Washington, D.C. 20549
EAU TECHNOLOGIES, INC.
Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
At March 30, 2014, 28,575,371 shares of the Registrant’s common stock, $0.0001 par value per share, were outstanding. The aggregate market value of shares of common stock held by nonaffiliates as of June 30, 2013, was $734,883.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A “SAFE HARBOR” FOR FORWARD LOOKING STATEMENTS. This Form 10-K contains statements that are not historical facts. These statements are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should” and similar expressions or words. Forward-looking statements include statements about our liquidity, our ability to fund operations, reserves, patent protection, outsourcing, life spans of generators, losses, demand for our products, expected returns, long-lived assets and internal controls. Our future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. There are numerous factors that could cause actual results to differ materially from the results discussed in forward-looking statements, including:
| ● | The Company defaulted under its loan agreements with our major stockholder, and its principal and our director, due to its inability to repay as of the maturity date. The Company subsequently negotiated an extension of the obligations until November 30, 2014. The Company does not currently have sufficient cash to repay the indebtedness. Although this default has been resolved by obtaining an extension, there is no assurance that we will be able to repay the indebtedness at the new maturity date or obtain future extensions. |
| ● | Our ability to raise investment capital necessary to continue to fund our operations and product development activities. |
| ● | Our ability to adequately manage and fund the development of our business. |
| ● | The introduction of new laws, regulations or policies that could affect our products or our business practices. These laws, regulations or policies could impact our industry as a whole, or could impact only those portions in which we are currently active. |
| ● | Our ability to continue to develop our products and to develop products and services that will be accepted by our customers. |
| ● | Changes in economic conditions, including changes in interest rates, financial market performance and our industry. These types of changes can impact the economy in general, resulting in a downward trend that impacts not only our business, but all companies with which we compete; or, the changes can impact only those parts of the economy upon which we rely in a unique manner. |
| ● | Changes in relationships with customers and/or suppliers: an adverse change in our relationships with customers and/or suppliers would have a negative impact on our earnings and financial position. |
| ● | Our ability to protect our intellectual property and trade secrets in order to maintain an advantage over our competitors. |
| ● | Our failure to achieve and maintain effective internal control over financial reporting. |
| ● | Factors that we have discussed in previous public reports and other documents filed with the Securities and Exchange Commission. |
This list provides examples of factors that could affect the results described by forward-looking statements contained in this Form 10-K. However, this list is not intended to be exhaustive; many other factors could impact our business, and it is impossible to predict with any accuracy which factors could result in which negative impacts. Although we believe that the forward-looking statements contained in this Form 10-K are reasonable, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements contained in this section, and you are cautioned not to place undue reliance on the forward-looking statements contained in this Form 10-K. In addition to the risks listed above, other risks may arise in the future, and we disclaim any obligation to update information contained in any forward-looking statement.
PART I
ITEM 1. BUSINESS
EAU TECHNOLOGIES, INC., (referred to herein sometimes as “EAU,” “we,” “us,” or the “Company”), is in the business of developing, manufacturing and marketing equipment that uses water electrolysis to create non-toxic cleaning and disinfecting fluids for food safety applications as well as dairy drinking water. These fluids have various commercial applications and may be used in commercial food processing and agricultural products that clean, disinfect, remediate and hydrate. The processes for which these fluids may be used are referred to in this Report (the “Report”) as the “EW Technology.” For example, we believe that our food and agricultural treatment products may be used to systemically treat various facets and phases of the food chain, from grow-out to downstream food, to cleaning and sanitizing food productions equipment, by eliminating dangerous and unhealthy pathogens from the food chain with our highly effective solutions. At the levels employed, the fluids and products are environmentally safe and non-toxic and do not contain or leave harmful residues. The electrolyzed water fluids created by the EW Technology (referred to herein sometimes as the “EW Fluids” or “Empowered WaterTM”) generated by our specialized equipment can be used in place of many of the traditional products used in commercial, industrial and residential disinfecting and cleaning.
Our focus is on our three core competencies which are, producing high volumes of electrolyzed water, controlling the properties of the water and using our application knowledge. Because of our ability to produce high volumes of water and control the water properties, our target market is in commercial applications where we believe we can add value by generating measurable productivity, employee safety and efficiency gains. We will continue to use a disciplined stage gate development process that drives ideas to commercial test installations that turn into revenues. Once we have developed an application we will attempt to find strategic partners that would be able to assist us with a large scale commercial roll-out of the technology.
We have identified the following industries for early stage sales and marketing focus: 1) food and beverage processing, 2) dairy production and processing, 3) meat and poultry processing and 4) agricultural grow-out and processing (“Primary Markets”). As of the date of this Report, the Company was focused on these markets because we believe that for each of these markets we have a competitive advantage, the potential ability to attract a leading strategic industry partner, or we can provide an attractive value-added proposition. To penetrate these markets, EAU is conducting trials and completing commercial installations that are leading to partnerships with enterprises that can assist in rolling the technology out on a large scale.
Food and Beverage Processing. In 2008 we installed our equipment to test a clean-in-place (CIP) application with an international beverage bottling company for use with cold beverages. There were three stages of this trial that were conducted simultaneously: 1) Syrup tanks; 2) Bag in box line and; 3) Bottling line. The purpose of the trial was to identify whether EAU’s non-toxic ambient temperature Empowered Waters could replace current 3-5 step CIP processes. In order to become an approved technology for this bottling company, EAU had to show cleaning performance, good antimicrobial efficacy, no negative smell or taste impacts, and improved CIP efficiency.
Results showed Empowered Water™ was able to improve current cleaning and sanitizing efficacy, minimizing the use of commercial chemicals while complying with microbiological integrity and sensory testing requirements. Testing also identified water and energy consumption savings as well as significant timesaving that can increase bottling production line availability.
In August 2010, following the successful tests, the Company received its first purchase orders from the international beverage company. EAU installed its environmentally friendly Empowered Water™ CIP Systems at three of the company’s bottling plants and recorded revenue from the sale of these systems during the first quarter 2011. The Company received an additional order for this same bottling company in 2012 for one of its largest bottling plants. Because of the success we have achieved in this application, we began testing with another International Bottler of soft drinks and have achieved similar success in duplicating results with that company. EAU is now an approved CIP application with both international bottling companies and is marketing to both companies bottling operations in North America.
Upon the successful installations and as part of the Company’s plans to find a strategic industry partner, the Company entered into a non-exclusive commercial relationship with an international manufacturer of food processing equipment. In connection with the agreement the company ordered two Empowered Water Generator systems. We shipped the systems during the fourth quarter of 2011. The systems were used for customer product testing and on-site customer validation. Following the successful tests and validations, the company placed multiple orders for our equipment. During 2013, we shipped six new systems.
Dairy Production and Processing. The Company commenced hydration and production tests on dairy cattle in 2006. Multiple on-site trials and University studies were performed. Initial results indicated an increase in milk production and milk fat while maintaining the protein content. In August 2008, we reached an agreement with a dairy located in Georgia to begin paying for the use of our equipment. In the first quarter of 2009, due to positive results, the Company installed a second unit at this dairy to provide our fluids to all of the cows. In January 2012, the Company was notified that the dairy completed their bankruptcy reorganization and that the new owners were discontinuing the use of our equipment on the dairy.
In April 2011, the Company signed a purchase agreement with Fonterra Co-Operative Group Limited, New Zealand for a Dairy Drinking Water System to be used in a new 3,000 cow dairy in Yutian, China. We shipped the system in August 2011 and installed the system in December 2011. We recognized revenues from the sale of this system during 2011. We are currently receiving minimal revenues from this market.
Meat and Poultry Processing. We began testing of our EW Technology and EW Fluids (the “EW System”) in poultry processing in 2005. Over the course of the next three years, we showed significant results in killing salmonella on the processed poultry. Independent testing analysis revealed pre-chill microbial reduction was significantly below the Food Safety Inspection Services (the enforcement arm of the USDA) allowable limit at that time. From these results we successfully completed Phase I of our USDA Online Reprocessing (“OLR”) Certification. In 2008, we completed the OLR data gathering stage at Fieldale Farms (“Fieldale”) a poultry plant in northern Georgia and submitted our findings to the USDA for OLR approval. EAU received a letter from the USDA approving our fluids for use in the plant for OLR applications.
In 2009 we began receiving revenues of approximately $27,500 per month from Fieldale. Per the terms of the agreement, we were to help the plant achieve Category 1 compliance for post-chill microbial performance. The plant completed a USDA test set October 2009 with the result that it met the Category 1 requirements for that test set. Fieldale indicated that it was suspending the agreement as of November 23, 2009 and ceased making payments. In February 2011, the Company filed a complaint in the Superior Court of Cobb County Georgia against Fieldale for breaching the agreement. (See Part II, Item 1 - Legal Proceedings.)
Agriculture. In 2006 we made initial sales to Water Science, LLC, a Florida limited liability company (“Water Science”) for the Latin American markets. Water Science is a major shareholder of the Company and its managing member, Peter Ullrich, is a director of our company. We have shipped multiple systems to Ecuador, Mexico, Columbia, Costa Rica and Holland for trials and Water Science internal use, including six new systems in 2012 and one more in the first quarter of 2013. Water Science is utilizing the technology for its own flower and agricultural endeavors. Further studies are being done as each country that has the Empowered Water™ technology ramps up for their own outside sales efforts.
Patents. We have obtained patent protection on four separate uses of electrolyzed fluids (cleaning and disinfecting eggs, carpet cleaning, mold remediation and poultry processing). The Company received notification that it was granted a process patent in New Zealand for the use of electrolyzed water in the assistance of rumen digestion in dairy cows. The similar process patent is pending in the United States. Those applications are how the fluids are used and how they are stabilized for use in different applications. Additionally, we have a patent pending on the electrolysis equipment and several provisional patent pending applications filed to protect new processes and products, as described herein.
EW Fluids
EW Fluids can have varying strength and properties. We have created products by researching and testing the cleaning and sanitizing characteristics of EW Fluids with varying electrical charges, pH levels and ppm (parts per million) of hypochlorous acid and sodium hydroxide. We are able to create new applications for electrolyzed water by producing various models of our electrolyzing machines, which can create electrolyzed water to meet the needs of specific markets and their application requirements.
