Changes are Blacklined (====)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB-A
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AMENDMENT NO. 1
===============
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Delaware 33-0750453
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10410 Trademark Street, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (909) 987-0456
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ____
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and will not be contained, to the best of
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
The information required in Part III by Items 9, 10, 11, 12, and 14 is
incorporated by reference to the issuer's proxy statement in connection with the
2004 Annual Meeting of Shareholders, which will be filed by the issuer within
120 days after the close of its fiscal year.
State issuer's revenues for its most recent fiscal year: $729,000.00.
As of September 23, 2004, the aggregate market value of the issuer's Common
Stock (based on its reported last sale price on the American Stock Exchange)
held by non-affiliates of the issuer was $8,486,221.
At September 23, 2004 14,801,435 shares of issuer's Common Stock were
outstanding.
PART I
ITEM 1. BUSINESS
Overview
AquaCell Technologies, Inc. (the "Company") was incorporated in Delaware on
March 19, 1997. The Company is engaged in the manufacture and sale of products
for water filtration and purification through our operating subsidiaries, Water
Science Technologies, Inc. (WST), and to a lesser extent, Global Water-Aquacell.
Our water filtration products address various water treatment applications for
industrial, commercial, institutional and residential purposes.
Our Aquacell Media, Inc. subsidiary places the Company's patented Aquacell
Bottled Water Cooler System into various locations at no cost and sells targeted
advertising on the bottle band of the permanently attached five-gallon bottle.
Our flagship product is our patented Aquacell Bottled Water Cooler System.
We replace traditional five-gallon bottle water coolers with a permanently
installed convenient alternative where the bottle never needs changing and water
bottles no longer need to be delivered, stored or replaced. In addition, we
replace water fountains where users tend to have greater concerns as to
sanitation and water quality. Our primary marketing focus for this product is
through our Aquacell Media subsidiary's "Message On The Bottle" in-store
advertising program. We have placed coolers into various chain drug stores, and
are selling advertising to manufacturers of products available for sale in those
locations.
Water Purification Industry Background
Warning of a mounting water crisis, the United Nations designated 2003 as
the "International Year of Freshwater", stating, "Water is likely to become a
growing source of tension and fierce competition between nations if present
trends continue...". The UN has reported that more than half of humanity will
be living with water shortages within 50 years. According to a report from
scientists at the International Water Management Institute, the risk of wars
being fought over water is rising because of explosive global population growth
and widespread complacency. It has been suggested, however, that employing
water purification systems, including desalination plants, in areas of the world
lacking fresh drinking water, could avert such wars.
The highly fragmented water purification industry has thousands of
companies involved in various capacities, including companies which design fully
integrated systems for processing millions of gallons of water for municipal,
industrial, and commercial applications, down to the independent water delivery
route person.
According to an article appearing in The Wall Street Journal, water supply
businesses generate approximately $400 billion in revenue worldwide annually.
Demand for water purification has continued to grow nationally and
internationally due to economic expansion, scarcity of usable water, concern
about water quality and regulatory requirements. One of the fastest growing
segments of the industry is the drinking water segment, including point-of-use
filtration systems for providing purified drinking water and bottled drinking
water.
In November 2002, the Wall Street Journal reported that the new kitchen
status symbol is the water cooler, and that home delivery service of water is
increasing. Sales of water coolers at retail has escalated due to consumer
demand, according to the June 16, 2003 Weekly of Home Products Retailing. The
September 9, 2004 Wall Street Journal reported that home filtration has grown to
be a $1.6 billion industry.
U.S. Drinking Water Analysis
Beverage Marketing Corp., a research and consulting group, has found that
the per-capita consumption of bottled water has doubled over the past 10 years
to 22.6 gallons. That is 6.8 billion gallons overall, accounting for $8.3
billion in wholesale sales. While many consumers use water filtration systems
and drink bottled water for improved taste, there are other more important
reasons to do so.
Risks of Tap Water. Tap water, regardless of its source, may contain
certain contaminants that can affect one's health. Although municipalities are
required to provide drinking water that complies with the Safe Drinking Water
Act, the water supplied to homes from municipalities may contain startling
levels of chlorine in addition to bacteria, toxins and parasites. Although the
water may be purified upon leaving the treatment facility, impurities may be
picked up from the pipes used to transfer it to the tap.
In the United States, water quality is being compromised by pollution,
aging municipal water systems, and contaminated wells and surface water. Water
Conditioning & Purification reported in their January 2004 edition that between
1991 and 1998 there were over 429,000 cases of illness, with 58 deaths caused by
outbreaks of contamination of water systems, and that there is sound scientific
reach showing that the use of in-home purification systems can decrease the
amount of gastrointestinal illness by up to 40 percent or more.
The recent highly publicized discovery of lead-tainted water in the
District of Columbia has resulted in the introduction of legislation to remove
lead from water lines throughout the nation. The proposed law could result in
spending $500 billion over 20 years to restructure the 1974 Safe Drinking Water
Act and its 1991 amendments. Overall, cost estimates for upgrading municipal
water systems in the United States range from $151 billion to $1 trillion, with
projected costs as high as $6900 per household in some areas.
Additionally, costs for protection stemming from potential terrorism will
cost $450 million for Congressional ordered vulnerability studies, with an
additional $1.6 billion needed for basic security at pumping stations and
treatment plants. The August 12, 2004 Review-Journal of Las Vegas reported that
it had obtained a bulletin issued by the FBI and Department of Homeland Security
reporting that terrorists discussed a plot to recruit employees of water
treatment facilities to poison drinking supplies during the chlorination process
in hopes of causing mass casualties.
The awareness level of consumers of the potential hazards of drinking tap
water is continuously increasing, and we believe that more educated consumers
will be seeking to minimize such potential risks through the purchase of point-
of-use filtration systems. An article appearing in the September 2002 Water
Technology magazine, included predictions from point-of-use experts on the
industry's future. The article includes statements that the home water
treatment market will grow from its current 15 percent penetration to near 100%,
with every home having a point-of-use water drinking water system within the
next 20 years, as point-of-use equipment will become a regular solution to some
municipal water quality problems.
Problems With Bottled Water. While some people have resorted to drinking
bottled water as a safe alternative to tap water, even bottled water can contain
impurities. In February 1999, the Natural Resources Defense Council released an
extensive four year scientific study of bottled water sold in the United States,
titled "BOTTLED WATER: Pure Drink or Pure Hype?" This study included testing of
more than 1000 bottles of 103 brands of bottled water. One-third of the bottled
waters tested were found, in at least one test sample, to contain levels of
contamination that exceeded allowable limits under either state or bottled water
standards. Contaminants found in the bottled waters included synthetic organic
chemicals, bacteria and arsenic. The study further revealed that, according to
government and industry estimates, 25% to 40% of bottled water is just tap
water- sometimes with additional treatment, sometimes not. The conclusion of
the study was that bottled water is not necessarily any better regulated, purer,
or safer than most tap water.
In June 2003 the nation's largest bottled water company was charged with
falsely advertising that the source of the water was a pristine protected
spring, when allegedly it is actually heavily treated ground water.
Environmental groups argue strongly that bottled water is very
environmentally unfriendly. From the threat to local wells and streams and
disruption of the natural hydrological cycle, to the use of fossil fuels and
release of thousands of tons of harmful emissions related to the delivery of
bottled water, the environment is being negatively impacted. Furthermore, the
growth of bottled water sales, particularly in individual serve bottles, has
lead to an environmental issue with discarded water bottles creating a crisis
in landfills. These bottles remain in the landfills forever, unless they are
incinerated, which releases toxic fumes into the air that harm the ozone layer.
In California alone, 3 million bottles per day are tossed into landfills
(1 billion per year), which is expected to increase with the popularity of
bottled water.
In Store Advertising Industry
According to Advertising Age, retailers and marketers have transformed
retail stores into a media channel. Budgets previously earmarked for
traditional advertising are increasingly migrating into in-store advertising
and promotional programs.
Although in-store promotions and point-of-purchase displays have been
around for many years, it has only recently been transformed into a new form of
advertising. This transformation may be attributed to marketing studies
conducted by Point-of-purchase Advertising International, (POPAI), beginning in
2001 which conclusively showed that point-of-purchase advertising is compatible
with other advertising means and can increase sales volumes significantly.
POPAI has found that 50 to 70% of all buying decisions are made at the
point of purchase, and that in-store marketing plays a large role in changing
customer behavior and attitudes.
In-store advertising is primarily dominated by floor and shelf advertising,
which has demonstrated that such advertising increases sales of the advertised
products by 15% to 35%. According to Inc. magazine, revenues of FloorGraphics,
the pioneer of in-store floor advertising grew 7,500% over a five-year period
from its inception in 1998 to $75 million.
Our Products
Our flagship product is our patented Aquacell Bottled Water Cooler System.
