PART
I
ITEM
1.
DESCRIPTION
OF 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 fluids. These fluids have various commercial applications
and may be used in commercial food processing 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 “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, 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 fluids created
by the EOW Technology (referred to herein sometimes as the “EO Fluids” or
“Empowered Water
TM
”)
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
.
We
have
identified the following industries for early stage sales and marketing focus:
1) dairy production and processing, 2) meat and poultry processing, 3)
clean
in
place (“CIP”) for food and beverage processing and 4) agricultural grow-out and
processing (
“Primary
Markets”
).
As of
the date of this Report, the Company was focused on these markets because we
believe that for each of these markets we have a competitive advantage, a
leading strategic industry partner, or we can provide an attractive value-added
proposition. To penetrate these markets, EAU is conducting trials 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. Those facets 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 several provisional patent
pending applications filed to protect new processes and products, as described
herein. Previously, the Company’s revenues had been primarily generated 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 to introduce what we have learned there to the United
States. We will continue to seek to derive future EOW Technology revenues from
recurring fees charged to customers based on per-unit or per-gallon of fluid
used after equipment is installed. Additionally, we will seek to introduce
our
technology to meat and poultry processing by leveraging the development and
trials that we concluded here in the United States.
Products
and Related Markets
EOW
Technology
We
intend
to lease generators that create electrolyzed fluids that are produced on-site
at
commercial processing facilities (“CIP Systems”), particularly in the food
products sectors that require high volumes of non-toxic cleaning fluids. This
market niche should allow us to exploit the fact that our non-toxic products
are
more effective than most toxic chemical treatments at typically used
concentration levels. The quantity of electrolyzed sanitizing fluids can be
metered, and the user of the generator will pay a lease fee based on either
a
set price per unit of fluid drawn from the generator, or will pay a fee based
on
the number of units, such as animal carcasses, that are treated with our
electrolyzed water products. 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. Other than existing agreements in place, EAU does
not
intend to sell its equipment to the markets it is entering.
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 plans a full rollout at the end of the trials.
In
2005,
we entered into an agreement with Tyson Foods, Inc., to test our EOW Technology
and EO Fluids (the “
EOW
System
”)
in its
Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EOW System
trial was completed.
The
trial yielded significant results in killing salmonella on the
processed poultry. Independent testing analysis conducted by ABC Research,
Inc., in Gainesville, Florida, revealed pre-chill microbial reduction was
significantly below the Food Safety Inspection Service (the enforcement arm
of
the USDA; “FSIS”) allowable limit. From these results we
successfully completed phase I of our USDA Online Reprocessing (OLR)
Certification. The EAU Technologies OLR intervention also tested well showing
a
statistically significant difference between control and test groups.
The
Company has experienced some sales resistance from the multiple industries
including the poultry industry, as the status quo for the industry is to use
the
currently available toxic solutions that keep processing plants within
regulatory limits of the allowable levels of pathogens. Throughout our learning
process, we found that if a plant is in compliance with the USDA there would
be
no reason for that plant to take steps to better its processes unless there
is a
financial benefit of doing so. Due to the state of the industry it would take
a
change in government regulation or policy to make a dramatic change. We believe
on February 5, 2008, that event occurred. 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 proposed 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. For processors with strong processes
and
intervention systems, 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, in conjunction with the new FSIS policies
and
regulations, there is now more than just incentive, efficacy, and positive
environmental aspects to our technology that will make EAU appealing to the
industry.
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 “physically”
kill mold spores and break down associated mycotoxins. We are currently working
with an industry leader in environmental remediation to develop the protocol
to
use Empowered Water™ in mold remediation work.
As
of the
date of this Report, the Company maintained an inventory of several EOW
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 years. This may
lead
to recurring sales, creating additional and ongoing revenues.
EOW
Fluids can have varying strength and properties. We have created products by
researching and testing the cleaning and sanitizing characteristics of EOW
Fluids with varying electrical charges, pH levels and ppm (parts per million)
of
hypochlorous acid. 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 EOW Technology is unique in the marketplace. Beyond our
initial focus in our
four
Primary Markets, our EO 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 EOW
Fluids:
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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 expect to receive
additional patent protection for other uses of Primacide A. EAU has
completed successful trials in the field to further validate the
use of
Primacide A as a disinfectant.
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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
now
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.
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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.
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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 plans a full rollout at
the end
of the trials.
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Agriculture
In
2006
we made initial sales under the “Exclusive License and Distribution Agreement”
with
Water
Science, LLC, a Florida limited liability company (“
Water
Science
”)
principally owned by Esmeralda’s CEO and Chairman of the board of directors,
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 shipped
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. As of December 31, 2007, EAU had four
completed P-1200 Systems in inventory ready to ship upon receiving destination
orders from Water Science. EAU received deposits on these systems in 2006.
While
waiting for those destination orders, EAU has continuously upgraded the
technology to accommodate varying local water qualities. 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 EOW
Technology and other products and services are listed below. We intend to focus
more efforts on these markets after we attain targeted revenues 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
“physically” kill mold spores and break down associated mycotoxins.
Medical
–
The
medical industry is in dire need of new and more effective sanitizing and
disinfecting solutions. We believe that our EOW 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.
Fish
Processing
–
We
believe that our EOW 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 processing clean
in
place (“CIP”), environmental remediation 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 EOW Technology, to kill bacteria, viruses and fungus and
to
clean the living environment without the use of harsh chemicals. Our
agricultural products 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 EOW 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 sell our products in these markets because our
equipment is better suited for larger applications.
Our
Agricultural Products also provide an organic alternative at a reasonable price.
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, 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 currently being used.
Manufacturing
and Sources of Supply
We
manufacture and assemble contractually manufactured 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 will outsource to third parties the majority of manufacturing
and
assembly of electrolyzed water generator components that comprise our EOW
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. However, as of the date of this Report, we do not intend
to
enter into any single long-term contract related to generator manufacture.
Distribution
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 use a network of resellers and third party distributors 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. There have been many companies in the EOW 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
EOW
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 regulation 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, 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.
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 through the electrolysis process is generally recognized as safe for
indirect food contact and food contact surfaces.
We
have
submitted a request to the EPA to confirm that our commercial fluid generator
is
a pesticide device, and are awaiting their response. 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. Two patents have been issued (for carpet cleaning and egg
sanitization) 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:
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generate
electrolyzed water that has a longer shelf life;
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sanitize
agricultural products;
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enhance
current products for further use in carpet
cleaning;
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sanitize
and disinfect hard and soft
surfaces;
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provide
superior personal care products;
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create
more effective and easier to use home surface sanitation products;
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provide
a superior drinking and commercial-use water
product.
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Our
research and development expenditures totaled $140,944 for the year ended
December 31, 2007, and $335,853 in 2006.
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, 2007 and 2006. 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.
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
do
not expect to use outside distributors to market or sell our products in the
next 12 months. 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.
We
may need substantial additional funds that we may not be able to
acquire.
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.
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:
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Growth
rate of the market for environmentally friendly sanitizing
products;
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Our
ability to attract and retain
customers;
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Our
ability to upgrade, develop and maintain our systems and
infrastructure;
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Amount
and timing of operating costs and capital expenditures relating to
business expansion and
infrastructure;
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Delays
in developing and introducing new
products;
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Announcement,
introduction and market acceptance of new or enhanced sanitizing
products
by competitors;
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Governmental
regulation of our products by agencies such as the FDA, USDA, EPA,
or
others.
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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.
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-KSB. 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.
We
have
identified material weaknesses in our internal controls over financial
reporting. See “Item 8A—Controls and Procedures—Management’s Report on
Internal Control Over Financial Reporting” for a discussion of these material
weaknesses. As of the date of this Annual Report on Form 10-KSB, we are
still in the process of implementing remedial measures related to the material
weaknesses identified as discussed at Item 8A—“Controls and
Procedures—Management’s Report on Internal Control Over Financial Reporting.” If
our efforts to remedy the weaknesses we identified are not successful, our
business and operating results could be harmed and the reliability of our
financial statements could be impaired, which could adversely affect our stock
price. 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 are first
required to issue our management report on internal control over financial
reporting in our annual report on Form 10-KSB for the fiscal year ending
December 31, 2007. We have dedicated significant time and resources during
fiscal 2007 and expect to dedicate more time and resources during fiscal 2008
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, 2009. 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’s 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.
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, and include Hoshizaki, Miox, and Toyo. 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.
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.
