UNITED STATES
SECURITIES ANDEXCHANGECOMMISSION
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 March 31, 2005 |
| o | 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 May 10, 2005, the Registrant had8,008,373shares of Common Stock, $0.0001 par value outstanding.
PART I - FINANCIAL INFORMATION
ELECTRIC AQUAGENICS UNLIMITED, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
MARCH 31, 2005
ASSETS |
| CURRENT ASSETS | | | |
Cash and cash equivalents | | $ | 834,108 | |
| Accounts receivable, net | | | 157,305 | |
| Receivables from affiliate | | | 327,026 | |
| Inventory | | | 1,343,172 | |
| | | | | |
Total current assets | | | 2,661,611 | |
| | | | | |
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $145,561 | | | 868,279 | |
| | | | | |
| OTHER ASSETS | | | | |
Patents, trademarks and intellectual property | | | 1,030,800 | |
Investments | | | 898,275 | |
Goodwill | | | 160,259 | |
Deposits | | | 5,758 | |
| | | | | |
Total assets | | $ | 5,624,982 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| CURRENT LIABILITIES | | | | |
Accounts payable | | $ | 739,734 | |
| Accrued expenses | | | 47,748 | |
| Notes payable | | | 14,900 | |
| Current portion of long-term debt | | | 43,660 | |
| | | | | |
Total current liabilities | | | 846,042 | |
| | | | | |
| LONG TERM DEBT,net of current portion | | | 222,858 | |
| | | | | |
| STOCKHOLDERS’ EQUITY | | | | |
Common stock, $.0001 par value; 50,000,000 shares authorized; 7,154,761 issued and outstanding | | | 715 | |
Additional paid in capital | | | 11,348,141 | |
Stock issuance obligation | | | 1,125,000 | |
Accumulated deficit | | | (7,917,774 | ) |
| | | | | |
Total stockholders’ equity | | | 4,556,082 | |
| | | | | |
Total liabilities and stockholders’ equity | | $ | 5,624,982 | |
See accompanying notes to consolidated financial statements.
ELECTRIC AQUAGENICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDEDMARCH 31, 2005 AND 2004
| | | 2005 | | 2004 | |
| NET SALES | | $ | 87,880 | | $ | 100,000 | |
| | | | | | | | |
| COST OF GOODS SOLD | | | 23,175 | | | 33,600 | |
| | | | | | | | |
| GROSS PROFIT | | | 64,705 | | | 66,400 | |
| | | | | | | | |
| OPERATING EXPENSES | | | | | | | |
Marketing and promotion | | | 204,964 | | | 203,797 | |
Research and development | | | 299,889 | | | 118,361 | |
General and administrative | | | 1,287,590 | | | 1,399,851 | |
| | | | | | | | |
Total operating expenses | | | 1,792,443 | | | 1,722,009 | |
| | | | | | | | |
| LOSS FROM OPERATIONS | | | (1,727,738 | ) | | (1,655,609 | ) |
| | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | |
| Loss from equity method investee | | | (27,000 | ) | | — | |
| Interest expense | | | (13,389 | ) | | (74,227 | ) |
| Interest income | | | 15,699 | | | — | |
| Other income (expense) | | | 998 | | | — | |
| | | | | | | | |
Total other income (expense) | | | (23,692 | ) | | (74,277 | ) |
| | | | | | | | |
| LOSS BEFORE PROVISION FOR INCOME TAXES | | | (1,751,430 | ) | | (1,729,836 | ) |
| | | | | | | | |
| PROVISION FOR INCOME TAXES | | | — | | | — | |
| | | | | | | | |
| NET LOSS | | $ | (1,751,430 | ) | $ | (1,729,836 | ) |
| | | | | | | | |
| NET LOSS PER SHARE | | $ | (0.31 | ) | $ | (0.41 | ) |
| | | | | | | | |
| WEIGHTED AVERAGE OF SHARES OUTSTANDING | | | 5,605,500 | | | 4,145,628 | |
See accompanying notes to consolidated financial statements.