The Aquacell cooler is hooked up to a standard municipal water supply. The
water is filtered and purified through multiple step systems and the treated
water then automatically and continuously fills the permanently attached five-
gallon bottle on the cooler. Our patents pertain to the attachment of the
bottle to the cooler, and the float valve in the bottle, providing the
automatic refilling. The permanently attached five-gallon bottle is significant
to the Company's marketing strategies. A 2001 World Wildlife Fund study
confirmed the widespread belief that consumers associate bottled water with
social status and healthy living.
The Company originally marketed this product under the trade name Purific
and manufactured the multi-stage Aquacell filters, which were used in
conjunction with other technologies to create various configurations and models
to meet the needs of the client
Utilizing our patented technology we redesigned our self-filling water
cooler to streamline the manufacturing process, which has reduced our
manufacturing cost and allowed us to increase productivity. This new model, the
Aquacell 1000 Bottled Water Cooler System, has the filtration system mounted
inside the cooler. It includes ultra-violet light disinfection coupled with the
same NSF approved filter utilized by nearly every fast-food restaurant
(including McDonald's and Taco Bell) and convenience store across the country
for the filtering of water used in the Pepsi or Coke beverage dispenser.
Everpure, a water industry leader with more than 70 years of water filtration
expertise, manufactures the filter.
The main advantages of the Aquacell Bottled Water Cooler Systems over
bottled water are Cost, Convenience and Quality. Since the tragic events of
September 11, 2001 an additional benefit of the cooler has emerged, and that is
the security aspect of eliminating potential risk of bottled water deliveries.
Other benefits include:
. Saves money. Our self-filling cooler has been proven to save most
companies a considerable amount of money over the costs of bottled water
alternatives.
. No bottles to change. When changing water bottles, most people spill or
splash the water, and often a relatively strong person must be located
to change the bottle. Also, the cleanliness of the hands of the person
changing the bottle is an issue, since anything on their hands will end
up in the water.
. Reduce potential worker's compensation claims. Potential worker's
compensation claims from injuries due to lifting the 40-pound bottle can
be costly.
. No bottles to store. Replacement water bottles are cumbersome to store,
taking up a lot of valuable space. The higher the rent, the more it
costs to store the water.
. Never run out of water. Since our patented cooler continuously refills
itself as water is dispensed, the cooler always has water available when
needed.
. No delivery problems. Deliveries of bottled water can disrupt office
operations, as well as pose potential security risks. Additionally, in
large office buildings wait time for freight elevators can delay bottled
water delivery by several hours, further adding to the inconvenience of
bottled water delivery.
. Freshly filtered and disinfected water. The quality of bottled water
varies greatly depending upon the source and whether or not it is
filtered or purified. Also, water which has been stored in certain
areas can absorb taste and odor through the bottle. The water in our
Aquacell Bottled Water Cooler Systems maintains its freshness as it is
constantly being replenished.
We also manufacture custom designed systems to treat commercial and
industrial water treatment concerns through our Water Science Technologies
subsidiary.
Our Aquacell Media Inc. Subsidiary
Aquacell Media provides the unique "Message On The Bottle" advertising
program, in which we install our patented Aquacell Bottled Water Cooler System
free of charge in various locations. Aquacell Media retains ownership of the
coolers, and revenue is generated through the sale of advertising on the band of
the cooler's permanently attached five-gallon bottle. We are, in effect,
creating a water cooler billboard. Since the water cooler is a known
congregating location, it is the perfect venue for advertisers.
The benefits to advertising on the Aquacell Bottled Water Cooler System
bottle label include: a high level of viewing frequency; no clutter from
competing ads; and long viewing time - since pages can't be turned, there is no
channel surfing or mouse clicking. Since the bottle is permanently attached to
the water cooler, the label - which can be changed intermittently to coincide
with advertising campaigns - remains intact.
In comparing the cost of our "Message On The Bottle" to other medias, we
offer a significantly less-expensive way for advertisers to reach the consumer,
at a fraction of the average cost of print ads.
Aquacell 1000 Bottled Water Cooler Systems are currently being installed in
national chain drug stores, and Aquacell Media is in negotiations with other
retailers including supermarkets and other national chain stores, for
installations of coolers in those locations as well. The Company utilizes the
services of Roto-Rooter Plumbers and the service network of the manufacturer of
the filter used in the Aquacell 1000 Bottled Water Cooler System.
The stores in which systems have been placed literally have customers lined
up at the cooler, providing added value for retailers and their customers.
Store employees appreciate the patented feature of the Aquacell cooler that
eliminates the necessity of having to change the bottle.
As presented in the advertisements Aquacell Media ran in trade magazines
during April which are available for viewing on the Company's website at
www.aquacell.com, the "Message On The Bottle" advertising provides a unique
point-of-sale opportunity for manufacturers to reach the consumer. Advertising
on the bottle gets face-to-face impact, and the advertisers also advertise on
the cups, further reinforcing their brand message and literally putting it right
into the shoppers' hands. The Company is in the final stages of negotiations
with major manufacturers and providers of consumer goods and health care related
products and/or their advertising agencies, for the advertisements of their
products.
The Company has engaged and will continue to engage several new marketing
partners to assist the Company in acquiring a wide variety of companies for both
advertising and placement of coolers into retailers.
Through J. DeKama Associates, the company has tapped into the services of
Advantage Sales and Marketing, LLC, ("Advantage") the nation's leading sales and
marketing agency specializing in outsourced sales, merchandising, and marketing
services to manufacturers, suppliers and producers of food products and consumer
goods. Advantage represents 1,200 clients and has an associate base that
exceeds 11,500 persons producing over $700 million per year. Top brand name
clients include Unilever, Mars, Quaker, Del Monte, Johnson and Johnson, Gillette
and SC Johnson. Advantage provides extensive retail coverage across several
classes of trade, including: 24,000 supermarkets; 12,000 drug stores; 78,000
convenience stores; 4,500 mass merchandisers; 1,400 super stores; and 900 club
stores.
Inasmuch as we only began placing the coolers toward the end of the fiscal
year, no revenues were generated by this subsidiary during the year ended June
30, 2004.
Our Global Water-Aquacell, Inc. Subsidiary
Global Water-Aquacell has historically manufactured and marketed the
company's flagship patented self-filling bottled water cooler to Fortune 500
companies and the US government.
Shortly after the Company's initial public offering in February 2001, we
entered into an exclusive distribution agreement with Corbett Water Technologies
and S&B Technical ("Corbett"), for sales of the Company's flagship patented
self-filling water cooler. The relationship with Corbett proved disastrous to
the Company, hampering our marketing plans and costing the Company significant
non-cash losses of almost $2,000,000 during the term of the agreement, in
addition to lost business opportunities over the past year. At the end of its
last fiscal year, the Company was able to negotiate the return of these
exclusive rights, enabling the Company to restructure its marketing plan and
form new marketing alliances.
Global Water-Aquacell is continuing to sell the patented bottled water
cooler system to its current customers, primarily comprised of Fortune 500 and
US government customers; however, the Company is focusing its marketing efforts
for this product through its Aquacell Media subsidiary "Message on the Bottle"
program, as described above.
For new customers wishing to purchase the Company's patented water cooler
system, we are offering the Aquacell 1000 Bottled Water Cooler System, as
previously described.
Global Water-Aquacell will also continue to sell replacement filters for
our water coolers. The filtration systems on our patented water coolers require
replacement after 2,000 gallons of water have passed through the system or after
one year from the date of installation, whichever comes first. We contact our
customers on a regular basis to facilitate timely replacement of filters.
Customers with high water usage often stock replacement filters.
Our Water Science Technologies, Inc. Subsidiary
In March 2002, AquaCell closed on its acquisition of Water Science
Technologies (WST), a Tempe, Arizona based manufacturer of integrated water
purification and treatment systems. WST is a wholly owned subsidiary of
AquaCell.
WST operates as a manufacturer of custom designed systems to meet a variety
of water purification and treatment needs. The company will continue to
manufacture certain custom systems for various applications, and additionally,
management intends to develop targeted product lines for four specific markets,
which we believe will position WST for long-term growth.
The first area of concentration is purification and bottling systems for
water bottling plants, both foreign and domestic. Bottled water is the fastest
growing segment of both the beverage industry and the water industry. WST has
manufactured numerous systems for bottling plants installed throughout the US,
and Central and South America including systems for brands such as Culligan,
O Premium, and numerous private-label supermarket brands.
The second area of concentration will be on systems to treat water for car
washes, providing environmentally friendly recycling and discharge, as well as
spot-free rinse. We currently supply such systems for use in car washes in a
regional southwest area, and will look to expand the program throughout the US.
The third product line will encompass the restaurant and food service
industry, providing protection of equipment and more consistent quality of
food.
The fourth product line will target emergency drinking water systems,
including the recently designed portable system capable of converting swimming
pool water into drinking water.
We anticipate that these product lines will be marketed by marketing
partners with expertise in the corresponding industries.
Customers
Our Global Water customers currently include companies across a broad range
of industries including investment banking, consumer products, aerospace,
entertainment, banking, brokerage houses, manufacturing and insurance. Our
customers also include professional service providers and governmental agencies.
