Attached files
file | filename |
---|---|
EX-23.1 - EAU TECHNOLOGIES, INC. | v179102_ex23-1.htm |
EX-31.2 - EAU TECHNOLOGIES, INC. | v179102_ex31-2.htm |
EX-31.1 - EAU TECHNOLOGIES, INC. | v179102_ex31-1.htm |
EX-32.1 - EAU TECHNOLOGIES, INC. | v179102_ex32-1.htm |
EX-32.2 - EAU TECHNOLOGIES, INC. | v179102_ex32-2.htm |
THE
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended: December 31, 2009
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _________________ to _________________
|
Commission
File Number: 000-51807
|
EAU
TECHNOLOGIES, INC.
(Name
of Registrant in Our Charter)
Delaware
|
2842
|
87-0654478
|
(State
of Incorporation )
|
(Primary
Standard Industrial Classification Code Number)
|
(I.R.S.
Employer Identification No.)
|
Wade
R. Bradley
|
|
1890
Cobb International Blvd
|
1890
Cobb International Blvd
|
Suite
A
|
Suite
A
|
Kennesaw,
Georgia 30152
|
Kennesaw,
Georgia 30152
|
(678)
388-9492
|
(678)-388-9492
|
(Address
and telephone number of Principal Place of Business)
|
(Name,
address and telephone number of agent for
service)
|
Securities
registered under Section 12(b) of the Act:
|
||
Title
of each class
|
Name
of each exchange on which registered
|
|
None
|
None
|
|
Securities
registered under Section 12(g) of the Act:
|
||
Common Stock, $0.0001
par value
|
||
(Title
of class)
|
||
Indicate
by check mark if the Registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act).
Yes o No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer” “accelerated
filer” and smaller reporting company” in Rule 12b-2 of the Act (Check
one):
Large
accelerated filer o
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No x
At
March 30, 2010, 19,986,168 shares of the Registrant’s common stock, $0.0001
par value per share, were outstanding. The aggregate market value of
shares of common stock held by nonaffiliates as of June 30, 2009, was
$2,331,201.
Documents
Incorporated By Reference: None
TABLE OF
CONTENTS
Page
|
||||
|
PART
I
|
|||
ITEM
1.
|
BUSINESS.
|
2
|
||
ITEM
1A.
|
RISK
FACTORS.
|
9
|
||
ITEM
2.
|
PROPERTY.
|
15
|
||
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
15
|
||
ITEM
4.
|
RESERVED.
|
16
|
||
|
PART
II
|
|||
ITEM
5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY
SECURITIES.
|
16
|
||
ITEM
6
|
SELECTED
FINANCIAL DATA.
|
18
|
||
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
18
|
||
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
23
|
||
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
|
23
|
||
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
23
|
||
ITEM
9A.
|
CONTROLS
AND PROCEDURES.
|
23
|
||
ITEM
9B
|
OTHER
INFORMATION
|
25
|
||
|
PART
III
|
|||
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT.
|
25
|
||
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
29
|
||
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
35
|
||
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
37
|
||
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
39
|
||
|
PART
IV
|
|||
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
40
|
||
SIGNATURES
|
44
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A “SAFE HARBOR” FOR
FORWARD LOOKING STATEMENTS. This Form 10-K contains statements that
are not historical facts. These statements are called “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
involve important known and unknown risks, uncertainties and other factors and
can be identified by phrases using “estimate,” “anticipate,” “believe,”
“project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should”
and similar expressions or words. Our future results, performance or
achievements may differ materially from the results, performance or achievements
discussed in the forward-looking statements. There are numerous
factors that could cause actual results to differ materially from the results
discussed in forward-looking statements, including:
·
|
Our
ability to raise investment capital necessary to continue to fund our
operations and product development
activities.
|
·
|
Our
ability to adequately manage and fund the development of our
business.
|
·
|
The
introduction of new laws, regulations or policies that could affect our
products or our business practices. These laws, regulations or
policies could impact our industry as a whole, or could impact only those
portions in which we are currently
active.
|
·
|
Our
ability to continue to develop our products and to develop products and
services that will be accepted by our
customers.
|
·
|
Changes
in economic conditions, including changes in interest rates, financial
market performance and our industry. These types of changes can
impact the economy in general, resulting in a downward trend that impacts
not only our business, but all companies with which we compete; or, the
changes can impact only those parts of the economy upon which we rely in a
unique manner.
|
·
|
Changes
in relationships with customers and/or suppliers: an adverse change in our
relationships with customers and/or suppliers would have a negative impact
on our earnings and financial
position.
|
·
|
Our
ability to protect our intellectual property and trade secrets in order to
maintain an advantage over our
competitors.
|
·
|
Our
failure to achieve and maintain effective internal control over financial
reporting.
|
·
|
Factors
that we have discussed in previous public reports and other documents
filed with the Securities and Exchange
Commission.
|
This list
provides examples of factors that could affect the results described by
forward-looking statements contained in this Form 10-K. However, this
list is not intended to be exhaustive; many other factors could impact our
business, and it is impossible to predict with any accuracy which factors could
result in which negative impacts. Although we believe that the forward-looking
statements contained in this Form 10-K are reasonable, we cannot provide you
with any guarantee that the anticipated results will be achieved. All
forward-looking statements in this Form 10-K are expressly qualified in their
entirety by the cautionary statements contained in this section, and you are
cautioned not to place undue reliance on the forward-looking statements
contained in this Form 10-K. In addition to the risks listed above,
other risks may arise in the future, and we disclaim any obligation to update
information contained in any forward-looking statement.
PART
I
ITEM
1. BUSINESS
EAU TECHNOLOGIES, INC., previously
known as Electric Aquagenics Unlimited, Inc. (referred to herein sometimes as
“EAU,” “we,” “us,” or the “Company”), is in the business of
developing, manufacturing and marketing equipment that uses water electrolysis
to create non-toxic cleaning and disinfecting fluids as well as dairy drinking
water. These fluids have various commercial applications and may be used in
commercial food processing and agricultural products that clean, disinfect,
remediate, hydrate and moisturize. The processes for which these fluids may be
used are referred to in this Report (the “Report”) as the “EW
Technology.” For example, we believe that our food and agricultural
treatment products potentially may be used to systemically treat various facets
and phases of the food chain, from soil to animal feed to meat processing, by
eliminating dangerous and unhealthy pathogens from the food chain with
organically based and highly effective solutions. We make the claim that our
products are “non-toxic”. We can do this because at the levels we employ our
technology, our studies both internal as well as through third parties show no
toxicity. Further studies are in progress to make more specific
claims. At the levels employed, the fluids and products are
environmentally safe and non-toxic and do not contain or leave harmful residues
associated with chemical-based supplements or disinfecting and cleaning agents.
The electrolyzed water fluids created by the EW Technology (referred to herein
sometimes as the “EW Fluids” or “Empowered WaterTM”)
generated by our specialized equipment can be used in place of many of the
traditional products used in commercial, industrial and residential disinfecting
and cleaning.
Our focus is on our three core
competencies which are, producing high volumes of electrolyzed water,
controlling the properties of the water and using our application
knowledge. Because of our ability to produce high volumes of water
and control the water properties, our target market is in commercial
applications where we believe we can add value by generating measurable
productivity and efficiency gains. We will continue to use a
disciplined stage gate development process that drives ideas to commercial test
installations that turn into revenues. Once we have developed an
application we will attempt to find strategic partners that would be able to
assist us with a large scale commercial roll-out of the
technology. Our goal is to generate streams of revenues through
pricing contracts that let us participate in the on-going added
value.
We have
identified the following industries for early stage sales and marketing focus:
1) dairy production and processing, 2) meat and poultry processing, 3) clean in
place (“CIP”) for food and beverage processing and 4) agricultural grow-out
and processing (“Primary Markets”). As of the date of this Report,
the Company was focused on these markets because we believe that for each of
these markets we have a competitive advantage, the potential ability to attract
a leading strategic industry partner, or we can provide an attractive
value-added proposition. To penetrate these markets, EAU is
conducting trials and completing commercial installations that will lead to
partnerships with enterprises who can assist in rolling the technology out on a
large scale.
We
have obtained patent protection on four separate uses of electrolyzed fluids
(cleaning and disinfecting eggs, carpet cleaning, mold remediation and poultry
processing). Those applications are how the fluids are used and how
they are stabilized for use in different applications. Additionally, we have a
patent pending on the electrolysis equipment and several provisional patent
pending applications filed to protect new processes and products, as described
herein.
2
Products
and Related Markets
EW
Technology
We intend
to lease or sell generators that create electrolyzed fluids that are produced
on-site at commercial processing facilities. As of the date of this
Report, generators have been sold on a commercial basis as well as continuing
trials in multiple new commercial applications.
Dairy Cattle. The
Company commenced hydration and production tests on dairy cattle in
2006. Initial results indicate an increase in milk production and
milk fat while maintaining the protein content. In August 2008, we
reached an agreement with a dairy located in Georgia to begin paying for the use
of our equipment. During the first quarter of 2009, the
Company installed a second unit at the dairy located in Georgia to provide our
fluids to all of the cows on the dairy. EAU is currently receiving
minimal revenues in a commercial capacity. We will continue to do
more clinical research and field testing in the dairy market in order to support
a full industry rollout.
Poultry. In 2005,
we began testing of our EW Technology and EW Fluids (the “EW System”) in Tyson Food’s
Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EW System
trial was completed. The trial yielded significant results in
killing salmonella on the processed poultry. Independent testing analysis
conducted by ABC Research, Inc., in Gainesville, Florida, revealed
pre-chill microbial reduction was significantly below the Food Safety Inspection
Services (the enforcement arm of the USDA) allowable limit.
From these results we successfully
completed Phase I of our USDA Online Reprocessing (“OLR”) Certification. The EAU
Technologies OLR intervention also tested well showing a statistically
significant difference between control and test groups.
The Company has experienced some sales
resistance from the multiple industries including the poultry industry, because
operators did not have sufficient motivation to invest in new technologies to
improve the safety and cleanliness of food products. In February
2008, a regulatory change occurred that we believe may increase the
motivation. The Food Safety Inspection Service (“FSIS”), a division
of the USDA, sets the public heath performance standards for all raw and
processed meat, poultry and egg- processing standard for the United
States. The FSIS has implemented a process called the “Public Health
Risk Based Inspection” platform to regulate these industries based on the
relative risk a processing facility imposes to the human health
index. The new system allows the FSIS to allocate and prioritize its
resources at processing plants based on the risk each plant presents. The new
categorization platform lists processors in three categories, Category 1: 10%
positive and below; Category 2: 10%-20% positive for Salmonella and other
pathogens; Category 3: 20%-22% positive for Salmonella and other pathogens. For
processors with strong processes and intervention systems meeting the Category 1
criteria, there would be far less FSIS inspectors on site, thus reducing the
cost incurred by the plant. We believe that with the success that we have
achieved in field trials and commercial installations, in conjunction with the
new FSIS policies and regulations, will make EAU’s products appealing to the
industry. While it will take time for the poultry industry to fall into
compliance with this new rating system, EAU now has a tangible reason for
poultry plants to seriously consider our EW technology for its pathogen
remediation process.
In 2008,
EAU signed a lease agreement with Fieldale Farms, a large poultry producer in
northern Georgia, to install our equipment at their facility. We
began receiving revenues of approximately $27,500 per month from this facility
in February 2009. Per the terms of the agreement, we were to help the
plant achieve Category 1 status. The plant completed a USDA test set
October 2009 with the result that it complied with Category 1
status. The plant has indicated that it intends to terminate the
agreement as of November 23, 2009. We currently are not receiving
monthly rent payments, while management is in negotiations to continue
operations. We completed the OLR data gathering stage and submitted
our findings to the USDA for OLR approval. EAU received a letter from
the USDA approving our fluids for use in the plant for OLR
applications.
3
Clean in
Place. In the
third quarter of 2008 we installed our equipment to test a clean-in-place (CIP)
application with an international beverage bottling company for use with cold
beverages. This test is complete and was a success. There were three
stages of this trial that were conducted simultaneously: 1) Syrup tanks; 2) Bag
in box; 3) Bottling. The purpose of the trial was to identify whether EAU’s
non-toxic ambient temperature Empowered Waters could replace current 3-5 step
CIP processes. In order to become an approved technology for this bottling
company, EAU had to show good antimicrobial efficacy, water savings, and
improved CIP efficiency. At this time, this installation does not generate any
revenues. With the positive results of all phases of the tests being
completed for carbonated beverages, EAU is now in a position to begin marketing
our systems within the bottling company. We are expanding our CIP
capabilities have plans to work with the bottling company on a hot fill
application for pasteurized beverages. EAU will continue to test
other CIP applications to manage all beverage and food products as the
technology is introduced.
EW Fluids. EW
Fluids can have varying strength and properties. We have created
products by researching and testing the cleaning and sanitizing characteristics
of EW Fluids with varying electrical charges, pH levels and ppm (parts per
million) of hypochlorous acid and sodium hydroxide. We are able to
create new applications for electrolyzed water by producing various models of
our electrolyzing machines, which can create electrolyzed water to meet the
needs of specific markets and their application requirements.
The
versatility of our EW equipment is unique in the
marketplace. Beyond our initial focus in our four Primary Markets,
our EW Fluids have potential uses in many other areas. The Company
produces its electrolyzed fluids through an advanced continuous-flow
electrolysis process using the basic raw materials of water, electricity, and
sodium chloride (salt). EAU’s generators produce the following EW
Fluids:
·
|
Primacide A is a
disinfecting and sanitizing fluid that kills bacteria; yeast; molds;
viruses, including e-coli, salmonella, staphylococcus, streptococcus,
lysteria, campylobacter, vibrio vulnificus; and hundreds of other
organisms. It is highly oxidative and acidic due to its pH of
2.4 and positive 1150 millivolt (one thousandth of a volt) ORP (oxidative
reduction potential) and hypochlorous acid concentration of 10 to 200
ppm. Primacide A can be applied to a wide variety of
surfaces. Hands sprayed with Primacide A and then wiped with a
micro fiber cloth were found to have less residual bacteria and other
microbes than hands cleaned using 62% alcohol. Tests performed
by the University of Georgia Food Science Department indicated that
Primacide A can be used to sanitize and wash meat carcasses, strawberries,
lettuce, cabbage, carrots and other vegetables. Surfaces such
as floors in hospital operating rooms, bench tops, treatment tables,
cutting boards and other surfaces can be effectively sanitized by cleaning
with Primacide A. Further tests performed at the University of
Georgia Poultry Science Department have established successful and
dramatic log reductions of organisms in chicken chillers and also in
in-line spraying. We have filed and received patent protection for the
washing and sanitizing of eggs and mold remediation and expect to receive
additional patent protection for other uses of Primacide A. EAU
has completed successful commercial installations as well as trials in the
field to further validate the use of Primacide A as a
disinfectant.
|
·
|
Primacide B is an
alkaline based cleaner. Primacide B is created in the
electrolysis process with a sodium hydroxide ion attached to the oxygen
and hydrogen molecules. It emulsifies oils, fats and other
lipids, but has no surfactant base and therefore leaves no residue when
used to clean surfaces. It has a pH of 11.0 to 11.5, and is
therefore very alkaline. Its alkaline nature and its negative
(960) millivolt ORP result in a product that is effective in emulsifying
oil and grease. Primacide B is primarily a cleaner with some
bacteria killing properties, but is significantly slower and less
effective as an anti-bacterial agent than Primacide A. We have
submitted provisional patent applications to the United States Patent and
Trademark Office to approve Primacide B for many uses. We have
received a patent for using Primacide B in carpet cleaning. We
recently applied to the U.S. Patent and Trademark Office for a utility
patent relating to Primacide A and Primacide B as cleaners and sanitizers
of all hard surfaces.
|
4
·
|
Primacide C is a product
that was developed by the University of Georgia by Dr. Yen Con Hung and
Company executives to stabilize acid water (Primacide A). This process has
been submitted for patent protection and is currently
pending. We license this technology from the University of
Georgia. This product is useful in applications ranging from
spraying on produce in grocery stores to consumer products requiring a
longer shelf life. Recently we have modified the license
agreement to reflect the current state of our business relationship with
the University of Georgia Research Foundation, the department that
commercializes UGA’s technologies. This agreement allows EAU to
continue to aggressively market and develop uses of Primacide C for
numerous applications. Early in 2009 EAU
received an issued patent for the use of Empowered Water™ (both Primacide
A and C) in mold
remediation.
|
·
|
Dairy Drinking
Water – The Company commenced hydration
and production tests on dairy cattle in 2006. Initial results
indicate a possible increase in milk production and milk fat while
maintaining the protein
content. The Company has expanded its investment
into the application of its technology in the dairy
channel. Multiple trials and University studies are being
either planned or implemented to validate early results. EAU is currently in three commercial
installations.
|
Agriculture
In 2006 we made initial sales to Water
Science, LLC, a Florida limited liability company (“Water Science”) for the Latin
American markets. Water Science is a major shareholder of the Company
and its managing member, Peter Ullrich, is a director of our
company. We have shipped a total of five P-1200s to Ecuador, Mexico,
Columbia, Costa Rica and Holland for trials and Water Science internal
use. Water Science is utilizing the technology for its own flower and
agricultural endeavors. Further studies are being done as each
country that has the Empowered Water™ technology ramps up for their own outside
sales efforts.
Additional
Agricultural Markets
While the majority of our efforts and
all of our sales in agriculture have been in connection with Water Science, we
are investigating the potential to enter other agricultural markets such
as green house and grow out of vegetable plants and vegetable packing
facilities.
Other
Markets, Products and Industries
Some of the other markets and
industries that are attractive channels for our EW Technology and other products
and services are listed below. We intend to focus more efforts on these markets
after we attain our business plan in our current market channels.
Environmental
Remediation – Environmental remediation
is a multi-billion dollar industry that consists of home and commercial cleanup
and reconstruction, generally following disasters such as floods or
fires. The Company believes that its technology can be used for mold
remediation. The Company’s electrolyzed fluids can be employed to
kill mold spores and break down associated mycotoxins. Early in 2009
EAU received an issued patent for the use of Empowered Water™ in mold
remediation.
Medical – The medical industry is in
need of new and more effective sanitizing and disinfecting solutions. We believe
that our EW Technology will work well in many facets of the medical industry.
However, the regulatory, environmental and governmental restrictions and
requirements to operate in the market will require significant capital and
personnel expenditures. We intend to look for appropriate joint
venture partners to assist in this market.
5
Fish
Processing – We
believe that our EW Fluids are an excellent sanitizer in seafood processing
houses as earlier studies conducted on fish in the Cook Islands proved
effective. We intend to further research this area at an undetermined
future date.
Grocery Store
Produce and Meat Departments - We are currently installed in four Whole
Foods Market (WFM) stores in the South Region. These stores are using the
Empowered Water™ in three areas of the store: floral, fresh cut produce and
leafy vegetable rinse area. Empowered Water™ may also be used
by grocery store meat departments as a cleaning agent and disinfectant on
cutting surfaces where multiple products, such as beef, poultry and seafood are
cut and packaged, and where cross contamination commonly
occurs. Using our electrolyzed fluids, a store’s processing machinery
and floor surfaces can be cleaned and sanitized without the use of toxic
chemicals.
Markets
and Distribution
We
presently market our existing products in our identified market channels (dairy
production and processing, meat and poultry processing, food and beverage
processing clean in place (“CIP”) and agricultural grow-out). Future
plans include enhancing our current products, and introducing new products and
features to meet changing customer requirements and evolving industry standards,
as opportunities arise and are fiscally reasonable. Our present
products are based on the use of EW Technology, to kill bacteria, viruses and
fungus and to clean the living environment without the use of harsh
chemicals. Our agricultural products manage pathogens, stimulate
plant growth and animal productivity.
Our
products meet the growing demand for safe foods and environmentally friendly,
non-toxic disinfectants and cleaning fluids. Consumers are becoming more aware
of the detrimental effects of toxic products, chemicals, and biocides (as
evidenced by the preponderance of anti-microbial agents). There are numerous
companies attempting to enter the EW market with their own versions of
electrolysis or plasma generators that create similar fluids as Empowered
Water™. EAU has focused much of its time and energy in developing high volume
systems that meet the needs of a commercial marketplace. As a result, we have an
opportunity to penetrate and lease our systems in these markets because our
equipment is better suited for larger applications.
Our
solutions provide an ecologically safe alternative to toxic cleaning chemicals
and pesticides. We have identified a large number of potential markets for our
products within specific industry channels, but will focus initially on
developing and marketing in the dairy production and processing, meat and
poultry processing, clean in place (CIP) applications initially in liquid food
and beverage processing, environmental remediation and agricultural
grow-out industries.
The safe
food, sanitizing, disinfecting, agricultural and cleaning industries are
currently using products and methodologies that have increasingly expensive
environmental and social consequences as compared to our Fluids. We
believe that our products provide an attractive alternative to the chemicals and
other toxic substances and technologies currently being used.
Manufacturing
and Sources of Supply
We manufacture and assemble specialized
parts in our Kennesaw, Georgia facility. We utilize contract labor
both internally as well as externally for certain aspects of the manufacturing
and assembly process until demand for our technology increases to a level
necessary for further investment. Eventually we expect to outsource
to third parties the majority of manufacturing and assembly of electrolyzed
water generator components that comprise our EW Technology. In the
future, outsourcing more of the Empowered Generator manufacture and assembly
will enable us to benefit from the manufacturing capabilities of those who can
accommodate significant increases in production volume as
necessary. We have been in discussions with several companies to
assist us in rolling out our technology. However, as of the date of this Report,
we do not have any definitive agreements in place.
