U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark one)
_X_ Quarterly report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2004.
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuers as Specified in its Charter)
Delaware 33-0750453
------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
10410 Trademark Street
Rancho Cucamonga, CA 91730
----------------------------------------
(Address of Principal Executive Offices)
(909) 987-0456
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(Issuer's Telephone Number, Including Area Code)
__________________________________
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
Securities under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value
17,846,797 shares outstanding as of February 14, 2005.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
AQUACELL TECHNOLOGIES, INC.
FORM 1O-QSB
FOR THE QUARTER ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE
Condensed Consolidated Balance Sheet as of December 31, 2004....... 1
Condensed Consolidated Statements of Operations for the
three and six month periods ended December 31, 2004 and 2003....... 2
Condensed Consolidated Statements of Cash Flow for the
six month periods ended December 31, 2004 and 2003................. 3
Notes to Condensed Consolidated Financial Statements............... 5
Item 2. Managements Discussion and Analysis:
Forward-Looking Statements.........................................10
Overview...........................................................10
Critical Accounting Policies.......................................11
Results of Operations..............................................12
Liquidity and Capital Resources....................................13
PART II - OTHER INFORMATION
Item 2(C). Sales of Unregistered Securities...................................15
Item 3. Controls and Procedure.............................................15
Item 4. Submission of Matters to a Vote of Security Holders................15
Item 6. Exhibits and Reports on Form 8-K...................................16
Signature.....................................................................16
Index to Exhibits.............................................................17
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2004
(Unaudited)
ASSETS
Current assets:
Cash.......................................................... $ 460,000
Subscriptions receivable...................................... 6,000
Accounts receivable, net of allowance of $46,000.............. 31,000
Inventories................................................... 91,000
Prepaid expenses and other current assets..................... 31,000
------------
Total current assets..................................... 619,000
------------
Property, equipment and billboard coolers, net..................... 971,000
------------
Other assets:
Goodwill...................................................... 824,000
Patents, net.................................................. 65,000
Security deposits............................................. 16,000
------------
Total other assets....................................... 905,000
------------
$ 2,495,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 385,000
Accrued liabilities........................................... 725,000
Customer deposits............................................. 104,000
Dividend payable.............................................. 33,000
Installment note payable...................................... 1,000
Current portion of deferred payable........................... 22,000
------------
Total current liabilities................................ 1,270,000
Deferred payable, net of current portion........................... 451,000
------------
Total liabilities........................................ 1,721,000
------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - Class A, par value $.00l;
1,870,000 shares authorized;
70,000 shares issued and outstanding............................ -
Preferred stock, par value $.001;
8,130,000 shares authorized;
no shares issued................................................ -
Common stock, par value $.001;
40,000,000 shares authorized;
17,746,797 shares issued and outstanding........................ 18,000
Additional paid-in capital......................................... 22,020,000
Accumulated deficit................................................ (19,284,000)
------------
2,754,000
Subscriptions receivable........................................... (65,000)
Unamortized deferred compensation.................................. (1,915,000)
------------
Total stockholders' equity............................... 774,000
------------
$ 2,495,000
============
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Net sales...........................................$ 111,000 $ 200,000 $ 310,000 $ 401,000
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales....................................... 77,000 148,000 201,000 277,000
Salaries and wages.................................. 296,000 402,000 584,000 701,000
Legal, accounting and other professional expenses... 59,000 50,000 111,000 100,000
Consulting fees and expenses- research and
development...................................... - 47,000 24,000 62,000
Stock based compensation............................ 241,000 227,000 483,000 602,000
Fair value adjustment of derivative................. - 187,000 - 394,000
Write-off of accrued interest on notes.............. - 48,000 - 48,000
Other............................................... 293,000 319,000 630,000 574,000
------------ ------------ ------------ ------------
966,000 1,428,000 2,033,000 2,758,000
------------ ------------ ------------ ------------
Loss from operations before other
income.............................................. (855,000) (1,228,000) (1,723,000) (2,357,000)
------------ ------------ ------------ ------------
Other income:
Interest income..................................... - - - 1,000
------------ ------------ ------------ ------------
- - - 1,000
------------ ------------ ------------ ------------
Net loss for the period..................................$ (855,000) $(1,228,000) $(1,723,000) $(2,356,000)
============ ============ ============ ============
Weighted average shares outstanding-
basic and diluted................................... 15,697,000 10,697,000 15,136,000 10,023,000
============ ============ ============ ============
Loss attributable to common stockholders:
Net loss............................................$ (855,000) $(1,228,000) $(1,723,000) $(2,356,000)
Preferred stock dividends................................ 9,000 16,000 18,000 32,000
------------ ------------ ------------ ------------
Loss attributable to common stockholders............$ (864,000) $(1,244,000) $(1,741,000) $(2,388,000)
============ ============ ============ ============
Net loss per common share...........................$ (0.06) $ (0.12) $ (0.12) $ (0.24)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended December 31,
------------------------------
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss...................................................................$ (1,723,000) $ (2,356,000)
Adjustment to reconcile net loss to net cash used in operating activities:
Write-off of accrued interest on notes receivable..................... - 48,000
Fair value adjustment of derivative................................... - 394,000
Stock based compensation.............................................. 483,000 602,000
Depreciation and amortization......................................... 22,000 27,000
Bad debt provision.................................................... 4,000 -
Changes in:
Accounts receivable................................................... 16,000 3,000
Accrued interest receivable........................................... - 20,000
Prepaid expenses and other current assets............................. 22,000 20,000
Inventories........................................................... 3,000 (295,000)
Accounts payable...................................................... (197,000) (349,000)
Accrued liabilities................................................... 19,000 (55,000)
Customer deposits..................................................... 43,000 (22,000)
------------- -------------
Net cash used in operating activities............................ (1,308,000) (1,963,000)
------------- -------------
Cash flows from investing activities:
Payments on note issued for purchase of property and equipment........ (2,000) (2,000)
Collections on notes receivable....................................... - 68,000
Capital expenditures.................................................. (185,000) (2,000)
------------- -------------
Net cash provided by (used in) investing activities.............. (187,000) 64,000
------------- -------------
Cash flows from financing activities:
Proceeds from private placements of common stock....................... - 2,555,000
Expenses of offerings.................................................. - (259,000)
Preferred stock dividends paid......................................... - (28,000)
Exercise of stock options.............................................. - 38,000
Proceeds from subscriptions receivable................................. 40,000 -
Proceeds from exercise of common stock warrants........................ 1,058,000 -
Expense of warrant exercise............................................ (3,000) -
Proceeds (repayments) of loans from related parties.................... - (80,000)
------------- -------------
Net cash provided by financing activates......................... 1,095,000 2,226,000
------------- -------------
Increase (decrease) in cash................................................ (400,000) 327,000
Cash, beginning of period.................................................. 860,000 32,000
------------- -------------
Cash, end of period........................................................$ 460,000 $ 359,000
============= =============
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- (CONTINUED)
(Unaudited)
Six Months Ended December 31,
------------------------------
2004 2003
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................................$ - $ -
Supplemental schedule of non-cash investing and financing activities:
Conversion of inventory to depreciable assets for advertising program......$ - $ 6,000
Issuance of common stock and warrants for services to the company..........$ 318,000 $ 2,564,000
Dividends payable on preferred stock.......................................$ 18,000 $ 16,000
Subscriptions receivable for exercise of warrants..........................$ 71,000 $ -
Write-off of notes receivable against reserve..............................$ - $ 177,000
Conversion of 605,000 shares of preferred stock to common stock in 2004....$ - $ -
Issuance of common stock in payment of dividends on preferred stock........$ 26,000 $ -
Issuance of common stock for legal fee in connection with stock offering...$ 24,000 $ -
Expense of warrant exercise offset against subscription receivable.........$ 126,000 $ -
Issuance of warrants in connection with amendment to financial consulting
agreement.............................................................$ 143,000 $ -
Dividend of subsidiary common stock to the Company's common stockholders...$ 33,000 $ -
See notes to condensed consolidated financial statements.
4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of AquaCell Technologies, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the six months ended December 31, 2004
are not necessarily indicative of the results to be expected for the full year.
For further information, refer to the Company's annual report filed on Form
10-KSB for the year ended June 30, 2004.
