Form 10QSB for AQUA SOCIETY, INC.
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11-Mar-2005
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report constitute "forward-looking statements". These statements, identified by words such as plan, "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under the caption "Management's Discussion and Analysis or Plan of Operation" and elsewhere in this Quarterly Report. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. We advise you to carefully review the reports and documents we file from time to time with the Securities and Exchange Commission (SEC), particularly our Annual Reports on Form 10-KSB and our Current Reports on Form 8-K.
As used in this Quarterly Report, the terms "we", "us", "our", the Company and Aqua Society mean Aqua Society, Inc. unless otherwise indicated. All dollar amounts in this Quarterly Report are in U.S. dollars unless otherwise stated.
INTRODUCTION
The following discussion and analysis summarizes our plan of operation for the next twelve months, our results of operations for the three month period ended December 31, 2004 and changes in our financial condition from September 30, 2004. This discussion should be read in conjunction with the Managements Discussion and Analysis or Plan of Operation included in our Annual Report on Form 10-KSB for the year ended September 30, 2004.
Corporate Background
We were incorporated under the laws of the State of Nevada on March 2, 2000, under the name V G Tech, Inc.
On September 22, 2004, we completed the acquisition of Aqua Society GmbH (Aqua GmbH). Aqua GmbH was founded as a limited liability company under the laws of Germany on May 13, 2004. Prior to our acquisition of Aqua GmbH, we were in the business of providing services in the areas of digital graphics and special effects. Upon completing the acquisition of Aqua GmbH, we abandoned this digital imaging business. We are now in the business of designing and developing technologies for application, and providing consulting services, in the areas of heating, ventilating, air conditioning and refrigeration (HVAC&R), water purification and waste water treatment (collectively, the Aqua Business).
Effective December 27, 2004, we changed our name to Aqua Society, Inc. to better reflect the nature of our current business operations
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Recent Corporate Developments
The following significant corporate developments have occurred since the end of our fiscal year on September 30, 2004:
1. On October 15, 2004, we granted options to purchase up to 10,000,000 shares of our common stock at a price of $1.70 per share (the Options). The Options were granted to certain of our employees and consultants, including options to purchase 2,000,000 shares to Achim Stamm, our President, Secretary and Treasurer and a member of our Board of Directors and options to purchase 1,000,000 shares to Dr. Erwin Oser who was appointed to our Board of Directors on October 20, 2004, and was acting as one of our consultants at the time of the grant. The Options were granted pursuant to our 2004 Stock Incentive Plan and are exercisable for a period of 5 years from the date of the grant.
2. On October 18, 2004, we raised $1,000,000 in equity financing by completing a private placement offering with an independent corporate investor. See Part II, Item 2, Changes In Securities.
3. On October 20, 2004, Dr. Erwin Oser was appointed to our Board of Directors. In addition to his duties as a member of our Board of Directors, Dr. Oser is in charge of research and development for our Energy Technologies Department.
4. On November 15, 2004, we announced that we had entered into a non-binding agreement in principle with WAT-membratec GmbH (WAT) to acquire a 25.1% interest in WAT for approximately EUR 300,000. WAT has been engaged in the manufacture of water and waste-water filtration systems for 25 years. The principal shareholder of WAT is Rolf Haake. Mr. Haake is one of our consultants and is in charge of research and development for our Water Purification Department. We do not currently have a binding definitive agreement for the acquisition of WAT and there is no assurance that we will be able to reach such an agreement.
5. In November of 2004, we received a request from Alstom Marine to submit a bid to supply and install an advanced waste water treatment facility onboard a 2,900 passenger cruise ship. Alstom Marine builds high added value ships such as cruise ships, high speed ferries and liquefied natural gas tankers. We are currently in the process of preparing our bid to be submitted to Alstom Marine. There is no assurance that the Company's bid will be accepted or that the parties will be able to reach an agreement for the provision of the Company's services.
