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AQUALIV TECHNOLOGIES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This quarterly report on Form 10-Q and other reports filed by AquaLiv Technologies, Inc. (the "Company") from time to time with the SEC (collectively, the "Filings") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company's business, industry, and the Company's operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report. Overview Our research has revealed that all substances have an inherent information signature. Biological systems naturally understand this information and respond to it. While science has not previously detected this powerful aspect of our natural world, AquaLiv's technology can already record, catalog, and mix this bioinformation into unique composites. These composites are designed for specific applications and then programmed into water for delivery to biological systems. With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is poised to provide innovative ingredient-free solutions to the world's problems. AquaLiv Water System The AquaLiv water system addresses every aspect of water to make it whole and full of vital nutrients. The system requires no electicity, is eco-friendly, removes most impurities (including harmful sodium fluoride), and creates a healthful and stable alkaline pH. Users of the AquaLiv Water System have reported stabilized blood sugar, improvements in both high and low blood pressure, reduced allergy symptoms, less headaches, better digestion, and healthy glowing skin. Some diabetics have even reported that AquaLiv helped them decrease their insulin requirements. Infotone Face Mist Infotone Face Mist contains a non-toxic and 100% natural mineral clay ceramic ball that features AquaLiv's BioT™ Bioinformation Technology. This revolutionary technology turns regular water into a powerful tonic that when misted over the face encourages optimal hydration and clear, youthful, glowing skin. Researchers observed improved hydration, suppleness, firmness, and texture and reduced dryness, oxidation, wrinkles, skin pigmentation, and blemishes. Infotone Face Mist stands apart from other facial water misters because it isn't just a typical water mister. In fact, no other water mister on the market today utilizes AquaLiv's BioT™ Bioinformation Technology. Infotone is the first cosmetic of its kind. AgSmart™ Rice AgSmart™ Rice has demonstrated over 100% crop yield increase over test control yield (same seeds, same practices, adjacent parcel) while decreasing duration before harvest by one month. It is also more resistant to pests, disease, and storms. All AgSmart™ products are 100% natural and organic standards compliant. Based on our experience, we do not expect all farms to achieve a 100% yield increase, but rather a 30-60% increase will be average. NatuRx™ Medication Alternatives Based on AquaLiv's BioT™ Bioinformation Technology, NatuRx™ formulations utilize novel wave-based information composites in lieu of active-molecules for treatment. Physics-based medicine, not chemistry. NatuRx™ formulations are non-toxic and have no contraindications. NatuRx™ formulations are in development and not yet available to the general public. Focus Systems, Inc. Remote Desktop and Cloud Computing A remote device runs the client software that implements the chosen protocol(s) and allows the user to access an entire desktop environment that is being projected from a remote server or group of servers. Although the remote device may be a personal computer running an agent, the remote device, sometimes called a "Thin Client," does not need to have a large amount of memory or storage. In fact, it may offer no local storage at all. The remote device does not need to be based upon the same hardware architecture or operating system as used by the remote servers. It is quite possible for a small, hand held device based upon an X-scale processor running some embedded operating system to display Linux, Windows, UNIX or even Z/OS applications. The Company believes that there are inherent benefits of operating in a completely portable desktop office environment. Remote desktop users can access their same computer desktop from the office, at home, a mobile device, or virtually anywhere in the world. Access to central data and shared recourses will increase productivity and reduce cost for businesses. The remote environment is controlled, managed and updated by the Company from a centralized location, further reducing operating costs for its customers. VOIP Phone Service VoIP phone service is a method for taking analog audio signals (similar to the kind you hear when you talk on the phone) and turning them into digital data that can be transmitted over the Internet. This allows VoIP service to replace traditional landline service for business and residential customers. Since VoIP phone service is digital, companies can run both data and voice over the same network infrastructure greatly reducing costs. This reduction in cost is experienced in both the initial start-up phase, as well as the ongoing maintenance and services fees associated with phone service. Company management believes that the trend away from traditional phone service to digital VoIP services will continue to grow. (8) Table of Contents Plan of Operation Recent advancements in AquaLiv's technology uncovered a new field of biological information science. With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is ready to expand its innovative product offering. While the economy has slowed in recent years, recent sales campaigns have produced positive results for AquaLiv. 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. 