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 10,839,843 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. There are approximately 11,651,781 shares of Common Stock which
are available for sale under Rule 144 beginning December 31,
2007.
Employees
As
of
December 31, 2007 we had 11 full-time employees and 5 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
2.
|
DESCRIPTION
OF 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
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
Our
Annual Meeting of Stockholders was held at the Courtyard Marriott Buckhead,
located at 3332 Peachtree Road NE, Atlanta, Georgia 30326, on Tuesday, December
6, 2007 at 7:30 a.m. for the following purposes:
|
|
1.
|
To
elect seven directors to serve for one-year terms expiring at the
annual
meeting in 2008 and until their successors are elected and qualified.
|
|
|
2.
|
To
consider and act upon the proposed 2007 Stock Incentive
Plan.
|
|
|
3.
|
To
ratify the appointment of HJ & Associates, LLC as independent auditors
for the fiscal year ending December 31,
2007.
|
The
results of the voting were as follows:
|
PROPOSAL
|
|
FOR
|
|
WITHHELD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01
- DIRECTORS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WADE
R BRADLEY
|
|
11,345,042
|
|
18,118
|
|
|
|
|
|
KARL
HELLMAN
|
|
11,341,282
|
|
21,878
|
|
|
|
|
|
THEODORE
C JACOBY JR
|
|
11,345,482
|
|
17,678
|
|
|
|
|
|
J
LEO MONTGOMERY
|
|
11,346,042
|
|
17,118
|
|
|
|
|
|
JAY
S POTTER
|
|
11,324,282
|
|
38,878
|
|
|
|
|
|
PETER
F ULLRICH
|
|
11,348,682
|
|
14,478
|
|
|
|
|
|
WILLIAM
J WARWICK
|
|
11,351,642
|
|
11,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
WITHHELD
|
|
NON-VOTES
|
|
|
|
|
|
|
|
|
|
|
|
02
- STOCK INCENTIVE PLAN
|
|
8,445,996
|
|
65,585
|
|
90,738
|
|
2,760,841
|
|
|
|
|
|
|
|
|
|
|
|
03
- RATIFY AUDITORS
|
|
11,274,136
|
|
77,014
|
|
12,010
|
|
0
|
PART
II
|
ITEM
5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER 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
December 2007, the Company issued 480,260 options to various employees. The
options are for a term of ten years and have an exercise price of $1.30 per
share. The options vest over a period of four 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.
In
November 2007, the Company issued 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.
On
May 7,
2007, the Company issued 100,000 shares of common stock to an individual who
exercised 100,000 warrants for $50,000 or $0.50 per share.
In
May
2007, Peter F. Ullrich and Water Science LLC (“WS”), shareholders of EAU
Technologies, Inc., entered into an agreement (the “Termination Agreement”) for
the cancellation and reissuance of existing warrants held by WS (“Original
Warrants”) to purchase a total of 8.4 million shares of the Company’s common
stock. In the Termination Agreement, the parties agreed as
follows:
|
·
|
The
Original Warrants were cancelled.
|
|
·
|
The
Company granted to WS replacement warrants (“Replacement Warrants”) to
purchase a total of 8.4 million shares of common stock at an exercise
price of $1.30 per share, with an expiration date of May 9,
2010.
|
|
·
|
The
Company has a right (“Put Right”) to require WS to exercise one of the
Replacement 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
warrant shares are subject to an amended registration rights
agreement.
|
In
October 2007, Water Science LLC exercised a portion of its warrants for
$2,000,000 and the Company issued 1,538,463 shares of common stock to Water
Science, at an exercise price of $1.30 per share.
In
October 2006, the Company issued 500,000 options to Wade R. Bradley in
connection with the appointment of Mr. Bradley as Chief Executive Officer and
President. 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 4.71%, volatility at 81.29% and the stock price
at $1.46. The value of each warrant is approximately $1.25 per warrant. The
Company recognized $332,533 and $63,216 during the years ended December 31,
2007
and 2006, respectively, as consulting expense.
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, 2007
|
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2007
|
|
$
|
1.09
|
|
$
|
0.86
|
|
|
Quarter
Ended June 30, 2007
|
|
|
2.25
|
|
|
1.00
|
|
|
Quarter
Ended September 30, 2007
|
|
|
1.25
|
|
|
0.80
|
|
|
Quarter
Ended December 31, 2007
|
|
|
1.55
|
|
|
0.56
|
|
|
|
|
EAU Technologies, Inc. Common Stock
|
|
|
|
|
High
|
|
Low
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2006
|
|
$
|
3.35
|
|
$
|
2.40
|
|
|
Quarter
Ended June 30, 2006
|
|
|
2.85
|
|
|
1.75
|
|
|
Quarter
Ended September 30, 2006
|
|
|
2.00
|
|
|
1.51
|
|
|
Quarter
Ended December 31, 2006
|
|
|
1.70
|
|
|
0.85
|
|
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, 2007, the Company had approximately 459 record holders of common
stock.
|
ITEM
6.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
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 report
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 Report, the Company was focused on these markets because we
believe that for each of these markets we have a competitive advantage, a
leading strategic industry partner, or we can provide an attractive value-added
proposition. To penetrate these markets, EAU is conducting trials 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
shipped and installed five 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 six farms in different
regions of the Country.
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-KSB, 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:
|
|
·
|
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.
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. The
Company has historically had very few uncollectible amounts.
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.
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.
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 $524,000.
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 $1,413,744 in cash as of December 31, 2007, compared to $206,094
at
December 31, 2006. Our working capital as of December 31, 2007 was $114,443
compared to $961,230 at December 31, 2006. The primary reason for the change
in
our working capital for the year ended December 31, 2007, was due to the
reclassification of the senior convertible note from long-term debt to a current
liability. The Company has received and recorded $697,500 in advance deposits
from Water Science on machine orders at December 31, 2007. 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. These deliveries are targeted to
occur during 2008. Long term debt decreased from $1,371,091 at December 31,
2006
to $59,045 at December 31, 2007. This is due to the reclassification of the
senior convertible note from long-term debt to a current liability. At December
31, 2007, our stockholders’ deficit was $6,574,573.
Summary
of select balance sheet information follows:
|
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
Balance
Sheet Data
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
1,413,744
|
|
$
|
206,094
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
4,677,688
|
|
|
3,077,702
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
5,347,458
|
|
|
4,929,761
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
4,563,245
|
|
|
2,116,472
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Debt
|
|
|
59,045
|
|
|
1,371,091
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
5,347,458
|
|
$
|
4,929,761
|
|
Results
Of Operations For The Year Ended December 31, 2007 As Compared To The Year
Ended
December 31, 2006
Revenues
and Net Income -
Net
revenues for the year ended December 31, 2007, decreased by $271,873, or 24%,
to
$878,599, of which $717,503 are revenues from a related party, compared to
revenues of $1,150,472 for the year ended December 31, 2006. The majority of
the
revenues are from sales of our EO water machines to Water Science, a related
party with an exclusive license for Central and South America. Equipment sales
to Water Science totaled $517,503 or 59% of total revenues. We also recognized
$200,000 in licensing revenues related to the exclusive license granted to
Water
Science.
Our
cost
of sales decreased by $262,852, to $519,751, for the year ended December 31,
2007. This is a 34% decrease over the $782,603 cost of sales during the year
ended December 31, 2006. This decrease is attributable to the decrease in
product sales of our EO water machines. We have also been able to develop better
cost-effective manufacturing processes and procedures.
Our
net
loss for the year ended December 31, 2007, was $10,891,337, which is $2,375,980
more than the $8,515,357 net loss for the fiscal year ended December 31, 2006.
This increase of 28% in the net loss is primarily attributable to the Company’s
continued capital raising efforts. In May 2007, the Company, as part of a
financing agreement with a related party, cancelled 8,400,000 outstanding
warrants and granted 8,400,000 new warrants. (See Item 5 above) As part of
the
new warrants the Company recorded a non-cash loss on derivative liability of
$2,118,761 in 2007 as compared with a gain on the adjustment to fair value
of
the derivative liability of $714,404 in 2006.
General
and Administrative Expense -
The
Company incurred total general and administrative expenses of $8,260,609 in
2007, a 24% increase over the $6,638,052 incurred in 2006. General and
administrative expenses for 2007 consist primarily of payroll expense
($1,318,354), expenses related to stock options and warrants ($4,705,545),
professional fees ($966,988), travel related expenses ($269,699) and insurance
expense ($209,033).