6. Effective December 1, 2004, we entered into a non-binding memorandum of understanding with Gulf Water Treatment Co. Ltd. ("GWT") to collaborate on the production of water treatment, filtration and desalination systems in the United Arab Emirates (the "UAE"). Under the memorandum of understanding, the Company will provide materials, equipment, expertise and training to GWT. GWT is a UAE company specializing in the custom design and manufacture of water and waste-water treatment equipment, parts and chemicals for markets within member states of the Cooperation Council for the Arab States of the Gulf (the GCC). The fees and prices to be paid for providing these services to GWT have yet to be determined. We are currently in negotiations towards a definitive agreement with GWT and there are no assurances that we will be able to reach such an agreement with GWT.
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7. On December 6, 2004, we increased our authorized capital from 100,000,000 shares of common stock with a par value of $0.001 per share to 300,000,000 shares of common stock with a par value of $0.001 per share.
8. Effective December 10, 2004, we acquired a 33% interest in UFI-TEC GmbH (UFI-TEC) for EUR 25,565. UFI-TEC is a German company that develops and constructs membrane filtration systems for a variety of applications, including industrial sewage treatment, water purification and food, biotechnology and pharmaceutical processing. The acquisition of our interest in UFI-TEC has allowed us to develop a strategic alliance with a leader in membrane filtration technologies.
9. In December of 2004, we received an order from BS Technik GmbH for 15 Thermomobile units at an aggregate price of EUR 164,283 (approximately US $220,008 at an exchange rate of US $1.33920 per EUR on March 9, 2005).
10. On December 27, 2004, we amended and restated our Articles of Incorporation, changing our name to Aqua Society, Inc. to better reflect the current nature of our business operations.
11. In January of 2005, we entered into an agreement with the State Ministry of Health and Population for the Ivory Coast (the "Ministry of Health") to conduct evaluations of the cold storage systems at various hospitals and healthcare facilities within the Ivory Coast and to provide them with estimates for repairing and upgrading those systems. Our agreement with the Ministry of Health also calls for us to provide estimates to supply a number of healthcare facilities with Thermomobile refrigeration units for the safe storage and handling of medicines, vaccines and blood products. The terms of the Company's agreement with the Ministry of Health extend for a period of seven years and will be renewed automatically for an additional seven year period unless one of the parties provides notice of its intent to annul the agreement at least six months prior to the end of the first seven year term. The fees and prices to be paid to the Company for providing its services and supplying equipment have yet to be determined and will be negotiated between the Company and the individual hospitals and healthcare facilities. The Ministry of Health has agreed to facilitate the introduction of the Company to those hospitals and health care facilities and to guarantee payment under any contracts negotiated with those facilities. However, there is no assurance that we will be able to reach definitive agreements with the individual hospitals and healthcare facilities.
12. Our first project under our agreement with the Ministry of Health for the Ivory Coast is for the supply and installation of cold storage equipment to the National Centre of Blood Transfusion (the national blood bank) for the Ivory Coast (the CNTS). In January of 2005, we successfully submitted a bid to the CNTS to develop an integrated refrigeration system for the storage and transportation of their blood supplies and have entered into a three year service agreement with the CNTS (the CNTS Service Agreement). Under the CNTS Service Agreement, we will conduct a complete evaluation of their cold storage chain and supply and install refrigerated storage facilities for twelve blood banks in the Ivory Coast. In addition, we will supply them with Thermomobile units to be used to transport blood from these blood banks to individual hospitals throughout the Ivory Coast. We will also train CNTS personnel to properly operate and maintain the supplied equipment. Under the terms of the CNTS Service Agreement, the CNTS will, based on our recommendations, provide us with orders for the equipment to be supplied. Based on a joint assessment of the CNTS needs, we have estimated that the purchase price will be EUR 1,945,976 (approximately US $2,606,051 based on an exchange rate of US $1.33920
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per EUR on March 9, 2005) for the equipment expected to be ordered in 2005, EUR 944, 649 (approximately US $1,265,074) for the equipment expected to be ordered in 2006 and EUR 637,218 (approximately US $853,362) for the equipment expected to be ordered in 2007, for a total purchase price of EUR 3,527,843 (approximately US $4,724,487). These amounts are initial estimates only. The actual amounts that we receive under the CNTS Service Agreement may vary significantly from the amounts estimated depending upon the actual orders placed by the CNTS. The actual orders for equipment placed by the CNTS may vary from our initial assessments due to a variety of factors that may be outside of our control, including the budgetary constraints of the CNTS and the individual blood banks.