Our WST customers include a broad range of industries including water bottling,
car washes, and various manufacturing facilities. Our targeted Aquacell Media
customers include manufacturers of branded consumer products for the purchase of
advertising on our Aquacell Bottled Water Cooler Systems installed free of
charge in retail locations.
Production, Raw Materials and Supplies
Our Products are manufactured in our 10,000 square foot manufacturing
facility located in Rancho Cucamonga, California, and the WST 8,300 square foot
facility located in Tempe, Arizona. Our California plant is located within a
100-mile radius of 95% of our suppliers allowing for just-in-time inventory.
Our facilities utilize manufacturing processes that follow the guidelines
of the Water Quality Association. The manufacturing process of our various
products includes utilization of injection-molded parts, for which we own the
molds. Multiple vendors have been identified as sources for parts and supplies
for our products and we do not anticipate any shortages of such materials.
Upon completion of manufacture, each product undergoes quality assurance
testing prior to shipping and installation. The raw materials and components
used in these products are commonly available commodities such as off the shelf
water coolers, water bottles, various fittings, plastic tubing, wiring, valves,
sediment filters, reverse osmosis membrane filters and ultra-violet lights. Our
products are fabricated from these materials and assembled together with
products bought from other companies to form an integrated product. We do not
depend on any single supplier. If any supplier were to become unable to
perform, we believe we could readily find a substitute source. We are not a
party to any material long-term fixed price supply contracts.
Government Regulation
Federal, state, local and foreign environmental laws and regulations
require substantial expenditures and compliance with water quality standards and
impose liabilities for noncompliance. We believe that environmental laws and
regulations and their enforcement are, and will continue to be, a significant
factor affecting the marketability of our products. The treatment of drinking
water in the United States is governed by the Safe Drinking Water Act. The 1996
amendments to the Act emphasize risk-based standards for contaminants in
drinking water, afford small water supply systems operational flexibility and
provide assistance to water system infrastructures through a multi-billion-
dollar Drinking Water State Revolving Fund. The Fund program assists public
water systems with the financing of the costs of drinking infrastructure that is
necessary to achieve or maintain compliance with the Safe Drinking Water Act
requirements and to protect public health. The Fund, patterned after the State
Revolving Fund contained in the Clean Water Act, provides funding to the states
to establish a renewable source of financing for drinking water infrastructure
projects. The Fund program is designed to ensure that the drinking water
supplies in the United States remain safe and affordable, and that systems that
receive funding will be properly operated and maintained. Regulations under the
Safe Water Drinking Act also established maximum containment levels for a wide
variety of chemicals that may be present in drinking water treatment to meet
applicable standards.
Any changes in applicable regulations or their enforcement may affect our
operations by imposing additional regulatory compliance costs on our customers,
requiring modification of our products or affecting the market for our products.
To the extent that demand for our products are created by the need to comply
with such enhanced standards or their enforcement, any modification of the
standards or their enforcement may reduce demand, thereby adversely affecting
our business, financial condition or results of operations. The relaxation or
repeal of any such laws or regulations or the strict enforcement thereof could
also adversely affect our business and prospects. Conversely, changes in
applicable environmental requirements imposing additional regulatory compliance
requirements or causing stricter enforcement of these laws or regulations could
increase the demand for our products.
Competition
The drinking water purification industry is fragmented and highly
competitive due to the large number of businesses within certain product areas.
We compete with many companies that have greater market penetration, depth of
product line, resources and access to capital, all of which could be competitive
advantages. Competitors of our Global Water-Aquacell products include: bottled
water brands such as Arrowhead, Deer Park, Poland Spring, and Sparkletts; water
filtration system manufacturers such as Culligan, Brita, which is owned by
Clorox and Pur, which is owned by Proctor and Gamble; and flat-top point-of-use
water cooler manufacturers such as Oasis, Cordley-Temprite, and Mutual of
Omaha's Innowave product. Competitors of our WST subsidiary include water
filtration systems manufacturers such as Ionics and Osmonics.
Competitors in the in-store advertising industry include News Corp and
FloorGraphics.
While we believe that we can deliver our products on an economically
competitive basis, there can be no assurance in that regard. In addition, many
competitors have greater financial resources than us to finance their expansion
and internal growth opportunities. Consequently, we may encounter significant
competition in our efforts to achieve our strategic goals. There can be no
assurance that our competitors will not develop products that are superior to
ours or achieve greater market acceptance than our products. Competition could
have a material adverse effect on our ability to consummate arrangements with
customers or enter into strategic business alliances. Moreover, in response to
changes in the competitive environment, we may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on our business, financial condition and results of
operations.
Intellectual Property
We own a United States and Canadian patent on our automatic-refilling
purified bottle water cooler. These patents do not expire until November 20,
2006 and October 2, 2009, respectively. We have filed for two patents with the
US Patent and Trademark office, which if granted, would provide exclusive rights
for utilizing the water cooler bottle as an advertising mechanism. We have
federally registered our Water Science Technologies International trademark and
have pending applications to federally register our "Never Change Another
Bottle" logo and AquaCell marks. We also conduct business in California under
the name Global Water Solutions, Inc. We intend to seek appropriate additional
trademark or service mark registrations in connection with our product and
service offerings.
Marketing Research and Development
During the current fiscal year the company spent $123,000 researching
potential new business opportunities and developing strategic marketing
prospects.
Employees
As of June 30, 2004 we had 20 employees. None of our employees are covered
under collective bargaining agreements although we do have employment agreements
with certain executives. Management believes we maintain a good relationship
with our employees.
ITEM 2. PROPERTIES
Our principal executive office and our 10,000 square foot manufacturing
facility are located in Rancho Cucamonga, California under a five-year lease
that commenced on January 1, 1999 and expires on December 31, 2004. That lease
has an average annual base rent of $69,600. We also maintain a 7,000 square
foot warehouse in Rancho Cucamonga, California under a one-year lease expiring
in April 2005. That lease has an annual rent of $37,800. We also maintain an
8300 square foot WST manufacturing facility in Tempe, Arizona under a five (5)
year lease that commenced on November 1, 2001 and expires on October 31, 2006.
That lease has an average annual base rent of $55,900. We believe that, if
necessary, alternative space is readily available at comparable rates and on
comparable terms with respect to all of our leased properties. We also believe
that we can obtain additional space necessary to support increases in our future
operation. We believe that the properties described above are currently
protected by adequate insurance.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced quotation on the American Stock
Exchange on February 12, 2001 following its initial public offering. The
following table sets forth, for the periods indicated, the last sale prices for
the Common Stock as reported by American Stock Exchange:
Period High ($) Low ($)
------ -------- -------
Fiscal 2005
7/1/04 -9/23/04 $ 0.90 $ 0.58
Fiscal 2004
Fourth Quarter.................... $ 1.72 $ 0.82
Third Quarter..................... 1.92 1.20
Second Quarter.................... 2.84 1.20
First Quarter..................... 3.05 2.06
Fiscal 2003
Fourth Quarter.................... $ 3.15 $ 0.94
Third Quarter..................... 1.30 0.60
Second Quarter.................... 1.00 0.55
First Quarter..................... 1.10 0.78
On September 23, 2004, the last sale price of the Common Stock as reported
by AMEX was $0.74. On September 23, 2004, there were approximately 120 holders
of record of the Company's Common Stock and, the Company believes, over 1,100
beneficial owners of the Company's Common Stock.
The Company presently intends to retain all earnings for the Company's
continued growth. Depending upon the Company's capital resources and needs, the
Company may pay cash dividends in the future. The payment of dividends on
common stock, if any, in the future is within the discretion of the Board of
Directors and will depend upon the Company's earnings, its capital requirements
and financial condition, and other relevant factors, although this may change
based upon the foregoing factors.
Recent Sales of Unregistered Securities
During the year ended June 30, 2004, the Company made the following sales
of unregistered securities:
Exemption
Consideration Received and Description of From If Option, Warrant or
Date Title of Number Underwriting or Other Discounts to Registration Convertible Security,
of Sale Security Sold Market Price Afforded to Purchasers Claimed Terms of Exercise or Conversion
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
2/19/04 Common Stock 650,000 Issued in connection with 4(2);
private placement at $1.00 per share. 4(6)
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
2/19/04 Warrants to 736,667 Issued in connection with private placement, 4(2); All exercisable at $1.75 per share.
Purchase including 86,667 to placement agent - 4(6)
Common Stock no cash until exercise.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
4/20/04 Common Stock 652,173 Issued in connection with private placement 4(2);
at $1.15 per share. 4(6)
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
4/20/04 Warrants to 752,173 Issued in connection with private placement, 4(2); All exercisable at $1.90 per share.
Purchase including 100,000 to placement agent - 4(6)
Common Stock no cash until exercise.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
6/30/04 Common Stock 964,867 Issued in connection with repricing of 4(2);
certain warrants, issued on 7/29/03 4(6)
and 9/9/03 to $.83.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
6/30/04 Warrants to 964,867 Issued as replacement warrants for exercise 4(2); 382,501 exercisable at $4.00 per
Purchase of repriced warrants. 4(6) share. 582,366 exercisable at $2.00
Common Stock per share.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
8/6/03 Warrants to 1,250,000 No cash received until exercise. 4(2); All exercisable at $.01 per share.
