10-k, Form 10-K for AQUALIV TECHNOLOGIES, INC.
14-Jan-2013
Annual Report
http://biz.yahoo.com/e/130114/aqlv10-k.html
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER "FORWARD-LOOKING STATEMENTS" AND "RISK FACTORS"AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Overview
The Company is the parent of AquaLiv, Inc. and Focus Systems, Inc. ("Focus Systems"). AquaLiv, Inc.'s technology alters the behavior of organisms, including plants and humans, without chemical interaction. From increased crop yields to drug-free medicine, AquaLiv, Inc. is providing innovative, ingredient-free solutions to the world's largest problems. The company's platform technology influences biological processes naturally and without chemical interaction. To date, AquaLiv, Inc. has released products in the industries of water treatment, skincare, and agriculture. The company is primarily known for the AquaLiv Water System product which also produces the majority of the company's revenue. Focus Systems is a technology company providing customers with remote desktop services and Voice over Internet Protocol (VoIP) phone services. Focus Systems maintains servers that house data and applications that its customers can access remotely without the need for the customers to maintain a server. The company's VoIP service utilizes the internet for phone service rather than through a traditional telecommunications company.
The Company continues to struggle with liquidity and capital resources sufficient to be able to fully execute on its business plan. Previously we have issued press releases regarding the potential for a $50 million capital infusion. While the Company has continued to work with the funding group towards this goal, we have yet to receive any funds from this effort. Subsequently, our ability to execute on planned initiatives, such as the acquisition of certain Japanese operations owned by our Chief Science Officer, have been suspended until such time that adequate capital resources are obtained and business initiatives can be reevaluated. Additionally, the lack of funding has hampered our ability to properly market our existing products and services. Our AquaLiv, Inc. retail product lines, AquaLiv Water System and Infotone Hydrating Mist, each suffer from our inability to market the products to greater numbers of people, and such the sales of each have remained relatively stagnate over the course of the past year. Our Focus Systems services, Remote Desktop and VoIP phones service, have also been impacted by our inability to hire sales personnel and properly market these service lines, which has resulted in declining numbers of customers for each service line. Without an increase in liquidity and capital resources, these trends may continue, which could greatly impact the ability for these subsidiaries to thrive.
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Plan of Operation
Recent advancements in AquaLiv, Inc.'s technology have created opportunities in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine. AquaLiv, Inc. is ready to expand its innovative product offering. Additionally, management is investigating possible acquisitions that would be accretive to the core business and enable the growth of its revenues both locally and abroad.
The technology industry, especially as it applies to the small business sector, has slowed drastically during the recession. New service orders for both remote desktop and VoIP products have been slow since acquisition. Management is working on increasing exposure for its remote desktop product and is working to expand its VoIP phone service from the small business market into the residential market as well. Management is investigating possible acquisitions that would be accretive to the core business and enable the growth of its revenues.
Results of Operations
For the Year Ended September 30, 2012 Compared to the Year Ended September 30, 2011
Revenues
Revenues were approximately $479,529 for the fiscal year ended September 30, 2012, as compared to approximately $590,138 for the prior fiscal year. Revenue was comprised of sales revenue, service revenue, and royalty revenue (stopped receiving June 22, 2011). Sales revenue, the revenue generated by AquaLiv, Inc., for the fiscal year ended September 30, 2012 and 2011 amounted to $449,626 and $446,053, respectively. Sales revenue accounted for 93.8% of the revenue for the fiscal year ended September 30, 2012 and 76% of the revenue for the prior fiscal year. Service revenue is the revenue generated by Focus Systems and includes fees for remote desktop and VoIP services provided by Focus Systems. Service revenue amounted to $29,904 for the fiscal year ended September 30, 2012, compared to $44,085 for the fiscal year ended September 30, 2011. Service revenue accounted for 6.2% of the total revenue, for the fiscal year ended September 30, 2012, and 7% for the fiscal year ended September 30, 2011. Royalty revenue for the fiscal year ended September 30, 2012 and 2011 amounted to $0 and $100,000, respectively. Royalty revenue accounted for 0% of the revenue for the fiscal year ended September 30, 2012 (stopped receiving June 22, 2011) and 17% of the revenue for the fiscal year ended September 30, 2011. The decrease in total revenue was due to sales and service revenue remaining relatively flat for the current fiscal year compared to the prior fiscal year, and the lack of royalty revenue during the current fiscal year. The decrease in revenues related to royalty revenue is a reflection of the distribution of the assets of Infrared Applications, Inc. ("Infrared") on June 22, 2011, as which time the Company ceased recognizing royalty revenue.
