UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q





x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2011





or





 ̈
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





000-51807(Commission File No.)


EAU TECHNOLOGIES, INC.


(exact name of registrant as specified in its charter)


Delaware

87-0654478(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)1890 Cobb International Blvd, Suite A, Kennesaw Georgia

30152(Address of principal executive offices)

(Zip Code)


Issuer’s telephone number:  (678) 388-9492





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ̈No ̈





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
x(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈Nox





As of May 12, 2011, the Registrant had 20,006,168 shares of Common Stock, $0.0001 par value outstanding.








EAU TECHNOLOGIES, INC.


QUARTERLY REPORT ON FORM 10-Q


March 31, 2011





INDEX





PagePART I. FINANCIAL INFORMATIONITEM 1.
Financial StatementsBalance Sheets – March 31, 2011 and December 31, 2010
3Statements of Operations – Three months ended March 31, 2011 and 2010
5Statement of Stockholders’ Equity (Deficit) – Three months ended March 31, 2011 and 2010
6Statements of Cash Flows – Three months ended March 31, 2011 and 2010
7Notes to Financial Statements
9ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
20ITEM 4T.
Controls and Procedures
20PART II. OTHER INFORMATIONITEM 1.
Legal Proceedings
20ITEM 1A.
Risk Factors
21ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21ITEM 3.
Defaults Upon Senior Securities
21ITEM 4.
ReservedITEM 5.
Other Information
21ITEM 6.
Exhibits
21SIGNATURES
22


2





PART I - FINANCIAL INFORMATION





EAU TECHNOLOGIES, INC.





BALANCE SHEETS





ASSETS





March 31,


December 31,2011


2010(Unaudited)CURRENT ASSETSCash

$
73,536


$
178,992Accounts receivable, net


82,420



25,119Accounts receivable – related party, net


5,500



6,111Prepaid expense


25,664



42,852Inventory, net


1,427,149



1,808,084Total current assets


1,614,269



2,061,158PROPERTY AND EQUIPMENT, net of accumulated depreciation of $113,991 and $111,669


6,730



9,052LEASED EQUIPMENT, net of accumulated depreciation of $462,981 and $449,688


642,828



656,121OTHER ASSETSDeposits


8,838



8,838Intellectual property, net


113,874



101,190Total other assets


122,712



110,028Total assets

$
2,386,539


$
2,836,359





See notes to financial statements.


3


EAU TECHNOLOGIES, INC.





BALANCE SHEETS (Continued)





LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)





March 31,


December 31,2011


2010(Unaudited)CURRENT LIABILITIESAccounts payable

$
467,117


$
533,069Accrued expenses


351,743



341,713Accrued interest


1,105,207



978,622Warranty reserve


69,807



72,796Advance deposits on machine orders


-



446,606Advance deposits on machine orders – related party


329,630



329,630Unsecured short term loans – related party


465,000



50,000Convertible notes payable – related party, net of discounts of $460,946 and $633,801


4,339,054



4,166,199Total current liabilities


7,127,558



6,918,635STOCKHOLDERS’ EQUITY (DEFICIT)Common stock, $.0001 par value; 50,000,000 shares authorized; 20,006,168 and 20,006,168 issued and outstanding, respectively


2,001



2,001Additional paid in capital


42,410,881



42,368,794Accumulated deficit


(47,153,901
)


(46,453,071
)Total stockholders’ equity (deficit)


(4,741,019
)


(4,082,276
)Total liabilities and stockholders’ equity (deficit)

$
2,386,539


$
2,836,359





See notes to financial statements.


4


EAU TECHNOLOGIES, INC.





UNAUDITED STATEMENTS OF OPERATIONS





Three Months EndedMarch 31,2011


2010NET REVENUES – RELATED PARTY

$
-


$
74,627NET REVENUES


630,642



87,775TOTAL REVENUES


630,642



162,402COST OF GOODS SOLD


426,031



40,815GROSS PROFIT


204,611



121,587OPERATING EXPENSESDepreciation and amortization


2,662



3,884Research and development


3,000



66,751General and administrative


599,783



750,332Total operating expenses


605,445



820,967LOSS BEFORE OTHER INCOME (EXPENSE)


(400,834
)


(699,380
)OTHER INCOME (EXPENSE)Interest expense


(299,996
)


(96,265
)Interest income


-



26Gain (Loss) on derivative liability


-



572,348Total other income (expense)


(299,996
)


476,109LOSS BEFORE PROVISION FOR INCOME TAXES


(700,830
)


(223,271
)PROVISION FOR INCOME TAXES


-



-NET LOSS

$
(700,830
)

$
(223,271
)NET LOSS PER SHARE

$
(0.04
)

$
(0.01
)WEIGHTED AVERAGE OF SHARES OUTSTANDING


20,006,168



19,926,835





See notes to financial statements.


