______________________________________________________________________________
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, 2004
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
(I.R.S. Employer
incorporation or organization)
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, 2004, the Registrant had 6,052,655 shares of Common Stock, $0.0001 par value outstanding.
See Notes to Financial Statements
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Electric Aquagenics Unlimited, Inc.
Balance Sheets
June 30,
December 31,
2004
2003
(unaudited)
ASSETS
Current assets:
Cash
$
801,807
$
593,175
Accounts receivable, less allowance for doubtful
accounts of $1,000 in 2004 and 2003
101,409
100,000
Accounts receivable-related parties
269,677
236,512
Inventories - finished goods
11,123
48,800
Inventories - work in process
108,025
-
Total current assets
1,292,041
978,487
Fixed assets:
Computers
23,043
18,944
Furniture & fixtures
4,898
1,390
Machinery & equipment
47,633
47,633
Vehicles
181,049
-
Total fixed assets
256,623
67,967
Less accumulated depreciation
(39,282)
(26,551)
Net fixed assets
217,341
41,416
Other assets:
Investment in non-marketable securities at cost
50,000
-
Investment in non-marketable securities of equity
method investee
222,500
-
Total other assets
272,500
-
Total assets
$
1,781,882
$
1,019,903
See Notes to Financial Statements
June 30,
December 31,
2004
2003
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
$
58,288
$
140,186
Accounts payable-related parties
-
6,831
Accrued interest-related party loans
7,609
9,623
Short-term notes
3,800
33,700
Short-term notes-related parties
4,500
59,407
Convertible bridge loans- related parties
-
93,423
Convertible bridge loans-other
-
50,000
Current portion of long-term debt
28,887
-
Current portion of long-term debt-related parties
6,516
5,846
Total current liabilities
109,600
399,016
Long-term debt:
Notes payable-less current portion
136,445
-
Notes payable-less current portion-related parties
130,569
133,956
Total long-term debt
267,014
133,956
Stockholders equity:
Common stock, par value $ .0001 per share;
50,000,000 authorized shares; 6,052,655 and 3,810,535
shares issued and outstanding, respectively
605
381
Additional paid in capital
6,087,575
2,688,299
Retained earnings (deficit)
(4,682,912)
(2,201,749)
Total stockholders’ equity
1,405,268
486,931
Total liabilities and stockholders’ equity
$
1,781,882
$
1,019,903
See Notes to Financial Statements
Electric Aquagenics Unlimited, Inc.
Statements of Operations
Six Months Ended
Three Months Ended
June 30,
June 30,
2004
2003
2004
2003
(unaudited)
(unaudited)
Revenues
Regular sales
$
175,000
$
200,000
$
75,000
$
100,000
Cost of goods sold
(56,100)
(63,461)
(22,500)
(32,349)
Gross Profit
118,900
136,539
52,500
67,651
Other Expenses
Other general and administrative
726,950
116,454
523,154
80,928
Advertising
-
7,028
-
-
Management, legal and consulting fees paid
to affiliates or shareholders
1,473,640
98,867
90,000
71,375
Research and development
272,151
32,845
153,790
25,932
Depreciation
12,731
4,700
11,519
2,600
Rents- related party
33,500
15,655
18,500
10,707
Total other expenses
2,518,972
275,549
796,963
191,542
Net operating loss
(2,400,072)
(139,010)
(744,463)
(123,891)
Other income (expense)
Interest expense - related party
(35,071)
(15,470)
-
(7,735)
Interest expense- other
(48,552)
(19,154)
(9,396)
(8,593)
Interest income
2,532
985
2,532
985
Net loss before income taxes
(2,481,163)
(172,649)
(751,327)
(139,234)
Income tax (expense) benefit
-
-
-
-
Net loss
$
(2,481,163)
$
(172,649)
$
(751,327)
$
(139,234)
Net loss per share
$
(.48)
$
(.06)
$
(.13)
$
(.05)
Weighted average shares outstanding
5,177,272
2,864,410
5,960,498
2,918,255
See Notes to Financial Statements
Electric Aquagenics Unlimited, Inc.
