UNITED
STATES
S
ECURITIES
AND
E
XCHANGE
C
OMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the quarterly period ended March 31, 2008
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.
|
000-51807
|
(Commission
File No.)
|
EAU
TECHNOLOGIES, INC.
(name
of
small business issuer in its charter)
Delaware
|
87-0654478
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1890
Cobb International Blvd, Suite A,
Kennesaw
Georgia
|
30152
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Issuer’s
telephone number:
(678)
388-9492
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
|
Accelerated
filer
|
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 Exchange Act). Yes
¨
No
x
As
of May
12, 2008, the Registrant had
15,443,612
shares
of
Common Stock, $0.0001 par value outstanding.
EAU
TECHNOLOGIES, INC.
QUARTERLY
REPORT ON FORM 10-Q
March
31,
2008
INDEX
|
|
Page
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
ITEM
1.
|
Financial
Statements
|
|
|
|
|
|
Balance
Sheets - March 31, 2008 and December 31, 2007
|
3
|
|
|
|
|
Statements
of Operations - Three months ended March 31, 2008 and 2007
|
5
|
|
|
|
|
Statement
of Stockholders’ Equity (Deficit)
|
6
|
|
|
|
|
Statements
of Cash Flows - Three months ended March 31, 2008 and 2007
|
7
|
|
|
|
|
Notes
to Financial Statements
|
9
|
|
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
|
14
|
|
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
|
|
ITEM
4T.
|
Controls
and Procedures
|
19
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
21
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
21
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
21
|
|
|
|
ITEM
4.
|
Submission
of matters to Vote of Security Holders
|
21
|
|
|
|
ITEM
5.
|
Other
Information
|
22
|
|
|
|
ITEM
6.
|
Exhibits
|
22
|
|
|
|
SIGNATURES
|
|
23
|
PART
I -
FINANCIAL INFORMATION
EAU
TECHNOLOGIES, INC.
BALANCE
SHEETS
ASSETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
CURRENT
ASSETS
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Cash
and cash equivalents
|
|
$
|
704,628
|
|
$
|
1,413,744
|
|
Accounts
receivable, net
|
|
|
18,251
|
|
|
61,196
|
|
Accounts
receivable - related party, net
|
|
|
360,615
|
|
|
357,615
|
|
Pre-paid
expense
|
|
|
191,129
|
|
|
30,600
|
|
Inventory,
net
|
|
|
2,809,653
|
|
|
2,814,533
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,084,276
|
|
|
4,677,688
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net of accumulated depreciation of $241,388 and $220,064
|
|
|
185,230
|
|
|
206,554
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Deposits
|
|
|
11,658
|
|
|
11,658
|
|
Restricted
cash
|
|
|
240,000
|
|
|
240,000
|
|
Note
receivable
|
|
|
150,000
|
|
|
150,000
|
|
Intellectual
property
|
|
|
67,898
|
|
|
61,558
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
469,556
|
|
|
463,216
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,739,062
|
|
$
|
5,347,458
|
|
See
notes
to financial statements.
EAU
TECHNOLOGIES, INC.
BALANCE
SHEETS (Continued)
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
March
31,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
CURRENT
LIABILITIES
|
|
(Unaudited)
|
|
(Audited)
|
|
Accounts
payable
|
|
$
|
409,858
|
|
$
|
287,183
|
|
Accrued
expenses
|
|
|
656,839
|
|
|
645,054
|
|
Warranty
reserve
|
|
|
116,000
|
|
|
122,000
|
|
Advance
- related party
|
|
|
500,000
|
|
|
500,000
|
|
Advance
deposits on machine orders - related party
|
|
|
697,500
|
|
|
697,500
|
|
Current
portion of long-term debt
|
|
|
20,189
|
|
|
19,841
|
|
Senior
convertible note payable - related party, current portion net
of
discounts of $458,333 and $708,333
|
|
|
2,541,667
|
|
|
2,291,667
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,942,053
|
|
|
4,563,245
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current portion
|
|
|
54,341
|
|
|
59,045
|
|
Deferred
licensing revenue - related party
|
|
|
491,667
|
|
|
541,667
|
|
Derivative
liability - related party
|
|
|
6,672,321
|
|
|
6,758,074
|
|
|
|
|
|
|
|
|
|
Total
long term liabilities
|
|
|
7,218,329
|
|
|
7,358,786
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
12,160,382
|
|
|
11,922,031
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value; 50,000,000 shares authorized;
15,443,612
and
15,105,650 issued and outstanding, respectively
|
|
|
1,545
|
|
|
1,511
|
|
Additional
paid in capital
|
|
|
35,787,137
|
|
|
35,406,545
|
|
A
ccumulated
deficit
|
|
|
(43,210,002
|
)
|
|
(41,982,629
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity (deficit)
|
|
|
(7,421,320
|
)
|
|
(6,574,573
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,739,062
|
|
$
|
5,347,458
|
|
See
notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENTS
OF OPERATIONS
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
NET
SALES - RELATED PARTY
|
|
$
|
50,000
|
|
$
|
58,448
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
|
45,655
|
|
|
15,027
|
|
|
|
|
|
|
|
|
|
TOTAL
SALES
|
|
|
95,655
|
|
|
73,475
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
