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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 March 31, 2006.
___ 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
27,909,408 shares outstanding as of May 19, 2006.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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AQUACELL TECHNOLOGIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE
Condensed Consolidated Balance Sheet as of March 31, 2006.......... 1
Condensed Consolidated Statements of Operations for the
three and nine month periods ended March 31, 2006 and 2005......... 2
Condensed Consolidated Statements of Cash Flow for the
nine month periods ended March 31, 2006 and 2005................... 3
Notes to Condensed Consolidated Financial Statements............... 5
Item 2. Management's Discussion and Analysis:
Forward-Looking Statements.........................................13
Overview...........................................................13
Critical Accounting Policies.......................................14
Results of Operations..............................................14
Liquidity and Capital Resources....................................16
PART II - OTHER INFORMATION
Item 2(c). Sales of Unregistered Securities...................................18
Item 3. Controls and Procedure.............................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
Item 6. Exhibits and Reports on Form 8-K...................................19
Signature.....................................................................19
Index to Exhibits.............................................................20
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
ASSETS
Current assets:
Cash.......................................................... $ 9,000
Accounts receivable, net of allowance of $15,000.............. 11,000
Inventories................................................... 22,000
Loan receivable- related party................................ 515,000
Prepaid expenses and other current assets..................... 5,000
------------
Total current assets..................................... 562,000
------------
Property, equipment, and billboard coolers, net.................... 1,239,000
------------
Other assets:
Patents, net.................................................. 38,000
Security deposits............................................. 8,000
------------
Total other assets....................................... 46,000
------------
$ 1,847,000
------------
------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.............................................. $ 581,000
Accrued liabilities........................................... 986,000
Preferred stock dividend payable- Class A..................... 1,000
Loan payable- related party................................... 30,000
Current portion of deferred payable........................... 22,000
------------
Total current liabilities................................ 1,620,000
Deferred payable- net of current portion........................... 451,000
------------
Total liabilities........................................ 2,071,000
------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock - Class A, par value $.00l;
liquidity preference $45,000;
1,870,000 shares authorized;
70,000 shares issued and outstanding............................ -
Preferred stock - Class B, par value $.001;
4,000,000 shares authorized;
no shares issued and outstanding................................ -
Preferred stock, par value $.001;
4,130,000 shares authorized;
no shares issued and outstanding............................... -
Common stock, par value $.001;
75,000,000 shares authorized;
27,909,408 shares issued and outstanding........................ 28,000
Additional paid-in capital......................................... 25,665,000
Accumulated deficit................................................ (25,300,000)
------------
393,000
Unamortized deferred compensation.................................. (617,000)
------------
Total stockholders' deficiency........................... (224,000)
------------
$ 1,847,000
------------
------------
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue:
Net sales...........................................$ 27,000 $ 36,000 $ 95,000 $ 147,000
Advertising revenue................................. - 20,000 76,000 20,000
------------ ------------ ------------ ------------
27,000 56,000 171,000 167,000
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales....................................... 9,000 14,000 47,000 67,000
Salaries and wages.................................. 123,000 230,000 395,000 607,000
Legal, accounting and other professional expenses... 42,000 70,000 146,000 179,000
Stock based compensation............................ 356,000 262,000 767,000 745,000
Other............................................... 405,000 343,000 1,209,000 1,004,000
------------ ------------ ------------ ------------
935,000 919,000 2,564,000 2,602,000
------------ ------------ ------------ ------------
Loss from operations .................................... (908,000) (863,000) (2,393,000) (2,435,000)
------------ ------------ ------------ ------------
Other income (expense):
Management fee income- related party................ - 30,000 - 90,000
Interest income (expense)- related party............ 8,000 (2,000) 20,000 27,000
Interest expense.................................... (41,000) - (77,000) -
------------ ------------ ------------ ------------
(33,000) 28,000 (57,000) 117,000
------------ ------------ ------------ ------------
Loss from continuing operations.......................... (941,000) (835,000) (2,450,000) (2,318,000)
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations of subsidiary..... (133,000) (37,000) (651,000) (277,000)
Loss from write off of goodwill attributable to
discontinued operations........................... (750,000) - (750,000) -
------------ ------------ ------------ ------------
Loss from discontinued operations................... (883,000) (37,000) (1,401,000) (277,000)
------------ ------------ ------------ ------------
Net loss ................................................$(1,824,000) $ (872,000) $(3,851,000) $(2,595,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding-
basic and diluted................................... 26,244,000 17,906,000 23,106,000 16,046,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss attributable to common stockholders:
Net loss............................................$(1,824,000) $ (872,000) $(3,851,000) $(2,595,000)
Preferred stock dividends........................... 1,000 1,000 3,000 19,000
------------ ------------ ------------ ------------
Loss attributable to common stockholders............$(1,825,000) $ (873,000) $(3,854,000) $(2,614,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss from continuing operations.....................$ (.04) $ (.05) $ (.11) $ (.14)
Loss from discontinued operations...................$ (.03) $ (.00) $ (.06) $ (.02)
------------ ------------ ------------ ------------
Net loss per common share...........................$ (.07) $ (.05) $ (.17) $ (.16)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements.