Statements of Changes in Stockholders’ Equity (unaudited)
Additional
Common Stock
Paid in
Retained
Shares
Amount
Capital
Earnings (Deficit)
Total
Balance at January 1, 2003
2,810,535
281
1,019,930
(1,330,655)
(310,444)
Common stock issued for cash,
net of offering costs
1,000,000
100
1,739,900
-
1,740,000
Detachable warrants issued for
bridge loan-related parties
-
-
66,562
-
66,562
Detachable warrants issued
for bridge loan-other
-
-
5,984
-
5,984
Return of capital to shareholder
-
-
(55,000)
-
(55,000)
Extinguishment of debt with
beneficial conversion feature
-
-
(89,077)
-
(89,077)
Net loss - December 31, 2003
-
-
-
(871,094)
(871,094)
Balance at December 31, 2003
3,810,535
381
2,688,299
(2,201,749)
486,931
Common stock issued for cash,
net of offering costs
1,000,000
100
1,699,900
-
1,700,000
Common stock issued for
conversion of notes payable
128,630
13
132,698
-
132,711
Common stock issued for
conversion of notes payable-
related parties
28,214
3
49,371
-
49,374
Common stock issued for services
244,250
24
255,851
-
255,875
Common stock issued for
services-related parties
841,026
84
1,261,456
-
1,261,540
Net loss – June 30, 2004
-
-
-
(2,481,163)
(2,481,163)
Balance at June 30, 2004
6,052,655
605
6,087,575
(4,682,912)
1,405,268
See Notes to Financial Statements
Electric Aquagenics Unlimited, Inc.
Statements of Cash Flows
Six Months Ended
June 30,
2004
2003
(unaudited)
Operating activities
Net loss
$
(2,481,163)
$
(172,649)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation
12,731
4,700
Common stock issued for interest
75,985
-
Common stock issued for services
1,517,415
-
Changes in operating assets and liabilities:
Accounts receivable
(1,409)
(135,000)
Accounts receivable-related parties
(33,165)
(11,820)
Inventories
(70,348)
63,461
Other assets
-
2,052
Accounts payable and accrued expenses
(81,898)
11,146
Accounts payable-related parties
(6,831)
(4,220)
Accrued interest-related party loans
(2,014)
15,470
Net cash used in operating activities
(1,070,697)
(226,860)
Investing activities
Purchase of property, plant and equipment
(20,083)
(34,083)
Net cash used in investing activities
(20,083)
(34,083)
Financing activities
Investment in non-marketable securities at cost
(50,000)
-
Investment in non-marketable securities of equity
method investee
(222,500)
-
Proceeds from short-term notes-related parties
-
15,000
Payments on short-term notes and convertible loans
-
(1,832)
Payments on short-term notes and convertible loans-
related parties
(122,130)
-
Proceeds from issuance of common stock
1,700,000
561,955
Principal payments on long-term debt-related parties
(2,717)
-
Principal payments on long-term debt
(3,241)
-
Net cash provided by financing activities
1,299,412
535,123
Net increase (decrease) in cash
208,632
314,180
Cash at beginning of period
593,175
29,432
Cash at end of period
$
801,807
$
343,612
Supplemental disclosures:
Interest paid in cash
$
23,307
$
13,868
Property (vehicles) acquired with long-term debt
$
168,573
$
-
Common stock issued for conversion of notes payable
$
106,100
$
-
See Notes to Financial Statements
Electric Aquagenics Unlimited, Inc.
Notes to Condensed Financial Statements (unaudited)
June 30, 2004 and 2003
1.
