______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003
or
( )
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
333-86830 |
(Commission File No.) |
ELECTRIC AQUAGENICS UNLIMITED, INC.
(name of small business issuer in its charter)
Delaware | 87-0654478 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1464 W. 40 S. Suite #200, Lindon, Utah 84042-1629 (Address of principal executive offices) (Zip Code) | |
Issuer’s telephone number: (801) 443-1031 | |
As of August 12, 2003, the Registrant had 3,133,785 shares of Common Stock, $0.0001 par value outstanding.
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Electric Aquagenics Unlimited, Inc.
Balance Sheets
June 30,
December 31,
2003
2002
(unaudited)
ASSETS
Current assets:
Cash
$
343,612
$
29,432
Accounts receivable, less allowance for doubtful
accounts of $1,000 in 2003 and 2002
160,000
25,000
Accounts receivable-related parties
132,455
120,635
Inventories
95,122
158,583
Total current assets
731,189
333,650
Fixed assets:
Computers
$
18,944
$
18,944
Furniture & fixtures
1,390
1,390
Injection Molding
5,000
-
Machinery & equipment
30,455
1,372
Total fixed assets
55,789
21,706
Less accumulated depreciation
(20,180)
(15,480)
Net fixed assets
35,609
6,226
Other assets:
Deposits
$
-
$
2,052
Total other assets
-
2,052
Total assets
$
766,798
$
341,928
(See Notes to Financial Statements)
June 30,
December 31,
2003
2002
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses
$
116,073
$
104,927
Accounts payable-related parties
6,424
10,644
Accrued interest-related party loans
49,567
34,097
Short-term notes
45,700
45,700
Short-term notes-related parties
41,200
26,200
Convertible bridge loans-other
50,000
50,000
Convertible bridge loans- related parties
236,000
236,000
Current portion of long-term debt
6,100
4,704
Total current liabilities
551,064
512,272
Long-term debt:
Notes payable-less current portion
$
136,872
$
140,100
Stockholders equity (deficit):
Common stock, par value $ .0001 per share;
50,000,000 authorized shares; 3,133,785 and 2,810,535
shares issued and outstanding, respectively
$
313
$
281
Additional paid in capital
1,581,853
1,019,930
Retained earnings (deficit)
(1,503,304)
(1,330,655)
Total stockholders’ equity (deficit)
78,862
(310,444)
Total liabilities and stockholders’ equity (deficit)
$
766,798
$
341,928
(See Notes to Financial Statements)
Electric Aquagenics Unlimited, Inc.
Statement of Operations
Six Months Ended
Three Months Ended
June 30,
June 30,
2003
2002
2003
2002
(unaudited)
(unaudited)
Revenues
Regular sales
$
200,000
$
95,000
$
100,000
$
95,000
Cost of goods sold
(63,461)
(35,418)
(32,349)
(35,418)
Gross Profit
136,539
59,582
67,651
59,582
Other Expenses
Other general and administrative
116,454
76,554
80,928
56,659
Advertising
7,028
10,419
-
5,419
Management, legal and consulting fees paid
to affiliates or shareholders
98,867
40,488
71,375
26,690
Research and development
32,845
128,866
25,932
63,791
Depreciation
4,700
3,060
2,600
1,530
Rents- related party
15,655
7,000
10,707
4,000
Total other expenses
275,549
266,387
191,542
158,089
Net operating loss
(139,010)
(206,805)
(123,891)
(98,507)
Other income (expense)
Interest expense - related party
(15,470)
(116,256)
(7,735)
(57,176)
Interest expense- other
(19,154)
(31,640)
(8,593)
(31,640)
Interest income
985
-
985
-
Net loss before income taxes
(172,649)
(354,701)
(139,234)
(187,323)
Income tax (expense) benefit
-
-
-
-
Net loss
$
(172,649)
$
(354,701)
$
(139,234)
$
(187,323)
Net loss per share
$
(.06)
$
(.13)
$
(.05)
$
(.07)
Weighted average shares outstanding
2,864,410
2,634,702
2,918,255
2,599,535
(See Notes to Financial Statements)
Electric Aquagenics Unlimited, Inc.
