UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2009

 
or

¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.


000-51807
(Commission File No.)
EAU TECHNOLOGIES, INC.
(exact name of registrant as specified in its charter)
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)
Issuer’s telephone number:  (678) 388-9492

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨
  
Accelerated filer                   ¨
Non-accelerated filer    ¨
  
Smaller reporting company  x
(Do not check if a smaller reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes ¨  No x

As of November 16, 2009, the Registrant had 19,661,168 shares of Common Stock, $0.0001 par value outstanding.

 
 
 

EAU TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 2009

INDEX
 
   
Page
     
PART I. FINANCIAL INFORMATION
     
ITEM 1.
Financial Statements
  
     
 
Balance Sheets – September 30, 2009 and December 31, 2008
 3
     
 
Statements of Operations – Three and Nine months ended September 30, 2009 and 2008
 5
     
 
Statement of Stockholders’ Equity (Deficit)
 6
     
 
Statements of Cash Flows – Nine months ended September 30, 2009 and 2008
 7
     
 
Notes to Financial Statements
 9
     
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
16
     
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
23
     
ITEM 4T.
Controls and Procedures
23
     
PART II. OTHER INFORMATION
     
ITEM 1.
Legal Proceedings
23
     
ITEM 1A.
Risk Factors
24
     
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24
     
ITEM 3.
Defaults Upon Senior Securities
24
     
ITEM 4.
Submission of Matters to a Vote of Security Holders
24
     
ITEM 5.
Other Information
24
     
ITEM 6.
Exhibits
24
     
SIGNATURES
  
25
 
 
2
 

PART I - FINANCIAL INFORMATION

EAU TECHNOLOGIES, INC.

BALANCE SHEETS

ASSETS

   
September 30,
    
December 31,
  
   
2009
    
2008
  
 
  
(Unaudited)
    
(Audited)
  
CURRENT ASSETS
                
Cash and cash equivalents
   $ 137,825     $ 494,612  
Accounts receivable, net
     31,710       8,710  
Accounts receivable – related party, net
     355,656       358,656  
Accrued interest
     13,125       1,875  
Pre-paid expense
     48,075       52,468  
Note receivable, current portion
     150,000       150,000  
Inventory, net
     2,169,053       3,014,503  
                 
Total current assets
     2,905,444       4,080,824  
                 
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $129,716 and $113,359
     30,288       46,644  
                 
LEASED EQUIPMENT, net of accumulated depreciation of $117,593 and $15,156
     1,010,580       200,253  
                 
OTHER ASSETS
                
Deposits
     10,496       10,496  
Restricted cash
     240,000       240,000  
Intellectual property, net
     91,134       87,561  
                 
Total other assets
     341,630       338,057  
                 
Total assets
   $ 4,287,942     $ 4,665,778  

See notes to financial statements.

 
3
 

EAU TECHNOLOGIES, INC.

BALANCE SHEETS (Continued)

  LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   
September 30,
    
December 31,
  
   
2009
    
2008
  
 
  
(Unaudited)
    
(Audited)
  
CURRENT LIABILITIES
            
Accounts payable
   $ 387,585     $ 373,206  
Accrued expenses
     871,492       658,608  
Warranty reserve
     92,160       100,000  
Current portion of deferred licensing revenue – related party
     191,667       200,000  
Advance deposits on machine orders – related party
     697,500       697,500  
Current portion of long-term debt
     39,892       23,581  
Convertible notes payable – related party, net of discounts of $0 and $76,754
     -       2,923,246  
                 
Total current liabilities
     2,280,296       4,976,141  
                 
LONG TERM LIABILITIES
                
                 
Long term debt, net of current portion
     17,452       39,150  
Convertible notes payable – related party, net of discounts of $0 and $76,754
     3,200,000       -  
Deferred licensing revenue – related party
     -       141,667  
Derivative liability – related party
     11,762,027       8,621,940  
                 
Total long term liabilities
     14,979,479       8,802,757  
                 
Total liabilities
     17,259,775       13,778,898  
                 
STOCKHOLDERS’ EQUITY (DEFICIT)
                
Common stock, $.0001 par value; 50,000,000 shares authorized; 19,886,168 and 18,285,918 issued and outstanding, respectively
     1,989       1,829  
Additional paid in capital
     41,363,255       39,594,894  
Accumulated deficit
     (54,337,077 )     (48,709,843 )
                 
Total stockholders’ equity (deficit)
     (12,971,833 )     (9,113,120 )
                 
Total liabilities and stockholders’ equity (deficit)
   $ 4,287,942     $ 4,665,778  

See notes to financial statements.

 
4
 

EAU TECHNOLOGIES, INC.

UNAUDITED STATEMENTS OF OPERATIONS

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
                         
NET SALES – RELATED PARTY
   $ 50,000     $ 50,000     $ 150,000     $ 192,620  
                                 
NET SALES
     155,025       45,625       413,650       136,516  
                                 
TOTAL SALES
     205,025       95,625       563,650       329,136  
                                 
COST OF GOODS SOLD
     40,611       8,958       102,436       76,026  
                                 
GROSS PROFIT
     164,414       86,667       461,214       253,110  
                                 
OPERATING EXPENSES
                                
Depreciation and amortization
     4,778       17,632       16,580       60,055  
Research and development
     103,391       67,945       220,396       98,734  
General and administrative
     855,379       958,554       2,454,008       3,095,996  
                                 
Total operating expenses
     963,548       1,044,131       2,690,984       3,254,785  
                                 
LOSS BEFORE OTHER INCOME (EXPENSE)
     (799,134 )     (957,464 )     (2,229,770 )     (3,001,675 )
                                 
OTHER INCOME (EXPENSE)
                                
Interest expense
     (81,049 )     (117,907 )     (268,851 )     (623,526 )
Interest income
     3,829       800       11,474       12,281  
Gain (Loss) on derivative liability
     (1,310,744 )     298,810       (3,140,087 )     127,014  
Other income (expense)
     -       -       -       140  
                                 
Total other income (expense)
     (1,387,964 )     181,703       (3,397,464 )     (484,091 )
                                 
LOSS BEFORE PROVISION FOR INCOME TAXES
     (2,187,098 )     (775,761 )     (5,627,234 )     (3,485,766 )
                                 
PROVISION FOR INCOME TAXES
     -       -               -  
                                 
NET LOSS
   $ (2,187,098 )   $ (775,761 )   $ (5,627,234 )   $ (3,485,766 )
                                 
NET LOSS PER SHARE
   $ (0.11 )   $ (0.05 )   $ (0.30 )   $ (0.22 )
                                 
WEIGHTED AVERAGE OF SHARES OUTSTANDING
     19,621,494       16,947,956       19,074,059       15,847,466  

See notes to financial statements.

