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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Delaware 33-0750453
------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10410 Trademark Street, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (909) 987-0456
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes _X_ No ____
Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B contained herein, and will not be
contained, to the best of issuer's knowledge, in definitive proxy
or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
The information required in Part III by Items 9, 10, 11 and 12
is incorporated by reference to the issuer's proxy statement in
connection with the 2003 Annual Meeting of Shareholders, which
will be filed by the issuer within 120 days after the close of
its fiscal year.
State issuer's revenues for its most recent fiscal year:
$1,588,000.
As of September 15, 2003, the aggregate market value of the
issuer's Common Stock (based on its reported last sale price on
the American Stock Exchange) held by non-affiliates of the issuer
was $21,216,101.
At September 25, 2003 10,429,255 shares of issuer's Common
Stock were outstanding.
PART I
ITEM 1. BUSINESS
Overview
AquaCell Technologies, Inc. (the "Company") is engaged in the
manufacture and sale of products for water filtration and
purification through our operating subsidiaries, Global Water-
Aquacell, Inc. and Water Science Technologies, Inc. (WST). Our
products address various water treatment applications for
industrial, commercial, institutional and residential purposes.
These applications range from providing purified drinking water-
through our point-of-use patented self-filling Purificr Water
Cooler and production of water bottling plant equipment- to
equipment for processing water for ultra-pure purposes, such as
micro-chip and pharmaceutical manufacturing. The Company was
incorporated in Delaware on March 19, 1997.
Our flagship product is our patented five-gallon self-refilling
bottle Purific water cooler, manufactured by our Global Water-
Aquacell subsidiary. The various filtration systems available on
our cooler contain different combinations of systems, which
utilize sediment filters, reverse osmosis, carbon block, multi-
media filters and ultra-violet light. We replace traditional
five-gallon bottle water coolers with a permanently installed
convenient alternative where the bottle never needs changing and
water bottles no longer need to be delivered, stored or replaced.
In addition, we replace water fountains where users tend to have
greater concerns as to sanitation and water quality.
Water Purification Industry Background
Warning of a mounting water crisis, the United Nations has
designated 2003 as the "International Year of Freshwater",
stating, "Water is likely to become a growing source of tension
and fierce competition between nations if present trends
continue.". The UN has reported that more than half of humanity
will be living with water shortages within 50 years. However, an
article appearing in the June 2003 Water Conditioning &
Purification magazine, states that wars over water are unlikely
since it would cost far less to build water treatment and
desalination systems to produce water for a given country -
giving rise to the water purification industry.
The highly fragmented water purification industry has thousands
of companies involved in various capacities, including companies
which design fully integrated systems for processing millions of
gallons of water for municipal, industrial, and commercial
applications, down to the independent water delivery route
person.
According to an article appearing in The Wall Street Journal,
water supply businesses generate approximately $400 billion in
revenue worldwide annually. Demand for water purification has
continued to grow nationally and internationally due to economic
expansion, scarcity of usable water, concern about water quality
and regulatory requirements. One of the fastest growing segments
of the industry is the drinking water segment, including point-of-
use filtration systems for providing purified drinking water and
bottled drinking water.
In November 2002, the Wall Street Journal reported that the new
kitchen status symbol is the water cooler, and that home delivery
service of water is increasing. Sales of water coolers at retail
has escalated due to consumer demand, according to the June 16,
2003 Weekly of Home Products Retailing.
U.S. Drinking Water Analysis
While many consumers use water filtration systems and drink
bottled water for improved taste, there are other more important
reasons to do so.
Risks of Tap Water. Tap water, regardless of its source, may
contain certain contaminants that can affect one's health.
Although municipalities are required to provide drinking water
which complies with the Safe Drinking Water Act, the water
supplied to homes from municipalities may contain startling
levels of chlorine in addition to bacteria, toxins and parasites.
Although the water may be purified upon leaving the treatment
facility, impurities may be picked up from the pipes used to
transfer it to the tap. Lead may also leach into the water from
pipes, especially in older construction.
In the United States, water quality is being compromised by
pollution, aging municipal water systems, and contaminated wells
and surface water. According to an August 12, 2002 U.S. News and
World Report article, researchers question whether Americans are
getting sick from their drinking water far more often than is
recognized. The report further states that the next five years
will see more new rules than have been adopted in all the years
since the enactment of the Safe Drinking Water Act in 1974.
Cost estimates for upgrading municipal water systems in the
United States range from $151 billion to $1 trillion, with
projected costs as high as $6900 per household in some areas.
Additionally, costs for protection stemming from potential
terrorism will cost $450 million for Congressional ordered
vulnerability studies, with an additional $1.6 billion needed for
basic security at pumping stations and treatment plants.
The awareness level of consumers of the potential hazards of
drinking tap water is continuously increasing, and we believe
that more educated consumers will be seeking to minimize such
potential risks through the purchase of point-of-use filtration
systems. An article appearing in the September 2002 Water
Technology magazine, included predictions from point-of-use
experts on the industry's future. The article includes
statements that the home water treatment market will grow from
its current 15 percent penetration to near 100%, with every home
having a point-of-use water drinking water system within the next
20 years, as point-of-use equipment will become a regular
solution to some municipal water quality problems.
Problems With Bottled Water. While some people have resorted
to drinking bottled water as a safe alternative to tap water,
even bottled water can contain impurities. In February 1999, the
Natural Resources Defense Council released an extensive four year
scientific study of bottled water sold in the United States,
titled "BOTTLED WATER: Pure Drink or Pure Hype?" This study
included testing of more than 1000 bottles of 103 brands of
bottled water. One- third of the bottled waters tested were
found, in at least one test sample, to contain levels of
contamination that exceeded allowable limits under either state
or bottled water standards. Contaminants found in the bottled
waters included synthetic organic chemicals, bacteria and
arsenic. The study further revealed that, according to
government and industry estimates, 25% to 40% of bottled water is
just tap water- sometimes with additional treatment, sometimes
not. The conclusion of the study was that bottled water is not
necessarily any better regulated, purer, or safer than most tap
water.
In June, 2003 the nation's largest bottled water company was
charged with falsely advertising that the source of the water was
a pristine protected spring, when allegedly it is actually
heavily treated ground water.
The growth of bottled water sales, particularly in individual
serve bottles, has lead to an environmental issue with discarded
water bottles creating a crisis in landfills. These bottles
remain in the landfills forever, unless they are incinerated,
which releases toxic fumes into the air that harm the ozone
layer. In California alone, 3 million bottles per day are tossed
into landfills (1 billion per year), which is expected to
increase with the popularity of bottled water.
Our Global Water-Aquacell, Inc. Subsidiary
Our flagship product is our patented PURIFICr Water Cooler.
The Purific cooler is hooked up to a standard municipal water
supply. The water is filtered and purified through multiple step
systems and the treated water then automatically and continuously
fills the permanently attached five-gallon bottle on the cooler.
Our patents pertain to the attachment of the bottle to the
cooler, and the float valve in the bottle, providing the
automatic refilling.
The filtration systems available on the Purific cooler vary in
complexity; however, each system contains the proprietary multi-
stage Aquacell Multi-Media Filter set. These unique multi-media
filters contain various medias known to filter certain impurities
from water, including activated carbon, activated alumina, KDF r
and Environmental Protection Agency (EPA) registered silver
impregnated carbon, used to prohibit bacterial growth, a common
problem with simple carbon filters. EPA registration is given
to a product only after evidence is submitted to validate that
the labeling claims are true and that it does not impart over 50
ppb of silver to the treated water. EPA registration is an
important selling aid, as it makes the customer aware that the
product is established and reliable. The Aquacell was also
involved in a study performed by the EPA for effectiveness in
removing various waterborne contaminants.
Purific Cooler Models:
We manufacture five different models of Purific water coolers
with varying complexity of filtration systems, designed to meet
the needs of the customers to which they are sold.
Purific 2001 - The Purific 2001 is equipped with our most
comprehensive triple purification and filtration system designed
to protect against potentially harmful foreign contaminates in
drinking water. The system features a pressure regulator and
water monitor with an enclosed filtration case that also serves
as a leak detector with an automatic shutoff system. The target
market is a corporation seeking the best possible water
purification system in light of the events of September 11, 2001.
Purific 500 - Our best selling system is equipped with the
Aquacell multi media and carbon block filtration in addition to
either ultraviolet light or reverse osmosis. The system includes
a pressure regulator and water monitor. The target market is
Fortune 1000 companies. Our filtration systems on this unit have
been tested and validated by the Water Quality Association (WQA),
which is a trade association comprised of 2,600 members in the
household, commercial, industrial and small system water
treatment industry, and has earned the WQA Gold Seal of Approval.
Purific 300 - The Purific 300 combines Aquacell multi-media
filtration with either ultraviolet light or reverse osmosis. The
target market is mid-size companies who have moderate monthly
bottled water bills.
Purific 100 - A basic Aquacell multi-media filtration
combined with a sediment filter comprises the filtration system.
The target market is small companies, or those seeking to
primarily just improve the taste of the tap water.
Purific 50 - Designed for the retail consumer market, the
Purific 50 provides Aquacell multi-media filtration.