Statements of Changes in Stockholders’ Equity (Deficit) (unaudited)
Additional
Common Stock
Paid in
Retained
Shares
Amount
Capital
Earnings (deficit)
Total
Balance at January 1, 2002
2,599,535
$
260
$
935,740
$
(656,730)
$
279,270
Exercise of Common Stock
warrants
211,000
21
190
-
211
Detachable warrants issued
for bridge loan-related party
-
-
14,000
-
14,000
Detachable warrants issued
with convertible debt
-
-
28,000
-
28,000
Issuance of debt with beneficial
conversion feature-related party
-
-
14,000
-
14,000
Issuance of debt with beneficial
conversion feature
-
-
28,000
-
28,000
Net loss - December 31, 2002
-
-
-
(673,925)
(673,925)
Balance at December 31, 2002
2,810,535
281
1,019,930
(1,330,655)
(310,444)
Net proceeds from issuance of
common stock
323,250
32
561,923
-
561,955
Net loss – June 30, 2003
-
-
-
(172,649)
(172,649)
Balance at June 30, 2003
3,133,785
$
313
$
1,503,304
$
(1,503,304)
$
(78,862)
(See Notes to Financial Statements)
Electric Aquagenics Unlimited, Inc.
Statements of Cash Flows
For the Six Months Ended
June 30,
2003
2002
(unaudited)
Operating activities
Net loss
$
(172,649)
$
(354,701)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation
4,700
3,060
Allowance for doubtful accounts
-
-
Amortization of debt discount (interest)
-
147,896
Changes in operating assets and liabilities:
Accounts receivable
(135,000)
(50,000)
Accounts receivable-related parties
(11,820)
(34,900)
Inventories
63,461
35,418
Other assets
2,052
6,000
Accounts payable and accrued expenses
11,146
32,786
Accounts payable-related parties
(4,220)
(3,518)
Accrued interest-related party loans
15,470
-
Net cash used in operating activities
(226,860)
(217,959)
Investing activities
Purchase of property, plant and equipment
(34,083)
-
Net cash used in investing activities
(34,083)
-
Financing activities
Proceeds from short-term notes-related parties
15,000
25,000
Proceeds from (payments on) short-term notes and
convertible debentures
(1,832)
121,400
Issuance of common stock for cash
561,955
211
Net cash provided by financing activities
535,123
146,611
Net increase (decrease) in cash
314,180
(71,348)
Cash at beginning of period
29,432
105,330
Cash at end of period
$
343,612
$
33,982
Supplemental disclosures:
Detachable warrants issued with
convertible loans
$
-
$
42,000
Interest paid in cash
$
13,868
$
-
(See Notes to Financial Statements)
Electric Aquagenics Unlimited, Inc.
Notes to Condensed Financial Statements (unaudited)
June 30, 2003 and 2002
1.
Presentation
The financial statements as of June 30, 2003 and 2002 and for the three and six months then ended were prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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 condensed or omitted pursuant to such rules and regulations. In the opinion of management, all necessary adjustments, which consist primarily of normal recurring adjustments, to the financial statements have been made to present fairly the financial position and results of operations and cash flows. The results of operations for the respective periods presented are not necessarily indicative of the results for the respective complete years. The Com pany has previously filed with the SEC an annual report on Form 10-KSB which included audited financial statements for the year ended December 31, 2002. It is suggested that the financial statements contained in this filing be read in conjunction with the statements and notes thereto contained in the Company’s 10-KSB filing.
2.
Net income per common share
Net income per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options and warrants are considered to be common stock equivalents.
Basic net loss per common share is the amount of net loss for the period available to each share of common stock outstanding during the reporting period. Diluted net loss per common share is the amount of net loss for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.
No changes in the computation of diluted earnings per share amounts are presented since warrants granted would have been anti-dilutive due to the Company’s net reported loss. Such warrants could potentially dilute basic EPS in the future.
3.
Public Offering
During the Company’s most recent reporting period ended June 30, 2003, the Company has issued 323,250 shares of its common stock in a registered offering of up to 1,000,000 shares at $2.00 per share. The registered offering required that all money raised be held in an escrow account until such time as a minimum of $400,000 had been raised. In June 2003, the Company successfully raised more than $400,000 and began using the proceeds in operations. Of the total proceeds raised of $646,500 through June 30, 2003, $84,545 was used to pay commissions and other costs of raising capital for net proceeds of $561,955. The offering is still open and additional shares may be issued.
Item 2.