Cost of Sales
Cost of sales for the fiscal year ended September 30, 2012 was $123,173 as compared to $193,430 for the prior fiscal year. The decrease in cost of sales is a result of cost saving measures instituted and the outsourcing of certain services by our subsidiaries.
General and Administrative Expenses
Operating expense for the fiscal year ended September 30, 2012 was $783,537 as compared to $1,020,310 for the prior fiscal year, a decrease of 22%. The decrease was due to the reduction of expenses following the distribution of the Infrared assets on June 22, 2011. Additionally, consulting fees decreased from $60,819 in 2011 to $35,810 in 2012, a decrease of 41%, and a result of the Company limiting its use of outside vendors to perform services for us. Research and development decreased from $9,936 in 2011 to $1,213 in 2012, an 88% decrease and a result of reduced research work on AquaLiv, Inc.'s technologies during the fiscal year. Travel, meals, and entertainment decreased from $20,333 in 2011, to $18,769 in 2012, an 8% decrease and a result of management's need to travel to meetings throughout the fiscal year slightly less than the prior fiscal year. Other general and administrative decreased from $287,412 in 2011 to $254,384 in 2012, a decrease of 10%, and primarily attributed to a decrease in utilities, rent, and other items associated with the disposition of the Infrared assets on June 22, 2011. There was a onetime loss on goodwill impairment associated with the AquaLiv, Inc. acquisition during the 2011 fiscal year in the amount of $315,484, a result of the Company fully impairing the goodwill received in the acquisition. The reductions in operating expenses were offset by increases in other areas, including professional fees which increased from $88,683 in 2011 to $178,001 in 2012, an increase of 100%, attributed to the increase in legal and other fees. An increase in management fees from $105,900 in 2011 to $120,000 in 2012, an increase of 13%, and a result of fees paid to our acting President. Payroll expense increased from $127,455 in 2011 to $172,861 in 2012, and increase of 36% and attributed to the employees acquired in with the acquisition of AquaLiv, Inc.
Other Income and Expense
For the fiscal year ended September 30, 2012, the expense was $226,758 compared to income of $17,352 for the prior fiscal year, an increase of 1,306%. The increase in expense resulted primarily from a one time gain on distribution of assets of Infrared during the prior fiscal year and the authorization of debt expense associated with our derivative liabilities. Normal operations for the Company will result in a net other expense when accounting for interest expense.
Net (Loss) Before Provision for Income Taxes
The net loss for the fiscal year ended September 30, 2012 was $653,939 versus $606,250 for the prior fiscal year. The increase in the loss of $47,689 was due to a decrease in operating expenses of $196,421 and a decrease in cost of goods of $70,257. The decreases to expenses were primarily offset by a decrease in revenues of $110,609 and an increase in other expenses of $209,406.
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Liquidity and Capital Resources
Operating expenses for the fiscal year ended September 30, 2012 and 2011, were $783,537 and $1,020,310, respectively. The net loss for the fiscal year ended September 30, 2012 and 2011 was $653,939 and $606,250, respectively.
As of September 30, 2012, the Company did not have and continues to not have sufficient cash on hand to pay present obligations as they become due. In addition, due to current economic conditions and the Company's related risks and uncertainties, there is no assurance that we will be able to raise additional capital on acceptable terms, if at all, to meet our current obligation over the next 12 months. Because of the foregoing, the Company's auditors have expressed substantial doubt about our ability to continue as a going concern.
If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy. Our estimated working capital requirement for the next 12 months is $500,000, with an estimated burn rate of $35,000 per month.
On April 27, 2012, the Company entered into a securities purchase agreement (the "Purchase Agreement") with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership ("TCA"), pursuant to which TCA purchased from the Company a two hundred thousand dollar ($200,000) senior secured redeemable debenture (the "Debenture"). The maturity date of the Debenture is April 24, 2013, subject to adjustment (the "Maturity Date"). The Debenture bears interest at a rate of twelve percent (12%) per annum.