During
the year ended December 31, 2007, we expended $966,988 in professional fees,
which include legal and consulting fees. This was a decrease of $377,006 or
28%,
from the $1,343,994 spent in 2006. This decrease is primarily due to the
Company’s efforts to reduce costs and better utilize its own resources.
Our
interest expense remained relatively unchanged from $1,161,485 in 2006 to
$1,122,930 in 2007. 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 10 to our audited financial statements. This required accounting
treatment resulted in our recognizing a $1,000,000 in interest expense for
the
year ended December 31, 2007 and 2006.
Research
and Development -
Our
research and development expenses for the year ended December 31, 2007, were
$140,944, a decrease of $194,909, or 58%, as compared to $335,853 for the year
ended December 31, 2006.
Summary
of select income statement information follows:
|
|
|
Year
Ended
December
31,
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Better
(Worse)
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
878,599
|
|
$
|
1,150,472
|
|
$
|
(271,873
|
)
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
358,848
|
|
|
367,869
|
|
|
(9,021
|
)
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
10,926,379
|
|
|
7,434,940
|
|
|
(3,491,439
|
)
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) from discontinued operations
|
|
|
35,042
|
|
|
(1,080,417
|
)
|
|
1,115,459
|
|
|
103
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
10,891,337
|
|
|
8,515,357
|
|
|
(2,375,980
|
)
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
0.79
|
|
|
0.71
|
|
|
(0.08
|
)
|
|
11
|
%
|
Liquidity
And Capital Resources
At
December 31, 2007, we had cash and cash equivalents of $1,413,744, compared
to
$206,094 at December 31, 2006.
We
have
had continuing net losses of $10,891,337 for the year ended December 31, 2007
compared with net losses of $8,515,357 for the year ended December 31, 2006.
The
net loss per share for the year ended 2007 was $0.79 compared to a loss of
$0.71
per share for the same period in 2006. Our working capital as of December 31,
2007 was $114,443 for reasons discussed above under financial position.
Net
cash
used in operating activities for the year ended December 31, 2007 was
$4,715,198, a 23% decrease, compared to $6,104,588 for the same period in 2006.
The primary uses of cash were purchases of inventory of $357,084, an increase
in
restricted cash of $240,000 and a decrease in accounts payable of $296,020.
Also
included in the net cash used is $116,453 used from discontinued operations.
At
December 31, 2007, the Company’s net inventory was $2,814,533, representing an
increase of 12% from the $2,502,263 on hand at December 31, 2006. 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 $4,705,545. 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 $1,000,000. (See Note 10 to
the Company’s financial statements.) Further, the Company recognized a non-cash
increase in the derivative liability of $2,118,762, due to changes in the
Black-Scholes value of the liability.
Cash
flows from investing activities provided the Company $1,891,164 during the
period ended December 31, 2007 as compared to $429,862 provided for in the
same
period in 2006. During 2007, the cash flows consisted primarily of net cash
receipts of $2,150,000 from the sale of our consumer products division (See
Note
15 to the Company’s financial statements) and the issuance of a Note Receivable
for $150,000 and purchase of equipment of $91,848. During 2006 the primary
cash
flows from investing activities consisted primarily of $456,201 provided from
the sale of our investment in Equilease and $54,552 used to purchase equipment.
Cash
flows from financing activities provided the Company $4,031,684 and $5,199,472
for the years ended December 31, 2007 and 2006, respectively. This is primarily
a result of the Company’s continued sales of its common stock to fund
operations. The Company raised $3,550,000 and $5,230,747 from the sale of stock
and $500,000 and $0 from the advance made by a related party in anticipation
of
exercising warrants. This amount was offset by payments made on notes payable
in
the amount of $18,316 and $31,275 in 2007 and 2006, 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 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.
|
ITEM
7.
|
FINANCIAL
STATEMENTS
|
Our
consolidated financial statements and the independent auditors' report are
attached to this Report and are incorporated into this Item 7 by
reference.
|
ITEM
8.
|
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.
|
ITEM8
A.
|
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, 2007,
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 for the year ended
December
31, 2007. 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.
|
In
2006,
Management also determined that certain stock options and warrants granted
in
2005 for services may not have been properly treated for tax withholding.
Management is reviewing all granted options and warrants with professional
tax
accountants to resolve this matter.
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.
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, 2007. 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, 2007, the
Company’s internal control over financial reporting was not effective to provide
reasonable assurance based on those criteria.
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 will perform
quarterly price tests on certain inventory
items.
|
|
|
·
|
Certain
accrued expenses were not properly reconciled and accrued. The Company
will create 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
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.” The Company is also taking the following steps to
remediate the material weaknesses:
|
|
·
|
Inventory
price testing and full inventory counts will be performed
quarterly.
|
|
|
·
|
The
Company will create 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
|
|
|
·
|
The
Company will review all stock grants and option/warrants grants at
least
quarterly and will reconcile the accounting records on a timelier
basis
.
|
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
Management
has made significant changes to internal controls over financial reporting
and
has taken the following corrective actions:
|
|
·
|
Engaged
an outside accounting firm to assist the Company with documenting
and
testing our internal controls;
|
|
|
·
|
Management
has implemented a regular routine of reconciling all balance sheet
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.
|
ITEM8
B.
|
OTHER
INFORMATION
|
None
PART
III
|
ITEM
9.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 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
|
|
47
|
|
Chief
Executive Officer; Director
|
|
|
|
|
|
|
|
Brian
D. Heinhold
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
|
35
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
Doug
Kindred
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
|
52
|
|
Chief
Technology Officer
|
|
|
|
|
|
|
|
Larry
Earle
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
|
38
|
|
Senior
Vice President of Live Processing
|
|
|
|
|
|
|
|
Joseph
A. Stapley
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
|
39
|
|
Senior
Vice President of Investor Relations and Business
Development
|
|
|
|
|
|
|
|
Jay
S. Potter
10509
Vista Sorrento Pkwy. #300
San
Diego, CA 92121
|
|
42
|
|
Director
|
|
William
J. Warwick
1063
Ocean Ridge Drive
Wilmington,
North Carolina 28405
|
|
72
|
|
Director
|
|
|
|
|
|
|
|
Peter
Ullrich
1800
NW 89
th
Place
Miami,
FL 33172
|
|
65
|
|
Director
|
|
|
|
|
|
|
|
Theodore
C. Jacoby, Jr.
1716
Hidden Creek Ct.
St.
Louis, MO 63131
|
|
67
|
|
Director
|
|
|
|
|
|
|
|
J.
Leo Montgomery
1890
Cobb International Blvd.
Kennesaw,
GA 30152
|
|
67
|
|
Non-executive
Chairman of the Board; Director
|
|
|
|
|
|
|
|
Karl
G. Hellman
1776
Chadds Lake Drive
Marietta,
GA 30068
|
|
61
|
|
Director
|
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.
Jay
Potter served as the Chairman of the Board from May 2006 until October 2007.
Mr.
Potter also sat as Interim CEO from May 2006 until November 2006 when Mr.
Bradley was hired. Mr. Potter is also a member of the Company’s audit committee
and 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.
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. Mr. Montgomery serves
as
Non-Executive Chairman of the Board. The Board also appointed Mr. Hellman as
a
member of the Compensation Committee and appointed Mr. Montgomery as a member
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.
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.
Larry
Earle
is
currently Senior Vice President of Live Processing. Mr. Earle has
extensive experience in process operations, management and
engineering. He has spent the past seven years working in the
poultry industry as a production superintendent, plant manager and operations
consultant for companies such as Seaboard Farms, Inc., ConAgra Foods, Inc.
and
Cagle’s, Inc. Mr. Earle started out his career as a project and business
manager for an industrial engineering firm now owned by BioMed, working with
process plants and manufacturing facilities such as Coca-Cola Company and
Cargill,
Incorporated
.
He holds a BBA in Agricultural Business Management from West Georgia College
of
the University of Georgia and holds certifications in Energy Management Systems,
ASME, Technology Management, and Quality Assurance Systems.
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.
Jay
S.