 
5
 

EAU TECHNOLOGIES, INC.

UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

   
COMMON STOCK
    
ADDITIONAL
              
               
PAID IN
    
ACCUMULATED
        
   
SHARES
    
AMOUNT
    
CAPITAL
    
DEFICIT
    
TOTAL
  
Balance, December 31, 2008 (Audited)
     18,285,918     $ 1,829     $ 39,594,894     $ (48,709,843 )   $ (9,113,120 )
                                         
Issuance of shares for cash at $1.00 per share, to Water Science, a related party.
     1,450,000       145       1,449,855       -       1,450,000  
                                         
Issuance and vesting of options and warrants for services
     -       -       248,771       -       248,771  
                                         
Cancellation of shares
     (24,750 )     (2 )     2               -  
                                         
Issuance of shares of restricted stock to members of the Board of Directors
     150,000       15       59,985               60,000  
                                         
Issuance of shares for consulting services
     25,000       2       9,748               9,750  
                                         
Net loss for the nine months ended September 30, 2009
     -       -       -       (5,627,234 )     (5,627,234 )
                                         
Balance, September 30, 2009
     19,886,168     $ 1,989     $ 41,363,255     $ (54,337,077 )   $ (12,971,833 )

See notes to financial statements.

 
6
 

EAU TECHNOLOGIES, INC.

 UNAUDITED STATEMENTS OF CASH FLOWS
 
   
For the Nine Months
  
   
Ended September 30,
  
   
2009
    
2008
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net loss
   $ (5,627,234 )   $ (3,485,766 )
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation
     119,015       65,708  
Bad debt expense
     22,500       5,092  
Shares issued for services
     69,750       157,373  
Warrants and options issued for services
     248,771       488,910  
Discount of note payable
     76,754       539,473  
Changes in operating assets and liabilities:
                
(Increase) decrease in accounts receivable
     (45,500 )     13,315  
(Increase) decrease in accounts receivable – related party
     3,000       (182 )
(Increase) in pre-paid expense
     4,393       4,559  
(Increase) in accrued interest
     (11,250 )     -  
(Increase) decrease in inventory
     40,266       (23,717 )
(Increase) decrease in deposits
     -       (66,935 )
Increase (decrease) in accounts payable
     14,379       (301 )
Increase (decrease) in warranty reserve
     (7,840 )     (14,000 )
Increase in accrued expenses
     212,884       28,688  
(Decrease) in deferred revenue
     (150,000 )     (150,000 )
Increase (decrease) in derivative liability
     3,140,087       (127,014 )
Net cash (used) in operating activities
     (1,890,025 )     (2,564,797 )
CASH FLOWS FROM INVESTING ACTIVITIES
                
Acquisition of property and equipment
     (107,580 )     -  
Intellectual property disbursements
     (3,795 )     (16,081 )
Net cash (used) in investing activities
     (111,375 )     (16,081 )
CASH FLOWS FROM FINANCING ACTIVITIES
                
Payments on notes payable
     (5,387 )     (7,851 )
Proceeds from issuance of note payable – related party
     200,000       -  
Proceeds from issuance of common stock – related party
     1,450,000       1,701,500  
Net cash provided by financing activities
     1,644,613       1,693,649  
NET INCREASE (DECREASE) IN CASH
     (356,787 )     (887,229 )
Cash and cash equivalents, beginning of period
     494,612       1,413,744  
                 
Cash and cash equivalents, end of period
   $ 137,825     $ 526,515  

See notes to financial statements.

 
7
 

EAU TECHNOLOGIES, INC.

 UNAUDITED STATEMENTS OF CASH FLOWS
(Continued)

   
Nine Months Ended
  
   
September 30,
  
   
2009
    
2008
  
             
Supplemental Disclosures of Cash Flow Information:
            
             
Cash paid during the period for:
            
Interest
   $ 3,613     $ 16,550  
Income Taxes
   $ -     $ -  
                 
                 
Supplemental Disclosures of Non-cash Investing and Financing Activities:
                
                 
Common stock issued for services
   $ 69,750     $ 157,373  
Reclass inventory to Property and Equipment
   $ 805,184     $ -  

See notes to financial statements.

 
8
 

EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying condensed financial statements were prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In management’s opinion all necessary adjustments, which consist primarily of normal recurring adjustments, to the financial statements have been made to present fairly the financial position and results of operations and cash flows.  The results of operations for the respective periods presented are not necessarily indicative of the results for the respective complete years.  The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Certain prior period amounts have been reclassified in the condensed financial statements to conform to current period presentation. 

NOTE 2 – RESTRICTED CASH

In November 2006 the Company entered into an employment agreement with Wade Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited $240,000 with an escrow agent in January 2007. The Company has recognized this amount as restricted cash on the Company’s financial statements.