25,657
|
|
|
10,885
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
69,998
|
|
|
62,590
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,324
|
|
|
20,877
|
|
Research
and development
|
|
|
10,402
|
|
|
73,600
|
|
General
and administrative
|
|
|
1,082,383
|
|
|
1,053,966
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,114,109
|
|
|
1,148,443
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE OTHER INCOME (EXPENSE)
|
|
|
(1,044,111
|
)
|
|
(1,085,853
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(277,145
|
)
|
|
(283,534
|
)
|
Interest
income
|
|
|
8,130
|
|
|
6,161
|
|
Gain
(loss) on derivative liability
|
|
|
85,753
|
|
|
21,437
|
|
Other
income (expense)
|
|
|
-
|
|
|
(716
|
)
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(183,262
|
)
|
|
(256,652
|
)
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(1,227,373
|
)
|
|
(1,342,505
|
)
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(1,227,373
|
)
|
|
(1,342,505
|
)
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from discontinued operations (Net of $0 in income taxes)
|
|
|
-
|
|
|
(203,624
|
)
|
|
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
(203,624
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,227,373
|
)
|
$
|
(1,546,129
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE CONTINUING OPERATIONS
|
|
$
|
(0.08
|
)
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE DISCONTINUED OPERATIONS
|
|
$
|
-
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE OF SHARES OUTSTANDING
|
|
|
15,254,002
|
|
|
13,338,982
|
|
See
notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
COMMON
STOCK
|
|
ADDITIONAL
|
|
|
|
|
|
|
|
|
|
|
|
PAID
IN
|
|
ACCUMULATED
|
|
|
|
|
|
SHARES
|
|
AMOUNT
|
|
CAPITAL
|
|
DEFICIT
|
|
TOTAL
|
|
Balance,
December 31, 2007 (Audited)
|
|
|
15,105,650
|
|
$
|
1,511
|
|
$
|
35,406,545
|
|
$
|
(41,982,629
|
)
|
$
|
(6,574,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for cash of $1,500.
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
and vesting of options and warrants for services
|
|
|
-
|
|
|
-
|
|
|
162,970
|
|
|
-
|
|
|
162,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the three months ended March 31, 2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,227,373
|
)
|
|
(1,227,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
|
15,443,612
|
|
$
|
1,545
|
|
$
|
35,787,137
|
|
$
|
(43,210,002
|
)
|
$
|
(7,421,320
|
)
|
See
notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENTS OF CASH FLOWS
|
|
For
the Three
Months
|
|
|
|
Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,227,373
|
)
|
$
|
(1,546,129
|
)
|
Adjustments
to reconcile net loss to net cash
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,324
|
|
|
20,877
|
|
Bad
debt expense
|
|
|
4,100
|
|
|
-
|
|
Shares
issued for services
|
|
|
49,296
|
|
|
-
|
|
Warrants
and options issued for services
|
|
|
162,970
|
|
|
152,222
|
|
Discount
of note payable
|
|
|
250,000
|
|
|
250,000
|
|
Loss
on disposal of assets
|
|
|
-
|
|
|
716
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
38,845
|
|
|
(2,606
|
)
|
(Increase)
decrease in accounts receivable - related party
|
|
|
(3,000
|
)
|
|
13,877
|
|
Decrease
in pre-paid expense
|
|
|
6,331
|
|
|
1,685
|
|
(Increase)
in inventory
|
|
|
4,880
|
|
|
(9,574
|
)
|
(Increase)
decrease in deposits
|
|
|
-
|
|
|
(1,728
|
)
|
(Increase)
in restricted cash
|
|
|
-
|
|
|
(240,000
|
)
|
Increase
(decrease) in accounts payable
|
|
|
122,675
|
|
|
41,720
|
|
Increase
(decrease) in warranty reserve
|
|
|
(6,000
|
)
|
|
-
|
|
Increase
(decrease) in accrued expenses
|
|
|
11,785
|
|
|
(50,430
|
)
|
Increase
in advance deposits on machine orders
|
|
|
-
|
|
|
13,600
|
|
(Decrease)
in deferred revenue
|
|
|
(50,000
|
)
|
|
(50,000
|
)
|
(Decrease)
in derivative liability
|
|
|
(85,753
|
)
|
|
(21,437
|
)
|
Net
cash used in continuing operations
|
|
|
(699,920
|
)
|
|
(1,427,207
|
)
|
Net
cash used in discontinued operations
|
|
|
-
|
|
|
(21,101
|
)
|
Net
cash used in operating activities
|
|
|
(699,920
|
)
|
|
(1,448,308
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
-
|
|
|
(21,127
|
)
|
Intellectual
property disbursements
|
|
|
(6,340
|
)
|
|
(145
|
)
|
Net
cash used in continuing operations
|
|
|
(6,340
|
)
|
|
(21,272
|
)
|
Net
cash used in discontinued operations
|
|
|
-
|
|
|
(21,502
|
)
|
Net
cash (used) in investing activities
|
|
|
(6,340
|
)
|
|
(42,774
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Payments
on notes payable
|
|
|
(4,356
|
)
|
|
(5,678
|
)
|
Proceeds
from issuance of common stock - related party
|
|
|
1,500
|
|
|
1,500,000
|
|
Net
cash provided (used) by financing activities
|
|
|
(2,856
|
)
|
|
1,494,322
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(709,116
|
)
|
|
3,240
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,413,744
|
|
|
206,094
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
704,628
|
|
$
|
209,334
|
|
See
notes
to financial statements.