The versatility of our EW equipment is unique in the marketplace. Beyond our initial focus in our four Primary Markets, our EW Fluids have potential uses in many other areas. The Company produces its electrolyzed fluids through an advanced continuous-flow electrolysis process using the basic raw materials of water, electricity, and sodium chloride (salt). EAU’s generators produce the following EW Fluids:
| ● | Primacide A is a disinfecting and sanitizing fluid that kills bacteria; yeast; molds; viruses, including e-coli, salmonella, staphylococcus, streptococcus, lysteria, campylobacter, vibrio vulnificus; and hundreds of other organisms. It is highly oxidative and acidic due to its pH of 2.4 and positive 1150 millivolt (one thousandth of a volt) ORP (oxidative reduction potential) and hypochlorous acid concentration of 10 to 200 ppm. Primacide A can be applied to a wide variety of surfaces. Hands sprayed with Primacide A and then wiped with a micro fiber cloth were found to have less residual bacteria and other microbes than hands cleaned using 62% alcohol. Tests performed by the University of Georgia Food Science Department indicated that Primacide A can be used to sanitize and wash meat carcasses, strawberries, lettuce, cabbage, carrots and other vegetables. Surfaces such as floors in hospital operating rooms, bench tops, treatment tables, cutting boards and other surfaces can be effectively sanitized by cleaning with Primacide A. Further tests performed at the University of Georgia Poultry Science Department have established successful and dramatic log reductions of organisms in chicken chillers and also in in-line spraying. We have filed and received patent protection for the washing and sanitizing of eggs and mold remediation and expect to receive additional patent protection for other uses of Primacide A. EAU has completed successful commercial installations as well as trials in the field to further validate the use of Primacide A as a disinfectant. |
| ● | Primacide B is an alkaline based cleaner. Primacide B is created in the electrolysis process with a sodium hydroxide ion attached to the oxygen and hydrogen molecules. It emulsifies oils, fats and other lipids, but has no surfactant base and therefore leaves no residue when used to clean surfaces. It has a pH of 11.0 to 11.5, and is therefore very alkaline. Its alkaline nature and its negative (960) millivolt ORP result in a product that is effective in emulsifying oil and grease. Primacide B is primarily a cleaner with some bacteria killing properties, but is significantly slower and less effective as an anti-bacterial agent than Primacide A. We have submitted provisional patent applications to the United States Patent and Trademark Office to approve Primacide B for many uses. We have received a patent for using Primacide B in carpet cleaning. |
| ● | Primacide C is a product that was developed by the University of Georgia by Dr. Yen Con Hung and Company executives to stabilize acid water (Primacide A). This process has been submitted for patent protection and is currently pending. We license this technology from the University of Georgia. This product is useful in applications ranging from spraying on produce in grocery stores to consumer products requiring a longer shelf life. Early in 2009 EAU received an issued patent for the use of Empowered Water™ (both Primacide A and C) in mold remediation. |
Additional Agricultural Markets
While the majority of our efforts and all of our sales in agriculture have been in connection with Water Science, we are investigating the potential to enter other agricultural markets such as green house and grow out of fruits and vegetable plants and fruit and vegetable packing facilities.
Other Markets, Products and Industries
Some of the other markets and industries that are attractive channels for our EW Technology and other products and services are listed below. We intend to focus more efforts on these markets after we attain our business plan in our current market channels.
Environmental Remediation – Environmental remediation is a multi-billion dollar industry that consists of home and commercial cleanup and reconstruction, generally following disasters such as floods or fires. The Company believes that its technology can be used for mold remediation. The Company’s electrolyzed fluids can be employed to kill mold spores and break down associated mycotoxins. Early in 2009 EAU received an issued patent for the use of Empowered Water™ in mold remediation.
Medical – The medical industry is in need of new and more effective sanitizing and disinfecting solutions. We believe that our EW Technology will work well in many facets of the medical industry. However, the regulatory, environmental and governmental restrictions and requirements to operate in the market will require significant capital and personnel expenditures. We intend to look for appropriate joint venture partners to assist in this market.
Fish Processing – We believe that our EW Fluids are an excellent sanitizer in seafood processing houses as earlier studies conducted on fish in the Cook Islands proved effective. We intend to further research this area at an undetermined future date.
Grocery Store Produce and Meat Departments - Empowered Water™ has been used in various areas of Grocery stores such as, floral, fresh cut produce and leafy vegetable rinse area. Empowered Water™ may also be used by grocery store meat departments to aid in extending the shelf life of the product as well as an anti-bacterial agent and disinfectant on cutting surfaces where multiple products, such as beef, poultry and seafood are cut and packaged, and where cross contamination commonly occurs. Using our electrolyzed fluids, a store’s processing machinery and floor surfaces can be cleaned and sanitized without the use of toxic chemicals.
Markets and Distribution
We presently market our existing products in our identified market channels (food and beverage processing clean in place (“CIP”), dairy production and processing, meat and poultry processing, and agriculture markets). Future plans include enhancing our current products, and introducing new products and features to meet changing customer requirements and evolving industry standards, as opportunities arise and are fiscally reasonable.
Our products meet the growing demand for safe foods and environmentally friendly, non-toxic disinfectants and cleaning fluids. Consumers are becoming more aware of the detrimental effects of toxic products, chemicals, and biocides (as evidenced by the preponderance of anti-microbial agents). There are numerous companies attempting to enter the EW market with their own versions of electrolysis or plasma generators that create similar fluids as Empowered Water™. EAU has focused much of its time and energy in developing high volume systems that meet the needs of a commercial marketplace. As a result, we have an opportunity to penetrate and lease our systems in these markets because our equipment is better suited for larger applications.
Our solutions provide an ecologically safe alternative to toxic cleaning chemicals and pesticides. We have identified a large number of potential markets for our products within specific industry channels, but to date we have focused initially on developing and marketing in the dairy production and processing, meat and poultry processing, clean in place (CIP) applications initially in liquid food and beverage processing and agricultural grow-out industries.
The safe food, sanitizing, disinfecting, agricultural and cleaning industries are currently using products and methodologies that have increasingly expensive environmental and social consequences as compared to our EW Fluids. We believe that our products provide an attractive alternative to the chemicals and other toxic substances and technologies currently being used.
Manufacturing and Sources of Supply
We manufacture and assemble specialized parts in our Kennesaw, Georgia facility. We utilize contract labor both internally as well as externally for certain aspects of the manufacturing and assembly process until demand for our technology increases to a level necessary for further investment. Eventually we expect to outsource to third parties the majority of manufacturing and assembly of electrolyzed water generator components that comprise our EW Technology. In the future, outsourcing more of the Empowered Generator manufacture and assembly should enable us to benefit from the manufacturing capabilities of those who can accommodate significant increases in production volume as necessary.
Production and Distribution
We have established relationships with independent manufacturing facilities to assure that we are able to meet any dramatic increase in demand for our products. Using components supplied by reliable third parties, we believe that our generator technology is not exposed to any problems related to using a single source supplier. EAU markets the high volume equipment developed primarily for installation in food and beverage processing facilities, on dairies, in poultry, beef and produce processing facilities and in other high use areas.
Our current product line consists of several different commercial generators varying in volume capacity and active ingredient concentrations. The volume and concentration levels vary widely by industry and application. Commercial generators have an expected lifespan of approximately five to seven years. This may lead to recurring sales, creating additional and ongoing revenues.
We assemble and distribute our Empowered Water™ generators from our company facility in Kennesaw, Georgia. However, in the future, as generator sales volume increases and our electrolyzed fluid product lines are launched, we intend to partner with industry leaders with established distribution channels to assist with the marketing of our products.
Competition
There is broad competition in the market for disinfecting, sanitizing, and surface cleaning products as well as agricultural products. Many of our competitors are extremely large, financially healthy companies, which have substantial market share and name recognition, and easy access to marketing outlets and capital markets. Many of these companies are able to frequently update and expand their products, introduce new products, and diversify product offerings. These other companies with substantially greater financial, creative and marketing resources, and proven histories, may decide to enter and effectively compete in some or all of our markets, which could adversely affect our operations.
We believe our products are unique because of their volume capabilities, effectiveness and price, and because they are environmentally safe and non-toxic at the levels we employ. There have been many companies in the EW marketplace for many years. Application and volume constraints have contributed to slow growth in the market. We believe that we have more usable application knowledge with the technology on a commercial scale as compared to most competitors using other EW technologies. We believe that we will be able to capture a portion of the market for environmentally safe and non-toxic cleaning products and for our Agricultural Products, although there can be no guarantee that we will be successful in these plans.
Governmental Regulation
Because many of our products are sanitizing products and have applications related to the food industry, existing governmental regulations have a large potential effect on our new products. We frequently will be required to obtain approval or favorable designations from governmental agencies, such as the FDA, USDA, FSIS, EPA, and others, in order to bring new products to market. We believe that our current applications for electrolyzed water products are subject to specific sections in the United States Code of Federal Regulations, which contain regulations created by the aforementioned government agencies. In addition, commercial laboratories such as National American Medical Science Association (NAMSA) have performed several toxicity tests. At the concentrations analyzed, the electrolyzed water solutions show no toxicity. Further approvals will be required if we advance our products into the medical and certain health care industries. These approvals can be costly and time consuming. We intend to approach each sector based on market demand and capital availability.
The active ingredient in our Primacide A and C fluid is electrolytically generated hypochlorous acid. This, in addition to the positive oxidation-reduction potential and a low pH makes Primacide A and C effective disinfectants. We have established that our particular method of creating hypochlorous acid at the level we employ through the electrolysis process is safe for indirect food contact and food contact surfaces based on scientific data, trials and commercial installations.
The active ingredient in our Primacide B is electrolytically generated sodium hydroxide. This, in addition to the negative oxidative-reduction potential and a high pH, makes Primacide B a very effective emulsifier or cleaner. We have established that our particular method of creating sodium hydroxide through electrolysis is GRAS (generally regarded as safe) for most surfaces.
The EPA indicated that even though our generator is exempt from an antimicrobial type registration, we are required to register with the EPA annually as a disinfectant device manufacturer. We utilize our internal regulatory specialists as well as outside consultants to ensure this process is completed properly and competently.
Trademarks & Proprietary Rights
The name Primacide is registered with the U.S. Patent and Trademark Office. The names “Empowered Water,” “EAU Technologies, Inc.” and “Electric Aquagenics Unlimited,” are some of our trademarks.
We have filed several provisional utility patent applications with the U.S. Patent and Trademark Office. Four patents have been issued (for carpet cleaning, egg sanitization, mold remediation and poultry processing) while others are in pending or application status. We have entered into an exclusive license for certain stabilized acid water (Primacide C) technology developed by the University of Georgia. Two other patent applications that have been filed by us involve stabilizing our Primacide C product and a process application for poultry processing.
We retain patent counsel, Bracewell and Giuliani, LLP located in Houston, Texas, to prepare other patent applications related to the use of Primacide A, B and C in various cleaning and disinfecting applications. In addition to several utility applications, a process patent application has been filed for the water generator and stabilization processes, including Primacide A, B and C. We retain Clayton, Howarth & Cannon, P.C. located in Salt Lake City, Utah to prepare and handle our Trademark applications and Trademark related issues.
Research and Development
The goal of our research and development activities is to further the introduction of environmentally safe products for our customers that address the limitations and dangers caused by chemical sanitizers. Our efforts are focused on researching and testing the cleaning and sanitizing characteristics of electrolyzed water with varying electrical charges and pH levels. Our research focuses on the ability and range of efficacy of our electrolyzed water to kill specific microorganisms. We are attempting to develop new technologies, applications and products that will:
● | generate electrolyzed water that has a longer shelf life; |
| ● | show value add propositions through commercial installations; |
| ● | sanitize agricultural products; |
| ● | enhance current products for further use in carpet cleaning; |
| ● | sanitize and disinfect hard and soft surfaces; |
| ● | find more efficient ways to apply our effective solutions; |
Our research and development expenditures totaled approximately $18,438 for the year ended December 31, 2013, and $7,500 in 2012.
Employees
As of December 31, 2013 we had 7 full-time employees and 2 contractors. As our business grows, we anticipate that we will need to employ additional project managers, field technicians, salaried clerical staff and sales personnel. We believe that our relationships with our employees are good.
ITEM 1A. RISK FACTORS
We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.
Risks Related To Our Business
An investment in the Company's securities involves a high degree of risk, including, but not necessarily limited to, the risk factors described below. Each prospective investor should carefully consider the following risk factors inherent in and affecting the Company and its business before making an investment decision to purchase the Company's securities.
We recently defaulted under our loan agreements with our major stockholder, director and senior lender. We renegotiated the indebtedness to extend the maturity date, but any future default could cause holders of our common stock to lose their entire investment.
In November 2013, the Company defaulted under its loan agreements (“Loan Agreements”) with our major stockholder, Water Science, and its principal and our director, Peter Ullrich (collectively, “Lenders”), due to our inability to repay as of the maturity date. In April 2014, we entered into an amendment to the Loan Agreements (“Amendment”) to extend the maturity date until November 30, 2014.
