x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the quarterly period ended June 30, 2008
|
or
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.
|
Delaware
|
87-0654478
|
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification No.)
|
1890 Cobb International Blvd, Suite A, Kennesaw Georgia
|
|
30152
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Large
accelerated filer ¨
|
Accelerated
filer
¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Page
|
||
PART
I. FINANCIAL INFORMATION
|
||
ITEM
1.
|
Financial
Statements
|
|
Balance
Sheets – June 30, 2008 and December 31, 2007
|
3
|
|
Statements
of Operations – Three and Six months ended June 30, 2008 and
2007
|
5
|
|
Statement
of Stockholders’ Equity (Deficit)
|
7
|
|
Statements
of Cash Flows – Six months ended June 30, 2008 and 2007
|
8
|
|
Notes
to Financial Statements
|
10
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
ITEM
4T.
|
Controls
and Procedures
|
22
|
PART
II. OTHER INFORMATION
|
||
ITEM
1.
|
Legal
Proceedings
|
23
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
24
|
ITEM
4.
|
Submission
of matters to Vote of Security Holders
|
24
|
ITEM
5.
|
Other
Information
|
24
|
ITEM
6.
|
Exhibits
|
24
|
SIGNATURES
|
25
|
June 30,
|
December 31,
|
||||||
2008
|
2007
|
||||||
CURRENT
ASSETS
|
(Unaudited)
|
|
(Audited)
|
|
|||
Cash
and cash equivalents
|
$
|
676,408
|
$
|
1,413,744
|
|||
Accounts
receivable, net
|
43,085
|
61,196
|
|||||
Accounts
receivable – related party, net
|
357,797
|
357,615
|
|||||
Prepaid
expense
|
146,916
|
30,600
|
|||||
Inventory,
net
|
2,874,958
|
2,814,533
|
|||||
Total
current assets
|
4,099,164
|
4,677,688
|
|||||
PROPERTY
AND EQUIPMENT, net of
|
|||||||
accumulated
depreciation of $262,487 and $220,064
|
164,131
|
206,554
|
|||||
OTHER
ASSETS
|
|||||||
Deposits
|
10,496
|
11,658
|
|||||
Restricted
cash
|
240,000
|
240,000
|
|||||
Note
receivable
|
150,000
|
150,000
|
|||||
Intellectual
property
|
69,304
|
61,558
|
|||||
Total
other assets
|
469,800
|
463,216
|
|||||
Total
assets
|
$
|
4,733,095
|
$
|
5,347,458
|
June 30,
|
December 31,
|
||||||
2008
|
2007
|
||||||
CURRENT
LIABILITIES
|
(Unaudited)
|
|
(Audited)
|
|
|||
Accounts
payable
|
$
|
225,719
|
$
|
287,183
|
|||
Accrued
expenses
|
652,150
|
645,054
|
|||||
Warranty
reserve
|
114,000
|
122,000
|
|||||
Advance
– related party
|
-
|
500,000
|
|||||
Advance
deposits on machine orders – related party
|
697,500
|
697,500
|
|||||
Current
portion of long-term debt
|
20,563
|
19,841
|
|||||
Senior
convertible note payable – related party, current portion net of
discounts of $260,965 and $708,333
|
2,739,035
|
2,291,667
|
|||||
Total
current liabilities
|
4,448,967
|
4,563,245
|
|||||
LONG
TERM LIABILITIES
|
|||||||
Long
term debt, net of current portion
|
53,573
|
59,045
|
|||||
Deferred
licensing revenue – related party
|
441,667
|
541,667
|
|||||
Derivative
liability – related party
|
6,929,870
|
6,758,074
|
|||||
Total
long term liabilities
|
7,425,110
|
7,358,786
|
|||||
Total