Purchase 4(6)
Common Stock
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
6/28/04 Common Stock 100,000 Issued in connection with service agreement 4(2)
at $.82.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
1/2/04 Options to 80,000 Option granted under 2002 Director's Stock 4(2) All immediately exercisable at $1.24
Purchase Option Plan - no cash received. through 1/2/2014.
Common Stock
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
4/14/04 Options to 50,000 Option granted under 2002 Director's Stock 4(2) All immediately exercisable at $1.45
Purchase Option Plan - no cash received. through 4/14/2014.
Common Stock
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
1/5/04 Options to 490,000 Option granted under 1998 Incentive Plan - 4(2) All exercisable at $1.24 until
Purchase no cash received. 1/5/2011 and vesting over five
Common Stock year term.
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
2/20/04 Warrants to 150,000 No cash received until exercise. 4(2) All exercisable at $1.22 per share.
Purchase
Common Stock
------- ------------ --------- --------------------------------------------- ------------ ------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-KSB 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 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.
At the end of our last fiscal year, we were able to complete the lengthy
negotiation for the return of our exclusive marketing rights for our patented
self-filling water coolers, and begin to restructure our marketing plan and form
new sales and marketing alliances. During the year ended June 2004, we
researched various opportunities to create a unique business model that would
provide an on-going revenue stream. We streamlined our manufacturing process and
reduced the manufacturing cost of our patented self-filling bottled water
cooler. Our new Aquacell 1000 Bottled Water Cooler System features NSF approved
water filtration mounted inside the cooler's cabinet.
During the year, we launched our "Message On The Bottle" advertising
program through our Aquacell Media subsidiary. Aquacell Media installs the
Aquacell 1000 coolers free of charge in 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 and the cups.
Aquacell 1000 coolers are being installed in the pharmacy areas of national
chain drug stores and supermarkets, and we are in negotiations with other
retailers including national chain stores, for installations of coolers in those
locations as well. The stores in which systems have been placed literally have
customers lined up at the cooler, providing added value for retailers, employees
and their customers.
As presented in the advertisements we ran in trade magazines during the
year, which are available for viewing on our website at www.aquacell.com, the
"Message On The Bottle" advertising provides a unique point-of-sale opportunity
for manufacturers to reach the consumer. Advertising on the bottle gets face-
to-face impact, and the advertisers further reinforce their brand message by
printing it on the cups, literally putting the message right into the shoppers'
hands. We are in the final stages of lengthy negotiations with major
manufacturers and providers of health care related products and/or their
advertising agencies, for the advertisements of their products.
AquaCell has engaged several new marketing partners, including Beau Dietl &
Associates. Through this association, we retained the services of J.DeKama
Associates, through which we have signed consulting agreements with former
Unilever executives who have tapped into the services of Advantage Sales and
Marketing. This network has been instrumental in assisting us in developing a
wide variety of companies for both advertising and for placement of Aquacell
1000 coolers into retail locations. By utilizing these and other individuals
who are responsible for payment of their own expenses, and who will receive cash
compensation only upon the generation of revenues, we do not anticipate
incurring any significant direct sales and marketing expenses in the rollout of
this program.
During the year ended June 30, 2004 we incurred non-cash charges for stock
based compensation for warrants issued to consultants, which we believe is a
benefit to the Company and its shareholders for the growth of the Company.
We raised net equity of approximately $4.3 million to enable us to move
forward with the restructuring of our marketing program, a significant portion
of which has been utilized for the manufacturing of inventory of Aquacell 1000
coolers and related operating costs.
Our relationship with our previous distributor, Corbett Water Technologies
and S&B Technical, cost the Company approximately $2,000,000 in non-cash
charges. Deferred payments for the balance of approximately $473,000 are to be
paid solely through 5% of future revenues generated by our Global Water-
Aquacell subsidiary, which we anticipate will take several years to be paid.
We are embarking on additional opportunities, including expansion of our
"Message On The Bottle" advertising program into more diverse areas, which we
believe will provide long-term benefits to the Company.
Results of Operations
For the year ended June 30, 2004 revenues were $729,000 on a consolidated
basis, representing a decrease of $859,000 as compared to the prior year. This
decrease is attributable to the restructuring of our marketing plan following
the long and costly negotiation for the return of the exclusive distribution
rights from Corbett Water Technologies and S&B Technical ("Corbett"), which
resulted in a non-cash loss of approximately $2,000,000.
Net loss on a consolidated basis, before preferred stock dividends, for the
year ended June 30, 2004 was increased to $4,512,000 or $0.40 per share, as
compared to $2,574,000 or $0.30 per share for the prior year. The increase in
the loss is primarily attributable to the decrease in revenues, as well as an
increase in costs and expenses of $1,050,000 or 25%. The significant increase
in the costs and expenses was a result of an increase in stock based
compensation resulting primarily from marketing alliances entered into during
the year ended June 30, 2004 in the amount of $873,000 and a fair value
adjustment of a deferred payable in the amount of $333,000, attributable to
the dissolution of the Corbett agreements. The impairment loss on goodwill in
connection with our acquisition of Water Science Technologies (WST), increased
by $146,000 to $218,000 for the year ended June 30, 2004.
On a consolidated basis costs of sales percentage increased to 74% for the
year ended June 30, 2004 as compared to 62% for the prior year. This increase is
primarily attributable to the 77% cost maintained by our WST subsidiary, and a
WST inventory reserve in the net amount of $10,000.
Salaries and wages increased by $7,000 for the year ended June 30, 2004
over the prior year. Legal, accounting and other professional expenses
increased by approximately $26,000 for the year ended June 30, 2004. Stock
based compensation increased by $873,000 to $1,072,000 for the year ended June
30, 2004. Other expenses, consisting primarily of rent - $176,000, telephone
and utilities - $65,000, travel- $67,000, business promotion - $181,000,
insurance - $107,000 and vehicle expenses - $115,000, increased by
approximately $227,000 to $1,393,000 for the year ended June 30, 2004.
Liquidity and Capital Resources
During the year ended June 30, 2004 we financed our operations primarily
from the sales of equity securities and exercise of warrants and options.
During the year ended June 30, 2004 the Company received net proceeds of
$3,486,000, after deducting expenses of $468,000, from the sale of 3,005,204
shares of its common stock in connection with sales of equity securities. We
received $33,000 in connection with the exercise of 35,000 options to acquire
shares of common stock and the Company received net proceeds of $785,000 in
connection with the exercise of common stock purchase warrants representing
2,114,867 shares of common stock.
Cash used by operations during year ended June 30, 2004 amounted to
$2,648,000. Net loss of $4,512,000 was reduced by non-cash charges for stock
based compensation in the amount of $1,072,000, impairment loss on goodwill in
the amount of $218,000, reduction of deferred payable to fair value and write-
off of note and accrued interest in the amount of $381,000, provision for bad
debts in the mount of $17,000 and depreciation and amortization of $45,000.
Cash used by operations was further increased by an increase in inventories of
$10,000, a decrease in accounts payable of $195,000 and an increase in security
deposits of $2,000. Cash used by operations was further decreased by an increase
in accrued expenses of $203,000, a decrease in prepaid expenses of $70,000 and
net changes in accounts receivable, accrued interest receivable, and customer
deposits in the aggregate amount of $65,000.
Cash used by investing activities during the year ended June 30, 2004, in
the amount of $695,000 represented capital expenditures of $782,000 - primarily
comprised of $770,000 in billboard coolers used for advertising - increased by
payments on notes issued for the purchase of equipment in the amount of $4,000,
reduced by collections on notes receivable in the amount of $91,000.
Cash provided by financing activities was approximately $4,171,000. The
Company raised $3,486,000, net of expenses of $ 468,000, from sales of equity
securities. The Company also raised $785,000, net of expenses of $ 79,000, from
the exercise of outstanding warrants and $33,000 from the exercise of employee
stock options. Repayments of loans from related parties amounted to $80,000 and
the Company paid preferred stock dividends in the amount of $53,000.
We have granted warrants, subsequent to our initial public offering in
connection with consulting, marketing and financing agreements that may generate
additional capital of up to approximately $17,000,000 if exercised. There is no
assurance however, that any of the warrants will be exercised.
Management believes that its current 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.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. 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 Rules 13a-15(e) and 15d-15(e)
=============================
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 as of the date of their evaluation.
=====
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 14.
ITEM 10. EXECUTIVE COMPENSATION
See Item 14.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 14.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 14.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed.
See Exhibit Index.
(b) Reports on Form 8-K.
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Items 9, 10, 11, 12, and 14 is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the 2004 Annual Meeting of Stockholders.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 3, 2005 AQUACELL TECHNOLOGIES, INC.