Presentation
The financial statements as of June 30, 2004 and 2003 and for the six months and three months ended June 30, 2004 and 2003 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. &n bsp;The Company has previously filed with the SEC an annual report on Form 10-KSB which included audited financial statements for the two years ended December 31, 2003. 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. Investments
The Company has signed an agreement to purchase up to a 2% interest in KesAir Technologies, LLC, a manufacturing, research and development entity, for $300,000. As of June 30, 2004, the Company has paid $50,000. Subsequent to June 30, 2004, the Company paid the remaining $250,000 to complete the purchase of an interest in KesAir Technologies, LLC. Additionally, the Company has signed an agreement to purchase up to a 40% interest in ByoCoat Strategies Corporation, Inc., a research and development entity, for $400,000. As of June 30, 2004, the Company has paid $222,500. Subsequent to June 30, 2004, the Company paid an additional $22,000. As of June 30, 2004, the Company has not accrued any liabilities related to these purchase agreements as the Company is given the option to complete part or all of the acquisition.
See Notes to Financial Statements
Item 2.
Management's Discussion and Analysis or Plan of Operation
We are in the business of developing, manufacturing and marketing equipment that uses water electrolysis to create fluids that sanitize and clean surfaces. The fluids generated by our machines are environmentally safe and are free from toxins and harmful residues associated with traditional chemical based disinfecting and cleaning agents. The electrolyzed fluids generated by our machines are intended to replace many of the traditional methods used in commercial and industrial disinfecting and cleaning.
So far, most of our sales have been to an affiliated company, Zerorez Franchising Systems, Inc., that uses our machines to generate electrolyzed water to be used to clean and sanitize carpets and other flooring surfaces. Carpet cleaning is one of the eight market channels being pursued by the Company. However, we are continuing to make progress in our efforts to diversify into other critical areas, particularly in the poultry processing, consumer drinking water, grocery produce spraying and mold remediation industries. Our diversification efforts have now resulted in securing six of the eight market channels. These initial eight channels are only the beginning of the applications available to the Company. Additional channels are still in their early stages, with negotiations underway with several potential strategic and joint venture partners.
We have now entered into the following joint venture agreements for distribution of our generators into specific markets: carpet cleaning, poultry processing, drinking water, grocery produce spraying, mold remediation and oyster depuration. Beef and fish JV’s are in final closing stages.
To date, these joint venture arrangements have resulted in the placement of our equipment in two poultry processing plants: Murray’s Chicken, a poultry plant in South Fallsburg, New York and most recently with Amick Farms, Batesburg, South Carolina. Although operations using electrolyzed fluid from our equipment in these plants are just beginning, reports on the efficacy of the fluid in killing common poultry pathogens has been encouraging, as we expected them to be. We are gathering a significant amount of information and we are gaining substantial know-how with respect to each particular operation which we intend to use to our advantage as we move into other poultry processing plants. Covenant Water Systems has now made arrangements with several other poultry processors for the placement of our equipment in their processing plants.
We recently granted an exclusive distributorship to KES Science & Technology, Inc. of Atlanta, Georgia for the marketing of the Company’s products into the grocery produce spraying market, childcare, dental and physician offices industries.
KES provides products and services to wholesale and retail grocery stores, cold storage warehouses and florists, both nationally and internationally. Its products and services consist of post-harvest technologies for produce, meat and the floral industry that preserve and extend the life of these products that have a limited shelf life. An affiliate of KES known as KesAir Technologies, LLC, is currently introducing itsAiroCideTM air pathogen removal technology into medical healthcare, childcare, mold remediation, and other industries. KesAir’sAiroCideTM technology complements EAU’s products for surface cleaning and disinfecting without toxicity. The Company has agreed to invest a total of $300,000 in KESAir Technologies, LLC, in exchange for a 2% ownership interest. The investment has been fully funded.
We have entered into a joint venture arrangement with a Louisiana shrimp and oyster producer to provide equipment that will produce electrolyzed fluid to clean and sanitize oysters, and we are continuing to conduct tests with respect to the use of our products to clean and sanitize fish and other seafood products. Our generators have been installed at the University of Georgia, Food Science Department to conduct the preliminary tests for oyster depuration. These tests have been very successful in killing the vibrio organism in oysters. A second generator will soon be installed at Oregon State University with Dr. Su to complete the oyster protocols that will be used for market penetration. These channels are expected to be on line by the 4th quarter, 2004.