2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31,
------------------------------
2006 2005
------------- -------------
Cash flows from operating activities:
Loss from continuing operations............................................$ (2,450,000) $ (2,318,000)
Adjustment to reconcile loss from continuing operations to
net cash used in operating activities:
Stock based compensation.............................................. 767,000 745,000
Depreciation and amortization......................................... 130,000 39,000
Bad debt provision.................................................... 6,000 -
Changes in:
Accounts receivable................................................... 35,000 (32,000)
Prepaid expenses and other current assets............................. 35,000 16,000
Inventories........................................................... (12,000) 5,000
Security deposits..................................................... 3,000 -
Accounts payable...................................................... (141,000) (36,000)
Accrued liabilities................................................... 114,000 185,000
Unearned income....................................................... - 10,000
Customer deposits..................................................... - (2,000)
------------- -------------
Net cash used in operating activities............................ (1,513,000) (1,388,000)
------------- -------------
Cash flows from investing activities:
Payments on note issued for purchase of property and equipment........ - (3,000)
Capital expenditures.................................................. (144,000) (359,000)
------------- -------------
Net cash used in investing activities............................ (144,000) (362,000)
------------- -------------
Cash flows from financing activities:
Proceeds from private placements of common stock....................... 620,000 170,000
Expenses of offerings.................................................. (25,000) -
Proceeds from private placement of Class B preferred stock............. 68,000 -
Preferred stock dividends paid- Class B................................ (37,000) -
Proceeds from subscriptions receivable................................. 168,000 40,000
Proceeds from exercise of common stock warrants........................ 1,315,000 1,114,000
Expense of warrant exercise............................................ (72,000) (4,000)
Loans to related entities- net......................................... (395,000) (304,000)
Repayments of loans from related parties- net.......................... (70,000) -
------------- -------------
Net cash provided by financing activates......................... 1,572,000 1,016,000
------------- -------------
Net cash provided from (used by) discontinued operations................... 2,000 (23,000)
------------- -------------
(Decrease) in cash......................................................... (83,000) (757,000)
Cash, beginning of period.................................................. 92,000 823,000
------------- -------------
Cash, end of period........................................................$ 9,000 $ 66,000
------------- -------------
------------- -------------
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- (CONTINUED)
(Unaudited)
Nine Months Ended March 31,
------------------------------
2006 2005
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................................$ - $ -
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock and warrants for services to the company..........$ - $ 294,000
Dividends payable on preferred stock- Class A..............................$ 1,000 $ 19,000
Subscriptions receivable for exercise of warrants..........................$ - $ 66,000
Issuance of common stock in payment of dividends on preferred stock........$ 4,000 $ 26,000
Issuance of common stock for legal fee in connection with stock offering...$ - $ 24,000
Expense of warrant exercise offset against subscription receivable.........$ 57,000 $ 131,000
Deemed dividends on preferred stock........................................$ 24,000 $ -
Expenses of equity raise recorded as accounts payable......................$ 1,000 $ -
Conversion of 605,000 shares of Class A preferred stock into
605,000 shares of common stock..........................................$ - $ 1,000
Conversion of 718,000 shares of Class B preferred stock into
718,000 shares of common stock..........................................$ 1,000 $ -
See notes to condensed consolidated financial statements.