13. In February of 2005, we delivered and installed three demonstration models of the Aquamission at various locations within the Persian Gulf. These units are currently operational, with the largest unit producing approximately 1,000 litres of drinking water per day.
14. We have received an order from Refrigeraciones Kal-Tec Espana S.L., a Spanish company (Kal-Tec), for the purchase of one Aquamission unit at a price of EUR 562,000 (approximately US $752,630 based on an exchange rate of US $1.33920 per EUR on March 9, 2005). It is expected that Kal-Tec will not be acquiring the Aquamission for its own use but will seek to resell the unit to an end user in Spain. We have until September 30, 2005 to construct and deliver the Aquamission unit to Kal-Tec. Payment will be due from Kal-Tec on June 30, 2006 unless Kal-Tec is able to resell the Aquamission unit earlier, in which case the purchase price will become immediately due.
THE AQUA BUSINESS
We are in the business of designing, developing and marketing technologies and products, and providing consulting services, in the areas of HVAC&R, water purification and waste water treatment. We are currently in the process of developing and marketing the following products and providing the following services:
The Aquamission Product
The Aquamission product utilizes a patented process to extract water from the surrounding atmosphere. Air is supplied to a refrigerated surface contained within the unit which then causes water in the air to condensate. The collected water is then passed through a treatment filter for purification. The result is potable water which meets the standards established by the World Health Organizations Guidelines for Drinking-Water Quality. The amount of water produced by each Aquamission unit will depend upon a variety of factors, including the ambient temperature and humidity and the size of the unit. A smaller unit, approximately 40cm x 40cm x 60cm in size, is, at optimal temperature and humidity (approximately 23C and an average relative humidity of 75%), capable of producing up to 24 liters of drinking quality water per day. A larger unit of approximately 240 cm x 600 cm x 240 cm in size, is, at optimal temperature and humidity, capable of producing up to 6,000 liters of drinking quality water per day. In addition to producing potable water, as a by-product of the condensation process, the refrigerated air expelled by the Aquamission allows it to serve as an air conditioning unit. We have completed the technical development and testing of the Aquamission and are now in the process of developing the market for the Aquamission.
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The Thermomobile Product:
The Thermomobile product is a multi-purpose, self-contained, mobile, refrigerated container unit. The Thermomobile is designed such that the entire container unit can be loaded onto and transported by a variety of large or small transport vehicles. The device is able to utilize either the power supplied by the vehicles own power system or publicly supplied electricity to keep the interior of the unit refrigerated. Thus the cooling chain can be maintained at all times, whether the Thermomobile is loaded onto a transport vehicle or not. The Thermomobile product does not require expensive modifications or permanent affixation to the transport vehicle, allowing the vehicle to still be utilized as a non-refrigerated transport. Technical development and testing of the Thermomobile has been completed and we are now in the process of developing the market for this product.
The Thermomission Product:
The Thermomission is a product we are developing to improve the energy efficiency of refrigeration units. In every refrigeration unit, latent (i.e. waste) heat is transported from the inside of the unit to its outside. The Thermomission is being developed to convert this wasted heat into electricity which is then returned to the refrigeration unit, lowering total energy consumption.
We have conducted an initial test of a Thermomission prototype installed in a water treatment system. The results of this test indicated that use of the Thermomission reduced the energy consumed in the water treatment process by 50 percent. We are in the process of making further refinements and improvements to the Thermomission.
Consulting Services
In addition to developing our core Aqua products, we also provide consulting services in the areas of HVAC&R, water purification and waste water treatment. Our employees and consultants have considerable expertise in utilizing existing and emerging technologies to provide efficient solutions to client problems, including:
1. The use of membrane and vacuum technologies to design, construct and maintain water purification, water recycling and waste water treatment systems;
2. Constructing, evaluating, improving and enhancing cold storage facilities used to safely store food and medical products; and
3. Constructing, evaluating, improving and enhancing the HVAC&R infrastructure of various facilities.
PLAN OF OPERATION
Over the next twelve months, we plan to continue our research and development plans for the Aquamission, Thermomobile and Thermomission products. Our plan of operation for this period involves the following:
1. The Aquamission Product:
We have completed the technical development and testing of the Aquamission and we are currently in the process of developing the market for this product. Throughout this process, we
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will continue to evaluate the Aquamission and seek methods for improving its efficiency, its commercial appeal and its marketability. We intend to market the Aquamission primarily in geographic locations with high ambient temperatures and relative humidity but without readily available sources of fresh water, such as the Persian Gulf.