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. Results of Operations For the Three and Six Months Ended March 31, 2012 Compared with the Three and Six Months Ended March 31, 2011 Revenues The revenues for the three months ending March 31, 2012 were $124,448 as compared to $159,018 in the quarter ending March 31, 2011. Revenues were $264,168 for the six months ended March 31, 2012, as compared to $302,628 for the six months ended March 31, 2011. Sales revenue comprised of 94.1% and 93.2% of our revenue for the three and six months ending March 31, 2012, respectively, compared to the same three and six month periods in 2011, where sales revenue accounted for 75.4% and 77.4% of overall revenue, respectively. Service revenue accounted for 5.9% and 6.8% of our revenues for the three and six months ending March 31, 2012, respectively, compared to the same three and six month periods in 2011, where service revenue accounted for 6.4% and 7.3% of overall revenue, respectively. The Company stopped receiving royalty revenue on June 22, 2011 in conjunction with the distribution of Infrared Applications, Inc., therefore, royalty revenues were $0 for the three and six months ended March 31, 2012, compared to $28,800 and $46,400 for the three and six months ended March 31, 2011, respectively. Royalty revenue accounted for 0% of revenues for the three and six months ended March 31, 2012, compared to the same three and six month periods in 2011, where royalty revenue accounted for 18.1% and 15.3 of overall revenue, respectively. Revenue recognition is accounted for as follow: Sales revenue is billed, paid, and shipped in the same period each month; Service revenue is billed in advance on the first day of the month that service is rendered; and royalty revenue is recorded as earned in the month it is received. Cost of Goods Sold Cost of goods sold for the three and six months ending March 31, 2012 were $38,138 (30.6% of total revenues) and $71,809 (27.2% of total revenues), respectively, compared to $59,522 (37.4% of total revenues) and $106,046 (35% of total revenues), respectively, for the same three and six month periods ending March 31, 2011. The improvement in cost of goods sold is associated with outsourcing changes made to operations related to Focus Systems. Operating Expenses Operating expenses for the three months ending March 31, 2012 were $198,933 as compared to $187,994 for the quarter ending March 31, 2011. The increase of $12,602 in consulting fees, increase of $5,970 in management fees, increase of $19,200 in payroll expense, decrease of $2,028 in professional fees, increase of $4,595 in research and development, increase of $8,160 in travel expense, and decrease of $28,369 in general and administrative fees is due in part to the increased costs of running the businesses compared to the quarter ending March 31, 2011. The operation expenses for the six months ending March 31, 2012, were $383,842 as compared to $655,192 for the six months ending March 31, 2011. The increase of $8,357 in consulting fees, increase of $15,080 in management fees, increase of $38,211 in payroll expense, decrease of $21,603 in professional fees, decrease of $6,110 in research and development, increase of $9,947 in travel expense, and increase of $252 in general and administrative fees is due in part to the increased costs of running the businesses compared to the six months ending March 31, 2011. The decrease of $315,484 in loss on goodwill impairment, AquaLiv, was due to the one time write down of goodwill attributed to the acquisition of that business during the six months ending March 31, 2011. The Company expects operating expenses to remain higher that previously comparable periods as the Company expands its services. Other Income and Expense Interest expense for the three months ended March 31, 2012 was $20,917 as compared to $3,767 for the three months ended March 31, 2011, and was $42,386 for the six months ended March 31, 2012 as compared to $6,344 for the six months ended March 31, 2011. The increase in interest expense is due to an increase in loss on derivative liability. Net (Loss) Before Provision for Income Taxes The net loss for the three months ended March 31, 2012 was $124,626 as compared to $62,723 for the three months ended March 31, 2011. The increase in net loss is attributed to the increase in our operating expenses due to the subsidiary changes and business additions to the Company. The net loss for the six months ended March 31, 2012 was $203,170 as compared to $437,947 for the six months ended March 31, 2011. The one time write off of goodwill attributed to the AquaLiv acquisition during the six months ended March 31, 2011 accounted for the decrease in net loss between then and the same period ending March 31, 2012. Had that one time event not occurred, the company would have reported an increase in our operating expenses for the six months ended March 31, 2012, as compared to the six months ended March 31, 2011. The increase in normal operating expenses is due to the subsidiary changes and business additions to the Company. Liquidity and Capital Resources Operating expenses for the six months ended March 31, 2012 and 2011, was $383,842 and $655,192, respectively. The net loss for the six months ended March 31, 2012 and 2011, was $(203,170) and $(437,947), respectively. As of March 31, 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. 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. The Company expects the current resources from the Debenture, as well as the resources available from the Equity Agreement once the registration statement is declared effective, will be sufficient for a period of approximately 24 months, depending upon certain funding conditions contained herein, unless significant additional financing is received. 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. Going Concern We have limited working capital and limited revenues from sales of products, services, or licensing. During the three months ended March 31, 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 There are no off-balance sheet arrangements. (9) Table of Contents |