At December 31, 2004 the Company's ability to continue as a going concern,
for the reasons outlined on the 10-KSB filed for the year ended June 30, 2004,
still existed. During the six months ended December 31, 2004 the Company
successfully obtained external financing through exercise of warrants and plans
to continue to raise capital through the sale or exercise of equity securities
on a just in time basis.
NOTE B - SUBSCRIPTIONS RECEIVABLE
At December 31, 2004 a part of subscriptions receivable in the amount of
$6,000 is reported as a current asset since such amount represented a receivable
for exercise of warrants that has been subsequently collected prior to the
issuance of the financial statements.
NOTE C - INVENTORIES
Inventories consist of the following at December 31, 2004:
Raw materials ........................................... $ 52,000
Work in progress ........................................ 39,000
------------
$ 91,000
============
5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)
NOTE D - PROPERTY, EQUIPMENT, AND BILLBOARD COOLERS
Property, equipment, and billboard coolers is summarized as follows at
December 31, 2004:
Billboard coolers, including parts....................... $ 951,000
Furniture and fixtures .................................. 36,000
Equipment- office ....................................... 102,000
Machinery and equipment ................................. 128,000
Rental units ............................................ 9,000
Leasehold improvements .................................. 12,000
Truck ................................................... 11,000
------------
1,249,000
Less accumulated depreciation ........................... 278,000
------------
$ 971,000
============
NOTE E- DEFERRED PAYABLE
At December 31, 2004, the deferred payable in the amount of $473,000
represented the balance due to a private company for the return and cancellation
of all exclusive distribution and marketing rights previously held under a
distribution agreement. This amount is payable solely from 5% of the future
revenues to be generated by our Global Water-Aquacell subsidiary.
NOTE F - COMMITMENTS AND CONTINGENCIES
1). Employment Agreement
--------------------
During December 2004 the Company entered into a three year employment
contract, effective January 2005, with an officer of the Company's Aquacell
Media, Inc. subsidiary. The contract calls for a signing bonus of 50,000 shares
of common stock of the Company and a minimum annual salary of $125,000.
2). Other
-----
During December 2004 the Company announced that it would spinoff of its
Aquacell Water, Inc. subsidiary, an inactive company, to its common stockholders
of record on January 3, 2005, on a share for share basis. In connection with the
spinoff it is anticipated that Aquacell Water will acquire Water Science
Technologies, Inc., a wholly owned subsidiary of the Company.
NOTE G - EQUITY TRANSACTIONS
During August 2004 the Company amended a February 2004 consulting agreement
to provide for additional compensation of 100,000 common shares. These shares
were valued at $66,000 based upon closing market price at the date of issuance.
Such amount will be amortized to expense over the remaining term of the
agreement. Amortization amounted to $11,000 for the six months ended December
31, 2004.
6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)
NOTE G - EQUITY TRANSACTIONS -(continued)
During August 2004 the Company issued 50,000 common stock purchase warrants at a
price of $.66 per share in connection with performance under an existing
consulting agreement. These warrants were valued at $25,000 utilizing the Black
Scholes valuation method. Such amount will be amortized over a period of 31
months. Amortization amounted to $4,000 for the six months ended December 31,
2004.
During September 2004 the Company issued an aggregate of 457,000 shares of
common stock in connection with the exercise of 457,000 common stock purchase
warrants issued in previously completed private placements. Warrants with
exercise prices of $2.00 and $4.00 were repriced to $.70 and $.56. The Company
realized gross proceeds of $286,000 and expenses were $32,000 in connection with
the exercise. New common stock purchase warrants were issued for 247,000 shares
of common stock exercisable at $.90 per share and 210,000 shares of common stock
exercisable at $.95 per share and an additional 210,000 shares of common stock
exercisable at $4.00 per share.
During October and November 2004 the Company issued an aggregate of 693,000
shares of common stock in connection with the exercise of 693,000 common stock
purchase warrants issued in previously completed private placements. Warrants
with exercise prices ranging from $.80 to $4.00 were repriced to prices ranging
from $.55 to $.68. The Company realized gross proceeds of $434,000 and expenses
were $43,000 in connection with the exercise. New common stock purchase warrants
were issued for 600,000 shares of common stock exercisable at $.80 per share and
93,000 shares of common stock exercisable at $.90 per share.