ELECTRIC AQUAGENICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDEDMARCH 31, 2005 AND 2004
| | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net loss | | $ | (1,751,430 | ) | $ | (1,729,836 | ) |
Adjustments to reconcile net loss to net cashused in operating activities: | | | | | | | |
Depreciation | | | 32,500 | | | 1,211 | |
Loss from equity method investee | | | 27,000 | | | — | |
Changes in operating assets and liabilities: | | | | | | | |
Decrease in accounts receivable | | | 26,706 | | | 25,000 | |
(Increase) in receivables from affiliates | | | — | | | (25,913 | ) |
(Increase) decrease in inventory | | | (839,856 | ) | | 15,177 | |
Increase (decrease) in accounts payable | | | 450,914 | | | (43,583 | ) |
Increase (decrease) in accrued expenses | | | 24,336 | | | (9,623 | ) |
| | | | | | | | |
Net cash used in operating activities | | | (2,029,830 | ) | | (1,767,567 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
| Acquisition of property and equipment | | | (362,916 | ) | | (216,831 | ) |
| Investments | | | (120,556 | ) | | (160,259 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (483,472 | ) | | (1,289,258 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
| Payments on notes payable | | | — | | | (79,900 | ) |
| Payments on long term debt | | | (10,479 | ) | | (134,957 | ) |
| Proceeds from issuance of common stock | | | 2,975,000 | | | 3,178,500 | |
| | | | | | | | |
Net cash provided by financing activities | | | 2,964,521 | | | 2,963,643 | |
| | | | | | | | |
| NET DECREASE IN CASH | | | 451,219 | | | 1,196,076 | |
| | | | | | | | |
| CASH and cash equivalents, beginning of period | | | 382,889 | | | 593,175 | |
| | | | | | | | |
| CASH and cash equivalents, end of period | | $ | 834,108 | | $ | 1,789,251 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
ELECTRIC AQUAGENICS UNLIMITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements as of March 31, 2005 and 2004 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 management’s opinion that 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 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, 2004. 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.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Electric Aquagenics Unlimited, Inc. and its wholly owned subsidiaries Equilease, Inc. and Aquagen International, Inc. (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated.
NOTE 3 - - COMMON STOCK
In February 2005, the Company successfully completed additional private placement offering of $2,975,000 for 850,000 shares of its common stock at $3.50 per share. Under this offering, the Company received proceeds of $2,630,600, net of offering costs of approximately $344,000 plus placement agent warrants of 73,800 shares.
NOTE 4 - - STOCK OPTION PLAN
In February 2005, the Company’s board of directors approved and adopted its 2005 Omnibus Stock Option Plan. Under the plan, the Company may issue both Incentive Stock Options to employees only and Non-Qualified Stock Options to employees and consultants at its discretion. The exercise price of the incentive stock options are 100% of the fair market value at grant date. The exercise price of the non-qualified options are at not less than 85% of the fair market value at grant date.
NOTE 5 - - GOING CONCERN
During the current period, the Company incurred significant losses and a negative cash flow from operations. As a result, at March 31, 2005, the Company had a high level of equity financing transactions and additional financing will be required by the Company to fund its future activities and to support its operations. However, there is no assurance that the Company will be able to obtain additional financing. Furthermore, there is no assurance that rapid technological changes, changing customer needs and evolving industry standards will enable the Company to introduce new products and services on a continual and timely basis so that profitable operations can be attained. The Company’s ability to achieve and maintain profitability and positive cash flows is dependent upon its ability to increase sales and profit margins and control operating expenses. Management plans to mitigate its losses in the near term through the further development and marketing of its patents, trademarks, brand and product offerings.
ELECTRIC AQUAGENICS UNLIMITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 6 - - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the three months ended March 31, 2005, the Company paid cash for the following:
| Interest | | $ | 13,389 | |
| Income taxes | | $ | — | |
NOTE 7 - - SUBSEQUENT EVENTS
In April 2005, the Company sold its investment in Biofilm Strategies Corporation, a privately held Delaware corporation (“Biofilm”), consisting of 359,000 shares of common stock (the “Shares”), to an unrelated third party for a total consideration of $718,000, which was paid in cash at the closing. The Shares represented approximately thirty-six percent (36%) of the total issued and outstanding capital stock of Biofilm, and were acquired by the Company in increments between April 2004 and January 2005 for total cash consideration of $359,000. The sale resulted in a gain to the Company of $359,000. The reason for the sale was that the Board of Directors of the Company determined that the business of Biofilm no longer fit into the Company’s strategic plans.
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 clean, disinfect, remediate, and hydrate; and developing, manufacturing and marketing consumer products that support a healthy lifestyle. The fluids generated by our machines are environmentally safe and free from toxins and harmful residues associated with chemical based disinfecting and cleaning agents. The electrolyzed fluids generated by our machines will replace many of the traditional products used in commercial, industrial and residential disinfecting and cleaning.
