x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the quarterly period ended September 30, 2008
|
or
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.
|
000-51807
|
(Commission
File No.)
|
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 o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
(Do
not check if a smaller reporting company)
|
Page
|
||||
PART
I. FINANCIAL INFORMATION
|
||||
ITEM
1.
|
Financial
Statements
|
|||
Balance
Sheets - September 30, 2008 and December 31, 2007
|
3
|
|||
Statements
of Operations - Three and Nine months ended September 30, 2008
and
2007
|
5
|
|||
|
|
|||
Statement
of Stockholders’ Equity (Deficit)
|
7
|
|||
|
||||
Statements
of Cash Flows - Nine months ended September 30, 2008 and 2007
|
8
|
|||
|
||||
Notes
to Financial Statements
|
10
|
|||
|
||||
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
|
17
|
||
|
||||
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
||
|
||||
ITEM
4T.
|
Controls
and Procedures
|
23
|
||
|
||||
PART
II. OTHER INFORMATION
|
|
|||
|
||||
ITEM
1.
|
Legal
Proceedings
|
25
|
||
|
||||
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
||
|
||||
ITEM
3.
|
Defaults
Upon Senior Securities
|
25
|
||
|
||||
ITEM
4.
|
Submission
of matters to Vote of Security Holders
|
25
|
||
|
||||
ITEM
5.
|
Other
Information
|
25
|
||
|
||||
ITEM
6.
|
Exhibits
|
25
|
||
|
||||
SIGNATURES
|
26
|
September
30,
|
December
31,
|
||||||
2008
|
2007
|
||||||
CURRENT
ASSETS
|
(Unaudited)
|
(Audited)
|
|||||
Cash
and cash equivalents
|
$
|
526,515
|
$
|
1,413,744
|
|||
Accounts
receivable, net
|
42,789
|
61,196
|
|||||
Accounts
receivable - related party, net
|
357,797
|
357,615
|
|||||
Prepaid
expense
|
84,824
|
30,600
|
|||||
Deposits
|
65,597
|
—
|
|||||
Inventory,
net
|
2,645,205
|
2,814,533
|
|||||
Total
current assets
|
3,722,727
|
4,677,688
|
|||||
PROPERTY
AND EQUIPMENT, net of
|
|||||||
accumulated
depreciation of $285,772 and $220,064
|
333,891
|
206,554
|
|||||
OTHER
ASSETS
|
|||||||
Deposits
|
12,996
|
11,658
|
|||||
Restricted
cash
|
240,000
|
240,000
|
|||||
Note
receivable
|
150,000
|
150,000
|
|||||
Intellectual
property
|
77,639
|
61,558
|
|||||
Total
other assets
|
480,635
|
463,216
|
|||||
Total
assets
|
$
|
4,537,253
|
$
|
5,347,458
|
September
30,
|
December
31,
|
||||||
2008
|
2007
|
||||||
CURRENT
LIABILITIES
|
(Unaudited)
|
(Audited)
|
|||||
Accounts
payable
|
$
|
286,882
|
$
|
287,183
|
|||
Accrued
expenses
|
673,742
|
645,054
|
|||||
Warranty
reserve
|
108,000
|
122,000
|
|||||
Advance
- related party
|
—
|
500,000
|
|||||
Advance
deposits on machine orders - related party
|
697,500
|
697,500
|
|||||
Current
portion of long-term debt
|
25,461
|
19,841
|
|||||
Senior
convertible note payable - related party, current portion net of
discounts of $168,860 and $708,333
|
2,831,140
|
2,291,667
|
|||||
Total
current liabilities
|
4,622,725
|
4,563,245
|
|||||
LONG
TERM LIABILITIES
|
|||||||
Long
term debt, net of current portion
|
45,574
|
59,045
|
|||||
Deferred
licensing revenue - related party
|
391,667
|
541,667
|
|||||
Derivative
liability - related party