During November 2004 the Company amended an August 2003 consulting agreement to
provide for additional compensation of 300,000 common shares. These shares were
valued at $177,000 bases upon closing market price at the date of issuance. The
original agreement was extended for a two year period and the remaining
aggregate deferred compensation in the amount of $410,632 will be amortized to
expense over the remaining term of the agreement. Amortization amounted to
$17,000 for the six months ended December 31, 2004.
During November 2004 the Company amended an August 2003 nonexclusive finders
arrangement to provide for the issuance of 225,000 common stock purchase
warrants at an exercise price of $.85 per share. These warrants were valued at
$143,000 utilizing the Black-Scholes valuation method and have been charged to
Additional Paid-In Capital as a cost of raising capital.
During November 2004 the Company issued 40,000 shares of common stock in payment
of legal fees in connection with the January 2005 filing of a registration
statement. The shares were valued at $24,000 based upon the closing market price
at the date of issuance.
7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)
NOTE G - EQUITY TRANSACTIONS -(continued)
During December 2004 the Company issued an aggregate of 974,000 shares of
common stock in connection with the exercise of 974,000 common stock purchase
warrants issued in previously completed private placements. Warrants with
exercise prices ranging from $1.75 to $4.00 were repriced to $.55. The Company
realized gross proceeds of $536,000 and expenses were $54,000 in connection with
the exercise. New common stock purchase warrants were issued for 974,000 shares
of common stock exercisable at $.75. In connection with the transaction 301,000
warrants were repriced from $2.00 and $4.00 to $1.00.
During December 2004 605,000 shares of class A preferred stock were
converted into 605,000 shares of common stock.
During December 2004 the Company issued an aggregate of 35,000 shares of
common stock in payment of dividends on preferred stock in the amount of $26,000
for the quarters ended June 2004, September 2004 and December 2004.
During December 2004 the Company issued 50,000 shares of common stock in
connection with an employment agreement. These shares were valued at $20,000
based upon the closing market price at the date of issuance. Such amount will be
amortized over the term of the employment agreement commencing January 2005.
During December 2004 the Company issued 100,000 common stock purchase
warrants at a price of $.40 per share in connection with two consulting
agreements. These warrants were valued at $30,000 utilizing the Black Scholes
valuation method. Such amount will be amortized over a five year period. No
amortization was recorded during the six months ended December 31, 2004.
NOTE H - SPINOFF OF AQUACELL WATER, INC.
Aquacell Water, Inc. is an inactive company without assets, liabilities or
operations. Accordingly the spinoff will have no material effect on our
financial statements.
8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)
NOTE I - OTHER COSTS AND EXPENSES
Other costs and expenses consisted of the following:
Six Months Ended December 31,
-----------------------------
2004 2003
------------ ------------
Rent.................................... $ 98,000 $ 78,000
Telephone and utilities................. 32,000 34,000
Travel.................................. 42,000 24,000
Business promotion........ ............. 51,000 67,000
Insurance............................... 73,000 52,000
Vehicle expenses........................ 48,000 53,000
Listing fees............................ 28,000 23,000
Exchange fees, transfer agent fees and
investor fees and expenses.......... 35,000 32,000
Office expenses, postage and supplies... 47,000 46,000
Other expenses.......................... 176,000 167,000
------------ ------------
$ 630,000 $ 576,000
============ ============
NOTE J - CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of
credit risk consists of cash. Such amounts are in excess of FDIC insurance
limits.
NOTE K- SUBSEQUENT EVENTS
During January 2005 the Company issued an aggregate of 100,000 common
shares in connection with the exercise of outstanding warrants. The Company
realized gross proceeds of $55,000 in connection with the exercise of warrants
repriced from $.80 to $.55.