6
Production
and Distribution
As of the date of this Report, the
Company maintained an inventory of several EW generators sufficient to meet
demand. We have established relationships with independent
manufacturing facilities to assure that we are able to meet any dramatic
increase in demand for our products. Using components supplied by reliable third
parties, we believe that our generator technology is not exposed to any problems
related to using a single source supplier. EAU markets the high
volume equipment developed primarily for installation on dairies and in poultry,
beef and produce processing facilities and in other high use areas.
Our
current product line consists of several different commercial generators varying
in volume capacity and active ingredient concentrations. The volume and
concentration levels vary widely by industry and
application. Commercial generators have an expected lifespan of
approximately five to seven years. This may lead to recurring sales,
creating additional and ongoing revenues.
We assemble and distribute our
Empowered Water™ generators from our company facility plant in Kennesaw,
Georgia. However, in the future, as generator sales volume increases
and our electrolyzed fluid product lines are launched, we intend to partner with
industry leaders with established distribution channels to assist with the
marketing of our products.
Competition
There is broad competition in the
market for disinfecting, sanitizing, and surface cleaning products as well as
agricultural products. Many of our competitors are extremely large, financially
healthy companies, which have substantial market share and name recognition, and
easy access to marketing outlets and capital markets. Many of these
companies are able to frequently update and expand their products, introduce new
products, and diversify product offerings. These other companies with
substantially greater financial, creative and marketing resources, and proven
histories, may decide to enter and effectively compete in some or all of our
markets, which could adversely affect our operations.
We believe our products are unique
because of their volume capabilities, effectiveness and price, and because they
are environmentally safe and non-toxic at the levels we employ. There
have been many companies in the EW marketplace for many years. Application and
volume constraints have contributed to slow growth in the market. We believe
that we have more usable application knowledge with the technology on a
commercial scale as compared to most competitors using other EW technologies. We
believe that we will be able to capture a portion of the market for
environmentally safe and non-toxic cleaning products and for our Agricultural
Products, although there can be no guarantee that we will be successful in these
plans.
Governmental
Regulation
Because
many of our products are sanitizing products and have applications related to
the food industry, existing governmental regulations have a large potential
effect on our new products. We frequently will be required to obtain
approval or favorable designations from governmental agencies, such as the FDA,
USDA, FSIS, EPA, NOP, and others, in order to bring new products to
market. We believe that our current applications for electrolyzed
water products are subject to specific sections in the United States Code of Federal
Regulations, which contain regulations created by the aforementioned
government agencies. In addition, commercial laboratories such as
National American Medical Science Association (NAMSA) have performed several
toxicity tests. At the concentrations analyzed, the electrolyzed water solutions
show no toxicity. Further approvals will be required when we advance
our products into the medical and certain health care
industries. These approvals can be costly and time
consuming. We intend to approach each sector based on market demand
and capital availability.
7
The
active ingredient in our Primacide A and C fluid is electrolytically generated
hypochlorous acid. This, in addition to the oxidation-reduction
potential of positive 1,150 millivolts plus, and a low pH makes Primacide A and
C effective disinfectants. We have established that our
particular method of creating hypochlorous acid at the level we employ
through the electrolysis process is safe for indirect food contact and food
contact surfaces based on scientific data, trials and commercial
installations.
The
active ingredient in our Primacide B is electrolytically generated sodium
hydroxide. This, in addition to the negative oxidative-reduction
potential of approximately -400 and a high pH, makes Primacide B a very
effective emulsifier or cleaner. We have established that our
particular method of creating sodium hydroxide through electrolysis is GRAS
(generally regarded as safe) for most surfaces.
The EPA
indicated that even though our generator is exempt from an antimicrobial type
registration, we are required to register it with the EPA
annually. We utilize our internal regulatory specialists as well as
outside consultants to ensure this process is completed properly and
competently.
Trademarks
& Proprietary Rights
The name
Primacide is registered with the U.S. Patent and Trademark
Office. The names “Empowered Water,” “EAU Technologies, Inc.” and
“Electric Aquagenics Unlimited,” are some of our trademarks.
We have
filed several provisional utility patent applications with the U.S. Patent and
Trademark Office. Four patents have been issued (for carpet cleaning, egg
sanitization, mold remediation and poultry processing) while others are in
pending or application status. We have entered into an exclusive
license for certain stabilized acid water (Primacide C) technology developed by
the University of Georgia. Two other patent applications that have
been filed by us involve stabilizing our Primacide C product and a process
application for poultry processing.
We retain
patent counsel, Bracewell and Giuliani, LLP located in Houston, Texas, to
prepare other patent applications related to the use of Primacide A, B and C in
various cleaning and disinfecting applications. In addition to
several utility applications, a process patent application has been filed for
the water generator and stabilization processes, including Primacide A, B and
C. We retain Clayton, Howarth & Cannon, P.C. located in Salt Lake
City, Utah to prepare and handle our Trademark applications and Trademark
related issues.
Research
and Development
The goal of our research and
development activities is to further the introduction of environmentally safe
products for our customers that address the limitations and dangers caused by
chemical sanitizers. Our efforts are focused on researching and
testing the cleaning and sanitizing characteristics of electrolyzed water with
varying electrical charges and pH levels. Our research focuses on the
ability and range of efficacy of our electrolyzed water to kill specific
microorganisms. We are attempting to develop new technologies,
applications and products that will:
·
|
generate
electrolyzed water that has a longer shelf life;
|
·
|
show
value add propositions through commercial
installations;
|
·
|
sanitize
agricultural products;
|
8
·
|
enhance
current products for further use in carpet cleaning;
|
·
|
sanitize
and disinfect hard and soft surfaces;
|
·
|
find
more efficient ways to apply our effective solutions;
|
·
|
provide
a superior dairy drinking water
product.
|
Our
research and development expenditures totaled approximately $448,000 for the
year ended December 31, 2009, and $228,000 in 2008.
Employees
As of December 31, 2009 we had 9
full-time employees and 3 consultants. As our business grows, we
anticipate that we will need to employ additional project managers, field
technicians, salaried clerical staff and sales personnel. We believe
that our relationships with our employees are good.
ITEM
1A. RISK FACTORS
We
are subject to various risks that may materially harm our business, financial
condition and results of operations. You should carefully consider the risks and
uncertainties described below and the other information in this filing before
deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your
investment.
Risks
Related To Our Business
An
investment in the Company's securities involves a high degree of risk,
including, but not necessarily limited to, the risk factors described below.
Each prospective investor should carefully consider the following risk factors
inherent in and affecting the Company and its business before making an
investment decision to purchase the Company's securities.
We
cannot guarantee that we will continue as a going concern because we have not
yet been successful in establishing profitable operations.
We have
received a report from our independent auditors on our financial statements for
fiscal years ended December 31, 2009 and 2008. The footnotes to our financial
statements list factors, including recurring losses since incorporation, which
raise some doubt about our ability to continue as a going concern.
We
will need substantial additional funds that we may not be able to
acquire.
We do not
receive sufficient revenues to fund all of our operational needs. The
majority of our funding has come from shareholders. We currently have
sufficient funds to operate our business until the middle of 2010. We
do not have any agreements in place for additional funding. We may
not have enough funding for operations to fund our business until it is
developed enough to bring the business plan to maturity. Our cash
requirements may vary materially from those now planned as a result of marketing
efforts, relationships with suppliers, changes in the direction of our business
strategy, and/or competitive and technical advances for electrolyzed water as a
sanitizer. We may not be able to continue to improve or develop successful
electrolyzed water products. In addition, it may be more costly than we have
anticipated developing new products. We may incur costs that are necessary to
comply with governmental requirements. For example, we may be required to obtain
approval from the U.S. Food and Drug Administration for our current or planned
products. We may require substantial additional funding for our operating
expenses and for marketing and sales programs. We may not be able to obtain
adequate funds for these purposes when we need them or on acceptable
terms.
9
It
is difficult for third parties to evaluate our likely future performance because
we are an early stage company without long operating history.
Since our
incorporation in March 2000, we have been engaged in start-up and development
activities. We have operated at a loss, and we expect losses to continue. We
have little operating history upon which a third party may base an evaluation of
our likely future performance.
We
may not be able to successfully develop our business because our products and
market are evolving.
There can
be no assurance that our business strategies will lead to any profits. We face
risks and uncertainties relating to our ability to successfully implement our
strategies. We face expenses and uncertainties related to operating with a
little known product, with an unproven business model, and a new and rapidly
evolving market. Our business model is based on an expectation that demand for
ecologically friendly disinfecting and cleaning products will increase
materially. However, the demand may never materialize.
We
have a history of losses, and we will need additional capital to continue our
operations. If we are unable to obtain additional capital, we will have to
curtail our operations.
We have
generated limited revenues and incurred significant losses. We have never been
profitable and continue to incur losses from operations. We may never generate
sufficient revenue, income and cash flows to support our operations. We expect
to incur losses because we anticipate incurring significant expenses in
connection with developing our generators and products, expanding markets, and
building brand awareness. Our future revenues could decline by reason of factors
beyond our control such as technological changes and developments, downturns in
the economy and decreases in demand for sanitizing electrolyzed fluid related
products. If we continue to incur losses, if our revenues decline or grow at a
slower rate, or if our expenses increase without commensurate increases in
revenues, our operating results will suffer and the value of our common stock
may decline.
Our
management may not have adequate time and resources to conduct our distribution
activities, which could hinder our ability to sell products.
Currently
we do not use independent parties to distribute or place our
generators. We may not be able to sell our products effectively if
our management does not have adequate time and resources to conduct our
distribution activities. Moreover, as our sales grow, the strain on our
management to sell and distribute products may increase. In the event that we
decide to retain distributors, we may not be able to establish relationships
with distributors. In addition, we may incur additional costs and business
delays and interruptions in sourcing distributors.
It
may be difficult to assess our future income performance as a number of factors
may cause fluctuations in operating results.
We
believe that period-to-period comparisons of our operating results are not a
good indication of our future performance because of variables which
include:
|
-
|
Growth
rate of the market for environmentally friendly sanitizing
products;
|
-
|
Our ability to attract and retain customers; | |
-
|
Our
ability to upgrade, develop and maintain our systems and
infrastructure;
|
|
|
-
|
Amount
and timing of operating costs and capital expenditures relating to
business expansion and infrastructure;
|
-
|
Delays in developing and introducing new products; |
10
|
-
|
Announcement,
introduction and market acceptance of new or enhanced sanitizing products
by competitors;
|
|
-
|
Governmental
regulation of our products by agencies such as the FDA, USDA, EPA, or
others.
|
Failure
to successfully develop and introduce new products would harm our
business.
Our
future success depends in large part on our ability to develop new or enhanced
uses for our products. We may fail to identify new product opportunities
successfully or develop and timely bring new products to market. We may also
experience delays in completing development of enhancements to, and new versions
of, our products. We may be unable to develop or acquire marketable products in
a timely manner. In addition, product innovations may not achieve the market
penetration or price stability necessary for profitability. As the market and
technology related to environmentally friendly sanitizing products grows, we may
change our business model to take advantage of new business opportunities,
including business areas in which we do not have extensive experience. Failure
to develop these or other businesses successfully would be harmful to our
business.
We
may be unable to protect our intellectual property and proprietary rights, which
could harm our business.
Our
success depends in part upon our ability to protect our intellectual property.
We rely on a combination of trade secret, trademark, and contractual protection
to establish and protect our proprietary rights. We have been
assigned rights to applications submitted to the U.S. Patent and Trademark
Office for a utility patent relating to the use of our electrolyzed acidic fluid
to sanitize eggs, and a second patent relating to the use of our electrolyzed
alkaline fluid to clean and sanitize carpets and hard surfaces. We
are also applying for patent protection from the United States government, but
do not own patents on products that we intend to launch in the next 12 months.
We may enter into confidentiality agreements with employees and consultants
involved in product development or distribution. Despite efforts to protect
proprietary rights through confidentiality and license agreements, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Precautions may not prevent someone from misappropriating or
infringing our intellectual property, or an independent third-party from
developing competitive products.
Our
products are not patented which creates vulnerability to
competitors.
The
active ingredient in the sanitizing fluids that are created by our generator
products is electrolyzed water that kills bacteria, viruses and molds shortly
after contact. Our patents and patent applications apply only to certain aspects
of our technology and products. We did not create the concept of
electrolyzed water as a sanitizer and cleaner and other companies may purchase
machines to create electrolyzed water or develop machines to create electrolyzed
water and compete with us. Such competition could have a harmful effect on our
business.
If
our services and technologies are used in defective products or include
defective parts, we may be subject to product liability or other
claims.
If we
market products that are defectively manufactured, used in defective or
malfunctioning products or contain defective components, we could be subject to
product liability claims and product recalls, safety alerts or advisory notices.
While we have product liability insurance coverage, we cannot assume that it
will be adequate to satisfy claims made against us in the future or that we will
be able to obtain insurance in the future at satisfactory rates or in adequate
amounts. Product liability claims or product recalls in the future, regardless
of their ultimate outcome, could have a material adverse effect on our business,
financial condition, results of operations and reputation, and on our ability to
attract and retain licensees and customers.
11
Failure
to achieve and maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse
effect on our business and stock price.
Section 404
of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we
establish and maintain an adequate internal control structure and procedures for
financial reporting and include a report of management on our internal control
over financial reporting in our annual report on Form 10-K. That report
must contain an assessment by management of the effectiveness of our internal
control over financial reporting and must include disclosure of any material
weaknesses in internal control over financial reporting that we have
identified.
The
requirements of Section 404 of the Sarbanes-Oxley Act are ongoing and also
apply to future years. We expect that our internal controls over
financial reporting will continue to evolve as we continue in our efforts to
grow and expand our business. Although we intend to continue to improve our
internal control processes in order to ensure compliance with the
Section 404 requirements, any control system, regardless of how well
designed, operated and evaluated, can provide only reasonable, not absolute,
assurance that its objectives will be met. Therefore, we cannot assure you that
in the future additional material weaknesses or significant deficiencies will
not exist or otherwise be discovered.
We will incur substantial costs to
comply with the requirements of the Sarbanes-Oxley Act of
2002.
The
Sarbanes-Oxley Act of 2002 (the Act) introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements is the
requirement under Section 404 of the Act for management to annually assess
and report on the effectiveness of our internal control over financial
reporting and for our registered public accountant to attest to this report. The
SEC has modified the effective date and adoption requirements of
Section 404 implementation for non-accelerated filers, such as us, such
that we were first required to issue our management report on internal control
over financial reporting in our annual report on Form 10-K for the fiscal
year ending December 31, 2007. We have dedicated significant time and
resources during fiscal years 2008 and 2009 and expect to dedicate more
time and resources during fiscal 2010 to ensure compliance. The costs to comply
with these requirements will likely be significant and adversely affect our
operating results. In addition, there can be no assurance that we will be
successful in our efforts to comply with Section 404. If we fail to comply
with Section 404, we could incur penalties and additional expenditures to meet
the requirements, which could affect the ability of our auditors to issue an
unqualified report, which is currently required to be submitted by
December 31, 2010. If the auditors are unable to issue an unqualified
report, this, in turn, may further adversely affect our business and operating
results.
We
may incur additional costs to address federal and state tax compliance
issues.
Management
has determined that the Company owes taxes with respect to certain stock options
and warrants granted for services provided to the Company. This tax
liability arose because the Company failed to satisfy withholding tax
obligations when options were exercised and to timely amend certain options to
comply with the applicable requirements of Section 409A of the Code during
fiscal year 2005 and the first six months of 2006. Management has
reviewed all options and warrants with professional tax advisors to determine
the proper treatment. However, based on the present estimate of this
tax liability, the Company has accrued a liability in its financial statements
of $82,000 for these taxes. The Company’s estimate assumes that a
significant discount may be utilized in determining the fair market value of the
Company’s stock for purposes of calculating the applicable employment taxes owed
by the Company based on factors such as lack of marketability or restrictions on
trading. If this position were challenged successfully by the
Internal Revenue Service, the Company’s actual tax liability may be
greater. The Company has estimated its maximum potential tax
liability attributable to the options to be approximately $184,000.
The
Company has also determined that it may owe additional taxes with respect to
compensation paid to certain former officers in 2005 and the first six months of
2006. The Company classified these former officers as independent
contractors for federal and state tax purposes. If the Company’s
classification of these former officers as independent contractors were
challenged successfully, the Company would be liable for underpayment of federal
and state employment taxes. Based on the present estimate of this tax
liability, the Company has accrued a liability in its financial statements of
approximately $173,000. This estimate assumes that the Company
may reduce its tax liability for the income and self-employment taxes paid by
these former officers on the compensation received from the
Company. If the Company is unable to reduce its tax liability for
taxes paid by these former officers, the Company’s actual tax liability
attributable to this issue may be greater. The Company has estimated
its maximum potential tax liability attributable to this issue to be up to
approximately $390,000.
12
GENERAL
RISKS RELATING TO THE SANITATION AND CLEANING INDUSTRIES.
Competition
from major companies may decrease our market share, net revenues and gross
margins.
Competition
in the chemical based disinfecting and surface cleaning products market is
intense, and we expect competition to increase. Companies such as SC Johnson,
The Clorox Company, Dow, and Procter & Gamble dominate the market. It is
possible that large companies that sell chemical based disinfecting and surface
cleaning products could develop sanitizers composed of electrolyzed fluids as
the key ingredient. Due to these potential competitors' extreme size and
financial health, they could use their substantial market share and name
recognition, and easy access to marketing outlets and capital markets to compete
with us. These companies have substantially greater financial, creative and
marketing resources, and proven histories, and may decide to enter and
effectively compete in the electrolyzed fluid market, which could adversely
affect our business.
Competitors
currently selling electrolyzed fluid based sanitation and cleaning products may
decrease our market share, net revenues and gross margins.
Many of
the companies that already sell electrolyzed fluid based sanitation and cleaning
products are able to frequently update and expand products and introduce new
products and to diversify product offerings. Many of these competitors are large
and financially strong. We compete with these companies primarily in developing
electrolyzed fluid products and applications and obtaining customers. These
companies have substantially greater financial, creative and marketing resources
and proven histories that could make it difficult to compete or maintain
customers in the electrolyzed fluid sanitizer market.
Our
net revenues and gross margins will not improve if the market for
environmentally friendly sanitizing products does not develop.
The
market for environmentally friendly sanitizing products is new and evolving. As
a result, demand and market acceptance for our products is uncertain. If this
new market fails to develop, develops more slowly than expected or becomes
saturated with competitors, or if our products do not achieve or sustain market
acceptance, our business could be harmed.
Our
success will depend on growth in consumer acceptance of environmentally friendly
sanitizing products as an alternative to chemically based products.
Factors
that might influence market acceptance of our products over which we have little
or no control include development of alternative products or methods and
willingness of consumers and businesses to use environmentally friendly
sanitizing products. Our success depends on the increasing demand for
environmentally friendly disinfecting and sanitizing products. If such demand
does not continue to increase, demand for our products will be limited and our
financial results will suffer.
13
Inability
to manage growth could hinder our success.
We
believe electrolyzed water as a sanitizer has broad applications and due to its
non-toxic nature has advantages over chemical based sanitizers. As a result, we
believe that we have the ability to grow rapidly during the next few years. In
the event we do grow rapidly, we will be in circumstances currently unfamiliar
to us. Our efforts to manage our production and larger scale quality assurance
efforts may not be successful or we may fail to satisfy large demand
requirements on a timely and/or cost-effective basis. A failure to manage our
growth would have an adverse effect on our operations and overall financial
health.
ADDITIONAL
RISKS RELATED TO OUR COMMON STOCK
Continued
control by existing management and a limited number of
shareholders.
The
Company's management and a limited number of shareholders retain significant
control over the Company and its business plans and investors may be unable to
meaningfully influence the course of action of the Company. The existing
management and a limited number of shareholders are able to control
substantially all matters requiring shareholder approval, including nomination
and election of directors and approval or rejection of significant corporate
transactions. There is also a risk that the existing management of the Company
and a limited number of shareholders will pursue an agenda which is beneficial
to themselves at the expense of other shareholders.
There
is no assurance of an active public market for the Company's common stock and
the price of the Company's common stock may be volatile.
Given the
relatively minimal public float and trading activity in the Company's
securities, there is little likelihood of any active and liquid public trading
market developing for its shares. If such a market does develop, the price of
the shares may be volatile. Since the shares do not qualify to trade on any
national securities exchange, if they do actually trade, the only available
market will continue to be through the OTC Bulletin Board or in the "pink
sheets". It is possible that no active public market with significant liquidity
will ever develop. Thus, investors run the risk that investors may never be able
to sell their shares.
Possible
future issuances of additional shares that are authorized may dilute the
interests of stockholders.
The
Company's Certificate of Incorporation currently authorizes its Board of
Directors to issue up to 50,000,000 shares of Common Stock. Any additional
issuances of any of the Company's securities will not require the approval of
shareholders and may have the effect of further diluting the equity interest of
shareholders.
Existence
of limited market for the Company's common stock.
There has
been a very limited market for the Company's common stock. Accordingly, although
quotations for the Company's common stock have been, and continue to be,
published on the OTC Bulletin Board and the "pink sheets" published by the
National Quotation Bureau, Inc., these quotations, in light of the Company's
operating history, continuing losses and financial condition, are not
necessarily indicative of the value of the Company. Such quotations are
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
14
There
are legal restrictions on the resale of the common shares, including penny stock
regulations under the U.S. federal securities laws. These restrictions may
adversely affect the ability of investors to resell their shares.