5





EAU TECHNOLOGIES, INC.





STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)





ADDITIONALCOMMON STOCK


PAID IN


ACCUMULATEDSHARES


AMOUNT


CAPITAL


DEFICIT


TOTALBalance, December 31, 2010


20,006,168


$
2,001


$
42,368,794


$
(46,453,071
)

$
(4,082,276
)Vesting of options for services (unaudited)


-



-



42,087



-



42,087Net loss for the three months ended March 31, 2011 (unaudited)


-



-



-



(700,830
)


(700,830
)Balance, March 31, 2011 (unaudited)


20,006,168


$
2,001


$
42,410,881


$
(47,153,901
)

$
(4,741,019
)





See notes to financial statements.


6





EAU TECHNOLOGIES, INC.





UNAUDITED STATEMENTS OF CASH FLOWS





For the Three MonthsEnded March 31,2011


2010CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(700,830
)

$
(223,271
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


15,954



18,295Warrants and options vested or issued for services


42,087



49,256Discount of note payable


172,855



-Changes in operating assets and liabilities:Decrease in restricted cash


-



240,000(Increase) decrease in accounts receivable


(57,301
)


7,350Decrease in accounts receivable – related party


611



32Decrease in pre-paid expense


17,188



19,755Decrease in inventory


380,935



68,369(Increase) in deposits


-



(1,075
)Increase (decrease) in accounts payable


(65,952
)


35,954(Decrease) in warranty reserve


(2,989
)


(5,962
)Increase (decrease) in advance deposits for machine orders


(446,606
)


12,500(Decrease) in advance deposits for machine orders – related party


-



(20,356
)Increase in accrued expenses


10,030



14,750Increase in accrued interest


126,585



94,857(Decrease) in deferred revenue


-



(50,000
)(Decrease) in derivative liability


-



(572,348
)Net cash (used) in operating activities


(507,433
)


(311,894
)CASH FLOWS FROM INVESTING ACTIVITIESIntellectual property disbursements


(13,023
)


(3,153
)Net cash (used) in investing activities


(13,023
)


(3,153
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of note payable – related party


415,000



350,000Proceeds from issuance of common stock – related party


-



100,200Net cash provided by financing activities


415,000



450,200NET INCREASE (DECREASE) IN CASH


(105,456
)


135,153Cash, beginning of period


178,992



181,481Cash, end of period

$
73,536


$
316,634





See notes to financial statements.


7


EAU TECHNOLOGIES, INC.





UNAUDITED STATEMENTS OF CASH FLOWS


(Continued)





Three Months EndedMarch 31,2011


2010Supplemental Disclosures of Cash Flow Information:Cash paid during the period for:Interest

$
557


$
1,407Income Taxes

$
-


$
-





See notes to financial statements.


8





EAU TECHNOLOGIES, INC.





CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 1 – BASIS OF PRESENTATION





The accompanying condensed financial statements were prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In management’s opinion all necessary adjustments, which consist primarily of normal recurring adjustments, to the financial statements have been made to present fairly the financial position and results of operations and cash flows.  The results of operations for the respective periods presented are not necessarily indicative of the results for the respective complete years.  The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.





Certain prior period amounts have been reclassified in the condensed financial statements to conform to current period presentation.





NOTE 2 - INVENTORIES





The composition of inventories is as follows at:





March 31,


December 31,2011


2010Finished goods

$
637,288


$
1,012,994Raw materials


1,189,837



1,195,090Allowance for obsolete inventory


(400,000
)


(400,000
)$
1,427,149


$
1,808,084





NOTE 3 – WARRANTY RESERVE





The Company warrants its products against defects in materials and workmanship for a period of three years.  The Company reviews the historical experience of failure rates and estimates the rate of warranty claims that will be made and has accrued a warranty reserve for these anticipated future warranty costs.  If actual results differ from the estimates, the Company would adjust the estimated warranty liability.  Changes in the warranty reserve for the three months ended March 31, 2011 are as follows:





Warranty reserve at beginning of period

$
72,796Costs accrued for additional warranties


-Service obligations honored


(2,989
)Warranty reserve at end of period

$
69,807


9


EAU TECHNOLOGIES, INC.





CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 4 - CONVERTIBLE NOTES PAYABLE – RELATED PARTIES





In September 2005, the Company entered into a Senior Convertible Note (the “Note”) with Water Science, a related party, in exchange for $3,000,000. Pursuant to the debt agreement, the Note accrued interest at the rate of 3% per annum and was initially due, principal and interest together, on September 16, 2008.  In June 2008, Water Science agreed to extend the maturity date of the Note to March 16, 2009.  In March 2009, the Company and Water Science agreed to extend the maturity date to September 16, 2009 and increase the interest rate to 10%.  No principal or interest payments needed to be paid during the loan period.  In October 2008, as part of a new financing agreement, the Company amended the Note and changed the conversion rate from $3.00 per share to $1.00 per share.  The Note may be converted into 3,000,000 shares of the Company’s $0.0001 par value common stock prior to the maturity date, and at any time, by the holder at a price per share equal to $1.00 per share, subject to certain other conversion adjustments.  The Company granted a security interest in all of the Company’s assets as collateral for the loan.  In connection with the original issuance of the Note, the Company granted a three year warrant to purchase up to two million shares of the Company’s $0.0001 par value common stock with an exercise price of $2.76 per share.  In August 2009, the Company entered into an agreement with Water Science, a related party, to extend the maturity date of the Promissory Note from September 16, 2009 to November 1, 2010.  In October 2010, the Company entered into a Third Amended and Restated Secured Convertible Promissory Note (“Amendment”), which extended the maturity date until December 1, 2011.  The Amendment also deleted the anti-dilution protection for subsequent equity offerings contained in the Note, as described above, and the loan agreement entered into in August 2009, and terminated the registration rights agreement contained in both agreements.




On August 27, 2009, the Company entered into a Loan Agreement with Mr. Peter Ullrich, a related party, whereby he agreed to loan $600,000 to the Company, funded in three installments, as follows, $200,000 payable on September 15, 2009, $200,000 payable on October 15, 2009, and $200,000 payable on November 15, 2009.  Simple interest accrued at a rate of 10% per annum on the unpaid principal amount outstanding and the loan was scheduled to mature on November 1, 2010, at which time accrued interest and the outstanding principal balance were due.   In October 2010, the Company entered into an Amended and Restated $600,000 loan agreement, which extended the maturity date to December 1, 2011.  The agreement contains an optional conversion right, whereby the Lender may convert all or any portion of the outstanding principal and interest due into shares of the Company’s common stock at a price per share equal to $1.00 per share.





The amendments agreed to in October 2010 deleted the anti-dilution protection for subsequent equity offerings contained in the notes and terminated the registration rights agreement contained in both agreements.  Due to this change the “round down” provisions were eliminated.  This has resulted in the Company no longer recording a derivative liability.  The Company recorded a gain of $572,348 in the change of the derivative liability to fair market value for the three month period ended March 31, 2010.





In October, 2010, the Company entered into a loan agreement with Peter Ullrich, a related party.  The principal amount of the Note is $1,200,000, with Mr. Ullrich having already advanced $905,000 to the Company prior to October, 2010.  The remaining balance of $295,000 on the Note was paid by Water Science, a related party, in two installments, with $145,000 paid on October 25, 2010 and $150,000 paid on November 29, 2010.  The Note bears interest at a rate of 10% annually and will mature on December 1, 2011.  The Note is convertible into shares of the Company’s common stock at $1.00 per share and no principal or interest payments are due until maturity.  Also, in conjunction with the Note, the Company issued a warrant to Peter Ullrich to purchase 6,969,231 shares of the Company’s common stock at $0.31 per share (the “Warrant”).  The Warrant has a term of five years.


10





EAU TECHNOLOGIES, INC.





CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 5 – RELATED PARTY TRANSACTIONS





Sales to Affiliates – In September 2005, Water Science, a related party, paid to the Company $1,000,000 for the exclusive rights to sell our products in South America and Mexico.  The agreement allows for a pro-rated refund during the first 5 years under certain circumstances.  The Company recognized income from this agreement over the first 5 years of the agreement.  As of December 31, 2010, the deferred revenue had been fully recognized.  The Company recognized $50,000 in the period ended March 31, 2010.  This agreement also gives Water Science the rights to purchase machinery from the Company at cost plus 25 percent.  The Company did not have any sales to Water Science during the three months ended March 31, 2011 and had sales of $24,627 for the same period in 2010.  The Company has received and recorded $329,630 in advance deposits from Water Science on machine orders at March 31, 2011.