liabilities
|
11,874,077
|
11,922,031
|
|||||
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|||||||
Common
stock, $.0001 par value; 50,000,000 shares authorized;
16,674,380
and
15,105,650 issued and outstanding, respectively
|
1,668
|
1,511
|
|||||
Additional
paid in capital
|
37,549,984
|
35,406,545
|
|||||
Accumulated
deficit
|
(44,692,634
|
)
|
(41,982,629
|
)
|
|||
Total
stockholders’ equity (deficit)
|
(7,140,982
|
)
|
(6,574,573
|
)
|
|||
Total
liabilities and stockholders’ equity (deficit)
|
$
|
4,733,095
|
$
|
5,347,458
|
Three Months Ended
|
Six Months Ended
|
||||||||||||
June 30,
|
June 30,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||
NET
SALES – RELATED PARTY
|
$
|
75,475
|
$
|
250,786
|
$
|
125,475
|
$
|
309,234
|
|||||
NET
SALES
|
62,381
|
52,972
|
108,036
|
67,999
|
|||||||||
TOTAL
SALES
|
137,856
|
303,758
|
233,511
|
377,233
|
|||||||||
COST
OF GOODS SOLD
|
41,411
|
132,086
|
67,068
|
142,971
|
|||||||||
GROSS
PROFIT
|
96,445
|
171,672
|
166,443
|
234,262
|
|||||||||
OPERATING
EXPENSES
|
|||||||||||||
Depreciation
and amortization
|
21,099
|
36,468
|
42,423
|
57,345
|
|||||||||
Research
and development
|
20,387
|
8,875
|
30,789
|
82,475
|
|||||||||
General
and administrative
|
1,055,059
|
4,791,478
|
2,137,442
|
5,845,444
|
|||||||||
Total
operating expenses
|
1,096,545
|
4,836,821
|
2,210,654
|
5,985,264
|
|||||||||
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
(1,000,100
|
)
|
(4,665,149
|
)
|
(2,044,211
|
)
|
(5,751,002
|
)
|
|||||
OTHER
INCOME (EXPENSE)
|
|||||||||||||
Interest
expense
|
(228,474
|
)
|
(283,509
|
)
|
(505,619
|
)
|
(567,043
|
)
|
|||||
Interest
income
|
3,351
|
4,549
|
11,481
|
10,710
|
|||||||||
Gain
(Loss) on derivative liability
|
(257,549
|
)
|
(2,716,765
|
)
|
(171,796
|
)
|
(2,695,328
|
)
|
|||||
Other
income (expense)
|
140
|
39,023
|
140
|
38,307
|
|||||||||
Total
other income (expense)
|
(482,532
|
)
|
2,956,702
|
(665,794
|
)
|
(3,213,354
|
)
|
||||||
LOSS
BEFORE PROVISION FOR
INCOME TAXES
|
(1,482,632
|
)
|
(7,621,851
|
)
|
(2,710,005
|
)
|
(8,964,356
|
)
|
|||||
PROVISION
FOR INCOME TAXES
|
-
|
-
|
-
|
-
|
|||||||||
LOSS
FROM CONTINUING OPERATIONS
|
(1,482,632
|
)
|
(7,621,851
|
)
|
(2,710,005
|
)
|
(8,964,356
|
)
|
DISCONTINUED
OPERATIONS:
|
|||||||||||||
(Loss)
from operations of discontinued operations (Net of $0 in income
taxes)
|
-
|
(171,971
|
)
|
-
|
(375,595
|
)
|
|||||||
(Loss)
on disposal of discontinued operations (Net of $0 in income
taxes)
|
-
|
-
|
-
|
-
|
|||||||||
LOSS
FROM DISCONTINUED OPERATIONS
|
-
|
(171,971
|
)
|
-
|
(375,595
|
)
|
|||||||
NET
LOSS
|
$
|
(1,482,632
|
)
|
$
|
(7,793,822
|
)
|
$
|
(2,710,005
|
)
|
$
|
(9,339,951
|
)
|
|
NET
LOSS PER SHARE CONTINUING OPERATIONS
|
$
|
(0.09
|
)
|
$
|
(0.56
|
)
|
(0.18
|
)
|
$
|
(0.67
|
)
|
||
NET
LOSS PER SHARE DISCONTINUED OPERATIONS
|
$
|
0.00
|
$
|
(0.01
|
)
|
$
|
0.00
|
$
|
(0.03
|
)
|
|||
WEIGHTED
AVERAGE OF SHARES
OUTSTANDING
|
16,486,418
|
13,523,231
|
15,440,794
|
13,431,615
|
|
COMMON STOCK
|
|