Our
securities are subject to the “penny stock” rules, which apply generally to
equity securities with a price of less than $5.00 per share, other than
securities registered on certain national exchanges or quoted on the NASDAQ
Capital Market. For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchaser of such securities
and have received the purchaser's written consent to the transactions prior to
the purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the Securities and Exchange Commission relating
to the penny stock market. The broker-dealer also must disclose the commissions
payable to the broker-dealer and the registered underwriter, current quotations
for the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally among other requirements, monthly statements must be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. As such, the "penny
stock" rules may restrict the ability of purchasers in this offering to sell the
common stock and warrants offered hereby in the secondary market. The
transaction costs associated with penny stocks are high, reducing the number of
broker-dealers willing to engage in the trading of our shares. This results in
reduced liquidity and an increase in the spread between the bid and ask price.
Investors should be aware that the level of trading activity on the secondary
market can be very illiquid and investors may find it expensive and difficult to
sell their shares.
Sales
of a substantial number of restricted shares that will be eligible for sale
could adversely affect the price of our common stock.
We have
issued shares of "restricted" common stock in consideration for proprietary
rights, business plans, organizational services and expenses and cash in private
placements. Many of the shares are held by persons who are officers, directors
and/or control persons of the Company and who hold such shares as "restricted
securities", as that term is defined in Rule 144 promulgated under the
Securities Act of 1933, as amended. These securities held by officers, directors
and/or control persons may be sold in compliance with Rule 144 which provides,
in essence, that officers and directors and others holding restricted securities
may each sell, in brokerage transactions, an amount equal to 1% of the company's
total outstanding common stock every three months. In addition, Rule 144
provides that shares must not be sold until they have been held for a period of
at least one year from the date they were fully paid for. The possible sale of
these restricted securities under Rule 144 may, in the future, have a depressive
effect on the price of the company's Common Stock in any public market which may
develop, assuming there is such a market, of which there can be no
assurance. Furthermore, persons holding restricted securities for one
year who are not "affiliates" of the company, as that term is
defined in Rule 144, may sell their securities pursuant to Rule 144 without any
restrictions and/or limitations on the number of shares sold.
ITEM
2. PROPERTY
Our
corporate headquarters are located in leased office space at 1890 Cobb
International Blvd, Suite A, B & C, Kennesaw, GA 30152. We believe that our
current offices are adequate for present needs. Office space is leased and will
be increased, as we deem necessary. We believe that it will not be
difficult to find additional or alternative office space if necessary in the
foreseeable future.
ITEM
3. LEGAL PROCEEDINGS
None
15
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND PURCHASES OF EQUITY SECURITIES
Our
common stock is presently listed on the OTC Bulletin Board under the symbol
EAUI.OB. Prior to the completion of our name change from Electric
Aquagenics Unlimited, Inc. to EAU Technologies, Inc., on January 17, 2007, our
common stock was listed under the symbol EAQU.OB. We have not
declared dividends on our common stock and do not anticipate paying dividends on
our common stock in the foreseeable future.
In July
2009, the Company granted 25,000 shares of EAU common stock to Larry Earle, a
consultant to the Company, pursuant to the Company’s 2007 Stock Incentive
Plan.
In May
2009, the Compensation Committee of the Board of Directors of the Company
granted 30,000 shares of restricted stock for each director, effective on May
14, 2009. The restricted stock will vest ratably over a period of two years from
the date of grant. These grants were made pursuant to the annual directors’
compensation program approved by the Board in December 2007.
In
November 2008, Theodore Jacoby, a director of the Company, purchased 100,000
shares of common stock of the Company for $100,000 at a price of $1.00 per
share.
In
October 2008, the Board of Directors approved a transaction with Water Science,
LLC, (“WS”) a related party, pursuant to (1) a Stock Purchase Agreement (the
“Purchase Agreement”) and (2) a Second Amended and Restated Senior Secured
Convertible Promissory Note (the “Second Amended Convertible Note”). The
Purchase Agreement provides for the purchase of 2.5 million shares of common
stock of the Company at a price of $1.00 per share and the amendment of the
original Amended and Restated Senior Secured Convertible Promissory Note dated
as of May 8, 2008, to change the conversion rate from $3.00 per share to $1.00
per share, as reflected in the Second Amended Convertible Note. The purchase of
the common stock will occur in six monthly installments of $350,000 beginning
October 14, 2008 plus a final installment of $400,000 on April 15, 2009. On
March 27, 2009, the Company and Water Science amended the payment schedule of
the Stock Purchase Agreement. The purchase of the common stock will
occur in four monthly installments of $250,000 on April 15, 2009, $250,000 on
May 15, $250,000 on June 15 and a final installment of $200,000 on July 15,
2009. If WS defaults on its obligation to purchase the stock under
the Purchase Agreement, then the conversion price reverts back to $3.00 per
share. The Second Amended Convertible Note includes an interest rate
of 3% and a maturity date of March 16, 2009. In March 2009, the Company and WS
amended the Second Amended Convertible Note to extend the maturity date to
September 16, 2009 and increase the interest rate to 10%. WS is
controlled by Peter Ullrich, a member of the Board of Directors of the
Company.
In
February 2008, the Compensation Committee of the Board of Directors of the
Company granted $30,000 to each board member in the form of 23,077 shares of
restricted stock for each director, effective on February 27, 2008. The
restricted stock will vest ratably over a period of two years from the date of
grant. These grants were made pursuant to the annual directors’ compensation
program approved by the Board in December 2007. The amount of
compensation was based on recommendations from a non-related human resource
consulting firm. The Compensation Committee also granted 49,500
shares of restricted stock to various employees, which will vest one year from
the date of grant.
In January 2008, an officer of the
Company exercised 150,000 options for $1,500 or $0.01 per share. The
options were granted in 2003 for services.
16
Our
shares are thinly traded, with low average daily volume. This,
coupled with a limited number of market makers, impairs the liquidity of our
common stock, not only in the number of shares of common stock that can be
bought and sold, but also through possible delays in the timing of transactions,
and lower prices for our common stock that might otherwise
prevail. This could make it difficult for an investor to sell shares
of our common stock or to obtain a desired price.
Our
common stock may be subject to the low-price security, or so called “penny
stock,” rules that impose additional sales practice requirements on
broker-dealers who sell such securities. The securities Enforcement
and Penny Stock Reform Act of 1990 require additional disclosure in connection
with any trades involving a stock defined as a “penny stock” (generally defined
as, according to recent regulations adopted by the U.S. Securities
and Exchange Commission, any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions), including the deliver,
prior to any penny stock transaction, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. The
regulations governing low-priced or penny stocks sometimes may limit the ability
of broker-dealers to sell the Company’s common stocks and thus, ultimately, the
ability of the investors to sell their securities in the secondary
market. Prices for the Company’s shares will be determined in the
marketplace and may be influenced by many factors, including the depth and
liquidity of the market for the shares, the Company’s results of operations,
what investors think of the Company and general economic and market
conditions. Market fluctuations could have a material adverse impact
on the trading of our shares.
The table below sets forth the range of
high and low closing prices of our common stock as reported on the OTC Bulletin
Board, for the last two years. Common stock began trading publicly
during May 2004.
EAU
Technologies, Inc. Common Stock
|
||||||||
High
|
Low
|
|||||||
Year
Ended December 31, 2009
|
||||||||
Quarter
Ended March 31, 2009
|
$ | 0.65 | $ | 0.13 | ||||
Quarter
Ended June 30, 2009
|
0.40 | 0.18 | ||||||
Quarter
Ended September 30, 2009
|
0.39 | 0.20 | ||||||
Quarter
Ended December 31, 2009
|
1.01 | 0.23 |
EAU
Technologies, Inc. Common Stock
|
||||||||
High
|
Low
|
|||||||
Year
Ended December 31, 2008
|
||||||||
Quarter
Ended March 31, 2008
|
$ | 1.40 | $ | 0.92 | ||||
Quarter
Ended June 30, 2008
|
1.10 | 0.80 | ||||||
Quarter
Ended September 30, 2008
|
1.15 | 0.80 | ||||||
Quarter
Ended December 31, 2008
|
0.80 | 0.25 |
As the foregoing are over-the-counter
market quotations, they reflect inter-dealer prices, without retail markup,
markdown, or commissions, and may not represent actual
transactions.
As of
December 31, 2009, the Company had approximately 400 record holders of common
stock.
17
ITEM
6. SELECTED FINANCIAL DATA
As a smaller reporting company, as
defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), we are not required to provide the information required by this
item.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EAU TECHNOLOGIES, INC., previously
known as Electric Aquagenics Unlimited, Inc. (referred to herein sometimes as
“EAU,” “we,” “us,” or the “Company”), is in the business of
developing, manufacturing and marketing equipment that uses water electrolysis
to create non-toxic cleaning and disinfecting fluids as well as dairy drinking
water. These fluids have various commercial applications and may be used in
commercial food processing and organic or non-organic agricultural products that
clean, disinfect, remediate, hydrate and moisturize. The processes for which
these fluids may be used are referred to in this Report (the “Report”) as the
“EW Technology.” For example, we believe that our food and
agricultural treatment products potentially may be used to systemically treat
various facets and phases of the food chain, from soil to animal feed to meat
processing, by eliminating dangerous and unhealthy pathogens from the food chain
with organically based and highly effective solutions. We make the claim that
our products are “non-toxic”. We can do this because at the levels we employ our
technology, our studies both internal as well as through third parties show no
toxicity. Further studies are in progress to make more specific
claims. At the levels employed, the fluids and products are
environmentally safe and non-toxic and do not contain or leave harmful residues
associated with chemical-based supplements or disinfecting and cleaning agents.
The electrolyzed water fluids created by the EW Technology (referred to herein
sometimes as the “EW Fluids” or “Empowered WaterTM”)
generated by our specialized equipment can be used in place of many of the
traditional products used in commercial, industrial and residential disinfecting
and cleaning.
Our focus is on our three core
competencies which are, producing high volumes of electrolyzed water,
controlling the properties of the water and using our application
knowledge. Because of our ability to produce high volumes of water
and control the water properties, our target market is in commercial
applications where we believe we can add value by generating measurable
productivity and efficiency gains. We will continue to use a
disciplined stage gate development process that drives ideas to commercial test
installations that turn into revenues. Once we have developed an
application we will attempt to find strategic partners that would be able to
assist us with a large scale commercial roll-out of the
technology. Our goal is to generate streams of revenues through
pricing contracts that let us participate in the on-going added
value.
We have
identified the following industries for early stage sales and marketing focus:
1) dairy production and processing, 2) meat and poultry processing, 3) clean in
place (“CIP”) for food and beverage processing and 4) agricultural grow-out
and processing (“Primary Markets”). As of the date of this Report,
the Company was focused on these markets because we believe that for each of
these markets we have a competitive advantage, the potential ability to attract
a leading strategic industry partner, or we can provide an attractive
value-added proposition. To penetrate these markets, EAU is
conducting trials and completing commercial installations that will lead to
partnerships with industry leaders who can assist in rolling the technology out
on a large scale.
We
have obtained patent protection on four separate uses of electrolyzed fluids
(cleaning and disinfecting eggs, carpet cleaning, mold remediation and poultry
processing). Those uses are how the fluids are used and how they are
stabilized for use in different applications. Additionally, we have a patent
pending on the electrolysis equipment and several provisional patent pending
applications filed to protect new processes and products, as described herein.
18
Our operations are currently funded by
a combination of revenues and capital funding.
Critical
Accounting Estimates
The preparation of financial statements
and related disclosures in conformity with U.S. generally accepted accounting
principles and our discussion and analysis of our financial condition and
results of operations require us to make judgments, assumptions and estimates
that affect the amounts reported in our consolidated financial statements and
accompanying notes. Note 1 of the notes to consolidated financial
statements in Part II, Item 7 of this Form 10-K, describes the
significant accounting policies and methods used in preparation of our
consolidated financial statements. We base our estimates on historical
experience, current trends, future projections, and on various other assumptions
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates. We
believe the following to be our critical accounting estimates because they are
both important to the portrayal of our financial condition and results and they
require us to make judgments and estimates about matters that are inherently
uncertain.
Our critical accounting policies and
estimates include the following:
·
|
Revenue
recognition;
|
·
|
Inventory
valuation;
|
·
|
Impairment
of long-lived assets; and
|
·
|
Allowances
for doubtful accounts.
|
Revenue recognition. We recognize
revenue according to the terms of the contract and when title passes to the
customer or when services are performed in accordance with contract
terms. The Company provides an allowance for sales returns based on
current and historical experience.
Inventory. Inventory consists
primarily of finished goods, is stated at the lower of cost or market; cost is
determined on first-in, first-out (FIFO) method.
Impairment of long-lived assets.
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset. Long-lived assets are reported at the lower of
carrying or fair value less costs to sell.
Allowance for doubtful
accounts. The Company
sells its products to various commercial customers. It regularly
reviews its aging and reserves for amounts that may be at risk in
collection.
Commitments
and Contingencies
On May 1, 2006, we entered into a
consulting agreement with JL Montgomery Consulting, LLC, a Florida limited
liability company. By the terms of this agreement, JL Montgomery
Consulting agreed to assist the Company in locating and structuring equity and
long-term debt financing; to help establish financial policies and procedures;
to offer strategic financial assistance; to provide strategic business planning;
to offer financial advice to the Company and its Board of Directors on financial
matters; and to introduce the Company to third parties, including independent
companies, governmental contacts, and/or third party individuals interested in
purchasing our products or forming a business relationship with us. As
compensation, we granted to JL Montgomery Consulting a five-year, fully vested
warrant to purchase up to 500,000 of our $.0001 common stock at the price of
$2.76 per share. In October 2007, these warrants were extended an
additional 5 years.
19
In December 2006, the Company entered
into an amended exclusive licensing and product supplier agreement with Zerorez,
an affiliated entity, to provide Zerorez with its Primacide water solutions and
water generator for its carpet cleaning franchisees. The Company is committed to
sell to Zerorez the Primacide B water generator over the next 5 years under the
agreement, ending on December 31, 2011. The agreement allows for the
automatic renewal of the agreement for three (3) terms of five year terms,
unless both parties agree to the cancellation of the agreement.
In September 2005, Water Science, a
related party, paid to the Company $1,000,000 for the exclusive rights to sell
our products in South America and Mexico. The agreement allows for a
pro-rated refund during the first 5 years under certain
circumstances. The agreement provides termination rights by Water
Sciences and a pro rata refund of the fee. This agreement also gives
Water Science the rights to purchase machinery from the Company at cost plus 25
percent.
Management has determined that certain
stock options and warrants granted for services may not have been properly
treated for income tax withholding purposes. Management is reviewing
all granted options and warrants with professional tax accountants to determine
the proper treatment. In addition, in the past the Company has
classified several consultants and officers as independent contractors for
federal and state tax purposes. This classification could be
challenged by the applicable taxing authorities for some or all of these
individuals. Management believes that it is reasonably estimatable
and probable that the amount of liability to the Company will be approximately
$255,000. The Company has estimated the potential tax liability as a
range between $129,000 and $574,000.
Our operations are currently funded by
a combination of capital funding and revenues.
Financial Position and
Results of Operations
The following discussion should be read
in conjunction with selected financial data and the financial statements and
notes to financial statements.
Financial
Position
The Company had $181,481 in cash as of
December 31, 2009, compared to $494,612 at December 31, 2008. Our
working capital as of December 31, 2009 was a negative $3,261,810 compared to a
negative $895,317 at December 31, 2008. The primary reason for the change in our
working capital for the year ended December 31, 2009, was due to the increased
net value of the senior convertible note and our reduced inventory
values. The Company has received and recorded approximately $350,000
in advance deposits from Water Science on machine orders at December 31,
2009. We expect this will be reduced as the Company delivers machines
on order to Water Science, a related party. Water Science, who has
exclusive rights to sell our products in South America and Mexico, is also an
affiliate of the Company, by agreement may purchase machinery from us at cost
plus 25 percent. Long term debt decreased to $6,512 at December 31,
2009 from $39,150 at December 31, 2008. At December 31, 2009 our
stockholders’ deficit was $10,822,050.
Summary
of select balance sheet information follows:
December
31,
2009
|
December
31,
2008
|
|||||||
Balance Sheet
Data:
|
||||||||
Cash
and Cash Equivalents
|
$ | 181,481 | $ | 494,612 | ||||
Total
Current Assets
|
2,298,605 | 4,080,824 | ||||||
Total
Assets
|
3,407,770 | 4,665,778 | ||||||
Total
Current Liabilities
|
5,560,415 | 4,976,141 | ||||||
Long
Term Debt
|
6,512 | 39,150 | ||||||
Derivative
Liability
|
8,662,893 | 8,621,940 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 3,407,770 | $ | 4,665,778 |
20
Results
Of Operations For The Year Ended December 31, 2009 As Compared To The Year Ended
December 31, 2008
Revenues and Net
Loss - Net revenues for the year ended December 31, 2009, increased by
$287,401, to $724,510, of which $201,264 are revenues from a related party,
compared to revenues of $437,109 for the year ended December 31, 2008. The
majority of the revenues are from leasing revenues from our EW water systems in
the poultry and dairy market. We also recognized $200,000 in
licensing revenues related to the exclusive license granted to Water Science, a
related party.
Our cost
of sales increased by $58,242, to $143,048, for the year ended December 31,
2009. This is a 67% increase over the $84,806 cost of sales during the year
ended December 31, 2008. This increase is attributable to the additional sales
of our EW water machines.
Our net
loss for the year ended December 31, 2009, was $3,425,708, which is $3,301,506
less than the $6,727,214 net loss for the fiscal year ended December 31, 2008.
This decrease of 48% in the net loss is primarily attributable to the Company’s
continued efforts to focus on our core segments and continued cost saving
measures. A significant change in the net loss is also directly
related to the derivative liability. In October 2008, as part of a
financing agreement with a related party, the Company reduced the conversion
rate of the Company’s convertible note from $3.00 per share to $1.00 per
share. This reduction, as well as adjusting the fair market value of
the liability, resulted in a loss on derivative liability of $1,863,866 in 2008
as compared with a loss on the adjustment to fair value of the derivative
liability of $40,953 in 2009. Due to the uncertainty of continuing
operations of our system at the poultry plant, the Company recorded an
impairment loss of approximately $248,000.
General and
Administrative Expense – The Company incurred total general and
administrative expenses of $2,903,769, a 32% decrease over the $4,193,761
incurred in 2008. The majority of the change is due to certain warrants that
were issued in 2008 as part of ongoing financing agreements. General
and administrative expenses for 2009 consist primarily of payroll and labor
expense of $1,323,000, expenses related to stock options and warrants of
$267,000, professional fees of $512,000, insurance expense of $300,000, and
travel related expenses of $90,000.
During
the year ended December 31, 2009, we expended approximately $512,000 in
professional fees, which include legal and consulting fees. This was a decrease
of $148,000 or 22%, from the $660,000 spent in 2008. This decrease is primarily
due to the Company’s efforts to reduce costs and better utilize its own
resources.
Our
interest expense decreased from $742,625 in 2008 to $358,415 in
2009. The majority of the interest expense is related to a $3,000,000
loan to us from Water Sciences. This loan has a full discount of $3,000,000
which is being amortized to interest expense over the life of the loan. See Note
11 to our audited financial statements. This required accounting treatment
resulted in our recognizing $76,754 and $631,579 in interest expense for the
years ended December 31, 2009 and 2008, respectively.
Research and
Development - Our research and development expenses for the year ended
December 31, 2009, were $447,637, an increase of $219,606, or 96%, as compared
to $228,031 for the year ended December 31, 2008.
21
Summary
of select income statement information follows:
Year
Ended December
31, |
||||||||||||||||
2009
|
2008
|
Better
(Worse)
|
Percent
Change
|
|||||||||||||
Revenue,
net
|
$ | 724,510 | $ | 437,109 | $ | 287,401 | 66 | % | ||||||||
Gross
profit
|
581,462 | 352,303 | 229,159 | 65 | % | |||||||||||
Net
loss
|
3,425,708 | 6,727,214 | 3,301,506 | 48 | % | |||||||||||
Loss
per share
|
0.18 | 0.41 | 0.23 | 56 | % |
Liquidity
And Capital Resources
We do not
receive sufficient revenues to fund all of our operational needs. The
majority of our funding has come from shareholders. We currently have
sufficient funds to operate our business until the middle of 2010. We
do not have any agreements in place for additional funding. We may
not have enough funding for operations to fund our business until it is
developed enough to bring the business plan to maturity. Our working
capital requirements for the foreseeable future will vary based upon a number of
factors, including, our timing in the implementation of our business plan, our
growth rate and the level of our revenues. Our current assets, along
with cash generated from anticipated revenues, will not provide us with
sufficient funding for the next twelve months. Our two convertible
notes payable with Water Science, which will become due in November 2010, will
require cash of $3,600,000, plus interest, in order to satisfy the debt, if the
note is not converted into common stock. We anticipate that we may
need an additional $2,000,000 or more in future funding to execute our business
plan over the next twelve months. Moreover, if we able to expand our sale of EW
machines as anticipated, we may need significant additional working capital to
fund that expansion. We do not have arrangements in place to provide
us with this funding or any additional funding. In light of these circumstances,
the ability of the Company to continue as a going concern is in substantial
doubt.
At
December 31, 2009, we had cash and cash equivalents of $181,481, compared to
$494,612 at December 31, 2008. We have had continuing net losses of
$3,425,708 for the year ended December 31, 2009 compared with net losses of
$6,727,214 for the year ended December 31, 2008. The net loss per
share for the year ended 2009 was $0.18 compared to a loss of $0.41 per share
for the same period in 2008. Our working capital as of December 31,
2009 was a negative $3,261,810 for reasons discussed above under financial
position.
