x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30,
2010
|
|
or
|
¨
|
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)
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(Zip Code)
|
Page
|
||
PART
I. FINANCIAL INFORMATION
|
||
ITEM
1.
|
Financial
Statements
|
|
Balance
Sheets – September 30, 2010 and December 31, 2009
|
3
|
|
Statements
of Operations – Three and Nine months ended September 30, 2010 and
2009
|
5
|
|
Statement
of Stockholders’ Equity (Deficit)
|
6
|
|
Statements
of Cash Flows – Nine months ended September 30, 2010 and
2009
|
7
|
|
Notes
to Financial Statements
|
9
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
ITEM
4T.
|
Controls
and Procedures
|
24
|
PART
II. OTHER INFORMATION
|
||
ITEM
1.
|
Legal
Proceedings
|
24
|
ITEM
1A.
|
Risk
Factors
|
24
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
25
|
ITEM
4.
|
Reserved
|
25
|
ITEM
5.
|
Other
Information
|
25
|
ITEM
6.
|
Exhibits
|
25
|
SIGNATURES
|
26
|
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Restated)
|
|||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 245,996 | $ | 181,481 | ||||
Accounts
receivable, net
|
51,495 | 42,995 | ||||||
Other
receivable – related party
|
5,500 | 6,248 | ||||||
Pre-paid
expense
|
29,500 | 45,419 | ||||||
Inventory,
net
|
1,855,809 | 2,022,462 | ||||||
Total
current assets
|
2,188,300 | 2,298,605 | ||||||
PROPERTY
AND EQUIPMENT, net of
|
||||||||
accumulated
depreciation of $144,456 and $133,821
|
15,548 | 26,183 | ||||||
LEASED
EQUIPMENT, net of
|
||||||||
accumulated
depreciation of $449,067 and $406,952
|
679,105 | 721,221 | ||||||
OTHER
ASSETS
|
||||||||
Deposits
|
37,115 | 10,496 | ||||||
Restricted
cash
|
- | 240,000 | ||||||
Intellectual
property, net
|
116,673 | 111,265 | ||||||
Total
other assets
|
153,788 | 361,761 | ||||||
Total
assets
|
$ | 3,036,741 | $ | 3,407,770 |
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Restated)
|
|||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 389,195 | $ | 401,663 | ||||
Accrued
expenses
|
375,421 | 351,215 | ||||||
Accrued
interest
|
882,269 | 572,892 | ||||||
Warranty
reserve
|
81,879 | 92,160 | ||||||
Current
portion of deferred licensing revenue – related party
|
- | 141,667 | ||||||
Advance
deposits on machine orders
|
404,800 | - | ||||||
Advance
deposits on machine orders – related party
|
329,630 | 349,986 | ||||||
Current
portion of long-term debt
|
57,344 | 50,832 | ||||||
Current
portion of convertible notes payable – related party
|
- | 3,600,000 | ||||||
Derivative
liability – related party
|
- | 5,333,401 | ||||||
Total
current liabilities
|
2,520,538 | 10,893,816 | ||||||
LONG
TERM LIABILITIES
|
||||||||
Convertible
notes payable – related party
|
4,505,000 | - | ||||||
Derivative
liability – related party
|
103,374 | - | ||||||
Long
term debt, net of current portion
|
- | 6,512 | ||||||
Total
long term liabilities
|
4,608,374 | 6,512 | ||||||
Total
liabilities
|
7,128,912 | 10,900,328 | ||||||
STOCKHOLDERS’
EQUITY (DEFICIT)
|
||||||||
Common
stock, $.0001 par value; 50,000,000 shares authorized; 20,006,168 and
19,886,168 issued and outstanding, respectively
|
2,001 | 1,989 | ||||||
Additional
paid in capital
|
41,559,471 | 41,311,512 | ||||||
Accumulated
deficit
|
(45,653,643 | ) | (48,806,059 | ) | ||||
Total
stockholders’ equity (deficit)
|
(4,092,171 | ) | (7,492,558 | ) | ||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 3,036,741 | $ | 3,407,770 |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Restated)
|
(Restated)
|
|||||||||||||||
NET
SALES – RELATED PARTY
|
$ | 41,667 | $ | 50,000 | $ | 166,294 | $ | 150,000 | ||||||||
NET
SALES
|
70,560 | 155,025 | 247,966 | 413,650 | ||||||||||||
TOTAL
SALES
|
112,227 | 205,025 | 414,260 | 563,650 | ||||||||||||
COST
OF GOODS SOLD
|
13,293 | 40,611 | 78,070 | 102,436 | ||||||||||||
GROSS
PROFIT
|
98,934 | 164,414 | 336,190 | 461,214 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Depreciation
and amortization
|
3,884 | 4,778 | 11,653 | 16,580 | ||||||||||||
Research
and development
|
73,443 | 103,391 | 160,151 | 220,396 | ||||||||||||