ADDITIONAL
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
PAID IN
|
|
ACCUMULATED
|
|
|
|
|||||
|
|
SHARES
|
|
AMOUNT
|
|
CAPITAL
|
|
DEFICIT
|
|
TOTAL
|
|
|||||
Balance, December 31, 2007 (Audited)
|
15,105,650
|
$
|
1,511
|
$
|
35,406,545
|
$
|
(41,982,629
|
)
|
$
|
(6,574,573
|
)
|
|||||
Issuance
of shares for cash of $1,500 (unaudited)
|
150,000
|
15
|
1,485
|
-
|
1,500
|
|||||||||||
Issuance
of shares of restricted stock to members of the Board of Directors
and
certain employees (unaudited)
|
187,962
|
19
|
216,137
|
-
|
216,156
|
|||||||||||
Exercise
of warrants for $1,000,000, or $1.30 per share, by Water Science,
a
related party (unaudited)
|
769,230
|
77
|
999,923
|
-
|
1,000,000
|
|||||||||||
Exercise
of warrants for $600,000, or $1.30 per share, by Water Science, a
related
party (unaudited)
|
461,538
|
46
|
599,954
|
-
|
600,000
|
|||||||||||
Issuance
and vesting of options and warrants for services
(unaudited)
|
-
|
-
|
325,940
|
-
|
325,940
|
|||||||||||
Net
loss for the six months ended June 30, 2008 (unaudited)
|
-
|
-
|
-
|
(2,710,005
|
)
|
(2,710,005
|
)
|
|||||||||
Balance,
June 30, 2008 (unaudited)
|
16,674,380
|
$
|
1,668
|
$
|
37,549,984
|
$
|
(44,692,634
|
)
|
$
|
(7,140,982
|
)
|
For the Six Months
Ended June 30,
|
|||||||
2008
|
2007
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
Net
loss
|
$
|
(2,710,005
|
)
|
$
|
(9,339,951
|
)
|
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
|||||||
Depreciation
|
42,423
|
57,345
|
|||||
Bad
debt expense
|
5,092
|
-
|
|||||
Shares
issued for services
|
103,334
|
-
|
|||||
Warrants
and options issued for services
|
325,940
|
4,192,054
|
|||||
Discount
of note payable
|
447,368
|
500,000
|
|||||
Loss
on disposal of assets
|
-
|
716
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
(Increase)
decrease in accounts receivable
|
13,019
|
(11,187
|
)
|
||||
(Increase)
decrease in accounts receivable - related party
|
(182
|
)
|
18,304
|
||||
(Increase)
decrease in pre-paid expense
|
(3,494
|
)
|
802
|
||||
(Increase)
in inventory
|
(60,425
|
)
|
11,084
|
||||
(Increase)
decrease in deposits
|
1,162
|
(7,728
|
)
|
||||
(Increase)
in restricted cash
|
-
|
(240,000
|
)
|
||||
Increase
(decrease) in accounts payable
|
(61,464
|
)
|
(338,139
|
)
|
|||
Increase
(decrease) in warranty reserve
|
(8,000
|
)
|
-
|
||||
Increase
(decrease) in accrued expenses
|
7,096
|
(24,178
|
)
|
||||
(Decrease)
in deferred revenue
|
(100,000
|
)
|
(100,000
|
)
|
|||
Increase
(decrease) in derivative liability
|
171,796
|
2,695,329
|
|||||
Net
cash used in continuing operations
|
(1,826,340
|
)
|
(2,585,549
|
)
|
|||
Net
cash used in discontinued operations
|
-
|
(21,391
|
)
|
||||
Net
cash used in operating activities
|
(1,826,340
|
)
|
(2,606,940
|
)
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
Acquisition
of property and equipment
|
-
|
(21,127
|
)
|
||||
Intellectual
property disbursements
|
(7,746
|
)
|
(145
|
)
|
|||
Net
cash used in continuing operations
|
(7,746
|
)
|
(21,272
|
)