|
6,631,060
|
6,758,074
|
|||||
Total
long term liabilities
|
7,068,301
|
7,358,786
|
|||||
Total
liabilities
|
11,691,026
|
11,922,031
|
|||||
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|||||||
Common
stock, $.0001 par value; 50,000,000 shares authorized; 17,135,918
and
15,105,650 issued and outstanding, respectively
|
1,714
|
1,511
|
|||||
Additional
paid in capital
|
38,312,908
|
35,406,545
|
|||||
Accumulated
deficit
|
(45,468,395
|
)
|
(41,982,629
|
)
|
|||
Total
stockholders’ equity (deficit)
|
(7,153,773
|
)
|
(6,574,573
|
)
|
|||
Total
liabilities and stockholders’ equity (deficit)
|
$
|
4,537,253
|
$
|
5,347,458
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||
September
30,
|
September
30,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||
NET
SALES - RELATED PARTY
|
$
|
50,000
|
$
|
44,893
|
$
|
192,620
|
$
|
354,127
|
|||||
NET
SALES
|
45,625
|
60,465
|
136,516
|
128,464
|
|||||||||
TOTAL
SALES
|
95,625
|
105,358
|
329,136
|
482,591
|
|||||||||
COST
OF GOODS SOLD
|
8,958
|
26,099
|
76,026
|
169,070
|
|||||||||
GROSS
PROFIT
|
86,667
|
79,259
|
253,110
|
313,521
|
|||||||||
OPERATING
EXPENSES
|
|||||||||||||
Depreciation
and amortization
|
17,632
|
7,284
|
60,055
|
64,629
|
|||||||||
Research
and development
|
67,945
|
64,667
|
98,734
|
147,142
|
|||||||||
General
and administrative
|
958,554
|
831,511
|
3,095,996
|
6,676,955
|
|||||||||
Total
operating expenses
|
1,044,131
|
903,462
|
3,254,785
|
6,888,726
|
|||||||||
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
(957,464
|
)
|
(824,203
|
)
|
(3,001,675
|
)
|
(6,575,205
|
)
|
|||||
OTHER
INCOME (EXPENSE)
|
|||||||||||||
Interest
expense
|
(117,907
|
)
|
(277,386
|
)
|
(623,526
|
)
|
(844,429
|
)
|
|||||
Interest
income
|
800
|
3,399
|
12,281
|
14,109
|
|||||||||
Gain
(Loss) on derivative liability
|
298,810
|
147,713
|
127,014
|
(2,547,615
|
)
|
||||||||
Other
income (expense)
|
—
|
1,476
|
140
|
39,783
|
|||||||||
Total
other income (expense)
|
181,703
|
(124,798
|
(484,091
|
)
|
(3,338,152
|
)
|
|||||||
LOSS
BEFORE PROVISION
FOR
INCOME TAXES
|
(775,761
|
)
|
(949,001
|
)
|
(3,485,766
|
)
|
(9,913,357
|
)
|
|||||
PROVISION
FOR INCOME TAXES
|
—
|
—
|
—
|
—
|
|||||||||
LOSS
FROM CONTINUING OPERATIONS
|
(775,761
|
)
|
(949,001
|
)
|
(3,485,766
|
)
|
(9,913,357
|
)
|
|||||
DISCONTINUED
OPERATIONS:
|
|||||||||||||
(Loss)
from operations of discontinued operations (Net of $0 in income
taxes)
|
—
|
(250,251
|
)
|
—
|
(625,846
|
)
|
|||||||
(Loss)
on disposal of discontinued operations (Net of $0 in income
taxes)
|
—
|
—
|
—
|
—
|
|||||||||
LOSS
FROM DISCONTINUED OPERATIONS
|
—
|
(250,251
|
)
|
—
|
(625,846
|
)
|
|||||||
NET
LOSS
|
$
|
(775,761
|
)
|
$
|
(1,199,252
|
)
|
$
|
(3,485,766
|
)
|
$
|
(10,539,203
|
)
|
|
NET
LOSS PER SHARE CONTINUING OPERATIONS
|
$
|
(0.05
|
)
|
$
|
(0.07
|
)
|
(0.22
|
)
|
$
|
(0.74
|
)
|
||
NET
INCOME (LOSS) PER SHARE DISCONTINUED OPERATIONS
|
$
|
0.00
|
$
|
(0.02
|
)
|
$
|
0.00
|
$
|
(0.05
|
)
|
|||
WEIGHTED
AVERAGE OF SHARES
OUTSTANDING
|
16,947,956
|
13,567,187
|
15,847,466
|
13,478,401
|
ADDITIONAL
|
||||||||||||||||