EAU
TECHNOLOGIES, INC.
UNAUDITED
STATEMENTS OF CASH FLOWS
(Continued)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,645
|
|
$
|
8,934
|
|
Income
Taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Non-cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
$
|
49,296
|
|
$
|
-
|
|
Warrants
and stock options granted
|
|
$
|
162,970
|
|
$
|
152,222
|
|
See
notes
to financial statements.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION
The
accompanying condensed financial statements were prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In management’s opinion all
necessary adjustments, which consist primarily of normal recurring adjustments,
to the financial statements have been made to present fairly the financial
position and results of operations and cash flows. The results of operations
for
the respective periods presented are not necessarily indicative of the results
for the respective complete years. The financial statements should be read
in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2007.
NOTE
2 - RESTRICTED CASH
In
November 2006 the Company entered into an employment agreement with Wade
Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited
$240,000 with an escrow agent in January 2007. The Company has recognized this
amount as restricted cash on the Company’s financial statements. The Company
recognized $2,375 in interest income from the escrow account for the three
months ended March 31, 2008.
NOTE
3 - INVENTORIES
The
composition of inventories is as follows at:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
Finished
goods
|
|
$
|
1,340,439
|
|
$
|
1,326,599
|
|
Raw
materials
|
|
|
1,869,214
|
|
|
1,887,934
|
|
Allowance
for obsolete inventory
|
|
|
(400,000
|
)
|
|
(400,000
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
2,809,653
|
|
$
|
2,814,533
|
|
NOTE
4 - WARRANTY RESERVE
The
Company warrants its products against defects in materials and workmanship
for a
period of three years. The Company reviews the historical experience of failure
rates and estimates the rate of warranty claims that will be made and has
accrued a warranty reserve for these anticipated future warranty costs. If
actual results differ from the estimates, the Company would adjust the estimated
warranty liability. Changes in the warranty reserve for the three months ended
March 31, 2008 are as follows:
Warranty
reserve at beginning of period
|
|
$
|
122,000
|
|
Costs
accrued for additional warranties
|
|
|
-
|
|
Service
obligations honored
|
|
|
(6,000
|
)
|
Warranty
reserve at end of period
|
|
$
|
116,000
|
|
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
5 - 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 is
due, principal and interest together, on September 16, 2008. No principal or
interest payments need to be paid during the loan period. The Note may be
converted into 1,000,000 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 $3.00 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 issuance of the Note, the Company also
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
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 has a right to require Water Science to exercise warrants
for
up to 3,230,769 shares; the Company may exercise the put right from time to
time, but not more often than once per month.
The
exercise price of these warrants is to be adjusted if the Company should issue
stock for less than the original exercise price. Due to this feature wherein
the
conversion price is reset if shares are issued at a price less than the fixed
conversion price, and pursuant to EITF 00-19, the Company has elected to
bifurcate the conversion feature from the debt host, and accounts for the
feature as a derivative liability with changes in fair value being recorded
in
the income statement. As of March 31, 2008 and December 31, 2007, the value
of
the derivative liability was $6,672,321 and $6,758,074. The Company recorded
a
gain of $85,753 and $21,437 in the change of the derivative liability to fair
market value for the period ended March 31, 2008 and 2007, respectively.
NOTE
6 - RELATED PARTY TRANSACTIONS
Sales
to Affiliates -
In
September 2005, Water Science, a related party, paid to the Company $1,000,000
for the exclusive rights to sell our products in South America and Mexico.
The
agreement allows for a pro-rated refund during the first 5 years under certain
circumstances. The Company recognizes income from this agreement over the first
5 years of the agreement. The Company recognized $50,000 in each of the periods
ended March 31, 2008 and 2007. This agreement also gives Water Science the
rights to purchase machinery from the Company at cost plus 25 percent.
During
the three months ended March 31, 2008, the Company did not have any sales to
Water Science. T
he
Company has previously received and recorded $697,500 in advance deposits from
Water Science on machine orders. In connection with the past sales of machines
and products, the Company has recorded approximately $352,115 in accounts
receivable at March 31, 2008.
During
the three months ended March 31, 2007, the Company sold approximately $8,448
in
products and services to Water Science.