As of April 10, 2014, we had approximately $5,100,000 in short-term debt due under the Loan Agreements. We do not currently have sufficient cash to repay this indebtedness. The terms of the Loan Agreements are described in Footnote 9 to the audited financial statements included in this Form 10-K. The report of our independent registered public accounting firm includes an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business.
Although this default has been resolved by obtaining an extension, there is no assurance that we will be able to repay the indebtedness at the new maturity date or obtain future extensions. The Loan Agreements are secured by substantially all of our present and future assets on a first lien basis. Our ability to continue as a going concern is dependent on our ability to successfully execute a refinancing of the amounts due under the Loan Agreements. The inability to refinance or restructure our debt would have a material adverse effect on the solvency of the Company and our ability to continue as a going concern. If we defaulted again and the Lenders exercised their rights and remedies in the Loan Agreements, then the proceeds of the assets constituting their collateral could be insufficient to repay the indebtedness owed to them in full, and therefore holders of our common stock could lose their entire investment. Under these circumstances we may be unable to continue operating as a going concern. In addition, the presence of the going concern explanatory paragraph may have an adverse impact on our relationship with third parties with whom we do business, including our customers, vendors and employees and could make it challenging and difficult for us to raise additional debt or equity financing to the extent needed, all of which could have a material adverse impact on our business, results of operations and financial condition.
For additional discussion of our Loan Agreements, see “Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
We cannot guarantee that we will continue as a going concern because we have not yet been successful in establishing profitable operations.
We have received a report from our independent auditors on our financial statements for fiscal years ended December 31, 2013 and 2012 which contains a modification indicating substantial doubt about the Company’s ability to continue as a going concern. In addition, the footnotes to our financial statements list factors, including recurring losses since incorporation, which raise substantial doubt about our ability to continue as a going concern.
We may need substantial additional funds that we may not be able to acquire.
The majority of our funding has come from shareholders. We currently do not have sufficient funds on hand to fund all of our operational needs for the next 12 months. We currently will have sufficient funds to operate our business provided we receive expected orders from our customers or if we are able to secure additional funding. We do not have any agreements in place for additional funding. We may not have enough funding for operations to fund our business until it is developed enough to bring the business plan to maturity. Our cash requirements may vary materially from those now planned as a result of marketing efforts, relationships with suppliers, changes in the direction of our business strategy, and/or competitive and technical advances for electrolyzed water as a sanitizer. We may not be able to continue to improve or develop successful electrolyzed water products. In addition, it may be more costly than we have anticipated developing new products. We may incur costs that are necessary to comply with governmental requirements. For example, we may be required to obtain approval from the U.S. Food and Drug Administration for our current or planned products. We may require substantial additional funding for our operating expenses and for marketing and sales programs. We may not be able to obtain adequate funds for these purposes when we need them or on acceptable terms.
It is difficult for third parties to evaluate our likely future performance because we are still developing our markets.
Since our incorporation in March 2000, we have been engaged in start-up and development activities. We have operated at a loss, and we expect losses to continue. We have little operating history upon which a third party may base an evaluation of our likely future performance.
We may not be able to successfully develop our business because our products and market are evolving.
There can be no assurance that our business strategies will lead to any profits. We face risks and uncertainties relating to our ability to successfully implement our strategies. We face expenses and uncertainties related to operating with a little known product, with an unproven business model, and a new and rapidly evolving market. Our business model is based on an expectation that demand for ecologically friendly disinfecting and cleaning products will increase materially. However, the demand may never materialize.
We have a history of losses, and we will need additional capital to continue our operations. If we are unable to obtain additional capital, we will have to curtail our operations.
We have generated limited revenues and incurred significant losses. We have never been profitable and continue to incur losses from operations. We may never generate sufficient revenue, income and cash flows to support our operations. We expect to incur losses because we anticipate incurring significant expenses in connection with developing our generators and products, expanding markets, and building brand awareness. Our future revenues could decline by reason of factors beyond our control such as technological changes and developments, downturns in the economy and decreases in demand for sanitizing electrolyzed fluid related products. If we continue to incur losses, if our revenues decline or grow at a slower rate, or if our expenses increase without commensurate increases in revenues, our operating results will suffer and the value of our common stock may decline.
Our management may not have adequate time and resources to conduct our distribution activities, which could hinder our ability to sell products.
We may not be able to sell our products effectively if our management does not have adequate time and resources to conduct our distribution activities. Moreover, as our sales grow, the strain on our management to sell and distribute products may increase. In the event that we decide to retain distributors, we may not be able to establish relationships with distributors. In addition, we may incur additional costs and business delays and interruptions in sourcing distributors.
It may be difficult to assess our future income performance as a number of factors may cause fluctuations in operating results.
We believe that period-to-period comparisons of our operating results are not a good indication of our future performance because of variables which include:
| | - | Growth rate of the market for environmentally friendly sanitizing products; |
| | - | Our ability to attract and retain customers; |
| | - | Our ability to upgrade, develop and maintain our systems and infrastructure; |
| | - | Amount and timing of operating costs and capital expenditures relating to business expansion and infrastructure; |
| | - | Delays in developing and introducing new products; |
| | - | Announcement, introduction and market acceptance of new or enhanced sanitizing products by competitors; |
| | - | Governmental regulation of our products by agencies such as the FDA, USDA, EPA, or others. |
Failure to successfully develop and introduce new products would harm our business.
Our future success depends in large part on our ability to develop new or enhanced uses for our products. We may fail to identify new product opportunities successfully or develop and timely bring new products to market. We may also experience delays in completing development of enhancements to, and new versions of, our products. We may be unable to develop or acquire marketable products in a timely manner. In addition, product innovations may not achieve the market penetration or price stability necessary for profitability. As the market and technology related to environmentally friendly sanitizing products grows, we may change our business model to take advantage of new business opportunities, including business areas in which we do not have extensive experience. Failure to develop these or other businesses successfully would be harmful to our business.
We may be unable to protect our intellectual property and proprietary rights, which could harm our business.
Our success depends in part upon our ability to protect our intellectual property. We rely on a combination of trade secret, trademark, and contractual protection to establish and protect our proprietary rights. We have been assigned rights to applications submitted to the U.S. Patent and Trademark Office for a utility patent relating to the use of our electrolyzed acidic fluid to sanitize eggs, and a second patent relating to the use of our electrolyzed alkaline fluid to clean and sanitize carpets and hard surfaces. We are also applying for patent protection from the United States government, but do not own patents on products that we intend to launch in the next 12 months. We may enter into confidentiality agreements with employees and consultants involved in product development or distribution. Despite efforts to protect proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Precautions may not prevent someone from misappropriating or infringing our intellectual property, or an independent third-party from developing competitive products.
Most of our products are not patented which creates vulnerability to competitors.
The active ingredient in the sanitizing fluids that are created by our generator products is electrolyzed water that kills bacteria, viruses and molds shortly after contact. Our patents and patent applications apply only to certain aspects of our technology and products. We did not create the concept of electrolyzed water as a sanitizer and cleaner and other companies may purchase machines to create electrolyzed water or develop machines to create electrolyzed water and compete with us. Such competition could have a harmful effect on our business.
If our services and technologies are used in defective products or include defective parts, we may be subject to product liability or other claims.
If we market products that are defectively manufactured, used in defective or malfunctioning products or contain defective components, we could be subject to product liability claims and product recalls, safety alerts or advisory notices. While we have product liability insurance coverage, we cannot assume that it will be adequate to satisfy claims made against us in the future or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition, results of operations and reputation, and on our ability to attract and retain licensees and customers.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and include a report of management on our internal control over financial reporting in our annual report on Form 10-K. That report must contain an assessment by management of the effectiveness of our internal control over financial reporting and must include disclosure of any material weaknesses in internal control over financial reporting that we have identified.
The requirements of Section 404 of the Sarbanes-Oxley Act are ongoing and also apply to future years. We expect that our internal controls over financial reporting will continue to evolve as we continue in our efforts to grow and expand our business. Although we intend to continue to improve our internal control processes in order to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. Therefore, we cannot assure you that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered.
We are exposed to unique risks from operations in China which could affect our operations
Our international operations expose us to a wide variety of risks including increased credit risks, customs duties, import quotas and other trade restrictions, potentially greater inflationary pressures. Changes may occur in foreign trade and investment laws in the territories and countries where we will operate. United States laws and regulations relating to investment and trade in foreign countries could also change to our detriment. Any of these factors could adversely affect our revenues and profits.
We are subject to risk of political instability and trade sanctions within China. Since 1949, China has been primarily a planned economy subject to a system of macroeconomic management. Although the Chinese government still owns a significant portion of the productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms. We cannot predict what affects the economic reform and macroeconomic measures adopted by the Chinese government may have on our business or results of operations. As China shifts to a market economy, growing economic and social freedoms may conflict with the more restrictive political and governmental policies.
Further risks relating to international operations include, but are not restricted to, unexpected changes in legal and regulatory requirements, changes in tariffs, exchange rates and other barriers, political and economic instability, possible effects of war and acts of terrorism, difficulties in accounts receivable collections, difficulties in managing distributors or representatives, difficulties in staffing and managing international operations, difficulties in protecting our intellectual property overseas, seasonality of sales and potentially adverse tax consequences. Any of these factors could adversely affect our revenues and profits. Additional risks include, but are not limited to the following:
| ● | We may be sensitive to a slowdown in economic growth or other adverse changes in the China economy. This is particularly true in light of current financial and economic uncertainties. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China may materially reduce the demand for our services and materially and adversely affect our business. |
● | New political and economic policies of the PRC government could affect our business. |
● | The PRC legal system embodies uncertainties which could limit the legal protections available to us. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. We are subject to laws and regulations applicable to foreign investment in mainland China. However, these laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors. |
Any of these actions could have an adverse effect on our business, financial condition, results of operations and cash flows.
GENERAL RISKS RELATING TO THE SANITATION AND CLEANING INDUSTRIES.
Competition from major companies may decrease our market share, net revenues and gross margins.
Competition in the chemical based disinfecting and surface cleaning products market is intense, and we expect competition to increase. Companies such as Ecolab, Johnson Diversey, SC Johnson, The Clorox Company, Dow, and Procter & Gamble dominate the market. It is possible that large companies that sell chemical based disinfecting and surface cleaning products could develop sanitizers composed of electrolyzed fluids as the key ingredient. Due to these potential competitors' extreme size and financial health, they could use their substantial market share and name recognition, and easy access to marketing outlets and capital markets to compete with us. These companies have substantially greater financial, creative and marketing resources, and proven histories, and may decide to enter and effectively compete in the electrolyzed fluid market, which could adversely affect our business.
Competitors currently selling electrolyzed fluid based sanitation and cleaning products may decrease our market share, net revenues and gross margins.
Many of the companies that already sell electrolyzed fluid based sanitation and cleaning products are able to frequently update and expand products and introduce new products and to diversify product offerings. Many of these competitors are large and financially strong. We compete with these companies primarily in developing electrolyzed fluid products and applications and obtaining customers. These companies have substantially greater financial, creative and marketing resources and proven histories that could make it difficult to compete or maintain customers in the electrolyzed fluid sanitizer market.
Our net revenues and gross margins will not improve if the market for environmentally friendly sanitizing products does not develop.
The market for environmentally friendly sanitizing products is new and evolving. As a result, demand and market acceptance for our products is uncertain. If this new market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if our products do not achieve or sustain market acceptance, our business could be harmed.
Our success will depend on growth in consumer acceptance of environmentally friendly sanitizing products as an alternative to chemically based products.
Factors that might influence market acceptance of our products over which we have little or no control include development of alternative products or methods and willingness of consumers and businesses to use environmentally friendly sanitizing products. Our success depends on the increasing demand for environmentally friendly disinfecting and sanitizing products. If such demand does not continue to increase, demand for our products will be limited and our financial results will suffer.