4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (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 nine months ended March 31, 2006 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, 2005.
The Company incurred net losses of $3,851,000 and $2,595,000 for the nine
months ended March 31, 2006 and 2005, respectively. In addition, the Company had
a working capital deficiency of $1,058,000 and a stockholders' deficiency of
$224,000 at March 31, 2006. These factors continue to raise substantial doubt
about the Company's ability to continue as a going concern.
There can be no assurance that sufficient funds will be generated during
the next year or thereafter from operations or that funds will be available from
external sources such as debt or equity financings or other potential sources.
The lack of additional capital could force the Company to curtail or cease
operations and would, therefore, have a material adverse effect on its business.
Furthermore, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significant dilutive effect on the Company's stockholders.
The accompanying condensed consolidated financial statements do not include
any adjustments related to the recoverability or classification of asset-
carrying amounts or the amounts and classifications of liabilities that may
result should the Company be unable to continue as a going concern.
Reclassifications:
Certain items in these financial statements have been reclassified to
conform to the current period presentation. These reclassifications had no
impact on our results of operations, stockholders' equity or cash flow.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment."
This statement is a revision of SFAS No. 123 and supersedes APB 25 and its
related implementation guidance. SFAS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under
SFAS 123R, SBP awards result in a cost that will be measured at fair value on
the awards' grant date, based on the estimated number of awards that are
expected to vest. This statement was adopted by the Company as of January 1,
2006.
5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE B - INVENTORIES
Inventories consist of the following at March 31, 2006:
Raw materials ........................................... $ 22,000
------------
------------
NOTE C - LOAN RECEIVABLE- RELATED PARTY
At March 31, 2006 loan receivable from related party consisted of advances
made to Aquacell Water, Inc., a former subsidiary. These advances bear interest
at prime rate plus 1/2% and are payable on demand.
NOTE D - PROPERTY, EQUIPMENT, AND BILLBOARD COOLERS
Property, equipment, and billboard coolers is summarized as follows at
March 31, 2006:
Billboard coolers - on location ......................... $ 776,000
Billboard coolers - not on location ..................... 395,000
Billboard cooler parts - not on location ................ 207,000
Furniture and fixtures .................................. 36,000
Equipment - office ...................................... 43,000
Machinery and equipment ................................. 79,000
Leasehold improvements .................................. 12,000
Truck ................................................... 11,000
------------
1,559,000
Less accumulated depreciation ........................... 320,000
------------
$ 1,239,000
------------
------------
Depreciation expense was $114,000 and $24,000 for the nine months ended
March 31, 2006 and 2005 respectively.
NOTE E - ACCRUED LIABILITIES
At March 31, 2006 the accrued liabilities consisted of officers' salaries
of $289,000, payroll taxes withheld of $295,000, accrued payroll taxes of
$97,000, accrued penalties and interest on taxes payable of $128,000 and other
accrued liabilities of $177,000. As of March 31, 2006 two tax liens have been
filed, one Federal tax lien of approximately $76,000 and one state tax lien of
approximately $26,000.
NOTE F - DEFERRED PAYABLE
At March 31, 2006, 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.
6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE G - EQUITY TRANSACTIONS
During July 2005 the Company issued 533,333 shares of its common stock in
connection with the exercise of 533,333 common stock warrants. Warrants with
exercise prices ranging from $.75 to $1.00 were repriced to $.30. The Company
realized gross proceeds of $160,000 and expenses were $16,000 in connection with
the exercise. New common stock purchase warrants were issued for 533,333 shares
of common stock exercisable at $.50 per share.
During August 2005 the Company completed a private placement of 900,000
shares of its common stock. The offering consisted of one share of common stock
at a price of $.30 per share and one-half common stock purchase warrant
exercisable at $.60 per share. The Company received proceeds of $270,000 and
there were no expenses incurred. The offering also consisted of one half common
stock purchase warrant in the Company's Aquacell Water subsidiary exercisable at
$5.00 per share.