Senior
Note Payable -
In
September 2005, the Company entered into a Senior Convertible Note with Water
Science in exchange for $3,000,000 (see Note 5). For the three months ended
March 31, 2008, the Company recognized $22,500 in interest expense related
to
the Senior Note. The Company also recognized $250,000 in interest expense due
to
the discount of this note and the beneficial conversion feature. The Company
has
recorded a gain of approximately $85,453 in the change of the derivative
liability to fair market value for the three months ended March 31, 2008.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
6 - RELATED PARTY TRANSACTIONS
-
continued
Licensing
Fee -
In
September 2005, the Company
received
$1,000,000 in exchange for providing Water Science exclusive licensing and
distribution rights for a five-year term for a specified market area. The
agreement provides termination rights by Water Sciences and a pro rata refund
of
the fee. The Company recognizes the fee on a pro rata basis over the life of
the
agreement. The Company recognized $50,000 for the each of the three months
ended
March 31, 2008 and 2007.
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 elected to deposit $240,000 in cash with an escrow agent.
The
escrow agreement provides different scenarios upon which either the Company
or
the Chief Executive Officer shall be entitled to interest on the escrowed funds.
Advances
-
Periodically throughout the year, the Company advances officers and employees
cash for certain reimbursable expenses. As of March 31, 2008 and 2007, the
Company had advances to employees or officers in the amount of $8,500 and
$1,500, respectively.
Employee
Options
-
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.
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 warrants were
valued using the Black-Scholes model with the following assumptions: risk free
rate of 4.64%, volatility at 87.06% and the stock price at $1.30. The value
of
each warrant is approximately $1.13 per warrant. The number of options granted
was based on recommendations from a non-related human resource consulting firm.
The Company recognized $70,538 in expense during the three months ended March
31, 2008.
In
November 2007, the Company granted 530,000 options to Douglas Kindred, in
connection with the appointment of Mr. Kindred as Chief Technology Officer.
The
options are for a term of ten (10) years and have an exercise price of $1.30
per
share. The options vest over a period of four (4) years. The warrants were
valued using the Black-Scholes model with the following assumptions: risk free
rate of 4.28%, volatility at 85.99% and the stock price at $1.01. The value
of
each warrant is approximately $0.85 per warrant. The number of options granted
was based on recommendations from a non-related human resource consulting firm.
The Company recognized $58,659 in expense during the three months ended March
31, 2008.
Restricted
Stock Grant
-
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. The Company
recognized $49,296 in expense for the three months ended March 31, 2008 for
the
value of the restricted stock that has vested.
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
7 - CAPITAL STOCK
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.
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.
NOTE
8 - GOING CONCERN
The
Company has incurred significant losses and has had negative cash flows from
operations. As a result, at March 31, 2008, 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. Management
is seeking 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 $5,000,000 for the upcoming
twelve months. 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, 2007
with an explanatory paragraph regarding the Company's ability to continue as
a
going concern. The financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. However, as
a
result of recurring operating losses, such realization of assets and
satisfaction of liabilities are subject to uncertainty, which raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock
Based-Compensation Expense
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires
the measurement and recognition of compensation expense for all share-based
payments to employees and directors including employee stock options and
stock purchases related to the Company’s employee stock option and award plans
based on estimated fair values. SFAS 123(R) supersedes the Company’s previous
accounting under Accounting Principles Board Option No. 25, “Accounting for
Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In
March 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied
the provisions of SAB 107 in its adoption of SFAS 123(R).
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1,
2006,
the first day of the Company’s fiscal year 2006. The Company’s financial
statements as of and for the three month period ended March 31, 2008 reflect
the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, the Company’s financial statements for the prior year have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based
compensation expense recognized under SFAS 123(R) for the three month period
ended March 31, 2008 and 2007 was $162,970 and $152,222, respectively, related
to employee stock options issued and vesting during the period.
Basic
and
Fully Diluted Loss Per Share
Basic
and
Fully Diluted net loss per share is computed using the weighted-average number
of common shares outstanding during the period.
|
|
For
the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Loss
(numerator)
|
|
$
|
(1,227,373
|
)
|
$
|
(1,546,129
|
)
|
Shares
(denominator)
|
|
|
15,254,002
|
|
|
13,338,982
|
|
Per
share amount
|
|
$
|
(0.08
|
)
|
$
|
(0.12
|
)
|
The
Company’s outstanding stock options have been excluded from the basic net loss
per share calculation for the three month period ended March 31, 2008 and 2007,
because they are anti-dilutive.
The
following table is a summary of the status of the warrants and options granted
for the three months ended March 31, 2008:
|
|
Number
of Options and Warrants
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
|
|
10,641,839
|
|
$
|
1.55
|
|
Granted-
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
(150,000
|
)
|
|
0.01
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(315,000
|
)
|
|
1.99
|
|
Outstanding
at end of period
|
|
|
10,176,839
|
|
$
|
1.56
|
|
EAU
TECHNOLOGIES, INC.
CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
A
summary
of the status of the warrants outstanding at March 31, 2008 is presented
below:
|
|
Warrants
Outstanding
|
|
Warrants
Exercisable
|
|
Range
of Exercise Prices
|
|
Weighted-Average
Number Outstanding
|
|
Weighted-Average
Remaining Contractual Life
|
|
Weighted-Average
Exercise Price
|
|
Number
Exercisable
|
|
Exercise
Price
|
|
$.01-.50
|
|
|
310,000
|
|
|
1.9
years
|
|
$
|
0.04
|
|
|
310,000
|
|
$
|
0.04
|
|
1.00-1.99
|
|
|
8,436,797
|
|
|
3.1
years
|
|
|
1.30
|
|
|
7,126,537
|
|
|
1.30
|
|
2.00-2.99
|
|
|
720,000
|
|
|
6.4
years
|
|
|
2.56
|
|
|
720,000
|
|
|
2.56
|
|
3.00-3.99
|
|
|
191,666
|
|
|
4.4
years
|
|
|
3.38
|
|
|
191,666
|
|
|
3.38
|
|
4.00-4.99
|
|
|
255,000
|
|
|
1.5
years
|
|
|
4.00
|
|
|
255,000
|
|
|
4.00
|
|
5.00-5.50
|
|
|
263,376
|
|
|
1.7
years
|
|
|
5.15
|
|
|
263,376
|
|
|
5.15
|
|
$.01-5.50
|
|
|
10,176,839
|
|
|
3.2
years
|
|
$
|
1.56
|
|
|
8,866,579
|
|
$
|
1.60
|
|
The
fair
value of each warrant granted is estimated on the date granted using the
Black-Scholes pricing model, with the following assumptions for warrants issued
in 2007: risk-free interest rate of between 4.6% and 4.99%, expected dividend
yield of zero, expected lives of 3 and 5 years and expected volatility of
between 59.76% and 89.54%.
Item
2.
Management's
Discussion and Analysis or Plan of Operation
The
following discussion and analysis provides information, which management
believes is relevant to an assessment and understanding of the Company’s
condensed results of operations and financial condition. The discussion should
be read in conjunction with the financial statements included in our annual
report on Form 10-KSB, and notes thereto.
Overview
EAU
TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc.
(referred to herein sometimes as “EAU,” “we,” “us,” or the “Company”), is in the
business of developing, manufacturing and marketing equipment that uses water
electrolysis to create fluids. These fluids have various commercial applications
and may be used in commercial food processing organic or conventional
agricultural products that clean, disinfect, remediate, hydrate and moisturize.
The processes for which these fluids may be used are referred to in this
prospectus as the “EOW Technology.” For example, we believe that our food and
agricultural treatment products potentially may be used to systemically treat
all facets and phases of the food chain, from soil to animal feed to meat
processing. Our products would accomplish this 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. We are conducting
further studies so we can make more specific claims in the future. At the levels
employed, the fluids and products are safe for the environment and non-toxic.
Our fluids and products also do not contain or leave harmful residues often
associated with chemical-based supplements and disinfecting and cleaning agents.
The electrolyzed fluids created by the EOW Technology (referred to herein
sometimes as the “EO Fluids” or “Empowered Water
TM
”)
generated by our patented and patent pending specialized equipment currently
replace many of the traditional products used in commercial, industrial and
residential disinfecting and cleaning.
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 Prospectus, the Company was focused on these markets because
we
believe that for each of these markets we have a competitive advantage, a
leading strategic industry partner, or we can provide an attractive value-added
proposition. To penetrate these markets, EAU is conducting trials 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 two separate facets of electrolyzed fluids as
well
as the water generating technology. The facets for which we have obtained patent
protection are how the fluids are used and how they are stabilized for use
in
different applications. Additionally, we have patents pending on poultry
processing, and we have filed several provisional patent pending applications
to
protect new processes and products. Previously, we generated our revenues
primarily from equipment sales to the carpet and living surfaces industries,
and
some consumer product sales. In 2006, we saw our first sales in the agriculture
segment. All of these sales were made to Water Science, LLC, a company set
up
primarily to market Empowered Water™ in Latin America. Currently we are seeking
to expand those markets as well as introducing what we have learned in those
markets to the United States. We will continue to seek to derive future EOW
Technology revenues from recurring fees we charge to customers based on per-unit
or per-gallon of fluid used after equipment has been installed. Additionally,
we
will seek to introduce our technology to meat and poultry processing by
leveraging the development and trials that we conducted in the United States.
We
have
recently signed a contract to install our pathogen remediation equipment at
Murray’s Chicken in South Fallsburg, NY. Murray’s Chicken processes poultry
grown without antibiotics and is Certified Humane. Murray’s recently announced
the launching of its Eco Friendly packaging.
We
have
shipped and installed five of the nine units ordered from Water Sciences, LLC.
The units have been installed in Holland, Ecuador, Costa Rica, Mexico and
Colombia. Shipment dates and locations of the remaining units have yet to be
determined by Water Sciences. Water Sciences is currently using Empowered Water™
fluids in various agricultural channels.
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. In January 2007, the Company
entered into an amended exclusive licensing and product supplier agreement
with
Zerorez Franchising Systems, Inc. (Zerorez), a previously affiliated entity,
to
provide Zerorez with its Primacide water solutions and water generator for
its
carpet cleaning franchisees. The Company has sold Empowered Water™ generators to
over 30 franchises. 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
May
2007, we signed an agreement with a small dairy plant whereby the dairy has
agreed to lease our equipment and pay a royalty for the technology beginning
in
August 2007. The Company had been testing our equipment in this facility for
over one year. While the amounts for this agreement are not significant, the
Company believes that this agreement will serve as a model for expanding its
presence in the dairy industry. Since then, we have also signed agreements
with
multiple other dairies to install our equipment and begin testing our equipment
at their facilities. We are currently in trials on five farms in different
regions of the Country.