Inability to manage growth could hinder our success.
We believe electrolyzed water as a sanitizer has broad applications and due to its non-toxic nature has advantages over chemical based sanitizers. As a result, we believe that we have the ability to grow rapidly during the next few years. Our efforts to manage our production and larger scale quality assurance efforts may not be successful or we may fail to satisfy large demand requirements on a timely and/or cost-effective basis. A failure to manage our growth would have an adverse effect on our operations and overall financial health.
ADDITIONAL RISKS RELATED TO OUR COMMON STOCK
Continued control by existing management and a limited number of shareholders.
The Company's management and a limited number of shareholders retain significant control over the Company and its business plans and investors may be unable to meaningfully influence the course of action of the Company. The existing management and a limited number of shareholders are able to control substantially all matters requiring shareholder approval, including nomination and election of directors and approval or rejection of significant corporate transactions. There is also a risk that the existing management of the Company and a limited number of shareholders will pursue an agenda which is beneficial to themselves at the expense of other shareholders.
There is no assurance of an active public market for the Company's common stock and the price of the Company's common stock may be volatile.
Given the relatively minimal public float and trading activity in the Company's securities, there is little likelihood of any active and liquid public trading market developing for its shares. If such a market does develop, the price of the shares may be volatile. Since the shares do not qualify to trade on any national securities exchange, if they do actually trade, the only available market will continue to be through the OTC Markets. It is possible that no active public market with significant liquidity will ever develop. Thus, investors run the risk that investors may never be able to sell their shares.
Possible future issuances of additional shares that are authorized may dilute the interests of stockholders.
The Company's Certificate of Incorporation currently authorizes its Board of Directors to issue up to 50,000,000 shares of Common Stock. Any additional issuances of any of the Company's securities will not require the approval of shareholders and may have the effect of further diluting the equity interest of shareholders.
Existence of limited market for the Company's common stock.
There has been a very limited market for the Company's common stock. Accordingly, although quotations for the Company's common stock have been, and continue to be, published on the OTC Markets. These quotations, in light of the Company's operating history, continuing losses and financial condition, are not necessarily indicative of the value of the Company. Such quotations are inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
Our stock is currently listed on the OTCQB™ market which may have an unfavorable impact on our stock price and liquidity.
The OTCQB market is a significantly more limited market in comparison to other larger trading markets such as the NASDAQ Stock Market. The quotation of our shares on the OTCQB results in a relatively illiquid market available for existing and potential shareholders to trade shares of our common stock, which could ultimately depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
There are legal restrictions on the resale of the common shares, including penny stock regulations under the U.S. federal securities laws. These restrictions may adversely affect the ability of investors to resell their shares.
Our securities are subject to the “penny stock” rules, which apply generally to equity securities with a price of less than $5.00 per share, other than securities registered on certain national exchanges or quoted on the NASDAQ Capital Market. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser of such securities and have received the purchaser's written consent to the transactions prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to the broker-dealer and the registered underwriter, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally among other requirements, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As such, the "penny stock" rules may restrict the ability of purchasers in this offering to sell the common stock in the secondary market. The transaction costs associated with penny stocks are high, reducing the number of broker-dealers willing to engage in the trading of our shares. This results in reduced liquidity and an increase in the spread between the bid and ask price. Investors should be aware that the level of trading activity on the secondary market can be very illiquid and investors may find it expensive and difficult to sell their shares.
Sales of a substantial number of restricted shares that will be eligible for sale could adversely affect the price of our common stock.
We have issued shares of "restricted" common stock in consideration for proprietary rights, business plans, organizational services and expenses and cash in private placements. Many of the shares are held by persons who are officers, directors and/or control persons of the Company and who hold such shares as "restricted securities", as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended. These securities held by officers, directors and/or control persons may be sold in compliance with Rule 144 which provides, in essence, that officers and directors and others holding restricted securities may each sell, in brokerage transactions, an amount equal to 1% of the company's total outstanding common stock every three months. In addition, Rule 144 provides that shares must not be sold until they have been held for a period of at least six months from the date they were fully paid for. The possible sale of these restricted securities under Rule 144 may, in the future, have a depressive effect on the price of the company's Common Stock in any public market which may develop, assuming there is such a market, of which there can be no assurance. Furthermore, persons holding restricted securities for six months who are not "affiliates" of the company, as that term is defined in Rule 144, may sell their securities pursuant to Rule 144 without any restrictions and/or limitations on the number of shares sold.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 2. PROPERTIES
Our corporate headquarters are located in leased office space at 1890 Cobb International Blvd, Suite A, B & C, Kennesaw, GA 30152. We believe that our current offices are adequate for present needs. Office space is leased and will be increased, as we deem necessary. We believe that it will not be difficult to find additional or alternative office space if necessary in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On February 11, 2011, the Company filed a Verified Complaint for Damages (“Complaint”) in the Superior Court of Cobb County State of Georgia against Fieldale Farms Corporation (“Fieldale”). The lawsuit seeks approximately $1,100,000 plus interest, which is the amount due under the agreement and an additional amount not less than $100,000 for the costs of EAU’s replacement of Fieldale equipment. Pursuant to the agreement the Company leased and installed certain equipment to Fieldale. In exchange, Fieldale agreed to pay the Company a monthly rental fee for a guaranteed term of four (4) years. Although the Company and the Company’s technology performed in accordance with the agreement, Fieldale Farms cancelled the agreement in the fourth quarter of 2009. While we are unable at this time to estimate the likelihood of a favorable outcome in this matter, we intend to prosecute vigorously our claims against Fieldale. In March 2011, the Company received an Answer and Counterclaim, wherein Fieldale alleges that the Company caused damage to other equipment and property of Fieldale and seeks to recover its actual damages estimated at $400,000. The Company disputes the claim and will vigorously defend against the claim. In October 2011, the case was moved from Cobb County to Habersham County. The Company filed for summary judgment, which was heard by the judge in May 2012. In October 2012, the Judge ruled on the case. The Judge ruled against the Company’s claims due to a damages provision in the contract. The judge further accepted the Company’s arguments to dismiss each of the counter claims made by Fieldale. The Company has filed an appeal on the judge’s ruling against the Company’s claims for breach of contract, and Fieldale has filed a cross-appeal on its counter-claims. Fieldale’s cross-appeal will apply only if the Court of Appeals reverses the Superior Court’s dismissal of the Company’s claims. The appeal was heard by three judges in April 2013. In December 2013 the appeal was denied by the Court of Appeals. The Company has applied to the Supreme Court of Georgia for certiorari, which means that we have asked the Supreme Court to review the Court of Appeals decision. No decision has been made at this time.
ITEM 4. MINE SAFTEY DISCLOSURES
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock trades on the OTCQB Marketplace, operated by OTC Markets Group Inc., under the ticker symbol “EAUI”. Previously our common stock was quoted on the OTC Bulletin Board under the symbol EAUI.OB. We have not declared dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future.
Our shares are thinly traded, with low average daily volume. This, coupled with a limited number of market makers, impairs the liquidity of our common stock, not only in the number of shares of common stock that can be bought and sold, but also through possible delays in the timing of transactions, and lower prices for our common stock that might otherwise prevail. This could make it difficult for an investor to sell shares of our common stock or to obtain a desired price.
Our common stock may be subject to the low-price security, or so called “penny stock,” rules that impose additional sales practice requirements on broker-dealers who sell such securities. The securities Enforcement and Penny Stock Reform Act of 1990 require additional disclosure in connection with any trades involving a stock defined as a “penny stock” (generally defined as, according to recent regulations adopted by the U.S. Securities and Exchange Commission, any equity security that has a market price of less than $5.00 per share, subject to certain exceptions), including the deliver, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. The regulations governing low-priced or penny stocks sometimes may limit the ability of broker-dealers to sell the Company’s common stocks and thus, ultimately, the ability of the investors to sell their securities in the secondary market. Prices for the Company’s shares will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the shares, the Company’s results of operations, what investors think of the Company and general economic and market conditions. Market fluctuations could have a material adverse impact on the trading of our shares.
The table below sets forth the range of high and low closing prices of our common stock as reported on the OTCQB Marketplace, for the last two years. Common stock began trading publicly during May 2004.
| | EAU Technologies, Inc. Common Stock | |
| | | High | | | Low | |
| Year Ended December 31, 2013 | | | | | | |
| Quarter Ended March 31, 2013 | | $ | 0.1 | | | | 0.02 | |
| Quarter Ended June 30, 2013 | | | 0.12 | | | | 0.08 | |
| Quarter Ended September 30, 2013 | | | 0.15 | | | | 0.03 | |
| Quarter Ended December 31, 2013 | | | 0.06 | | | | 0.03 | |
| | | | | | | | | |
| | | | High | | | Low | |
| Year Ended December 31, 2012 | | | | | | | | |
| Quarter Ended March 31, 2012 | | $ | 0.1 | | | | 0.01 | |
| Quarter Ended June 30, 2012 | | | 0.6 | | | | 0.07 | |
| Quarter Ended September 30, 2012 | | | 0.15 | | | | 0.01 | |
| Quarter Ended December 31, 2012 | | | 0.14 | | | | 0.02 | |
As the foregoing are over-the-counter market quotations, they reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not represent actual transactions.
As of December 31, 2013, the Company had approximately 380 record holders of common stock.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EAU TECHNOLOGIES, INC., (referred to herein sometimes as “EAU,” “we,” “us,” or the “Company”), is in the business of developing, manufacturing and marketing equipment that uses water electrolysis to create non-toxic cleaning and disinfecting fluids for food safety applications as well as dairy drinking water. These fluids have various commercial applications and may be used in commercial food processing and agricultural products that clean, disinfect, remediate and hydrate. The processes for which these fluids may be used are referred to in this Report (the “Report”) as the “EW Technology.” For example, we believe that our food and agricultural treatment products may be used to systemically treat various facets and phases of the food chain, from soil to animal feed to meat processing, by eliminating dangerous and unhealthy pathogens from the food chain with organically based and highly effective solutions. At the levels employed, the fluids and products are environmentally safe and non-toxic and do not contain or leave harmful residues. The electrolyzed water fluids created by the EW Technology (referred to herein sometimes as the “EW Fluids” or “Empowered WaterTM”) generated by our specialized equipment can be used in place of many of the traditional products used in commercial, industrial and residential disinfecting and cleaning.
Our focus is on our three core competencies which are, producing high volumes of electrolyzed water, controlling the properties of the water and using our application knowledge. Because of our ability to produce high volumes of water and control the water properties, our target market is in commercial applications where we believe we can add value by generating measurable productivity and efficiency gains. We will continue to use a disciplined stage gate development process that drives ideas to commercial test installations that turn into revenues. Once we have developed an application we will attempt to find strategic partners that would be able to assist us with a large scale commercial roll-out of the technology.
We have identified the following industries for early stage sales and marketing focus: 1) food and beverage processing, 2) dairy production and processing, 3) meat and poultry processing and 4) agricultural grow-out and processing (“Primary Markets”). As of the date of this Report, the Company was focused on these markets because we believe that for each of these markets we have a competitive advantage, the potential ability to attract a leading strategic industry partner, or we can provide an attractive value-added proposition. To penetrate these markets, EAU is conducting trials and completing commercial installations that will lead to partnerships with enterprises that can assist in rolling the technology out on a large scale.
We have obtained patent protection on four separate uses of electrolyzed fluids (cleaning and disinfecting eggs, carpet cleaning, mold remediation and poultry processing). Those uses are how the fluids are used and how they are stabilized for use in different applications. Additionally, we have a patent pending on the electrolysis equipment and several provisional patent pending applications filed to protect new processes and products, as described herein.