Potter
has
served as a director of the Company since September 2005. From May 2006 until
October 2006, he served as interim CEO of the Company. He has been the Chairman
of the Board of Directors of Voice Vision since its inception in March
2007. Mr. Potter has been active in the financial industry for 20 years
and has successfully participated, directed or placed over one hundred million
dollars of capital in start-up and early stage companies. Mr. Potter takes
an active role in the development of the funded companies and to that end has
participated as advisor, director and officer. Currently, Mr. Potter is a
director for ENVSION Solar, LLC, and Envirepel Energy, Inc., two companies
that
he helped fund, and that he continues to guide and advise in the renewable
energy sector. He also is the founder of GreenCore Private Equity Fund,
investing in cutting edge companies developing renewable energy and other
"green" technologies. He has served as Chairman, President and CEO of
Nexcore Capital, Inc. and its financial service affiliates since co-founding
the
company in 1989. Mr. Potter serves as Founder and Chairman of Sterling
Energy Resources, Inc., a public oil and gas company (Symbol: SGER) involved
in
the acquisition, exploration and development of oil and natural gas from its
numerous leases. Mr. Potter holds Series 7, 24 and 63 licenses in good
standing with the National Association of Securities Dealers,
Inc.
William
J. Warwick
has
served as a director of the Company since 2003. 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. 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.
Theodore
C. Jacoby, Jr.
was
appointed as a director in September 2007. 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 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 currently an Advisory Director at SunTrust Robinson Humphrey (a division
of SunTrust Capital Markets). 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 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,
Jay S. Potter 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 four times during 2007. 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 2007. 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.
|
|
|
•
|
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 10 meetings during 2007. 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,
2007
all
Section 16(a) filing requirements applicable to our directors, officers, and
greater than 10% beneficial owners were completed.
|
ITEM
10.
|
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
|
|
|
2007
2006
|
|
|
240,000
40,000
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
332,533
63,216
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
5,750
1,000
|
(1)
(1)
|
|
578,283
104,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doug Kindred
Chief Technology Officer
|
|
|
2007
2006
|
|
|
125,936
120,000
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
33,892
0.00
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
6,330
8,884
|
(1)
(1)
|
|
128,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Earle
Senior Vice President, Live Processing
|
|
|
2007
2006
|
|
|
120,000
120,000
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
1,469
0.00
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
6,227
5,351
|
(1)
(1)
|
|
127,696
125,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joe Stapley
Senior Vice President, Investor Relations
|
|
|
2007
2006
|
|
|
120,000
120,000
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
6,496
0.00
|
|
|
0.00
0.00
|
|
|
0.00
0.00
|
|
|
0.00
3,920
|
(1)
|
|
126,496
123,920
|
|
|
|
(1)
|
Other
compensation consists of car
allowances.
|
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,
2007.
|
|
|
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
|
|
|
200,000
|
|
|
300,000
|
|
|
1.30
|
|
|
11/6/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doug
Kindred,
Chief
Technology Officer
|
|
|
150,000
150,000
20,000
|
|
|
25,000
530,000
|
|
|
0.01
1.50
3.50
2.45
1.30
|
|
|
1/2/2008
1/2/2008
5/27/2015
6/1/2015
11/8/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Stapley,
Senior
Vice President, Investor Relations
|
|
|
25,000
|
|
|
25,000
159,230
|
|
|
3.50
2.45
1.30
|
|
|
5/27/2015
6/1/2015
12/6/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry
Earle,
Senior
Vice President, Live Processing
|
|
|
25,000
|
|
|
75,000
36,000
|
|
|
2.45
3.50
1.30
|
|
|
6/1/2015
5/27/2015
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.
Mr. Earle was awarded a stock option grant of 36,000 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.
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. Mr. Earle is eligible for a $30,000 bonus, 25% 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, 2007, 2 executives had current employment agreements (the
“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
|
|
·
|
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").
The
material terms of the 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
|
|
·
|
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 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.
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.
ITEM
11.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table presents information about the beneficial ownership of our
common stock as of
March
25, 2008 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 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
15,257,113
shares
of
common stock outstanding as of
March
25,
2008.
|
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
|
|
|
14,
485,569
|
|
|
62.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Water
Science, LLC. (1)
1800
NW 89th Place
Miami,
FL 33172
|
|
|
11,000,000
|
|
|
47.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Wade
R. Bradley (2)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
|
|
200,000
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Stapley (3)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
|
|
123,250
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Doug
Kindred (4)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
|
|
148,250
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Larry
Earle (5)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
|
|
49,750
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
William
J. Warwick
1063
Ocean Ridge Drive
Wilmington,
North Carolina 28405
|
|
|
173,077
|
|
|
1.
1
|
%
|
|
|
|
|
|
|
|
|
|
|
Jay
S. Potter (
6
)
10509
Vista Sorrento Pkwy. #300
San
Diego, CA 92121
|
|
|
512,982
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Theodore
C. Jacoby, Jr.
1716
Hidden Creek Ct.
St.
Louis, MO 63131
|
|
|
73,077
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Karl
Hellman
555
Northpoint Center East, 4th Floor
Alpharetta,
GA 30022
|
|
|
23,077
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
J.
Leo Montgomery (
7
)
1890
Cobb International Blvd., Ste 100
Kennesaw,
GA 30152
|
|
|
567,377
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
All
current directors and executive officers
as
a group (11 persons)
|
|
|
16,
367,259
|
|
|
67.2
|
%
|
|
|
(1)
|
Mr.
Ullrich is the managing member of Water Science, LLC. Mr. Ullrich
beneficially owns 3,485,769 shares and indirectly through Water
Science
beneficially owns 3,138,463 shares, warrants to purchase 6,861,537
shares
at an exercise price of $1.30 per share and a convertible note
currently
convertible into 1,000,000 shares. The warrants and convertible
note 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; only 200,000 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. Only
25,000
shares with an exercise price of $3.50 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. Only 20,000 shares with an exercise price of $3.50 are currently
exercisable or exercisable within 60 days of the date of this
report.
|
|
|
(5)
|
Mr.
Earle own 24,750 shares and holds options to purchase a total of
136,000
shares at an exercise price of $2.45 (75,000 shares), $3.50 (25,000
shares) and $1.30 (36,000 shares) per share. Only the 25,000 shares,
with
an exercise price of $3.50, are currently exercisable.
|
|
|
(6)
|
Mr.
Potter beneficially owns 114,816 shares. Warrants to purchase a
total of
398,166 shares at exercise prices ranging from $0.01 to $5.00 per
share
are owned by companies controlled by Mr. Potter.
|
|
|
(7)
|
Mr.
Montgomery beneficially owns 67,377 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. See “Selling
Shareholders”.
|
Securities
Authorized for Issuance Under Equity Compensation
Plans
|
EQUITY
COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2007
|
|
|
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
|
|
|
700,260
|
|
$
|
1.99
|
|
|
1,769,740
|
|
|
Equity
compensation plans not approved by security holders*
|
|
|
9,941,579
|
|
$
|
1.52
|
|
|
N/A
|
|
|
Total
|
|
|
10,641,839
|
|
$
|
1.55
|
|
|
N/A
|
|
(1)
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.
|
ITEM
12.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
The
following are certain transactions during the year ended December 31,
2007,
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.
Sale
of Products to Affiliates of Shareholders
Water
Science, who has exclusive rights to sell our products in South America and
Mexico, is a major shareholder of the Company. Water Science by agreement may
purchase machinery from the Company at cost plus 25 percent.
During
the year ended December 31, 2007, the Company sold two large water generators,
three small water generators and related parts to Water Science for $517,503.
Further,
the Company has received and recorded $697,500 in advance deposits from Water
Science on machine orders at December 31, 2007. In connection with the sales
of
the machines and products, the Company has recorded approximately $357,615
in
accounts receivable at December 31, 2007.
During
the year ended December 31, 2006, the Company sold four large water generators,
one small water generator and related parts to Water Science for $660,141.
The
Company also sold approximately $239,419 in products to an entity related to
Water Science.
Pursuant
to the Amended and Restated Exclusive License and Distribution Agreement,
certain terms in the original Exclusive License and Distribution Agreement
between Water Science and us on or about September 19, 2005, were clarified,
specifically with respect to what products and technology is intended to be
covered by the License Agreement, and to specify the initial pricing with
respect to such products.
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.) 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.
The
Company made payments of $248,030 and $30,000 to SunTrust Robinson Humphrey
in
May and October of 2006, respectively, in connection with certain financing
agreements. During this time, Mr. Montgomery was an Advisory Director with
SunTrust Robinson Humphrey.
During
the year ended December 31, 2006, we sold our products to Zerorez Franchising
Systems, Inc. (“Zerorez”), a Nevada Corporation in which Gaylord Karren and John
Hopkins, former officers of the Company, are beneficial owners.
These
sales to affiliates represented
approximately
1%
of
our
revenue during the fiscal year ended December 31, 2006.