Our
operations are currently funded by a combination of revenues and capital
funding.
Financial
Position and
Results
of Operations
The
following discussion should be read in conjunction with selected financial
data
and the financial statements and notes to financial statements.
Financial
Position
The
Company had $704,628 in cash as of March 31, 2008, compared to $1,413,744 at
December 31, 2007. We also had $240,000 in restricted cash related to an escrow
agreement. The Company has received and recorded $697,500 in advance deposits
from Water Science on machine orders at March 31, 2008. This will be reduced
as
the Company delivers machines on order to Water Science, a related party. Water
Science, who has exclusive rights to sell our products in Central and South
America, is also an affiliate of the Company, by agreement may purchase
machinery from us at cost plus 25 percent.
Long
term
debt decreased slightly from $59,045 at December 31, 2007 to $54,341 at December
31, 2007. At March 31, 2008, our stockholders’ deficit was $7,421,320.
Results
of Operations
for the Three months ended March 31, 2008 and 2007
Revenues
and Net Income
The
Company had total revenues of $95,655 for the three months ended March 31,
2008,
which represents an increase of 30% from the $73,475 in total revenues for
the
same period one year earlier. The majority of the increase is due to the
increased maintenance fees the Company is collecting on its previously sold
machines. In an effort to streamline our corporate focus and our business plan,
the Company is no longer marketing products that are not directly related to
its
core competencies, which is the development of Empowered Water™
technologies.
Net
loss
from continuing operations for the three months ended March 31, 2008 was
$1,227,373, or a loss of $0.08 per share, compared with a net loss from
continuing operations of $1,342,505, or $0.10 per share for the same period
in
2007. For the three months ended March 31, 2007, the Company had additional
losses of $203,624 related to the Consumer Products division, which was sold
during 2007. The current quarter net loss includes $277,145 in interest expense,
compared to $283,534 in 2007. This is due to interest expense related to the
senior note payable entered into in September 2005.
General
and Administrative Expenses
The
Company’s general and administrative expenses totaled $1,082,383 during the
three months ended March 31, 2008, compared to $1,053,966 during the three
months ended March 31, 2007, for an increase of $28,417, or 3%. General and
administrative expense for 2008 consist primarily payroll and other compensation
expense ($436,606), legal and professional fees ($215,927), expense related
to
granting of stock and options ($162,970) and insurance expenses ($83,100).
Research
and Development
Research
and development expenses incurred during the three month period ended March
31,
2008 decreased $63,198 or 86%, from $73,600 in 2007 to $10,402 in 2008. While
the Company will continue to conduct research to improve its products and their
performance, it believes it has developed proven products that have commercial
value in its targeted markets.
Liquidity
and Capital Resources
The
Company had $704,628 in cash as of March 31, 2008, compared to $1,413,744 at
December 31, 2007. We have had continuing operating losses of $1,227,373 for
the
three months ended March 31, 2008, compared with operating losses of $1,342,505
for the three months ended March 31, 2007. The net loss per share for the first
quarter of 2008 was $0.08 compared to a loss of $0.10 per share for the same
period in 2007. The decrease is attributable to reduced operating expenses
and a
higher weighted-average of shares outstanding during 2008.
Net
cash
used in operating activities in the three month period ended March 31, 2008
was
$699,920, a 52% decrease, compared to $1,448,308 for the same period in 2007.
The
majority of the change is due to the decreased net loss and the increase in
restricted cash during the three months ended March 31, 2007. Also included
in
the net cash used is $21,101 used from discontinued operations.
At
March
31, 2008, the Company’s net inventory was $2,809,653, representing a decrease of
less than 1% from the $2,814,533 on hand at December 31, 2007. T
he
Company is in multiple tests of our equipment and has included the machines
in
inventory until they are sold and enter into revenues.
The
operating outflow of cash was reduced by the Company issuing warrants and stock
options in lieu of cash during the quarter of $162,970. The Company adopted
SFAS
123(R), effective January 1, 2006, and now expenses stock options given to
employees. The Company recognized a non-cash increase from the discounting
of
the Company’s note payable to Water Science, LLC of $250,000. (See Note 5 to the
Company’s financial statements.) Further, the Company recognized a non-cash
decrease in the derivative liability of $85,753, due to changes in the
Black-Scholes value of the liability.
The
Company used $6,340 in cash flows from investing activities during the period
ended March 31, 2008 as compared to $42,774 provided for in the same period
in
2007. During 2008, the cash flows consisted of expenditures made related to
intellectual property. During 2007 the primary cash flows from investing
activities consisted of $21,127 used to purchase equipment and $145 related
to
intellectual property.
The
Company used $2,856 in cash flows from financing activities for the period
ended
March 31, 2008 compared with $1,494,322 provided to the Company during the
same
period in 2007. The Company received proceeds of $1,500 from the exercising
of
options during the first three months of 2008, whereas, the Company received
proceeds of $1,500,000 from the issuance of stock during the three months ended
March 31, 2007. The other financing activity consisted of by payments made
on
notes payable in the amount of $4,356 and $5,678 in 2008 and 2007,
respectively.