NOTE 3 - INVENTORIES

The composition of inventories is as follows at:

   
September 30,
    
December 31,
  
   
2009
    
2008
  
Finished goods
   $ 977,981     $ 1,828,984  
Raw materials
     1,591,072       1,585,519  
Allowance for obsolete inventory
     (400,000 )     (400,000 )
                 
    $ 2,169,053     $ 3,014,503  

NOTE 4 – WARRANTY RESERVE

The Company warrants its products against defects in materials and workmanship for a period of three years.  The Company reviews the historical experience of failure rates and estimates the rate of warranty claims that will be made and has accrued a warranty reserve for these anticipated future warranty costs.  If actual results differ from the estimates, the Company would adjust the estimated warranty liability.  Changes in the warranty reserve for the nine months ended September 30, 2009 are as follows:

Warranty reserve at beginning of period
   $ 100,000  
Costs accrued for additional warranties
     -  
Service obligations honored
     (7,840 )
         
Warranty reserve at end of period
   $ 92,160  

 
9
 

EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 5 - CONVERTIBLE DEBT

In September 2005, the Company entered into a Senior Convertible Note (the “Note”) with Water Science, a related party, in exchange for $3,000,000. Pursuant to the debt agreement, the Note accrues interest at the rate of 3% per annum and was initially due, principal and interest together, on September 16, 2008.  In June 2008, Water Science agreed to extend the maturity date of the Note to March 16, 2009.  In March 2009, the Company and Water Science agreed to extend the maturity date to September 16, 2009 and increase the interest rate to 10%.  No principal or interest payments need to be paid during the loan period.  In October 2008, as part of a new financing agreement, the Company amended the Note and changed the conversion rate from $3.00 per share to $1.00 per share.  The Note may be converted into 3,000,000 shares of the Company’s $0.0001 par value common stock prior to the maturity date, and at any time, by the holder at a price per share equal to $1.00 per share, subject to certain other conversion adjustments.  The Company granted a security interest in all of the Company’s assets as collateral for the loan.  In connection with the original issuance of the Note, the Company granted a three year warrant to purchase up to two million shares of the Company’s $0.0001 par value common stock with an exercise price of $2.76 per share.

In August 2009, the Company entered into the Second Amendment (the “Amendment”) to the Second Amended and Restated Senior Secured Convertible Promissory Note (the “Promissory Note”) with Water Science, a related party.  The Amendment extends the maturity date of the Promissory Note from September 16, 2009 to November 1, 2010.  In all other material respects, the Promissory Note remains unchanged.  

In May 2007, the Company entered into a termination agreement related to the cancellation and reissuance of the existing warrants (“Original Warrants”) to purchase a total of 8.4 million shares of $0.0001 par value common stock of the Company, at a price of $2.76 per share, held by Water Science.  The Company granted to Water Science replacement warrants to purchase 8.4 million shares of common stock at a price of $1.30 per share, with an expiration date of May 9, 2010.  The Company had a right to require Water Science to exercise warrants for up to 3,230,769 shares.  During the year ended 2008, the Company required Water Science to exercise all of the options under the put rights.

On August 27, 2009, the Company entered into a Loan Agreement with Mr. Peter Ullrich, a related party, whereby he agreed to loan $600,000 to the Company, funded in three installments, as follows, $200,000 payable on September 15, 2009, $200,000 payable on October 15, 2009, and $200,000 payable on November 15, 2009.

Simple interest will accrue at a rate of 10% per annum on the unpaid principal amount outstanding and the loan will mature on November 1, 2010, at which time accrued interest and the outstanding principal balance shall be due.   The agreement contains an optional conversion right, whereby the Lender may convert all or any portion of the outstanding principal and interest due into shares of the Company’s common stock at a price per share equal to $1.00 per share; however, if the Lender fails to make any of the installment payments on the dates set forth above, the conversion price will increase to $3.00 per share.

The remaining warrants and the conversion rate contain “round down” provisions where the exercise price is to be adjusted if the Company should issue stock for less than the original exercise price.  Due to this feature, and pursuant to SEC guidance, the Company accounts for the warrants and convertible feature as a derivative liability with changes in fair value being recorded in the income statement.  As of September 30, 2009 and December 31, 2008, the value of the derivative liability was $11,762,027 and $8,621,940, respectively.  The Company recorded a loss of $3,140,087 and a gain of $127,014 in the change of the derivative liability to fair market value for the nine month period ended September 30, 2009 and 2008, respectively.

 
10
 

EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 6 – RELATED PARTY TRANSACTIONS

Sales to Affiliates – In September 2005, Water Science, a related party, paid to the Company $1,000,000 for the exclusive rights to sell our products in South America and Mexico.  The agreement allows for a pro-rated refund during the first 5 years under certain circumstances.  The Company recognizes income from this agreement over the first 5 years of the agreement.  The Company recognized $150,000 in each of the periods ended September 30, 2009 and 2008.  This agreement also gives Water Science the rights to purchase machinery from the Company at cost plus 25 percent.  The Company did not have any sales to Water Science during the nine months ended September 30, 2009 and had sales of $42,620 for the same period in 2008.  The Company has received and recorded $697,500 in advance deposits from Water Science on machine orders at September 30, 2009 and 2008.  In connection with the sales of the machines and products, the Company has recorded approximately $350,156 in accounts receivable at September 30, 2009.

Convertible Note Payable - In September 2005, the Company entered into a Senior Convertible Note with Water Science in exchange for $3,000,000 (see Note 5).  The Company accounts for the warrants and convertible debt feature as a derivative liability with changes in fair value being recorded in the income statement.  The Company recorded a loss of $3,140,087 and a gain of $127,014 due to the change in the fair market value for the nine months ended September 30, 2009 and 2008, respectfully.

On August 27, 2009, the Company entered into a Convertible Note with Mr. Peter Ullrich, a related party, whereby he agreed to loan $600,000 to the Company, funded in three installments, as follows, $200,000 payable on September 15, 2009, $200,000 payable on October 15, 2009, and $200,000 payable on November 15, 2009.  (see Note 5)

Licensing Fee –In September 2005, the Company received $1,000,000 in exchange for providing Water Science exclusive licensing and distribution rights for a five-year term for a specified market area. The agreement provides termination rights by Water Sciences and a pro rata refund of the fee. The Company recognizes the fee on a pro rata basis over the life of the agreement. The Company recognized $150,000 in each of the nine months ended September 30, 2009 and 2008.

Escrow Arrangement with Chief Executive Officer – In October 2006, the Company entered into an escrow agreement with the Chief Executive Officer. Pursuant to the escrow agreement, to secure the Company’s obligation to make the Severance Payment, the Company is required to deposit, at its election, either (1) cash in the amount of $240,000 or (2) an irrevocable letter of credit with a face amount of $240,000, with an agreed upon escrow agent who shall hold such funds (or letter of credit) in escrow. In January 2007, the Company deposited $240,000 in cash with an escrow agent.