Net cash
used in operating activities for the year ended December 31, 2009 was
$2,375,816, a 36% decrease, compared to $3,728,474 for the same period in
2008. The primary changes to the cash flow from operating activities
were the decrease in the advance deposits on machine orders of $347,514, which
was offset by a decrease in accounts receivable of $277,008, the increase in
accrued expenses of $265,499, the recognition of deferred revenue of $200,000
and an increase in accounts payable of $28,457.
The
operating outflow of cash was reduced by the Company issuing warrants and stock
options in lieu of cash during the quarter of $266,778. The Company
recognized a non-cash increase from the discounting of the Company’s note
payable to Water Science, LLC of $76,754. (See Note 11 to the
Company’s financial statements.) Further, the Company recognized a
non-cash increase in the derivative liability of $40,953, due to changes in the
Black-Scholes value of the liability.
22
At
December 31, 2009, the Company’s net inventory was $2,022,462, representing a
decrease of 33% from the $3,014,503 on hand at December 31, 2008. The
Company installed some equipment in a commercial capacity and removed the
equipment from inventory and reclassified it into property and equipment during
2009 pursuant to lease agreements. The Company also reviewed the
inventory and have made adjustments to the fair value in order to bring it to
the lower of cost or market.
Net cash
provided in investing activities during the period ended December 31, 2009 was
$18,072 as compared to cash used of $26,003 in the same period in
2008. During 2009, the cash flows consisted primarily of cash
received from a note receivable of $150,000 and expenditures of $107,580 for
property and equipment and $24,348 for patent work. During 2008 the
primary cash flows from investing activities consisted of $26,003 related to
intellectual property disbursements.
Cash
flows from financing activities provided the Company $2,044,613 and $2,835,345
for the years ended December 31, 2009 and 2008, respectively. This is
primarily a result of the Company’s continued sales of its common stock and
issuance of a note payable to fund operations. During the years ended
2009 and 2008, the Company raised $1,450,000 and $2,851,500 from the sale of
stock, respectively. The Company also received $600,000 from the
issuance of a note payable during 2009. This amount was offset by
payments made on notes payable in the amount of $5,387 and $16,155 in 2009 and
2008, respectively.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a
smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), we are not required to provide the
information required by this item.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements and the independent auditors' report are
attached to this Report and are incorporated into this Item 7 by
reference.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There
have been no changes in our independent accountants, HJ & Associates, LLC,
or disagreements with them on matters of accounting or financial
disclosure.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures
The
Company has evaluated, with the participation of the Company’s principal
executive and principal financial officers, the effectiveness of the issuer’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2009,
pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the
principal executive and financial officers concluded that the Company’s
disclosure controls and procedures were effective at the reasonable assurance
level.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been or will be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdown can occur because of simple error or
mistake.
23
Management’s Report on Internal
Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s board of directors,
management and other associates, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and those policies and procedures that:
(1)
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
(2)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
(3)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission, known as COSO,
in Internal Control –
Integrated Framework. Based on its assessment, management has concluded
that, as of December 31, 2009, the Company’s internal control over
financial reporting was effective to provide reasonable assurance based on those
criteria.
The scope
of management’s assessment of the effectiveness of internal control over
financial reporting includes all of the Company’s operations.
The
Company has taken the steps discussed below under “Changes to Internal Control
Over Financial Reporting.”
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation requirements by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
Changes to Internal Control Over
Financial Reporting
There
have been no significant changes in our internal control over financial
reporting that occurred during our most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, or other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation.
24
ITEM
9B. OTHER INFORMATION
On March 25, 2010, the Company obtained
an unsecured short term loan of $250,000 from Peter Ullrich a member of the
Board of Directors of the Company. This is in addition to an advance
of $100,000 from Mr. Ullrich which occurred on February 18, 2010, as previously
reported on the Company Form 8-K filed on February 24,
2010. The final agreements to document the loan have not been
signed, and the material terms are not final. However, the parties have
discussed and preliminarily agreed to terms similar to the $600,000 loan with
Mr. Ullrich on August 27, 2009, and described in the Company Form 8-K filed on
September 2, 2009, except the new loan will not include a term requiring a
potential reversion of the exercise price to $3.00 per share. In
addition, the new loan will provide for an additional advance of $50,000 to be
available to the Company in June 2010. Assuming the other terms
remain as anticipated, the final loan will be a $400,000 loan at 10% simple
interest, with a maturity of November 1, 2010, and conversion rights into
Company common stock at an exercise price of $1.00 per share. The
material terms of the final agreement will be disclosed in subsequent filings
with the Securities and Exchange Commission.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
Directors
and Executive Officers
The
following table sets forth the names, age, and position of each of our directors
and executive officers.
Name and Address
|
Age
|
Position and Office Held
|
||
Wade
R. Bradley
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
49
|
Chief
Executive Officer; Director
|
||
Brian
D. Heinhold
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
37
|
Chief
Financial Officer
|
||
Doug
Kindred
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
55
|
Executive
Vice President and Chief Technology Officer
|
||
Joseph
A. Stapley
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
41
|
Senior
Vice President of Investor Relations and Business
Development
|
||
William
J. Warwick
1063
Ocean Ridge Drive
Wilmington,
North Carolina 28405
|
74
|
Director
|
||
Peter
Ullrich
1800
NW 89th
Place
Miami,
FL 33172
|
67
|
Director
|
||
Theodore
C. Jacoby, Jr.
1716
Hidden Creek Ct.
St.
Louis, MO 63131
|
69
|
Director
|
25
J.
Leo Montgomery
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
69
|
Non-executive
Chairman of the Board; Director
|
||
Karl
G. Hellman
1776
Chadds Lake Drive
Marietta,
GA 30068
|
63
|
Director
|
In May
2009, Jay Potter, a director of the Company, resigned his position as a
director. Mr. Potter has served on the audit committee of
EAU.
William
J. Warwick, an independent board member who is also a member of the Company’s
audit committee, is an audit committee financial expert as defined in Item
407(d)(5) of Regulation S-B promulgated by the U.S. Securities and Exchange
Commission. Mr. Warwick is also a member of the Company’s
Compensation Committee.
In April
2007, the Board of Directors of the Company appointed Peter Ullrich, as a member
of the Board of Directors.
In
September 2007, the Board of Directors of the Company appointed Ted Jacoby, Jr.,
as a member of the Board of Directors. The Board also appointed Mr. Jacoby as a
member of the Audit Committee and the Compensation Committee.
In
October 2007, the Board of Directors of the Company appointed Karl Hellman and
J. Leo Montgomery as members of the Board of Directors. The Board also appointed
Mr. Hellman as a member of the Compensation Committee and appointed Mr.
Montgomery as a member of the Audit Committee. Mr. Montgomery serves
as Non-Executive Chairman of the Board. In October 2009, Mr. Montgomery was
appointed chairman of the Audit Committee.
Biographical
Information
Set forth
below is biographical information for each officer and director.
Wade Bradley is the
Company’s Chief Executive Officer and a board member. Before joining
EAU Mr. Bradley served as President of the Retail and Wholesale Group from
November 2005 to November 2006, and as Vice President of the Consumer Products
Group from June 2000 to November 2005, of Oil-Dri Corporation of America
(NYSE:ODC). He worked at various other positions with Oil-Dri from 1990 to
2000. Mr. Bradley began his career at the public accounting firm of Arthur
Young & Company in their Entrepreneurial Services Group. He then worked as
the Executive Director of a Non-Profit organization that assisted disadvantaged
youths in furthering their education. Mr. Bradley received his Bachelor of
Science in Accountancy from University of Illinois. He then attended the Harvard
Business School for a Master of Business Administration.
26
Brian D. Heinhold is the
Company’s Chief Financial Officer. Mr. Heinhold took over as CFO when
the former CFO resigned in September 2006. He served as the Company’s
controller since joining the Company in May 2006. Before joining EAU,
he worked for a Certified Public Accounting firm, from 2004 to 2006, as an
auditor and consultant. While working at the CPA firm, Mr. Heinhold
was involved with both private and public companies. From 2002 to
2004, he worked as a manager of an entertainment center in Salt Lake City, where
he oversaw the operations of the company. Prior to that, he worked as the
business and finance manager at a local automotive dealership from 2001 to
2002. From 1994 to 2001, Mr. Heinhold was the accounting manager of a
small engineering and manufacturing firm, where he oversaw all the functions of
the accounting department. He has also served in many volunteer
positions where he worked with adults and youth. Mr. Heinhold
graduated from the University of Utah with a Masters of Public Accountancy
degree and a Bachelor of Arts degree in Finance.
Doug Kindred is currently the
Company’s Chief Technology Officer and has over 27 years of management and
engineering experience in numerous industries. He was a co-owner and Vice
President of ESI, Inc., a turnkey, design/build engineering construction firm
for over 18 years. He served as President of an air pollution control equipment
manufacturer prior to joining EAU. He has extensive experience throughout his
career with the production of premium quality water including numerous boiler
feed water systems that utilized demineralizers, automated acid and caustic
regeneration systems, water softeners and condensate polishing systems for
various industries. Mr. Kindred holds a B.S. degree in Mechanical Engineering
from Georgia Tech and is a graduate of the Kenan-Flagler Business School
Executive Program at The University of North Carolina, Chapel Hill. He is a
registered professional engineer.
Joseph A. Stapley is
Senior Vice President of Investor Relations and Business Development. He has
worked for the Company since 2003 and became an executive officer in June
2005. Prior to joining the Company, Mr. Stapley was the head of
Corporate Finance at Nexcore Capital, Inc., a San Diego, California based
broker-dealer. Since 1996, Mr. Stapley has been involved with the funding of
over $100 million in financings, joint ventures, mergers and acquisitions for
start-up and growth stage companies. Mr. Stapley held a Series 7
Registered Representative license until 2005. He has extensive international
experience gained as the owner of a number of restaurants and an import-export
company based in Tokyo, Japan. Mr. Stapley holds a Bachelor of
Science degree in Business and Entrepreneurship from the Marshall School at the
University of Southern California.
William J. Warwick
has served as a director of the Company since 2003. As an early
investor in the Company, Mr. Warwick brought international executive experience
to the Company. He retired from AT&T after 39 years of service
with responsibilities including President of AT&T Consumer Products and
Senior Vice President AT&T. In 1993 he was elected Chairman and CEO,
AT&T China. His business activities are numerous and worldwide, having
served on many high profile boards of directors and industry associations. He is
currently Chairman, Executive Advisory Board, Cameron School of Business and a
member of the Board of Directors of the UNC-W Corporation at the University of
North Carolina at Wilmington, North Carolina. Mr. Warwick obtained
his BSBA from the University of North Carolina, Chapel Hill, and his MBA from
Northwestern University, Chicago.
Peter Ullrich has
served as a director of the Company since April 2007. Mr. Ullrich is
currently EAU’s largest shareholder and single largest customer and brings vast
international business experience to EAU. Mr. Ullrich is the owner of Water
Science, LLC (“WS”), Latin America’s exclusive licensee of EAU’s Empowered
Water™ technologies. Mr. Ullrich is also the owner and Chairman of the Board of
Esmeralda Farms, an innovative leader in the international floral industry. Mr.
Ullrich has been involved in all aspects of the international floral industry
for over 35 years. He is a pioneer in developing and adopting cutting edge
technologies that not only assist in building better business in the floral
industry but creating cleaner safer working environments for his over 5,000
employees. Esmeralda Farms are certified by various international “green”
organizations, such as Florverde, Flower Label Program and Veriflora. Mr.
Ullrich was the recipient of the 2006 SAF Gold Medal Achievement Award.
Mr. Ullrich was born and educated in Germany.
27
Theodore C. Jacoby,
Jr. was appointed as a director in September 2007. Mr.
Jacoby’s experience in the dairy industry provides both application and
practical knowledge to EAU. Mr. Jacoby is currently President and
Chief executive Officer of T.C. Jacoby & Co., the leading independent
distributor of bulk dairy products including raw milk, cream, condensed milk,
powdered milk, butter and cheese in the U.S. Mr. Jacoby has expanded T.C.
Jacoby to numerous international markets. Mr. Jacoby is an active member of the
international dairy community serving on the Board of Directors of the U.S.
Dairy Export Committee Council since 1995. He currently serves on the
Trade Policy Committee. T.C. Jacoby & Company is a member of
many other prominent dairy trade organizations including the International Dairy
Foods Association, California Milk Processors Association and Associate Member
of National Milk Producers Federation. Mr. Jacoby received his Bachelor of
Science degree in Agriculture from the Missouri College of Agriculture, Food,
and Natural Resources. After graduation, Mr. Jacoby proudly served in the
United States Marine Corp for four years.
J. Leo Montgomery was
appointed as a director and non-executive Chairman of the Board in October
2007. Mr. Montgomery brings vast financial and business experience to
EAU. Mr. Montgomery was a senior partner at Ernst & Young
retiring in 2003 after a 39 year career. Mr. Montgomery served in
several leadership roles at Ernst & Young and was the coordinating partner
for many major clients of the firm. He is also a member of the Board
of Directors of Cypress Communications, Inc. Mr. Montgomery has served as
a consultant to EAU Technologies since May 2006. Mr. Montgomery is a
Certified Public Accountant and holds a B.A. degree from Harding
University.
Karl G. Hellman was appointed as a
director in October 2007. Mr. Hellman provides the Company with
vast marketing and business experience. Mr. Hellman is the founder of
Resultrek, a management consulting and marketing training firm, where he has
served as Chief Executive Officer and President since 1999. Prior to
that from 1997 to 1999, Mr. Hellman served as a Principal of Scott, Madden &
Associates, a management consulting firm. Mr. Hellman has more than
30 years of consulting and corporate experience. He received his B.A.
from Beloit College and his Masters Degree from Northwestern
University.
Committees
The Board
of Directors maintains standing Audit and Compensation Committees.
Audit Committee. The Audit
Committee, which consists of Theodore C. Jacoby, Jr., J. Leo Montgomery and
William J. Warwick, serves as an independent and objective party to, among other
things, review the Company’s financial statements and annual report, review and
appraise the audit efforts of the Company’s auditors and pre-approve permissible
services to be performed for the Company by its auditors, and is responsible for
the appointment, compensation and oversight of the work of the independent
public accountants which audit the Company’s financial statements. The primary
function of the Audit Committee involves oversight functions to support the
quality and integrity of the Company’s accounting and financial reporting
processes generally. It should be noted, however, that the members of the
Committee are not necessarily experts in the fields of auditing and accounting
and do not provide special assurances on such matters. The Audit Committee met
five times during 2009. The Board of Directors has determined that J. Leo
Montgomery is an “audit committee financial expert” as that term is defined by
applicable rules of the Securities and Exchange Commission. The report of the
Audit Committee appears below in this Proxy Statement. A copy of the Audit
Committee’s charter is included on the Company’s website at www.eau-x.com.
Compensation Committee. The
Compensation Committee, consisting of Karl Hellman, Theodore C. Jacoby, Jr. and
William J. Warwick, sets the compensation of executive officers and administers
the Company’s incentive plans, including the Company’s stock option plans. The Compensation
Committee met twice during 2009. The Compensation Committee has adopted a
written charter, a copy of which is available on the Company’s website at www.eau-x.com. As set
forth in the Compensation Committee charter, the Committee:
|
•
|
Has
the authority to engage independent compensation consultants and legal
advisors when determined by the Committee to be necessary or appropriate.
In 2007, the Committee engaged a compensation consultant, Phillip Blount
& Associates, Inc., to assist it with, among other things, research on
appropriate director, executive and employee compensation
levels.
|
28
•
|
Has
the authority to delegate its responsibilities as it may deem appropriate,
to the extent allowed under applicable law. The Committee generally does
not delegate its responsibilities to
others.
|
•
|
Requests
that the Chief Executive Officer provide to the Committee his
recommendations relative to compensation of other executive officers of
the Company. The Committee meets in executive session to determine the
compensation of the Chief Executive Officer of the
Company.
|
Meetings and Attendance. The
Board of Directors held 5 meetings during 2009. Each incumbent director attended
at least 75 percent of the aggregate of the meetings of the Board of Directors
and of the committees of which he was a member. The Company strongly encourages
each Board member to attend the Company’s annual meeting of
stockholders.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, and the regulations of
the Securities and Exchange Commission promulgated thereunder, require our
directors, executive officers and persons who own more than 10% of a registered
class of our equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission, and provide us with
copies of such reports.
Based
solely on a review of the copies of the reports furnished to us, or written
representations that no reports were required to be filed, we believe that
during the fiscal year ended December 31, 2009 all Section 16(a)
filing requirements applicable to our directors, officers, and greater than 10%
beneficial owners were completed.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
of Executive Officers
The
following table provides certain summary information concerning the compensation
paid or accrued by us and our subsidiaries, to or on behalf of our Chief
Executive Officer. Other than as set forth in the table, no executive
officer’s cash salary and bonus exceeded $100,000 in any of the applicable
years. The following information includes the dollar value of base
salaries, bonus awards, the value of restricted shares issued in lieu of cash
compensation and certain other compensation, if any, whether paid or
deferred:
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other Compensation ($)
|
Total
($)
|
||||||||||
Wade
R. Bradley
Chief
Executive Officer
|
2009
2008
|
240,000
240,000
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
6,000
(1)
6,000
(1)
|
246,000
246,000
|
||||||||||
Doug
Kindred
Chief
Technology Officer
|
2009
2008
|
176,985
176,985
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
6,000
(1)
6,000
(1)
|
182,985
182,985
|
||||||||||
Joe
Stapley
Senior
Vice President, Investor Relations
|
2009
2008
|
136,000
136,000
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
0.00
0.00
|
136,000
136,000
|
(1)
|
Other
compensation consists of car
allowances.
|
29
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth
information regarding stock options and restricted stock held by the Company’s
Named Executive Officers at December 31, 2009.
Option
Awards
|
|||||||||
Name
|
Number
of
Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
|||||
Wade
R. Bradley,
Chief
Executive Officer
|
400,000
|
100,000
|
1.30
|
11/6/2016
|
|||||
Doug
Kindred,
Chief
Technology Officer
|
20,000
25,000
265,000
|
265,000
|
3.50
2.45
1.30
|
5/27/2015
6/1/2015
11/8/2017
|
|||||
Joseph
Stapley,
Senior
Vice President, Investor Relations
|
25,000
25,000
79,615
|
79,615
|
3.50
2.45
1.30
|
5/27/2015
6/1/2015
12/6/2017
|
Employee
Compensation
In April 2007, the Company engaged
Phillip Blount and Associates, Inc., a consulting firm in Human Resources, to
review the company’s overall compensation program. Based upon the
findings of that study, recommendations of management, and review by the Board,
the compensation changes noted below were made.
Base compensation – Phillip Blount and
Associates, Inc. performed an analysis on compensations levels for each employee
based on job description and comparative compensation levels to companies our
size. Based on the results of their findings certain employee’s base
compensation was adjusted upon approval by the Company’s board of
directors. Among the employee’s whose base compensation levels were
adjusted was Joseph A. Stapley and Douglas Kindred (named
executives). The base pay for Mr. Stapley was increased from $120,000
to $136,000. Mr. Kindred’s employment agreement is summarized
below.
Incentive Stock Options – Based on the
recommendations of Phillip Blount and Associates, Inc. and upon approval from
the Board of Directors, a total of 480,260 stock options were granted to various
employees, pursuant to the Company’s 2007 Stock Incentive Plan. The
following executives were included in the stock option grants: Joseph
Stapley and Larry Earle, effective immediately. The options were issued at a
$1.30 exercise price and vest ratably over a period of four years. Mr. Stapley
was awarded a stock option grant of 159,230 shares. It was also recommended that
Douglas Kindred was granted stock options, which were granted in November 2007
as part of Mr. Kindred’s employment agreement.
30
Corporate Bonus Program – In connection
with the adjustments to our Human Resources policies, the Board approved a
corporate bonus program. Bonuses will be paid to executive officers when the
Company achieves an approximate operational break-even run rate, measured as the
achievement of consistent revenues of $250,000 per month over two consecutive
months, not taking into account capital or one time extraordinary charges. In
the calculation of monthly revenues, equipment revenues will only comprise up to
$50,000 of the $250,000 monthly revenue target for the calculation of the bonus.
Once this target is achieved, the payout of the bonus will be over a period of 2
months to 12 months, at the discretion of management.
The following executives are included
in the Bonus Program: Wade R. Bradley (President and Chief Executive
Officer) is eligible for a $72,000 bonus, 30% of his base pay. Doug Kindred
(Chief Technology Officer) is eligible for a $61,600 bonus, 35% of his base pay.
Mr. Stapley is eligible for a $40,800 bonus, 30% of his base pay.
401(k) retirement plan – As part of the
compensation package, the Company established a “safe-harbor” retirement plan
for its employees. Effective January 1, 2008, the Company established
the EAU 401(k) Retirement Trust, wherein all full time employees are eligible to
participate, including executives. The plan allows the employee’s to
defer a portion of their income in a retirement account. As an
incentive for the employee’s to participate in the retirement plan, the Company
has agreed to match the employee’s deferral 100% of the amount of the deferrals
that do not exceed 3% of the participant’s compensation, plus 50% of the amount
of the participant’s deferrals that exceed 3% of the participant’s compensation
but do not exceed 5% of the participant’s compensation.
Employment
Agreements
As of
December 31, 2009, 2 executives had current employment
agreements.
Employment
Agreement and Option Agreement with Doug Kindred
In connection with the continued
employment of Mr. Kindred as Chief Technology Officer on November 8, 2007, Mr.
Kindred and the Company entered into an employment agreement (the “Agreement”),
a copy of which is attached as Exhibit 10.1 to the Form 8-K filed by the Company
dated November 8, 2007 and incorporated herein by reference.