Replacement Filters - We also sell replacement filters for
our Purific water coolers. The filtration systems on our
patented water coolers require replacement after 2,000 gallons of
water have passed through the system or after one year from the
date of installation, whichever comes first. We contact our
customers on a regular basis to facilitate timely replacement of
filters. Customers with high water usage often stock replacement
filters. The revenue from replacement filters will be
significant and will increase from year to year as we sell more
water coolers and other systems.
In order to expand the product line to new sales channels, we
are offering a system that will be marketed under the AquaCell
name, which will include one commercial grade filter manufactured
by a large, well-established water filtration company. This
filter is approved by the National Sanitation Foundation, and is
used by the top fast-food, convenience stores and numerous other
food service locations for the treatment of water serving
beverage bars and other food and beverage applications.
Advantages of the Purific Water Cooler
The Purific cooler's main advantages over bottled water are
Cost, Convenience and Quality. Since the tragic events of
September 11, 2001 an additional benefit of the Purific cooler
has emerged, and that is the Security aspect of eliminating
potential risk of bottled water deliveries. Other benefits of
Purific include:
. Saves money. Our self-filling cooler has been proven to save
most companies a considerable amount of money over the costs
of bottled water alternatives.
. No bottles to change. When changing water bottles, most
people spill or splash the water, and often a relatively
strong person must be located to change the bottle. Also
the cleanliness of the hands of the person changing the
bottle is an issue, since anything on their hands will end
up in the water.
. Reduce potential worker's compensation claims. Potential
worker's compensation claims from injuries due to lifting
the 40-pound bottle can be costly.
. No bottles to store. Replacement water bottles are
cumbersome to store, taking up a lot of valuable space in an
office. The higher the rent, the more it costs to store the
water.
. Never run out of water. Since our Purific cooler
continuously refills itself as water is dispensed, the
cooler always has water available when needed.
. No delivery problems. Deliveries of bottled water can
disrupt office operations, as well as pose potential
security risks. Additionally, in large office buildings
wait time for freight elevators can delay bottled water
delivery by several hours, further adding to the
inconvenience of bottled water delivery.
. Freshly filtered and purified water. The quality of bottled
water varies greatly depending upon the source and whether
or not it is filtered or purified. Also, water which has
been stored in certain areas can absorb taste and odor
through the bottle. The water in our Purific water cooler
maintains its freshness as it is constantly being
replenished.
Marketing of the Purific Water Cooler
Beginning in January 2002, Corbett Water Technologies, Inc.,
(CWT) a company with which we had signed an agreement for the
marketing and distribution of our Purific water coolers, built a
sales force through the recruitment of experienced sales
personnel from the largest bottled water delivery companies for
sales of Purific coolers. In late September 2002, CWT made a
decision to restructure its business model, reduced its sales
staff and did not implement a plan for national marketing. As a
result, we restructured our relationship with CWT, whereby CWT
relinquished its exclusive distribution rights, but is continuing
to sell Purific coolers on a non-exclusive basis.
In June 2002, we signed a distribution agreement with
Connecticut Water Service, an investor-owned public water
utility. Connecticut Water markets our Purific cooler to its
customers in Connecticut and other areas in New England. The
program began with Connecticut Water distributing solely to its
commercial customers. The program is now being rolled out to
include marketing of the new AquaCell branded cooler to their
residential customers.
In May 2003 we announced a successful product test that was
funded by a Fortune 100 company on our Purific water cooler. The
results of this test confirmed the competitive advantages of the
Purific system, particularly for the residential market, the
fastest growing segment of the bottled water industry.
Prior to signing these agreements, we sold our Purific
coolers directly to corporations, with an emphasis on Fortune 500
headquarter locations and the US Government under a General
Services Administration contract, to which we continue to sell
directly. Additionally, we have an arrangement with Roto-Rooter
Plumbers for the installation and sales of our Purific coolers.
We intend to maintain a small in-house sales force and rely on
our marketing partners for most of our sales.
Additional channels of distribution are being marketed to
through our AquaCell Media subsidiary, as described below.
Our Water Science Technologies, Inc. Subsidiary
In March 2002, AquaCell closed on its acquisition of Water
Science Technologies (WST), a Tempe, Arizona based manufacturer
of integrated water purification and treatment systems. WST is a
wholly owned subsidiary of AquaCell.
WST operates as a manufacturer of custom designed systems to
meet a variety of water purification and treatment needs. The
company will continue to manufacture certain custom systems for
various applications, and additionally, management intends to
develop targeted product lines for four specific markets, which
we believe will position WST for long-term growth.
The first area of concentration is purification and bottling
systems for water bottling plants, both foreign and domestic.
Bottled water is the fastest growing segment of both the beverage
industry and the water industry. WST has manufactured numerous
systems for bottling plants installed throughout the US, and
Central and South America including systems for brands such as
Culligan, O Premium, and numerous private-label supermarket
brands.
The second area of concentration will be on systems to treat
water for car washes, providing environmentally friendly
recycling and discharge, as well as spot-free rinse. We
currently supply such systems for use in car washes in a regional
southwest area, and will look to expand the program throughout
the US.
The third product line will encompass the restaurant and food
service industry, providing protection of equipment and more
consistent quality of food.
The fourth product line will target emergency drinking water
systems, including the recently designed portable system capable
of converting swimming pool water into drinking water.
Given WST's experience and expertise in manufacturing water
store equipment, the Company will be opening water stores in
various locations, which it will own and/or operate in
conjunction with strategic marketing partners.
We anticipate that these product lines will be marketed by
marketing partners with expertise in the corresponding
industries.
Our AquaCell Media Inc. Subsidiary
In September 2001, we formed a new subsidiary, dedicated to the
selling of advertising space on the bottle label of the
permanently attached five-gallon bottle of our patented self-
filling Purificr Water Cooler.
We are in effect creating a water cooler billboard. Since the
water cooler is a known congregating location, we believe it is
the perfect venue for advertisers. The benefits to advertising
on the Purific bottle label include a high level of viewing
frequency; no clutter from competing ads; and long viewing time -
since pages can't be turned, there is no channel surfing or mouse
clicking; and, it is inexpensive.
Since the bottle is permanently attached to the water cooler,
the label - which can be changed intermittently to coincide with
advertising campaigns - remains intact. The program will be
rolled out to encompass targeted industries such as health care,
brokerage firms, travel agencies, salons, schools and
universities.
The marketing model we have set up for this company will allow
us to maintain ownership of the coolers, and generate revenue
stream from the sales of advertising space.
No revenues were generated by this subsidiary during the year
ended June 30, 2003.
Customers
Our Global Water customers currently include companies across a
broad range of industries including investment banking, consumer
products, aerospace, entertainment, banking, brokerage houses,
manufacturing and insurance. Our customers also include
professional service providers and governmental agencies. Our
WST customers include a broad range of industries including water
bottling, car washes, and various manufacturing facilities.
Production, Raw Materials and Supplies
Our Products are manufactured in our 10,000 square foot
manufacturing facility located in Rancho Cucamonga, California,
and the WST 8,300 square foot facility located in Tempe, Arizona.
Our California plant is located within a 100-mile radius of 95%
of our suppliers allowing for just-in-time inventory. Our product
has a low cost of manufacturing. In our Global Water-Aquacell
subsidiary, less than 10% of product cost is in labor, allowing
for high gross profit margins because our operations do not
require a large full time employee base and, when needed,
temporary employees are readily available.
Our facility utilizes manufacturing processes that follow the
guidelines of the Water Quality Association. The manufacturing
process of our various products includes utilization of injection-
molded parts, for which we own the molds. Multiple vendors have
been identified as sources for parts and supplies for our
products and we do not anticipate any shortages of such
materials.
We maintain a controlled low inventory of finished goods. Upon
completion of manufacture, each product undergoes quality
assurance testing prior to shipping and installation. The raw
materials and components used in these products are commonly
available commodities such as off the shelf water coolers, water
bottles, various fittings, plastic tubing, wiring, valves,
sediment filters, reverse osmosis membrane filters and ultra-
violet lights. Our products are fabricated from these materials
and assembled together with products bought from other companies
to form an integrated product. We do not depend on any single
supplier. If any supplier were to become unable to perform, we
believe we could readily find a substitute source. We are not a
party to any material long-term fixed price supply contracts.
Government Regulation
Federal, state, local and foreign environmental laws and
regulations require substantial expenditures and compliance with
water quality standards and impose liabilities for noncompliance.
We believe that environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor
affecting the marketability of our products. The treatment of
drinking water in the United States is governed by the Safe
Drinking Water Act. The 1996 amendments to the Act emphasize risk-
based standards for contaminants in drinking water, afford small
water supply systems operational flexibility and provide
assistance to water system infrastructures through a multi-
billion-dollar Drinking Water State Revolving Fund. The Fund
program assists public water systems with the financing of the
costs of drinking infrastructure that is necessary to achieve or
maintain compliance with the Safe Drinking Water Act requirements
and to protect public health. The Fund, patterned after the
State Revolving Fund contained in the Clean Water Act, provides
funding to the states to establish a renewable source of
financing for drinking water infrastructure projects. The Fund
program is designed to ensure that the drinking water supplies in
the United States remain safe and affordable, and that systems
that receive funding will be properly operated and maintained.
Regulations under the Safe Water Drinking Act also established
maximum containment levels for a wide variety of chemicals that
may be present in drinking water treatment to meet applicable
standards.
