U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark one)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002.
[_] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
(Exact Name of Small Business Issuers as Specified in its Charter)
Delaware 33-0750453
(State of Incorporation) (IRS Employer Identification Number)
10410 Trademark Street
Rancho Cucamonga, CA 91730
(Address of Principal Executive Offices)
(909) 987-0456
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of Securities under a plan confirmed
by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Common Stock, $.001 par value 8,601,224 shares outstanding
as of November 7, 2002.
Transitional Small Business Disclosure Format (check one):
Yes [X] No [_]
AQUACELL TECHNOLOGIES, INC.
FORM 1O-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of September 30, 2002...... 1
Condensed Consolidated Statements of Operations for the
three-month periods ended September 30, 2002 and 2001.............. 2
Condensed Consolidated Statements of Cash Flow for the
three-month periods ended September 30, 2002 and 2001.............. 3
Notes to Condensed Consolidated Financial Statements............... 4
Item 2. Managements Discussion and Analysis:
Forward-Looking Statements......................................... 6
Overview........................................................... 6
Results of Operations.............................................. 6
Liquidity and Capital Resources.................................... 7
PART II- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.............................. 8
Signature................................................................. 8
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2002
(Unaudited)
ASSETS
Current assets:
Cash.......................................................... $ 26,000
Notes receivable, including accrued interest of $42,000....... 410,000
Accounts receivable, net of allowance of $4,000............... 734,000
Inventories................................................... 107,000
Prepaid expenses and other current assets..................... 176,000
------------
Total current assets..................................... 1,453,000
------------
Property and equipment, net........................................ 64,000
------------
Other assets:
Goodwill...................................................... 1,114,000
Investments................................................... 274,000
Patents, net.................................................. 115,000
Security deposits............................................. 14,000
------------
Total other assets....................................... 1,517,000
------------
$ 3,034,000
------------
------------
LIABILITIES
Current liabilities:
Accounts payable.............................................. $ 783,000
Accrued expenses.............................................. 263,000
Loans payable to finance company.............................. 376,000
Customer deposits............................................. 17,000
Current portion of long-term debt............................. 4,000
Loans payable to related parties.............................. 35,000
------------
Total current liabilities................................ 1,478,000
Long-term debt, net of current portion............................. 6,000
------------
Total liabilities........................................ 1,484,000
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.00l; 10,000,000 shares authorized;
no shares issued Common stock, par value $.001; 40,000,000 shares
authorized; 8,683,646 shares issued............................... 9,000
Additional paid-in capital........................................ 13,084,000
Accumulated deficit............................................... (10,700,000)
------------
2,393,000
Unamortized deferred compensation................................. (592,000)
Treasury stock, 82,422 shares at cost............................. (251,000)
------------
Total stockholders' equity.............................. 1,550,000
------------
$ 3,034,000
------------
------------
See notes to condensed consolidated financial statements.
1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
2002 2001
------------ ------------
Revenue:
Net sales.......................................... $ 930,000 $ 68,000
Rental income...................................... 2,000 2,000
------------ ------------
932,000 70,000
Cost of sales........................................ 465,000 28,000
------------ ------------
Gross profit......................................... 467,000 42,000
------------ ------------
Selling, general and administrative expenses:
Salaries and wages................................. 310,000 233,000
Legal, accounting and other professional expenses.. 74,000 154,000
Stock based compensation........................... 45,000 199,000
Other.............................................. 277,000 244,000
------------ ------------
706,000 830,000
------------ ------------
Loss from operations before other income (expense)... (239,000) (788,000)
------------ ------------
Other income (expense):
Interest income.................................... 18,000 40,000
Interest (expense)................................. (4,000) -
------------ ------------
14,000 40,000
------------ ------------
Net loss attributable to common stockholders......... $ 225,000 $ (748,000)
------------ ------------
------------ ------------
Net loss per common share- basic and diluted......... $ (0.03) (0.10)
------------ ------------
------------ ------------
Weighted average share outstanding-
basic and diluted.................................. 8,601,000 7,734,000
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss............................................. $ (225,000) $ (748,000)
Adjustment to reconcile net loss to net cash
used in operating activities:
Stock based compensation......................... 45,000 199,000
Depreciation and amortization.................... 15,000 13,000
Changes in:
Accounts receivable................................ (543,000) (8,000)
Accrued interest receivable........................ (18,000) 41,000
Prepaid expenses and other current assets.......... 40,000 35,000
Inventories........................................ (5,000) 24,000
Security deposits.................................. 3,000 -
Accounts payable................................... 65,000 155,000
Accrued expenses................................... 217,000 62,000
Customer deposits.................................. 1,000 -
------------ ------------
Net cash used in operating activities.......... (405,000) (227,000)
------------ ------------
Cash flows from investing activities:
Note issued for purchase of property and equipment. 9,000 -
Purchase of property and equipment................. (11,000) (4,000)
------------ ------------
Net cash used in investing activities.......... (2,000) (4,000)
------------ ------------
Cash flows from financing activities:
Proceeds of loans from finance company............. 376,000 -
Loans and advances from officers,
stockholders and others, net..................... 6,000 (1,000)
------------ ------------
Net cash provided by (used in)
financing activities......................... 382,000 (1,000)
------------ ------------
Decrease in cash..................................... (232,000) (25,000)
Cash, beginning of period............................ 51,000 298,000
------------ ------------
Cash, end of period.................................. $ 26,000 $ 66,000
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ - $ -
Supplemental schedule of non-cash investing
and financing activities:
Issuance of common stock warrants for
services to the company............................ $ 43,000 $ 223,000
Principal payments on notes receivable by
conversion of accrued officers salaries............ $ 153,000 $ -
See notes to condensed consolidated financial statements.