We did
not sell any products to Zerorez during the year 2007.
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 years each, unless both parties agree to the
cancellation of the agreement. The Company did not have any sales to Zerorez
in
2007 and received $25,000 from sales of machines to Zerorez in
2006.
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. Mr. Potter is independent under SEC
Rule 10A-3, but does not satisfy the definition of independence under the NASDAQ
Marketplace Rules due to the fees received from the Company in 2005 by Nexcore
Capital, his affiliate. 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.”
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 and Jay S. Potter as
non-independent members of the Audit Committee in accordance with the NASDAQ
listing standards exception. Mr. Potter is a principal of Nexcore Capital,
which
received placement fees from the Company in 2005 for assisting it with a private
placement. Due to this relationship, Mr. Potter is not deemed an independent
director under NASDAQ’s listing standards relating to Audit Committees. The
listing standards include restrictions on receiving compensation from the
Company for the past three years. The Board believes that Mr. Potter will
qualify as an independent director under the NASDAQ Rules beginning in 2008
after more than three years have elapsed since the receipt of the last of the
placement fees. The Board found Mr. Potter’s membership was necessary due to his
extensive financial expertise and his comprehensive knowledge of the history
of
the Company.
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
13.
EXHIBITS
(a)(1)
Financial Statements
The
following financial statements are incorporated by reference in Item 7 of this
Report:
Independent
Auditors’ Report
Balance
Sheet, December 31, 2007 and 2006
Statements
of Operations for years ended December 31, 2007 and 2006
Statements
of Changes of Stockholder Equity for years ended December, 2007 and
2006
Statements
of Cash Flow for year ended December, 2007 and 2006
Notes
to
Financial Statements
(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(ii).1
|
|
Bylaws
(incorporated by reference from registration statement on Form SB-2
filed
with the Securities and Exchange Commission on April 24,
2002).
|
|
10.1
|
|
Senior
Secured Convertible Promissory Note dated September 16, 2005 (Incorporated
by reference to Exhibit 10.2 of the Company’s Form 8-K, dated September
16, 2005)
|
|
10.2
|
|
Subscription
Agreement, by and between the Company and Water Science, LLC, dated
May 1,
2006 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K,
dated May 4, 2006)
|
|
10.3
|
|
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)
|
|
10.4
|
|
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)
|
|
10.5
|
|
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)
|
|
10.6
|
|
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)
|
|
10.7
|
|
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.)
|
|
10.8
|
|
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.)
|
|
10.9
|
|
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.)
|
|
10.10
|
|
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.)
|
|
10.11
|
|
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.)
|
|
10.12
|
|
Separation
Agreement by and between the Company and John Hopkins, dated May
26, 2006
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
April 2, 2007)
|
|
10.13
|
|
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
January 17, 2007)
|
|
10.14
|
|
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 January 17,
2007)
|
|
10.15
|
|
Waiver
Letter signed January 10, 2007 by Peter Ullrich (Incorporated by
reference
to Exhibit 10.3 of the Company’s Form 8-K dated January 17,
2007)
|
|
10.16
|
|
Agreement
Terminating Warrants and Registration Rights dated as of May 9, 2007
between the Company and Peter F. Ullrich and Water Sciences LLC
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
May 15, 2007)
|
|
10.17
|
|
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)
|
|
10.18
|
|
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)
|
|
10.19
|
|
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)
|
|
10.20
|
|
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)
|
|
10.21
|
|
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)
|
|
10.22
|
|
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)
|
|
10.23
|
|
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).
|
|
10.24
|
|
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)
|
|
10.25
|
|
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)
|
|
10.26
|
|
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)
|
|
10.27
|
|
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)
|
|
10.28
|
|
Waiver
and Consent Letter dated August 30, 2007 between the Company and
Water
Science, LLC.
|
|
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.
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT
FEES
The
following table shows the 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-QSB or services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years.
|
|
|
2007
|
|
2006
|
|
|
Audit
Fees
|
|
$
|
58,900
|
|
$
|
44,233
|
|
AUDIT-RELATED
FEES
HJ
did
not bill us for any audit-related fees in connection with its audit of our
financial statements for the fiscal years ended December 31, 2007.
FINANCIAL
INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For
the
fiscal years ended December 31, 2007 and December 31, 2006, HJ & Associates
did not bill us for, nor performed, any financial information systems design
or
implementation. For the fiscal years ended December 31, 2007 and December 31,
2006, we were not billed for professional services from any other accounting
firm for 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, 2007 or 2006.
ALL
OTHER FEES
We
were
not billed for any other professional services by HJ & Associates for the
fiscal years ended December 31, 2007 and December 31, 2006.
AUDITOR
INDEPENDENCE
Our
Board
of Directors considers that the work done for us in the year ended December
31,
2007 by HJ Associates, LLC is compatible with maintaining HJ Associates, LLC
independence.
AUDITOR’S
TIME ON TASK
All
of
the work expended by HJ & Associates on our December 31, 2007 audit was
attributed to work performed by HJ & Associates’ full-time, permanent
employees.
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.
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 is a successor enterprise to another company,
Primacide, LLC, which was founded by certain of the Company’s founders in 1998.
The Company was organized with an insignificant carrying amount of the assets of
Primacide, LLC. 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 with multiple dairies.
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 five years. Depreciation expense
for
the years ended December 31, 2007 and 2006 was $210,463 and $93,814,
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.
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.
Advertising
Costs
–
The
Company expenses advertising costs as incurred. The Company expensed
approximately $112,000 and $250,000, during the years ended December 31, 2007
and 2006, respectively.
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, 2007 and 2006 were
approximately $141,000 and $349,000, respectively.
Patents,
Trademarks and Intellectual Property
–
Patents, trademarks and intellectual property, consisting of trade secrets
and
formulas, are recorded in accordance with SFAS No. 142. As such, patents and
trademarks are initially measured based on their fair values. Patents and
trademarks will be
amortized
on a straight-line basis over its estimated life. Currently, we do not have
any
patents in force to begin amortizing. Intellectual property with indefinite
lives is not amortized, but the carrying amounts of these assets are reviewed
for impairment at least annually. The Company reviewed these assets for
impairment at December 31, 2007 and determined the no impairment was
indicated.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1
–
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
Comprehensive
Loss –
The
Company adopted SFAS No. 130,
“Reporting
Comprehensive Income”
(“SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income or loss, requiring its components to be reported in the
financial statements. For the year ended December 31, 2007 and 2006, the Company
had no other component of comprehensive income or loss other than the net loss
as reported in the statement of operations.
Earnings
Per Share –
The
Company adopted SFAS No. 128,
“Earnings
per Share”
(“SFAS
128"), which is effective for annual periods ending after December 15, 1997.
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.
Stock
Based Compensation
–
The
Company adopted SFAS 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.
Recently
Enacted Accounting Standards:
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154
“Accounting
Changes and Error Corrections, an amendment of APB Opinion 20 and FASB Statement
No. 3,”
which
changes the requirements for accounting for and reporting on a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
We
believe that the adoption of SFAS No. 154 will not have a material impact on
our
results of operations.
In
March
2006, the FASB issued SFAS No. 156
“Accounting
for Servicing of Financial Assets, an amendment of FASB No. 140,”
which
modifies the accounting for and reporting of servicing asset and servicing
liabilities. This statement is effective as of the beginning of our first fiscal
year that begins after September 15, 2006. SFAS No. 156 is not currently
applicable to the company and, we believe that the adoption of SFAS No. 156
will
not have a material impact on our results of operations.
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.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1
–
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
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
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Liabilities” (SFAS 159). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007. We are currently evaluating the impact the adoption of SFAS 159 may have
on our financial statements.
Reclassification
–
The
financial statements for periods prior to December 31, 2007, have been
reclassified to conform to the headings and classifications used in the December
31, 2007, financial statements.
NOTE
2 – CONCENTRATIONS OF CREDIT RISK
The
Company occasionally maintains cash balances in excess of the $100,000 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.
For
the
year ended December 31, 2007, sales to one customer, a related party,
represented approximately 82% of the Company’s total net sales. Approximately
81% of the Company’s outstanding receivables were attributable to one customer,
a related party, as of December 31, 2007.
For
the
year ended December 31, 2006, sales to one customer, a related party,
represented approximately 56% of the Company’s total net sales. Approximately
78% of the Company’s outstanding receivables were attributable to two customers,
one related party and one non-related party, as of December 31,
2006.