Any changes in applicable regulations or their enforcement may
affect our operations by imposing additional regulatory
compliance costs on our customers, requiring modification of our
products or affecting the market for our products. To the extent
that demand for our products are created by the need to comply
with such enhanced standards or their enforcement, any
modification of the standards or their enforcement may reduce
demand, thereby adversely affecting our business, financial
condition or results of operations. The relaxation or repeal of
any such laws or regulations or the strict enforcement thereof
could also adversely affect our business and prospects.
Conversely, changes in applicable environmental requirements
imposing additional regulatory compliance requirements or causing
stricter enforcement of these laws or regulations could increase
the demand for our products.
Competition
The drinking water purification industry is fragmented and
highly competitive due to the large number of businesses within
certain product areas. We compete with many companies that have
greater market penetration, depth of product line, resources and
access to capital, all of which could be competitive advantages.
Competitors of our Global Water-Aquacell products include:
bottled water brands such as Arrowhead, Deer Park, Poland Spring,
and Sparkletts; water filtration system manufacturers such as
Culligan, which is owned by US Filter Corporation, Brita, which
is owned by Clorox and Pur, which is owned by Proctor and Gamble;
and flat-top point-of-use water cooler manufacturers such as
Oasis, Cordley-Temprite, and Mutual of Omaha's Iinnowave product.
Competitors of our WST subsidiary include water filtration
systems manufacturers such as US Filter, Ionics, and Osmonics.
While we believe that we can deliver our products on an
economically competitive basis, there can be no assurance in that
regard. In addition, many competitors have greater financial
resources than us to finance their expansion and internal growth
opportunities. Consequently, we may encounter significant
competition in our efforts to achieve our strategic goals. There
can be no assurance that our competitors will not develop
products that are superior to ours or achieve greater market
acceptance than our products. Competition could have a material
adverse effect on our ability to consummate arrangements with
customers or enter into strategic business alliances. Moreover,
in response to changes in the competitive environment, we may
make certain pricing, service or marketing decisions or enter
into acquisitions or new ventures that could have a material
adverse effect on our business, financial condition and results
of operations.
Intellectual Property
We own a United States and Canadian patent on our automatic-
refilling purified bottle water cooler. These patents do not
expire until November 20, 2006 and October 2, 2009, respectively.
We have filed for two patents with the US Patent and Trademark
office, which if granted, would provide exclusive rights for
utilizing the water cooler bottle as an advertising mechanism.
We have federally registered our Purific and Water Science
Technologies International trademarks and have pending
applications to federally register our "Never Change Another
Bottle" logo and AquaCell marks. We also conduct business in
California under the name Global Water Solutions, Inc. We intend
to seek appropriate additional trademark or servicemark
registrations in connection with our product and service
offerings.
Research and Development
We have not spent any material amount of money on research and
development during the last two fiscal years.
Employees
As of June 30, 2003, we had 19 employees. None of our
employees are covered under collective bargaining agreements
although we do have employment agreements with certain
executives. Management believes we maintain a good relationship
with our employees.
ITEM 2. PROPERTIES
Our principal executive office and our 10,000 square foot
Global Water-Aquacell manufacturing facility are located in
Rancho Cucamonga, California under a five-year lease that
commenced on January 1, 1999 and expires on December 31, 2003.
That lease has an average annual base rent of $69,600. We also
maintain an 8300 square foot WST manufacturing facility in Tempe,
Arizona under a five (5) year lease that commenced on November 1,
2001 and expires on October 31, 2006. That lease has an average
annual base rent of $55,900. We believe that, if necessary,
alternative space is readily available at comparable rates and on
comparable terms with respect to all of our leased properties.
We also believe that we can obtain additional space necessary to
support increases in our future operation. We believe that the
properties described above are currently protected by adequate
insurance.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock commenced quotation on the American
Stock Exchange on February 12, 2001 following its initial public
offering. The following table sets forth, for the periods
indicated, the last sale prices for the Common Stock as reported
by American Stock Exchange:
Period High Low
($) ($)
Fiscal 2004
7/1/03 - 9/15/03 ..................... $3.05 $2.06
Fiscal 2003
Fourth Quarter ....................... $3.15 $0.94
Third Quarter ........................ 1.30 0.60
Second Quarter ....................... 1.00 0.55
First Quarter ........................ 1.10 0.78
Fiscal 2002
Fourth Quarter ....................... $3.04 $0.83
Third Quarter ........................ 4.18 2.95
Second Quarter ....................... 5.25 3.25
First Quarter ........................ 4.80 3.30
On September 15, 2003, the last sale price of the Common Stock
as reported by AMEX was $2.99. On September 15, 2003, there were
119 holders of record of the Company's Common Stock and, the
Company believes, over 700 beneficial owners of the Company's
Common Stock.
The Company presently intends to retain all earnings for the
Company's continued growth. Depending upon the Company's capital
resources and needs, the Company may pay cash dividends in the
future. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend
upon the Company's earnings, its capital requirements and
financial condition, and other relevant factors, although this
may change based upon the foregoing factors.
Recent Sales of Unregistered Securities
During the year ended June 30, 2003, the Company made the
following sales of unregistered securities:
Consideration Received
and Description of
Underwriting or Exemption
Other Discounts to From If Option, Warrant or
Date Title of Number Market Price Registration Convertible Security,
of Sale Security Sold Afforded to Purchasers Claimed Terms of Exercise or Conversion
-------- ------------ ------- -------------------------- ------------ ----------------------------------------
1/2/03 Options to 184,500 Option granted under 4(2) All exercisable at $0.60 per share until
Purchase 1998 Incentive Plan- 1/02/10 and vesting over 5 year term.
Common Stock No cash received.
4/21/03 Options to 12,500 Option granted under 4(2) All exercisable at $1.14 per share
Purchase 1998 Incentive Plan- through 4/21/10 and vesting over a 5
Common Stock No cash received. year term.
1/22/03 Options to 30,000 Option granted under 4(2) All immediately exercisable at $0.65
Purchase 2002 Director's Stock per share through 1/22/13.
Common Stock Option Plan-
No cash received.
8/24/02 Warrants to 60,000 No cash received 4(2) All exercisable at $0.78 per share.
Purchase until exercise.
Common Stock
3/16/03 Warrants to 150,000 No cash received 4(2) All exercisable at $1.00 per share.
Purchase until exercise.
Common Stock
1/6/03 Common Stock 100,000 Issued as compensation in 4(2) -
connection with financing
transactions.
4/10/03 Common Stock 25,000 Issued as compensation in 4(2) -
connection with financing
transactions.
4/16/03 Preferred 685,000 Issued in connection 4(2); 4(6) Convertible into Common Stock on a
Stock with private placement share for share basis.
at $0.63 per share.
4/16/03 Warrants to 685,000 Issued in connection with 4(2); 4(6) All exercisable at $1.16 per share.
Purchase private placement-
Common Stock No cash received until
exercise.
5/9/03 Preferred 500,000 Issued in connection with 4(2); 4(6) Convertible into Common Stock on a
Stock private placement at $0.75 share for share basis.
per share.
5/9/03 Warrants to 500,000 Issued in connection with 4(2); 4(6) All exercisable at $1.60 per share.
Purchase private placement-
Common Stock No cash received
until exercise.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the
Company with the Commission, statements identified by the words
"believe", "positioned", "estimate", "project", "target",
"continue", "will", "intend", "expect", "future", "anticipates",
and similar expressions express management's present belief,
expectations or intentions regarding the Company's future
performance within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to
place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company has no
obligations to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring
after the date of such statements.
Overview
The following discussions and analysis should be read in
conjunction with the Company's consolidated financial statements
and the notes presented following the consolidated financial
statements. The discussion of results, causes and trends should
not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
For the year ended June 30, 2003 we increased revenues by 51%
to $1,588,000 while cutting our per share losses by 33% and
decreasing our selling, general and administrative expenses by
32% to $3,044,000. This increase in revenues is primarily
attributable to the growing acceptance of our flagship Purificr
Water Cooler in the marketplace.
On May 30, 2003 the Company successfully completed
negotiations for the return of the exclusive distribution rights
for our Purific Water Cooler from Corbett Water Technologies,
Inc. (CWT) and S&B Technical Products, Inc. (S&B).Under the terms
of the agreement, CWT and S&B relinquished the exclusive
distribution rights to AquaCell, but will continue to sell
Purific coolers on a non-exclusive basis in the areas in which it
achieved significant sales. As a direct result of this nine
month negotiation process, during which time these entities did
not purchase any additional coolers, the Company was impeded from
pursuing new marketing avenues or channels of distribution.
While this encumbrance had a negative effect on sales during this
period, management believes that its decision to negotiate for
the return of these rights will, in the long term, prove to be
beneficial for the Company.
The Company is presently pursuing other opportunities for
sales and distribution of its self-filling coolers and does not
anticipate incurring significant marketing costs as it intends to
utilize channels of distribution, including joint-venture
marketing partners, where the selling groups will be responsible
for payment of their own sales and marketing expenses.
During May we completed a successful product test of our
Purific Water Cooler as the first phase of a project funded by a
Fortune 100 company and conducted by a consultant group they
hired for its implementation. Given these favorable results, we
are proceeding with our plans for marketing the Purific cooler to
the residential community, the fastest growing segment of the
bottled water industry, as well as other opportunities.