============== (Registrant)
By: /s/ JAMES C. WITHAM
-------------------------------
Name: James C. Witham
Title: Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ James C. Witham Chairman of the Board of Directors August 3, 2005
---------------------- and Chief Executive Officer ==============
James C. Witham (Principal Executive Officer)
/s/ Karen B. Laustsen Director and President August 3, 2005
---------------------- ==============
Karen B. Laustsen
/s/ Gary S. Wolff Director and Chief Financial Officer August 3, 2005
---------------------- (and Principal Accounting Officer) ==============
Gary S. Wolff
/s/ Glenn Bergenfield Director August 3, 2005
---------------------- ==============
Glenn Bergenfield
/s/ Dr. William DiTuro Director August 3, 2005
---------------------- ==============
Dr. William DiTuro
/s/ James Barton Director August 3, 2005
================ ======== ==============
----------------------
James Barton
============
EXHIBIT INDEX
Exhibit
Number Description
--------- -------------------------------------------------------------------
10.1 Agreement between Registrant and BD Advisor Corp.
dated August 6, 2003*
=
10.2 Agreement between Registrant and Excelsior Group I, Ltd.
dated August 6, 2003*
=
10.3 Agreement between Registrant and Limestone Capital Corp.
dated August 6, 2003*
=
31.1 Chief Executive Officer's Certification Pursuant to Rule 13A-14 and
15D-14 Under the Securities Exchange Act of 1934, As Amended
31.2 Chief Financial Officer's Certification Pursuant to Rule 13A-14 and
15D-14 Under the Securities Exchange Act of 1934, As Amended
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Previously Filed
=======================
AQUACELL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................ F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet, June 30, 2004.............................. F-2
Consolidated Statements of Operations for the years ended
June 30, 2004 and 2003.......................................... F-3
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 2004 and 2003...................... F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003.......................................... F-5
Notes to Consolidated Financial Statements............................. F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of
AquaCell Technologies, Inc.
We have audited the accompanying consolidated balance sheet of AquaCell
Technologies, Inc. and Subsidiaries as of June 30, 2004 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended June 30, 2004 These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted out audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AquaCell
Technologies, Inc. and Subsidiaries as of June 30, 2004, and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2004 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has incurred significant
operating losses for the years ended June 30, 2004 and 2003, and has a
significant working capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note A. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ WOLINETZ, LAFAZAN & COMPANY, P.C.
--------------------------------------
WOLINETZ, LAFAZAN & COMPANY, P.C.
Rockville Centre, New York
September 24, 2004
F-1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2004
ASSETS
Current assets:
Cash.......................................................... $ 860,000
Subscription receivable....................................... 40,000
Accounts receivable, net of allowance of $42,000.............. 51,000
Inventories................................................... 94,000
Prepaid expenses and other current assets..................... 53,000
-------------
Total current assets....................................... 1,098,000
-------------
Property, equipment, and billboard coolers, net.................. 797,000
-------------
Other assets:
Goodwill...................................................... 824,000
Patents, net.................................................. 76,000
Security deposits............................................. 16,000
-------------
Total other assets......................................... 916,000
-------------
$ 2,811,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 582,000
Accrued expenses.............................................. 706,000
Preferred stock dividend payable.............................. 9,000
Customer deposits............................................. 61,000
Installment note payable...................................... 3,000
Current portion of deferred payable........................... 10,000
-------------
Total current liabilities.................................. 1,371,000
Deferred payable, net of current portion......................... 463,000
-------------
Total liabilities.......................................... 1,834,000
-------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - Class A, par value $.001;
1,870,000 shares authorized; 675,000 issued and outstanding... 1,000
Preferred stock, par value $.00l;
8,130,000 shares authorized; no shares issued................. -
Common stock, par value $.001; 40,000,000 shares authorized;
14,491,295 shares issued and outstanding...................... 14,000
Additional paid-in capital....................................... 20,582,000
Accumulated deficit.............................................. (17,561,000)
-------------
3,036,000
Unamortized deferred compensation................................ (2,059,000)
-------------
Total stockholders' equity................................. 977,000
-------------
$ 2,811,000
=============
The accompanying notes are an integral part of these financial statements.
F-2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------
2004 2003
Revenue: ------------- -------------
Net sales ...................................... $ 728,000 $ 1,582,000
Rental income .................................. 1,000 6,000
------------- -------------
729,000 1,588,000
------------- -------------
Costs and expenses:
Cost of sales................................... 542,000 990,000
Salaries and wages.............................. 1,297,000 1,290,000
Legal, accounting and other
professional expenses......................... 198,000 172,000
Consulting fees and expenses -
marketing research and development............ 123,000 -
Stock based compensation........................ 1,072,000 199,000
Other........................................... 1,393,000 1,166,000
Impairment loss on goodwill..................... 218,000 72,000
Reduction of receivable to fair value........... - 274,000
Write-off of notes receivable and
accrued interest.............................. 48,000 59,000
Fair value adjustment of deferred payable -
derivative.................................... 333,000 140,000
Recovery of notes receivable reserve............ - (188,000)
------------- -------------
5,224,000 4,174,000
------------- -------------
Loss from operations before other income (expense) (4,495,000) (2,586,000)
------------- -------------
Other income (expense):
Interest expense................................ (19,000) (41,000)
Interest income................................. 2,000 53,000
------------- -------------
(17,000) 12,000
------------- -------------
Net loss for the year............................. $ (4,512,000) $ (2,574,000)
============= =============
Weighted average common shares outstanding -
basic and diluted............................... 11,396,000 8,655,000
============= =============
Loss attributable to common stockholders:
Net loss........................................ $ (4,512,000) $ (2,574,000)
Preferred stock dividends....................... 50,000 380,000
------------- -------------
Loss attributable to common stockholders........ $ (4,562,000) $ (2,954,000)
============= =============
Net loss per common share....................... $ (0.40) $ (0.34)
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock-
Class A Common Stock
================ ================== Additional Unamortized
Number Par Number Par Paid-in Deferred Accumulated Treasury
of Shares Value of Shares Value Capital Compensation Deficit Stock Total
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Balance- July 1, 2002........... - $ - 8,683,646 $ 9,000 $13,041,000 $ (593,000) $(10,475,000) $(251,000) $ 1,731,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Sale of 1,185,000 shares of
preferred stock in private
placements, net of costs
of $73,000................... 1,185,000 1,000 732,000 733,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Amortization of deferred costs.. 199,000 199,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Write-off of unamortized
deferred compensation........ (110,000) 110,000 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 125,000 shares of
common stock in connection
with financing arrangement... 125,000 - 89,000 89,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 160,000 common stock
warrants in connection with
credit facility agreement.... 43,000 (43,000) 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Retirement of 82,422 shares of
common stock held in
the treasury................. (82,422) - (251,000) 251,000 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 150,000 common stock
warrants in connection with
consulting agreement......... 12,000 (12,000) 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Deemed dividends on beneficial
conversion feature of 368,000
preferred stock offerings.... (368,000) 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Dividends on Class A
preferred stock.............. (12,000) (12,000)
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Net loss for the year ended
June 30, 2003................ (2,574,000) (2,574,000)
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Balances- June 30, 2003......... 1,185,000 1,000 8,726,224 9,000 13,544,000 (339,000) (13,049,000) - 166,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Sale of 3,005,204 shares of
common stock in connection
with private placements, net
of costs of $468,000......... 3,005,204 3,000 3,483,000 3,486,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 1,400,000 common
stock warrants in connection
with consulting agreements... 2,707,000 (2,707,000) 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Amortization of deferred costs.. 1,072,000 1,072,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Conversion of 510,000 shares of
preferred stock to 510,000
shares of common stock....... (510,000) - 510,000 - 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Dividends on
Class A preferred stock...... (50,000) (50,000)
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 100,000 shares of
common stock in connection
with service agreement....... 100,000 - 82,000 (82,000) 0
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 2,114,867 shares of
common stock upon exercise of
common stock warrants,
net of expenses of $79,000... 2,114,867 2,000 783,000 (3,000) 782,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Issuance of 35,000 shares of
common stock upon exercise of
stock options................ 35,000 - 33,000 33,000
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Net loss for the year ended
June 30, 2004................ (4,512,000) (4,512,000)
-------------------------------- --------- ------ ---------- ------- ------------ ------------ ------------- ---------- ------------
Balances June 30, 2004 675,000 $1,000 14,491,295 $14,000 $20,582,000 $(2,059,000) $(17,561,000) $ - $ 977,000
================================ ========= ====== ========== ======= ============ ============ ============= ========== ============
The accompanying notes are an integral part of these financial statements.