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 $9,540 in interest income from the escrow account for the year ended
December 31, 2007.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
4 – TRADE ACCOUNTS RECEIVABLE
Trade
accounts receivable consist of the following at December 31:
|
|
|
2007
|
|
2006
|
|
|
Trade
Accounts Receivable
|
|
$
|
86,196
|
|
$
|
159,225
|
|
|
Trade
Accounts Receivable - Related Party
|
|
|
357,615
|
|
|
219,479
|
|
|
Less
allowance for doubtful accounts
|
|
|
(25,000
|
)
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
418,811
|
|
$
|
353,704
|
|
Bad
debt
expense for the years ended December 31, 2007 and 2006 was $6,894 and $13,197,
respectively.
NOTE
5 – INVENTORIES
The
composition of inventories is as follows at December 31:
|
|
|
2007
|
|
2006
|
|
|
Finished
goods
|
|
$
|
1,887,934
|
|
$
|
543,336
|
|
|
Raw
materials
|
|
|
1,326,599
|
|
|
2,375,062
|
|
|
Allowance
for obsolete inventory
|
|
|
(400,000
|
)
|
|
(416,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,814,533
|
|
$
|
2,502,263
|
|
The
Company has established an allowance for obsolete inventory. Expense for
obsolete inventory was $132,613 and $121,303, for the years ended December
31,
2007 and 2006, respectively, and is included in Cost of Goods Sold.
NOTE
6 – PROPERTY AND EQUIPMENT
P
roperty
and equipment consisted of the following at December 31:
|
|
|
2007
|
|
2006
|
|
|
Machinery
and equipment
|
|
$
|
287,710
|
|
$
|
754,921
|
|
|
Vehicles
|
|
|
19,966
|
|
|
4,650
|
|
|
Furniture
and fixtures
|
|
|
64,442
|
|
|
50,824
|
|
|
ER
Systems
|
|
|
22,364
|
|
|
-
|
|
|
Leasehold
improvements
|
|
|
32,136
|
|
|
230,001
|
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
426,618
|
|
|
1,040,396
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(220,064
|
)
|
|
(406,919
|
)
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
206,554
|
|
$
|
633,477
|
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
7 – PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
P
atents,
trademarks and intellectual property consisted of the following at:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Patents
and trademarks
|
|
$
|
61,558
|
|
$
|
68,380
|
|
|
Intellectual
property
|
|
|
-
|
|
|
1,122,858
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
61,558
|
|
$
|
1,191,238
|
|
NOTE
8 – 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, 2007 and 2006. 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, 2007, the Company sold two large water generators,
three small water generators and related parts to Water Science for $517,503.
Further,
the Company has received and recorded $697,500 in advance deposits from Water
Science on machine orders at December 31, 2007. In connection with the sales
of
the machines and products, the Company has recorded approximately $357,615
in
accounts receivable at December 31, 2007.
During
the year ended December 31, 2006, the Company sold four large water generators,
one small water generator and related parts to Water Science for $660,141.
The
Company also sold approximately $239,419 in products to an entity related 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 10). Due to the discount of this
note and the beneficial conversion feature, the Company has recognized
$1,000,000 in interest expense for the years ended December 31, 2007 and 2006.
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 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 $2,118,761 due to the issuance of new warrants to Water Science in
May
2007 (see Note 10) and the change in the fair market value at December 31,
2007.
The Company recorded a gain of $714,404 in the change of the derivative
liability to fair market value for the year ended December 31, 2006.
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 $200,000 in each of the years ended December
31, 2007 and 2006.
Advances
from Related Party –
In
April
2007, Water Science advanced $1,000,000 to the Company. In June 2007 and August
2007, Water Science advanced an additional $1,000,000 to the Company. These
advances were used to exercise warrants in October 2007, see Note 10. In October
2007, Water Science advanced $500,000.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
8 – RELATED PARTY TRANSACTIONS
(Continued)
Escrow
Arrangement with Chief Executive Officer –
In
October 2006, the Company entered into an escrow agreement with the Chief
Executive Officer. Pursuant to the escrow agreement, to secure the Company’s
obligation to make the Severance Payment, the Company is required to deposit,
at
its election, either (1) cash in the amount of $240,000 or (2) an irrevocable
letter of credit with a face amount of $240,000, with an agreed upon escrow
agent who shall hold such funds (or letter of credit) in escrow. In January
2007, the Company deposited $240,000 in cash with an escrow agent.
Advances
–
Periodically throughout the year, the Company advances officers and employees
cash for certain reimbursable expenses. As of December 31, 2007 and 2006, the
Company had advances to employees or officers in the amount of $5,500 and
$1,000, respectively.
Employee
Options
–
In
December 2007, the Company granted 480,260 options to various employees. The
options are for a term of ten (10) years and have an exercise price of $1.30
per
share. The options vest over a period of four (4) years. The 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 Company recognized $19,594
during the year ended December 31, 2007.
In
November 2007, the Company granted 530,000 options to Douglas Kindred, in
connection with the appointment of Mr. Kindred as Chief Technology Officer.
The
options are for a term of ten (10) years and have an exercise price of $1.30
per
share. The options vest over a period of four (4) years. The warrants were
valued using the Black-Scholes model with the following assumptions: risk free
rate of 4.28%, volatility at 85.99% and the stock price at $1.01. The value
of
each warrant is approximately $0.85 per warrant. The Company recognized $33,892
during the year ended December 31, 2007.
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. (See Note 12)
Product
Supplier Agreement
–
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. The Company did not make any sales to Zerorez during 2007. The
Company received $25,000 from sales of machines to Zerorez in 2006.
NOTE
9 – 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:
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
9 – WARRANTY RESERVE (Continued)
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Warranty
reserve at beginning of period
|
|
$
|
102,362
|
|
$
|
96,800
|
|
|
Costs
accrued for additional warranties
|
|
|
44,000
|
|
|
62,000
|
|
|
Service
obligations honored
|
|
|
(24,362
|
)
|
|
(56,438
|
)
|
|
Warranty
reserve at end of period
|
|
$
|
122,000
|
|
$
|
102,362
|
|
NOTE
10 – 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 December 31, 2007 and 2006, the value of the
derivative liability was $6,758,074 and $4,639,312. The Company recorded a
loss
of approximately $2,118,761 in the change of the derivative liability to fair
market value for the year ended December 31, 2007 and a gain of $714,404 in
the
change of the derivative liability to fair market value for the year ended
December 31, 2006.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
11 – LONG TERM DEBT
Long-term
debt consisted of the following at:
|
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Unsecured
note payable to unrelated third party, payable in monthly installments
of
$1,500, including interest of approximately 22%, due October
2012
|
|
$
|
39,443
|
|
$
|
48,601
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
note payable to unrelated third party, payable in monthly installments
of
$1,500, including interest of approximately 22%, due October
2012
|
|
|
39,443
|
|
|
48,601
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
78,886
|
|
|
97,202
|
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(19,841
|
)
|
|
(17,778
|
)
|
|
|
|
|
|
|
|
|
|
|
Long
term debt
|
|
$
|
59,045
|
|
$
|
79,424
|
|
Maturities
of the notes payable are as follows:
|
Year
Ending December 31,
|
|
Amount
|
|
|
2008
|
|
|
19,841
|
|
|
2009
|
|
|
25,565
|
|
|
2010
|
|
|
33,480
|
|
|
2011
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
$
|
78,886
|
|
NOTE
12
–
COMMON STOCK
On
October 25, 2006, the Company entered into a stock purchase agreement with
Peter
F. Ullrich, a shareholder of the Company, whereby Mr. Ullrich agreed to purchase
a total of 2,307,692 newly issued shares of $0.0001 par value common stock
of
the Company for a purchase price of $1.30 per share in a private transaction,
for total consideration of $3,000,000. Under the terms of the agreement, Mr.
Ullrich purchased 1,153,846 shares on October 25, 2006 and the remaining
1,153,846 shares on January 2, 2007.
On
May 9,
2007, Peter F. Ullrich and Water Science LLC (“WS”), shareholders of EAU
Technologies, Inc., entered into an agreement (the “Termination Agreement”) for
the cancellation and reissuance of existing warrants held by WS (“Original
Warrants”) to purchase a total of 8.4 million shares of the Company’s common
stock. In the Termination Agreement, the parties agreed as follows:
|
·
|
The
Original Warrants were cancelled.
|
|
·
|
The
Company granted to WS replacement warrants (“Replacement Warrants”) to
purchase a total of 8.4 million shares of common stock at an exercise
price of $1.30 per share, with an expiration date of May 9,
2010.
|
|
·
|
The
Company has a right (“Put Right”) to require WS to exercise one of the
Replacement 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 value of the Put warrants was valued using the Black-Scholes model.
