which requires purification. The feedwater supplied is processed under operational conditions to determine whether the JetWater System can achieve the outcome sought by the potential customer. The JetWater System provides solutions to customers who wish to purify, desalinate or reuse water from a variety of sources. The JetWater System is particularly relevant to environmentally sensitive situations where the client would like to maximize fresh water recovery and minimize the volume of waste water. The JetWater System is based on a modular design. The production capacity of each module is 0.5 ML per day. The total system production capacity can be increased incrementally up to 5ML/d total production capacity, with 0.5, 1.0 and 1.5 ML per day being the most common system configurations. A 0.5 ML/d JetWater System is capable of providing potable water to a community of approximately 2,000 to 3,000 people. The JetWater System uses electrical power as its main energy supply.
Sales of JetWater Systems are expected to be driven by:
• | Tighter environmental regulations governing the disposal of waste water; |
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• | Rising demand for fresh water; |
• | Scarcity of new water supplies; and |
• | Strong political support for water reuse in the United States, Europe and Australia. |
Hybrid Coal and Gas Turbine
The Hybrid Coal and Gas Turbine, or HCGT, can use biomass or a combination of fugitive methane from underground coal mines and waste coal as the fuel source to generate between 5 megawatts and 30 megawatts of electric power, per generating module. A typical system has an operating cost that is competitive with large power stations. The HCGT technology has been developed over the past six years as part of a collaborative environmental research project with the Australian Government’s leading Science and Industry Research Organization and industry groups.
This new technology should significantly reduce the environmental impact of coal mining by lowering fugitive methane emissions from underground mines and reducing acid run-off and gaseous emissions from waste coal stockpiles. At the same time it should deliver potentially significant savings on power and waste coal management costs.
The key features of the HCGT technology are:
• | 5-30 megawatt electrical output; |
• | Utilizes waste products for fuel; |
• | Destroys methane at the sub-combustible concentrations in mine vent air; |
• | Stable operation with variable and low-quality fuels, including biomass; |
• | Based on proven mainstream technology; |
• | Economically viable and sustainable; and |
• | Able to satisfy qualification requirements for greenhouse gas trading schemes. |
Plan of Operations
Currently, there are no signed definitive agreements that will produce revenue and there can be no assurances that management will be successful in negotiating such agreements. The Company believes it is about to execute an electricity supply agreement with Fuxin Coal Group in China that it anticipates will result in the generation of sales revenue during the 2008 fiscal year. The Company is currently negotiating with the Fuxin Coal Group from China, along with another international entity, to build, own and operate an initial 30 megawatt power plant using vented air methane from selected coal mines and their waste coal deposits. The Company currently intends to enter into a long-term (20 year) electrical supply agreement.
Management is pursuing other opportunities for the JetWater System, the HCGT technology and other related technologies that could contribute to revenues at an earlier date.
Management intends to continue its review of all activities of the Company. That process includes: evaluating all professional relationships, engaging an independent advisor in connection with executive compensation, reviewing the Company’s governing documents and all securities law regulatory and compliance issues, preparing the Company’s mission statement and corporate value statement, preparing a code of ethics and assessing the financial requirements of the Company.
Management believes that additional funds will be required to permit product refinement and continue marketing of the JetWater System and the HCGT technology and to meet contractual deliveries.
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Results of Operations
The Company has been in the developmental stage since its inception (April 26,2000).
Net Loss. Our net loss from inception (April 26, 2000) through March 31, 2007 was $12,459,000. Our net loss for the three months ended March 31, 2007 was $262,000, as compared to $307,000 for the three months ended March 31, 2006.
Marketing, General and Administrative Expenses. Our general and administrative expenses from inception (April 26, 2000) through March 31, 2007 were $6,434,000. Our general and administrative expenses for the three months ended March 31, 2007 were $262,000 as compared to $322,000 for the three months ended March 31, 2006. The reduction in expenses of $60,000 is due to the decrease in consulting fees.
Research and Development Expenses. Our research and development expenses from inception (April 26, 2000) until March 31, 2007 were $1,200,000. All costs were related to the process of establishing the technological feasibility of the water purification system and consisted of approximately $697,000 for purchases of material and equipment to develop a prototype of the water purification machine, $400,000 consisted of payments to Global Power and Water, Inc. and $103,000 for payments to external consultants. There were no costs incurred by the Company in relation to the HCGT technology because the Company is a license holder only.
Intellectual Property. The Company had an impairment loss on intellectual property of $4,836,000. There has been no impairment during the quarter ended March 31, 2007.
Liquidity and Capital Resources
The Company had a cash balance of $78,240 at March 31, 2007, as compared to cash of $5,517 at December 31, 2006.
From the inception of the Company through March 31, 2007, net cash used in operations of $6,519,000 and net cash used in investing activities of $131,000 were financed almost entirely by the issuance of shares of common stock in various private placements for a total of $6,314,000 and shareholder loans in the amount of $367,000. Of these totals, $100,000 was raised through the sale of common stock of the Company in the quarter ended March 31, 2007.
Off-Balance Sheet Arrangements
At March 31, 2007, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, have concluded that its disclosure controls and procedures are effective to reasonably ensure that material information required to be disclosed by the Company in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specific by Securities and Exchange Commissions’ rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There were no changes made during our most recently completed fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarterly period ended March 31, 2007, the Company issued shares of its common stock in the following transactions:
Date Issued | Amount | Name | Cash/Services | Description of Transaction | |||||||||
February 8, 2007 | $ | 100,000 | Ms. Monica Bailey | Cash | Private placement with current stockholder | ||||||||
February 8, 2007 | $ | 783 | Muneera Pty Ltd. | Services | Offset of professional fees | ||||||||
February 12, 2007 | $ | 3,500 | Gaylord Beeson | Services | Director compensation | ||||||||
February 12, 2007 | $ | 3,500 | Mr. Murray Bailey | Services | Director compensation | ||||||||
February 12, 2007 | $ | 4,480 | Mr. Stephen Anderson | Services | Offset of professional fees | ||||||||
February 12, 2007 | $ | 9,800 | Ms. Colleen McCafferty | Services | Professional fees for services of Mr. Paul McCafferty |
The common stock in each of transactions described above was issued pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit Number | Description | |
31 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act | |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act |
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SIGNATURES
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.
Date: May 15, 2007 | EESTECH, INC. | |
| | |
By: | /s/ Murray Bailey | |
Name: Murray Bailey | ||
Title: Chief Executive Officer and Chief Financial Officer |
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EXHIBIT INDEX
Description | ||
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act |
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