COMMON
STOCK
|
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
|
|||||||||||
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)
|
—
|
—
|
488,910
|
—
|
488,910
|
|||||||||||
Net
loss for the Nine months ended September 30, 2008 (unaudited)
|
—
|
—
|
—
|
(3,485,766
|
)
|
(3,485,766
|
)
|
|||||||||
Balance,
September 30, 2008 (unaudited)
|
17,135,918
|
$
|
1,714
|
$
|
38,312,908
|
$
|
(45,468,395
|
)
|
$
|
(7,153,773
|
)
|
For
the Nine Months
Ended
September 30,
|
|||||||
2008
|
2007
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
Net
loss
|
$
|
(3,485,766
|
)
|
$
|
(10,539,203
|
)
|
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
|||||||
Depreciation
|
65,708
|
86,165
|
|||||
Bad
debt expense
|
5,092
|
—
|
|||||
Shares
issued for services
|
157,373
|
—
|
|||||
Warrants
and options issued for services
|
488,910
|
4,257,003
|
|||||
Discount
of note payable
|
539,473
|
750,000
|
|||||
Loss
on disposal of assets
|
—
|
1,816
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
(Increase)
decrease in accounts receivable
|
13,315
|
(1,525
|
)
|
||||
(Increase)
decrease in accounts receivable - related party
|
(182
|
)
|
175,055
|
||||
Decrease
in pre-paid expense
|
4,559
|
3,863
|
|||||
(Increase)
in inventory
|
(23,717
|
)
|
63,649
|
||||
(Increase)
decrease in deposits
|
(66,935
|
)
|
(5,402
|
)
|
|||
(Increase)
in restricted cash
|
—
|
(240,000
|
)
|
||||
(Decrease)
in accounts payable
|
(301
|
)
|
(245,635
|
)
|
|||
(Decrease)
in warranty reserve
|
(14,000
|
)
|
—
|
||||
Increase
(decrease) in accrued expenses
|
28,688
|
(83,171
|
)
|
||||
(Decrease)
in deferred revenue
|
(150,000
|
)
|
(150,000
|
)
|
|||
Increase
(decrease) in derivative liability
|
(127,014
|
)
|
2,547,614
|
||||
Net
cash used in continuing operations
|
(2,564,797
|
)
|
(3,379,771
|
)
|
|||
Net
cash used in discontinued operations
|
—
|
(52,167
|
)
|
||||
Net
cash used in operating activities
|
(2,564,797
|
)
|
(3,431,938
|
)
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
Acquisition
of property and equipment
|
—
|
(91,848
|
)
|
||||
Deposits
received on asset held for sale
|
—
|
100,000
|
|||||
Intellectual
property disbursements
|
(16,081
|
)
|
(7,389
|
)
|
|||
Net
cash used in continuing operations
|
(16,081
|
)
|
763
|
||||
Net
cash used in discontinued operations
|
—
|
—
|
|||||
Net
cash provided by (used in) investing activities
|
(16,081
|
)
|
763
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
Payments
on notes payable
|
(7,851
|
)
|
(15,005
|
)
|
|||
Advances
for purpose of exercising warrants - related party
|
—
|
2,000,000
|
|||||
Proceeds from issuance of common stock - related party
|
1,701,500
|
1,500,000
|
|||||
Proceeds from issuance of common stock
|
—
|
50,000
|
|||||
Net
cash provided by financing activities
|
1,693,649
|
3,534,995
|
|||||
NET
INCREASE (DECREASE) IN CASH
|
(887,229
|
)
|
103,820
|
||||
Cash
and cash equivalents, beginning of period
|
1,413,744
|
206,094
|
|||||
Cash
and cash equivalents, end of period
|
$
|
526,515
|
$
|
309,914
|
Nine
Months Ended September 30,
|
|||||||
2008
|
2007
|
||||||