The value of each warrant was $1.23, or a total of
$3,974,885.
|
|
·
|
The
warrant shares are subject to an amended registration rights
agreement.
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
12
–
COMMON STOCK – (Continued)
On
May 7,
2007, the Company issued 100,000 shares of common stock to an individual who
exercised 100,000 warrants for $50,000 or $0.50 per share.
In
October 2007, Water Science LLC exercised a portion of its warrants for
$2,000,000 and the Company issued 1,538,463 shares of common stock to Water
Science, at an exercise price of $1.30 per share.
In
October 2006, the Company granted 500,000 options to Wade R. Bradley in
connection with the appointment of Mr. Bradley as Chief Executive Officer and
President. 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 4.71%, volatility at 81.29% and the stock price
at $1.46. The value of each warrant is approximately $1.25 per warrant. The
Company recognized $332,533 and $63,216 during the years ended December 31,
2007
and 2006, respectively, as consulting expense.
In
October 2006, the Company sold and issued to Peter F. Ullrich, the managing
director of Water Science, LLC and a major shareholder, a total of 1,153,846
shares of the Company’s $0.0001 par value common stock for a total of $1.5
million cash, or $1.30 per share. As part of the transaction, Mr. Ullrich and
Water Science agreed that this transaction would not cause an adjustment to
the
conversion price of the Senior Convertible Note issued to Water Science in
September 2005, nor would it cause an adjustment to the exercise price of the
warrants granted to Water Science in September 2005. The Company paid $30,000
to
a placement agent in connection with this stock sale, which was netted against
the proceeds.
In
August
2006, the Company issued 75,000 shares of the Company’s common stock to three
employees (25,000 shares each) upon their exercising of outstanding stock
options. Each option was exercised at $0.01 per share. The Company received
proceeds of $750.
In
May
2006, the Company sold and issued to Water Science, LLC, a Florida limited
liability company (“Water Science”), a total of 1,600,000 shares of the
Company’s $0.0001 par value common stock for a total of $4 million cash, or
$2.50 per share. As part of the transaction, Water Science agreed that this
transaction would not cause an adjustment to the conversion price of the Senior
Convertible Note issued to Water Science in September 2005, nor would it cause
an adjustment to the exercise price of the warrants granted to Water Science
in
September 2005. The Company also granted to Water Science warrants to purchase
up to 6,400,000 shares of the Company’s $0.0001 par value common stock in
exchange for the payment of $2.76 per share. The Company paid $240,000 to
a placement agent in connection with this stock sale, which was netted against
the proceeds.
In
May
2006, the Company granted 500,000 warrants to purchase common stock for
consulting services. The warrants are for a term of five (5) years and have
an
exercise price of $2.76 per share. The warrants were valued using the
Black-Scholes model with the following assumptions: risk free rate of 4.99%,
volatility at 59.76% and the stock price at $1.95. The value of each warrant
is
approximately $0.92 per warrant. The Company recognized $459,552 in the second
quarter of 2006 as consulting expense.
In
April
2006, the Company issued 25,000 shares of the Company’s common stock to an
employee for services valued at $2.00 per share, or $57,500.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
12
–
COMMON STOCK (continued)
In
January 2006, the Company issued a total of 76,670 shares of the Company’s
common stock for services to three consultants valued at $2.58 per share or
$197,809.
During
the year ended December 31, 2006, the Company granted 775,000 options to
employees to purchase common stock in the Company for services. The Company
also
recognized an expense of $1,162,439 related to past options granted to employees
pursuant to FAS 123(R).
STOCK
INCENTIVE PLAN – In October 2007, the Company’s board of directors approved its
2007 Stock Incentive Plan (“the Plan”) upon shareholder approval. In December
2007, the Company’s shareholders approved the Plan. Under the plan, the Company
may issue up to 2,250,000 shares of both Incentive Stock Options to employees
only and Non-Qualified Stock Options to employees and consultants at its
discretion. As of December 31, 2007 the Company issued 480,260 options under
the
plan.
A
summary
of the status of the options and warrants granted at December 31, 2007 and
2006,
and changes during the years then ended is presented below.
|
|
|
For the years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding
at beginning of period
|
|
|
11,925,793
|
|
|
2.57
|
|
|
4,678,293
|
|
|
2.77
|
|
|
Granted
|
|
|
9,410,260
|
|
|
3.21
|
|
|
7,900,000
|
|
|
2.58
|
|
|
Exercised
|
|
|
(1,638,463
|
)
|
|
1.25
|
|
|
(75,000
|
)
|
|
0.01
|
|
|
Expired
or cancelled
|
|
|
(9,055,751
|
)
|
|
2.76
|
|
|
(577,500
|
)
|
|
3.00
|
|
|
Outstanding
at end of period
|
|
|
10,641,839
|
|
|
1.55
|
|
|
11,925,793
|
|
|
2.57
|
|
|
Weighted
average fair value of options exercisable
|
|
|
9,331,579
|
|
|
1.58
|
|
|
11,425,793
|
|
|
2.57
|
|
A
summary
of the status of the options and warrants outstanding at December 31, 2007
is
presented below:
|
|
|
Options and Warrants Outstanding
|
|
Options and 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
|
|
|
535,000
|
|
|
1.7
years
|
|
$
|
0.03
|
|
|
535,000
|
|
$
|
0.03
|
|
|
1.00
- 1.99
|
|
|
8,586,797
|
|
|
3.3
years
|
|
|
1.31
|
|
|
7,276,537
|
|
|
1.31
|
|
|
2.00
- 2.99
|
|
|
695,000
|
|
|
6.7
years
|
|
|
2.65
|
|
|
695,000
|
|
|
2.65
|
|
|
3.00
- 3.99
|
|
|
306,666
|
|
|
5.6
years
|
|
|
3.43
|
|
|
306,666
|
|
|
3.43
|
|
|
4.00
- 4.99
|
|
|
255,000
|
|
|
1.9
years
|
|
|
4.00
|
|
|
255,000
|
|
|
4.00
|
|
|
5.00
- 5.50
|
|
|
263,376
|
|
|
1.9
years
|
|
|
5.15
|
|
|
263,376
|
|
|
5.15
|
|
|
$.01-5.50
|
|
|
10,641,839
|
|
|
3.5
years
|
|
$
|
1.55
|
|
|
9,331,579
|
|
$
|
1.58
|
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
12
–
COMMON STOCK (continued)
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%. The following assumptions were used
for
options granted during 2006: risk-free interest rate of between 4.60% and 5.02%,
expected dividend yield of zero, expected lives of three to ten years and
expected volatility of between 59.76% and 91.21%.
NOTE
13 – INCOME TAXES
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.” SFAS No. 109 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, 2007
and
2006, the total of all deferred tax assets was approximately $12,521,000 and
$10,361,000, 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 $12,521,000 and $10,361,000
as of December 31, 2007 and 2006, respectively, which has been offset against
the deferred tax assets. The net change in the valuation allowance during the
year ended December 31, 2007, was $2,160,000.
The
Company has available at December 31, 2007, unused tax operating loss
carryforwards of approximately $25,500,000, which may be applied against future
taxable income and expire in various years through 2027.
The
components of income tax expense from continuing operations for the years ended
December 31, 2007 and 2006 consist of the following:
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Current
income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
-
|
|
|
Net
current tax expense
|
|
|
-
|
|
|
-
|
|
|
Deferred
tax expense (benefit) arising from:
|
|
|
|
|
|
|
|
|
Excess
of tax over financial accounting depreciation
|
|
$
|
66,786
|
|
$
|
32,024
|
|
|
Accrued
compensation and taxes
|
|
|
(95,354
|
)
|
|
69,826
|
|
|
Reserve
for bad debts
|
|
|
-
|
|
|
1,865
|
|
|
Derivative
liability
|
|
|
(2,520,762
|
)
|
|
-
|
|
|
Warranty
reserve
|
|
|
(7,325
|
)
|
|
(2,075
|
)
|
|
Deferred
income
|
|
|
74,600
|
|
|
74,600
|
|
|
Obsolete
inventory
|
|
|
6,018
|
|
|
(35,858
|
)
|
|
Net
operating loss carryforwards
|
|
|
(1,413,806
|
)
|
|
(2,468,710
|
)
|
|
Other
|
|
|
(62,432
|
)
|
|
-
|
|
|
Valuation
allowance
|
|
|
3,952,273
|
|
|
2,328,328
|
|
|
Net
deferred tax expense
|
|
$
|
-
|
|
$
|
-
|
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
13 – INCOME TAXES
(continued)
Deferred
income tax expense results primarily from the reversal of temporary timing
differences between tax and financial statement income.