We have constructed four saleable demonstration models of the Aquamission unit of varying sizes. Three of these demonstration models have been delivered and installed at locations within the Persian Gulf and are currently operational. The largest of these demonstration models is currently producing approximately 1,000 liters of drinking water per day. The fourth demonstration model is currently being stored at our facility located in Herten, Germany.
During the next few months, we will meet with potential purchasers for the Aquamission unit in the Persian Gulf. Our President, Secretary and Treasurer, Achim Stamm, will travel to Dubai in the United Arab Emirates at the end of March, 2005, to display the demonstration models and to meet with various parties interested in purchasing Aquamission units. We have not reached an agreement with any of these parties for the supply of Aquamission units or any of our other products or services and there is no assurance that we will be able to reach such an agreement.
In addition to our efforts to market the product in the Persian Gulf, we are also currently seeking to market the product in southern Europe. We have received an order from Kal-Tec, a Spanish company, to deliver an Aquamission unit to them by September 30, 2005. It is expected that Kal-Tec will not be acquiring the Aquamission for its own use, but will seek to resell the unit to an end-user in Spain. Construction of the Aquamission unit to be delivered to Kal-Tec is expected to begin in mid-May at our facility in Herten, Germany.
2. The Thermomobile Product:
Technical development and testing of the Thermomobile has been completed and we are now in the process of developing the market for this product. Throughout this process we will continue to evaluate and improve the Thermomobile to increase its commercial appeal and marketability.
In December of 2004, we entered into an agreement with BS Technik GmbH for the delivery of 15 Thermomobile units of varying sizes for an aggregate price of EUR 164,283 (approximately US $220,008 based on an exchange rate of US $1.3392 per EUR on March 9, 2005). We have completed the construction of two of these units at our facility in Herten, Germany and we expect to complete construction and delivery of the ordered units during 2005.
The Company has also reached an agreement with the State Ministry of Health and Population (the Ministry of Health) for the Ivory Coast to conduct evaluations of the cold storage systems for a number of healthcare facilities in the Ivory Coast and to provide them with estimates for the supply of Thermomobile units to be used for the safe storage and handling of medicines, vaccines and blood products. The fees and prices to be paid for providing our services and supplying them with equipment are still to be negotiated by us with the individual health care facilities and there is no assurance that we will be able to reach a definitive agreement with these facilities to provide them with our services or products.
The first project undertaken by us under our agreement with the Ministry of Health for the Ivory Coast is to supply and install cold storage equipment, including Thermomobile units, to the CNTS. The CNTS has already ordered two Thermomobile units which we hope to deliver in mid-April. During the next twelve months, we will work with the CNTS to continue to assess
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their cold storage needs at various facilities. We will also begin to deliver and install ordered equipment and will begin the construction of the Thermomobile units to be supplied to the CNTS at our facility in Herten, Germany.
3. The Thermomission Product:
An initial prototype of the Thermomission was constructed early in 2005 and was installed on a water treatment system for testing. Results of the test indicated that the energy consumption of the water treatment system was reduced by 50%. We intend to continue prototype testing of the Thermomission during the next twelve months and to refine our technical designs for this product.
4. Consulting Services:
In addition to providing estimates to the CNTS and other various healthcare facilities in the Ivory Coast, we will also be engaged in the following consulting activities during the next twelve months:
We have received a request from Alstom Marine to submit a bid to supply and install an advanced waste water treatment facility on board a 2,900 passenger cruise ship. Alstom Marine is a division of the French conglomerate Alstom and builds high value added ships such as cruise ships, high speed ferries, liquefied natural gas tankers and yachts. Alstom Marine is currently preparing detailed specifications for the cruise ship and will supply those specifications to us on completion. Once we have received these specifications, we will work to prepare our proposal. We hope to be able to submit our bid to Alstom Marine sometime in the next 4 to 5 weeks. There are no assurances that any proposals submitted by us will be accepted by Alstom Marine or that we will be able to reach an agreement with them for the provision of our services.