The
material terms of the agreement include the following:
1. Appointment. Per the
terms of the Agreement, Mr. Kindred will continue to serve as the Company’s
Chief Technology Officer.
2. Base Salary. Mr.
Kindred’s initial base salary will be $176,985 per year.
3. Annual Bonuses.
Beginning with the Company’s fiscal year which commences on January 1,
2008, Mr. Kindred is entitled to receive a bonus of up to 35% of his base salary
($61,945), upon the achievement of annual performance benchmarks, to be set by
the Board of Directors (the “Board”) and the CEO.
4. Inducement Stock Option
Grant. Mr. Kindred is entitled to receive stock options to purchase
530,000 shares of the Company’s common stock. The options will not constitute
incentive stock options under Section 422 of the Internal Revenue Code of
1986. The options shall vest in installments in accordance with the
schedule below:
•
|
132,500
shares shall vest on November 8,
2008
|
31
•
|
132,500
shares shall vest on November 8,
2009
|
•
|
132,500
shares shall vest on November 8,
2010
|
•
|
132,500
shares shall vest on November 8,
2011
|
The
exercise price per option is $1.30. The terms and conditions of the
options are included in a separate option grant agreement substantially in the
form attached in an 8-K the Company filed with the SEC dated November 8,
2007.
5. Standard Benefits.
Mr. Kindred will be eligible to participate in the Company’s standard benefits
package, on the same basis as other senior executives of the
Company.
6.
Vacation. Mr.
Kindred will be entitled to 20 business days of paid vacation per calendar
year.
7. Company Car. The
Company shall reimburse Mr. Kindred for the amount required to lease an
automobile of Mr. Kindred’s choice up to a maximum of $500 per month. In
addition, the Company will reimburse Mr. Kindred, up to a maximum of $1,000 per
year, for the following properly documented expenses related to such automobile:
(i) service, (ii) maintenance, (iii) repair and (iv) excess mileage fees
required by the automobile lease, if such excess mileage is the result of
required business travel by Mr. Kindred on behalf of the Company.
8. Term. The employment
agreement expires on the third anniversary of the Effective Date, subject to
automatic renewal for a one-year term unless either party has given the other 60
days’ prior written notice.
9. Severance. Mr.
Kindred will be entitled to certain severance payments and other rights if his
employment is terminated: (i) by the Company without “Cause,” as that term is
defined in his agreement, or (ii) by Mr. Kindred for “Good Reason,” as that term
is defined in his agreement. In each such instance, Mr. Kindred’s severance
benefits will be as follows:
•
|
Salary. Any unpaid base
salary through the date of
termination.
|
•
|
Vacation. Any earned but
unused vacation time.
|
•
|
Severance
Payment. He will be entitled to an amount equal to twelve
months of base salary payable over the 12-month period immediately
following termination.
|
•
|
Options. All unvested
options shall immediately vest and, together with the previously vested
options, must be exercised during the 60 days immediately following the
date of termination (and if not so exercised, all such options shall
automatically and irrevocably
terminate).
|
10.
Additional
Covenants. The employment agreement contains restrictive covenants,
including anti-solicitation provisions extending one year after termination of
his employment, as well as standard confidentiality obligations.
Employment
Agreement, Option Agreement, and Escrow Agreement with Mr. Bradley
In
connection with the appointment of Wade R. Bradley as Chief Executive Officer
and President and as further described under Item 5.02 below, the contents of
which are incorporated hereunder by reference, on October 24, 2006, Mr. Bradley
and the Company entered into an employment agreement, a copy of which was filed
as Exhibit 10.1 in an 8-K the Company filed with the SEC dated October 30, 2006
and incorporated herein by reference. Mr. Bradley agreed to begin working
for the Company on a date determined by him and in no event later than November
6, 2006 (the “Effective Date”).
32
In
February 2010, the Company and Wade R. Bradley amended Mr. Bradley’s employment
agreement to (i) remove a provision that required the Company to maintain
$240,000 in an escrow account as collateral for any future severance payment to
which Mr. Bradley may become entitled pursuant to the Employment Agreement and
(ii) reduce any future severance payment to which Mr. Bradley may become
entitled pursuant to the Employment Agreement from twelve months salary, paid
over the twelve month period following termination, to six months salary, paid
over the six month period following termination.
In
consideration of Mr. Bradley’s agreement to amend the Employment Agreement,
$120,000, less applicable Federal and state tax withholdings (which will be
retained by the Company and remitted to the applicable taxing authorities) and
applicable escrow agent fees, was disbursed directly to Mr.
Bradley. The remaining balance of $120,000 of the escrow funds, less
applicable escrow agent fees, was disbursed to the Company. All
interest earned on the escrow funds has also be remitted to the Company. Mr.
Bradley and the Company agreed to these amendments to provide the Company with
short-term liquidity it needs for operations.
In
conjunction with the disbursement of funds from escrow, the escrow agreement
between the Company, Mr. Bradley and Specialized Title Services, Inc., filed as
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed October 30, 2006,
was terminated.
The
material terms of the employment agreement include the following:
1. Appointment.
Beginning on the Effective Date, Mr. Bradley will serve as President and Chief
Executive Officer of the Company. The Company’s Board of Directors (the “Board”)
is obligated to nominate him to serve on the Board. Subject to shareholder
elections, he will serve on the Board through the term of his employment, with
no additional compensation for services as a director.
2. Base Salary. Mr.
Bradley’s initial base salary will be $240,000 per year. The Board may increase
his base salary from time to time.
3. Annual Bonuses.
Beginning with the Company’s fiscal year which commences on January 1,
2007, Mr. Bradley is entitled to receive a bonus of up to 30% of his base salary
($72,000), upon the achievement of annual performance benchmarks, to be set by
the Board from time to time in advance of each fiscal year.
4. Inducement Stock Option
Grant. Mr. Bradley is entitled to receive stock options to purchase
500,000 shares of the Company’s common stock, which will represent approximately
2.17% of the Company’s fully diluted capital stock. The options will not
constitute incentive stock options under Section 422 of the Internal Revenue
Code of 1986. The options shall vest in installments in accordance with
the schedule below:
•
|
100,000
shares shall vest on February 6,
2007
|
•
|
100,000
shares shall vest on November 6,
2007
|
•
|
100,000
shares shall vest on November 6,
2008
|
•
|
100,000
shares shall vest on November 6,
2009
|
33
•
|
100,000
shares shall vest on November 6,
2010
|
The
exercise price per option shall be equal to the closing sale price of the
Company’s common stock on October 24, 2006. The number of shares subject to the
options will be equitably adjusted in the event of any stock split, stock
dividend, reverse stock split or other similar event. The terms and conditions
of the options are included in a separate option grant agreement substantially
in the form attached in an 8-K the Company filed with the SEC dated October 30,
2006 as Exhibit 10.2.
5. Standard Benefits.
Mr. Bradley will be eligible to participate in the Company’s standard benefits
package, on the same basis as other senior executives of the
Company.
6. Vacation. Mr. Bradley
will be entitled to 20 business days of paid vacation per calendar
year.
7. Company Car. The
Company shall reimburse Mr. Bradley for the amount required to lease an
automobile of Mr. Bradley’s choice up to a maximum of $500 per month. In
addition, the Company will reimburse Mr. Bradley, up to a maximum of $1,000 per
year, for the following properly documented expenses related to such automobile:
(i) service, (ii) maintenance, (iii) repair and (iv) excess mileage fees
required by the automobile lease, if such excess mileage is the result of
required business travel by Mr. Bradley on behalf of the Company.
8. Term. The employment
agreement expires on the third anniversary of the Effective Date, subject to
automatic renewal for a one-year term unless either party has given the other 60
days’ prior written notice.
9. Severance. Mr.
Bradley will be entitled to certain severance payments and other rights if his
employment is terminated: (i) by the Company without “Cause,” as that term is
defined in his agreement, (ii) by Mr. Bradley for “Good Reason,” as that term is
defined in his agreement, or (iii) non-renewal other than for “Cause.” In each
such instance, Mr. Bradley’s severance benefits will be as follows:
•
|
Salary. Any
unpaid base salary through the date of
termination.
|
•
|
Vacation. Any
earned but unused vacation time.
|
•
|
Severance
Payment. He will be entitled to an amount equal to six
months of base salary payable over the 6-month period immediately
following termination. (This was amended in February
2010.)
|
•
|
Options. All
unvested options shall immediately vest and, together with the previously
vested options, must be exercised during the 60 days immediately following
the date of termination (and if not so exercised, all such options shall
automatically and irrevocably
terminate).
|
10. Additional Covenants.
The employment agreement contains restrictive covenants, including
anti-solicitation provisions extending one year after termination of his
employment, as well as standard confidentiality obligations.
Code
of Ethics
The
Company adopted a Code of Ethics on April 6, 2004, that applies to its principal
executive officer, principal financial officer, principal accounting officer and
controller or persons performing similar functions. A copy of our Code of Ethics
was filed as an exhibit to our Annual Report for the year ended December 31,
2004. The Company undertakes to provide to any person, without
charge, upon written or verbal request directed to Joseph A. Stapley, 1890 Cobb
International Boulevard, Kennesaw, Georgia, 30152, (678)388-9492.
34
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The
following table presents information about the beneficial ownership of our
common stock as of March 26, 2010 by:
·
|
each
person or entity who is known by us to own beneficially more than 5% of
the outstanding shares of our common
stock;
|
·
|
each
of our directors;
|
·
|
each
of our named executive officers;
and
|
·
|
all
directors and executive officers as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities, subject to community property laws, where applicable. The
percentage of beneficial ownership is based on 19,986,168 shares of common stock
outstanding as of March 26, 2010.
Name and Address of Beneficial
Owner
|
Number
of
Shares
Beneficially
Owned
|
Percentage
of
Shares
Outstanding
|
||||||
Peter
F. Ullrich (1)
1800
NW 89th Place
Miami,
FL 33172
|
19,715,769 | 68.3 | % | |||||
Water
Science, LLC. (1)
1800
NW 89th Place
Miami,
FL 33172
|
15,550,000 | 55.1 | % | |||||
Wade
R. Bradley (2)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
400,000 | 2.0 | % | |||||
Joseph
A. Stapley (3)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
227,865 | 1.1 | % | |||||
Doug
Kindred (4)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
438,250 | 2.2 | % | |||||
William
J. Warwick
1063
Ocean Ridge Drive
Wilmington,
North Carolina 28405
|
203,077 | 1.0 | % | |||||
Theodore
C. Jacoby, Jr.
1716
Hidden Creek Ct.
St.
Louis, MO 63131
|
303,077 | 1.5 | % | |||||
Karl
Hellman
555
Northpoint Center East, 4th Floor
Alpharetta,
GA 30022
|
53,077 | * | ||||||
J.
Leo Montgomery (5)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
597,377 | 2.9 | % | |||||
All
current directors and executive officers as a group
(11
persons)
|
21,969,342 | 72,7 | % |
*
|
Less than
1%
|
35
(1)
|
Mr.
Ullrich is the managing member of Water Science, LLC. Mr.
Ullrich beneficially owns 3,515,769 shares and indirectly through Water
Science beneficially owns 7,330,770 shares, warrants to purchase 5,169,230
shares at an exercise price of $1.30 per share and a convertible note
currently convertible into 3,700,000 shares. The warrants and
$3,000,000 of the convertible notes are held by Water Science,
LLC.
|
(2)
|
Mr.
Bradley holds options to purchase a total of 500,000 shares at an exercise
price of $1.30 per share; 400,000 shares are currently exercisable or
exercisable within 60 days of the date of this report.
|
(3)
|
Mr.
Stapley beneficially owns 98,250 shares and holds options to purchase a
total of 25,000 shares at an exercise price of $3.50 per share, options to
purchase 25,000 shares at an exercise price of $2.45 per share and options
to purchase 159,230 shares at an exercise price of
$1.30. Options to purchase 25,000 shares with an exercise price
of $3.50, 25,000 shares with an exercise price of $2.45 and 79,615 shares
with an exercise price of $1.30 are currently exercisable or exercisable
within 60 days of the date of this report.
|
(4)
|
Mr.
Kindred beneficially owns 128,250 shares and holds options to purchase a
total of 575,000 shares at exercise prices between $1.30 and $3.50 per
share. Options to purchase 20,000 shares with an exercise price
of $3.50, 25,000 shares with an exercise price of $2.45 and 265,000 shares
with an exercise price of $1.30 are currently exercisable or exercisable
within 60 days of the date of this report.
|
(5)
|
Mr.
Montgomery beneficially owns 97,377 shares and beneficially holds warrants
to purchase up to 500,000 shares at an exercise price of $2.76 per share
held by JL Montgomery Consulting,
LLC.
|
Securities Authorized for
Issuance Under Equity Compensation Plans
EQUITY
COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2009
|
|||||||
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
||||
Equity
compensation plans approved by security holders
|
585,260
|
$1.69
|
1,769,740
|
||||
Equity
compensation plans not approved by security holders*
|
7,802,607
|
$1.60
|
N/A
|
||||
Total
|
8,387,867
|
$1.60
|
N/A
|
(*)
Equity compensation plans not approved by security holders consist of
individually negotiated grants of options or warrants to consultants, directors,
suppliers, vendors and others who provide goods or services to the Company, and
grants of warrants to investors in connection with limited offerings of the
Company’s common stock.
36
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
following are certain transactions during the year ended December 31, 2009,
involving our officers, directors and shareholders owning more than 10% of our
outstanding stock. We believe that the terms of these transactions
are at least as favorable to us as we would expect to negotiate with unrelated
third parties.
On March
25, 2010, the Company obtained an unsecured short term loan of $250,000 from
Peter Ullrich a member of the Board of Directors of the Company. This
is in addition to an advance of $100,000 from Mr. Ullrich which occurred on
February 18, 2010, as previously reported on the Company Form 8-K filed on
February 24, 2010. The final agreements to document the loan
have not been signed, and the material terms are not final. However, the parties
have discussed and preliminarily agreed to terms similar to the $600,000 loan
with Mr. Ullrich on August 27, 2009, and described in the Company Form 8-K filed
on September 2, 2009, except the new loan will not include a term requiring a
potential reversion of the exercise price to $3.00 per share. In
addition, the new loan will provide for an additional advance of $50,000 to be
available to the Company in June 2010. Assuming the other terms
remain as anticipated, the final loan will be a $400,000 loan at 10% simple
interest, with a maturity of November 1, 2010, and conversion rights into
Company common stock at an exercise price of $1.00 per share. The
material terms of the final agreement will be disclosed in subsequent filings
with the Securities and Exchange Commission.
Effective
February 2009, Mr. Larry Earle resigned from the Company to pursue independent
consulting. We will to continue to work with Mr. Earle in the poultry
industry and benefit from his industry experience as he consults with the
Company.
During
the years ended December 31, 2009 and 2008, the Company engaged the services of
Resultrek for business consulting and planning. Resultrek is
controlled by Karl Hellman, a director of the Company. The Company
paid approximately $11,500 and $68,000, respectively, for various
projects.
In
November 2008, Theodore Jacoby, a director of the Company, purchased 100,000
shares of common stock of the Company for $100,000 at a price of $1.00 per
share.
The
Company has a consulting agreement with JL Montgomery Consulting, LLC, a
consulting practice owned by Mr. J. Leo Montgomery, who is the non-executive
Chairman of the Board. Under the agreement, in April 2006 Mr. Montgomery
received a warrant to purchase 500,000 shares of common stock at $2.76 per
share, to expire at the end of five years. (The agreement is described more
fully in the Company’s March 31, 2006 Quarterly Report on Form 10-QSB and
attached to the Form 10-QSB as exhibit 10.13. The consulting agreement and its
description are incorporated herein by this reference.) In October 2007, the
warrant was amended to expire in ten rather than five years. This agreement also
provides for consulting fees in a monthly amount to be negotiated after the
Company achieves two consecutive quarters of positive EBITDA. As the Company has
not achieved this milestone, no fees have been payable to date.
In
September 2005, the Company entered into a Senior Convertible Note (the “Note”)
with Water Science, a related party, in exchange for $3,000,000. Pursuant to the
debt agreement, the Note accrues interest at the rate of 3% per annum and was
initially due, principal and interest together, on September 16,
2008. In June 2008, Water Science agreed to extend the maturity date
of the Note to March 16, 2009. In March 2009, the Company and Water
Science agreed to extend the maturity date to September 16, 2009 and increase
the interest rate to 10%. No principal or interest payments need to
be paid during the loan period. In October 2008, as part of a new
financing agreement, the Company amended the Note and changed the conversion
rate from $3.00 per share to $1.00 per share. The Note may be
converted into 3,000,000 shares of the Company’s $0.0001 par value common stock
prior to the maturity date, and at any time, by the holder at a price per share
equal to $1.00 per share, subject to certain other conversion
adjustments. The Company granted a security interest in all of the
Company’s assets as collateral for the loan. In connection with the
original issuance of the Note, the Company granted a three year warrant to
purchase up to two million shares of the Company’s $0.0001 par value common
stock with an exercise price of $2.76 per share.
37
In August
2009, the Company entered into the Second Amendment (the “Amendment”) to the
Second Amended and Restated Senior Secured Convertible Promissory Note (the
“Promissory Note”) with Water Science, a related party. The Amendment
extends the maturity date of the Promissory Note from September 16, 2009 to
November 1, 2010. In all other material respects, the Promissory Note
remains unchanged.
In May
2007, the Company entered into a termination agreement related to the
cancellation and reissuance of the existing warrants (“Original Warrants”) to
purchase a total of 8.4 million shares of $0.0001 par value common stock of the
Company, at a price of $2.76 per share, held by Water Science. The
Company granted to Water Science replacement warrants to purchase 8.4 million
shares of common stock at a price of $1.30 per share, with an expiration date of
May 9, 2010. The Company had a right to require Water Science to
exercise warrants for up to 3,230,769 shares. During the year ended
2008, the Company required Water Science to exercise all of the options under
the put rights.
On August
27, 2009, the Company entered into a Loan Agreement with Mr. Peter Ullrich, a
related party, whereby he agreed to loan $600,000 to the Company, funded in
three installments, as follows, $200,000 payable on September 15, 2009, $200,000
payable on October 15, 2009, and $200,000 payable on November 15,
2009.
Simple
interest will accrue at a rate of 10% per annum on the unpaid principal amount
outstanding and the loan will mature on November 1, 2010, at which time accrued
interest and the outstanding principal balance shall be due. The
agreement contains an optional conversion right, whereby the Lender may convert
all or any portion of the outstanding principal and interest due into shares of
the Company’s common stock at a price per share equal to $1.00 per share;
however, if the Lender fails to make any of the installment payments on the
dates set forth above, the conversion price will increase to $3.00 per
share.
The
remaining warrants and the conversion rate contain “round down” provisions where
the exercise price is to be adjusted if the Company should issue stock for less
than the original exercise price. Due to this feature, and pursuant
to SEC guidance, the Company accounts for the warrants and convertible feature
as a derivative liability with changes in fair value being recorded in the
income statement. As of December 31, 2009 and 2008, the value of the
derivative liability was $8,662,893 and $8,621,940, respectively. The
Company recorded a loss of $40,953 and $3,140,087 in the change of the
derivative liability to fair market value for the years ended December 31, 2009
and 2008, respectively.
Director
Independence
The Board
of Directors has determined in accordance with the listing standards of The
NASDAQ Stock Market that each of the following directors is an independent
director: Mr. Hellman,
Mr. Jacoby and Mr. Warwick. To be an independent director under those
listing standards, a director must have no relationship which, in the opinion of
the Company’s Board of Directors, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director, and
must have no relationships which are specified in the independence standards to
preclude an independence determination. Mr. Bradley is not independent because
he is an executive officer. Mr. Ullrich is not independent due to the level of
beneficial ownership of common stock of the Company. As described at “Certain
Relationships and Related Transactions,” Mr. Hellman received consulting fees in
the amount of approximately $11,500. Due to the nature and amount of
these fees, Mr. Hellman is not disqualified from independence under the NASDAQ
listing standards. In making the foregoing determination, the Board
considered all relationships between members of the Board of Directors and the
Company, including the relationships described at “Certain Relationships and
Related Transactions.”
38
The Board
of Directors unanimously concluded that the above-rule listed relationships
would not affect the independent judgment of the three independent directors,
Mr. Hellman, Mr. Jacoby and Mr. Warwick, based on their experience, character
and independent means, and therefore do not preclude an independence
determination.
The Board
approved the participation of J. Leo Montgomery as a non-independent member of
the Audit Committee in accordance with the NASDAQ listing standards
exception.
The Board
has determined that J. Leo Montgomery does not meet the above independence
standards due to his consulting arrangement with the Company. The Board
nonetheless appointed Mr. Montgomery to the Audit Committee due to his extensive
financial and accounting expertise. The Board of Directors has determined that
Mr. Montgomery is an “audit committee financial expert” as that term is defined
by applicable rules of the Securities and Exchange Commission. The Audit
Committee previously did not have such an expert.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT
FEES
The
following table shows the audit fees for professional services rendered by the
principal accountant for the audit of the Company’s annual financial statements
and review of financial statements included in the Company’s Form 10-Q or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal
years. Audit fees consisted of work performed in the integrated audit
of the financial statements or the review of interim financial statements and
the related SEC Form 10-K and 10-Q filings, respectively.
HJ
& Associates, LLC
2009
|
2008
|
|||||||
Audit
Fees
|
$ | 58,218 | $ | 51,255 |
AUDIT-RELATED
FEES
HJ did
not bill us for any “audit-related fees” (as defined in Regulation S-X) in
connection with its audit of our financial statements for the fiscal years ended
December 31, 2009 or December 31, 2008.