Advances – Periodically throughout the year, the Company advances employees cash for certain reimbursable expenses.  As of September 30, 2009 and 2008, the Company had advances to employees in the amount of $5,500 and $8,500, respectively.

Employee Options – In December 2007, the Company granted 480,260 options to various employees.  The options are for a term of ten (10) years and have an exercise price of $1.30 per share.  The options vest over a period of four (4) years.   The options were valued using the Black-Scholes model with the following assumptions:  risk free rate of 4.64%, volatility at 87.06% and the stock price at $1.30.  The value of each warrant is approximately $1.13 per warrant.  The Company recognized $102,708 in stock option expense related to the options for the nine months ended September 30, 2009.

In November 2007, the Company granted 530,000 options to Douglas Kindred, in connection with the appointment of Mr. Kindred as Chief Technology Officer.  The options are for a term of ten (10) years and have an exercise price of $1.30 per share.  The options vest over a period of four (4) years.   The warrants were valued using the Black-Scholes model with the following assumptions:  risk free rate of 4.28%, volatility at 85.99% and the stock price at $1.01.  The value of each warrant is approximately $0.85 per warrant.  The Company recognized $91,508 during the period ended September 30, 2009.

 
11
 

EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 7 – CAPITAL STOCK

In July 2009, the Company granted 25,000 shares of EAU common stock to Larry Earle, a consultant to the Company, pursuant to the Company’s 2007 Stock Incentive Plan.

In May 2009, the Compensation Committee of the Board of Directors of the Company granted 30,000 shares of restricted stock for each director, effective on May 14, 2009. The restricted stock will vest ratably over a period of two years from the date of grant. These grants were made pursuant to the annual directors’ compensation program approved by the Board in December 2007.

In November 2008, Theodore Jacoby, a director of the Company, purchased 100,000 shares of common stock of the Company for $100,000 at a price of $1.00 per share.

In October 2008, the Board of Directors approved a transaction with Water Science, LLC (“WS”), a related party, pursuant to (1) a Stock Purchase Agreement (the “Purchase Agreement”) and (2) a Second Amended and Restated Senior Secured Convertible Promissory Note (the “Second Amended Convertible Note”). The Purchase Agreement provides for the purchase of 2.5 million shares of common stock of the Company at a price of $1.00 per share and the amendment of the original Amended and Restated Senior Secured Convertible Promissory Note dated as of May 8, 2008, to change the conversion rate from $3.00 per share to $1.00 per share, as reflected in the Second Amended Convertible Note. The purchase of the common stock was to occur in six monthly installments of $350,000 beginning October 14, 2008 plus a final installment of $400,000 on April 15, 2009. As of December 31, 2008, the Company had received $1,050,000 under the agreement.  As of September 30, 2009, the Company received the remaining payments of $1,450,000 under this agreement.

In March 2009, the Company and Water Science amended the payment schedule of the Purchase Agreement on the final $950,000.  The purchase of the common stock was scheduled to occur in four monthly installments of $250,000 on April 15, 2009, $250,000 on May 15, $250,000 on June 15 and a final installment of $200,000 on July 15, 2009.  As of the date of this report, the Company has received payment of all of these installments.  The Second Amended Convertible Note included an interest rate of 3% and a maturity date of March 16, 2009. In March 2009, the Company and Water Science agreed to extend the maturity date to September 16, 2009 and increase the interest rate to 10%.  In August 2009, the note was again extended until November 1, 2010.  WS is controlled by Peter Ullrich, a member of the Board of Directors of the Company.

In February 2008, the Compensation Committee of the Board of Directors of the Company granted $30,000 to each board member in the form of 23,077 shares of restricted stock for each director, effective on February 27, 2008. The restricted stock will vest ratably over a period of two years from the date of grant. These grants were made pursuant to the annual directors’ compensation program approved by the Board in December 2007.  The amount of compensation was based on recommendations from a non-related human resource consulting firm.  The Compensation Committee also granted 49,500 shares of restricted stock to various employees, which will vest one year from the date of grant.

In January 2008, an officer of the Company exercised 150,000 options for $1,500 or $0.01 per share.  The options were granted in 2003 for services.

 
12
 

EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 8 – GOING CONCERN

The Company has incurred significant losses and has had negative cash flows from operations.  As a result, at September 30, 2009, the Company has had a high level of equity financing transactions and additional financing will be required by the Company to fund its future activities and to support its operations.  We currently do not have sufficient funds to operate our business without additional funding.  The Company is currently seeking additional short-term funding to provide liquidity through the first half of 2010.  Management will continue to seek to obtain sufficient funding for its operations through either debt or equity financing.  However, there is no assurance that the Company will be able to obtain additional financing.  Furthermore, there is no assurance that rapid technological changes, changing customer needs and evolving industry standards will enable the Company to introduce new products and services on a continual and timely basis so that profitable operations can be attained.  The Company’s ability to achieve and maintain profitability and positive cash flows is dependent upon its ability to achieve positive sales and profit margins and control operating expenses.

The Company estimates that it will need approximately $2,000,000 for the upcoming twelve months to execute our business plan and an additional $3,000,000, plus interest, in order to satisfy our senior note payable with Water Science, which becomes due in November 2010, if the note is not converted into common stock.  Management plans to mitigate its losses in the near term through the further development and marketing of its trademarks, brand and product offerings.

Our auditors have issued their Independent Registered Public Accountants’ Report on the Company's financial statements for the fiscal year ended December 31, 2008 with an explanatory paragraph regarding the Company's ability to continue as a going concern. The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of recurring operating losses, such realization of assets and satisfaction of liabilities are subject to uncertainty, which raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Based-Compensation Expense

Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation — Stock Compensation, which requires a fair-value-based measurement method to account for stock-based compensation. The Company uses the Black-Scholes valuation formula, which is a closed-form model that uses an equation to determine the estimated fair value of stock options.  Stock-based compensation expense recognized for the nine month period ended September 30, 2009 and 2008 was $248,771 and $488,910, respectively, related to employee stock options issued and vesting during the period.

 
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EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basic and Fully Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period.