During August 2005 the Company completed a private placement of 200,000
shares of Series B Convertible Preferred Stock. The offering consisted of
200,000 shares of Class B convertible preferred stock exercisable at $.34 and
50,000 Class B common stock purchase warrants exercisable at $.50 per share. The
first year annual dividend of $.08 per share was prepaid in full at the time of
the placement. The Series B convertible preferred stock is convertible into the
Company's common stock on a share for share basis. In connection with this
offering the Company received net proceeds of $52,000 after dividends paid of
$16,000. There were no expenses in connection with this offering.
During September 2005 the Company issued an aggregate of 1,841,512 shares
of common stock in connection with the exercise of 1,841,512 common stock
warrants. Warrants with exercise prices ranging from $.50 to $2.00 were repriced
to prices ranging from $.30 to $.45. The Company realized gross proceeds of
$653,000 and expenses were $65,000 in connection with the exercises. New common
stock purchase warrants were issued for 524,512 shares of common stock
exercisable at $.70 per share, 868,333 exercisable at $.50 per share, 365,000
exercisable at $.55 per share and 83,667 exercisable at $.65 per share.
During September 2005 the Company completed a private placement for 333,333
shares of its common stock. The offering consisted of one share of common stock
at a price of $.30 per share and one common stock purchase warrants exercisable
at $.50 per share. The Company realized gross proceeds of $100,000 and expenses
of the offering amounted to $10,000. In addition the Company issued 13,333
common stock purchase warrants, exercisable at $.50 per share, to the placement
agent.
During September 2005 the Company completed a private placement for 150,000
shares of its common stock. The offering consisted of one share of common stock
at a price of $.38 per share and one common stock purchase warrant exercisable
at $.75. The Company realized gross proceeds of $57,000 and there were no
offering expenses.
7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE G - EQUITY TRANSACTIONS - (continued)
During November 2005 the Company issued an aggregate of 277,845 shares of
common stock in connection with the exercise of 277,845 common stock warrants.
Warrants with an exercise price of $.70 were repriced to $.40. The Company
realized gross proceeds of $111,000 and expenses were $11,000 in connection with
the exercises. New common stock purchase warrants were issued for 277,845 shares
of common stock exercisable at $.60 per share. In addition 277,845 common stock
purchase warrants were issued in the Company's Aquacell Water subsidiary
exercisable at $5.00 per share.
During December 2005 the Company issued an aggregate of 400,000 shares of
common stock in connection with the exercise of 400,000 common stock warrants.
Warrants with exercise prices of $.55 and $.50 were repriced to $.12. The
Company realized gross proceeds of $48,000 and there were no expenses in
connection with the exercise. New common stock purchase warrants were issued for
400,000 shares of common stock exercisable at $.20 per share.
During January 2006 the Company issued an aggregate of 11,828 common shares
in payment of accrued dividends on the Class A Preferred Stock.
During January 2006 the Company issued an aggregate of 1,250,453 shares of
common stock in connection with the exercise of 1,250,453 common stock warrants.
Warrants with exercise prices ranging from $.50 to $4.00 were repriced to prices
ranging between $.10 and $.125. The Company realized gross proceeds of $148,000
and expenses were $11,000 in connection with the exercises. New common stock
purchase warrants were issued for 1,250,453 shares of common stock exercisable
at $.35 per share.
During January 2006 the Company completed a private placement for 500,000
shares of its common stock. The offering consisted of 500,000 shares of common
stock at a price of $.20 per share and 250,000 common stock purchase warrants
exercisable at $.35 per share. The Company realized gross proceeds of $100,000
and there were no offering expenses.
During February 2006 the Company issued an aggregate of 223,473 shares of
common stock in connection with the exercise of 223,473 common stock warrants.
Warrants with exercise prices ranging from $.35 to $1.75 were repriced to $.20.
The Company realized gross proceeds of $45,000 and expenses were $5,000 in
connection with the exercises. New common stock purchase warrants were issued
for 223,473 shares of common stock exercisable at $.40 per share.