3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements include the accounts of AquaCell Technologies, Inc.
and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information
and with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The results of
operations for the three months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full
year. For further information, refer to the Company's annual
report filed on Form 10-KSB for the year ended June 30, 2002.
NOTE B - NOTES RECEIVABLE
At September 30, 2002, the notes receivable consist of
$50,000 from a non-affiliated party and $683,000 from non-
director/employee stockholders and entities owned by them at an
annual interest rate of 8%. Notes totaling $1,750,000 maturing
August 16, 2001 were extended to September 16, 2001. At
September 16, 2001, the notes were restructured into twelve-month
installment notes collateralized by marketable securities with
the first installment due October 16, 2001. Officer/stockholders
of Aquacell , have personally guaranteed up to $1,750,000 of the
notes and have offered as collateral designated assets and have
paid $721,000 in principal and $32,000 in interest through
contribution of salaries in the amount of $502,000 and surrender
of 82,422 shares of the Company's common stock, valued at
$251,000, at September 30, 2002. Such shares have been recorded
as treasury stock. During September, 2002 the
officers/stockholders contributed accrued salaries totaling
$153,000 as payment under the guaranty provisions of the notes
receivables. The Company has recorded an adjustment to reflect
a reduction in the estimated fair value of these notes of
$365,000 at June 30, 2001. The balance of the notes are
unsecured and matured between March 2002 and October 2002. The
note that matured in October 2002 was extended for one year.
Interest receivable at September 30, 2002 amounted to $6,000 from
a non-affiliated party and $36,000 from non-director/ employee
stockholders and entities owned by them.
NOTE C - INVENTORIES
Inventories consist of the following at September 30, 2002:
Raw materials............................... $ 106,000
Work in progress............................ 1,000
---------
$ 107,000
---------
---------
4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (Unaudited)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at September
30, 2002:
Furniture and fixtures.................... $ 35,000
Equipment - office........................ 95,000
Machinery and equipment................... 122,000
Rental units.............................. 9,000
Leasehold improvements.................... 10,000
Truck..................................... 11,000
---------
282,000
Less accumulated depreciation............. 218,000
---------
$ 64,000
---------
---------
NOTE E - LOANS PAYABLE TO FINANCE COMPANY
On August 24, 2002, the Company entered into a credit
facility agreement to finance the receivables of its largest
customer, Corbett Water Technologies, Inc. The agreement is for
a one-year term, and calls for interest at the rate of 18 1/4 % per
annum in addition to the payment of certain processing fees.
Payments are made directly to the lender by Corbett Water and the
financing is collateralized by the Company's accounts receivable
from Corbett Water Technologies, Inc. (See Note H.)
NOTE F - LOANS PAYABLE TO RELATED PARTIES
At September 30, 2002 the loans payable to related parties
consist of unsecured demand interest free loans of $35,000.
NOTE G - LONG TERM DEBT
At September 30, 2002 long-term debt consists of an
installment note, secured by a truck, payable in monthly payments
of $342 through February 2005. Maturities on the note are as
follows:
Year ending September 30, 2003............. $ 4,000
September 30, 2004............. 4,000
September 30, 2005............. 2,000
---------
$ 10,000
---------
---------
NOTE H - EQUITY TRANSACTIONS
In connection with a one-year credit facility agreement
entered into in August, 2002, the lender was granted warrants to
purchase 160,000 shares of common stock, at an exercise price of
$0.78 per share, whose total value is estimated at approximately
$43,000. The estimated value of the warrants is being amortized
to expense over one year. Amortization for the three months
ended September 30, 2002 was $4,000.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the
Company with the Commission, statements identified by the words
"believe", "positioned", "estimate", "project", "target",
"continue", "will", "intend", "expect", "future", "anticipates",
and similar expressions express management's present belief,
expectations or intentions regarding the Company's future
performance within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to
place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company has no
obligations to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring
after the date of such statements.
Overview
The following discussions and analysis should be read in
conjunction with the Company's condensed consolidated financial
statements and the notes presented following the condensed
consolidated financial statements. The discussion of results,
causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the
future.