During January 2005 the Company entered into a three year consulting
agreement with a company owned by an officer of the Company's Aquacell Media,
Inc. subsidiary. This officer also has an employment agreement with the Company
(see Note F1). The agreement calls for payment of cash compensation for water
cooler placements and/or for securing advertisers. Such commissions will be paid
from advertising revenues collected. In addition the consultant may earn up to
150,000 warrants for securing new locations for coolers.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with the
Commission, statements identified by the words "believe", "positioned",
"estimate", "project", "target", "continue", "will", "intend", "expect",
"future", "anticipates", and similar expressions express management's present
belief, expectations or intentions regarding the Company's future performance
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on any such forward-looking
statements, each of which speaks only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company has no obligations to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Overview
The following discussions and analysis should be read in conjunction with
the Company's condensed consolidated financial statements and the notes
presented following the condensed consolidated financial statements. The
discussion of results, causes and trends should not be constructed to imply any
conclusion that such results or trends will necessarily continue in the future.
During the six months ended December 31, 2004 the Company raised net equity
of $1,127,000 to enable the Company to move forward with the "Message On The
Bottle" advertising program through our Aquacell Media subsidiary. Aquacell
Media installs our patented Aquacell 1000 Bottled Water Cooler Systems free of
charge into various locations while retaining ownership of the coolers. Revenue
is generated through the sale of advertising on the band of the cooler's
permanently attached five-gallon bottle, as well as on the cup holder.
During the six months ended December 31, 2004, we commenced the initial
rollout of installations in Rite Aid stores, the nation's third largest drug
store chain with more than 3000 locations. Under the five year agreement,
signed in October 2004 the Company installs its Aquacell 1000 coolers at no cost
to Rite Aid, and sells the advertising space on the bottle band.
While securing advertisers is important to the success of our advertising
program - as it is the source of revenue generation, securing locations, or
"real estate", for the coolers is a critical first-step. Unlike other in-store
advertising mechanisms, we actually own a piece of "real estate" in the stores
for a five-year period, the intrinsic value of which cannot be measured. Having
begun this program less than a year ago, we believe we have made remarkable
progress in securing retail locations for our water cooler systems.
Aquacell Media has installed Aquacell 1000 systems on a test basis into
other stores including the nationwide drug chain CVS and Winn Dixie
supermarkets, as well as smaller regional drug and grocery chain stores.
10
During the quarter ended December 31, 2004, we secured our first
advertiser, Unilever, one of the world's largest consumer products companies.
This inaugural program is for Dove(R) Cool Moisture body wash and bar soap.
The cooler advertising program is coinciding with the initial launch of this
new product commencing February 2005, where Unilever saw a natural tie-in of
utilizing our water cooler billboard to portray the refreshment attribute of
Dove Cool Moisture. The Dove Cool Moisture advertising is displayed on our
coolers in select Rite Aid stores nationwide, as well as on coolers installed in
Duane Reade drug stores in the New York Metropolitan area.
In January 2005, we announced the hiring of Michael Dougherty as President
of our AquaCell Media subsidiary. Mr. Dougherty spent over 30 years with
Unilever, where he established programs with Advantage Sales and Marketing, the
nation's leading sales and marketing agency for suppliers of food products and
consumer goods. Mr. Dougherty will leverage his experience and relationship
with Advantage, to facilitate both location placements and advertisers for our
"Message On The Bottle" program.
In December 2004, we were notified by the American Stock Exchange that the
Amex accepted the Company's 18-month plan (the "Plan") for continued listing, in
connection with the Amex's listing requirements, following receipt of
notification of non-compliance with the Amex's minimum stockholder equity
requirement. The Plan was evaluated and accepted by the Amex, indicating that
the Company made a reasonable demonstration of an ability to regain compliance
with the continued listing standards within the allotted time frame.
We believe that maintaining our listing on the American Stock Exchange is
very important for our stockholders and believe we will meet our objectives over
the next year and a half to comply with the Exchange's requirements.
In December 2004, the Company announced it was spinning off its Aquacell
Water subsidiary to AquaCell Technologies stockholders, who will receive one
share of common stock in Aquacell Water for every share of common stock held in
AquaCell Technologies. Aquacell Water will operate as a holding company to
acquire companies in the water industry with the first acquisition to be Water
Science Technologies, Inc. (WST), currently a wholly owned subsidiary of
AquaCell Technologies. The pay date for the shares will coincide with the
effectiveness of the Aquacell Water registration statement which is intended to
be filed with the Securities and Exchange Commission in the first quarter of the
calendar year.