During March 2006 the Company completed a private placement for 937,500
shares of its common stock. The offering consisted of 937,500 shares of common
stock at a price of $.16 per share and 468,750 common stock purchase warrants
exercisable at $.40 per share. The Company realized gross proceeds of $150,000
and expenses were $15,000 in connection with the placement.
8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE G - EQUITY TRANSACTIONS - (continued)
During March 2006 the Company issued an aggregate of 751,666 shares of
common stock in connection with the exercise of 751,666 common stock warrants.
Warrants with exercise prices ranging from $.55 to $1.75 were repriced to $.20.
The Company realized gross proceeds of $150,000 and expenses were $15,000 in
connection with the exercises. New common stock purchase warrants were issued
for 751,666 shares of common stock exercisable at $.40 per share.
Increase in Authorized Capitalization
On July 19, 2005 the Board of Directors approved an amendment to the
Company's Certificate of Incorporation to permit the Company to issue up to
75,000,000 shares of common stock. This amendment was approved by the
stockholders at the December 7, 2005 annual meeting.
Amendment to 1998 Incentive Stock Plan
On October 10, 2005 the Board of Directors approved an increase in the 1998
Incentive Stock Plan's shares reserved for issuance from 2,000,000 to 3,000,000.
This amendment was approved by the stockholders at the December 7, 2005 annual
meeting.
Conversion of Class B Preferred Stock
During the nine months ended March 31, 2006, 918,000 shares of Class B
Preferred Stock were converted into common shares of the Company on a share for
share basis. No shares of Class B Preferred stock were issued and outstanding at
March 31, 2006.
Stock Based Compensation
Effective January 1, 2006, the Company adopted "SFAS 123(R)", which
requires all share-based payment transactions with employees, including grants
of employee stock options, to be recognized as compensation expense over the
requisite service period based on their relative fair values. Prior to the
adoption of SFAS 123(R), stock-based compensation expense related to employee
stock options was not recognized in the Statement of Operations if the exercise
price was at least equal to the market value of the common stock on the grant
date, in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Prior to January 1, 2006, the Company followed
the disclosure- only provisions under SFAS 123.
For the quarter ended March 31, 2006, stock based compensation included
$158,000 attributable to fully vested employee stock options.
9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE H - SPIN-OFF OF SUBSIDIARY
On July 19, 2005 the Board of Directors approved that management
reincorporate its Water Science Technologies subsidiary in Delaware and change
its name to Aquacell Water, Inc.
On November 8, 2005 the Company filed a Form 10 on behalf of its Aquacell
Water subsidiary in connection with the spin-off.
This report has reclassified the assets, liabilities and operations of the
Aquacell Water company to reflect discontinued operations based on the March 9,
2006 record date.
On March 13, 2006 the Form 10 of Aquacell Water that registered all
27,809,408 issued and outstanding shares of its common stock to be distributed
to the AquaCell Technologies, Inc. common stockholders on a share for share
basis was declared effective.
NOTE I - DISCONTINUED OPERATIONS
March 9, 2006 was established by the Company as the record date for the
spin-off of the common stock of its Aquacell Water, Inc. subsidiary to the
common stockholders of the Company on a share for share basis.
The Financial Accounting Standards Board's SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," addresses financial accounting
and reporting for the disposal of a component of an entity that has been
disposed of in a distribution to owners.
The Company has disposed of its Aquacell Water, Inc. subsidiary through a
distribution of common shares to its stockholders. Consequently, the
accompanying condensed consolidated financial statements reflect operations of
Aquacell Water, Inc. as discontinued operations in accordance with SFAS No. 144.
Results of operations and cash flows of Aquacell Water have been classified as
"Loss from discontinued operations," and "Net cash provided by (used in)
discontinued operations," respectively.