Our operations are currently funded by a combination of revenues and capital funding.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1 of the notes to consolidated financial statements in Part II, Item 7 of this Form 10-K, describes the significant accounting policies and methods used in preparation of our consolidated financial statements. We base our estimates on historical experience, current trends, future projections, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates. We believe the following to be our critical accounting estimates because they are both important to the portrayal of our financial condition and results and they require us to make judgments and estimates about matters that are inherently uncertain.
Our critical accounting policies and estimates include the following:
| ● | Impairment of long-lived assets; and |
| ● | Allowances for doubtful accounts. |
Revenue recognition. We recognize revenue according to the terms of the contract and when title passes to the customer or when services are performed in accordance with contract terms. The Company provides an allowance for sales returns based on current and historical experience.
Inventory. Inventory consists primarily of finished goods, is stated at the lower of cost or market; cost is determined on first-in, first-out (FIFO) method. Inventory items are reviewed for potential impairment and obsolescence and any adjustments are made as needed.
Impairment of long-lived assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets are reported at the lower of carrying or fair value less costs to sell.
Allowance for doubtful accounts. The Company sells its products to various commercial customers. It regularly reviews its aging and reserves for amounts that may be at risk in collection.
Commitments and Contingencies
In 2008, EAU signed a lease agreement with Fieldale Farms, a large poultry producer in northern Georgia, to install our equipment at their facility. We began receiving revenues of approximately $27,500 per month from this facility in February 2009. Per the terms of the agreement, we were to help the plant achieve Category 1 compliance for post-chill microbial performance. The plant completed a USDA test set October 2009 with the result that it met the Category 1 requirements for that test set. Fieldale indicated that it was suspending the agreement as of November 23, 2009 and ceased making payments. In February 2011, the Company filed a complaint in the Superior Court of Cobb County Georgia against Fieldale for breaching the agreement. (See Part I, Item 3 - Legal Proceedings)
In December 2010, the Company entered into a Second Amended and Restated License Agreement with Zerorez Franchising Systems, Inc. (“Zerorez”). The agreement amended the previous agreements with Zerorez by expanding the license granted to Zerorez by allowing Zerorez to acquire and use commercial Electrolyzed Water Generators in connection with their performance of franchise services other than the Primacide Generators manufactured or sold by the Company. The term of the agreement is for five years.
In September 2005, Water Science, a related party, paid to the Company $1,000,000 for the exclusive rights to sell our products in South America and Mexico. This agreement also gives Water Science the rights to purchase machinery from the Company at cost plus 25 percent.
Our operations are currently funded by a combination of capital funding and revenues.
Financial Position and Results of Operations
The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements. The financial statements have been restated, which affects the financial position and results of operations that follow.
Financial Position
The Company had $2,654 in cash as of December 31, 2013, compared to $753,348 at December 31, 2012. Our working capital deficit as of December 31, 2013 was $7,932,341 compared to a deficit of $6,854,029 at December 31, 2012. Our current debt and short term advances increased to $5,121,827 at December 31, 2013 from $4,642,375 at December 31, 2012. The Company has received and recorded approximately $555,000 in advance deposits on orders for our equipment. We expect the deposits will be reduced as the Company delivers machines on order to our customers during the first and second quarter of 2014. At December 31, 2013 our stockholders’ deficit was $7,808,794, compared to $5,969,577 at December 31, 2012.
Results Of Operations For The Year Ended December 31, 2013 As Compared To The Year Ended December 31, 2012
Revenues and Net Loss - Net revenues for the year ended December 31, 2013, increased by $1,512,840, to $1,984,049, of which $132,574 are revenues from a related party, compared to revenues of $471,209 for the year ended December 31, 2012. The majority of the revenues are from the sale of our EW water systems in the Clean-in-Place (“CIP”) market and the agriculture and dairy markets.
Our cost of sales increased from $320,672 for the year ended December 31, 2012 to $1,391,741 for the year ended December 31, 2013. This increase is attributable to the increased sales of our EW water systems.
For the year ended December 31, 2013, the Company had a net loss of $1,963,000, compared to a net loss of $2,031,881 for the year ended December 31, 2012. This decrease of approximately $70,000 of net losses is primarily due to the increase in net revenues.
General and Administrative Expense – The Company incurred total general and administrative expenses of $1,677,616, a decrease of $65,463 from the $1,743,079 incurred in 2012. General and administrative expenses for 2013 consist primarily of payroll and labor expense of $978,745, expenses related to stock options and warrants of $97,283, professional fees of $88,470, insurance expense of $241,767, and travel related expenses of $58,601.
Research and Development - Our research and development expenses for the year ended December 31, 2013, were $18,438, an increase of $10,938, as compared to $7,500 for the year ended December 31, 2012.
Interest Expense - Our interest expense increased from $465,336 in 2012 to $561,395 in 2013.
Liquidity And Capital Resources
We do not receive sufficient revenues to fund all of our operational needs. The majority of our additional funding has come from a single shareholder. We currently do not have sufficient funds on hand to fund all of our operational needs for the next 12 months. We will have sufficient funds to operate our business only if we receive expected orders from our customers and we are able to secure additional funding. We do not have any agreements in place for additional funding. We may not have enough funding for operations to fund our business until it is developed enough to bring the business plan to maturity. Our working capital requirements for the foreseeable future will vary based upon a number of factors, including, our timing in the implementation of our business plan, our growth rate and the level of our revenues. We project $1,500,000 is required over the next twelve months to execute our business plan. Moreover, if we able to expand our sale of EW machines as anticipated, we may need significant additional working capital to fund that expansion. We do not have arrangements in place to provide us with this funding or any additional funding. In light of these circumstances, the ability of the Company to continue as a going concern is in substantial doubt.
At December 31, 2013, we had cash of $2,654, compared to $753,348 at December 31, 2012. We had a net loss of $1,963,000 for the year ended December 31, 2013 compared with net loss of $2,031,881 for the year ended December 31, 2012. The net loss per share for the year ended 2013 and 2012 was $0.07.
Net cash used in operating activities for the year ended December 31, 2013 was $1,201,322, an 88% increase, compared to $640,141 for the same period in 2012. The primary changes to the cash flow from operating activities was an decrease in the advance deposits on machine orders of $1,069,440 due to shipping of orders, a decrease in inventory of $817,473, and an increase in accrued interest of $483,249.
At December 31, 2013, the Company’s net inventory was $653,967, representing a 55% decrease from the $1,169,966 on hand at December 31, 2012.
Net cash used in investing activities during the period ended December 31, 2013 was $12,328 as compared to $15,839 in the same period in 2012. These cash flows consisted of expenditures for patent work.
Cash flows from financing activities provided the Company $438,300 and $1,325,000 for the years ended December 31, 2013 and 2012, respectively. This is primarily a result of the Company’s continued issuance of notes payable to fund operations.
In November 2013, the Company defaulted under its loan agreements (“Loan Agreements”) with our major stockholder, Water Science, and its principal and our director, Peter Ullrich (collectively, “Lenders”), due to our inability to repay as of the maturity date. The terms of the Loan Agreements are described in Footnote 10 to the audited financial statements included in this Form 10-K. In April 2014, we entered into an amendment to the Loan Agreements (“Amendment”) to extend the maturity date until November 30, 2014.
As of April 10, 2014, we had approximately $5,100,000 in short-term debt due under the Loan Agreements. We do not currently have sufficient cash to repay this indebtedness. The report of our independent registered public accounting firm includes an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business.
Although this default has been resolved by obtaining an extension, there is no assurance that we will be able to repay the indebtedness at the new maturity date or obtain future extensions. The Loan Agreements are secured by substantially all of our present and future assets on a first lien basis. Our ability to continue as a going concern is dependent on our ability to successfully execute a refinancing of the amounts due under the Loan Agreements. The inability to refinance or restructure our debt would have a material adverse effect on the solvency of the Company and our ability to continue as a going concern. If we defaulted again and the Lenders exercised their rights and remedies in the Loan Agreements, then the proceeds of the assets constituting their collateral could be insufficient to repay the indebtedness owed to them in full, and therefore holders of our common stock could lose their entire investment. Under these circumstances we may be unable to continue operating as a going concern.
For additional discussion of the risks associated with our Loan Agreements, see “Part I - Item 1A – Risk Factors.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the independent auditors' report are attached to this Report and are incorporated into this Item 7 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in our independent accountants, HJ & Associates, LLC, or disagreements with them on matters of accounting or financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company has evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2013, pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the principal executive and financial officers concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other associates, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal Control – Integrated Framework. Based on its assessment, management has concluded that, as of December 31, 2013, the Company’s internal control over financial reporting was effective to provide reasonable assurance based on those criteria.
The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of the Company’s operations.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation requirements by the company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Changes to Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, or other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation.
ITEM 9B. OTHER INFORMATION
In April 2014, the Company entered into a loan agreement (“2014 Loan Agreement”) with a related party. The principal amount of the note is $303,300. The funds had been advanced to the Company at various times throughout 2013. The 2014 Loan Agreement provides for interest at a rate of 10% annually and will mature on November 30, 2014. The outstanding balance under the 2014 Loan Agreement is convertible into shares of the Company’s common stock at $0.31 per share and no principal or interest payments are due until maturity. The 2014 Loan Agreement provides that accrued interest and the outstanding principal balance can be prepaid, in whole or in part, at any time without premium or penalty. In connection with the negotiation of the 2014 Loan Agreement, the Company also granted a warrant to purchase up to 303,300 shares of the Company’s common stock at an exercise of $0.31 per share. The warrant expires in April, 2019.
On November 30, 2013, the Company defaulted under its loan agreements (“Loan Agreements”) with our major stockholder, Water Science, and its principal and our director, Peter Ullrich (collectively, “Lenders”) due to our inability to repay as of the maturity date. The terms of the Loan Agreements are described in Footnote 10 to the audited financial statements included in this Form 10-K. As of April 10, 2014, we had approximately $5,100,000 in short-term debt due under the Loan Agreements, including accrued and unpaid interest. We do not currently have sufficient cash to repay this indebtedness.
In April 2014, the Company entered into agreements with Water Science and Mr. Ullrich to extend the Senior Convertible Note, the $358,527 Note and the $1,325,000 Note until November 30, 2014.
In January 2014, the Company obtained an unsecured short term advance of $285,000 from Peter Ullrich a member of the Board of Directors of the Company. The final agreement to document the advance has not been signed, and the material terms are not final. It is anticipated that the final loan will be at 10% simple interest and conversion rights into Company common stock. The material terms of the final agreement will be disclosed in subsequent filings with the Securities and Exchange Commission.
On April 10, 2014, the Company entered into an amendment to the Loan Agreements (“Amendment”) to extend the maturity date until November 30, 2014. All of the other terms of the Loan Agreements remained unchanged by the Amendment. A copy of the Amendment is filed with this Form 10-K as Exhibits 10.27, 10.28 and 10.29, and incorporated herein by this reference.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND COPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names, age, and position of each of our directors and executive officers.
Name and Address | Age | Position and Office Held |
Wade R. Bradley 1890 Cobb International Blvd. Kennesaw, GA 30152 | 53 | Chief Executive Officer; Director |
Brian D. Heinhold 1890 Cobb International Blvd. Kennesaw, GA 30152 | 41 | Chief Financial Officer |
Doug Kindred 1890 Cobb International Blvd. Kennesaw, GA 30152 | 59 | Executive Vice President and Chief Technology Officer |
Peter Ullrich 1890 Cobb International Blvd. Kennesaw, GA 30152 | 71 | Director |
Theodore C. Jacoby, Jr. 1716 Hidden Creek Ct. St. Louis, MO 63131 | 73 | Director |
In April 2007, the Board of Directors of the Company appointed Peter Ullrich, as a member of the Board of Directors.