FINANCIAL
INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For the
fiscal years ended December 31, 2009 and December 31, 2008, HJ & Associates
did not bill us for, nor performed, any financial information systems design or
implementation.
TAX
FEES
HJ &
Associates did not bill us for any professional services rendered for tax
related services for the fiscal years ended December 31, 2009 or 2008. Tax
services provided by other firms are not included in this
disclosure.
39
ALL
OTHER FEES
We were
billed $1,119 and $0 for other professional services by HJ & Associates, LLC
for the fiscal years ended December 31, 2009 and December 31, 2008,
respectively.
AUDITOR
INDEPENDENCE
Our Board
of Directors considers that the work done for us in the year ended December 31,
2009 by HJ & Associates, LLC is compatible with maintaining HJ &
Associates, LLC independence.
POLICY
ON PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES
The Audit
Committee has adopted a written policy providing guidelines and procedures for
the pre-approval of all audit and permissible non-audit services provided by the
Company’s independent auditors. This policy contemplates that the independent
auditors will provide to the Audit Committee a proposed engagement letter and an
audit service fee proposal during the first quarter of each of the Company’s
fiscal years with a target of approving an engagement letter and appointing an
independent auditor for the audit of the Company’s financial statements as of
and for the year ended during such fiscal year prior to the review by the
Company’s independent auditor of the Company’s financial statements for the
Company’s first quarter. For non-audit services, Company’s management is
expected to submit to the Committee for approval a list of non-audit services
that it recommends that the Committee engage the independent auditor to provide
for the fiscal year, together with a budget estimating non-audit service
spending for the fiscal year. The Committee must approve both the engagement of
the auditor to provide the non-audit services and the budget for such services
prior to commencing the engagement. To ensure prompt handling of unexpected
matters, the Audit Committee has delegated to its Chair the authority to amend
or modify the list of approved permissible non-audit services and fees. The
Audit Committee approved all of the audit, audit related and tax services of the
Company’s principal accountant described in the preceding
paragraphs.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial
Statements
The
following financial statements are incorporated by reference in Item 8 of this
Report:
Independent
Auditors’ Report
Balance
Sheet, December 31, 2009 and 2008
Statements
of Operations for years ended December 31, 2009 and 2008
Statements
of Changes of Stockholder Equity for years ended December, 2009 and
2008
Statements
of Cash Flow for year ended December, 2009 and 2008
Notes to
Financial Statements
40
(a)(2)
Exhibits
Exhibit
No.
|
Identification of
Exhibit
|
|
3(i).1
|
Articles
of Incorporation (incorporated by reference from registration statement on
Form SB-2 filed with the SEC on July 29, 2002)
|
|
3(i).2
|
Certificate
of Amendment of Certificate of Incorporation (incorporated by reference
from registration statement on Form SB-2 filed with the Securities and
Exchange Commission on July 29, 2002)
|
|
3(i).3
|
Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from current report on Form 8-K filed with the Securities and Exchange
Commission on January 17, 2007)
|
|
3(ii).1
|
Amended
and Restated Bylaws (incorporated by reference from registration statement
on Form 8-K filed with the Securities and Exchange Commission on September
12, 2007).
|
|
10.1
|
Settlement
and License Amendment dated as of March 7, 2008 between the Company and
University of Georgia Research Foundation (Incorporated by reference from
current report on Form 8-K filed with the Securities and Exchange
Commission on March 13, 2008)
|
|
10.2
|
Stock
Purchase Agreement dated as of October 6, 2008 between the Company and
Water Sciences LLC (Incorporated by reference from current
report on Form 8-K filed with the Securities and Exchange Commission on
October 17, 2008)
|
|
10.3
|
Second
Amended and Restated Senior Secured Convertible Promissory Note dated as
of October 6, 2008 between the Company and Water Sciences LLC
(Incorporated by reference from current report on Form 8-K filed with the
Securities and Exchange Commission on October 17, 2008)
|
|
10.4
|
Warrant
Agreement, by and between the Company and Water Science, LLC, dated May 1,
2006 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K,
dated May 4, 2006)
|
|
10.5
|
Registration
Rights Agreement by and between the Company and Water Science, LLC, dated
May 1, 2006 (Incorporated by reference to Exhibit 10.3 of the Company’s
Form 8-K, dated May 4, 2006)
|
|
10.6
|
Amended
and Restated Exclusive License and Distribution Agreement, by and between
the Company and Water Science, LLC, dated May 1, 2006 (Incorporated by
reference to Exhibit 10.4 of the Company’s Form 8-K, dated May 4,
2006)
|
|
10.7
|
Consulting
Agreement by and between the Company and JL Montgomery Consulting, LLC,
dated May 1, 2006 (Incorporated by reference to Exhibit 10.13 of the
Company’s Form 10-QSB for the quarter ended March 31,
2006)
|
|
10.8*
|
Form
of Employment Agreement dated as of October 24, 2006 with Wade R. Bradley.
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
October 30, 2006.)
|
|
10.9*
|
Form
of Option Agreement dated as of October 24, 2006 with Wade R. Bradley.
(Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
October 30, 2006.)
|
|
10.10
|
Form
of Escrow Agreement dated as of October 24, 2006 with Wade R. Bradley.
(Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K dated
October 30, 2006.)
|
|
10.11
|
Amended
and Restated License Agreement dated as of January 10, 2007 by and between
Electric Aquagenics Unlimited, Inc. and Zerorez Franchising Systems, Inc.
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
November 16, 2006.)
|
|
10.12
|
Warrant
Agreement dated as of May 9, 2007 between the Company and Peter F. Ullrich
and Water Sciences LLC (Incorporated by reference to Exhibit 10.2 of the
Company’s Form 8-K dated May 15, 2007)
|
|
10.13
|
Warrant
and Put Agreement dated as of May 9, 2007 between the Company and Peter F.
Ullrich and Water Sciences LLC (Incorporated by reference to Exhibit 10.3
of the Company’s Form 8-K dated May 15, 2007)
|
|
10.14
|
Amended
and Restated Registration Rights Agreement dated as of May 9, 2007 between
the Company and Peter F. Ullrich and Water Sciences LLC (Incorporated by
reference to Exhibit 10.4 of the Company’s Form 8-K dated May 15,
2007)
|
|
10.15
|
License
agreement between University of Georgia Research Foundation, Inc. and
Electric Aquagenics Unlimited, Inc. dated June 18, 2002 (Incorporated by
reference to Exhibit 10.9 of the Company’s Form 10-QSB for the quarter
ended June 30, 2007)
|
|
10.16
|
Agreement
for Purchase and Sale of Assets dated as of August 13, 2007 between the
Company and Perfect Water & Essentials, LLC (“PWE”) (Incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K dated August 22,
2007)
|
|
10.17
|
Agreement
for Purchase and Sale of Assets dated as of August 13, 2007 between the
Company and Perfect Water & Essentials, LLC (“PWE”) (Incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27,
2007)
|
41
Exhibit
No.
|
Identification of
Exhibit
|
|
10.18*
|
EAU
Technologies, Inc. 2007 Stock Incentive Plan (incorporated by reference to
Annex A to the Registrant’s Definitive Proxy Statement filed with the
Commission on November 5, 2007).
|
|
10.19*
|
Form
of Employment Agreement dated as of November 8, 2007 with Doug Kindred
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
November 8, 2007)
|
|
10.20*
|
Form
of Option Agreement dated as of November 8, 2007 with Doug Kindred
(Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
November 8, 2007)
|
|
10.21
|
Promissory
Note dated November 15, 2007 in favor of the Company by Perfect Water
& Essentials, LLC (Incorporated by reference to Exhibit 10.2 of the
Company’s Form 8-K dated November 15, 2007)
|
|
10.22*
|
Form
of Option Agreement dated as of December 6, 2007 with select employees
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
December 6, 2007)
|
|
10.23
|
Waiver
and Consent Letter dated August 30, 2007 between the Company and Water
Science, LLC. (Incorporated by reference to Exhibit 10.28 of
the Company’s Form 10-KSB dated March 27, 2008)
|
|
10.24
|
Stock
Purchase Agreement dated as of January 10, 2007 by and between Electric
Aquagenics Unlimited, Inc. and Peter Ullrich. (Incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K dated November 16,
2006.)
|
|
10.25
|
Stock
Purchase Agreement dated as of November 10, 2008 between the Company and
Theodore Jacoby. (Incorporated by reference from Ex. 4 to quarterly report
on Form 10-Q filed with the Securities and Exchange Commission on November
13, 2008)
|
|
10.26
|
Form
of Restricted Stock Award Agreement for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
February 27, 2008.)
|
|
10.27*
|
Form
of Restricted Stock Award Agreement for Employees. (Incorporated by
reference to Exhibit 10.2 of the Company’s Form 8-K dated February 27,
2008.)
|
|
10.28
|
First
Amendment to Lease Agreement dated as of October 31, 2006 between the
Company and Cobb International Associates. (Incorporated by reference to
Exhibit 10.39 of the Company’s Registration Statement on Form S-1 (File
No. 333-144646 dated April 11, 2008.)
|
|
10.29
|
Security
Agreement dated September 16, 2005 between the Company and Water Science
LLC (Incorporated by reference to Ex.10.3 to the Company’s Form 8-K filed
on October 12, 2005).
|
|
10.30
|
First
Amendment to Second Amended and Restated Senior Secured Convertible
Promissory Note signed March 24, 2009 between the Company and Water
Science LLC. (Incorporated by reference to Ex.10.30 to the Company’s Form
10-K filed on March 30, 2009).
|
|
10.31
|
First
Amendment to Stock Purchase Agreement dated March 25, 2009 between the
Company and Water Science LLC. (Incorporated by reference to Ex.10.31 to
the Company’s Form 10-K filed on March 30, 2009).
|
|
10.32*
|
Amendment
to Employment Agreement dated as of December 17, 2008 between the Company
and Wade Bradley. (Incorporated by reference to Ex.10.32 to the Company’s
Form 10-K filed on March 30, 2009).
|
|
10.33*
|
Amendment
to Employment Agreement dated as of December 17, 2008 between the Company
and Doug Kindred (Incorporated by reference to Ex.10.33 to the Company’s
Form 10-K filed on March 30, 2009).
|
|
10.34
|
Second
Amendment to Second Amended and Restated Senior Secured Convertible
Promissory Note dated August 27, 2009, between the Company and Water
Science LLC. (Incorporated by reference to Ex. 10.1 to the Company’s Form
8-K filed with the Securities and Exchange Commission on September 2,
2009)
|
|
10.35
|
$600,000
Loan Agreement dated August 27, 2009, between the Company and Peter
Ullrich. (Incorporated by reference to Ex. 10.2 to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
September 2, 2009)
|
|
10.36
|
Stock
Purchase agreement between the Company and Ted
Jacoby. (Incorporated by reference to Ex. 10.1 to the Company’s
Form 8-K filed with the Securities and Exchange Commission on March 10,
2010)
|
|
10.37
|
Waiver
and Consent Letter dated August 30, 2007 between the Company and JLM
Consulting, LLC. (Incorporated by reference to Ex. 10.2 to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
March 10, 2010)
|
42
Exhibit
No.
|
Identification of
Exhibit
|
|
10.38
|
Waiver
and Consent Letter dated August 30, 2007 between the Company and Water
Science, LLC. (Incorporated by reference to Ex. 10.3 to
the Company’s Form 8-K filed with the Securities and Exchange Commission
on March 10, 2010)
|
|
14
|
Code
of Ethics (incorporated by reference from our Annual Report for the year
ended December 31, 2004, filed with the Securities and Exchange Commission
on April 15, 2005).
|
|
23.1
|
Consent
of HJ & Associates, LLC.
|
|
31.1
|
Certification
by Wade R. Bradley under section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
by Brian D. Heinhold under section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of Wade R. Bradley pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*Executive Compensation
Arrangement Pursuant to 601(b)(10)(iii)(A) of Regulation S-K.
43
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EAU Technologies, Inc.: | |||
Dated:
March 30, 2010
|
By:
|
/s/ Wade R. Bradley | |
Wade R. Bradley | |||
Chief Executive Officer | |||
(Principal Executive Officer) |
By:
|
/s/ Brian D. Heinhold | ||
Brian D. Heinhold | |||
Chief Financial Officer | |||
(Principal Financial Officer) |
Pursuant to the requirements of the
Securities Act of 1933, this report has been signed by the following persons in
the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Wade R. Bradley
|
Chief
Executive Officer
|
March
30, 2010
|
||
Wade
R. Bradley
|
(principal
executive officer)
|
|||
/s/ Brian D. Heinhold
|
Chief
Financial Officer
|
March
30, 2010
|
||
Brian
D. Heinhold
|
(principal accounting officer) | |||
/s/ J. Leo Montgomery
|
Director
|
March
30, 2010
|
||
J.
Leo Montgomery
|
||||
/s/ Karl Hellman |
Director
|
March
30, 2010
|
||
Karl
Hellman
|
||||
/s/ Theodore C. Jacoby, Jr.
|
Director
|
March
30, 2010
|
||
Theodore
C. Jacoby, Jr.
|
||||
/s/ Peter F. Ullrich
|
Director
|
March
30, 2010
|
||
Peter
F. Ullrich
|
||||
/s/ William J. Warwick
|
Director
|
March
30, 2010
|
||
William
J. Warwick
|
44
EAU TECHNOLOGIES,
INC.
REPORT
AND FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
CONTENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Financial
Statements
|
||
Balance
Sheets
|
F-3
– F-4
|
|
Statements
of Operations
|
F-5
|
|
Statements
of Changes in Stockholders’ Equity (Deficit)
|
F-6
|
|
Statements
of Cash Flows
|
F-7
– F-8
|
|
Notes
to Financial Statements
|
F-9
– F-23
|
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
EAU
Technologies, Inc.
Kennesaw,
Georgia
We have
audited the accompanying balance sheets of EAU Technologies, Inc. as of December
31, 2009 and 2008, and the related statements of operations, stockholders equity
(deficit) and cash flows for each of the two years in the period ended December
31, 2009. 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 our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial position of EAU Technologies, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We were
not engaged to examine management’s assessment about the effectiveness of EAU
Technologies, Inc.’s internal control over financial reporting as of December
31, 2009 and, accordingly, we do not express an opinion thereon.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 16 to the
financial statements, the Company has a working capital deficit as well as a
deficit in stockholders equity. This raises substantial doubt about
the Company’s ability to continue as a going concern. Management’s
plans in regard to this matter are also described in Note 16. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ HJ
& Associates, LLC
HJ &
Associates, LLC
Salt Lake
City, Utah
March 30,
2010
F-2
EAU
TECHNOLOGIES, INC.
BALANCE
SHEETS
ASSETS
December
31,
|
||||||||
2009
|
2008
|
|||||||
CURRENT
ASSETS
|
||||||||
Cash and cash
equivalents
|
$ | 181,481 | $ | 494,612 | ||||
Accounts
receivable, net
|
42,995 | 8,710 | ||||||
Accounts
receivable – related party, net
|
6,248 | 358,656 | ||||||
Accrued
interest
|
- | 1,875 | ||||||
Prepaid
expense
|
45,419 | 52,468 | ||||||
Note
Receivable, current portion
|
- | 150,000 | ||||||
Inventory,
net
|
2,022,462 | 3,014,503 | ||||||
Total current
assets
|
2,298,605 | 4,080,824 | ||||||
PROPERTY
AND EQUIPMENT, net of
|
||||||||
accumulated depreciation of
$133,821 and $113,360
|
26,183 | 46,644 | ||||||
LEASED
EQUIPMENT, net of
|
||||||||
accumulated depreciation of
$406,952 and $15,156
|
721,221 | 200,253 | ||||||
OTHER
ASSETS
|
||||||||
Deposits
|
10,496 | 10,496 | ||||||
Restricted
cash
|
240,000 | 240,000 | ||||||
Patents,
net of accumulated amortization of $644 and $0
|
111,265 | 87,561 | ||||||
Total other
assets
|
361,761 | 338,057 | ||||||
Total assets
|
$ | 3,407,770 | $ | 4,665,778 |
The
accompanying footnotes are an integral part of these financial
statements
F-3
EAU
TECHNOLOGIES, INC.
BALANCE SHEETS
(Continued)
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
December
31,
|
||||||||
2009
|
2008
|
|||||||
CURRENT
LIABILITIES
|
||||||||
Accounts payable
|
$ | 401,663 | $ | 373,206 | ||||
Accrued
expenses
|
924,107 | 658,608 | ||||||
Warranty
reserve
|
92,160 | 100,000 | ||||||
Advance
deposits on machine orders – related party
|
349,986 | 697,500 | ||||||
Current
portion of long-term debt
|
50,832 | 23,581 | ||||||
Current portion of deferred
licensing revenue – related party
|
141,667 | 200,000 | ||||||
Convertible note payables –
related party, current portion net of discounts of $0 and
$76,754
|
3,600,000 | 2,923,246 | ||||||
Total current
liabilities
|
5,560,415 | 4,976,141 | ||||||
LONG
TERM LIABILITIES
|
||||||||
Long term debt, net of current
portion
|
6,512 | 39,150 | ||||||
Deferred licensing revenue –
related party
|
- | 141,667 | ||||||
Derivative liability – related
party
|
8,662,893 | 8,621,940 | ||||||
Total long term
liabilities
|
8,669,405 | 8,802,757 | ||||||
Total Liabilities
|
14,229,820 | 13,778,898 | ||||||
STOCKHOLDERS’
EQUITY (DEFICIT)
|
||||||||
Common
stock, $.0001 par value; 50,000,000 shares authorized; 19,886,168 and
18,285,918 issued and outstanding, respectively
|
1,989 | 1,829 | ||||||
Additional paid in
capital
|
41,311,512 | 39,594,894 | ||||||
Accumulated
deficit
|
(52,135,551 | ) | (48,709,843 | ) | ||||
Total stockholders’ equity
(deficit)
|
(10,822,050 | ) | (9,113,120 | ) | ||||
Total liabilities and
stockholders’ equity (deficit)
|
$ | 3,407,770 | $ | 4,665,778 |
The
accompanying footnotes are an integral part of these financial
statements
F-4
EAU
TECHNOLOGIES, INC.
STATEMENTS OF
OPERATIONS
For
the Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
NET
REVENUES – RELATED PARTY
|
$ | 201,264 | $ | 226,188 | ||||
NET
REVENUES
|
523,246 | 210,921 | ||||||
TOTAL
REVENUES
|
724,510 | 437,109 | ||||||
COST
OF GOODS SOLD
|
143,048 | 84,806 | ||||||
GROSS
PROFIT
|
581,462 | 352,303 | ||||||
OPERATING
EXPENSES
|
||||||||
Depreciation and
amortization
|
21,106 | 64,330 | ||||||
Research and
development
|
447,637 | 228,031 | ||||||
General and
administrative
|
2,903,769 | 4,193,761 | ||||||
Total operating
expenses
|
3,372,512 | 4,486,122 | ||||||
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
(2,791,050 | ) | (4,133,819 | ) | ||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
expense
|
(358,415 | ) | (742,625 | ) | ||||
Interest
income
|
13,458 | 12,956 | ||||||
Gain
(Loss) on derivative liability
|
(40,953 | ) | (1,863,866 | ) | ||||
Impairment
of fixed assets
|
(248,748 | ) | 140 | |||||
Total other income
(expense)
|
(634,658 | ) | (2,593,395 | ) | ||||
LOSS
BEFORE PROVISION FOR
INCOME TAXES
|
(3,425,708 | ) | (6,727,214 | ) | ||||
PROVISION
FOR INCOME TAXES
|
- | - | ||||||
NET
LOSS
|
$ | (3,425,708 | ) | $ | (6,727,214 | ) | ||
NET
LOSS PER SHARE
|
$ | (0.18 | ) | $ | (0.41 | ) | ||
WEIGHTED
AVERAGE OF SHARES
OUTSTANDING
|
19,336,215 | 16,404,945 |
The
accompanying footnotes are an integral part of these financial
statements
F-5
EAU
TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS’
EQUITY(DEFICIT)
ADDITIONAL
|
|||||||||||||||||||||
COMMON
STOCK
|
PAID
IN
|
ACCUMULATED
|
|||||||||||||||||||
SHARES
|
AMOUNT
|
CAPITAL
|
DEFICIT
|
TOTAL
|
|||||||||||||||||
Balance,
December 31, 2007
|
15,105,650 | $ | 1,511 | $ | 35,406,545 | $ | (41,982,629 | ) | $ | (6,574,573 | ) | ||||||||||
Issuance
of shares for cash of $1,500
|
150,000 | 15 | 1,485 | - | 1,500 | ||||||||||||||||
Issuance
of shares of restricted stock to members of the Board of Directors and
certain employees
|
187,962 | 19 | 216,137 | - | 216,156 | ||||||||||||||||
Exercise
of warrants for $2,200,000, or $1.30 per share, by Water Science, a
related party
|
1,692,306 | 169 | 2,199,831 | - | 2,200,000 | ||||||||||||||||
|
|||||||||||||||||||||
Issuance
of shares for $1,050,000, or $1.00 per share, to Water Science, a related
party
|
1,050,000 | 105 | 1,049,895 | - | 1,050,000 | ||||||||||||||||
|
|||||||||||||||||||||
Issuance
of shares for $100,000, or $1.00 per share, to Theodore Jacoby, a
director
|
100,000 | 10 | 99,990 | - | 100,000 | ||||||||||||||||
|
|||||||||||||||||||||
Issuance
and vesting of options and warrants for services
|
- | - | 621,011 | - | 621,011 | ||||||||||||||||
|
|||||||||||||||||||||
Net
loss for the year ended December 31, 2008
|
- | - | - | (6,727,214 | ) | (6,727,214 | ) | ||||||||||||||
|
|||||||||||||||||||||
Balance,
December 31, 2008
|
18,285,918 | 1,829 | 39,594,894 | (48,709,843 | ) | (9,113,120 | ) | ||||||||||||||
Issuance
of shares for cash at $1.00 per share, to Water Science, a related
party.
|
1,450,000 | 145 | 1,449,855 | - | 1,450,000 | ||||||||||||||||
Issuance
and vesting of options and warrants for services
|
- | - | 197,028 | - | 197,028 | ||||||||||||||||
Cancellation
of shares
|
(24,750 | ) | (2 | ) | 2 | - | |||||||||||||||
Issuance
of shares of restricted stock to members of the Board of
Directors
|
150,000 | 15 | 59,985 | 60,000 | |||||||||||||||||
Issuance
of shares for consulting services
|
25,000 | 2 | 9,748 | 9,750 | |||||||||||||||||
Net
loss for the year ended December 31, 2009
|
- | - | - | (3,425,708 | ) | (3,425,708 | ) | ||||||||||||||
Balance,
December 31, 2009
|
19,886,168 | $ | 1,989 | $ | 41,311,512 | $ | (52,135,551 | ) | $ | (10,822,050 | ) |
The
accompanying footnotes are an integral part of these financial
statements
F-6
EAU
TECHNOLOGIES, INC.