   
For the Three Months Ended
    
For the Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
                         
Net Loss (numerator)
   $ (2,187,098 )   $ (775,761 )   $ (5,627,234 )   $ (3,485,766 )
Shares (denominator)
     19,621,494       16,947,956       19,074,059       15,847,466  
Per share amount
   $ (0.11 )   $ (0.05 )   $ (0.30 )   $ (0.22 )

The Company’s outstanding stock options have been excluded from the basic net loss per share calculation for the three month period ended September 30, 2009 and 2008, because they are anti-dilutive.

The following table is a summary of the status of the warrants and options granted and outstanding at September 30, 2009:
   
Number
    
Weighted
  
   
of Options
    
Average Exercise
  
   
and Warrants
    
Price
  
             
Outstanding at beginning of period
     8,387,867     $ 1.60  
Granted
     -       -  
Exercised
     -       -  
Forfeited
     -       -  
Expired
     (209,095 )     2.80  
                 
Outstanding at end of period
     8,178,772     $ 1.56  

A summary of the status of the warrants outstanding at September 30, 2009 is presented below:

       
Warrants Outstanding
    
Warrants Exercisable
  
Range of
      
Weighted-Average
Weighted-Average
      
Weighted-Average
  
Exercise
  
Number
  
Remaining
  
Exercise
    
Number
    
Exercise
  
Prices
  
Outstanding
  
Contractual Life
  
Price
    
Exercisable
    
Price
  
                           
$.01-.50
     210,000  
0.7 years
   $ 0.06       210,000     $ 0.06  
1.00-1.99
     6,724,491  
1.8 years
     1.30       5,766,796       1.30  
2.00-2.99
     720,000  
4.9 years
     2.56       720,000       2.56  
3.00-3.99
     115,000  
5.3 years
     3.46       115,000       3.46  
4.00-4.99
     255,000  
0.1 years
     4.00       255,000       4.00  
5.00-5.50
     154,281  
0.4 years
     5.00       154,281       5.00  
                                   
$.01-5.50
     8,178,772  
2.1 years
   $ 1.56       7,221,077     $ 1.60  
The fair value of each warrant granted is estimated on the date granted using the Black-Scholes pricing model, with the following assumptions for warrants issued in 2007: risk-free interest rate of between 4.6% and 4.99%, expected dividend yield of zero, expected lives of 3 and 5 years and expected volatility of between 59.76% and 89.54%.  No options or warrants were granted in 2008 or 2009.

 
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EAU TECHNOLOGIES, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 10 – SUBSEQUENT EVENTS

In October 2009, the Company received $200,000 in cash from a related party on the next installment of the note payable to Peter Ullrich.

In 2008, EAU signed an agreement with Fieldale Farms, a large poultry producer in northern Georgia, to install our equipment at their facility.  We began receiving revenues of approximately $27,500 per month from this facility in February 2009.  Per the terms of the agreement, we were to help the plant achieve Category 1 status.  The plant completed a USDA test set October 2009 with the results that it complied with Category 1 status.  The plant has indicated that it intends to terminate the agreement as of November 23, 2009.  Management is currently in negotiations to continue operations.  Should the negotiations fail to produce an ongoing relationship, management estimates that the loss on removing the equipment from the plant to be approximately $150,000 to $200,000.  However, at this time the system is still being utilized by the plant.

Management evaluated events through November 16, 2009, for consideration as a subsequent event to be included in our September 30, 2009 financial statements issued November 16, 2009.

 
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information, which management believes is relevant to an assessment and understanding of the Company’s condensed results of operations and financial condition. The discussion should be read in conjunction with the financial statements included in our annual report on Form 10-K, and notes thereto.

Overview
EAU TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc. (referred to herein sometimes as “EAU,”  “we,” “us,” or the “Company”), is in the business of developing, manufacturing and marketing equipment that uses water electrolysis to create non-toxic cleaning and disinfecting fluids. These fluids have various commercial applications and may be used in commercial food processing and organic or non-organic agricultural products that clean, disinfect, remediate, hydrate and moisturize. The processes for which these fluids may be used are referred to in this Report (the “Report”) as the “EW Technology.”  For example, we believe that our food and agricultural treatment products potentially may be used to systemically treat all facets and phases of the food chain, from soil to animal feed to meat processing, by eliminating dangerous and unhealthy pathogens from the food chain with organically based and highly effective solutions. We make the claim that our products are “non-toxic”. We can do this because at the levels we employ our technology, our studies both internal as well as through third parties show no toxicity.  Further studies are in progress to make more specific claims.  At the levels employed, the fluids and products are environmentally safe and non-toxic and do not contain or leave harmful residues associated with chemical-based supplements or disinfecting and cleaning agents. The electrolyzed water fluids created by the EW Technology (referred to herein sometimes as the “EW Fluids” or “Empowered WaterTM”) generated by our specialized equipment can be used in place of many of the traditional products used in commercial, industrial and residential disinfecting and cleaning.

Our focus is on our three core competencies which are, producing high volumes of electrolyzed water, controlling the properties of the water and using our application knowledge.  Because of our ability to produce high volumes of water and control the water properties, our target market is in commercial applications where we believe we can add value by generating measurable productivity and efficiency gains.  We will continue to use a disciplined stage gate development process that drives ideas to commercial test installations that turn into revenues.  Once we have developed an application we will attempt to find a strategic partner that would be able to assist us with a large scale commercial roll-out of the technology.  Our goal is to generate streams of revenues through pricing contracts that let us participate in the on-going added value.

We have identified the following industries for early stage sales and marketing focus: 1) dairy production and processing, 2) meat and poultry processing, 3) clean in place (“CIP”) for food and beverage processing and 4) agricultural grow-out and processing (“Primary Markets”).  As of the date of this Report, the Company was focused on these markets because we believe that for each of these markets we have a competitive advantage, a leading strategic industry partner, or we can provide an attractive value-added proposition.  To penetrate these markets, EAU is conducting trials and completing commercial installations that will lead to partnerships with industry leaders who can assist in rolling the technology out on a large scale.

Dairy Cattle.  The Company commenced hydration and production tests on dairy cattle in 2006.  Initial results indicate an increase in milk production and milk fat while maintaining the protein content.  In August 2008, we reached an agreement with a dairy located in Georgia to begin paying for the use of our equipment.    During the first quarter of 2009, the Company installed a second unit at the dairy located in Georgia to provide our fluids to all of the cows on the dairy.  EAU is currently receiving minimal revenues in a commercial capacity.  We will continue to do more clinical research and field testing in the dairy market in order to support a full industry rollout.  We recently engaged the University of Georgia to perform additional tests on dairy cows.