In September 2007, the Board of Directors of the Company appointed Ted Jacoby, Jr., as a member of the Board of Directors. The Board also appointed Mr. Jacoby as a member of the Audit Committee and the Compensation Committee.
Biographical Information
Set forth below is biographical information for each officer and director.
Wade Bradley is the Company’s Chief Executive Officer and a board member. Before joining EAU Mr. Bradley served as President of the Retail and Wholesale Group from November 2005 to November 2006, and as Vice President of the Consumer Products Group from June 2000 to November 2005, of Oil-Dri Corporation of America (NYSE:ODC). He worked at various other positions with Oil-Dri from 1990 to 2000. Mr. Bradley began his career at the public accounting firm of Arthur Young & Company in their Entrepreneurial Services Group. He then worked as the Executive Director of a Non-Profit organization that assisted disadvantaged youths in furthering their education. Mr. Bradley received his Bachelor of Science in Accountancy from University of Illinois. He then received his Masters of Business Administration from Harvard Business School.
Brian D. Heinhold is the Company’s Chief Financial Officer. Mr. Heinhold took over as CFO in September 2006. He served as the Company’s controller since joining the Company in May 2006. Before joining EAU, he worked for a Certified Public Accounting firm, from 2004 to 2006, as an auditor and consultant. While working at the CPA firm, Mr. Heinhold was involved with both private and public companies. From 2002 to 2004, he worked as a manager of an entertainment center in Salt Lake City, where he oversaw the operations of the company. Prior to that, he worked as the business and finance manager at a local automotive dealership from 2001 to 2002. From 1994 to 2001, Mr. Heinhold was the accounting manager of a small engineering and manufacturing firm, where he oversaw all the functions of the accounting department. He has also served in many volunteer positions where he worked with adults and youth. Mr. Heinhold graduated from the University of Utah with a Masters of Public Accountancy degree and a Bachelor of Arts degree in Finance.
Doug Kindred is currently the Company’s Executive Vice President and Chief Technology Officer and has over 27 years of management and engineering experience in numerous industries. He was a co-owner and Vice President of ESI, Inc., a turnkey, design/build engineering construction firm for over 18 years. He served as President of an air pollution control equipment manufacturer prior to joining EAU. He has extensive experience throughout his career with the production of premium quality water including numerous boiler feed water systems that utilized demineralizers, automated acid and caustic regeneration systems, water softeners and condensate polishing systems for various industries. Mr. Kindred holds a B.S. degree in Mechanical Engineering from Georgia Tech and is a graduate of the Kenan-Flagler Business School Executive Program at The University of North Carolina, Chapel Hill. He is a registered professional engineer.
Peter Ullrich has served as a director of the Company since April 2007. Mr. Ullrich is currently EAU’s largest shareholder and single largest customer and brings vast international business experience to EAU. Mr. Ullrich is the owner of Water Science, LLC (“WS”), Latin America’s exclusive licensee of EAU’s Empowered Water™ technologies. Mr. Ullrich is also the owner and Chairman of the Board of Esmeralda Farms, an innovative leader in the international floral industry. Mr. Ullrich has been involved in all aspects of the international floral industry for over 35 years. He is a pioneer in developing and adopting cutting edge technologies that not only assist in building better business in the floral industry but creating cleaner safer working environments for his over 5,000 employees. Esmeralda Farms are certified by various international “green” organizations, such as Florverde, Flower Label Program and Veriflora. Mr. Ullrich was the recipient of the 2006 SAF Gold Medal Achievement Award. Mr. Ullrich was born and educated in Germany.
Theodore C. Jacoby, Jr. was appointed as a director in September 2007. Mr. Jacoby’s experience in the dairy industry provides both application and practical knowledge to EAU. Mr. Jacoby is currently President and Chief executive Officer of T.C. Jacoby & Co., the leading independent distributor of bulk dairy products including raw milk, cream, condensed milk, powdered milk, butter and cheese in the U.S. Mr. Jacoby has expanded T.C. Jacoby to numerous international markets. Mr. Jacoby is an active member of the international dairy community serving on the Board of Directors of the U.S. Dairy Export Committee Council since 1995. He currently serves on the Trade Policy Committee. T.C. Jacoby & Company is a member of many other prominent dairy trade organizations including the International Dairy Foods Association, California Milk Processors Association and Associate Member of National Milk Producers Federation. Mr. Jacoby received his Bachelor of Science degree in Agriculture from the Missouri College of Agriculture, Food, and Natural Resources. After graduation, Mr. Jacoby proudly served in the United States Marine Corp for four years.
William Warwick served as a director of the Company until his resignation effective October 1, 2103. J. Leo Montgomery served as a director of the Company until his resignation effective December 17, 2013.
Committees
The Board of Directors maintains standing Audit and Compensation Committees.
Audit Committee. The Audit Committee, which consists of Theodore C. Jacoby, Jr., serves as an independent and objective party to, among other things, review the Company’s financial statements and annual report, review and appraise the audit efforts of the Company’s auditors and pre-approve permissible services to be performed for the Company by its auditors, and is responsible for the appointment, compensation and oversight of the work of the independent public accountants which audit the Company’s financial statements. The primary function of the Audit Committee involves oversight functions to support the quality and integrity of the Company’s accounting and financial reporting processes generally. It should be noted, however, that the members of the Committee are not necessarily experts in the fields of auditing and accounting and do not provide special assurances on such matters. Mr. Montgomery and Mr. Warwick served on the Audit Committee until the respective dates of their resignations. The Audit Committee met five times during 2013. The report of the Audit Committee appears below in this Proxy Statement. A copy of the Audit Committee’s charter is included on the Company’s website at www.eau-x.com.
Compensation Committee. The Compensation Committee, consisting of Theodore C. Jacoby, Jr., sets the compensation of executive officers and administers the Company’s incentive plans, including the Company’s stock option plans. Mr. Montgomery and Mr. Warwick served on the Compensation Committee until the respective dates of their resignations. The Compensation Committee did not meet during 2013. The Compensation Committee has adopted a written charter, a copy of which is available on the Company’s website at www.eau-x.com. As set forth in the Compensation Committee charter, the Committee:
| | ● | Has the authority to engage independent compensation consultants and legal advisors when determined by the Committee to be necessary or appropriate. In 2007, the Committee engaged a compensation consultant, Phillip Blount & Associates, Inc., to assist it with, among other things, research on appropriate director, executive and employee compensation levels. |
| | ● | Has the authority to delegate its responsibilities as it may deem appropriate, to the extent allowed under applicable law. The Committee generally does not delegate its responsibilities to others. |
| | ● | Requests that the Chief Executive Officer provide to the Committee his recommendations relative to compensation of other executive officers of the Company. The Committee meets in executive session to determine the compensation of the Chief Executive Officer of the Company. |
Meetings and Attendance. The Board of Directors held two meetings during 2012. Each incumbent director attended at least 75 percent of the aggregate of the meetings of the Board of Directors and of the committees of which he was a member. The Company strongly encourages each Board member to attend the Company’s annual meeting of stockholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, and the regulations of the Securities and Exchange Commission promulgated thereunder, require our directors, executive officers and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission, and provide us with copies of such reports.
Based solely on a review of the copies of the reports furnished to us, or written representations that no reports were required to be filed, we believe that during the fiscal year ended December 31, 2013 all Section 16(a) filing requirements applicable to our directors, officers, and greater than 10% beneficial owners were completed, except Mr. Ullrich filed one late Form 4 to report three transactions.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table provides certain summary information concerning the compensation paid or accrued by us and our subsidiaries, to or on behalf of our Chief Executive Officer. Other than as set forth in the table, no executive officer’s cash salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the value of restricted shares issued in lieu of cash compensation and certain other compensation, if any, whether paid or deferred:
| Name and Principal Position | | Year | | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
Wade R. Bradley Chief Executive Officer | | | 2013 2012 | | | | 240,000 240,000 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 6,000 (1) 6,000 (1) | | | | 246,000 246,000 | |
Doug Kindred Chief Technology Officer | | | 2013 2012 | | | | 176,985 176,985 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 0.00 0.00 | | | | 6,000 (1) 6,000 (1) | | | | 182,985 182,985 | |
| (1) | Other compensation consists of car allowances. |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information regarding stock options and restricted stock held by the Company's Named Executive Officers at December 31, 2013.
| | | Option Awards |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Option Exercise Price ($) | | Option Expiration Date |
| Wade R. Bradley, Chief Executive Officer | | | 500,000 | | | | | 0.31 | | 11/6/2016 |
Doug Kindred, Chief Technology Officer | | | 20,000 25,000 530,000 | | | | | 0.31 0.31 0.31 | | 5/27/2015 6/1/2015 11/8/2017 |
Employment Agreements
As of December 31, 2013, two executives had current employment agreements.
Employment Agreement and Option Agreement with Doug Kindred
In connection with the continued employment of Mr. Kindred as Chief Technology Officer on November 8, 2007, Mr. Kindred and the Company entered into an employment agreement (the “Agreement”), a copy of which is attached as Exhibit 10.1 to the Form 8-K filed by the Company dated November 8, 2007 and incorporated herein by reference.
The material terms of the agreement include the following:
1. Appointment. Per the terms of the Agreement, Mr. Kindred will continue to serve as the Company’s Chief Technology Officer.
2. Base Salary. Mr. Kindred’s initial base salary will be $176,985 per year.
3. Annual Bonuses. Beginning with the Company's fiscal year which commences on January 1, 2008, Mr. Kindred is entitled to receive a bonus of up to 35% of his base salary ($61,945), upon the achievement of annual performance benchmarks, to be set by the Board of Directors (the “Board”) and the CEO.
4. Inducement Stock Option Grant. Mr. Kindred is entitled to receive stock options to purchase 530,000 shares of the Company’s common stock. The options will not constitute incentive stock options under Section 422 of the Internal Revenue Code of 1986. The options vested in full on November 8, 2011.
The exercise price per option is $1.30. The terms and conditions of the options are included in a separate option grant agreement substantially in the form attached in an 8-K the Company filed with the SEC dated November 8, 2007. The exercise price per option was adjusted to $0.31 by the Company in September 2010.
5. Standard Benefits. Mr. Kindred will be eligible to participate in the Company’s standard benefits package, on the same basis as other senior executives of the Company.
6. Vacation. Mr. Kindred will be entitled to 20 business days of paid vacation per calendar year.
7. Company Car. The Company shall reimburse Mr. Kindred for the amount required to lease an automobile of Mr. Kindred’s choice up to a maximum of $500 per month. In addition, the Company will reimburse Mr. Kindred, up to a maximum of $1,000 per year, for the following properly documented expenses related to such automobile: (i) service, (ii) maintenance, (iii) repair and (iv) excess mileage fees required by the automobile lease, if such excess mileage is the result of required business travel by Mr. Kindred on behalf of the Company.
8. Term. The employment agreement expires on the third anniversary of the Effective Date, subject to automatic renewal on each one-year anniversary thereafter for a one-year term unless either party has given the other 60 days’ prior written notice.
9. Severance. Mr. Kindred will be entitled to certain severance payments and other rights if his employment is terminated: (i) by the Company without “Cause,” as that term is defined in his agreement, or (ii) by Mr. Kindred for “Good Reason,” as that term is defined in his agreement. In each such instance, Mr. Kindred’s severance benefits will be as follows:
| ● | Salary. Any unpaid base salary through the date of termination. |
| ● | Vacation. Any earned but unused vacation time. |
| ● | Severance Payment. He will be entitled to an amount equal to twelve months of base salary payable over the 12-month period immediately following termination. |
| ● | Options. All unvested options shall immediately vest and, together with the previously vested options, must be exercised during the 60 days immediately following the date of termination (and if not so exercised, all such options shall automatically and irrevocably terminate). |
10. Additional Covenants. The employment agreement contains restrictive covenants, including anti-solicitation provisions extending one year after termination of his employment, as well as standard confidentiality obligations.