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. We have no commitments
to
fund any future capital expenditures. Our current assets, along with cash
generated from anticipated revenues, will not provide us with sufficient funding
for the next twelve months. Our senior convertible note payable with Water
Science will become due in September 2008, which will require cash of $3,000,000
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 EO machines as anticipated, we will need significant
additional working capital to fund that expansion. We currently anticipate
that
during the second quarter we will exercise our put rights under the warrant
with
Water Science (see Note 5 to the financial statements) for a total of $500,000.
Otherwise, we do not have arrangements in place to provide us with this funding
or any additional funding. Management is seeking to obtain sufficient funding
for its operations through either debt or equity financing. In light of these
circumstances, the ability of the Company to continue as a going concern is
in
substantial doubt.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles and our discussion and analysis
of
our financial condition and results of operations require us to make judgments,
assumptions and estimates that affect the amounts reported in our financial
statements and accompanying notes. Note 1 of the notes to consolidated
financial statements in Part II, Item 7 of the Company’s Annual Report on
Form 10-KSB, dated December 31, 2007, describes the significant accounting
policies and methods used in preparation of our consolidated financial
statements. We base our estimates on historical experience, current
trends, future projections, and on various other assumptions we believe to
be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates. There were no material changes
in our judgments or estimates during the first quarter of 2008.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued Financial Interpretation No. (FIN) 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109.” FIN 48
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. This interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006.
We
have
noted that the Company has one item that would be subject to FIN 48, in that
the
Company has yet to file past tax returns. The Company is working with the
accounting firm to have all returns filed no later than the end of the second
quarter. We believe that the adoption of FIN 48 will not have a material impact
on our results of operations due to the ongoing net losses incurred by the
Company, which will offset any taxable income that may arise.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” that
provides guidance for using fair value to measure assets and liabilities. Under
SFAS 157, fair value refers to the price that would be received to sell an
asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop the assumptions that market participants would use when pricing the
asset or liability. The fair value hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data.
In
addition, SFAS 157 requires that fair value measurements be separately disclosed
by level within the fair value hierarchy. This standard will be effective for
financial statements issued for fiscal periods beginning after November 15,
2007
and interim periods within those fiscal years. The Company is currently
evaluating the impact of applying the various provisions of SFAS 157.
In
September 2006, SFAS No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
—an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”), improves
financial reporting by requiring an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. We do not believe SFAS 158 will have an impact on our results of
operations, financial position, or cash flow.
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No. 115
(“SFAS
159”), which allows an entity the irrevocable option to elect fair value for the
initial and subsequent measurement for certain financial assets and liabilities
under an instrument-by-instrument election. Subsequent measurements for the
financial assets and liabilities an entity elects to fair value will be
recognized in earnings. SFAS 159 also establishes additional disclosure
requirements. SFAS 159 is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted provided that the entity
also adopts SFAS 157. We have not yet determined the impact this standard will
have on our financial statements.
In
December 2007, the FASB issued SFAS 141(R),
Business
Combinations
,
an
Amendment of SFAS 141, which provides additional guidance on business
combinations including defining the acquirer, recognizing and measuring the
identifiable assets acquired and the liabilities assumed, and any noncontrolling
interest in the acquiree. Also in December 2007, the FASB issued SFAS 160,
Noncontrolling
Interests in Consolidated Financial Statements
,
which
amended ARB 51, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS Nos. 141(R) and 160 are scheduled to become effective for
us for financial statements issued for fiscal year 2009. We do not believe
SFAS 141(R) will have an impact on our future financial position, results of
operations and operating cash flows.
Inflation
We
do not
expect the impact of inflation on operations to be significant.
Precious
Metals
Raw
materials used by the Company in the EO Machines include a number of precious
metals and minerals. Prices of these materials can be volatile and the Company
has no fixed price contracts or arrangements. The Company ordinarily does not
attempt to hedge the price risk of its raw materials. Commercial deposits of
certain metals that are required for the alloys used in the EO Machines are
found in only a few parts of the world, and for certain materials only single
sources are readily available. The availability and prices of these metals
and
other materials may be influenced by private or governmental cartels, changes
in
world politics, unstable governments in exporting nations, production
interruptions, inflation and other factors. Although the Company has not
experienced significant shortages of its supplies and raw materials, there
can
be no assurance that such shortages will not occur in the future. Any such
shortages or prices fluctuations could have a material adverse effect on the
Company.