 
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 Poultry.  In 2005, we began testing of our EW Technology and EW Fluids (the “EW System”) in Tyson Food’s Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EW System trial was completed. The trial yielded significant results in killing salmonella on the processed poultry. Independent testing analysis conducted by ABC Research, Inc., in Gainesville, Florida, revealed pre-chill microbial reduction was significantly below the Food Safety Inspection Service (the enforcement arm of the USDA; “FSIS”) allowable limit.

From these results we successfully completed Phase I of our USDA Online Reprocessing (“OLR”) Certification. The EAU Technologies OLR intervention also tested well showing a statistically significant difference between control and test groups.  On April 29, 2009, EAU received a letter of “no objection” from the USDA for our installation at Fieldale Farms to be our Phase II facility. Assuming that we are able to duplicate earlier results, which is not guaranteed, we expect to receive approval for full commercialization of Empowered Water™ as an OLR option. With this approval there will be no limitations to leasing our technology as an OLR agent.

The Company has experienced some sales resistance from the multiple industries including the poultry industry, because operators did not have sufficient motivation to invest in new technologies to improve the safety and cleanliness of food products.  In February 2008, a regulatory change occurred that we believe may increase the motivation.  The Food Safety Inspection Service (“FSIS”), a division of the USDA, sets the public heath performance standards for all raw and processed meat, poultry and egg processing standard for the United States.  The FSIS has implemented a process called the “Public Health Risk Based Inspection” platform to regulate these industries based on the relative risk a processing facility imposes to the human health index.  The new system allows the FSIS to allocate and prioritize its resources at processing plants based on the risk each plant presents. The new categorization platform lists processors in three categories, Category 1: 10% positive and below; Category 2: 10%-20% positive for Salmonella and other pathogens; Category 3: 20%-22% positive for Salmonella and other pathogens. For processors with strong processes and intervention systems meeting the Category 1 criteria, there would be far less FSIS inspectors on site, thus reducing the cost incurred by the plant. We believe that with the success that we have achieved in field trials and commercial installations, in conjunction with the new FSIS policies and regulations, will make EAU’s products appealing to the industry. While it will take time for the poultry industry to fall into compliance with this new rating system, EAU now has a tangible reason for poultry plants to seriously consider our EW technology for its pathogen remediation process.

In 2008, EAU signed a lease agreement with Fieldale Farms, a large poultry producer in northern Georgia, to install our equipment at their facility.  We began receiving revenues of approximately $27,500 per month from this facility in February 2009.  Per the terms of the agreement, we were to help the plant achieve Category 1 status.  The plant completed a USDA test set October 2009 with the results that it complied with Category 1 status.  The plant has indicated that it intends to terminate the agreement as of November 23, 2009.  Management is currently in negotiations to continue operations.  Should the negotiations fail to produce an ongoing relationship, management estimates that the loss on removing the equipment from the plant to be approximately $150,000 to $200,000.  However, at this time the system is still being utilized by the plant.  EAU received a letter of “no objection” from the USDA for our installation at Fieldale Farms to be our Phase II facility.  We have completed the OLR data gathering stage and have submitted our findings to the USDA for OLR approval.

Clean-in-Place.  In the third quarter of 2008 we installed our equipment to test a clean-in-place (CIP) application with an international beverage bottling company for use with cold beverages.  This test is complete and was a success. There were three stages of this trial that were conducted simultaneously: 1) Syrup tanks; 2) Bag in box; 3) Bottling. The purpose of the trial was to identify whether EAU’s non-toxic ambient temperature Empowered Waters could replace current 3-5 step CIP processes. In order to become an approved technology as well as an approved vendor for this bottling company, EAU had to show good antimicrobial efficacy, water savings, and improved CIP efficiency. At this time, this installation does not generate any revenues.  With the positive results of all phases of the tests being completed for carbonated beverages, EAU is now in a position to begin marketing our systems within the bottling company.  We are expanding our CIP capabilities and are working with the bottling company on a hot fill application for pasteurized beverages.  EAU will continue to test other CIP applications to manage all beverage and food products as the technology is introduced.

 
17
 

We have obtained patent protection on four separate uses of electrolyzed fluids (poultry processing, cleaning and disinfecting eggs, carpet cleaning and mold remediation).  The uses are process patents and how the fluids are used and how they are stabilized for use in different applications. Additionally, we have a patent pending on the electrolysis equipment and several provisional patent pending applications filed to protect new processes and products, as described herein.

Our operations are currently funded by a combination of revenues and capital funding.

Financial Position and Results of Operations

The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements.

Financial Position

The Company had $137,825 in cash as of September 30, 2009, compared to $494,612 at December 31, 2008.  We also had $240,000 in restricted cash related to an escrow agreement.  The Company has received and recorded $697,500 in advance deposits from Water Science on machine orders at September 30, 2009.  This will be reduced as the Company delivers machines on order to Water Science, a related party.  Water Science, who has exclusive rights to sell our products in Central and South America, is also an affiliate of the Company, and by agreement may purchase machinery from us at cost plus 25 percent.  Long term debt decreased slightly from $39,150 at December 31, 2008 to $17,452 at September 30, 2009.  At September 30, 2009, our stockholders’ deficit was $12,971,833.

Results of Operations for the Three months ended September 30, 2009 and 2008

Revenues and Net Income

The Company had total revenues of $205,025 for the three months ended September 30, 2009, which represents an increase of 114% from the $95,625 in total revenues for the same period one year earlier.  The increase is due to the increased fees the Company is collecting on its leased systems and maintenance fees from previously sold machines.  In an effort to streamline our corporate focus and our business plan, the Company is no longer marketing products that are not directly related to its core competencies, which is the development of Empowered Water™ technologies.