STATEMENTS OF CASH
FLOWS
For
the Year ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (3,425,708 | ) | $ | (6,727,214 | ) | ||
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
||||||||
Depreciation
|
412,901 | 77,996 | ||||||
Bad
debt expense
|
41,115 | 55,092 | ||||||
Common
stock issued for services
|
69,750 | 216,156 | ||||||
Warrants
and options granted
|
197,028 | 621,011 | ||||||
Discount
of note payable
|
76,754 | 631,579 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
(Increase) in accounts
receivable
|
(75,400 | ) | (2,606 | ) | ||||
(Increase) decrease in accounts
receivable – related party
|
352,408 | (1,041 | ) | |||||
(Increase) decrease in pre-paid
expense
|
7,049 | (21,868 | ) | |||||
(Increase) decrease in accrued
interest
|
1,875 | (1,875 | ) | |||||
Decrease (increase) in
inventory
|
186,858 | (318,309 | ) | |||||
Decrease in
deposits
|
- | 1,162 | ||||||
Increase in accounts
payable
|
28,456 | 86,023 | ||||||
Increase in accrued
expenses
|
265,499 | 13,554 | ||||||
(Decrease) in warranty
reserve
|
(7,840 | ) | (22,000 | ) | ||||
(Decrease)
in advance deposits on machine orders – related party
|
(347,514 | ) | - | |||||
(Decrease)
in deferred revenue
|
(200,000 | ) | (200,000 | ) | ||||
Increase
in derivative liability
|
40,953 | 1,863,866 | ||||||
Net cash used in operating
activities
|
(2,375,816 | ) | (3,728,474 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Acquisition
of property and equipment
|
(107,580 | ) | - | |||||
Proceeds
from note receivable
|
150,000 | - | ||||||
Intellectual
property disbursements
|
(24,348 | ) | (26,003 | ) | ||||
Net
cash provided (used) in investing activities
|
18,072 | (26,003 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments
on notes payable
|
(5,387 | ) | (16,155 | ) | ||||
Proceeds
from issuance of common stock – related party
|
1,450,000 | 2,851,500 | ||||||
Proceeds
from issuance of notes payable – related party
|
600,000 | - | ||||||
Net
cash provided by financing activities
|
2,044,613 | 2,835,345 | ||||||
NET
INCREASE (DECREASE) IN CASH
|
(313,131 | ) | (919,132 | ) | ||||
CASH
and cash equivalents, beginning of period
|
494,612 | 1,413,744 | ||||||
CASH
and cash equivalents, end of period
|
$ | 181,481 | $ | 494,612 |
The
accompanying footnotes are an integral part of these financial
statements
F-7
EAU
TECHNOLOGIES, INC.
STATEMENTS OF CASH
FLOWS
(Continued)
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Cash paid during the period
for:
|
||||||||
Interest
|
$ | 4,369 | $ | 20,650 | ||||
Income Taxes
|
$ | - | $ | - | ||||
Supplemental
Disclosures of Non-cash Investing and Financing Activities
|
||||||||
Common stock issued for
services
|
$ | 69,750 | $ | 216,156 |
The
accompanying footnotes are an integral part of these financial
statements
F-8
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Description – EAU
Technologies, Inc. (the “Company” or “EAU”), was incorporated on March 6, 2000,
under the laws of the state of Delaware and commenced operations in September,
2000 as Primacide, Inc. On May 10, 2001, the Company changed its name
from Primacide, Inc., to Electric Aquagenics Unlimited, Inc. On
January 17, 2007 the Company changed its name from Electric Aquagenics
Unlimited, Inc. to EAU Technologies, Inc. The Company is in the
business of developing, manufacturing and marketing equipment that uses water
electrolysis to create fluids. These fluids have various commercial applications
and may be used in commercial food processing organic or non-organic
agricultural and consumer products that clean, disinfect, remediate, hydrate and
moisturize. These products, which the Company intends to market
nationally and internationally, are for commercial and residential use. The
Company’s financial statements are presented in accordance with accounting
principles generally accepted in the United States of America.
Cash
and Cash Equivalents - For purposes of the balance sheet and statement of
cash flows, the Company considers all highly liquid debt instruments purchased
with maturity of three months or less to be cash equivalents.
Receivables
– Receivables represent valid claims against debtors for sales or other
charges arising on or before the balance-sheet date and are reduced to their
estimated net realizable value. The Company estimates allowances for
doubtful accounts based on the aged receivable balances and historical
losses. The Company charges off uncollectible accounts receivable
when management estimates no possibility of collecting the related
receivable.
Inventory – Inventory, consisting
primarily of finished goods, is stated at the lower of cost or market; cost is
determined on first-in, first-out (FIFO) method.
Property
and Equipment, and Depreciation – Property and equipment are recorded at
historical cost. Expenditures for additions and major improvements
that extend the life of the asset are capitalized, whereas the cost of
maintenance and repairs are expensed as incurred. The Company is
currently testing its system in multiple locations. Upon completion
of the tests, and once the lease for the system has started, the cost of the
system will be transferred from inventory to property and
equipment. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets ranging from three to seven
years. Depreciation expense for the years ended December 31, 2009 and
2008 was $20,684 and $64,330, respectively. In September 2005, the
Company pledged all the assets of the Company as collateral for the Senior
Convertible Note, payable to Water Science, a related party.
Long-Lived
Assets – Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset. Long-lived assets are reported at the lower of
carrying or fair value less costs to sell.
Fair
Value of Financial Instruments – The carrying values of cash
on hand, receivables, payables and accrued expenses approximate their fair value
due to the short period to maturity of these instruments.
F-9
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recognition of
Sales and Costs of Goods Sold – The Company records sales of its
products based upon the terms of the contract; when title passes to its
customers; and, when collectibility is reasonably assured. The
Company provides an allowance for sales returns based on current and historical
experience. Cost of goods sold consists of the purchase price of
products sold including inbound shipping charges.
Warranties – The Company warrants its
products against defects in materials and workmanship for a period of three
years. The Company has accrued a reserve for these anticipated future
warranty costs.
Income
Taxes – Deferred
income taxes are provided using the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of the changes in tax laws
and rates of the date of enactment.
When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions
taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above is reflected as a
liability for unrecognized tax benefits in the accompanying balance sheet along
with any associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest
and penalties associated with unrecognized tax benefits are classified as
additional income taxes in the statement of income.
Accounting
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company 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.
Research
and Development – Research and development costs are expensed as
incurred. Research and development expenses for the years ended December 31,
2009 and 2008 were approximately $448,000 and $228,000,
respectively.
Patents,
Trademarks and Intellectual Property –
Patents, trademarks and intellectual property, consisting of trade secrets and
formulas are recorded in accordance with Accounting Standards Codification 350,
Intangibles – Goodwill and
Other (ASC 350), (formerly Statement of Financial Accounting Standards
“SFAS” No. 142, "Goodwill and Other Intangible Assets"). As such,
patents and trademarks are initially measured based on their fair
values.
Loss Per Share
–
The Company follows the
provisions of ASC Topic 260 "Earnings Per Share". Earnings per share (EPS) are computed
based on the weighted average number of shares actually
outstanding. No changes in the computation of diluted earnings per share amounts
are presented because warrants granted would have been anti-dilutive due to the
Company’s net reported
loss.
F-10
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
Stock
Based Compensation -
Stock-based compensation is calculated according to FASB ASC Topic 718,
Compensation — Stock
Compensation, which requires a fair-value-based measurement method to
account for stock-based compensation.
Recently Enacted Accounting Standards
- Accounting Standards
Codification (ASC 105)(the “Codification”). The Codification, which was
launched on July 1, 2009, became the single source of authoritative
non-governmental U.S. generally accepted accounting principles (GAAP),
superseding various existing authoritative accounting pronouncements. The
Codification eliminates the GAAP hierarchy contained in Statement 162 and
establishes one level of authoritative GAAP. All other literature is considered
non-authoritative. This Codification is effective for financial statements
issued for interim and annual periods ending after September 15, 2009.
There are no changes to our consolidated financial statements due to the
implementation of the Codification other than changes in reference to various
authoritative accounting pronouncements in our consolidated financial
statements.
Business Combinations (ASC
805): In
January 2009, the Company adopted Business Combinations
changing the method of applying the acquisition method in a number of
significant aspects. The standard also amends Income Taxes, such that
adjustments made to valuation allowances on deferred taxes and acquired tax
contingencies associated with acquisitions that closed prior to the effective
date of Business
Combinations would also apply the provisions of Business Combinations. The
standard was effective on a prospective basis for all acquisitions on or after
January 1, 2009 and does not have a significant impact on the Company’s
financial statements.
Fair Value Measurements and
Disclosures (ASC 820): In
September 2009, an update was made to Fair Value Measurements and
Disclosures – “Investments in Certain Entities that Calculate Net Asset
Value per Share (or Its Equivalent).” This update permits entities to
measure the fair value of certain investments, including those with fair values
that are not readily determinable, on the basis of the net asset value per share
of the investment (or its equivalent) if such net asset value is calculated in a
manner consistent with the measurement principles in Financial Services-Investment
Companies as of the reporting entity’s measurement date. The update also
requires enhanced disclosures about the nature and risks of investments within
its scope that are measured at fair value on a recurring or nonrecurring basis.
Effective for interim and annual periods ending after December 15, 2009,
the Company is currently evaluating the effect that adoption of this update will
have, if any, on its financial statements.
In August
2009, an update was made to Fair Value Measurements and
Disclosures – “Measuring Liabilities at Fair Value.” This update permits
entities to measure the fair value of liabilities, in circumstances in which a
quoted price in an active market for an identical liability is not available,
using a valuation technique that uses a quoted price of an identical liability
when traded as an asset, quoted prices for similar liabilities or similar
liabilities when traded as assets or the income or market approach that is
consistent with the principles of Fair Value Measurements and
Disclosures. Effective upon issuance, the Company has determined the
update does not currently have an impact on its financial
statements.
F-11
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
In April
2009, the FASB provided additional guidance in Fair Value Measurements and
Disclosures for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased and on
identifying circumstances that indicate a transaction is not orderly. The
guidance emphasizes that the objective of a fair value measurement remains the
same. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sales) between market participants at the measurement
date under current market conditions. This guidance is effective for interim and
annual reporting periods ending after June 15, 2009. The Company believes
the adoption of this guidance has no impact on its financial
statements.
Subsequent Events (ASC
855): In
May 2009, the FASB issued Subsequent Events
establishing general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
Subsequent Events sets
forth the period after the balance sheet date that entities should evaluate
events of transactions that may occur for potential recognition or disclosure in
the financial statements, circumstances under which entities should recognize
and the disclosures that should be made about events or transactions that occur
after the balance sheet date. Effective for interim and annual periods ending
after June 15, 2009, we adopted this standard for our quarter ended
June 30, 2009, and the adoption did not have a material impact on our
results of operations, financial position or cash flows.
Revenue Recognition (ASC
605): In
October 2009, an update was made to Revenue Recognition – “Multiple-Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force” and
the corresponding Software—“Certain Revenue Arrangements That
Include Software Elements – a consensus of the FASB Emerging Issues Task Force.”
The update to Revenue
Recognition removes the objective-and-reliable-evidence-of-fair-value
criterion, replaces references to “fair value” with “selling price”, provides a
hierarchy that entities must use to estimate the selling price, eliminates the
use of the residual method for allocation, and expands the ongoing disclosure
requirements. The Software update changes the
accounting model for revenue arrangements and provides guidance on how a vendor
should allocate arrangement consideration to deliverables that includes both
tangible products and software. Both standards are effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The adoption of this standard is not
expected to have a material impact on our financial statements.
Reclassification - The financial statements
for periods prior to December 31, 2009, have been reclassified to conform to the
headings and classifications used in the December 31, 2009, financial
statements.
NOTE
2 – CONCENTRATIONS OF CREDIT RISK
The Company occasionally maintains cash
balances in excess of the $250,000 federally insured limit. To date,
the Company has not incurred, and the Company’s management does not currently
expect to incur, any losses associated with its cash balances.
The Company extends unsecured credit to
its customers in the normal course of business. Periodically, the
Company performs credit evaluations of its customers’ financial condition for
determination of doubtful accounts.
F-12
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
3 – RESTRICTED CASH
In
November 2006 the Company entered into an employment agreement with Wade
Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited
$240,000 with an escrow agent in January 2007. The Company has recognized this
amount as restricted cash on the Company’s financial statements. The
Company recognized $40 and $2,962 in interest income from the escrow account for
the years ended December 31, 2009 and 2008, respectively. In February
2010, the Company and Mr. Bradley amended Mr. Bradley’s employment agreement and
removed the requirement of the escrow account and have closed the
account.
NOTE
4 - TRADE ACCOUNTS RECEIVABLE
Trade
accounts receivable consist of the following
at:
December
31
|
||||||||
2009
|
2008
|
|||||||
Trade
accounts receivable
|
$
|
130,660
|
$
|
78,710
|
||||
Trade
accounts receivable – related party
|
6,248 | 358,656 | ||||||
Less
allowance for doubtful accounts
|
(87,665 | ) | (70,000 | ) | ||||
$ | 49,243 | $ | 367,366 |
During
2009, sales to three customers represented approximately 89% of our
revenues. During 2008, one customer, a related party represented
approximately $52% of our revenues. Bad debt expense for the years
ended December 31, 2009 and 2008 was $41,115 and $55,092,
respectively.
NOTE
5 - INVENTORIES
The
composition of inventories is as follows at December 31:
2009
|
2008
|
|||||||
Finished
goods
|
$ | 894,488 | $ | 1,828,984 | ||||
Raw
materials
|
1,527,974 | 1,585,519 | ||||||
Allowance
for obsolete inventory
|
(400,000 | ) | (400,000 | ) | ||||
$ | 2,022,462 | $ | 3,014,053 |
NOTE
6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following at December 31:
2009
|
2008
|
|||||||
Machinery
and equipment
|
$ | 63,426 | $ | 63,426 | ||||
Furniture
and fixtures
|
64,442 | 64,442 | ||||||
Leasehold
improvements
|
32,136 | 32,136 | ||||||
Total
property and equipment
|
160,004 | 160,004 | ||||||
Less:
accumulated depreciation
|
(133,821 | ) | (113,360 | ) | ||||
Property
and equipment, net
|
$ | 26,183 | $ | 46,644 |
F-13
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
7 – LEASED ASSETS
Leased
assets consist of equipment that has been placed in service and is under an
operating lease agreement with two customers. Each system is custom
designed for the size and fluid requirements of the application. We
recorded approximately $445,000 and $39,000 in revenues from the lease of these
systems for the year ended December 31, 2009 and 2008,
respectively. The amount of equipment at December 31:
2009
|
2008
|
|||||||
Leased
equipment
|
1,128,173 | 215,409 | ||||||
Less:
accumulated depreciation
|
(406,952 | ) | (15,156 | ) | ||||
Leased
equipment, net
|
$ | 721,221 | $ | 200,253 |
Due to
the uncertainty of continuing operations of our system at a poultry plant, the
Company recorded an impairment loss of approximately $248,000. The
impairment was determined to be an amount that the Company could not recover
should the system be removed. We concluded that the remaining value
could be recouped in a subsequent sale.
At
December 31, 2009, minimum lease payments receivable for each succeeding period
based on current agreements is as follows:
2010
|
$ | 168,000 | ||
2011
|
$ | 168,000 | ||
2012
|
$ | 126,000 | ||
2013
|
$ | - | ||
2014
|
$ | - |
NOTE
8 – INTANGIBLE ASSETS
Patents,
trademarks and intellectual property, consisting of trade secrets and formulas
are recorded in accordance with Accounting Standards Codification 350, Intangibles – Goodwill and Other
(ASC 350), (formerly Statement of Financial Accounting Standards “SFAS”
No. 142, "Goodwill and Other Intangible Assets"). As such, patents
are initially measured based on their fair values. The patents which
have been granted are being amortized over a period of 20 years. Patents
which are pending or are being developed are not amortized until a patent has
been issued. The amount of intangible assets, consisting of patents, as of
December 31, 2009 is as follows:
Gross
amount of patents
|
$ | 111,909 | ||
Less
amount of accumulated amortization
|
(644 | ) | ||
Net
value of patents
|
$ | 111,265 |
Amortization
expense for the fiscal years ended December 31, 2009 and 2008 was $644 and $0,
respectively.
The
estimated amortization expense, based on current intangible balances, for the
next fiscal years beginning January 1, 2010 is as follows:
2010
|
$ | 1,357 | ||
2011
|
$ | 1,357 | ||
2012
|
$ | 1,357 | ||
2013
|
$ | 1,357 | ||
2014
|
$ | 1,357 |
F-14
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
9 – RELATED PARTY TRANSACTIONS
Sales to
Affiliates – In September 2005, Water Science, a related party, paid to
the Company $1,000,000 for the exclusive rights to sell our products in South
America and Mexico. The agreement allows for a pro-rated refund
during the first 5 years under certain circumstances. The Company
recognizes income from this agreement over the first 5 years of the
agreement. The Company recognized $200,000 in each of the years ended
December 31, 2009 and 2008. This agreement also gives Water Science
the rights to purchase machinery from the Company at cost plus 25
percent. During the year ended December 31, 2009, the Company sold
less than $1,500 in parts to Water Science. During the year ended
December 31, 2008, the Company sold one small water generator and miscellaneous
spare parts to Water Science for $26,188. Further, the Company has
received and recorded $349,986 in advance deposits from Water Science on machine
orders at December 31, 2009. In connection with the sales to Water
Sciences, the Company has recorded approximately $750 in accounts receivable at
December 31, 2009.
Convertible Note
Payable - In September 2005, the Company entered into a Senior
Convertible Note with Water Science in exchange for $3,000,000 (see Note
11). Due to the discount of this note and the beneficial conversion
feature, the Company has recognized approximately $76,750 and $632,500 in
interest expense for the years ended December 31, 2009 and 2008,
respectively. The Company accounts for the warrants and convertible
debt feature as a derivative liability with changes in fair value being recorded
in the income statement. The Company recorded a loss of $40,953 due
to the change in the fair market value at December 31, 2009. The
Company recorded a loss of $1,863,866 in the change of the derivative liability
to fair market value for the year ended December 31, 2008.
The
Company entered into a Loan Agreement with Mr. Peter Ullrich, a related party,
whereby he agreed to loan $600,000 to the Company. Simple interest
will accrue at a rate of 10% per annum on the unpaid principal amount
outstanding and the loan will mature on November 1, 2010. (See Note
11)
Escrow
Arrangement with Chief Executive Officer – In October 2006, the
Company entered into an escrow agreement with the Chief Executive Officer.
Pursuant to the escrow agreement, to secure the Company’s obligation to make the
Severance Payment, the Company is required to deposit, at its election, either
(1) cash in the amount of $240,000 or (2) an irrevocable letter of credit with a
face amount of $240,000, with an agreed upon escrow agent who shall hold such
funds (or letter of credit) in escrow. In January 2007, the Company deposited
$240,000 in cash with an escrow agent. In February 2010, the Company and the
Chief Executive Officer entered into an agreement to terminate the escrow
agreement and close the account.
Advances –
Periodically throughout the year, the Company advances officers and employees
cash for certain reimbursable expenses. As of December 31, 2009 and
2008, the Company had advances to employees or officers in the amount of
$5,500.
Employee Options
– In December 2007, the Company granted 480,260 options to various
employees. The options are for a term of ten (10) years and have an
exercise price of $1.30 per share. The options vest over a period of
four (4) years. The options were valued using the Black-Scholes
model with the following assumptions: risk free rate of 4.64%,
volatility at 87.06% and the stock price at $1.30. The value of each
option is approximately $1.13. In May 2009, 36,000 options were
cancelled due to the departure of an employee. The Company recognized
$74,709 during the year ended December 31, 2009.
In
November 2007, the Company granted 530,000 options to Douglas Kindred, in
connection with the appointment of Mr. Kindred as Chief Technology
Officer. The options are for a term of ten (10) years and have an
exercise price of $1.30 per share. The options vest over a period of
four (4) years. The options were valued using the Black-Scholes
model with the following assumptions: risk free rate of 4.28%,
volatility at 85.99% and the stock price at $1.01. The value of each
option is approximately $0.85. The Company recognized $69,424 during
the year ended December 31, 2009.