As further consideration, the Company issued to TCA 5,555,556 shares of the Company's common stock on May 1, 2012 totaling an aggregate amount of twenty five thousand dollars ($25,000) (the "Incentive Shares"). In the event the value of the Incentive Shares issued to TCA does not equal $25,000 after a nine month evaluation date, the Purchase Agreement provides for an adjustment provision allowing for necessary action (either the issuance of additional shares to TCA or the return of shares previously issued to TCA to the Company's treasury) to adjust the number of Incentive Shares issued. The Incentive Shares are not being registered for resale in this registration statement.
First Pledge and Escrow Agreement
On April 27, 2012, in connection with the Purchase Agreement, the Company entered into a pledge and escrow agreement (the "First P&E Agreement"), by and among the Company, TCA and David Kahan, P.A., as escrow agent (the "Escrow Agent"). Pursuant to the terms of the First P&E Agreement, the Company agreed to issue and irrevocably pledge to TCA the lesser of (i) 4.99% of the Company's common stock and (ii) 200% of the outstanding amount under the Debenture, subject to adjustment pursuant to the terms of the Purchase Agreement. On May 1, 2012, the Company issued 11,516,104 shares of common stock to TCA in escrow. Upon timely payment in full of all obligations under the transaction documents, TCA will notify the Escrow Agent in writing and the Escrow Agent shall return the pledged materials to the Company and all of TCA's rights in and to the pledged materials and other collateral shall be terminated.
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Second Pledge and Escrow Agreement
On April 27, 2012, in connection with the Purchase Agreement, the Company entered into a pledge and escrow agreement (the "Second P&E Agreement"), by and among the Company, TCA and the Escrow Agent. Pursuant to the terms of the Second P&E Agreement, the Company agreed to irrevocably pledge to TCA its entire ownership in Aqualiv, Inc., consisting of 50,000 shares of AquaLiv, Inc.'s common stock.
First Security Agreement
On April 27, 2012, the Company entered into a security agreement (the "First Security Agreement") with TCA, related to the issuance of the Debenture, whereby the Company granted to TCA a continuing, first priority security interest in all of the Company's assets, wheresoever located and whether now existing or hereafter arising or acquired.
Second Security Agreement
On April 27, 2012, Focus Systems, Inc., entered into a security agreement (the "Second Security Agreement") with TCA, related to the issuance of the Debenture, whereby Focus Systems granted to TCA a continuing, first priority security interest in all of the Focus Systems assets, wheresoever located and whether now existing or hereafter arising or acquired.
Guaranty Agreement
On April 27, 2012, Focus Systems entered into a guaranty agreement (the "Guaranty Agreement") with TCA, in connection with the Company's issuance of the Debenture. Pursuant to the terms of the Guaranty Agreement, Focus Systems has guaranteed and is to act as surety to TCA for the payment of the Liabilities (as defined below) when they become due. The "Liabilities" includes, collectively,
(i) the repayment of all sums due under the Debenture and other transaction documents and (ii) the performance and observance of all terms, conditions, covenants, representations and warranties set forth in the transaction documents.
Further, on April 27, 2012, the Company entered into an Equity Facility Agreement (the "Equity Agreement") with Auctus Private Equity Fund, LLC, a Massachusetts corporation ("Auctus"). Pursuant to the terms of the Equity Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the a registration statement, Auctus has committed to purchase up to $3,500,000 of the Company's common stock, par value $0.001 per share. Pursuant to the terms of the Debenture issued by the Company in favor of TCA, the Company shall cause Auctus to pay directly to TCA, for each advance taken by the Company under the Equity Agreement, 50% of any net proceeds otherwise payable to the Company, up to $25,000 per month.
Management has determined that general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy.
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Going Concern
We have limited working capital and limited revenues from sales of products, services, or licensing. During the fiscal year ended September 30, 2012, our operating expenses continued to be greater than our revenues. These factors have caused our accountants to express substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.
Our ability to continue as a going concern has caused the Board of Directors to continue to look for sources of investment capital, and investigate merger and acquisition opportunities. We will look to further diversify our holdings and sources of cash flow.
Off-Balance Sheet Arrangements
As of September 30, 2012, the Company has no off balance sheet arrangements.
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