Net loss from continuing operations for the three months ended September 30, 2009 was $2,187,098, or a loss of $0.11 per share, compared with a net loss from continuing operations of $775,761, or $0.05 per share for the same period in 2008.  The majority of the increased net loss is due to the recording of the derivative liability to fair market value, which is based on calculating the Black Scholes value for the liability.  For the three months ended September 30, 2009, the Company recognized a loss of $1,310,744 on the derivative liability as compared to a gain of $298,810 for the three months ended September 30, 2008.  The current quarter net loss includes $81,049 in interest expense, compared to $117,907 in 2008.  This is due to interest expense related to the senior note payable entered into in September 2005.  During the current period the discount of the note was fully expensed.

General and Administrative Expenses

The Company’s general and administrative expenses totaled $855,379 during the three months ended September 30, 2009, compared to $958,554 during the three months ended September 30, 2008, for a decrease of $103,175.  General and administrative expense for 2009 consists primarily of payroll and other compensation expense ($344,910), legal and professional fees ($136,083), expense related to granting of stock and options ($92,369) and insurance expenses ($74,075).

 
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Research and Development

Research and development expenses incurred during the three month period ended September 30, 2009 increased $35,446, from $67,945 in 2008 to $103,391 in 2009.  While the Company will continue to conduct research to improve its products and their performance, it believes it has developed proven products that have commercial value in its targeted markets.

Results of Operations for the Nine months ended September 30, 2009 and 2008

Revenues and Net Income

The Company had total revenues of $563,650 for the nine months ended September 30, 2009, which represents an increase of 71% from the $329,136 in total revenues for the same period one year earlier.  The increase is due to the increased fees the Company is collecting on its leased systems and maintenance fees from previously sold machines.  In an effort to streamline our corporate focus and our business plan, the Company is no longer marketing products that are not directly related to its core competencies, which is the development of Empowered Water™ technologies.

Net loss from continuing operations for the nine months ended September 30, 2009 was $5,627,234, or a loss of $0.30 per share, compared with a net loss from continuing operations of $3,485,766, or $0.22 per share for the same period in 2008.  The majority of the increased net loss is due to the recording of the derivative liability to fair market value, which is based on calculating the Black Scholes value for the liability.  The terms of our agreements with Water Science and Peter Ullrich were amended in August 2009, which caused additional accruals.  For the nine months ended September 30, 2009, the Company recognized a loss of $3,140,087 on the derivative liability as compared to a gain of $127,014 for the nine months ended September 30, 2008.  Excluding the loss on the derivative liability the Company had a net loss of $2,487,147, or $0.13 per share.  The current quarter net loss includes $268,851 in interest expense, compared to $623,526 in 2008.  This is due to interest expense related to the senior note payable entered into in September 2005.  During the current period the discount of the note was fully expensed.

General and Administrative Expenses

The Company’s general and administrative expenses totaled $2,454,008 during the nine months ended September 30, 2009, compared to $3,095,996 during the nine months ended September 30, 2008, for a decrease of $641,988.  General and administrative expense for 2009 consists primarily of payroll and other compensation expense ($1,050,985), legal and professional fees ($409,575), expense related to granting of stock and options ($258,522) and insurance expenses ($219,788).

Research and Development

Research and development expenses incurred during the nine month period ended September 30, 2009 increased $121,662, from $98,734 in 2008 to $220,396 in 2009.  While the Company will continue to conduct research to improve its products and their performance, it believes it has developed proven products that have commercial value in its targeted markets.

Liquidity and Capital Resources
 
The Company had $137,825 in cash as of September 30, 2009, compared to $494,612 at December 31, 2008.  We have had continuing operating losses of $5,627,234 for the nine months ended September 30, 2009, compared with operating losses of $3,485,766 for the nine months ended September 30, 2008.  The net loss per share for the first nine months of 2009 and 2008 was $0.30 and $0.22 per share, respectively.  The majority of the decrease is attributable to the recording of the derivative liability to fair market value as described above.

 
19
 

Net cash used in operating activities in the nine month period ended September 30, 2009 was $1,890,025, a 26% decrease, compared to $2,564,797 for the same period in 2008.  The majority of the cash used was for normal operating expenses.  The majority of the remaining changes were non-cash changes, such as a decrease in deferred revenue, increase in accounts receivable and the recognition of expenses related to stock options.

At September 30, 2009, the Company’s net inventory was $2,169,053, representing a decrease of approximately $845,000, or 28% from the $3,014,503 on hand at December 31, 2008.  The Company is in multiple tests of our equipment and has included the machines in inventory until they are sold and begin producing revenues.  During the first nine months of 2009 we completed the installation of a poultry system and a dairy system and have removed the systems from inventory and included them in property and equipment.

The operating outflow of cash was reduced by the Company issuing warrants and stock options in lieu of cash during the quarter of $248,771.  The Company recognized a non-cash increase from the discounting of the Company’s note payable to Water Science, LLC of $76,754.  (See Note 5 to the Company’s financial statements.)  Further, the Company recognized a non-cash increase in the derivative liability of $3,140,087, due to changes in the Black-Scholes value of the liability.

The Company used $111,375 in cash flows from investing activities during the period ended September 30, 2009 as compared to $16,081 used in the same period in 2008.  The cash flows from investing activities consisted of expenditures made for purchase of equipment ($107,580) and expense related to intellectual property ($3,795).

Cash flows from financing activities provided the Company $1,644,613 for the period ended September 30, 2009 compared with $1,693,649 provided the Company during the same period in 2008.  The Company received proceeds of $1,450,000 from the issuance of stock during the nine months ended September 30, 2009.

We currently do not have sufficient funds to operate our business without additional funding.  The Company is currently seeking additional short term funding to provide liquidity through the first half of 2010.  Our working capital requirements for the foreseeable future will vary based upon a number of factors, including, our timing in the implementation of our business plan, our growth rate and the level of our revenues.  Our current assets, along with cash generated from anticipated revenues, will not provide us with sufficient funding for the next twelve months.  Our senior convertible note payable with Water Science, which was extended in August 2009, will become due in November 2010, which will require cash of $3,000,000, plus interest, in order to satisfy the debt, if the note is not converted into common stock.  We anticipate that we may need an additional $2,000,000 or more in future funding to execute our business plan over the next twelve months. Moreover, if we able to expand our sale of EW machines as anticipated, we may need significant additional working capital to fund that expansion.  We do not have arrangements in place to provide us with this funding or any additional funding. In light of these circumstances, the ability of the Company to continue as a going concern is in substantial doubt.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require us to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  Note 1 of the notes to consolidated financial statements in Part II, Item 7 of the Company’s Annual Report on Form 10-K, dated December 31, 2008, describes the significant accounting policies and methods used in preparation of our consolidated financial statements.  We base our estimates on historical experience, current trends, future projections, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates.  There were no material changes in our judgments or estimates during the first quarter of 2009.
 