Summarized below are the results of discontinued operations:
Nine Months Ended March 31,
------------------------------
2006 2005
------------ ------------
Net Sales............................... $ 555,000 $ 34,000
------------ ------------
------------ ------------
Discontinued Operations:
Loss from discontinued operations of
subsidiary.......................... $ (651,000) $ (277,000)
Write-off goodwill attributable to
Company's investment in
Aquacell Water, Inc................. (750,000) -
------------ ------------
Loss from discontinued operations..... $(1,401,000) $ (277,000)
------------ ------------
------------ ------------
10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE J - COMMITMENTS AND CONTINGENCIES
Employee Contracts
On November 1, 2005 the Company entered into five year employment
agreements with three executives of the Company. These agreements provide for
aggregate minimum annual salaries of $284,000. The agreements also provide for
incentive bonuses based upon achievement of certain milestones.
NOTE K - OTHER COSTS AND EXPENSES
Other costs and expenses consisted of the following:
Nine Months Ended March 31,
------------------------------
2006 2005
------------ ------------
Manufacturing expenses - billboard coolers. $ 329,000 $ 389,000
Rent....................................... 29,000 29,000
Telephone and utilities.................... 43,000 25,000
Travel..................................... 20,000 51,000
Business promotion........ ................ 49,000 77,000
Consulting, service fees,
commissions and expenses............... 229,000 45,000
Insurance.................................. 37,000 46,000
Vehicle expenses........................... 25,000 46,000
Listing fees............................... - 28,000
Exchange fees, transfer agent fees and
investor fees and expenses............. 91,000 122,000
Office expenses, postage and supplies...... 17,000 16,000
Depreciation and amortization.............. 130,000 39,000
Supplies................................... 39,000 32,000
Other expenses............................. 171,000 59,000
------------ ------------
$ 1,209,000 $ 1,004,000
------------ ------------
------------ ------------
NOTE L - INTEREST EXPENSE:
Included in interest expense is penalties and interest on delinquent
payroll taxes payable in the amount of $42,000 for the nine months ended
March 31, 2006 and $-0- for the nine months ended March 31, 2005.
11
NOTE M - SEGMENT DATA:
The Company has two reportable segments; water products and advertising.
The following table presents information about the Company's business
segments as of and for the nine months ended March 31, 2006 and 2005.
Three Months Ended Nine Months Ended
March 31, 2006 March 31, 2006
-------------------------- --------------------------
Water Water
Related Related
Products Advertising Total Products Advertising Total
------------- ------------ ----------- ------------- ------------ ------------
Net revenue.....................$ 95,000 $ 76,000 $ 171,000 $ 147,000 $ 20,000 $ 167,000
Loss from continuing operations.$ (710,000) $(1,740,000) $(2,450,000) $ (872,000) $(1,446,000) $(2,318,000)
Stock based compensation........$ 28,000 $ 739,000 $ 767,000 $ 140,000 $ 605,000 $ 745,000
Depreciation and amortization...$ 1,000 $ 129,000 $ 130,000 $ 1,000 $ 38,000 $ 39,000
Identifiable assets.............$ 446,000 $ 1,401,000 $ 1,847,000 $ 224,000 $ 1,236,000 $ 1,460,000
12
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 that 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 consolidated financial statements and the notes presented
following the consolidated financial statements. The discussion of results,
causes and trends should not be construed to imply any conclusion that such
results or trends will necessarily continue in the future.
The operations of AquaCell Technologies, Inc. are conducted through its
AquaCell Media, Inc. subsidiary. AquaCell Media, Inc. is in the out-of-home
segment of the advertising industry through the sale of advertising on our
patented self-filling water cooler, the Aquacell Bottled Water Cooler System.
This business model called "Coolertising" was launched in 2004, designed to
provide us with an on-going revenue model in comparison to selling the coolers,
as we had previously done. We install our "billboard" water coolers into retail
and other strategic locations free of charge to these locations under five-year
contracts, and retain ownership of the cooler. We currently have approximately
1400 coolers installed in Rite Aid and Duane Reade drug stores.
During the quarter ended March 31, 2006, we signed contracts with Winn-
Dixie supermarkets and CVS pharmacies for installation of our billboard water
coolers, and will begin these installations in the next quarter. We continue to
have a test program underway in Kmart/Sears.
Advertisers to date have been CBS Television and Unilever, who reported a
34% sales lift of its advertised Dove Cooler Moisture in stores carrying the
cooler ads. CBS Television has used Coolertising to promote three new
comedies, and has signed up for a new campaign for the late-summer/early fall
2006.