General
and administrative
|
596,832 | 855,379 | 1,928,751 | 2,454,008 | ||||||||||||
Total
operating expenses
|
674,159 | 963,548 | 2,100,555 | 2,690,984 | ||||||||||||
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
(575,225 | ) | (799,134 | ) | (1,764,365 | ) | (2,229,770 | ) | ||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
expense
|
(112,054 | ) | (81,049 | ) | (313,307 | ) | (268,851 | ) | ||||||||
Interest
income
|
36 | 3,829 | 62 | 11,474 | ||||||||||||
Gain
(Loss) on derivative liability
|
216,465 | (1,431,438 | ) | 5,230,026 | (905,604 | ) | ||||||||||
Total
other income (expense)
|
104,447 | (1,508,658 | ) | 4,916,781 | (1,162,981 | ) | ||||||||||
INCOME
(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
(470,778 | ) | (2,307,792 | ) | 3,152,416 | (3,392,751 | ) | |||||||||
PROVISION
FOR INCOME TAXES
|
- | - | - | - | ||||||||||||
NET
INCOME (LOSS)
|
$ | (470,778 | ) | $ | (2,307,792 | ) | $ | 3,152,416 | $ | (3,392,751 | ) | |||||
EARNINGS
PER SHARE
|
||||||||||||||||
BASIC
|
$ | (0.02 | ) | $ | (0.12 | ) | $ | 0.16 | $ | (0.18 | ) | |||||
DILUTED
|
N/A | N/A | $ | 0.16 | N/A | |||||||||||
WEIGHTED
AVERAGE OF SHARES OUTSTANDING
|
20,006,168 | 19,621,494 | 19,980,014 | 19,074,059 |
ADDITIONAL
|
||||||||||||||||||||
COMMON STOCK
|
PAID IN
|
ACCUMULATED
|
||||||||||||||||||
SHARES
|
AMOUNT
|
CAPITAL
|
DEFICIT
|
TOTAL
|
||||||||||||||||
Balance,
December 31, 2009 (Restated)
|
19,886,168 | $ | 1,989 | $ | 41,311,512 | $ | (48,806,059 | ) | $ | (7,492,558 | ) | |||||||||
Exercise
of warrants for cash of $200, or $0.01 per share
|
20,000 | 2 | 198 | - | 200 | |||||||||||||||
Issuance
of shares for $100,000, or $1.00 per share, to Theodore Jacoby, a
director
|
100,000 | 10 | 99,990 | - | 100,000 | |||||||||||||||
Vesting
of options for services
|
- | - | 147,771 | - | 147,771 | |||||||||||||||
Net
gain for the nine months ended September 30, 2010
|
- | - | - | 3,152,416 | 3,152,416 | |||||||||||||||
Balance,
September 30, 2010
|
20,006,168 | $ | 2,001 | $ | 41,559,471 | $ | (45,653,643 | ) | $ | (4,092,171 | ) |
For the Nine Months
|
||||||||
Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
(Restated)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|||||||
Net
income (loss)
|
$ | 3,152,416 | $ | (3,392,751 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
|
53,769 | 119,015 | ||||||
Bad
debt expense
|
- | 22,500 | ||||||
Warrants
and options vested or issued for services
|
147,771 | 69,750 | ||||||
Shares
issued for services
|
- | 248,771 | ||||||
Discount
of note payable
|
- | 76,754 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Decrease
in restricted cash
|
240,000 | - | ||||||
(Increase)
in accounts receivable
|
(8,500 | ) | (45,500 | ) | ||||
Decrease
in accounts receivable – related party
|
748 | 3,000 | ||||||
Decrease
(increase) in pre-paid expense
|
15,919 | 4,393 | ||||||
(Increase)
in accrued interest
|
- | (11,250 | ) | |||||
(Increase)
decrease in inventory
|
166,653 | 40,266 | ||||||
(Increase)
in deposits
|
(26,619 | ) | - | |||||
Increase
(decrease) in accounts payable
|
(12,468 | ) | 14,379 | |||||
(Decrease)
in warranty reserve
|
(10,281 | ) | (7,840 | ) | ||||
Increase
in advance deposits for machine orders
|
404,800 | - | ||||||
(Decrease)
in advance deposits for machine orders – related party
|
(20,356 | ) | - | |||||
Increase
in accrued expenses
|
24,206 | 24,634 | ||||||
Increase
in accrued interest
|
309,377 | 188,250 | ||||||
(Decrease)
in deferred revenue
|
(141,667 | ) | (150,000 | ) | ||||
(Decrease)
in derivative liability
|
(5,230,027 | ) | 905,604 | |||||
Net
cash (used) in operating activities
|
(934,259 | ) | (1,890,025 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Acquisition
of property and equipment
|
- | (107,580 | ) | |||||
Intellectual
property disbursements
|
(6,426 | ) | (3,795 | ) | ||||
Net
cash (used) in investing activities
|
(6,426 | ) | (111,375 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments
on notes payable
|
- | (5,387 | ) | |||||
Proceeds
from issuance of note payable – related party