|
|||
Net
cash used in discontinued operations
|
-
|
(22,526
|
)
|
||||
Net
cash (used) in investing activities
|
(7,746
|
)
|
(43,798
|
)
|
|||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
Payments
on notes payable
|
(4,750
|
)
|
(10,216
|
)
|
|||
Advances
for purpose of exercising warrants – related party
|
-
|
1,500,000
|
|||||
Proceeds from issuance of common stock – related party
|
1,101,500
|
1,500,000
|
|||||
Proceeds from issuance of common stock
|
-
|
50,000
|
|||||
Net
cash provided (used) by financing activities
|
1,096,750
|
3,039,784
|
|||||
NET
INCREASE (DECREASE) IN CASH
|
(737,336
|
)
|
389,046
|
||||
Cash
and cash equivalents, beginning of period
|
1,413,744
|
206,094
|
|||||
Cash
and cash equivalents, end of period
|
$
|
676,408
|
$
|
595,140
|
Six
Months Ended
|
|||||||
June
30,
|
|||||||
2008
|
2007
|
||||||
Supplemental
Disclosures of Cash Flow Information:
|
|||||||
Cash
paid during the period for:
|
|||||||
Interest
|
$
|
13,251
|
$
|
23,567
|
|||
Income
Taxes
|
$
|
-
|
$
|
-
|
|||
Supplemental
Disclosures of Non-cash Investing and Financing
Activities:
|
|||||||
Common
stock issued for services
|
$
|
103,334
|
$
|
-
|
|||
Warrants
and stock options granted
|
$
|
325,940
|
$
|
4,192,054
|
|
June
30,
|
|
December
31,
|
|
|||
|
|
2008
|
|
2007
|
|
||
Finished
goods
|
$
|
1,546,877
|
$
|
1,326,599
|
|||
Raw
materials
|
1,728,081
|
1,887,934
|
|||||
Allowance
for obsolete inventory
|
(400,000
|
)
|
(400,000
|
)
|
|||
$
|
2,874,958
|
$
|
2,814,533
|
Warranty
reserve at beginning of period
|
$
|
122,000
|
||
Costs
accrued for additional warranties
|
2,000
|
|||
Service
obligations honored
|
(10,000
|
)
|
||
Warranty
reserve at end of period
|
$
|
114,000
|
For the Three Months Ended
|
For the Six Months Ended
|
||||||||||||
June 30,
|
June 30,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||
Net
Loss (numerator)
|
$
|
(1,482,632
|
)
|
$
|
(7,793,822
|
)
|
$
|
(2,710,005
|
)
|
$
|
(9,339,951
|
)
|
|
Shares
(denominator)
|
16,486,418
|
13,523,231
|
15,440,794
|
13,431,615
|
|||||||||
Per
share amount
|
$
|
(0.09
|
)
|
$
|
(0.58
|
)
|
$
|
(0.18
|
)
|
$
|
(0.70
|
)
|
Number
|
Weighted
|
||||||
of
Options
|
Average
Exercise
|
||||||
and
Warrants
|
Price
|
||||||
Outstanding
at beginning of period
|
10,641,839
|
$
|
1.55
|
||||
Granted
|
-
|
-
|
|||||
Exercised
|
(1,380,768
|
)
|
1.16
|
||||
Forfeited
|
-
|
-
|
|||||
Expired
|
(335,000
|
)
|
1.99
|
||||
Outstanding
at end of period
|
8,926,071
|
$
|
1.60
|
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||||||||
Range
of
Exercise
Prices
|
Number
Outstanding
|
Weighted-Average
Remaining
Contractual
Life
|
Weighted-Average
Exercise
Price
|
Number
Exercisable
|
Weighted-Average
Exercise
Price
|
||||||||||||
$
|
.01-.50
|
310,000
|
1.6
years
|
$
|
0.04
|
310,000
|
$
|
0.04
|
|||||||||
1.00-1.99
|
7,186,029
|
3.1
years
|
1.30
|
5,895,769
|
1.30
|
||||||||||||
2.00-2.99
|
720,000
|
6.1
years
|
2.56
|
720,000
|
2.56
|
||||||||||||
3.00-3.99
|
191,666
|
4.1
years
|
3.38
|