Management's Discussion and Analysis or Plan of Operation
We are an early stage company that designs, develops and manufactures equipment that uses water electrolysis to create fluids that sanitize and clean surfaces in a wide array of industries and applications. We also intend to develop and market electrolyzed fluid products generated by this equipment. We have documented test results in the food processing, mold remediation and carpet cleaning industries demonstrating unprecedented pathogen killing effectiveness of the electrolyzed fluid generated by our equipment. We have identified 6 industries for early stage focus. Phase one will consist of (a) carpet cleaning, (b) mold remediation, and (c) consumer products. Phase two will primarily target (a) poultry processors, (b) beef processors, and (c) fruits and vegetables.
We currently generate modest revenues by selling or leasing our commercial units through one of our affiliates, H20 Aqua Care Franchising Systems, Inc. (AquaCare). Over the last 18 months the company has also been working with a restoration company, AquaSafe Enviro Recovery, Inc. (AER) that has been granted an exclusive license for use of the fluid technology in the mold remediation industry. The fluid, Primacide A, was approved by the EPA in December, 2002 for use on both food and non-food surfaces. AER has documented actual on-site mold remediation jobs using Primacide A that have shown dramatic results in solving mold contaminations in homes and commercial buildings. Provisional utility patents have been filed both in the carpet cleaning and mold remediation applications.
We are also in early discussions to provide our products to various consumer product companies. Products such as a hand sanitizer, baby wipes, feminine hygiene wipes, mouth wash, baby changing station disinfectant, unique hydrating drinking water and several other products could potentially use the electrolyzed fluid generated by our equipment. These products using our electrolyzed fluid will be unique in providing both a non-toxic and antimicrobial process and results.
We also continue to perform testing in the poultry and beef packaging industries in conjunction with the University of Georgia, Athens. Further tests will soon be started at Colorado State University for a major beef processing company in the Mid-West. We are also in the process of testing our products to wash and disinfect fruits and vegetables. Extensive testing has already been performed using our electrolyzed fluids on fruits and vegetables to extend the life of these perishables by safely and effectively reducing the mold and fungus counts that decay and destroy fruits and vegetables.
We have organized pilot test programs underway in processing plants in four industries; i.e. poultry processing, beef processing, mold remediation and fruit and vegetable processing. Revenues in these second tier industries are expected to begin in the fourth quarter of 2003.
On September 13, 2002, we received an FDA approval letter designating its fluids as generally regarded as safe (GRAS) for all foods and food contact surfaces and equipment. It further states that the approval applies to other products that are already approved for hypochlorous acid application, including beef, pork, eggs etc. This inclusion was granted under 21 CFR 173, 178, 182, 184, 198 and 40 CFR 180. The fluid was approved in December 2002 by the EPA and USDA as well as the National Organic Program.
The Company recently concluded cytotoxicity and ISO skin sensitivity and vaginal irritation tests on mucosal membrane at NAMSA, (National Administration of Medical Science Association) Irvine, California to support the Company’s claims for the fluids to be used as consumer safe products such as hand and body wipes, baby wipes, mouth wash and for skin treatment. The NAMSA tests show no toxicity for these products.
Results of Operations
The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements.
Selected Financial Information
Three months ended | Six Months ended | ||
June 30, | June 30, |
2003 | 2002 | 2003 | 2002 | |||||
Revenue, net | $ | 100,000 | 95,000 | 200,000 | 95,000 | |||
Gross profit (loss) | 67,651 | 59,582 | 136,539 | 59,582 | ||||
Operating expenses | 191,542 | 158,089 | 275,549 | 266,387 | ||||
Other income (expense) | (15,343) | (88,816) | (33,639) | (147,896) | ||||
Net loss | (139,234) | (187,323) | (172,649) | (354,701) |
June 30, 2003 | December 31, 2002 | ||||
Balance Sheet Data: | |||||
Cash and Cash Equivalents | $ | 343,612 | $ | 29,432 | |
Total Current Assets | 731,189 | 333,650 | |||
Total Assets | 766,798 | 341,928 | |||
Total Current Liabilities | 551,064 | 512,272 | |||
Long Term Debt | 136,872 | 140,100 | |||
Total stockholders’ equity | 78,862 | (310,444) | |||
Discussion
From 2002 to 2003 revenue has been fairly level, averaging approximately $100,000 per quarter. We have recently formalized our licensing arrangements for our products in the carpet cleaning and mold remediation industries. That will allow our licensees in those industries to begin to grow, which will, in turn, lead to an increase in our anticipated revenue.