During the six months ended December 31, 2004 we continued to incur non-
cash charges for stock based compensation for warrants issued to consultants,
which we believe is a continuing benefit to the Company and its stockholders for
the future growth of the Company. Such charges were $483,000.
Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP"). The preparation
of these condensed consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosure of contingent assets and
liabilities. These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
11
other sources. We base our estimates and judgments on historical experience and
all available information. However, future events are subject to change, and the
best estimates and judgments routinely require adjustment. US GAAP requires us
to make estimates and judgments in several areas, including those related to
recording various accruals, income taxes, the useful lives of long-lived assets,
such as property and equipment and intangible assets, and potential losses from
contingencies and litigation. We believe the policies discussed below are the
most critical to our condensed consolidated financial statements because they
are affected significantly by management's judgments, assumptions and estimates.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of
net assets of a business acquired. The Company has adopted Statements of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets". The Company operates as a single integrated business, and as
such has one operating segment which is also the reportable unit. Fair value of
the reporting unit is determined by comparing the fair value of the unit with
its carrying value, including goodwill. Impairment tests are performed using
discounted cash flow analysis and estimates of sales proceeds. The annual
evaluation of goodwill is performed at June 30th, the end of the Company's
fiscal year.
Income taxes:
The Company accounts for income taxes using the asset and liability method
described on SFAS No. 109, "Accounting For Income Taxes", the objective of which
is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting and the tax bases of the Company's
assets and liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled. A valuation allowance related to deferred tax
assets is recorded when it is more likely than no that some portion or all of
the deferred tax assets will not be realized.
Long-lived assets:
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." In accordance with SFAS No. 144, long-lived
assets to be held are reviewed whenever events or changes in circumstances
indicate that their carrying value may not recoverable. The Company periodically
reviews the carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred, and has determined that as of June 30,
2004 that impairment, where appropriate, was recorded in the financial
statements.
Results of Operations
During the six months ended December 31, 2004 on a consolidated basis,
revenues were $310,000 as compared to $401,000 for the similar period of the
preceding year, resulting primarily from a decrease in sales by our WST
subsidiary, and cost of sales was 65% for the six months ended December 31, 2004
as compared to 69% for the same period of the prior year. The decrease in cost
of sales percentage resulted from a lower contribution to total revenues by our
WST subsidiary which operates at a higher cost of sales percentage.
Net loss on a consolidated basis, attributable to common stockholders, for
the six months ended December 31, 2004 decreased to $1,741,000 or $0.12 per
share, as compared to $2,388,000 or $.24 per share for the same period of the
prior year. The decrease in the loss is primarily attributable to the decrease
12
in stock based compensation in the amount of $119,000, a fair value adjustment
of a derivative in the amount of $394,000, and write-off of accrued interest on
notes receivable in the amount of $48,000.
Salaries and wages decreased by $117,000 for the six months ended December
31, 2004 over the prior year resulting primarily from bonuses paid in the prior
year. Legal, accounting and other professional expenses increased by
approximately $11,000 for the six months ended December 31, 2004 resulting
primarily from a professional fee paid for one-time consulting services.
Consulting fees and expenses in connection with the research and development of
new business opportunities decreased by $21,000 for the six months ended
December 31, 2004 primarily because these fees and expenses were utilized in the
installations of our billboard coolers during the quarter ended December 31,
2004 and were capitalized as part of the asset cost. Stock based compensation
decreased by $119,000 to $483,000 for the six months ended December 31, 2004
resulting from a direct write-off of certain warrants issued during the prior
year. Other selling, general and administrative expenses, increased by
approximately $56,000 to $630,000 for the six months ended December 31, 2004.
Current period expenses consisted primarily of rent - $98,000, telephone and
utilities- $32,000, travel- $42,000, business promotion- $51,000, insurance-
$73,000, and vehicle expenses-$48,000.
Liquidity and Capital Resources
The Company has developed a plan to address liquidity, in connection with
its ability to continue as a going concern, in several ways. It will continue to
raise capital through the sale or exercise of equity securities. Toward that end
the Company raised net equity of approximately $1,127,000 through the exercise
of warrants to purchase common shares during the six months ended December 31,
2004. The Company has continued to pursue the placement of our water cooler
billboards in various locations and the Company is seeking to increase its
revenues through the sale of advertising on the band of the cooler's permanently
attached five-gallon bottle as outlined in the Overview section of Management's
Discussion.