Our consumer products currently consist of Aquagen® oxygen supplement and wellness products sold primarily through the health food and nutraceutical markets, and Perfect Empowered Drinking Water™, a drinking water that we bottle at a newly constructed bottling facility located at our corporate offices. We plan to expand the market for our Aquagen® products and to develop other personal use products, such as skin care products, periodontal products and a hand sanitizer product. We also intend to continue to develop and market commercial and residential cleaning products, such as a bottled surface cleaning product
Our revenues in the past have been derived primarily from equipment sales to franchisees of our affiliated carpet cleaning company. However, we are continuing to work on diversifyinginto other high demand areas such as poultry processing, consumer products and grocery produce spraying systems, and we are beginning to generate limited revenues in those areas. As we move into those areas, we hope to develop a model whereby we derive revenue from a combination of equipment leases, metering, piecing and entering into distributorships and joint ventures with various specific industry leading companies. Piecing is the process in which we place and maintain machines at commercial facilities, such as processing plants, and the facility is charged per unit of product processed at a designated price.
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 | |
| | | March 31, | |
| | | 2005 | | 2004 | |
Revenue, net | | $ | 87,880 | | $ | 100,000 | |
| | | | | | | | |
| Gross profit (loss) | | | 64,705 | | | 66,400 | |
| | | | | | | | |
| Operating loss | | | (1,727,738 | ) | | (1,655,609 | ) |
| | | | | | | | |
| Other income (expense) | | | (23,692 | ) | | (74,227 | ) |
| | | | | | | | |
| Net income (loss) | | | (1,751,430 | ) | | (1,729,836 | ) |
| | | March 31, 2005 | | December 31, 2004 | |
| Balance Sheet Data: | | | | | |
| | | | | | |
| Cash and Cash Equivalents | | $ | 834,108 | | $ | 382,889 | |
| | | | | | | | |
| Total Current Assets | | | 2,661,611 | | | 1,389,556 | |
| | | | | | | | |
| Total Assets | | | 5,624,982 | | | 3,906,959 | |
| | | | | | | | |
| Total Current Liabilities | | | 846,042 | | | 370,792 | |
| | | | | | | | |
| Long Term Debt | | | 222,858 | | | 233,337 | |
| | | | | | | | |
| Total stockholders’ equity | | $ | 4,556,082 | | $ | 3,302,830 | |
Discussion
The Company’s revenue from operations has remained fairly level over the last few quarters, with most of the Company’s revenues coming from sales of its equipment to franchisees of ZEROREZ Franchising Systems, Inc., an affiliate of the Company that is in the business of offering carpet cleaning franchises to the public. At the present time, there are almost thirty ZEROREZ outlets in operation in several cities throughout the United States. ZEROREZ franchisees are required to obtain and use certain equipment from the Company. Since each ZEROREZ franchisee is required to purchase or lease at least one of our fluid generators for each five carpet cleaning trucks it has in operation, the anticipated growth in ZEROREZ franchisees should translate directly into revenue growth for the Company. We expect that revenue from the sale of our fluid generators to ZEROREZ franchisees will continue to increase as ZEROREZ more actively promotes the franchises.
We have successfully installed our equipment in one poultry processing plant, and we should begin generating revenue from that plant in the near future. We are continuing to actively market our equipment to the poultry processing industry, and we anticipate that revenue generated by that industry segment will represent a significant addition to our total revenue in future years.
In February, 2005, we completed development of our new advanced P-6000 Electrolyzed Oxidative Water System that is capable of producing up to 6,000 gallons of electrolyzed oxidative water per hour, and we are currently equipment to produce even larger quantities of electrolyzed oxidative water. This increased capacity allows us to scale and customize flow volumes to support several different commercial applications, including poultry processing, beef processing and other high volume food processing facilities.
In March 2005 we entered into a manufacturing agreement with a third party to manufacture our expanding product line. Previously, all equipment was manufactured in-house in our Kennesaw, Georgia facility. However, as orders for our larger capacity equipment have begun to be received, we made the determination to outsource some of our manufacturing to assure a constant supply of our equipment.
In April 2005, we launched our new bottled drinking water product, known as “Perfect Empowered Drinking WaterTM.” So far, we have signed with one local distributor to distribute our bottled drinking water through local and regional grocery outlets. We expect to begin obtaining revenues from our bottled drinking water during the second and third quarter of 2005, and we anticipate that our drinking water revenues will eventually become a significant portion of our total revenue.
Also in April 2005, we completed a beta installation of our Empowered WaterTM pathogen intervention system at a supermarket in Georgia. The system, which was jointly developed with KES Science and Technology located in Kennesaw, Georgia, is designed to spray our specially treated electrolyzed oxidative water on produce and floral products in the store. Tests have shown that spraying fruits, vegetables and floral products with our electrolyzed oxidative water dramatically increases the freshness and shelf life of such products.