The Company recently invested capital to acquire a 40% ownership interest in ByoCoat Strategies Corporation, Inc., a company involved in developing products to control or eliminate Lysteria and biofilm in cooked and ready to eat (RTE) meats in exchange for a total cash payment of $400,000. To date, $222,500 has been paid. The balance is being paid in installments of $22,000 per month.
Our operations are currently funded by a combination of revenues and capital funding.
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, |
| | | 2004 | | 2003 | | 2004 | | 2003 |
Revenue, net
| $ | 75,000 | | 100,000 |
| 175,000 |
| 200,000 |
Gross profit (loss) | | 52,500 | | 67,651 |
| 118,900 |
| 136,539 |
Operating expenses | | 796,963 | | 191,542 |
| 2,518,972 |
| 275,549 |
Other income (expense) | | (6,864) | | (15,343) |
| (81,091) |
| (33,639) |
Net loss | | (744,463) | | (123,891) |
| (2,400,072) |
| (139,010) |
| | | June 30, 2004 (unaudited) | | December 31, 2003 |
Balance Sheet Data: | | | | |
Cash and Cash Equivalents | $ | 801,807 | $ | 593,175 |
Total Current Assets | | 1,292,041 | | 978,487 |
Total Assets | | 1,781,882 | | 1,019,903 |
Total Current Liabilities | | 109,600 | | 399,016 |
Long Term Debt | | 267,014 | | 133,956 |
Total stockholders’ equity | | 1,405,268 | | 486,931 |
Discussion
The Company’s revenues for the three months ended June 30, 2004 were $75,000, compared to $100,000 for the same period in 2003. This 25% reduction in revenues was attributable to several factors, including the following. First, most of the Company’s revenues continue to be derived from sales of equipment to franchisees of ZEROREZ Franchising Systems, Inc., and during the first half of 2004 ZEROREZ intentionally slowed down its efforts to sell new franchises in order to allow it to assure that certain critical systems are in place for what it anticipates will be a brisk franchising climate during the second half of 2004 and into 2005. EAU has obtained lease line funds to assist in the financing and expansion of revenues from carpet cleaning franchise sales which not only creates a sale of a generator, but also a 1% royalty on gross revenues of all Zerorez franchisees.
Second, management of the Company has been actively pursuing joint venture, distributorship and other strategic relationships in which its products may be used. Although it has been successful in attracting promising strategic relationships, the time and energies spent in that effort are non-revenue generating. A total of six of the targeted eight market channels are now under joint venture contracts. This significant effort on the part of management is planned and required to accomplish the shortest routes to revenues in the various market channels.
Third, the Company has been very active in its efforts to raise additional capital in order to allow it to accumulate sufficient working capital to actively pursue all of its business plans and objectives. While these financing efforts have been largely successful, they have stretched the initial management team. Recent additions to management and staff personnel to handle the increasing work load due to channel development has been accomplished.
Fourth, the Company has continued to lay the groundwork for what it hopes will be a rapid growth phase in the near future. This groundwork includes the continued testing and analysis of the efficacy of the Company’s products, development and refinement of the Company’s business plan, and continued development of a network of business contacts that will, presumably, lead to future revenues.