Employment Agreement, Option Agreement, and Escrow Agreement with Mr. Bradley
In connection with the appointment of Wade R. Bradley as Chief Executive Officer and President and as further described under Item 5.02 below, the contents of which are incorporated hereunder by reference, on October 24, 2006, Mr. Bradley and the Company entered into an employment agreement, a copy of which was filed as Exhibit 10.1 in an 8-K the Company filed with the SEC dated October 30, 2006 and incorporated herein by reference. Mr. Bradley agreed to begin working for the Company on a date determined by him and in no event later than November 6, 2006 (the "Effective Date").
In February 2010, the Company and Wade R. Bradley amended Mr. Bradley’s employment agreement to (i) remove a provision that required the Company to maintain $240,000 in an escrow account as collateral for any future severance payment to which Mr. Bradley may become entitled pursuant to the Employment Agreement and (ii) reduce any future severance payment to which Mr. Bradley may become entitled pursuant to the Employment Agreement from twelve months salary, paid over the twelve month period following termination, to six months salary, paid over the six month period following termination.
In consideration of Mr. Bradley’s agreement to amend the Employment Agreement, $120,000, less applicable Federal and state tax withholdings (which were retained by the Company and remitted to the applicable taxing authorities) and applicable escrow agent fees, was disbursed directly to Mr. Bradley. The remaining balance of $120,000 of the escrow funds, less applicable escrow agent fees, was disbursed to the Company. All interest earned on the escrow funds has also been remitted to the Company. Mr. Bradley and the Company agreed to these amendments to provide the Company with short-term liquidity it needed for operations.
In conjunction with the disbursement of funds from escrow, the escrow agreement between the Company, Mr. Bradley and Specialized Title Services, Inc., filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed October 30, 2006, was terminated.
The material terms of the employment agreement include the following:
1. Appointment. Beginning on the Effective Date, Mr. Bradley will serve as President and Chief Executive Officer of the Company. The Company's Board of Directors (the "Board") is obligated to nominate him to serve on the Board. Subject to shareholder elections, he will serve on the Board through the term of his employment, with no additional compensation for services as a director.
2. Base Salary. Mr. Bradley’s initial base salary will be $240,000 per year. The Board may increase his base salary from time to time.
3. Annual Bonuses. Beginning with the Company's fiscal year which commences on January 1, 2007, Mr. Bradley is entitled to receive a bonus of up to 30% of his base salary ($72,000), upon the achievement of annual performance benchmarks, to be set by the Board from time to time in advance of each fiscal year.
4. Inducement Stock Option Grant. Mr. Bradley is entitled to receive stock options to purchase 500,000 shares of the Company’s common stock, which will represent approximately 2.17% of the Company’s fully diluted capital stock. The options will not constitute incentive stock options under Section 422 of the Internal Revenue Code of 1986. The options were fully vested on November 6, 2010.
The exercise price per option shall be equal to the closing sale price of the Company’s common stock on October 24, 2006. The number of shares subject to the options will be equitably adjusted in the event of any stock split, stock dividend, reverse stock split or other similar event. The terms and conditions of the options are included in a separate option grant agreement substantially in the form attached in an 8-K the Company filed with the SEC dated October 30, 2006 as Exhibit 10.2. The exercise price per option was adjusted to $0.31 by the Company in September 2010.
5. Standard Benefits. Mr. Bradley will be eligible to participate in the Company’s standard benefits package, on the same basis as other senior executives of the Company.
6. Vacation. Mr. Bradley will be entitled to 20 business days of paid vacation per calendar year.
7. Company Car. The Company shall reimburse Mr. Bradley for the amount required to lease an automobile of Mr. Bradley’s choice up to a maximum of $500 per month. In addition, the Company will reimburse Mr. Bradley, up to a maximum of $1,000 per year, for the following properly documented expenses related to such automobile: (i) service, (ii) maintenance, (iii) repair and (iv) excess mileage fees required by the automobile lease, if such excess mileage is the result of required business travel by Mr. Bradley on behalf of the Company.
8. Term. The employment agreement expires on the third anniversary of the Effective Date, subject to automatic renewal on each one-year anniversary thereafter for a one-year term unless either party has given the other 60 days’ prior written notice.
9. Severance. Mr. Bradley will be entitled to certain severance payments and other rights if his employment is terminated: (i) by the Company without “Cause,” as that term is defined in his agreement, (ii) by Mr. Bradley for “Good Reason,” as that term is defined in his agreement, or (iii) non-renewal other than for “Cause.” In each such instance, Mr. Bradley’s severance benefits will be as follows:
| ● | Salary. Any unpaid base salary through the date of termination. |
| ● | Vacation. Any earned but unused vacation time. |
| ● | Severance Payment. He will be entitled to an amount equal to six months of base salary payable over the 6-month period immediately following termination. (This was amended in February 2010.) |
| ● | Options. All unvested options shall immediately vest and, together with the previously vested options, must be exercised during the 60 days immediately following the date of termination (and if not so exercised, all such options shall automatically and irrevocably terminate). |
10. Additional Covenants. The employment agreement contains restrictive covenants, including anti-solicitation provisions extending one year after termination of his employment, as well as standard confidentiality obligations.
Director Compensation
The following table shows the compensation paid to our non-employee directors for the 2013 fiscal year.
Name | | Fees Earned or Paid in Cash ($) | | | Stock Awards ($) | | | Option Awards ($) (1) (2) | | | Total ($) | |
| William J. Warwick (3) | | $ | 0 | | | $ | 0 | | | $ | 30,000 | | | $ | 30,000 | |
| Ted Jacoby | | $ | 0 | | | $ | 0 | | | $ | 30,000 | | | $ | 30,000 | |
| Peter Ullrich | | $ | 0 | | | $ | 0 | | | $ | 30,000 | | | $ | 30,000 | |
| Leo Montgomery (4) | | $ | 0 | | | $ | 0 | | | $ | 30,000 | | | $ | 30,000 | |
(1) Represents for each director a grant of 96,775 stock options with an exercise price of $0.31 per share.
(2) The following directors hold stock options or warrants as of December 31, 2013 covering the following number of shares of the Company’s Common Stock:
| William J. Warwick | 387,100 |
| Ted Jacoby | 387,100 |
| Peter Ullrich | 3,136,631 |
| J. Leo Montgomery | 587,100 |
(3) Mr. Warwick resigned as a member of the Board of Directors on October 1, 2013.
(4) Mr. Montgomery resigned as a member of the Board of Directors on December 17, 2013.
Directors of the Company are not paid a salary. They are reimbursed for their costs incurred in attending Board meetings. In December 2007, the Board determined, based on a study from the compensation consultants, that the directors should receive a total package of $30,000 per year, in a combination of cash fees and equity, beginning in 2008. In 2013, the Board approved a grant of 96,775 stock options to each director, with an exercise price of $0.31 and a term of 5 years.
Code of Ethics
The Company adopted a Code of Ethics on April 6, 2004, that applies to its principal executive officer, principal financial officer, principal accounting officer and controller or persons performing similar functions. A copy of our Code of Ethics was filed as an exhibit to our Annual Report for the year ended December 31, 2004. The Company undertakes to provide to any person, without charge, upon written or verbal request to EAU Tehnologies, Inc. 1890 Cobb International Boulevard, Kennesaw, Georgia, 30152, (678)388-9492.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information about the beneficial ownership of our common stock as of March 30, 2014 by:
| ● | each person or entity who is known by us to own beneficially more than 5% of the outstanding shares of our common stock; |
| ● | each of our named executive officers; and |
| · | all directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities, subject to community property laws, where applicable. The percentage of beneficial ownership is based on 28,575,371 shares of common stock outstanding as of March 30, 2014.
Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | | Percentage of Shares Outstanding |
Peter F. Ullrich (1) 1890 Cobb International Blvd. Kennesaw, GA 30152 | 30,015,892 | | 76.3% |
Water Science, LLC. (1) 1890 Cobb International Blvd. Kennesaw, GA 30152 | 10,330,770 | | 32.7% |
Wade R. Bradley (2) 1890 Cobb International Blvd. Kennesaw, GA 30152 | 500,000 | | 1.7% |
Doug Kindred (3) 1890 Cobb International Blvd. Kennesaw, GA 30152 | 703,250 | | 2.4% |
Theodore C. Jacoby, Jr. (4) 1716 Hidden Creek Ct. St. Louis, MO 63131 | 609,531 | | 2.1% |
All current directors and executive officers as a group (5 persons) | 32,167,385 | | 78.7% |
___________________________
*Less than 1%
| (1) | Mr. Ullrich is the managing member of Water Science, LLC. Mr. Ullrich beneficially owns 11,915,770 shares, warrants to purchase 3,136,631 shares at an exercise price of $0.31 per share; 3,088,243 shares are currently exercisable or exercisable within 60 days of the date of this report. Mr. Ullrich holds convertible notes currently convertible into 4,632,721 shares and indirectly through Water Science beneficially owns 7,330,770 shares and a convertible note currently convertible into 3,000,000 shares. |
| (2) | Mr. Bradley holds options to purchase a total of 500,000 shares at an exercise price of $0.31 per share; all options are currently exercisable or exercisable within 60 days of the date of this report. |
| (3) | Mr. Kindred beneficially owns 128,250 shares and holds options to purchase a total of 575,000 shares at exercise prices of $0.31 per share; all options are currently exercisable or exercisable within 60 days of the date of this report. |
| (4) | Mr. Jacoby beneficially owns 464,368 shares and holds options to purchase a total of 387,100 shares at an exercise price of $0.31 per share; options to purchase 338,713 shares are currently exercisable or exercisable within 60 days of the date of this report. |
Securities Authorized for Issuance Under Equity Compensation Plans
| EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2012 | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans | |
Equity compensation plans approved by security holders | | | 1,746,448 | | | $ | 0.31 | | | | 258,090 | |
Equity compensation plans not approved by security holders* | | | 3,151,306 | | | $ | 0.31 | | | | N/A | |
| Total | | | 4,897,754 | | | $ | 0.31 | | | | N/A | |
(*) Equity compensation plans not approved by security holders consist of individually negotiated grants of options or warrants to consultants, directors, suppliers, vendors and others who provide goods or services to the Company, and grants of warrants to investors in connection with limited offerings of the Company’s common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following are certain transactions during the year ended December 31, 2013, involving our officers, directors and shareholders owning more than 10% of our outstanding stock. We believe that the terms of these transactions are at least as favorable to us as we would expect to negotiate with unrelated third parties.
In January 2013, the Compensation Committee of the Board of Directors of the Company authorized the Company to grant to each board member 96,775 options to purchase shares of the Company’s common stock at an exercise price of $0.31 per share for each director for the current year of service. The options will vest over a period of two years from the date of grant as follows: half on January 1, 2014 and half on January 1, 2015. The grants were made pursuant to the annual directors’ compensation program approved by the Board in December 2007.