The Company had total revenues of $87,880 for the three months ended March 31, 2005, which represents a decline of 12% from the $100,000 in total revenues for the same period one year earlier. Management believes that it will begin generating significant revenues from its bottled drinking water sales and poultry processing plant operations during the next few quarters, beginning with the second quarter of 2005.
Marketing and promotion expenses remained flat in the first quarter of 2005 when compared to those expenses during the same period one year earlier.
Research and development expenses incurred in the first quarter of 2005 were 153% higher than those expenses incurred during the same period one year earlier. This increase is attributable to several factors, including the Company’s stepped up development of higher capacity electrolyzed oxidative water generators, the conducting of beta testing in the supermarket area, activities undertaken to refine the production of the Company’s bottled drinking water, and the Company’s increased activities in the poultry processing industry. It is anticipated that the Company’s research and development expenditures will continue at approximately the same level as during the first quarter of 2005.
The Company’s general and administrative expenses totaled $1,287,590 during the first quarter of 2005, compared to $1,399,851 during the first quarter of 2004. This 8% decline in general and administrative expenses is attributable to the issuance of common stock for services during the first quarter of 2004 vs. 2005, offset by increases in capital funding fees and legal and accounting expenses. The Company anticipates that its general and administrative expenses will remain fairly constant during the next several quarters, while the Company anticipates that its total revenues during such period will increase substantially.
Liquidity And Capital Resources
At March 31, 2005, we had cash and cash equivalents of $834,108, compared to $1,789,251 on the same date one year earlier, and $382,889 at December 31, 2004. At March 31, 2005, the Company’s inventory was $1,343,172, representing an increase of 167% from the $503,316 on hand at December 31, 2004 and a 3,895% increase over the $33,623 on hand at March 31, 2004. This substantial inventory buildup is primarily a result of the Company’s anticipated sales of bottled drinking water during the second and third quarter of 2005 and the anticipated increase in orders of equipment for the poultry processing industry. The Company’s total accounts receivable from related parties and others has remained fairly constant from December 31, 2004 to March 31, 2005.
The Company’s cash balance and the Company’s large increase in inventory during the first three months of 2005 is largely attributable to the offering and sale of the Company’s common stock during the first quarter of 2005 in a private offering. In the private offering, the Company offered and sold a total of 850,000 shares of common stock for a purchase price of $3.50 per share.
The Company raised gross proceeds of $2,975,000 in the private offering, of which a total of approximately $344,000 was paid to the placement agent in commissions and fees, resulting in net proceeds to the Company of approximately $2,631,000. The Company also granted to the placement agent five (5) year warrants to purchase a total of 73,800 shares of the Company’s common stock at an initial exercise price of $5.00 per share.
Proceeds from the private offering should be sufficient to fund our continuing operations at their current level through at least the third quarter of 2005. 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 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.
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 will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
There have been nosignificant 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
| | 10.1 | 2005 Omnibus Stock Option Plan adopted by the Board of Directors on February 10, 2005 |
| | 10.2* | Selling Agent Agreement between the Company and Nexcore Capital, Inc. dated February 10, 2005 |
| | 10.3** | Agreement and Plan of Acquisition between the Company and Aquagen International, Inc. dated March 11, 2005 |
| | 31.1 | Rule 302 Certification of Chief Executive Officer and Chief Financial Officer |
| | | Rule 906 Certification of Chief Executive Officer and Chief Financial Officer |
* Incorporated by reference to our Current Report on Form 8-K filed February 15, 2005
** Incorporated by reference to our Current Report on Form 8-K filed March 18, 2005
During the quarter ended March 31, 2005, we filed with the Securities and Exchange Commission Current Reports on Form 8-K as follows:
On January 11, 2005, we filed a Current Report on Form 8-K regarding our entry into a material definitive agreement in principle to acquire all of the assets of Aquagen International, Inc.
On February 15, 2005, we filed a Current Report on Form 8-K regarding our entry into a Selling Agreement with Nexcore Capital, Inc. for the private offering of up to 850,000 shares of our common stock, and regarding the termination of a Standby Equity Distribution Agreement and related agreements between the Company and Cornell Capital Partners, Ltd., and regarding the unregistered sale of shares of our common stock pursuant to the private offering of up to 850,000 shares of our common stock.
On March 18, 2005, we filed a Current Report on Form 8-K regarding our entry into a definitive Agreement and Plan of Acquisition with Aquagen International, Inc. pursuant to which we agreed to acquire all of the assets of Aquagen International, Inc.
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 May 16, 2005.
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| | ELECTRIC AQUAGENICS UNLIMITED,INC. |
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| By: | /s/ Gaylord M. Karren |
| |
Gaylord M. Karren |
| | Chief Executive Officer Principal Executive Officer and Principal Financial Officer |