We recently teamed up with Beau Dietl & Associates (BDA), an
internationally renowned security expert for marketing and sales
of our Purific cooler. BDA sees the delivery of bottled water as
a major security risk that needs to be addressed, which can
easily be rectified with our Purific cooler.
During September 2003 the Company commenced negotiations for a
lease on a 20,000 square foot facility that will triple its
existing manufacturing capabilities.
Results of Operations
For the year ended June 30, 2003 on a consolidated basis, we
increased revenues by 51% to $1,588,000 as compared to $1,049,000
for the similar period of the preceding year. Approximately 1,400
coolers were sold during the year ended June 30, 2003 as compared
to approximately 800 for the prior year. The revenue increase is
primarily attributable to an increase in sales to Corbett Water,
a former distributor, in the amount of approximately $254,000 and
a sales increase by our Water Science Technologies (WST)
subsidiary in the approximate amount of $227,000, attributable to
our first full year of ownership. Revenue resulting from sale of
replacement filters was insignificant during the year ended June
30, 2003. Net loss on a consolidated basis, attributable to
common stockholders, for the year ended June 30, 2003 was
decreased by 26% to $2,814,000 or $0.33 per share, as compared to
$3,804,000 or $0.47 per share for the prior year. The decrease in
the loss is primarily attributable to the increase in revenues,
as well as a reduction in selling, general and administrative
expenses of $1,470,000 or 33%. The significant decrease in the
selling, general and administrative expenses was principally a
result of a $1,226,000 impairment charge impacting only the prior
period.
On a consolidated basis gross margin percentage decreased to
38% for the year ended June 30, 2003 as compared to 46% for the
prior year. This decrease is attributable to the 28% gross margin
maintained by our WST subsidiary. Our Global Water-Aquacell
subsidiary reflected a gross profit margin of approximately 51%
based on material and direct labor costs reflecting a decrease of
6% from the prior year. This decrease is attributable to
increased labor and related costs.
Salaries and wages increased by $291,000 for the year ended
June 30, 2003 over the prior year. This increase is primarily
attributable to salaries incurred by our WST subsidiary of
approximately $203,000 for our first full year of ownership and
payments to senior management in the approximate amount of
$107,000. Legal, accounting and other professional expenses
decreased by approximately $295,000 for the year ended June 30,
2003 primarily attributable to terminated consulting agreements.
Stock based compensation decreased by $429,000 to $199,000 for
the year ended June 30, 2003. Other selling, general and
administrative expenses, consisting primarily of rent- $168,000,
telephone and utilities- $75,000, travel- $62,000, business
promotion- $153,000, insurance- $97,000 and vehicle expenses-
$101,000 increased by approximately $159,000 to $1,166,000 for
the year ended June 30, 2003. During the year ended June 30,
2003 the Company recorded a onetime reduction to fair value, in
the amount of $274,000, of its receivable in connection with the
sale of an investment.
Liquidity and Capital Resources
During the year ended June 30, 2003 we financed our operations
primarily from the collections of receivables in the normal
course of business and the sales of equity securities. During
the year ended June 30, 2003 the Company received net proceeds of
$733,000, after deducting expenses of $73,000, from the sale of
1,185,000 shares if its Series A convertible preferred stock. A
net increase in loans from related parties amounted to $51,000.
Cash used by operations during year ended June 30, 2003
amounted to $799,000. Net loss of $2,434,000 was reduced by non-
cash stock based compensation and loan fee amortization in the
amount of $288,000, reduction of receivable to fair value and
write-off of note and accrued interest in the amount of $333,000,
impairment loss on goodwill of $72,000, depreciation and
amortization of $58,000, provision for bad debts of $21,000 and
increased by a reduction in notes receivable reserve of $188,000.
Cash used by operations was further decreased by a decrease in
accounts receivable in the amount of $96,000 and by accounts
payable and accrued expenses in the amount of $887,000. Net loss
was further decreased by net changes in accrued interest
receivable, prepaid expenses, customer deposits and inventories
amounting to $68,000.
Cash used in investing activities during the year ended June
30, 2003 represented expenditures for property and equipment in
the amount of $11,000 decreased by notes issued for the purchase
of equipment in the amount of $7,000, net of repayments.
Cash provided by financing activities was approximately
$784,000. The Company borrowed $51,000 from related parties.
Sales of Series A convertible preferred stock amounted to
$733,000 net of expenses of $48,000.
Subsequent to June 30, 2003 the Company raised an additional
$2,296,000 from the sale of equity securities, net of expenses of
$259,000.
We have granted warrants, subsequent to our initial public
offering in connection with consulting, marketing and financing
agreements that may generate additional capital of up to
approximately $13,900,000 if exercised. There is no assurance
however, that any of the warrants will be exercised.
During the year ended June 30, 2003 principal payments of
$567,000, which consisted of contributed accrued officers'
salaries, reduced the balance on the $1,750,000 installment notes
receivable to $177,000 at June 30, 2003.
Management believes that its current cash position and cash
flows expected to be generated from future operations will be
sufficient to meet presently anticipated needs for working
capital and capital expenditures through at least the next 12
months; however, there can be no assurance in that regard. The
Company presently has no material commitments for future capital
expenditures.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report the
Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the
Company's chief executive officer and chief financial officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14
adopted under the Securities Exchange Act of 1934. Based upon
that evaluation, the chief executive officer and chief financial
officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 12.
ITEM 10. EXECUTIVE COMPENSATION.
See Item 12.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
See Item 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 9, 10, 11, and 12 is
incorporated by reference to the information included in the
Company's definitive proxy statement in connection with the 2003
Annual Meeting of Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 25, 2003 AQUACELL TECHNOLOGIES, INC.
(Registrant)
By: /s/ JAMES C. WITHAM
-------------------------------
Name: James C. Witham
Title: Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ James C. Witham Chairman of the Board of Directors September 25, 2003
---------------------- and Chief Executive Officer
James C. Witham (Principal Executive Officer)
/s/ Karen B. Laustsen Director and President September 25, 2003
----------------------
Karen B. Laustsen
/s/ Gary S. Wolff Director and Chief Financial Officer September 25, 2003
---------------------- (and Principal Accounting Officer)
Gary S. Wolff
/s/ Glenn Bergenfield Director September 25, 2003
----------------------
Glenn Bergenfield
/s/ Dr. William DiTuro Director September 25, 2003
----------------------
Dr. William DiTuro
EXHIBIT INDEX
Exhibit
Number Description
--------- ---------------------------------------------------
31.1 CEO's Certification pursuant to Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934,
as amended
31.2 CFO's Certification pursuant to Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934,
as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
AQUACELL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT AUDITORS............................. F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet, June 30, 2003.................. F-2
Consolidated Statements of Operations for the years ended
June 30, 2003 and 2002.............................. F-3
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 2003 and 2002.......... F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2003 and 2002.............................. F-5
Notes to Consolidated Financial Statements................. F-7
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Aquacell Technologies, Inc.
We have audited the accompanying consolidated balance sheet of
Aquacell Technologies, Inc. and Subsidiaries as of June 30, 2003, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended
June 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted out audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Aquacell Technologies, Inc. and Subsidiaries as of June 30, 2003,
and the results of their operations and their cash flows for each of
the two years in the period ended June 30, 2003 in conformity with
accounting principles generally accepted in the United States of
America.
WOLINETZ, LAFAZAN & COMPANY, P.C.
Rockville Centre, New York
September 15, 2003
F-1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2003
ASSETS
Current assets:
Cash ......................................................... $ 32,000
Notes receivable, including accrued interest of $69,000 ...... 160,000
Accounts receivable, net of allowance of $25,000 ............. 74,000
Inventories .................................................. 84,000
Prepaid Expenses ............................................. 123,000
-----------
Total current assets ...................................... 473,000
-----------
Property and equipment, net ..................................... 38,000
-----------
Other assets:
Goodwill ..................................................... 1,042,000
Patents, net ................................................. 98,000
Security deposits ............................................ 14,000
-----------
Total other assets......................................... 1,154,000
-----------
$1,665,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 735,000
Accrued expenses ............................................ 502,000
Preferred stock dividend payable............................. 12,000
Customer deposits ........................................... 23,000
Current portion of long term note ........................... 4,000
Loans payable - related parties ............................. 80,000
-----------
Total current liabilities ................................ 1,356,000
Long term note, net of current portion ......................... 3,000
-----------
Total liabilities ........................................ 1,359,000
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - Class A, par value $.001;
1,870,000 shares authorized;
1,185,000 issued and outstanding ............................ 1,000
Preferred stock, par value $.00l;
8,130,000 shares authorized;
no shares issued ............................................ -
Common stock, par value $.001;
40,000,000 shares authorized;
8,726,224 shares issued and outstanding ..................... 9,000
Additional paid-in capital ..................................... 13,544,000
Accumulated deficit ............................................ (12,909,000)
-----------
645,000
Unamortized deferred compensation .............................. (339,000)
-----------
Total stockholders' equity ............................... 306,000
-----------
$1,665,000
===========
The accompanying notes are an integral part of these financial statements.