The Company’s general and administrative expenses increased 546%, from $80,928 to $523,154, during the first three months of 2004 as compared to the same period one year earlier. A large portion of this increase is attributable to the Company’s grant of common stock during the second quarter of 2004 to several individuals and entities as compensation for consulting and other services rendered to the Company. The increase in general and administrative expenses is also attributable to the additional costs that have been incurred in installing the Company’s generators in poultry processing, the hiring of several new employees, mold testing installation and the costs incurred in the Company’s continuing capital raising activities and the Company’s pursuit of joint ventures, distributorships and marketing efforts with Ruder Finn, New York. This effort is expensive and intended to get the Company’s name branded and exposed and first to market. Employees and contract consultants have increased over the last 12 months from one to thirteen. There are now eleven full time employees. Travel and legal expenses in accomplishing the successful closings of six joint venture agreements has been extremely heavy, but expected for a company at this stage of development. Management continues to be very optimistic in meeting its milestone objectives as detailed in the original business plan. The production of the final model of the commercial generator was extended by several months due to the various channel joint venture partners requiring special features, not included in the prototype units, which were necessary to provide satisfactory product and service expectations. This resulted in design changes which have now been incorporated. Assembly procedures are now in place and production models are being assembled in order to supply the current demand in the various channels coming on line.
The Company’s Research and Development expenses increased from $25,932 during the second quarter of 2003 to $153,790 during the same period in 2004. This increase is attributable to a substantial increase in the Company’s testing be the areas of poultry processing, mold remediation and oyster, fish processing in the Cook Islands and seafood cleaning and processing. Some of the increase in research and development expenditures is also attributable to increased costs associated with the development of the higher capacity EO water generator that is needed to adequately service large poultry and beef processing plants. Beef testing facilities will receive the first generator in the third quarter of 2004 with revenues expected to come on line in this channel in the fourth quarter, 2004.
Liquidity And Capital Resources
At June 30, 2004, we had cash and cash equivalents of $801,807, compared to $593,175 at December 31, 2003, and compared to $1,789,251 at March 31, 2004. The Company has been successful in raising needed capital from investors, and that success has continued through the first six months of 2004. The increase in the Company’s cash and cash equivalents during the first quarter of 2004 was largely attributable to the completion in the first quarter of 2004 of a private offering of the Company’s common stock, in which the Company raised $2 million in capital. The decrease in cash and cash equivalents during the second quarter was largely attributable to the Company’s increased expenses incurred in finding and negotiating appropriate strategic relationships, the fact that the Company raised no equity capital during the second quarter of 2004, and the lack of revenues during the second quarter of 20 04.
The Company’s current cash reserves should be sufficient to fund our continuing operations at their current level through at least the third quarter of 2004. 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, and the Company is presently undertaking a private limited offering of its stock in order to raise additional working capital to be used in the future. In addition, management is expecting an increase in cash flows through anticipated increases in revenue.
If we do not raise sufficient funds in the future, 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.
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 that any design w ill 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 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities
During the three months ended June 30, 2004, the Company issued the following unregistered securities in transactions that were not registered under the Securities Act of 1933:
1.
On May 7, 2004 the Company issued a total of 221,000 shares of common stock to the following individuals and entities in exchange for consulting services rendered to the Company. The consulting services consisted of assistance in connection with the offering and sale of the Company’s common stock in a private offering that was completed in March 2004, ongoing investor relations services, and consulting services in connection with the sale and installation of the Company’s products in poultry processing plants. These issuances of securities have been in transactions exempt from registration under Section 4(2) of the Securities Act of 1933 and Rules 505 and 506 promulgated thereunder.
Name | Number of Shares |
Temple Securities | 108,500 |
Colin Nesbitt | 500 |
Joseph Stapley | 10,000 |
Kennedy Taylor | 2,500 |
Suzanne Hendricks | 5,000 |
John Largen | 2,000 |
John Steiner | 7,500 |
Integra Management | 60,000 |
Terry Willis | 25,000 |
Item 6.
Exhibits and Reports on Form 8-K
(a)
Exhibits.
31
Certification of Chief Executive Officer and Chief Financial Officer
32
Certification 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 13, 2004.
ELECTRIC AQUAGENICS UNLIMITED, INC.
By:
/s/ Gaylord M. Karren
Gaylord M. Karren
Chief Executive Officer
Principal Executive Officer and
Principal Financial Officer