191,666
|
3.38
|
||||||||||||
4.00-4.99
|
255,000
|
1.3
years
|
|
|
4.00
|
255,000
|
4.00
|
||||||||||
5.00-5.50
|
263,376
|
|
1.4
years
|
5.15
|
263,376
|
5.15
|
|||||||||||
$
|
.01-5.50
|
8,926,071
|
3.2
years
|
$
|
1.60
|
7,635,811
|
$
|
1.64
|
·
|
Inventory
price testing was determined to be misstated. The Company has subsequently
tested approximately 98% of inventory item costs and has performed
price
tests on certain inventory items.
|
·
|
Certain
accrued expenses were not properly reconciled and accrued. The Company
has
created an allowance account for unbilled and/or unknown expenses
not
received at the quarter end. Management will estimate an allowance
and
will reconcile subsequent invoices with this account on a quarterly
basis
|
·
|
Certain
stock options or warrants were not properly reconciled and accrued.
The
Company will review all stock grants and option/warrants grants at
least
quarterly and will reconcile the accounting records on a timelier
basis.
|
· |
Management
has implemented a regular routine of reconciling all balance sheet
accounts, particularly inventory and equity accounts, on a regular
timely
basis to ensure the accuracy of our
records;
|
· |
Management
has, and will, implement better review procedures of all balance
sheet
accounts.
|
EXHIBIT NO.
|
DESCRIPTION OF
EXHIBIT
|
|
3(i).1
|
Certificate
of Incorporation (Incorporated by reference from registration statement
on
Form SB-1 filed with the SEC on July 29, 2002 (File No. 333-86830))
|
|
3(i).2
|
Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from registration statement on Form SB-1 filed with the Securities
and
Exchange Commission on July 29, 2002 (File No. 333-86830))
|
|
3(i).3
|
Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from current report on Form 8-K filed with the Securities and Exchange
Commission on January 17, 2007)
|
|
3(ii).1
|
Amended
and Bylaws (Incorporated by reference from registration statement
on
current report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
|
|
10.1
|
Settlement
and License Amendment dated as of March 7, 2008 between the Company
and
University of Georgia Research Foundation (Incorporated by reference
from
current report on Form 8-K filed with the Securities and Exchange
Commission on March 13, 2008)
|
|
10.2
|
Amended
and Restated Senior Secured Convertible Promissory Note dated as
of June
2, 2008 between the Company and Water Sciences LLC (Incorporated
by
reference from current report on Form 8-K filed with the Securities
and
Exchange Commission on June 3, 2008)
|
|
31.1
|
Certification
by Wade
R. Bradley
under Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
by
Brian D. Heinhold
under Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of Wade
R. Bradley
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
By:
|
/s/
Wade R. Bradley
|
Wade
R. Bradley
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
By:
|
/s/
Brian D. Heinhold
|
Brian
D. Heinhold
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|