In
October 2006, the Company granted 500,000 options to Mr. Wade Bradley, the
Company’s CEO, pursuant to his employment agreement. The options vest
over four years and have an exercise price of $1.30 per share. The
Company recognized $52,895 during the year ended December 31,
2009. (See Note 13)
F-15
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
10 – WARRANTY RESERVE
The
Company warrants its products against defects in materials and workmanship for a
period of three years. The Company reviews the historical experience
of failure rates and estimates the rate of warranty claims that will be made and
has accrued a warranty reserve for these anticipated future warranty
costs. If actual results differ from the estimates, the Company would
adjust the estimated warranty liability. Changes in the warranty
reserve are as follows:
For
the Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Warranty
reserve at beginning of period
|
$ | 100,000 | $ | 122,000 | ||||
Costs
accrued for additional warranties
|
- | 3,208 | ||||||
Service
obligations honored
|
(7,840 | ) | (25,208 | ) | ||||
Warranty
reserve at end of period
|
$ | 92,160 | $ | 100,000 |
NOTE
11 - SENIOR CONVERTIBLE DEBT
In
September 2005, the Company entered into a Senior Convertible Note (the “Note”)
with Water Science, a related party, in exchange for $3,000,000. Pursuant to the
debt agreement, the Note accrues interest at the rate of 3% per annum and was
initially due, principal and interest together, on September 16,
2008. In June 2008, Water Science agreed to extend the maturity date
of the Note to March 16, 2009. In March 2009, the Company and Water
Science agreed to extend the maturity date to September 16, 2009 and increase
the interest rate to 10%. No principal or interest payments need to
be paid during the loan period. In October 2008, as part of a new
financing agreement, the Company amended the Note and changed the conversion
rate from $3.00 per share to $1.00 per share. The Note may be
converted into 3,000,000 shares of the Company’s $0.0001 par value common stock
prior to the maturity date, and at any time, by the holder at a price per share
equal to $1.00 per share, subject to certain other conversion
adjustments. The Company granted a security interest in all of the
Company’s assets as collateral for the loan. In connection with the
original issuance of the Note, the Company granted a three year warrant to
purchase up to two million shares of the Company’s $0.0001 par value common
stock with an exercise price of $2.76 per share.
In August
2009, the Company entered into the Second Amendment (the “Amendment”) to the
Second Amended and Restated Senior Secured Convertible Promissory Note (the
“Promissory Note”) with Water Science, a related party. The Amendment
extends the maturity date of the Promissory Note from September 16, 2009 to
November 1, 2010. In all other material respects, the Promissory Note
remains unchanged.
In May
2007, the Company entered into a termination agreement related to the
cancellation and reissuance of the existing warrants (“Original Warrants”) to
purchase a total of 8.4 million shares of $0.0001 par value common stock of the
Company, at a price of $2.76 per share, held by Water Science. The
Company granted to Water Science replacement warrants to purchase 8.4 million
shares of common stock at a price of $1.30 per share, with an expiration date of
May 9, 2010. The Company had a right to require Water Science to
exercise warrants for up to 3,230,769 shares. During the year ended
2008, the Company required Water Science to exercise all of the options under
the put rights.
F-16
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
11 - SENIOR CONVERTIBLE DEBT – (Continued)
On August
27, 2009, the Company entered into a Loan Agreement with Mr. Peter Ullrich, a
related party, whereby he agreed to loan $600,000 to the Company, funded in
three installments, as follows, $200,000 payable on September 15, 2009, $200,000
payable on October 15, 2009, and $200,000 payable on November 15,
2009. Simple interest will accrue at a rate of 10% per annum on the
unpaid principal amount outstanding and the loan will mature on November 1,
2010, at which time accrued interest and the outstanding principal balance shall
be due. The agreement contains an optional conversion right, whereby
the Lender may convert all or any portion of the outstanding principal and
interest due into shares of the Company’s common stock at a price per share
equal to $1.00 per share.
The
warrants and the conversion rate of the convertible notes contain “round down”
provisions where the exercise price is to be adjusted if the Company should
issue stock for less than the original exercise price. Due to this
feature, and pursuant to SEC guidance, the Company accounts for the warrants and
convertible feature as a derivative liability with changes in fair value being
recorded in the income statement. As of December 31, 2009 and 2008,
the value of the derivative liability was $8,662,893 and $8,621,940,
respectively. The Company recorded a loss of $40,953 and $1,863,866
in the change of the derivative liability to fair market value for the years
ended December 31, 2009 and 2008, respectively.
NOTE
12 – LONG TERM DEBT
Long-term debt consisted of the
following at:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Unsecured
note payable to unrelated third party, payable in monthly installments of
$1,500, including interest of approximately 22%, due October
2012
|
$ | 28,672 | $ | 31,366 | ||||
Unsecured
note payable to unrelated third party, payable in monthly installments of
$1,500, including interest of approximately 22%, due October
2012
|
28,672 | 31,365 | ||||||
Total
debt
|
57,344 | 62,731 | ||||||
Less: current
portion
|
(50,832 | ) | (23,581 | ) | ||||
Long
term debt
|
$ | 6,512 | $ | 39,150 |
The
Company has paid extra payments in the past and there is a potential that the
notes could be paid off prior to the original maturity date. The
estimated maturities of the notes payable are as follows:
Year Ending December 31,
|
Amount
|
|||
2009
|
$ | 50,832 | ||
2010
|
6,512 | |||
2011
|
- | |||
Thereafter
|
- | |||
$ | 57,344 |
F-17
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
13 – COMMON STOCK
In July
2009, the Company granted 25,000 shares of EAU common stock to Larry Earle, a
consultant to the Company, pursuant to the Company’s 2007 Stock Incentive
Plan.
In May
2009, the Compensation Committee of the Board of Directors of the Company
granted 30,000 shares of restricted stock for each director, effective on May
14, 2009. The restricted stock will vest ratably over a period of two years from
the date of grant. These grants were made pursuant to the annual directors’
compensation program approved by the Board in December 2007.
In
November 2008, Theodore Jacoby, a director of the Company, purchased 100,000
shares of common stock of the Company for $100,000 at a price of $1.00 per
share.
In
October 2008, the Board of Directors approved a transaction with Water Science,
LLC (“WS”), a related party, pursuant to (1) a Stock Purchase Agreement (the
“Purchase Agreement”) and (2) a Second Amended and Restated Senior Secured
Convertible Promissory Note (the “Second Amended Convertible Note”). The
Purchase Agreement provides for the purchase of 2.5 million shares of common
stock of the Company at a price of $1.00 per share and the amendment of the
original Amended and Restated Senior Secured Convertible Promissory Note dated
as of May 8, 2008, to change the conversion rate from $3.00 per share to $1.00
per share, as reflected in the Second Amended Convertible Note. The purchase of
the common stock was to occur in six monthly installments of $350,000 beginning
October 14, 2008 plus a final installment of $400,000 on April 15, 2009. As of
December 31, 2008, the Company had received $1,050,000 under the
agreement. As of September 30, 2009, the Company received the
remaining payments of $1,450,000 under this agreement.
In March
2009, the Company and Water Science amended the payment schedule of the Purchase
Agreement on the final $950,000. The purchase of the common stock was
scheduled to occur in four monthly installments of $250,000 on April 15, 2009,
$250,000 on May 15, $250,000 on June 15 and a final installment of $200,000 on
July 15, 2009. As of the date of this report, the Company has
received payment of all of these installments. The Second Amended
Convertible Note included an interest rate of 3% and a maturity date of March
16, 2009. In March 2009, the Company and Water Science agreed to extend the
maturity date to September 16, 2009 and increase the interest rate to
10%. In August 2009, the note was again extended until November 1,
2010. WS is controlled by Peter Ullrich, a member of the Board of
Directors of the Company
In
February 2008, the Compensation Committee of the Board of Directors of the
Company granted $30,000 to each board member in the form of 23,077 shares of
restricted stock for each director, effective on February 27, 2008. The
restricted stock will vest ratably over a period of two years from the date of
grant. These grants were made pursuant to the annual directors’ compensation
program approved by the Board in December 2007. The amount of
compensation was based on recommendations from a non-related human resource
consulting firm. The Compensation Committee also granted 49,500
shares of restricted stock to various employees, which will vest one year from
the date of grant.
In
January 2008, an officer of the Company exercised 150,000 options for $1,500 or
$0.01 per share. The options were granted in 2003 for
services.
A summary
of the status of the options and warrants granted at December 31, 2009 and 2008,
and changes during the years then ended is presented below.
F-18
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
13 – COMMON STOCK – (Continued)
For
the years ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||||||||||||
Outstanding
at beginning of period
|
8,387,867 | $ | 1.60 | 10,641,839 | $ | 1.55 | ||||||||||
Granted
|
- | - | - | - | ||||||||||||
Exercised
|
- | - | (1,842,306 | ) | 1.19 | |||||||||||
Expired
or cancelled
|
(570,576 | ) | 3.52 | (411,666 | ) | 2.21 | ||||||||||
Outstanding
at end of period
|
7,817,291 | $ | 1.46 | 8,387,867 | $ | 1.60 | ||||||||||
Weighted
average fair value of options exercisable
|
7,230,161 | $ | 1.47 | 7,430,172 | $ | 1.63 |
A summary
of the status of the options and warrants outstanding at December 31, 2009 is
presented below:
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||||||||||
Range
of
Exercise
Prices
|
Number
Outstanding
|
Weighted-Average
Remaining
Contractual
Life
|
Weighted-Average
Exercise
Price
|
Number
Exercisable
|
Weighted-Average
Exercise
Price
|
||||||||||||||
$ | .01-.50 | 210,000 |
0.4
years
|
$ | 0.10 | 210,000 | $ | 0.10 | |||||||||||
1.00-1.99 | 6,688,491 |
1.6
years
|
1.30 | 6,101,361 | 1.30 | ||||||||||||||
2.00-2.99 | 720,000 |
4.6
years
|
2.56 | 720,000 | 2.56 | ||||||||||||||
3.00-3.99 | 115,000 |
5.0
years
|
3.46 | 115,000 | 3.46 | ||||||||||||||
4.00-4.99 | 5,000 |
0.4
years
|
4.00 | 5,000 | 4.00 | ||||||||||||||
5.00-5.50 | 78,800 |
0.3
years
|
5.00 | 78,800 | 5.00 | ||||||||||||||
$ | .01-5.50 | 7,817,291 |
1.9
years
|
$ | 1.46 | 7,230,161 | $ | 1.47 |
The fair
value of each warrant granted is estimated on the date granted using the
Black-Scholes pricing model, with the following assumptions used for the grants
during 2007: risk-free interest rate of between 4.28% and 4.64%, expected
dividend yield of zero, expected lives of three to ten years and expected
volatility of between 72.07% and 87.06%.
F-19
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
14 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC 740, Income Taxes. ASC
740 requires the Company to provide a net deferred tax asset or liability equal
to the expected future tax benefit or expense of temporary reporting differences
between book and tax accounting and any available operating loss or tax credit
carryforwards. At December 31, 2009 and 2008, the total of all
deferred tax assets was approximately $16,010,000 and $14,837,000, respectively,
and the total of the deferred tax liabilities was approximately $0 and $0,
respectively. The amount of and ultimate realization of the benefits
from the deferred tax assets for income tax purposes is dependent, in part, upon
the tax laws in effect, the Company’s future earnings, and other future events,
the effects of which cannot be determined. Because of the uncertainty
surrounding the realization of the deferred tax assets, the Company established
a valuation allowance of approximately $16,010,000 and $14,837,000 as of
December 31, 2009 and 2008, respectively, which has been offset against the
deferred tax assets. The net change in the valuation allowance during
the year ended December 31, 2009, was $1,201,000.
The
Company has available at December 31, 2009, unused tax operating loss
carryforwards of approximately $32,439,000, which may be applied against future
taxable income and expire in various years through 2029.
The
components of income tax expense from continuing operations for the years ended
December 31, 2009 and 2008 consist of the following:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Federal
|
$ | - | $ | - | ||||
State
|
- | - | ||||||
Net
current tax expense
|
- | - | ||||||
Deferred
tax expense (benefit) arising from:
|
||||||||
Excess
of tax over financial accounting depreciation
|
$ | (14,008 | ) | $ | (6,518 | ) | ||
Accrued
compensation and taxes
|
(10,084 | ) | - | |||||
Accrued
interest
|
(213,689 | ) | - | |||||
Reserve
for bad debts
|
(6,589 | ) | (16,785 | ) | ||||
Derivative
liability
|
(15,275 | ) | (695,223 | ) | ||||
Warranty
reserve
|
2,924 | 8,206 | ||||||
Deferred
income
|
74,600 | 74,600 | ||||||
Impairment
of fixed assets
|
(92,783 | ) | - | |||||
Net
operating loss carryforwards
|
(907,827 | ) | (1,681,089 | ) | ||||
Other
|
(18,503 | ) | 1,249 | |||||
Valuation
allowance
|
1,201,234 | 2,315,560 | ||||||
$ | - | $ | - |
Deferred
income tax expense results primarily from the reversal of temporary timing
differences between tax and financial statement income.
F-20
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
14 – INCOME TAXES – (Continued)
The
temporary differences gave rise to the following deferred tax asset (liability)
at December 31, 2009 and 2008:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Excess
of tax over book accounting depreciation
|
$ | (95,301 | ) | $ | (81,293 | ) | ||
Obsolete
inventory
|
149,200 | 149,200 | ||||||
Accrued
interest – related party
|
213,689 | - | ||||||
Accrued
compensation and payroll taxes
|
112,152 | 102,068 | ||||||
Warranty
reserve
|
34,376 | 37,300 | ||||||
Contribution
carryover
|
7,124 | 7,124 | ||||||
Deferred
income
|
52,842 | 127,442 | ||||||
Reserve
for bad debt
|
32,699 | 26,110 | ||||||
263A
capitalization
|
79,684 | - | ||||||
NOL
carryforwards
|
12,099,731 | 11,191,903 | ||||||
Derivative
liability
|
3,231,259 | 3,277,167 | ||||||
Impairment
of fixed assets
|
92,783 | - |
The
Company files income tax returns in the U.S. federal jurisdiction, and North
Carolina, Georgia, and Utah. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2003. The statue of
limitations remains open on all years from 2000 going forward. Once the
returns have been filed the IRS will have 3 years to examine and adjust the
amounts reported.
The
company operates at a loss and will only be liable for minimum state tax
payments once returns are filed. No unrecognized liability will be
added to the Company’s balance sheet for the un-filed returns as the amounts
reported are an immaterial amount.
At
December 31, 2009, there are no tax
positions for which the ultimate deductibility is highly certain but for which
there is uncertainty about the timing of such deductibility. Because
of the impact of deferred tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would not affect the annual
effective tax rate but would accelerate the payment of cash to the taxing
authority to an earlier period.
F-21
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE 15 – COMMITMENTS AND
CONTINGENCIES
The
Company entered into an amended exclusive licensing and product supplier
agreement with Zerorez, an affiliated entity, to provide Zerorez with its
Primacide water solutions and water generator for its carpet cleaning
franchisees. The Company is committed to sell to Zerorez the Primacide B water
generator for over the next 5 years under the agreement, ending on December 31,
2011. The agreement allows for the automatic renewal of the agreement
for three (3) terms of five year terms, unless both parties agree to the
cancellation of the agreement.
In
September 2005, the Company entered into an exclusive license and distribution
agreement with Water Sciences LLC, a related party, in exchange for receiving
$1,000,000 and future royalty payments. Under the agreement, the licensee was
granted the exclusive right to commercialize and develop the Company’s low-cost,
non-toxic electrolyzed oxidative fluids used for cleaning, disinfection,
remediation and hydration and to manufacture, distribute and sell the products
to certain territories within Central and South America. Royalty payments under
the agreement range from 2% - 5% depending on the annual sales volume of the
licensee. This agreement automatically renews each year and shall remain in
effect unless sooner terminated by the Company or licensee.
Management
has determined that certain stock options and warrants granted for services may
not have been properly treated for income tax withholding
purposes. Management is reviewing all granted options and warrants
with professional tax accountants to determine the proper
treatment. In addition, in the past the Company has classified
several consultants and officers as independent contractors for federal and
state tax purposes. This classification could be challenged by the
applicable taxing authorities for some or all of these
individuals. Management believes that it is reasonably estimatable
and probable that the amount of liability to the Company will be approximately
$255,000. The Company has estimated the potential tax liability as a
range between $129,000 and $574,000.
NOTE
16 – GOING CONCERN
The
Company has incurred significant losses and has had negative cash flows from
operations. As a result, at December 31, 2010, the Company has had a
high level of equity financing transactions and additional financing will be
required by the Company to fund its future activities and to support its
operations. We currently have sufficient funds to operate our
business until the middle of 2010. We do not have any agreements in
place for additional funding. Management will continue to seek to
obtain sufficient funding for its operations through either debt or equity
financing. However, there is no assurance that the Company will be
able to obtain additional financing. Furthermore, there is no
assurance that rapid technological changes, changing customer needs and evolving
industry standards will enable the Company to introduce new products and
services on a continual and timely basis so that profitable operations can be
attained. The Company’s ability to achieve and maintain profitability
and positive cash flows is dependent upon its ability to achieve positive sales
and profit margins and control operating expenses.
The
Company estimates that it will need approximately $2,000,000 for the upcoming
twelve months to execute our business plan and an additional $3,600,000, plus
interest, in order to satisfy our senior notes payable with Water Science, which
becomes due in November 2010, if the note is not converted into common
stock. Management plans to mitigate its losses in the near term
through the further development and marketing of its trademarks, brand and
product offerings.
Our
auditors have issued their Independent Registered Public Accountants’ Report on
the Company's financial statements for the fiscal year ended December 31, 2009
with an explanatory paragraph regarding the Company's ability to continue as a
going concern. The financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. However, as a
result of recurring operating losses, such realization of assets and
satisfaction of liabilities are subject to uncertainty, which raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-22
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
17 – LOSS PER SHARE
Basic
earnings per share is based on the weighted effect of all common shares issued
and outstanding, and is calculated by dividing net income by the weighted
average shares outstanding during the period. Diluted earnings per share is
calculated by dividing net income by the weighted average number of common
shares used in the basic earnings per share calculation plus the number of
common shares that would be issued assuming exercise or conversion of all
potentially dilutive common shares outstanding. At December 31, 2009, the
Company had outstanding warrants and notes payable convertible into shares of
common stock, which were not used in the computation of loss per share because
their effect would be anti-dilutive.
The
following data shows the amounts used in computing loss per share:
For
the years ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
loss
|
$ | (3,425,708 | ) | $ | (6,727,214 | ) | ||
Total
net loss per share
|
$ | (0.18 | ) | $ | (0.41 | ) | ||
Weighted
average number of common shares outstanding used
in loss per share for the period
|
19,336,215 | 16,404,945 |
NOTE
18 – SUBSEQUENT EVENTS
In
February 2010, the Company and Wade R. Bradley amended Mr. Bradley’s employment
agreement to (i) remove a provision that required the Company to maintain
$240,000 in an escrow account as collateral for any future severance payment to
which Mr. Bradley may become entitled pursuant to the Employment Agreement and
(ii) reduce any future severance payment to which Mr. Bradley may become
entitled pursuant to the Employment Agreement from twelve months salary, paid
over the twelve month period following termination, to six months salary, paid
over the six month period following termination.
In
consideration of Mr. Bradley’s agreement to amend the Employment Agreement,
$120,000, less applicable Federal and state tax withholdings (which will be
retained by the Company and remitted to the applicable taxing authorities) and
applicable escrow agent fees, was disbursed directly to Mr.
Bradley. The remaining balance of $120,000 of the escrow funds, less
applicable escrow agent fees, was disbursed to the Company. All
interest earned on the escrow funds has also be remitted to the Company. Mr.
Bradley and the Company agreed to these amendments to provide the Company with
short-term liquidity it needs for operations.
In
conjunction with the disbursement of funds from escrow, the escrow agreement
between the Company, Mr. Bradley and Specialized Title Services, Inc., filed as
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed October 30, 2006,
was terminated.
F-23
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE 18 – SUBSEQUENT
EVENTS –
(Continued)
On March
25, 2010, the Company obtained an unsecured short term loan of $250,000 from
Peter Ullrich a member of the Board of Directors of the Company. This
is in addition to an advance of $100,000 from Mr. Ullrich which occurred on
February 18, 2010, as previously reported on the Company Form 8-K filed on
February 24, 2010. The final agreements to document the loan
have not been signed, and the material terms are not final. However, the parties
have discussed and preliminarily agreed to terms similar to the $600,000 loan
with Mr. Ullrich on August 27, 2009, and described in the Company Form 8-K filed
on September 2, 2009, except the new loan will not include a term requiring a
potential reversion of the exercise price to $3.00 per share. In
addition, the new loan will provide for an additional advance of $50,000 to be
available to the Company in June 2010. Assuming the other terms
remain as anticipated, the final loan will be a $400,000 loan at 10% simple
interest, with a maturity of November 1, 2010, and conversion rights into
Company common stock at an exercise price of $1.00 per share. The
material terms of the final agreement will be disclosed in subsequent filings
with the Securities and Exchange Commission.
On March
10, 2010, the Board of Directors of EAU Technologies authorized the sale by the
Company of 100,000 unregistered shares of Common Stock of the Company at a price
of $1.00 per share to Theodore Jacoby, a director of the
Company.
Management
evaluated events subsequent to December 31, 2009 and concluded there were
no other events or transactions during this period that required recognition or
disclosure in its financial statements.
F-24