F-2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------
2003 2002
Revenue: ------------- -------------
Net sales .................................... $ 1,582,000 $ 1,042,000
Rental income ................................ 6,000 7,000
------------- -------------
1,588,000 1,049,000
Cost of sales .................................. 990,000 565,000
------------- -------------
Gross profit ................................... 598,000 484,000
------------- -------------
Selling, general and administrative expenses:
Salaries and wages ........................... 1,290,000 999,000
Legal, accounting and other professional
expenses .................................. 172,000 467,000
Stock based compensation...................... 199,000 628,000
Other ........................................ 1,166,000 1,007,000
Impairment loss on investment................. - 1,226,000
Impairment loss on goodwill................... 72,000 187,000
Reduction of receivable to fair value......... 274,000 -
Write-off of note receivable and accrued
interest .................................. 59,000 -
Recovery of notes-receivable reserve.......... (188,000) -
------------- -------------
3,044,000 4,514,000
------------- -------------
Loss from operations before other income
(expense).................................. (2,446,000) (4,030,000)
------------- -------------
Other income (expense):
Interest expense ............................. (41,000) -
Interest income .............................. 53,000 126,000
Other income ................................. - 100,000
------------- -------------
12,000 226,000
------------- -------------
Net loss for the year .......................... $ (2,434,000) $ (3,804,000)
============= =============
Weighted average common shares outstanding-
basic and diluted ........................... 8,655,000 8,149,000
============= =============
Loss attributable to common stockholders:
Net loss .................................... $ (2,434,000) $ (3,804,000)
Preferred stock dividends.................... 380,000 -
------------- -------------
Loss attributable to common stock holders.... $ (2,814,000) $ (3,804,000)
============= =============
Net loss per common share.................... $ (0.33) $ (0.47)
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
---------------- ----------------
Additional Unamortized
Number Par Number Par Paid-in Deferred Accumulated Treasury
of Shares Value of Shares Value Capital Compensation Deficit Stock Total
----------------------------------- --------- ------ --------- ------ ----------- ------------ ------------- ---------- ------------
Balances- July 1, 2001 ............ 7,733,250 $7,000 $ 9,441,000 $ (308,000) $ (6,671,000) $ 2,469,000
Issuance of common stock for
consulting services to
the Company .................... 240,000 - 324,000 (324,000) 0
Issuance of common stock warrants
for services to the Company .... 589,000 (589,000) 0
Amortization of deferred costs .... 628,000 628,000
Issuance of common stock for
investment in Corbett
Water Technologies, Inc. ....... 451,807 1,000 1,499,000 1,500,000
Issuance of common stock for
acquisition of Water Science
Technologies, Inc., including
55,337 shares issued to
vendors of acquired company .... 258,589 1,000 1,188,000 1,189,000
Surrender of 82,422 shares of
common stock by officers
in payment of principal and
interest on notes receivable ... $(251,000) (251,000)
Net loss for the year ended
June 30, 2002 .................. (3,804,000) (3,804,000)
--------- ------ --------- ------ ----------- ------------ ------------- ---------- ------------
Balances- June 30, 2002 ........... 8,683,646 9,000 13,041,000 (593,000) (10,475,000) (251,000) 1,731,000
Sale of 1,185,000 shares of
preferred stock in private
placements, net of costs
of $73,000 ..................... 1,185,000 $1,000 732,000 733,000
Amortization of deferred costs .... 199,000 199,000
Write-off of unamortized (110,000) 110,000 0
deferred compensation ..........
Issuance of 125,000 shares of
common stock in connection
with financing arrangement ..... 125,000 - 89,000 89,000
Issuance of 160,000 common stock
warrants in connection with
credit facility agreement ...... 43,000 (43,000) 0
Retirement of 82,422 shares of
common stock held in
the treasury ................... (82,422) - (251,000) 251,000 0
Issuance of 150,000 common stock
warrants in connection with
consulting agreement ........... 12,000 (12,000) 0
Deemed dividends on beneficial
conversion feature of 368,000
preferred stock offerings ...... (368,000) 0
Dividends on Class A
preferred stock ................ (12,000) (12,000)
Net loss for the year ended
June 30, 2003 .................. (2,434,000) (2,434,000)
Balances- June 30, 2003 ........... 1,185,000 $1,000 8,726,224 $9,000 $13,544,000 $ (339,000) $(12,909,000) $ - $ 306,000
========= ====== ========= ====== =========== ============ ============= ========== ============
The accompanying notes are an integral part of these financial statements.
F-4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
-----------------------------
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss ......................................... $ (2,434,000) $ (3,804,000)
Adjustment to reconcile net loss to net cash used in operating activities:
Issuance of common stock in connection
with financing transactions ................. 89,000 -
Impairment loss on investment .................. - 1,226,000
Impairment loss on goodwill .................... 72,000 187,000
Reduction of reserve on notes receivable ....... (188,000) -
Reduction of receivable to fair value .......... 274,000 -
Write-off of note receivable and
accrued interest ............................ 59,000 -
Stock based compensation ....................... 199,000 628,000
Provision for bad debts ........................ 21,000 1,000
Depreciation and amortization .................. 58,000 57,000
Changes in:
Accounts receivable ............................ 96,000 (120,000)
Accrued interest receivable .................... (53,000) -
Prepaid expenses and other current assets ...... 93,000 80,000
Inventories .................................... 18,000 55,000
Security deposits .............................. 3,000 -
Accounts payable ............................... 17,000 457,000
Accrued expenses ............................... 870,000 487,000
Customer deposits .............................. 7,000 (43,000)
-------------- --------------
Net cash used in operating activities .... (799,000) (789,000)
-------------- --------------
Cash flows from investing activities:
Notes issued for purchase of property and
equipment, net of payments .................. 7,000 -
Collections on notes receivable ................ - 498,000
Purchase of property and equipment ............. (11,000) (6,000)
Cash balance of acquired subsidiary ............ - 25,000
-------------- --------------
Net cash provided by (used in)
investing activities .................. (4,000) 517,000
-------------- --------------
Cash flows from financing activities:
Loans and advances from related parties ........ 51,000 25,000
Proceeds from private placements of
preferred stock ............................. 781,000 -
Expenses of offerings .......................... (48,000) -
-------------- --------------
Net cash provided by financing
activities ............................ 784,000 25,000
-------------- --------------
Decrease in cash ................................. (19,000) (247,000)
Cash, beginning of year .......................... 51,000 298,000
-------------- --------------
Cash, end of year ................................ $ 32,000 $ 51,000
============== ==============
The accompanying notes are an integral part of these financial statements.
F-5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended June 30,
-----------------------------
2003 2002
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid for interest ......................... $ 36,000 $ -
Supplemental schedule of non-cash investing and financing activities:
Note receivable payments of principal and
interest made by officers/
stockholders with their shares of the
Company's common stock
recorded as treasury stock .................. $ - $ 251,000
Issuance of common stock in connection with
investment ................................. $ - $ 1,500,000
Issuance of common stock and warrants for
services ................................... $ 55,000 $ 913,000
Issuance of common stock to acquire
subsidiary ................................. $ - $ 1,000,000
Issuance of common stock to satisfy
indebtedness to acquired subsidiary's
vendors .................................... $ - $ 189,000
Principal payments on notes receivable by
conversion of accrued officers
salaries ................................... $ 567,000 $ 349,000
Issuance of preferred stock in private
placement for expenses of the
offering ................................... $ 25,000 $ -
Retirement of 82,422 shares of treasury
stock ...................................... $ 251,000 $ -
Dividends payable on preferred stock .......... $ 12,000 $ -
Consideration received for sale of
investment ................................. $ 274,000 $ -
Deemed dividends on preferred stock ........... $ 368,000 $ -
Write-off of unamortized deferred
compensation ............................... $ 110,000 $ -
The accompanying notes are an integral part of these financial statements.
F-6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Note A - Description of Business
AquaCell Technologies, Inc. was incorporated in Delaware on March
19, 1997 and its principal business activity is the manufacture and
sale of products for water filtration and purification. The Company
conducts substantially all of its business in the United States.
As shown in the accompanying financial statements, the Company
has incurred substantial net losses since inception and utilized
substantial cash in operating activities. The Company expects its
operations will provide sufficient cash flows through June 30, 2004.
There is no assurance, however, that profitable operations will ever
be attained or that the Company will ever attain positive cash flow.
Note B - Summary of Significant Accounting Policies
[1] Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of AquaCell Technologies, Inc., and its wholly owned
subsidiaries (the "Company"). Such subsidiaries are Global Water
Aquacell, Inc., incorporated December 21, 1998, and Water Science
Technologies, Inc., acquired on March 19, 2002. AquaCell Media, Inc.,
formed on September 10, 2001, is a wholly owned subsidiary of the
Company that had no revenues through June 30, 2003. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
[2] Inventories:
Inventories are carried at the lower of cost, determined using
the FIFO (first-in, first-out) method or market.
[3] Property and equipment:
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets which
approximates three to five years.
[4] Goodwill:
Goodwill represents the excess of the purchase price over the
fair value of net assets of a business acquired. The Company has
adopted Statements of Financial Accounting Standards No. 142 (SFAS
142), "Goodwill and Other Intangible Assets". The Company operates as
a single integrated business, and as such has one operating segment
which is also the reportable unit. Fair value of the reporting unit is
determined by comparing the fair value of the unit with its carrying
value, including goodwill. Impairment tests are performed using
discounted cash flow analysis and estimates of sales proceeds. The
annual evaluation of goodwill is performed at June 30th, the end of
the Company's fiscal year.