Forward-Looking
Statements
All
forward-looking statements contained herein are deemed by the Company to be
covered by and to qualify for the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995. Prospective shareholders should
understand that several factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors could
cause actual results to differ materially from those projected herein. These
forward-looking statements include our expectations regarding working capital
requirements and future funding, and plans and objectives of management for
future operations, including plans and objectives relating to the products
and
the future economic performance of the Company. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, future business decisions, and
the
time and money required to successfully complete development projects, all
of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the
forward-looking statements contained herein will be realized. Forward-looking
information is inherently subject to risks and uncertainties, and actual results
could differ materially from those currently anticipated due to a number of
factors, which include, but are not limited to, risks associated with
successfully developing our business in evolving markets, our need for
additional capital, our continuing operating losses, the ability of our
management to conduct distribution activities and sell products, possible
failure to successfully develop new products, vulnerability to competitors
due
to lack of patents on our products, and other risk factors listed in our annual
report on Form 10-KSB for the year ended December 31, 2007 and our other SEC
reports. Based on actual experience and business development, the Company may
alter its marketing, capital expenditure plans or other budgets, which may
in
turn affect the results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included therein, the inclusion
of
any such statement should not be regarded as a representation by the Company
or
any other person that the objectives or plans will be achieved
.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
A
smaller
reporting company is not required to provide the information required by this
Item.
Item
4T.
Controls
and Procedures
Disclosure
Controls and Procedures
The
Company has evaluated, with the participation of the Company’s principal
executive and principal financial officers, the effectiveness of the issuer’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2008,
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 not effective at the reasonable assurance
level.
The
Company engaged an outside accounting firm to assist the Company with
documenting and testing our internal controls. Based on the results of their
tests and the evaluation of management, it was determined that some controls
were not effective. The majority of the deficiencies result from a lack of
segregation of duties, due to the size of our company and its accounting
department. While most of the control deficiencies were mitigated by alternative
procedures, the Company determined that there were some material weaknesses.
The
Company noted that certain audit adjustments were proposed by HJ &
Associates for the period ended December 31, 2007. In reviewing the audit
adjustments it was determined that the Company did have material weaknesses
as
described below.
A
“material weakness” is a significant deficiency, or combination of significant
deficiencies, in internal control over financial reporting such that there
is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis.
In its
assessment of internal control over financial reporting, management determined
that the following areas had a material weakness:
|
·
|
Inventory
price testing was determined to be misstated. The Company has subsequently
tested approximately 98% of inventory item costs and has performed
price
tests on certain inventory items.
|
|
·
|
Certain
accrued expenses were not properly reconciled and accrued. The Company
has
created an allowance account for unbilled and/or unknown expenses
not
received at the quarter end. Management will estimate an allowance
and
will reconcile subsequent invoices with this account on a quarterly
basis
|
|
·
|
Certain
stock options or warrants were not properly reconciled and accrued.
The
Company will review all stock grants and option/warrants grants at
least
quarterly and will reconcile the accounting records on a timelier
basis.
|
The
Company plans to test the remediation controls for the second quarter to
determine how effective the new procedures are in alleviating the material
weakness and deficiencies.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
The
design of any system of controls is based in part upon certain assumptions
about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
or
will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdown can occur because
of simple error or mistake.
Changes
to Internal Control Over Financial Reporting
Management
has made significant changes to internal controls over financial reporting
and
has taken the following corrective actions:
|
·
|
Management
has implemented a regular routine of reconciling all balance sheet
accounts, particularly inventory and equity accounts, on a regular
timely
basis to ensure the accuracy of our
records;
|
|
·
|
Management
has, and will, implement better review procedures of all balance
sheet
accounts;
|
Other
than the changes indicated above, there have been no significant changes in
our
internal control over financial reporting that occurred during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting, or other
factors that could significantly affect internal controls subsequent to the
date
of our most recent evaluation.
PART
II - OTHER INFORMATION
Item
1.
Legal
Proceedings
None
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
None
Item
3.
Defaults
Upon Senior Securities
None
Item
4.
Submission
of matters to Vote of Security Holders
There
were no matters submitted to a vote of stockholders during the first quarter
of
2008.
Item
5. Other Information
None
Item
6.
Exhibits
and Reports on Form 8-K
EXHIBIT
NO.
|
|
DESCRIPTION
OF EXHIBIT
|
|
|
|
3(i).1
|
|
Certificate
of Incorporation (Incorporated by reference from registration statement
on
Form SB-1 filed with the SEC on July 29, 2002 (File No.
333-86830
)
|
|
|
|
3(i).2
|
|
Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from registration statement on Form SB-1 filed with the Securities
and
Exchange Commission on July 29, 2002 (File No.
333-86830
)
|
|
|
|
3(i).3
|
|
Certificate
of Amendment of Certificate of Incorporation (Incorporated by reference
from current report on Form 8-K filed with the Securities and Exchange
Commission on January 17, 2007)
|
|
|
|
3(ii).1
|
|
Amended
and Bylaws (Incorporated by reference from registration statement
on
current report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
|
|
|
|
10.1
|
|
Settlement
and License Amendment dated as of March 7, 2008 between the Company
and
University of Georgia Research Foundation (Incorporated by reference
from
current report on Form 8-K filed with the Securities and Exchange
Commission on March 13, 2008)
|
|
|
|
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.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant cause
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
May 13, 2008
|
|
|
|
EAU
TECHNOLOGIES,
INC.
|
|
|
|
|
By:
|
/s/ Wade
R.
Bradley
|
|
Wade
R. Bradley
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/ Brian
D.
Heinhold
|
|
Brian
D. Heinhold
Chief
Financial Officer
(Principal
Financial Officer)
|
|
|
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