We have just recently formalized our licensing arrangement for the use of our products by H2O AquaCare Franchising Systems (“AquaCare”) in the carpet cleaning industry. AquaCare is a start-up franchisor that is still primarily in the planning and pre-marketing stage. It is now completing its marketing plan, and is in the process of registering with the various states to sell franchises. Consequently, there are only a few AquaCare franchises in operation that use our products.
The majority of our revenue during the last two years has been from the sale of our products to the few existing AquaCare franchisees. AquaCare anticipates a dramatic growth in the number of carpet cleaning franchises it will sell during the next couple years. This growth is expected to begin during the third and fourth quarters of 2003. Since each AquaCare franchisee will be required to purchase our products, the anticipated growth in the number of AquaCare franchisees should translate directly into revenue growth for the Company.
We have also recently formalized a licensing arrangement withAquaEnviro Recovery, LLC (“AER”), one of our affiliates that is involved in the mold remediation industry. We have done significant testing of our products to eliminate and prevent the growth of mold. The test results have confirmed that our products are very effective in eliminating existing mold and in treating confined areas to prevent the growth of mold in the future. The safety of our products from environmental and health standpoints makes them exceptionally well suited for use in mold remediation. AER is also a start-up company, and we anticipate that its growth over the next few years will significantly contribute to our revenues.
In addition, we expect revenues from the sale of disinfectant products to commence later in 2003 or early in 2004. The disinfectant products are initially being targeted to businesses in the meat packaging industry that require chemicals to disinfect their meat products and processing facilities. We have not yet fully developed our disinfectant products, nor have we completed any packaging designs for such products.
Cost of goods sold as a percentage of revenues during the three months ended June 30, 2003 was 32.3%, compared to 37.3% for the same period in 2002. The reduction in cost of sales as a percentage of revenues is a result of increased efficiencies and improved vendor selection. However, because of increased product development expenses, travel expenses and the costs incurred in our on-going public sale of common stock, our operating expenses increased 21.2% from the second quarter of 2002 to the second quarter of 2003, from $158,089 to $191,542.
The increase in operating expenses during the three months ended June 30, 2003 as compared to the three months ended June 30, 2002 was offset by an 82.7% reduction in other expenses. Other expenses, which includes primarily interest expense, decreased from $88,816 for the three months ended June 30, 2002 to $15,343 for the same period in 2003. Our net loss for the second quarter of 2003 was $139,234, which represents a 25.7% reduction from the $187,323 net loss for the second quarter of 2002.
Liquidity And Capital Resources
At June 30, 2003, we had cash and cash equivalents of $343,612, compared to $29,432 at December 31, 2002, an increase of 1,067%. Our accounts receivable from unrelated parties increased 540% from December 31, 2002 to June 30, 2003, from $25,000 to $160,000, and our total assets increased 124.3%, from $341,928 to $766,798, in the six months between December 31, 2002 and June 30, 2003. During that same period, our total current liabilities increased 7.6%, from $512,272 at December 31, 2002 to $551,064 at June 30, 2003.
We are currently attempting to raise $2,000,000 through a registered offering of 1,000,000 shares of our common stock. As of June 30, 2003, investors had subscribed for a total of 323,250 shares at $2.00 per share, for total gross proceeds of $646,500. Out of the gross proceeds, $84,545 was paid as costs related to the offering, resulting in net offering proceeds to the Company of $561,955. Proceeds from the registered offering should be sufficient to fund our continuing operations at their current level through the remainder of 2003. Management recognizes that additional funding will be required to finance growth and to achieve our strategic objectives. Management is actively pursuing additional sources of funding. In addition, management is expecting an increase in cash flows through anticipated increases in revenue.
If we do not raise sufficient funds, we may not be able to fund expansion, take advantage of future opportunities, meet our existing debt obligations or respond to competitive pressures or unanticipated requirements. Financing transactions in the future may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, inability to establish a public market for our common stock, or once we have a market for our common stock, a subsequent decline in the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult for us to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.
All forward-looking statements contained herein are deemed by the Company to be covered by and to qualify for the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. 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 on 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.
Item 3. Controls and Procedures
Within the ninety (90) day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance tha t any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
PART II – OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K
(a)
Exhibits.
EX 31.1 and EX 32.1 Certifications of Chief Executive Officer and Chief Financial Officer
(b)
Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on August 18, 2003.
ELECTRIC AQUAGENICS UNLIMITED, INC.
By: /s/ Gaylord M. Karren_____
Gaylord M. Karren
Chief Executive Officer
Principal Executive Officer and
Principal Financial Officer