The spinoff of our Aquacell Water, Inc. subsidiary will have no material
effect on the financial statements because this is an inactive company without
assets, liabilities or operations.
Cash used by operations during the six months ended December 31, 2004
amounted to $1,308,000. Net loss of $1,723,000 was reduced by non-cash stock
based compensation in the amount of $483,000, depreciation and amortization of
$22,000 and a bad debt provision of $4,000. Cash used by operations was further
increased by a decrease in accounts payable in the amount of $197,000. Net loss
was further decreased by net changes in prepaid expenses, accrued liabilities,
customer deposits, accounts receivable and inventories aggregating $103,000.
Cash used by investing activities during the six months ended December 31,
2004 represented capital expenditures in the amount of $185,000 primarily for
billboard coolers and by payments on notes issued for the purchase of equipment
in the amount of $2,000.
Cash provided by financing activities was approximately $1,095,000.
Proceeds from sales of common stock purchase warrants amounted to $1,055,000 net
of expenses of $3,000. Proceeds from subscriptions receivable were $40,000.
We have granted warrants, subsequent to our initial public offering, in
connection with private placements, consulting, marketing and financing
agreements that remain outstanding at the date of this filing and may generate
additional capital of up to approximately $10,350,000 if exercised. As of
13
December 31, 2004 250,000 warrants generating $42,000 were in the money and
6,038,000 warrants generating $10,308,000 were out of the money. Historically,
the Company has repriced out of the money warrants to generate additional
capital. There is no assurance however, that any of the warrants will be
exercised.
Management believes that its present cash position combined with subsequent
equity raises and conversion of warrants and cash flows expected to be generated
from future operations will be sufficient to meet presently anticipated needs
for working capital and capital expenditures through at least the next 12
months; however, there can be no assurance in that regard. The Company
presently has no material commitments for future capital expenditures.
14
PART II. OTHER INFORMATION
ITEM 2 (C). SALES OF UNREGISTERED SECURITIES
During the quarter ended December 2004 the Registrant sold 857,478 shares
of common stock upon exercise of Common Stock Purchase Warrants to 6 accredited
investors pursuant to the exemption provided by Regulation D, Rule 505, and
Section 4(2) of the Securities Act of 1933, as amended. New Common Stock
Purchase Warrants were issued to the investors at prices ranging from $.75 to
$.90.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 adopted under the
Securities Exchange Act of 1934. Based upon that evaluation, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period covered by this Report on Form 10-QSB certain matters
were submitted to a vote of security holders through the solicitation of
proxies:
a) The Company held its annual meeting of stockholders on December 7,
2004.
b) One matter voted upon at the meeting was the election of one Company
director, to wit, Gary S. Wolff. The Company's four other directors,
namely Karen B. Laustsen, Dr. William DiTuro, James C Witham, and
Glenn A. Bergenfield continued in office after the meeting.
c) Additional matter voted upon at the meeting was the appointment of
Wolinetz, Lafazan & Company, PC as the Company's independent auditors.
With respect to the election of Mr. Wolff as director, he received
12,888,647 votes with 79,604 votes withheld and no abstentions.
Wolinetz, Lafazan & Company, PC was elected as the Company's
independent auditors receiving 12,878,351 votes with 26,900 votes
against and 63,000 abstentions.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits.
31.1 CEO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
31.2 CFO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
32.0 Certification Pursuant to 18 U.S.C. Section 1350
B. Reports on Form 8-K.
During te period covered by this Form 10-QSB the following report of
Form 8-K was filed:
December 3, 2004 - American Stock Exchange Notifications
SIGNATURE
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.
AquaCell Technologies, Inc.
-------------------------------
Registrant
Date: February 14, 2005
/s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
16
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
31.1 CEO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
31.2 CFO's Certification Pursuant to Rule 13a-14(a)/ 15d-14(a)
32.0 Certification Pursuant to 18 U.S.C. Section 1350
17