The
temporary differences gave rise to the following deferred tax asset (liability)
at December 31, 2007 and 2006:
|
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Excess
of tax over book accounting depreciation
|
|
$
|
(87,811
|
)
|
$
|
(21,025
|
)
|
|
Obsolete
inventory
|
|
|
149,200
|
|
|
155,218
|
|
|
Accrued
compensation and payroll taxes
|
|
|
102,068
|
|
|
6,714
|
|
|
Warranty
reserve
|
|
|
45,506
|
|
|
38,181
|
|
|
Contribution
carryover
|
|
|
7,124
|
|
|
7,124
|
|
|
Deferred
income
|
|
|
202,042
|
|
|
276,642
|
|
|
Reserve
for bad debt
|
|
|
9,325
|
|
|
9,325
|
|
|
NOL
carryforwards
|
|
|
9,510,814
|
|
|
8,097,009
|
|
|
Derivative
liability
|
|
|
2,583,192
|
|
|
-
|
|
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 Company has not filed a tax return
since the 2003 year. Minimum state tax payments have accrued in states for
which
the company has operated since 2004. Upon filing all amounts paid will be
subject to penalties and interest according to the state tax jurisdiction.
The
statute
of limitations remains open on all years from 2004 going forward. The
statute will not begin to run until the Company files the tax returns. 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.
The
Company adopted the provisions of FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
,
on
January 1, 2007. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
Balance
at January 1, 2007
|
|
$
|
0
|
|
|
Additions
based on tax positions related to the current year
|
|
|
0
|
|
|
Additions
for tax positions of prior years
|
|
|
0
|
|
|
Reductions
for tax positions of prior years
|
|
|
0
|
|
|
Settlements
|
|
|
0
|
|
|
Balance
at December 31, 2007
|
|
$
|
0
|
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
13 – INCOME TAXES
(continued)
At
December 31, 2007, 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.
The
Company’s policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During the
years ended December 31, 2007 and 2006, the Company recognized approximately
$1,127,296, and $1,134,796 in interest. The Company had approximately $6,964,074
and $4,755,312 for the payment of interest accrued at December 31, 2007 and
2006, respectively.
NOTE
14
–
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 $524,000.
NOTE
15
–
DISCONTINUED OPERATIONS
In
August
2007, the Company signed a Purchase Agreement with Perfect Water &
Essentials, LLC (“PWE”) to for the sale of all of the assets of the Company’s
Consumer Products division. In November 2007, the Company closed the sale of
the
assets of its consumer division to PWE. At the closing, PWE paid a total of
$2,300,000 in cash (in addition to the cash on deposit of $50,000 applied toward
the purchase price) plus $150,000 to EAU in the form of a promissory note.
The
note has a maturity date of November 15, 2009. During the first year of the
term
of the note, it shall bear no interest. Beginning on November 15, 2008, and
until the note is paid in full, the note shall bear interest at the rate of
10%
per annum.
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
15
–
DISCONTINUED OPERATIONS (continued)
In
addition to the purchase of the assets, PWE was obligated under the Asset
Purchase Agreement to purchase a technology license from the Company to operate
the Perfect Essentials Division (the “Technology License”).
The
agreement allocated $500,000 of the total purchase price to the Technology
License, which was recorded as revenue for the year ended December 31, 2007.
The
closing took place on November 15, 2007. The Company recognized a loss from
operations of discontinued operations in the amount of $604,985 and $1,108,615
for the years ended December 31, 2007 and 2006, respectively. The Company
recorded a gain on disposal of discontinued operations in the amount of
$640,027. The following is a summary of the operations of the
division.
|
|
|
For the Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Sales,
net
|
|
$
|
722,244
|
|
$
|
799,237
|
|
|
Cost
of goods sold
|
|
|
336,337
|
|
|
476,912
|
|
|
Gross
profit
|
|
|
385,907
|
|
|
322,325
|
|
|
Operating
expenses
|
|
|
989,137
|
|
|
1,441,582
|
|
|
Loss
from operations
|
|
|
(602,230
|
)
|
|
(1,119,257
|
)
|
|
Other
income (expense)
|
|
|
(1,755
|
)
|
|
10,642
|
|
|
Loss
from discontinued operations
|
|
|
(604,985
|
)
|
|
(1,108,615
|
)
|
|
Gain
on disposal of discontinued operations
|
|
|
640,027
|
|
|
-
|
|
|
Net
income (loss) on discontinued operations
|
|
$
|
35,042
|
|
$
|
(1,108,615
|
)
|
In
September 2006, the Company sold their investment in Equilease, Inc.
(“Equilease”) to EOWORP, L.L.C., (“EOWORP”) a related party. Equilease provided
equipment financing for certain Zerorez franchisees, also related parties.
The
sole assets of Equilease were Notes Receivables. The Company was the sole owner
of Equilease and had the operations of Equilease into the Company’s books. The
terms of the agreement called for EOWORP to pay to the Company the current
value
of the Notes Receivables held by Equilease. Further, EOWORP agreed to pay off
other certain payables owed to the Company by Zerorez, a related party. The
total cash consideration paid to the Company was $452,559. The Company
recognized income from operations of discontinued operations in the amount
of
$28,248 for the year ended December 31, 2006. The Company recorded a loss on
disposal of discontinued operations in the amount of $50. The following is
a
summary of the results of operations for Equilease:
|
|
|
For the Year
Ended
December 31,
|
|
|
|
|
2006
|
|
|
Interest
Income
|
|
$
|
28,248
|
|
|
Loss
on discontinued operations
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
Net
Income
|
|
|
28,198
|
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
16
–
GOING CONCERN
The
Company has incurred significant losses and has had negative cash flows from
operations. As a result, at December 31, 2007, 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.
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, 2006, 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. Dilutive loss per share was not presented,
as the Company had no common stock equivalent shares for all periods presented
that would affect the computation of diluted loss per share.
The
following data shows the amounts used in computing loss per share:
|
|
|
For the years ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Net
loss from Continuing Operations
|
|
$
|
(10,926,379
|
)
|
$
|
(7,434,940
|
)
|
|
Net
income (loss) from Discontinued Operations
|
|
|
35,042
|
|
|
(1,080,417
|
)
|
|
Total
net loss
|
|
$
|
(10,891,337
|
)
|
$
|
(8,515,357
|
)
|
|
Net
loss per share continuing operations
|
|
|
(0.79
|
)
|
|
(0.71
|
)
|
|
Net
Income (loss) per share discontinued operations
|
|
|
0.00
|
|
|
(0.10
|
)
|
|
Total
net loss per share
|
|
$
|
(0.79
|
)
|
$
|
(0.81
|
)
|
|
Weighted
average number of common
shares
outstanding
used in loss per share for the period
|
|
|
13,837,978
|
|
|
10,541,203
|
|
EAU
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
17 – LOSS PER SHARE – (continued)
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 2005, 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).
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 year ended December 31, 2006 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 year ended December 31, 2007 was
$4,705,545 for stock options granted and vesting during the period. During
the
year ended December 31, 2006, the Company recognized $1,162,991 compensation
expense related to other stock options.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Statement of Operations.
Stock-based compensation expense recognized in our Statements of Operations
for
the year ended December 31, 2007 assumes all awards will vest, therefore no
reduction has been made for estimated forfeitures.
NOTE
18 – SUBSEQUENT EVENTS
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 Compensation Committee
also
granted 49,500 shares of restricted stock to various employees, which will
vest
one year from the date of grant.
In
March
2008, the Company and the University of Georgia Research Foundation entered
into
a Settlement and License Amendment (the “Amendment”). The Amendment settles a
dispute among the parties regarding the amount of royalties due under the
License Agreement dated as of June 18, 2002 in connection with the use of the
licensed technology by Water Science LLC. Under the Amendment, to settle this
dispute, the Company will pay to UGARF a total of $65,000, of which $25,000
has
been paid to date. The remaining $40,000 will be paid in four equal installments
of $10,000 each due on the first day of the calendar quarters of 2008, aside
from the initial payment, which is due within ten days of the effective date
of
the Amendment.