We have entered into a non-binding memorandum of understanding with Gulf Water Treatment Co. Ltd. (GWT) to collaborate on the production of water treatment, filtration and desalination systems in the United Arab Emirates (the UAE). Under this memorandum of understanding, we will provide GWT with expertise, training, materials and equipment for the production of facilities in the UAE. The fees and prices to be paid for providing these services to GWT have yet to be determined. We are currently in negotiations towards a definitive agreement with GWT and there are no assurances that we will be able to reach such an agreement with GWT.
We anticipate spending approximately $2,000,000 in pursuing our plan of operation over the next twelve months. This amount is in excess of our current cash reserves and anticipated revenues for that period. Accordingly, we will require substantial additional financing in order to fund our plan of operation. We anticipate that any additional financing will likely be in the form of equity financing as substantial debt financing is not expected to be available at this stage of our business.
Currently we do not have any financing arrangements in place and there is no assurance that we will be able to obtain sufficient financing in order to proceed with the development of the Aqua Products. If we do not obtain the necessary financing, then our plan of operation will be scaled back according to the amount of funds available. The inability to raise the necessary financing will severely restrict our ability to complete the development and commercialization of the Aqua Products.
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Our actual expenditures and business plan may differ from the one stated above. Our Board of Directors may decide not to pursue this plan. In addition, we may modify the plan based on available financing.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2004
Under generally accepted accounting principles, our financial results are reported as a continuation of the operations of Aqua GmbH, founded on May 13, 2004. See Critical Accounting Policies. As Aqua GmbH was founded on May 13, 2004, no comparative figures for the previous fiscal year have been presented.
First Quarter Summary
Three Months Ended December 31, 2004
Revenue $ --
Expenses 23,060,681
Net Income (Loss) $(23,060,681)
Revenues
We have not earned any revenue to date. We have reached an agreement with BS Technik GmbH to deliver 15 Thermomobile units for an aggregate price of EUR 164,283 (approximately US $220,008 based on an exchange rate of US $1.33920 per EUR on March 9, 2005). We expect to complete the sale of these units to BS Technik GmbH sometime in 2005. We have received an order from Kal-Tec for one Aquamission unit at a price of EUR 562,000 (approximately US $752,630), to be delivered by September 30, 2005. Construction on the Aquamission unit to be delivered to Kal-Tec is expected to begin shortly. Payment for the Aquamission unit to be delivered to Kal-Tec is due no later than June 30, 2006, unless Kal-Tec is able to resell the Aquamission unit at an earlier date, upon which the purchase price will become immediately due and owing.
Although we have reached an agreement with the CNTS to assess their cold storage facilities and supply them with materials and equipment, and have provided them with estimates for the equipment expected to be supplied to them, a final determination has not been made on the equipment to be supplied to the CNTS or on the final purchase to be paid by the CNTS. The actual amounts that we receive under the CNTS Service Agreement may vary significantly from the amounts estimated.
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Operating Costs and Expenses
Our operating expenses for the quarterly period ended December 31, 2004
consisted of the following:
Three Months Ended December 31, 2004
Accounting and Audit Fees $42,061
Advertising and Promotion 15,430
Amortization 2,158
Bank Charges and Interest 324
Commissions 6,478
Consulting Fees 6,000
Development Costs 269,300
Legal Fees 40,133
Filing Fees 666
Management Fees 116,610
Office and Miscellaneous 18,043
Stock-based Compensation 22,480,000
Transfer Agent 4,032
Travel 59,446
Total $23,060,681
On October 15, 2004, we issued a total of 10,000,000 options pursuant to our 2004 Stock Incentive Plan. Each option granted entitles the holder to acquire one share of our common stock at a price of $1.70 per share for a period of five years from the date of the grant. The fair value of these options, determined to be $22,480,000 according to the Black-Scholes option pricing model, has been recorded as stock based compensation for the period ended December 31, 2004.
Our development costs of $269,300 for the three month period ended December 31, 2004 are costs associated with the development of our products. The increase in these expenses over previous fiscal periods is a result of our increased product and business development activities during the three months ended December 31, 2004.
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