Supplemental
Disclosures of Cash Flow Information:
|
|||||||
Cash
paid during the period for:
|
|||||||
Interest
|
$
|
16,550
|
$
|
49,283
|
|||
Income
Taxes
|
$
|
—
|
$
|
—
|
|||
Supplemental
Disclosures of Non-cash Investing and Financing
Activities:
|
|||||||
Common
stock issued for services
|
$
|
157,373
|
$
|
197,809
|
|||
Warrants
and stock options granted
|
$
|
488,910
|
$
|
1,059,142
|
September
30,
2008
|
December
31,
2007
|
||||||
Finished
goods
|
$
|
1,145,097
|
$
|
1,326,599
|
|||
Raw
materials
|
1,900,108
|
1,887,934
|
|||||
Allowance
for obsolete inventory
|
(400,000
|
)
|
(400,000
|
)
|
|||
$
|
2,645,205
|
$
|
2,814,533
|
Warranty
reserve at beginning of period
|
$
|
122,000
|
||
Costs
accrued for additional warranties
|
2,000
|
|||
Service
obligations honored
|
(16,000
|
)
|
||
Warranty
reserve at end of period
|
$
|
108,000
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
September
30,
|
September
30,
|
||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||
Net
Loss (numerator)
|
$
|
(775,761
|
)
|
$
|
(1,199,252
|
)
|
$
|
(3,485,766
|
)
|
$
|
(10,539,203
|
)
|
|
Shares
(denominator)
|
16,947,956
|
13,567,187
|
15,847,466
|
13,478,401
|
|||||||||
Per
share amount
|
$
|
(0.05
|
)
|
$
|
(0.09
|
)
|
$
|
(0.22
|
)
|
$
|
(0.78
|
)
|
Number
|
|
|
Weighted
|
|
|||
|
|
|
of
Options
|
|
|
Average
Exercise
|
|
|
|
|
and
Warrants
|
|
|
Price
|
|
Outstanding
at beginning of period
|
10,641,839
|
$
|
1.55
|
||||
Granted
|
-
|
-
|
|||||
Exercised
|
(1,842,306
|
)
|
1.19
|
||||
Forfeited
|
-
|
-
|
|||||
Expired
|
(335,000
|
)
|
1.96
|
||||
Outstanding
at end of period
|
8,464,533
|
$
|
1.62
|
Warrants
Outstanding
|
Warrants
Exercisable
|
|||||||||||||||
Weighted-Average |
Weighted-Average
|
Weighted-Average
|
||||||||||||||
Exercise
|
|
Number
|
|
Remaining
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
|||||
Prices
|
|
Outstanding
|
|
Contractual
Life
|
|
Price
|
|
Exercisable
|
|
Price
|
||||||
$.01-.50
|
310,000
|
1.4
years
|
$
|
0.04
|
310,000
|
$
|
0.04
|
|||||||||
1.00-1.99
|
6,724,491
|
2.8
years
|
1.30
|
5,414,231
|
1.30
|
|||||||||||
2.00-2.99
|
720,000
|
5.9
years
|
2.56
|
720,000
|
2.56
|
|||||||||||
3.00-3.99
|
191,666
|
3.8
years
|
3.38
|
191,666
|
3.38
|
|||||||||||
4.00-4.99
|
255,000
|
1.0
years
|
4.00
|
255,000
|
4.00
|
|||||||||||
5.00-5.50
|
263,376
|
1.2
years
|
5.15
|
263,376
|
5.15
|
|||||||||||
$.01-5.50
|
8,464,533
|
3.0
years
|
$
|
1.60
|
7,154,273
|
$
|
1.67
|
· |
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
|
Stock
Purchase Agreement dated as of October 6, 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 October
17,
2008)
|
|
10.3
|
Second
Amended and Restated Senior Secured Convertible Promissory Note dated
as
of October 6, 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 October 17, 2008)
|
|
10.4
|
Stock
Purchase Agreement dated as of November 10, 2008 between the Company
and
Theodore Jacoby.
|
|
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.
|
EAU TECHNOLOGIES, INC. | ||
|
|
|
Dated: November 13, 2008 | 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)
|