Coolertising has begun to gain recognition in advertising trade magazines,
and during the quarter ended March 31, 2006 was included in an article in
Business Week on out of home advertising.
13
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
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.
Income taxes:
The Company accounts for income taxes using the asset and liability method
described in 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.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS NO. 123R, "Share Based Payment."
This statement is a revision of SFAS No. 123 and supersedes APB 25 and its
related implementation guidance. SFAS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under
SFAS 123R, SBP awards result in a cost that will be measured at fair value on
the awards' grant date, based on the estimated number of awards that are
expected to vest. This statement was adopted by the Company effective January 1,
2006.
Results of Operations
During the quarter ended March 31, 2006 the spin-off of the Company's
Aquacell Water subsidiary was declared effective and, in accordance with the
Financial Accounting Standards Board's SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," its operations were required to be
classified as discontinued operations since it was disposed of in a distribution
to the owners of the Company's common stock. Accordingly, the statement of
operations has been reclassified to reflect the loss from discontinued operation
which, during the quarter ended March 31, 2006, included the write-off of
goodwill, in the amount of $750,000, in connection with the Company's original
acquisition of Aquacell Water.
14
Nine Months Ended March 31, 2006
Continuing Operations
During the nine months ended March 31, 2006 on a consolidated basis,
revenues from continuing operations were $171,000 as compared to $167,000 for
the similar period of the preceding year. Cost of sales was 50% of net sales
for the nine months ended March 31, 2006 as compared to 46% of net sales for
the same period of the prior year.
Loss from continuing operations on a consolidated basis, attributable to
common stockholders, for the nine months ended March 31, 2006 increased to
$2,450,000 as compared to $2,318,000 for the same period of the prior year
resulting primarily from the amortization of vested stock options, in the amount
of $158,000, in accordance with SFAS No. 123R that was adopted by the Company as
of January 1, 2006.
Salaries and wages decreased by $212,000 for the nine months ended March
31, 2006 over the prior year resulting primarily from the new current year
executive employment contracts reflecting lower base salaries. Legal,
accounting and other professional expenses decreased by approximately $33,000
for the nine months ended March 31, 2006. Stock based compensation increased by
$22,000 to $767,000 for the nine months ended March 31, 2006 resulting from a
charge of $158,000 from the adoption of SFAS No. 123R offset by a reduction in
warrant compensation attributable to a direct write-off of certain warrants at
the end of the prior year. Other selling, general and administrative expenses,
increased by approximately $205,000 to $1,209,000 for the nine months ended
March 31, 2006. Current period expenses consisted primarily of manufacturing
expenses, billboard coolers- $329,000, rent- $29,000, telephone and utilities-
$43,000, travel- $20,000, business promotion- $49,000, consulting and service
fees, commissions and expenses- $229,000, insurance- $37,000, and vehicle
expenses- $25,000.
Discontinued Operations
Loss from discontinued operations increased by $1,124,000 for the nine
months ended March 31, 2006. The record date for the distribution of Aquacell
Water to the Company's common stockholders was established at March 9, 2006 and,
in accordance with SFAS No. 144, the operations of Aquacell Water were
reclassified to discontinued operations. In addition, the Company was
required to write-off the balance of goodwill resulting from its investment in
Aquacell Water resulting in a one-time charge of $750,000 and increasing the
loss from discontinued operations for the nine month period ended March 31,
2006.
Three Months Ended March 31, 2006
Continuing Operations
During the three months ended March 31, 2006 on a consolidated basis the
loss from continuing operations increased by $106,000 to $941,000 from the
comparable period of the prior year resulting primarily from the $158,000 charge
for vested stock options under SFAS No. 123R. The operating loss from
discontinued operations, increased by $96,000 for the three months ended March
31, 2006 over the prior year and the loss was increased by the $750,000 one-time
write-off of goodwill discussed above.
15
During the three months ended March 31, 2006, on a consolidated basis,
revenues from continuing operations decreased by $29,000 over the three months
ended March 31, 2005 resulting primarily from a decline in advertising revenues.