 
20
 
 
Recent Accounting Pronouncements

Accounting Standards Codification (ASC 105): In June 2009, the Financial Accounting Standards Board (FASB) issued Statement No. 168 – The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (the “Codification”). The Codification, which was launched on July 1, 2009, became the single source of authoritative non-governmental U.S. generally accepted accounting principles (GAAP), superseding various existing authoritative accounting pronouncements. The Codification eliminates the GAAP hierarchy contained in Statement 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. There are no changes to our consolidated financial statements due to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements in our consolidated financial statements.
 
Business Combinations (ASC 805): In January 2009, the Company adopted Business Combinations changing the method of applying the acquisition method in a number of significant aspects. The standard also amends Income Taxes, such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of Business Combinations would also apply the provisions of Business Combinations. The standard was effective on a prospective basis for all acquisitions on or after January 1, 2009 and does not have a significant impact on the Company’s financial statements.

Fair Value Measurements and Disclosures (ASC 820): In September 2009, an update was made to Fair Value Measurements and Disclosures – “Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).” This update permits entities to measure the fair value of certain investments, including those with fair values that are not readily determinable, on the basis of the net asset value per share of the investment (or its equivalent) if such net asset value is calculated in a manner consistent with the measurement principles in Financial Services-Investment Companies as of the reporting entity’s measurement date. The update also requires enhanced disclosures about the nature and risks of investments within its scope that are measured at fair value on a recurring or nonrecurring basis. Effective for interim and annual periods ending after December 15, 2009, the Company is currently evaluating the effect that adoption of this update will have, if any, on its financial statements.

In August 2009, an update was made to Fair Value Measurements and Disclosures – “Measuring Liabilities at Fair Value.” This update permits entities to measure the fair value of liabilities, in circumstances in which a quoted price in an active market for an identical liability is not available, using a valuation technique that uses a quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets or the income or market approach that is consistent with the principles of Fair Value Measurements and Disclosures. Effective upon issuance, the Company has determined the update does not currently have an impact on its financial statements.

In April 2009, the FASB provided additional guidance in Fair Value Measurements and Disclosures for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. The guidance emphasizes that the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sales) between market participants at the measurement date under current market conditions. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The Company believes the adoption of this guidance has no impact on its financial statements.

 
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Subsequent Events (ASC 855): In May 2009, the FASB issued Subsequent Events establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Subsequent Events sets forth the period after the balance sheet date that entities should evaluate events of transactions that may occur for potential recognition or disclosure in the financial statements, circumstances under which entities should recognize and the disclosures that should be made about events or transactions that occur after the balance sheet date. Effective for interim and annual periods ending after June 15, 2009, we adopted this standard for our quarter ended June 30, 2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

Revenue Recognition (ASC 605): In October 2009, an update was made to Revenue Recognition – “Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force” and the corresponding Software—“Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force.” The update to Revenue Recognition removes the objective-and-reliable-evidence-of-fair-value criterion, replaces references to “fair value” with “selling price”, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements. The Software update changes the accounting model for revenue arrangements and provides guidance on how a vendor should allocate arrangement consideration to deliverables that includes both tangible products and software. Both standards are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this standard is not expected to have a material impact on our financial statements.

Inflation

We do not expect the impact of inflation on operations to be significant.

Precious Metals

Raw materials used by the Company in the EW Machines include a number of precious metals and minerals. Prices of these materials can be volatile and the Company has no fixed price contracts or arrangements. The Company ordinarily does not attempt to hedge the price risk of its raw materials. Commercial deposits of certain metals that are required for the alloys used in the EW Machines are found in only a few parts of the world, and for certain materials only single sources are readily available. The availability and prices of these metals and other materials may be influenced by private or governmental cartels, changes in world politics, unstable governments in exporting nations, production interruptions, inflation and other factors. Although the Company has not experienced significant shortages of its supplies and raw materials, there can be no assurance that such shortages will not occur in the future. Any such shortages or prices fluctuations could have a material adverse effect on the Company.

 
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Forward-Looking Statements

All forward-looking statements contained herein are deemed by the Company to be covered by and to qualify for the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. Prospective shareholders should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved.  Any one of those factors could cause actual results to differ materially from those projected herein.  Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.  These forward-looking statements include our expectations regarding working capital requirements and future funding, our expectations regarding our internal controls, expectations regarding funding commitments, our expectations regarding reductions in deposits from Water Science, future inventory levels, future test results, and plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized.  Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risks associated with successfully developing our business in evolving markets, our need for additional capital, our continuing operating losses, the ability of our management to conduct distribution activities and sell products, possible failure to successfully develop new products, vulnerability to competitors due to lack of patents on our products, and other risk factors listed in our annual report on Form 10-K for the year ended December 31, 2008 and our other SEC reports. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans will be achieved.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4T.   Controls and Procedures

Disclosure Controls and Procedures

The Company has evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2009, pursuant to Exchange Act Rule 15d-15.  Based upon that evaluation, the principal executive and financial officers concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake.

Changes to Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, or other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None

 
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Item 1A. Risk Factors

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of stockholders during the third quarter of 2009.

Item 5.  Other Information

None

Item 6.  Exhibits

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
 
  
Second Amendment to Second Amended and Restated Senior Secured Convertible Promissory Note dated August 27, 2009, between the Company and Water Science LLC. (Incorporated by reference to Ex. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 2, 2009)
10.2
 
  
$600,000 Loan Agreement dated August 27, 2009, between the Company and Peter Ullrich.  (Incorporated by reference to Ex. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 2, 2009)
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.
 
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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant cause this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 16, 2009

EAU TECHNOLOGIES, INC.
   
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)
 
 
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