[5] Patents:
The value of patents is amortized over nine years, their
remaining useful lives at date of acquisition, using the straight-line
method. Patents at June 30, 2003, are stated net of accumulated
amortization of approximately $99,000. Amortization expense was
$22,000 for the years ended June 30, 2003 and 2002, respectively.
[6] Revenue recognition:
Revenues are recorded at the time our products are shipped unless
we agreed to install the products, in which case we recognize revenue
at the time of installation. Rental income from coolers is recognized
on a straight-line basis over the term of the rental agreement.
F-7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note B - Summary of Significant Accounting Policies (continued)
[7] Advertising:
Advertising costs are expensed as incurred. Advertising expense
for the years ended June 30, 2003 and 2002, was approximately $3,000
and $42,000, respectively.
The costs of direct response advertising, whose primary purpose
is to elicit sales to customers and that should result in probable
future benefits are capitalized. Advertising costs capitalized at
June 30, 2003, and included in prepaid expenses were approximately
$93,000. These costs will be written off when first placed into
service.
[8] Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
[9] Income taxes:
The Company accounts for income taxes using the asset and
liability method described on SFAS No. 109, "Accounting For Income
Taxes, the objective of which is to establish deferred tax assets and
liabilities for the temporary differences between the financial
reporting and the tax bases of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are
realized or settled. A valuation allowance related to deferred tax
assets is recorded when it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
[10] Net loss per common share:
Loss per common share is based upon the weighted average number
of common shares outstanding during the year. Diluted loss per common
share is the same as basic loss per share, as the effects of
potentially dilutive securities (see Notes H [2] and H [4]) are
antidilutive. Losses attributable to common stock have been adjusted
for the preferred stock dividends.
[11] Long-lived assets:
The Company accounts for the impairment and disposition of long-
lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets to Be Disposed Of." In accordance
with SFAS No. 121, long-lived assets to be held are reviewed whenever
events or changes in circumstances indicate that their carrying value
may not be recoverable. The Company periodically reviews the carrying
value of long-lived assets to determine whether or not an impairment
to such value has occurred, and has determined that as of June 30,
2003, that impairment, where appropriate, was recorded in the
financial statements.
[12] Concentrations of credit risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of trade
accounts receivables and notes receivable. The Company performs
ongoing credit evaluations of its customers' financial condition, but
does not require collateral to support such receivables.
The Company utilizes a limited number of suppliers for certain
components used in its products but has no long-term supply contracts
with them.
F-8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note B - Summary of Significant Accounting Policies (continued)
[13] Financial instruments:
The carrying amounts of the Company's cash, notes receivables,
accounts receivable, accounts payable, customer deposits and loans
payable to related parties, approximate fair value.
[14] Stock compensation plans:
The Company applies Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock-based compensation plans.
The Company does not recognize compensation expense for stock options
granted under the plans as the exercise price of the option on the
date of grant is equal to the fair market value as of that date.
[15] New accounting pronouncements:
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 as
well as all purchase method business combinations completed after June
30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. The Company has adopted
SFAS 141 for the year ended June 30, 2002.
SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121. The
Company has adopted SFAS No. 142 for the year ended June 30, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 amends
existing accounting guidance on asset impairment and provides a single
accounting model for long-lived assets to be disposed of. Among other
provisions, the new rules change the criteria for classifying an asset
as held-for-sale. The standard also broadens the scope of business to
be disposed of that qualify for reporting as discontinued operations,
and changes the timing of recognizing losses on such operations. The
Company has adopted SFAS 144 for the year ended June 30, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS No. 148 are effective
for financial statements for the year ended June 30, 2003. SFAS No.
148 did not have a material impact on the Company's consolidated
financial statements, as the adoption of this standard does not
require the Company to change, and the Company does not plan to
change, to the fair value based method of accounting for stock-based
compensation.
Note C - Inventories:
Inventories consist of the following at June 30, 2003:
Raw materials.............. $ 69,000
Work in progress........... 15,000
---------
$84,000
=========
F-9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note D - Property and Equipment:
Property and equipment is summarized as follows at June 30, 2003:
Furniture and fixtures.......................... $ 35,000
Equipment office................................ 95,000
Machinery and equipment......................... 122,000
Leasehold improvements.......................... 10,000
Rental units.................................... 9,000
Truck........................................... 11,000
---------
282,000
Less accumulated depreciation................... 244,000
---------
$ 38,000
Depreciation expense was $36,000 and $35,000 for the year ended
June 30, 2003 and 2002, respectively.
Note E - Notes Receivable
At June 30, 2003, the notes receivable consisted of the balances
of notes aggregating $268,000 due from non-director/employee
stockholders and entities owned by them bearing an annual interest
rate of 8%.
The first note, with a balance of $91,000, is unsecured and
matured October 2002. The note that matured in October 2002 was
extended for one year. In July 2003 the Company received a $68,000
principal payment plus accrued interest on this note and extended the
remaining balance to June 30, 2004.
The remaining notes, aggregating $177,000, were in the original
principal amount of $1,750,000, maturing August 16, 2001 and were
extended to September 16, 2001. At September 16, 2001 the notes were
restructured into twelve-month installment notes collateralized by
marketable securities with the first installment due October 16, 2001.
The Company recorded an adjustment to reflect a reduction in the
estimated fair value of these notes of $365,000 at June 30, 2001.
Officers/stockholders of AquaCell have personally guaranteed up to
$1,750,000 of the notes and have offered as collateral designated
assets. Installment payments of $438,000 were received by the Company
and the officer/stockholders have paid $1,135,000 of the remaining
principal balance of $1,312,000 and $32,000 in interest through June
30, 2003. These payments were made through contribution of salaries
in the amount of $916,000 and surrender of 82,422 shares of the
Company's common stock, valued at $251,000 through June 30, 2003.
Such shares were recorded as treasury stock and retired by the Company
at December 31, 2002. In January 2003 the collateral underlying the
guarantees was released.
Interest receivable at June 30, 2003 amounted to $69,000.
At June 30, 2003, the adjustment for reduction in the reserve
against these notes was decreased by $188,000 from $365,000 to
$177,000. Such decrease has been reported in the statement of
operations for the year ended June 30, 2003.
Note F - Receivable from Sale of Investment
At June 30, 2003, the receivable of $274,000 represented the
consideration received for the sale by the Company of its 15% interest
in a privately held corporation. The receivable is payable over three
years and bears interest at the rate of 4% per annum. Interest is
payable on a semi-annual basis. Principal payments will be made from
proceeds received from the sale of their AquaCell common stock in
excess of $1,339,000 and, if required, from 5% of future revenues to
be generated by our Global Water-Aquacell subsidiary.
At June 30, 2003 the Company recognized a fair value reduction of
$274,000 on this receivable. Such reduction has been charged to
operations during the year ended June 30, 2003.
Note G - Loans Payable - Related Parties
At June 30, 2003 loans payable to related parties consist of
unsecured demand interest free loans of $55,000 and an unsecured
demand loan with nominal interest in the amount of $25,000.
F-10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note H - Equity Transactions
[1] Series A Convertible Preferred Stock:
During March 2003 the Company completed a private placement of
685,000 shares of newly designated Series A Convertible Preferred
Stock. The offering consisted of one share of class A convertible
preferred stock at a price of $0.63 per share and one Class A common
stock purchase warrant exercisable at $1.16 per share. Both the
preferred stock and warrant contain certain call features. The Series
A Convertible Preferred Stock carries an 8% dividend and is
convertible into the Company's common stock on a one for one basis.
Based on the effective conversion price of the preferred stock using
relative fair value of $154,000 attributable to the warrants the
Company recognized a beneficial conversion feature of $158,000 as a
deemed dividend to the holders of the convertible preferred stock. In
connection with this offering the Company received gross proceeds of $
406,000. As part of this offering 40,000 shares, valued at $25,200,
were issued to the Company's attorney as consideration for expenses of
the offering.
During May 2003 the Company completed an additional private
placement of 500,000 shares of its newly designated Series A
Convertible Preferred Stock. The offering consists of one share of
class A convertible preferred stock at a price of $0.75 per share and
one Class A common stock purchase warrant exercisable at $1.60 per
share. Both the preferred stock and warrant contain certain call
features. Based on the effective conversion price of the preferred
stock using a relative fair value of $208,000 attributable to the
warrants the Company recognized a beneficial conversion feature of
$210,000 as a deemed dividend to the holders of the convertible
preferred stock. In connection with this offering the Company received
gross proceeds of $ 375,000. Expenses of the offering amounted to $
48,000.
[2] Stock option plans:
During August 1998, the Company adopted the 1998 Incentive Stock
Plan (the "Plan") under which options (either incentive or
nonqualified), stock appreciation rights, stock and other awards,
covering an aggregate amount of 1,000,000 shares of common stock, may
be granted to officers, directors, employees and consultants of the
Company. The exercise price established for any awards granted under
the Plan, shall be determined by a Compensation Committee appointed by
the Company's Board of Directors. The exercise price of incentive
stock options cannot be less than 100% (110% for 10% or greater
shareholder employees) of the fair market value ("FMV") at the date of
grant and the exercise price of nonqualified options cannot be less
than 85% of the FMV at the date of grant. The exercise period of
incentive options cannot extend beyond 10 years from the date of grant
and nonqualified options cannot extend beyond 15 years from the date
of grant.