Salaries and wages decreased by $107,000 for the three months ended
March 31, 2006 over the prior year resulting primarily from the current year
allocation of a portion of executive and other salaries to Aquacell Water. These
costs are reflected in the increased loss from discontinued operations. Legal,
accounting and other professional expenses decreased by approximately $28,000
for the three months ended March 31, 2006. Stock based compensation increased by
$94,000 to $356,000 for the three months ended March 31, 2006. Other selling,
general and administrative expenses increased by approximately $62,000 to
$405,000 for the three months ended March 31, 2006. Current period expenses
consisted primarily of manufacturing expenses- billboard coolers- $138,000,
consulting and service fees, commissions and expenses- $84,000, depreciation and
amortization- $46,000, rent- $10,000 and business promotion- $29,000.
Discontinued Operations
Loss from discontinued operations for the three months ended March 31, 2006
consisted of an operating loss of $133,000 and a one-time write-off of goodwill
in the amount of $750,000.
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 intends to
continue to raise capital through the sale or exercise of equity securities.
Toward that end the Company raised net equity of approximately $1,906,000
through the exercise of warrants to purchase common shares and private
placements of its common and preferred B shares during the nine months ended
March 31, 2006. 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.
Cash used by continuing operations during the nine months ended March 31,
2006 amounted to $1,513,000. Net loss from continuing operations of $2,450,000
was reduced by non-cash stock based compensation in the amount of $767,000
depreciation and amortization of $130,000 and bad debt provision of $6,000. Cash
used by operations was further increased by a decrease in accounts payable in
the amount of $141,000. Net loss was further decreased by an increase in accrued
liabilities of $114,000 and by net changes in prepaid expenses, accounts
receivable, customer deposits, security deposits, and inventories aggregating
$61,000.
Cash used by investing activities during the nine months ended March 31,
2006 represented capital expenditures in the amount of $144,000 primarily for
billboard coolers.
Cash provided by financing activities was approximately $1,572,000.
Proceeds from private placements of common and preferred B stock amounted to
$688,000. Proceeds from exercise of common stock purchase warrants amounted to
$1,315,000. Proceeds from subscriptions receivable were $168,000. Expenses of
our equity raises amount to $97,000, Net loan repayments were made to related
parties in the amount of $70,000 and dividends were paid on the Class B
preferred stock in the amount of $37,000. Net loans to related company spun-off
during the quarter ended March 31, 2006 amounted to $395,000.
16
Net cash provided from discontinued operations amounted to $2,000 for the
nine months ended March 31, 2006.
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 $10,448,000 if exercised. As of March
31, 2006 150,000 warrants generating $2,000 were in the money and 1,641,095
warrants generating $10,446,000 were out of the money. Historically, the Company
has repriced out of the money warrants issued in connection with equity
placements to generate additional capital. There is no assurance however, that
any of the warrants will be exercised.
At March 31, 2006 there were two outstanding tax liens; a Federal tax lien
against an inactive subsidiary in the amount of $76,000 and a state tax lien
against an inactive subsidiary in the amount of $26,000. We are in negotiations
to reach settlement agreements with the appropriate tax agencies. There are no
assurances that these negotiations will result in successful agreements and the
Company's assets could be subject to enforcement action.
Management believes that 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.
17
PART II. OTHER INFORMATION
ITEM 2 (C). SALES OF UNREGISTERED SECURITIES
During the quarter ended March 2006 the Registrant sold 2,225,592 shares of
common stock upon exercise of Common Stock Purchase Warrants to 11 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 $.35 to
$.40.
During the quarter ended March 2006 the Registrant sold 1,437,500 shares of
common stock in connection with Private Placements to 3 accredited investors
pursuant to the exemption provided by Regulation D, Rule 505 and section 4(2) of
the Securities Act of 1933, as amended.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the 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 there were no
matters submitted to a vote of security holders.
18
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 the period covered by this Form 10-QSB the following report of
Form 8-K was filed:
March 3, 2006 - Agreement with CVS Pharmacy, Inc. to install water
coolers into the pharmacy areas in CVS stores.
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: May 22, 2006
/s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
19
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
20