|
905,000 | 200,000 | ||||||
Proceeds
from issuance of common stock – related party
|
100,200 | 1,450,000 | ||||||
Net
cash provided by financing activities
|
1,005,200 | 1,644,613 | ||||||
NET
INCREASE (DECREASE) IN CASH
|
64,515 | (356,787 | ) | |||||
Cash
and cash equivalents, beginning of period
|
181,481 | 494,612 | ||||||
Cash
and cash equivalents, end of period
|
$ | 245,996 | $ | 137,825 |
For the Nine Months
|
||||||||
Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
(Restated)
|
||||||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 3,930 | $ | 3,613 | ||||
Income
Taxes
|
$ | - | $ | - | ||||
Supplemental
Disclosures of Non-cash Investing and Financing
Activities:
|
||||||||
Reclass
inventory to Property and Equipment
|
$ | - | $ | 805,184 |
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Finished
goods
|
$ | 769,122 | $ | 894,488 | ||||
Raw
materials
|
1,486,687 | 1,527,974 | ||||||
Allowance
for obsolete inventory
|
(400,000 | ) | (400,000 | ) | ||||
$ | 1,855,809 | $ | 2,022,462 |
Warranty
reserve at beginning of period
|
$ | 92,160 | ||
Costs
accrued for additional warranties
|
- | |||
Service
obligations honored
|
(10,281 | ) | ||
Warranty
reserve at end of period
|
$ | 81,879 |
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Restated)
|
(Restated)
|
|||||||||||||||
Net
Income (loss) (numerator)
|
$ | (470,778 | ) | $ | (2,307,792 | ) | $ | 3,152,416 | $ | (3,392,751 | ) | |||||
Shares
(denominator)
|
||||||||||||||||
Basic
|
20,006,168 | 19,621,494 | 19,980,014 | 19,074,059 | ||||||||||||
Diluted
|
N/A
|
N/A
|
19,980,014 |
N/A
|
||||||||||||
Per
share amount
|
|
|||||||||||||||
Basic
|
$ |
(0.02
|
) | $ | (0.12 | ) | $ | 0.16 | $ | (0.18 | ) | |||||
Dilutive
|
N/A
|
N/A
|
$ | 0.16 |
N/A
|
Number
|
Weighted
|
|||||||
of Options
|
Average Exercise
|
|||||||
and Warrants
|
Price
|
|||||||
Outstanding
at beginning of period
|
7,817,291 | $ | 1.46 | |||||
Granted
|
- | - | ||||||
Exercised
|
(20,000 | ) | 0.01 | |||||
Forfeited
|
- | - | ||||||
Expired
|
(5,580,531 | ) | 1.34 | |||||
Outstanding
at end of period
|
2,216,760 | $ | 1.79 |
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
|
||||||||||||
1.00-1.99
|
1,499,260 |
6.7
years
|
$ | 1.31 | 912,130 | $ | 1.31 | ||||||||||
2.00-2.99
|
625,000 |
5.4
years
|
2.68 | 625,000 | 2.68 | ||||||||||||
3.00-3.99
|
92,500 |
4.7 years
|
3.50 | 92,500 | 3.50 | ||||||||||||
$.01-5.50
|
2,216,760 |
6.2 years
|
$ | 1.79 | 1,629,630 | $ | 2.00 |
4.6% - 4.99%
|
||
Expected
life
|
3 to 5 years
|
|
59.76% - 89.54%
|
||
Dividend
yield
|
0.00%
|
|
As previously
reported, December
31, 2009
|
Restated,
December 31,
2009
|
Change
|
|||||||||
Total
assets
|
$ | 3,407,770 | $ | 3,407,770 | $ | 0 | ||||||
Derivative
liability
|
$ | 8,662,893 | $ | 5,333,401 | $ | (3,329,492 | ) | |||||
Total
liabilities
|
$ | 14,229,820 | $ | 10,900,328 | $ | (3,329,492 | ) | |||||
Accumulated
deficit
|
$ | 52,135,551 | $ | 48,806,059 | $ | (3,329,492 | ) | |||||
Total
Stockholders deficit
|
$ | 10,822,050 | $ | 7,492,558 | $ | (3,329,492 | ) |
As previously
reported,
September 30,
2009
|
Restated,
September 30,
2009
|
Change
|
||||||||||
Gross
profit
|
$ | 296,800 | $ | 296,800 | $ | 0 | ||||||
Gain
(loss) on derivative liability
|
$ | (3,140,087 | ) | $ | (905,604 | ) | $ | 2,234,483 | ||||
Net
loss
|
$ | (5,627,234 | ) | $ | (3,392,751 | ) | $ | 2,234,483 | ||||
Net
loss per share
|
$ | (0.30 | ) | $ | (0.18 | ) | $ | 0.12 |
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
|
$1.2
Million Loan Agreement dated October 21, 2010, between the Company and
Peter Ullrich.
|
|
10.2
|
Warrant
agreement, dated October 21, 2010, between the Company and Peter
Ullrich.
|
|
10.3
|
Third
Amended and Restated Senior Secured Convertible Promissory Note dated
October 21, 2010, between the Company and Water Science
LLC.
|
|
10.4
|
Amended
and Restated $600,000 Loan Agreement dated October 21, 2010, between the
Company and Peter Ullrich.
|
|
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.
|
|
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)
|