In January 2013, the Company entered into a loan agreement with Mr. Ullrich. The principal amount of the Note is $1,325,000. The funds had been advanced to the Company at various times throughout 2012. The Loan Agreement provides for interest at a rate of 10% annually and matured on November 30, 2013. The Company is working with Mr. Ullrich for the possible extension of the Note. The outstanding balance under the Loan Agreement is convertible into shares of the Company’s common stock at $0.31 per share and no principal or interest payments are due until maturity. The Loan Agreement provides that accrued interest and the outstanding principal balance can be prepaid, in whole or in part, at any time without premium or penalty. In connection with the negotiation of the Loan Agreement, the Company also granted a warrant to purchase up to 1,325,000 shares of the Company’s common stock at an exercise of $0.31 per share. The warrant expires on January 31, 2018. The indebtedness under the Loan Agreement is evidenced by a Promissory Note dated May 15, 2013 held by Mr. Ullrich. The Company also signed a Promissory Note with Mr. Jacoby under which the Company borrowed $50,000 from Mr. Jacoby under the same terms as the Promissory Note with Mr. Ullrich, except that Mr. Jacoby did not receive any warrants to purchase common stock.
Director Independence
The Board of Directors has determined in accordance with the listing standards of The NASDAQ Stock Market that each of the following director is an independent director: Mr. Jacoby. To be an independent director under those listing standards, a director must have no relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, and must have no relationships which are specified in the independence standards to preclude an independence determination. Mr. Bradley is not independent because he is an executive officer. Mr. Ullrich is not independent due to the level of beneficial ownership of common stock of the Company. In making the foregoing determination, the Board considered all relationships between members of the Board of Directors and the Company, including the relationships described at “Certain Relationships and Related Transactions.”
The Board of Directors unanimously concluded that the above-rule listed relationships would not affect the independent judgment of the independent director, Mr. Jacoby, based on his experience, character and independent means, and therefore do not preclude an independence determination.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
The following table shows the audit fees for professional services rendered by the principal accountant for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. Audit fees consisted of work performed in the integrated audit of the financial statements or the review of interim financial statements and the related SEC Form 10-K and 10-Q filings, respectively.
| HJ & Associates, LLC | | | | | | |
| | | 2013 | | | 2012 | |
| Audit Fees | | $ | 46,700 | | | $ | 50,300 | |
AUDIT-RELATED FEES
HJ did not bill us for any “audit-related fees” (as defined in Regulation S-X) in connection with its audit of our financial statements for the fiscal years ended December 31, 2013 or December 31, 2012.
TAX FEES
HJ & Associates did not bill us for any professional services rendered for tax related services for the fiscal years ended December 31, 2013 or 2012. Tax services provided by other firms are not included in this disclosure.
ALL OTHER FEES
We were not billed any fees for other professional services by HJ & Associates, LLC for the fiscal years ended December 31, 2013 and December 31, 2012.
AUDITOR INDEPENDENCE
Our Board of Directors considers that the work done for us in the year ended December 31, 2013 by HJ & Associates, LLC is compatible with maintaining HJ & Associates, LLC independence.
POLICY ON PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES
The Audit Committee has adopted a written policy providing guidelines and procedures for the pre-approval of all audit and permissible non-audit services provided by the Company’s independent auditors. This policy contemplates that the independent auditors will provide to the Audit Committee a proposed engagement letter and an audit service fee proposal during the first quarter of each of the Company’s fiscal years with a target of approving an engagement letter and appointing an independent auditor for the audit of the Company’s financial statements as of and for the year ended during such fiscal year prior to the review by the Company’s independent auditor of the Company’s financial statements for the Company’s first quarter. For non-audit services, Company’s management is expected to submit to the Committee for approval a list of non-audit services that it recommends that the Committee engage the independent auditor to provide for the fiscal year, together with a budget estimating non-audit service spending for the fiscal year. The Committee must approve both the engagement of the auditor to provide the non-audit services and the budget for such services prior to commencing the engagement. To ensure prompt handling of unexpected matters, the Audit Committee has delegated to its Chair the authority to amend or modify the list of approved permissible non-audit services and fees. The Audit Committee approved all of the audit, audit related and tax services of the Company’s principal accountant described in the preceding paragraphs.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are incorporated by reference in Item 8 of this Report:
Report of Independent Registered Public Accounting Firm
Balance Sheets, December 31, 2013 and 2012
Statements of Operations for years ended December 31, 2013 and 2012
(a)(2) Exhibits
| | Exhibit No. | | Identification of Exhibit |
| | 3(i).1 | | Articles of Incorporation (incorporated by reference from registration statement on Form SB-2 filed with the SEC on July 29, 2002) |
| | 3(i).2 | | Certificate of Amendment of Certificate of Incorporation (incorporated by reference from registration statement on Form SB-2 filed with the Securities and Exchange Commission on July 29, 2002) |
| | 3(i).3 | | Certificate of Amendment of Certificate of Incorporation (Incorporated by reference from current report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2007) |
| | 3(ii).1 | | Amended and Restated Bylaws (incorporated by reference from registration statement on Form 8-K filed with the Securities and Exchange Commission on September 12, 2007). |
| | 10.1 | | Settlement and License Amendment dated as of March 7, 2008 between the Company and University of Georgia Research Foundation (Incorporated by reference from current report on Form 8-K filed with the Securities and Exchange Commission on March 13, 2008) |
| | 10.2 | | Amended and Restated Exclusive License and Distribution Agreement, by and between the Company and Water Science, LLC, dated May 1, 2006 (Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K, dated May 4, 2006) |
| | 10.3 | | Consulting Agreement by and between the Company and JL Montgomery Consulting, LLC, dated May 1, 2006 (Incorporated by reference to Exhibit 10.13 of the Company’s Form 10-QSB for the quarter ended March 31, 2006) |
| | 10.4 | * | Form of Employment Agreement dated as of October 24, 2006 with Wade R. Bradley. (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated October 30, 2006.) |
| | 10.5 | * | Form of Option Agreement dated as of October 24, 2006 with Wade R. Bradley. (Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K dated October 30, 2006.) |
| | 10.6 | | Amended and Restated License Agreement dated as of January 10, 2007 by and between Electric Aquagenics Unlimited, Inc. and Zerorez Franchising Systems, Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated November 16, 2006.) |
| | 10.7 | * | EAU Technologies, Inc. 2007 Stock Incentive Plan (incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement filed with the Commission on November 5, 2007). |
| | 10.8 | * | Form of Employment Agreement dated as of November 8, 2007 with Doug Kindred (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 8, 2007) |
| | 10.9 | * | Form of Option Agreement dated as of November 8, 2007 with Doug Kindred (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated November 8, 2007) |
| | 10.10 | * | Form of Option Agreement dated as of December 6, 2007 with select employees (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 6, 2007) |
| | 10.11 | | First Amendment to Lease Agreement dated as of October 31, 2006 between the Company and Cobb International Associates. (Incorporated by reference to Exhibit 10.39 of the Company's Registration Statement on Form S-1 (File No. 333-144646 dated April 11, 2008.) |
| | 10.12 | | Security Agreement dated September 16, 2005 between the Company and Water Science LLC (Incorporated by reference to Ex. 10.3 to the Company’s Form 8-K filed on October 12, 2005). |
| | 10.13 | * | Amendment to Employment Agreement dated as of December 17, 2008 between the Company and Wade Bradley. (Incorporated by reference to Ex. 10.32 to the Company’s Form 10-K filed on March 30, 2009). |
| | 10.14 | * | Amendment to Employment Agreement dated as of December 17, 2008 between the Company and Doug Kindred (Incorporated by reference to Ex. 10.33 to the Company’s Form 10-K filed on March 30, 2009). |
| | 10.15 | * | Form of Amended Stock Option Agreement for Employees, Officers and a director. |
| | 10.16 | | $358,527 Loan Agreement dated December 31, 2011 between the Company and Peter F. Ullrich (Incorporated by reference to Ex. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 5, 2012) |
| | 10.17 | | Warrant Agreement dated December 31, 2011 between the Company and Peter F. Ullrich (Incorporated by reference to Ex. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 5, 2012) |
| | 10.18 | | First Amendment to Third Amended and Restated Senior Secured Convertible Promissory Note dated as of December 31, 2011 between the Company and Water Science LLC (Incorporated by reference to Ex. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 5, 2012) |
| | 10.19 | | Form of Option Agreement for Board of Directors Compensation (Incorporated by reference to Ex. 10.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on March 31, 2012) |
| | 10.20 | | Form of Stock Option agreement for Board of Directors compensation (incorporated by reference to Ex. 10.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 20, 2013) |
| | 10.21 | | Promissory Note between the Company and Peter F. Ullrich (incorporated by reference to Ex. 10.2 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 20, 2013) |
| | 10.22 | | Promissory Note between the Company and Theodore C. Jacoby, Jr. (incorporated by reference to Ex. 10.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 20, 2013) |
| | 10.23 | | $1,325,000 Loan Agreement between the Company and Peter F. Ullrich dated as of January 31, 2013 (incorporated by reference to Ex. 10.4 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 20, 2013) |
| | 10.24 | | Warrant between the Company and Peter F. Ullrich dated as of January 31, 2013 (incorporated by reference to Ex. 10.5 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 20, 2013) |
| | 10.25 | | 2013 Advances Loan Agreement between the Company and Peter F. Ullrich dated as of April 10, 2014. |
| | 10.26 | | Warrant between the Company and Peter F. Ullrich dated as of April 10, 2014. |
| | 10.27 | | Second Amendment to Third Amended and Restated Senior Secured Convertible Promissory Note dated as of April 10, 2014 between the Company and Water Science LLC |
| | 10.28 | | Amended and Restated $358,527 Loan Agreement dated April 10, 2014 between the Company and Peter F. Ullrich |
| | 10.29 | | Amended and Restated $1,325,000 Loan Agreement between the Company and Peter F. Ullrich dated as of April 10, 2014 |
| | 23.1 | | Consent of HJ & Associates, LLC. |
| | 31.1 | | Certification by Wade R. Bradley under section 302 of the Sarbanes-Oxley Act of 2002. |
| | 31.2 | | Certification by Brian D. Heinhold under section 302 of the Sarbanes-Oxley Act of 2002. |
| | 32.1 | | Certification of Wade R. Bradley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 32.2 | | Certification of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 101.INS** | | XBRL Instance Document |
| | 101.SCH** | | XBRL Taxonomy Extension Schema Document |
| | 101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | 101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document |
| | 101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Executive Compensation Arrangement pursuant to 601(b)(10)(iii)(A) of Regulation S-K |
| | |
| ** | Furnished herewith. Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability. |
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.
Dated: April 14, 2014
| | EAU Technologies, Inc.: | |
| | | | |
| | By: | /s/ Wade R. Bradley | |
| | | Wade R. Bradley | |
| | | Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | |
| | | | |
| | By: | /s/ Brian D. Heinhold | |
| | | Brian D. Heinhold | |
| | | Chief Financial Officer | |
| | | (Principal Financial Officer) | |
Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the following persons in the capacities and on the dates indicated.
| Signature | | Title | | Date |
/s/ Wade R. Bradley | | Chief Executive Officer | | April 14, 2014 |
| Wade R. Bradley | | (principal executive officer) | | |
/s/ Brian D. Heinhold | | Chief Financial Officer | | April 14, 2014 |
| Brian D. Heinhold | | (principal accounting officer) | | |
/s/ Theodore C. Jacoby, Jr. | | Director | | April 14, 2014 |
| Theodore C. Jacoby, Jr. | | | | |
/s/ Peter F. Ullrich | | Director | | April 14, 2014 |
| Peter F. Ullrich | | | | |
EAU TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
CONTENTS
| | Page |
| | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Financial Statements | |
| | |
| Balance Sheets | F-3 – F-4 |
| | |
Statements of Operations | F-5 |
| | |
Statements of Changes in Stockholders’ Equity (Deficit) | F-6 |
| | |
Statements of Cash Flows | F-7 – F-8 |
| | |
| Notes to Financial Statements | F-9 – F-20 |
| | |