For the three months ended September 30, 2002 we increased
revenues by 1231% to $932,000 while cutting our per share losses
by 70%. This increase in revenues is primarily attributable to
the growing acceptance of our flagship Purific Water Cooler in
the marketplace. We believe that through our marketing efforts,
as the educational process continues to reach corporate America
on the savings Purific provides along with the inconveniences it
eliminates, we expect that sales of Purific coolers will continue
to grow along with an increase of sales in our other products and
emerging product lines.
To improve cash flow in order to meet the demands of our
manufacturing requirements based upon our significant sales
increases, we entered into a credit facility agreement to finance
the receivables of our largest customer, Corbett Water
Technologies, Inc. This enabled us to turn the cash in a more
expeditious manner and to meet all of our production
requirements.
Results of Operations
During the three months ended September 30, 2002 on a
consolidated basis, we increased revenues by 1231% to $932,000 as
compared to $70,000 for the similar period of the preceding year.
Our gross profit margin of our flagship Purific water coolers,
based on material and direct labor costs, was maintained at
approximately 56% for the three months ended September 30, 2002.
6
Net loss on a consolidated basis for the three months ended
September 30, 2002 was decreased by 70% to $225,000 or $0.03 per
share, as compared to $748,000 or $.10 per share for the same
period of the prior year. The decrease in the loss is primarily
attributable to the increase in revenues, as well as a reduction
in professional fees and a reduction in stock based compensation.
Operating expenses consisting of salaries and wages and
other selling, general and administrative expenses, exclusive of
depreciation and amortization of $15,000 were $572,000 for the
three months ended September 30, 2002 as compared to $464,000 for
the comparable three months of the prior year. In addition,
legal, accounting and other professional expenses for the three
months ended September 30, 2002 were $74,000 compared to $154,000
for the three months ended September 30, 2001.
Current period expenses includes $45,000 of stock based
compensation representing the amortization of deferred
compensation based on the value of common stock and warrants
issued in connection with consulting and credit facility
agreements. Stock based compensation for the comparable period
of the prior year was $199,000.
Liquidity and Capital Resources
During the three months ended September 30, 2002 we financed
our operations primarily from the collections of receivables in
the normal course of business and the financing of certain
receivables due from Corbett Water Technologies. A net increase
in loans from officers and others amounted to $6,000 during the
period.
Cash used by operations during the three months ended
September 30, 2002 amounted to $405,000. Net loss of $225,000
was reduced by non-cash stock based compensation in the amount of
$45,000 and depreciation and amortization of $15,000. Cash used
by operations was further increased by an increase in accounts
receivable in the amount of $543,000 and decreased by accounts
payable and accrued expenses in the amount of $282,000. Net loss
was further decreased by net changes in accrued interest
receivable, prepaid expenses, security deposits, customer
deposits and inventories amounting to $21,000.
We have granted warrants, subsequent to our initial public
offering in connection with consulting and marketing agreements
that may generate additional capital of up to approximately
$6,900,000 if exercised. There is no assurance that any of these
warrants will be exercised.
Cash used in investing activities during the three months
ended September 30, 2002 represented expenditures for property
and equipment in the amount of $11,000 decreased by notes issued
for the purchase of equipment in the amount of $9,000.
The principal payments of $153,000, which consisted of the
conversion of accrued officers' salaries, reduced the balance on
the $1,750,000 installment notes receivable to $591,000 at
September 30, 2002.
Management believes that the collections on notes receivable
and cash flows expected to be generated from future operations
will be sufficient to meet presently anticipated needs for
working capital and capital expenditures through at least the
next 12 months; however, there can be no assurance in that
regard. The Company presently has no material commitments for
future capital expenditures.
7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K: None
SIGNATURE
In accordance with the requirements of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AquaCell Technologies, Inc.
-------------------------------
Registrant
Date: November 12, 2002 /s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
8
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AquaCell
Technologies, Inc. (the "Company") on Form 10-QSB for the first
fiscal quarter ended September 30, 2002 as filed with the
Securities and Exchange Commission (the "Report"), each of the
undersigned, in the capacities and on the dates indicated below,
hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. the Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. the information contained in the Report fairly
presents, in all material respects, the financial
condition and result of operations of the Company.
Date: November 12, 2002 /s/ James C. Witham
-------------------------------
Name: James C. Witham
Title: Chief Executive Officer
Date: November 12, 2002 /s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
9
CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, James C. Witham, Chief Executive Officer of AquaCell
Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
AquaCell Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days of the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002 /s/ James C. Witham
-------------------------------
Name: James C. Witham
Title: Chief Executive Officer
10
CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Gary S. Wolff, Chief Financial Officer of AquaCell
Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
AquaCell Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days of the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002 /s/ Gary S. Wolff
-------------------------------
Name: Gary S. Wolff
Title: Chief Financial Officer
11