During January 2002, the Board of Directors adopted a Director's
Option Plan covering an aggregate amount of 500,000 shares of common
stock. As of June 30, 2003, 30,000 options have been granted from
this plan.
A summary of stock option activity under both plans is as
follows:
Year Ended June 30,
-------------------------------------------------------
2003 2002
--------------------------- ---------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- ---------- ----------------
Balance, July 1.......... 551,000 $ 2.41 148,000 $ 3.06
Options granted..... 227,000 .64 406,000 2.17
Options cancelled... (272,000) 3.74 (3,000) 2.59
---------- ----------
Balance, June 30......... 506,000 $ .90 551,000 $ 2.41
========== ==========
Exercisable, June 30..... 188,000 $ 1.02 196,000 $ 2.60
========== ==========
F-11
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note H - Equity Transactions (continued)
[2] Stock option plans (continued)
The following table presents information relating to stock options
outstanding at June 30, 2003:
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------
Exercise Weighted-Average Weighted-Average Weighted-Average
Price Shares Exercise Price Remaining Life in Years Shares Exercise Price
-------- ------ ---------------- ----------------------- ------ ----------------
0.60 185,000 6.5
0.65 30,000 9.6 30,000
1.00 75,000 1.2 69,000
1.14 12,000 6.8
1.15 60,000 1.9 60,000
1.15 60,000 3.8 12,000
1.16 84,000 5.9 17,000
------- ---------------------- -------
506,000 $0.90 4.9 188,000 $1.02
======= ====================== =======
If the options had been accounted for under SFAS 123, net loss
attributable to common stockholders for the years ended June 30, 2003
and 2002, would have been $(2,876,000) OR $(0.33) per common share,
and $(4,064,000) or $(0.50) per common share, respectively. The fair
value of options granted during the years ended June 30, 2003 and June
30, 2002, was $0.27 and $0.64 per share on the date of grant,
respectively. The options were valued utilizing the Black-Scholes
valuation method using the following assumptions: risk-free interest
rate of 3.1% and 4.99%, volatility of 33% and 42% and expected lives
of five and three years, respectively.
[3] Issuances of common stock:
In connection with a six-month consulting agreement (see Note H
(4)) the Company issued 10,000 shares of its common stock valued at
$34,000. The value of the stock was amortized over the six-month life
of the agreement. Amortization amounted to $34,000 during the year
ended June 30, 2002.
In connection with a six-month consulting agreement (see Note H
(4)) the Company issued 10,000 shares of its common stock valued at
$42,000. The value of the stock was amortized over the six-month life
of the agreement. Amortization amounted to $42,000 during the year
ended June 30, 2002.
In connection with a five-year consulting agreement (see Note H
(4)) the Company issued 120,000 shares of its common stock valued at
$150,000. The value of the stock is being amortized over the five-
year life of the agreement. Amortization amounted to $30,000 during
the year ended June 30, 2003, and $4,000 during the year ended June
30, 2002.
In connection with a five-year consulting agreement (see Note H
(4)) the Company issued 100,000 shares of its common stock valued at
$98,000. The value of the stock is being amortized over the five-year
life of the agreement. Amortization amounted to $20,000 during the
year ended June 30, 2003, and $2,000 during the year ended June 30,
2002.
In connection with financing transactions, during January and
April 2003, the Company issued 125,000 shares of its common stock
valued at $89,000. Amortization amounted to $89,000 during the year
ended June 30, 2003.
F-12
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note H - Equity Transactions (continued)
[4] Issuances of common stock purchase warrants:
In connection with a financial consulting agreement, the Company
issued a warrant to purchase 200,000 shares of the Company's common
stock to be exercisable for a five-year period at $4.20 per share.
The Company estimated the fair value of these warrants to be $370,000,
utilizing the Black-Scholes valuation method using the following
assumptions: a risk-free interest rate of 4.99%, volatility of 42% and
a term of five years. Such amount was amortized over six months.
Amortization amounted to $308,000 during the year ended June 30, 2002.
In connection with a three-year consulting agreement, entered
into in August 2001, the Company issued a warrant to purchase 75,000
shares of the Company's common stock to be exercisable for a three-
year period at $4.40 per share. The Company estimated the fair value
of these warrants to be $110,000, utilizing the Black-Scholes
valuation method using the following assumptions: a risk-free interest
rate of 4.58%, volatility of 42%, and a term of three years. Such
amount is being amortized to expense over three years. Amortization
amounted to $37,000 and $31,000 during the years ended year June 30,
2003 and 2002, respectively.
In connection with a six-month consulting agreement, entered into
in September 2001, the Company issued warrants to purchase 100,000
shares of the Company's common stock to be exercisable for a three-
year period (50,000 at $4.50 per share and 50,000 at $5.50 per share).
The Company estimated the fair value of these warrants to be $79,000,
utilizing the Black-Scholes valuation method using the following
assumptions: a risk-free interest rate of 5.99%, volatility of 42%,
and a term of three years. Such amount was amortized to expense over
six months. Amortization amounted to $79,000 during the year ended
June 30, 2002.
In connection with a six-month consulting agreement, entered into
in October 2001, the Company issued warrants to purchase 100,000
shares of the Company's common stock to be exercisable for a three-
year period (50,000 at $4.50 per share and 50,000 at $5.50 per share).
The Company estimated the fair value of these warrants to be $83,000,
utilizing the Black-Scholes valuation method using the following
assumptions: a risk-free interest rate of 3.1%, volatility of 33.33%,
and a term of three years. Such amount is being amortized to expense
over six months. Amortization amounted to $83,000 during the year
ended June 30, 2002.
In connection with a distribution agreement (See Note K), the
Company issued warrants to purchase 300,000 shares of the Company's
common stock to be exercisable for a five-year period (100,000,
100,000, and 100,000 at exercise prices of $5.00, $6.00, and $7.00,
per share respectively). The Company estimated the fair value of
these warrants to be $283,000, utilizing the Black-Scholes valuation
method using the following assumptions: a risk-free interest rate of
3.1%, volatility of 33.33%, and a term of five years. Such amount is
being amortized to expense over five years. During the year ended June
30, 2003 the agreement was amended and the 100,000 warrants
exercisable at $6.00 per share and the 100,000 warrants exercisable at
$7.00 per share were to be returned to the Company and cancelled. The
unamortized portion of these warrants, in the amount of $110,000, was
written off to additional paid in capital. Amortization amounted to
$54,000 and $42,000 during the years ended June 30, 2003 and 2002
respectively.
In connection with a five-year consulting agreement, entered into
in May 2002, the Company issued a warrant to purchase 100,000 shares
of the Company's common stock to be exercisable for a five-year period
at $3.30 per share. The Company estimated the fair value of these
warrants to be $9,000, utilizing the Black-Scholes valuation method
using the following assumptions: a risk-free interest rate of 3.1%,
volatility of 33.33%, and a term of five years. Such amount is being
amortized to expense over five years. Amortization amounted to $2,000
during the year ended June 30,2003 and was insignificant during the
year ended June 30, 2002.
In connection with a one-year consulting agreement, entered into
in May 2002, the Company issued a warrant to purchase 50,000 shares of
the Company's common stock to be exercisable for a five-year period at
$1.05 per share. The Company estimated the fair value of these
warrants to be $18,000, utilizing the Black-Scholes valuation method
using the following assumptions: a risk-free interest rate of 3.1%,
volatility of 33.33%, and a term of five years. Such amount is being
amortized to expense over one year. Amortization amounted to $16,000
and $2,000 during the years ended June 30, 2003, and 2002
respectively.
F-13
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note H - Equity Transactions (continued)
[4] Issuances of common stock purchase warrants (continued)
In connection with a five-year consulting agreement, entered into
in June 2002, the Company issued warrants to purchase 200,000 shares
of the Company's common stock to be exercisable for a five-year period
(100,000 and 100,000 at exercise prices of $3.00 and $5.00, per share,
respectively). The Company estimated the fair value of these warrants
to be $6,000, utilizing the Black-Scholes valuation method using the
following assumptions: a risk-free interest rate of 3.1%, volatility
of 33.33%, and a term of five years. Such amount is being amortized
to expense over five years. Amortization was $1,000 during the year
ended June 30, 2003 and was insignificant during the year ended June
30, 2003.
In connection with a one-year credit facility agreement, entered
into in August 2002, the Company issued warrants to purchase 160,000
shares of common stock to be exercisable for a five-year period at
$.78 per share. The Company estimated the fair value of these warrants
to be $43,000 utilizing the Black-Scholes valuation method using the
following assumptions: a risk-free interest rate of 3.1%, volatility
of 33.33% and a term of five years. Such amount is being amortized to
expense over one year. Amortization amounted to $36,000 during the
year ended June 30, 2003.
In connection with a one-year consulting agreement, entered into
in March 2003, the Company issued a warrant to purchase 150,000 shares
of common stock to be exercisable for a two-year period at $1.00 per
share. The Company estimated the fair value of this warrant to be
$12,000 utilizing the Black-Scholes valuation method using the
following assumptions: a risk-free interest rate of 3.1%, volatility
of 33.33% and a term of two years. Such amount is being amortized to
expense over one year. Amortization amounted to $3,000 during the year
ended June 30, 2003.