F-4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-----------------------------
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss.......................................... $ (4,512,000) $ (2,574,000)
Adjustment to reconcile net loss to net cash used
in operating activities:
Issuance of common stock in connection with
financing transactions........................ - 89,000
Fair value adjustment of deferred payable....... 333,000 140,000
Impairment loss on goodwill..................... 218,000 72,000
Reduction of reserve on notes receivable........ - (188,000)
Reduction of receivable to fair value........... - 274,000
Write-off of notes receivable and
accrued interest.............................. 48,000 59,000
Stock based compensation........................ 1,072,000 199,000
Provision for bad debts......................... 17,000 21,000
Depreciation and amortization................... 45,000 58,000
Changes in:
Accounts receivable............................. 6,000 96,000
Accrued interest receivable..................... 21,000 (53,000)
Prepaid expenses................................ 70,000 93,000
Inventories..................................... (10,000) 18,000
Security deposits............................... (2,000) 3,000
Accounts payable................................ (195,000) 17,000
Accrued expenses................................ 203,000 870,000
Customer deposits............................... 38,000 7,000
------------- -------------
Net cash used in operating activities..... (2,648,000) (799,000)
------------- -------------
Cash flows from investing activities:
Notes issued for purchase of property and
equipment, net of payments.................... (4,000) 7,000
Collections on notes receivable................. 91,000 -
Capital expenditures............................ (782,000) (11,000)
------------- -------------
Net cash used in investing activities..... (695,000) (4,000)
------------- -------------
Cash flows from financing activities:
Proceeds (repayments) of loans from related
parties....................................... (80,000) 51,000
Proceeds from private placements of preferred
stock......................................... - 781,000
Expenses of preferred stock offerings.......... - (48,000)
Proceeds from private placements of
common stock.................................. 3,954,000 -
Expenses of common stock offerings.............. (468,000) -
Preferred stock dividends paid.................. (53,000) -
Proceeds from exercise of stock options......... 33,000 -
Proceeds from exercise of common stock warrants. 864,000 -
Expense of warrant exercise..................... (79,000) -
------------- -------------
Net cash provided by financing activities. 4,171,000 784,000
------------- -------------
Increase (decrease) in cash....................... 828,000 (19,000)
Cash, beginning of year........................... 32,000 51,000
------------- -------------
Cash, end of year................................. $ 860,000 $ 32,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended June 30,
-----------------------------
2004 2003
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ - $ 36,000
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock and warrants for
services...................................... $ 2,789,000 $ 55,000
Principal payments on notes receivable by
conversion of accrued officers' salaries...... $ - $ 567,000
Issuance of preferred stock in private
placement for expenses of the offering........ $ - $ 25,000
Retirement of 82,422 shares of treasury stock... $ - $ 251,000
Dividends payable on preferred stock............ $ 9,000 $ 12,000
Consideration received for sale of investment... $ - $ 274,000
Deemed dividends on preferred stock............. $ - $ 368,000
Write-off of unamortized deferred compensation.. $ - $ 110,000
Conversion of 510,000 shares of preferred stock
to 510,000 shares of common stock............. $ - $ -
Accrued legal fees paid as consideration for
warrant exercise.............................. $ 49,000 $ -
Legal fees prepaid as consideration for
warrant exercise.............................. $ 3,000 $ -
Write-off of notes receivable against reserve... $ 177,000 $ -
Subscription receivable for conversion of
warrants...................................... $ 40,000 $ -
Increase in derivative payable.................. $ - $ 140,000
The accompanying notes are an integral part of these financial statements.
F-6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Note A - Description of Business and Basis of Presentation
Description of Business:
AquaCell Technologies, Inc. was incorporated in Delaware on March 19,
1997 and its principal business activity is the manufacture and sale of products
for water filtration and purification through its operating subsidiaries Water
Science Technologies, Inc., and to a lesser extent, Global Water-Aquacell Inc.
Its Aquacell Media, Inc. subsidiary places coolers into various locations at no
cost and intends to sell targeted advertising on the bottle band of the
permanently attached five-gallon bottle. The Company conducts substantially all
of its business in the United States.
Going Concern:
The Company incurred net losses of $4,512,000 and $2,574,000 during the
years ended June 30, 2004 and 2003, respectively. In addition, the Company had a
working capital deficiency of $273,000 at June 30, 2004. These factors, amongst
others, raise substantial doubt about the Company's ability to continue as a
going concern.
There can be no assurance that sufficient funds required during the next
year or thereafter will be generated 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 resulting from the inability
to generate cash flow from operations or to raise capital from external sources
would force the Company to substantially curtail or cease operations and would,
therefore, have a material adverse effect on its business. Further, 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 existing stockholders.
The accompanying consolidated financial statements do not include any
adjustments related to the recoverability or classification of asset carrying
amounts or the amounts and classification of liabilities that may result should
the Company be unable to continue as a going concern.
During the year ended June 30, 2004, the Company had successfully
obtained external financing through private placements of equity securities and
exercise of warrants and options.
The Company has developed a plan to address liquidity in several ways,
namely:
. Continue to raise capital through the sale or exercise of equity
securities.
. Continue to pursue the placement of our water cooler billboards in
various locations; and
. Increase revenue through the sale of advertising on the band of the
cooler's permanently attached five-gallon bottle.
Note B - Summary of Significant Accounting Policies
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of AquaCell Technologies, Inc., and its wholly owned subsidiaries (the
"Company"). Such subsidiaries are Global Water Aquacell, Inc., incorporated
December 21, 1998, Water Science Technologies, Inc., acquired on March 19, 2002,
and AquaCell Media, Inc., formed on September 10, 2001. Aquacell Media, Inc. had
no revenues through June 30, 2004. All significant intercompany accounts and
transactions have been eliminated in consolidation.
[2] Inventories:
Inventories are carried at the lower of cost or market, using the FIFO
(first-in, first-out) method.
[3] Property and equipment and billboard coolers:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets which approximates three to five years.
Billboard coolers, manufactured by the Company, are stated at cost.
Depreciation will be computed effective July 1, 2004, using the straight-line
method over their estimated useful life of five years.
F-7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note B - Summary of Significant Accounting Policies-(continued)
[4] 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.
[5] Patents:
The value of patents is amortized over nine years, their remaining useful
lives at date of acquisition, using the straight-line method. Patents at June
30, 2004, are stated net of accumulated amortization of approximately $121,000.
Amortization expense was approximately $22,000 for each of the years ended June
30, 2004 and 2003.
[6] Revenue recognition:
Revenues are recorded at the time our products are shipped unless we
agreed to install the products, in which case we recognize revenue at the time
of installation. Rental income from coolers is recognized on a straight-line
basis over the term of the rental agreement. Advertising revenues will be
recognized on a straight-line basis over the term of the advertising contract.
[7] Advertising:
Advertising costs are expensed as incurred. Advertising expense for the
years ended June 30, 2004 and 2003, was approximately $119,000 and $3,000,
respectively.
The costs of direct response advertising, whose primary purpose is to
elicit sales to customers and that should result in probable future benefits are
capitalized. Advertising costs capitalized at June 30, 2003 and included in
prepaid expenses were approximately $78,000 and they were written off during the
year ended June 30, 2004.
[8] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
[9] 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 not that some portion or all of
the deferred tax assets will not be realized.
[10] Net loss per common share:
Loss per common share is based upon the weighted average number of common
shares outstanding during the year. Diluted loss per common share is the same
as basic loss per share, as the effects of potentially dilutive securities (see
Notes F [2] and F [4]) are antidilutive. Losses attributable to common stock
have been adjusted for the preferred stock dividends.
F-8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note B - Summary of Significant Accounting Policies-(continued)
[11] Long-lived assets:
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-
lived Assets to Be Disposed Of." In accordance with SFAS No. 121, long-lived
assets to be held are reviewed whenever events or changes in circumstances
indicate that their carrying value may not be 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.
[12] Concentrations of credit risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company performs ongoing credit evaluations of its customers'
financial condition, but does not require collateral to support such
receivables.
The Company utilizes a limited number of suppliers for certain components
used in its products but has no long-term supply contracts with them.
[13] Financial instruments:
The carrying amounts of the Company's cash, accounts receivable, accounts
payable, and customer deposits, approximate fair value because of the immediate
or short-term maturity of these financial instruments.
[14] Stock compensation plans:
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock-based compensation plans. The Company does not
recognize compensation expense for stock options granted under the plans as the
exercise price of the option on the date of grant is equal to the fair market
value as of that date.
[15] Shipping and handling fees and costs:
Shipping and handling fees and costs of approximately $21,000 and $34,000
for the years ended June 30, 2004 and 2003, respectively, are included in other
expenses.
[16] Derivatives:
The Company recognizes all speculative derivatives on the balance sheet
at fair value on the date the derivative instrument is entered into, with a
corresponding charge to income (loss) from operations in accordance with
FAS-133. Subsequent changes to fair value are reflected in income (loss) from
operations. Fair value is estimated at each balance sheet date using a Black-
Scholes pricing model.
[17] New accounting pronouncements:
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard
also broadens the scope of business to be disposed of that qualify for reporting
as discontinued operations, and changes the timing of recognizing losses on such
operations. The Company adopted SFAS 144 for the year ended June 30, 2003.
F-9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note B - Summary of Significant Accounting Policies-(continued)
[17] New accounting pronouncements (continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for financial statements
for the year ended June 30, 2003. SFAS No. 148 did not have a material impact on
the Company's consolidated financial statements, as the adoption of this
standard does not require the Company to change, and the Company does not plan
to change, to the fair value based method of accounting for stock-based
compensation.
[18] Reclassifications:
Certain items in these financial statements have been reclassified to
conform to the current period presentation.
Note C - Inventories:
Inventories consist of the following at June 30, 2004:
Raw materials.................................... $ 51,000
Work in progress................................. 32,000
Finished goods................................... 11,000
------------
$ 94,000
============
Note D - Property and Equipment and Billboard Coolers:
Property and equipment is summarized as follows at June 30, 2004:
Billboard coolers................................ $ 630,000
Billboard coolers parts.......................... 140,000
Furniture and fixtures........................... 36,000
Equipment - office............................... 101,000
Machinery and equipment.......................... 127,000
Leasehold improvements........................... 10,000
Rental units..................................... 9,000
Truck............................................ 11,000
------------
1,064,000
267,000
------------
Less accumulated depreciation.................... $ 797,000
============
Depreciation expense was approximately $23,000 and $36,000 for the year
ended June 30, 2004 and 2003, respectively.
Note E - Deferred Payable
At June 30, 2004, the deferred payable represented the unpaid balance due
to a private company for the return and cancellation of all exclusive
distribution and marketing rights previously held under a distribution
agreement. The unpaid balance of $473,000 represented a return to the private
company of $1,339,000 reduced by $866,000 received from the sales of 451,807
shares of AquaCell common stock that it owned (See Note H (2)). This amount is
payable solely from 5% of the future revenues to generated by our Global Water-
Aquacell subsidiary. The Company recognized a $333,000 fair value adjustment of
this payable during the year ended June 30, 2004.
F-10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note F - Equity Transactions
[1] Series A Convertible Preferred Stock:
During March 2003 the Company completed a private placement of 685,000
shares of newly designated Series A Convertible Preferred Stock. The offering
consisted of one share of class A convertible preferred stock at a price of
$0.63 per share and one Class A common stock purchase warrant exercisable at
$1.16 per share. Both the preferred stock and warrant contain certain call
features. The Series A Convertible Preferred Stock carries an 8% dividend and is
convertible into the Company's common stock on a one for one basis. Based on the
effective conversion price of the preferred stock using a relative fair value of
$154,000 attributable to the warrants the Company recognized a beneficial
conversion feature of $158,000 as a deemed dividend to the holders of the
convertible preferred stock. In connection with this offering the Company
received gross proceeds of $ 406,000. As part of this offering 40,000 shares,
valued at $25,000, were issued to the Company's attorney as consideration for
expenses of the offering.
During May 2003 the Company completed an additional private placement of
500,000 shares of its newly designated Series A Convertible Preferred Stock. The
offering consisted of one share of class A convertible preferred stock at a
price of $0.75 per share and one Class A common stock purchase warrant
exercisable at $1.60 per share. Both the preferred stock and warrant contain
certain call features. Based on the effective conversion price of the preferred
stock using a relative fair value of $208,000 attributable to the warrants the
Company recognized a beneficial conversion feature of $210,000 as a deemed
dividend to the holders of the convertible preferred stock. In connection with
this offering the Company received gross proceeds of $ 375,000. Expenses of the
offering amounted to $ 48,000.
During the year ended June 30, 2004, 510,000 shares of Series A
Convertible Preferred Stock were converted into 510,000 shares of Common Stock
of the Company.
[2] Stock option plans:
During August 1998, the Company adopted the 1998 Incentive Stock Plan
(the "Plan") under which options (either incentive or nonqualified), stock
appreciation rights, stock and other awards, covering an aggregate amount of
1,000,000 shares of common stock, may be granted to officers, directors,
employees and consultants of the Company. The exercise price established for
any awards granted under the Plan, shall be determined by a Compensation
Committee appointed by the Company's Board of Directors. The exercise price of
incentive stock options cannot be less than 100% (110% for 10% or greater
shareholder employees) of the fair market value ("FMV") at the date of grant and
the exercise price of nonqualified options cannot be less than 85% of the FMV at
the date of grant. The exercise period of incentive options cannot extend
beyond 10 years from the date of grant and nonqualified options cannot extend
beyond 15 years from the date of grant. At the December 2, 2003 annual meeting
the shareholders approved the increase in issuable shares from 1,000,000 to
2,000,000 in the plan.
During January 2002, the Board of Directors adopted a Director's Option
Plan covering an aggregate amount of 500,000 shares of common stock. As of June
30, 2004, 160,000 options have been granted under this plan.
A summary of stock option activity under both plans is as follows:
Year Ended June 30,
--------------------------------------------
2004 2003
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- ---------- --------
Balance July 1.................. 506,000 $0.90 551,000 $2.41
Options granted.............. 620,000 1.26 227,000 0.64
Options cancelled............ (25,000) 1.02 (272,000) 3.74
Options exercised............ (35,000) 0.94 - -
---------- -------- ---------- --------
Balance, June 30................ 1,066,000 $1.10 506,000 $0.90
========== ==========
Exercisable, June 30............ 377,000 $1.07 188,000 $1.02
========== ==========
F-11
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note F - Equity Transactions-(continued)
[2] Stock option plans (continued)
During the year ended June 30, 2004 options were exercised for 35,000
shares and the Company received proceeds of $33,000.
The following table presents information relating to stock options
outstanding at June 30, 2004:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Exercise Life in Exercise
Price Shares Price Years Shares Price
-------- --------- --------- --------- -------- ----------
0.60 168,500 5.5 53,000
0.65 30,000 8.6 30,000
1.00 63,000 .2 63,000
1.15 97,000 1.3 70,000
1.16 75,500 4.9 31,000
1.24 555,000 6.9 80,000
1.45 50,000 9.8 50,000
--------- --------- --------
1,066,000 $1.10 5.8 377,000 $1.07
========= ========= ========
If the options had been accounted for under SFAS 123, net loss
attributable to common stockholders for the years ended June 30, 2004 and 2003,
would have been $(5,234,000) OR $(0.46) per common share, and $(2,876,000) or
$(0.33) per common share, respectively. The fair value of options granted
during the years ended June 30, 2004 and June 30, 2003, was $0.27 and $0.64 per
share on the date of grant, respectively. The options were valued utilizing the
Black-Scholes valuation method using the following assumptions: risk-free
interest rate of 3.1% and 4.99%, volatility of 33% and 42% and expected lives of
five and three years, respectively.
[3] Issuances of common stock:
In connection with financing transactions, during January and April 2003,
the Company issued 125,000 shares of its common stock valued at $89,000.
Amortization amounted to $89,000 during the year ended June 30, 2003.
Between July and September 2003 the Company completed a private placement
of 1,703,000 shares of its common stock. The offering consisted of one share of
common stock at $1.50 per share and one common stock purchase warrant
exercisable at $4.00 per share. The Company received gross proceeds from the
offering of $2,555,000 and expenses of the offering were $259,000. In connection
with the offering the placement agent received 341,000 common stock purchase
warrants exercisable at $4.00 per share.
During February 2004 the Company completed a private placement of 650,000
shares of its common stock. The offering consisted of one share of common stock
at $1.00 per share and one common stock purchase warrant exercisable at $1.75
per share. The Company received gross proceeds from the offering of $649,000 and
expenses of the offering were $79,000. In connection with the offering the
placement agent received 87,000 common stock purchase warrants exercisable at
$1.75 per share.
During the year ended June 30, 2004 the Company issued 35,000 shares of
common stock in connection with the exercise of employee stock options. The
Company received proceeds of $33,000.
During December 2003 the Company issued 1,100,000 shares of common stock
in connection with the exercise of 1,100,000 common stock purchase warrants
issued for marketing and consulting agreements (see Note F(4)). The Company
received proceeds of $11,000.
F-12
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note F - Equity Transactions-(continued)
[3] Issuances of common stock (continued)
During April 2004 the Company completed a private placement of 652,000
shares of its common stock. The offering consisted of one share of common stock
at $1.15 per share and one common stock purchase warrant exercisable at $1.90
per share. The Company received gross proceeds from the offering of $760,000 and
expenses of the offering were $85,000. In connection with the offering the
placement agent received 100,000 common stock purchase warrants exercisable at
$1.90 per share.
During June 2004 the Company issued 965,000 shares of common stock in
connection with the repricing of 965,000 common stock purchase warrants issued
in a private placement completed during July - September 2003 (See Note F(3)).
The $4.00 warrants were repriced to $0.83. The Company received gross proceeds
of $812,000 from the warrant exercise and expenses were $79,000. In connection
with the exercise the Company issued new common stock purchase warrants for
383,000 shares of its common stock exercisable at $4.00 per share and 582,000
shares of its common stock exercisable at $2.00 per share and repriced an
additional 401,000 existing warrants from an exercise price of $4.00 to an
exercise price of $2.00 per share.
In connection with a three-year service agreement (see Note H (2)) the
Company issued 100,000 shares of its common stock valued at $82,000. There was
no amortization during the year ended June 30, 2004.