In connection with a private placement of series A convertible
preferred stock completed in March 2003, the Company issued warrants
to purchase 685,000 shares of common stock to be exercisable for a
five-year period at $1.16 per share (See Note H (1) above).
In connection with a private placement of series A convertible
preferred stock completed on May 2003, the Company issued warrants to
purchase 500,000 shares of common stock to be exercisable for a five-
year period at $1.60 per share (See Note H (1) above).
At June 30, 2003, the Company had warrants outstanding as follows:
Exercise Price Shares Expiration Date
-------------- ------ ---------------
.78 160,000 August 2007
1.00 150,000 March 2005
1.16 685,000 March 2008
1.60 500,000 May 2008
4.40 75,000 August 2004
4.50 50,000 September 2004
5.50 50,000 September 2004
4.50 50,000 October 2004
5.00 100,000 October 2006
5.50 50,000 October 2004
4.20 200,000 May 2006
8.25 120,000 February 2006
3.30 100,000 May 2007
1.05 50,000 May 2007
3.00 100,000 June 2007
5.00 100,000 June 2007
---------
2,540,000
=========
At June 30, 2003, the weighted average exercise price of the
outstanding warrants was $2.64 and the weighted average remaining
contractual life of the warrants was 3.58 years.
F-14
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note H - Equity Transactions (continued)
[5] Shares reserved:
At June 30, 2003, the Company has reserved 5,225,000 shares of
common stock for issuance upon conversion of preferred stock and
exercise of options and warrants.
Note I - Acquisition:
On March 19, 2002, the Company completed the acquisition of 100%
of the issued and outstanding common stock of Water Science
Technologies, Inc., a privately owned Arizona Corporation ("WST").
The purchase price was the issuance of 203,252 shares at a price of
$4.92 per share, for a total of $1,000,000, as calculated by taking
the average closing price of AquaCell common stock on the five
business days immediately preceding the signing of the agreement of
October 23, 2001. In addition, the Company issued 55,337 shares of
its common stock at $3.43 per share to WST vendors as calculated by
taking the average closing price of AquaCell common stock for five
days immediately preceding the closing on March 19, 2002.
The primary reasons for the acquisition of WST were the synergy
with our existing business and the addition of new capabilities to our
presence in the water industry with its history as a manufacturer of
integrated water purification and treatment systems. The purchase
price was a negotiated price between the parties based upon comparable
industry valuations. There are no contingent payments, options, or
commitments as part of this acquisition.
The transaction has been accounted for under the purchase method.
Accordingly, the consolidated balance sheet includes the assets and
liabilities of WST at June 30, 2002 and the consolidated statements of
operations include the results of WST from March 19, 2002. The
acquisition resulted in excess cost over fair value of net assets
acquired of $1,301,000. Pursuant to the provisions of SFAS 142, the
Company recorded an impairment loss of $72,000 for the year ended June
30, 2003 and an impairment loss of $187,000, for the year ended June
30, 2002. Such impairment losses resulted from the Company's
determination of fair value using present value cash flow analysis.
On the basis of a pro forma consolidation of the results of
operations as if the acquisition had taken place at July 1, 2000,
unaudited consolidated net revenues, net loss, and loss per share for
the year ended June 30, 2002, would have been approximately
$1,516,000, $(3,938,000), and $(0.48); and for the year ended June 30,
2001, would have been approximately $1,344,000, $(3,042,000), and
$(0.45), respectively.
A condensed unaudited balance sheet of WST at the date of
acquisition is presented below:
ASSETS
Current assets $ 131,000
Property and equipment, net 13,000
Deposits 5,000
-------------
$ 149,000
=============
LIABILITIES AND STOCKHOLDERS DEFICIENCY
Current liabilities $ 450,000
Stockholders' deficiency (301,000)
-------------
$ 149,000
=============
F-15
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note J - Income Taxes:
At June 30, 2003, the Company had available federal net operating
loss carryforwards to reduce future taxable income, if any of
approximately $8,200,000. The net operating loss carryforwards expire
at various dates through 2023.
At June 30, 2003, the Company has a deferred tax asset of
approximately $3,526,000, representing the benefit of its net
operating loss carryforwards. The Company has not recorded a tax
benefit because realization of the benefit is uncertain and therefore
a valuation allowance has been fully provided against the deferred tax
asset. The difference between the federal statutory rate of 34% and
the Company's effective tax rate of 0% is due to an increase in the
valuation allowance of $686,000 and $720,000 in 2003 and 2002,
respectively.
Note K - Commitments and Contingencies
[1] Lease commitments:
The Company occupies office space in California and Arizona,
under noncancellable operating leases. As of June 30, 2003, future
minimum commitments under office and equipment leases are as follows:
Year Ending June 30,
--------------------
2004 $ 107,000
2005 70,000
2006 65,000
2007 20,000
----------
$ 262,000
==========
Rent expense under office and equipment leases amounted to
$175,000 and $131,000 for the years ended June 30, 2003 and 2002,
respectively.
[2] Distribution agreement:
On October 9, 2001, the Company entered into distribution (See
Note N) and joint venture agreements with two privately held
companies. In connection with the distribution agreement, which
grants exclusive North American distribution and marketing rights,
excluding existing customers and existing distribution agreements, the
Company acquired 15% of a privately held company in exchange for
451,807 shares of common stock of the Company. The Company applied
the cost method of accounting in connection with this 15% investment
(See Note M). The Company granted warrants (100,000, 100,000, and
100,000 at exercises prices of $5.00, $6.00, and $7.00 per share,
respectively) in connection with the distribution agreement. In
connection with the joint-venture agreement, the agreement was
modified and AquaCell's initial ownership of 45% was reduced to 19%
ownership of all net profits, with no responsibility for funding any
of the manufacturing or marketing costs, with the remaining 81% owned
by the other privately held company.
On May 30, 2003 the Company negotiated the return and
cancellation of all exclusive distribution and marketing rights under
the distribution agreement and joint venture agreement, the return of
100,000 warrants exercisable at $6.00 per share and the return of
100,000 warrants exercisable at $7.00 per share. In exchange AquaCell
granted the private company the right to continue to sell Global Water-
Aquacell's products on a non-exclusive basis in those areas in which
it retains salesmen. It was agreed that the private company would
realize a return of $1,339,000 from sales of the 451,807 shares of
AquaCell common stock that it owns and, if required, from 5% of future
revenues to be generated by our Global Water-Aquacell subsidiary.
[3] Employment agreements
The Company has employment agreements with various executives and
employees of the Company which expire at various dates through
February, 2006. These agreements provide for aggregate minimum
salaries of $677,000 for the year ending June 30, 2004. The
agreements also provide for incentive bonuses based upon achievement
of certain milestones. No bonuses have been paid under these
agreements as of June 30, 2003.
Effective July 2002 the Company entered into a five-year
employment contract with one of the officers of WST. The contract
calls for a minimum annual salary of $100,000.
F-16
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2003
Note L - Long Term Note
At June 30, 2003 the long term note consists of an installment
note, secured by a truck, payable in monthly payments of $342 through
February 2005. Maturities on the note follows:
Year Ending June 30, 2004 $ 4,000
June 30, 2005 3,000
--------
$ 7,000
========
Note M - Impairment Loss On Investment
In connection with a 15% investment in Corbett Water
Technologies, Inc., the Company recognized an impairment loss of
$1,226,000 during the year ended June 30, 2002 in accordance with
generally accepted accounting principles (GAAP), as contained in the
provisions of SFAS-121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The investment
was sold during the year ended June 30, 2003 (See Note F).
Note N - Related Party Transactions
Included in net sales are sales to a former affiliate, pursuant
to a distribution agreement, aggregating approximately $706,000 for
the year ended June 30, 2003 and $452,000 for the year ended June 30,
2002. (See Note K (2)).
Note O - Major Customers and Suppliers
During the years ended June 30, 2003 and June 30, 2002, the
Company sold approximately 44% and 43% respectively, of its products
to a former affiliate (See Note K (2)).
During the years ended June 30, 2003 and 2002, the Company
purchased approximately 27% and 39% respectively, of its materials
from one vendor, the supplier of its raw cooler.
Note P - Subsequent Events
(1) During July through September 2003 the Company completed a
private placement of 1,703,000 shares of its common stock. The
offering consists of one share of common stock at a price of $1.50 per
share and one common stock purchase warrant exercisable at $4.00 per
share. The warrant contains a call feature. The Company received
proceeds of $2,296,000 net of expenses of $259,000. In connection with
the offering the placement agent received 341,000 common stock
purchase warrants exercisable at $4.00 per share.
(2) During August 2003 the Company entered into marketing and
consulting agreements with five separate entities. Consideration
for these agreements included cash fees of $45,000 and 1,250,000
warrants to purchase shares of common stock of the Company at a price
of $.01 per share. These warrants were valued at $2,564,000 utilizing
the Black-Scholes valuation method. Such amount will be amortized to
expense over the term of the agreements.
(3) During September 2003 the Board of Directors adopted a
resolution, subject to shareholders' approval, to amend the 1998 Stock
Option Plan to increase the number of shares issuable thereunder from
1,000,000 to 2,000,000.
F-17