[4] Issuances of common stock purchase warrants:
In connection with a distribution agreement (See Note H), the Company
issued warrants to purchase 300,000 shares of the Company's common stock to be
exercisable for a five-year period (100,000, 100,000, and 100,000 at exercise
prices of $5.00, $6.00, and $7.00, per share respectively). The Company
estimated the fair value of these warrants to be $283,000, utilizing the Black-
Scholes valuation method using the following assumptions: a risk-free interest
rate of 3.1%, volatility of 33.33%, and a term of five years. Such amount is
being amortized over five years. During the year ended June 30, 2003 the
agreement was amended and the 100,000 warrants exercisable at $6.00 per share
and the 100,000 warrants exercisable at $7.00 per share were returned to the
Company. The unamortized portion of these warrants, in the amount of $110,000,
was written off to additional paid in capital. Amortization amounted to $24,000
and $54,000 during the years ended June 30, 2004 and 2003 respectively.
In connection with a one-year credit facility agreement, entered into in
August 2002, the Company issued warrants to purchase 160,000 shares of common
stock to be exercisable for a five-year period at $.78 per share. The Company
estimated the fair value of these warrants to be $43,000 utilizing the Black-
Scholes valuation method using the following assumptions: a risk-free interest
rate of 3.1%, volatility of 33.33% and a term of five years. Such amount is
being amortized to expense over one year. Amortization amounted to $7,000 during
the year ended June 30, 2004, and $36,000 during the year ended June 30, 2003.
In connection with a one-year consulting agreement, entered into in March
2003, the Company issued a warrant to purchase 150,000 shares of common stock to
be exercisable for a two-year period at $1.00 per share. The Company estimated
the fair value of this warrant to be $12,000 utilizing the Black-Scholes
valuation method using the following assumptions: a risk-free interest rate of
3.1%, volatility of 33.33% and a term of two years. Such amount is being
amortized to expense over one year. Amortization amounted to $9,000 during the
year ended June 30,2004, and $3,000 during the year ended June 30, 2003.
In connection with a private placement of series A convertible preferred
stock completed in March 2003, the Company issued warrants to purchase 685,000
shares of common stock to be exercisable for a five-year period at $1.16 per
share (See Note F (1) above).
In connection with a private placement of series A convertible preferred
stock completed on May 2003, the Company issued warrants to purchase 500,000
shares of common stock to be exercisable for a five-year period at $1.60 per
share (See Note F (1) above).
F-13
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note F - Equity Transactions-(continued)
[4] Issuances of common stock purchase warrants (continued)
In connection with marketing and consulting agreements with five separate
entities, entered into in August 2003, the Company issued warrants to purchase
1,250,000 shares of common stock to be exercisable at $ .01 per share. The
Company estimated the fair value of these warrants to be $2,564,000 utilizing
the Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 3.1%, volatility of 33.33% and a term of five years. Such
amount is being amortized to expense over three years. Amortization amounted to
$926,000 for the year ended June 30, 2004.
In connection with a three year consulting agreement, entered into in
February 2004, the Company issued a warrant to purchase 150,000 shares of common
stock to be exercisable for a five-year period at $1.22 per share. The Company
estimated the fair value of this warrant to b e $143,000 utilizing the Black-
Scholes valuation method using the following assumptions: a risk free interest
rate of 3.1%, volatility of 106.9 % and a term of five years. Such expense is
being amortized to expense over three years. Amortization amounted to $17,000
for the year ended June 30, 2004.
In connection with a warrant repricing, completed in June 2004, the
Company issued common stock purchase warrants for 383,000 shares of its common
stock exercisable at $4.00 per share and for 582,000 shares of its common stock
exercisable at $2.00 per share (See Note F(3)).
At June 30, 2004, the Company had warrants outstanding as follows:
Exercise Price Shares Expiration Date
-------------- --------- ---------------
$ .01 150,000 August 2008
.78 160,000 August 2007
1.00 150,000 March 2005
1.16 685,000 March 2008
1.22 150,000 February 2009
1.60 500,000 May 2008
1.75 737,000 February 2009
1.90 752,000 April 2009
2.00 582,000 June 2009
2.00 401,000 September 2008
4.00 677,000 September 2008
4.00 383,000 June 2009
4.40 75,000 August 2004
4.50 50,000 September 2004
5.50 50,000 September 2004
4.50 50,000 October 2004
5.00 100,000 October 2006
5.50 50,000 October 2004
4.20 200,000 May 2006
8.25 120,000 February 2006
3.30 100,000 May 2007
3.00 100,000 June 2007
5.00 100,000 June 2007
---------
6,322,000
=========
At June 30, 2004, the weighted average exercise price of the outstanding
warrants was $2.49 and the weighted average remaining contractual life of the
warrants was 3.85 years.
During June 2004 an aggregate of 965,000 common stock purchase warrants
previously issued in a July through September 2003 private placement were
repriced from an exercise price of $4.00 per share to an exercise price of $0.83
per share. The Company realized gross proceeds of $812,000 and expenses were
$79,000 in connection with the repricing. New common stock purchase warrants
were issued for 383,000 shares of common stock exercisable at $4.00 per share
and 582,000 shares of common stock exercisable at $2.00 per share and an
additional 401,000 existing warrants were repricied from an exercise price of
$4.00 per share to an exercise price of $2.00 per share.
F-14
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note F - Equity Transactions-(continued)
[5] Shares reserved:
At June 30, 2004, the Company has reserved 9,347,000 shares of common
stock for issuance upon conversion of preferred stock and exercise of options
and warrants.
Note G - Income Taxes:
At June 30, 2004, the Company had available federal net operating loss
caryyforwards to reduce future taxable income, if any, of approximately
$10,800,000. The net operating loss carryforwards expire at various dates
through 2024.
At June 30, 2004, the Company has a deferred tax asset of approximately
$4,644,000, representing the benefit of its net operating loss carryforwards.
The Company has not recorded a tax benefit because realization of the benefit is
uncertain and therefore a valuation allowance has been fully provided against
the deferred tax asset. The difference between the federal statutory rate of
34% and the Company's effective tax rate of 0% is due to an increase in the
valuation allowance of $1,118,000 and $686,000 in 2004 and 2003, respectively.
Note H - Commitments and Contingencies
[1] Lease commitments:
The Company occupies manufacturing office space in California and
Arizona, under noncancellable operating leases. As of June 30, 2004, future
minimum commitments under office and equipment leases are as follows:
Year Ending June 30,
--------------------
2005 $ 137,000
2006 65,000
2007 20,000
-----------
$ 222,000
===========
Rent expense under office and equipment leases amounted to approximately
$176,000 and $175,000 for the years ended June 30, 2004 and 2003, respectively.
[2] Consulting agreements:
On May 30, 2003 the Company negotiated the return and cancellation of all
exclusive distribution and marketing rights under the distribution agreement and
joint venture agreement, with a private company, the return of 100,000 warrants
exercisable at $6.00 per share and the return of 100,000 warrants exercisable at
$7.00 per share. In exchange AquaCell granted the private company the right to
continue to sell Global Water-Aquacell's products on a non-exclusive basis in
those areas in which it retains salesmen. It was agreed that the private company
would realize a return of $1,339,000 from sales of the 451,807 shares of
AquaCell common stock that it owns and, if required, from 5% of future revenues
to be generated by our Global Water-Aquacell subsidiary (See Note E).
During August 2003 the Company entered into marketing and consulting
agreements with five separate entities. Consideration for one of these
agreements included cash fees of $45,000 paid over a three-month period. In
addition, 1,250,000 warrants to purchase common stock of the Company exercisable
for five years at a price of $ .01 per share, were issued for all these
agreements.
During February 2004 the Company entered into a three year consulting
agreement. Consideration for this agreement was 150,000 warrants to purchase
shares of common stock of the Company exercisable for five years at a price of
$1.22 per share (See Note F(4)).
During June 2004 the Company entered into a three-year service agreement.
The agreement calls for a cash payment of $6,000 per month over the term of the
agreement, and the issuance of 100,000 shares of the Company's common stock (See
Note F(3)).
F-15
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
June 30, 2004
Note H - Commitments and Contingencies-(continued)
[3] Employment agreements
The Company has employment agreements with various executives and
employees of the Company which expire at various dates through October, 2006.
These agreements provide for aggregate minimum salaries of $787,000 for the year
ending June 30, 2005. The agreements also provide for incentive bonuses based
upon achievement of certain milestones
Effective July 2002 the Company entered into a five-year employment
contract with an officer of WST. The contract calls for a minimum annual salary
of $100,000.
Note I - Related Party Transactions
Included in net sales are sales to a former affiliate, pursuant to a
distribution agreement, aggregating approximately $706,000 for the year ended
June 30, 2003 (See Note H (2)).
Note J - Major Customers and Suppliers
During the year ended June 30, 2003 the Company sold approximately 44% of
its products to a former affiliate (See Note H (2)).
During the year ended June 30, 2004 the Company purchased approximately
58% of its materials from two vendors, and during the year ended June 30, 2003
purchased approximately 27% of it's materials from one vendor.
Note K - Subsequent Events
During August 2004 the Company amended a February 2004 consulting
agreement to provide for additional compensation of 100,000 common shares. The
stock was valued at approximately $73,000.
During August 2004 the Company issued 50,000 warrants in connection with
the amendment of an April 2004 performance based agreement with a marketing
consultant.
F-16