Unsecured Short Term Loans–In January, February and March, 2011, the Company obtained unsecured short term loans totaling $465,000 from Peter Ullrich a member of the Board of Directors of the Company.  The final agreement to document the loan has not been signed, and the material terms are not final. It is anticipated that the final loan will be at 10% simple interest and conversion rights into Company common stock at an exercise price of $1.00 per share.  The material terms of the final agreement will be disclosed in subsequent filings with the Securities and Exchange Commission.





Convertible Notes Payable–See Note 4 for disclosure of related party Convertible Notes Payable.





Licensing Fee –In September 2005, the Company received $1,000,000 in exchange for providing Water Science exclusive licensing and distribution rights for a five-year term for a specified market area. The agreement provides termination rights by Water Sciences and a pro rata refund of the fee. The Company recognized the fee on a pro rata basis over the life of the agreement. As of December 31, 2010, the fee had been fully recognized.





Escrow Arrangement with Chief Executive Officer –In November 2006 the Company entered into an employment agreement with Wade Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited $240,000 with an escrow agent in January 2007. The Company has recognized this amount as restricted cash on the Company’s financial statements.  In February 2010, the Company and the Chief Executive Officer entered into an agreement to terminate the escrow agreement and closed the account.





Advances– Periodically throughout the year, the Company advances employees cash for certain reimbursable expenses.  As of March 31, 2011 and December 31, 2010, the Company had advances to employees in the amount of $5,500 and $5,500, respectively.





Employee Options– In December 2007, the Company granted 480,260 options to various employees.  The options are for a term of ten (10) years and which now have an exercise price of $0.31 per share.  The options vest over a period of four (4) years.   The options were valued using the Binomial model with the following assumptions:  risk free rate of 2.1%, volatility at 201.13% and the stock price at $0.31.  The value of each option is approximately $0.31 per option.  The Company recognized $18,677 in stock option expense related to the options for the three months ended March 31, 2011.





In November 2007, the Company granted 530,000 options to Douglas Kindred, in connection with the appointment of Mr. Kindred as Chief Technology Officer.  The options are for a term of ten (10) years and which now have an exercise price of $0.31 per share.  The options vest over a period of four (4) years.   The options were valued using the Binomial model with the following assumptions:  risk free rate of 2.1%, volatility at 199.88% and the stock price at $0.31.  The value of each option is approximately $0.31 per option.  The Company recognized $17,356 during the period ended March 31, 2011.


11





EAU TECHNOLOGIES, INC.





CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 6 – CAPITAL STOCK





The Company has certain notes payable to related parties that are convertible into shares of the Company’s common stock.  See Note 4.





In March 2010, Theodore Jacoby, a director of the Company, purchased 100,000 shares of common stock of the Company for $100,000 at a price of $1.00 per share.





In January 2010, a consultant exercised 20,000 warrants for $200, or $0.01 per share.  The warrants were granted in 2005 for services.





NOTE 7 – GOING CONCERN





The Company has incurred significant losses and has had negative cash flows from operations.  As a result, at March 31, 2011, the Company has had a high level of equity financing transactions and additional financing will be required by the Company to fund its future activities and to support its operations.  We currently do not have sufficient funds to operate our business without additional funding.  We do not have any written agreements in place for additional funding.Management will continue to seek to obtain sufficient funding for its operations through either debt or equity financing.  However, there is no assurance that the Company will be able to obtain additional financing.  Furthermore, there is no assurance that rapid technological changes, changing customer needs and evolving industry standards will enable the Company to introduce new products and services on a continual and timely basis so that profitable operations can be attained.  The Company’s ability to achieve and maintain profitability and positive cash flows is dependent upon its ability to achieve positive sales and profit margins and control operating expenses.





The Company estimates that it will need up to $1,500,000 for the upcoming twelve months to execute our business plan and an additional $5,265,000, plus interest, in order to satisfy our senior notes payable with Water Science, which becomes due in December 2011, if the note is not converted into common stock.  Management plans to mitigate its losses in the near term through the further development and marketing of its trademarks, brand and product offerings.





Our auditors have issued their Independent Registered Public Accountants’ Report on the Company's financial statements for the fiscal year ended December 31, 2010 with an explanatory paragraph regarding the Company's ability to continue as a going concern. The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of recurring operating losses, such realization of assets and satisfaction of liabilities are subject to uncertainty, which raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





NOTE 8 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Stock Based-Compensation Expense





Stock-based compensation is calculated according to FASB ASC Topic 718, Compensation — Stock Compensation, which requires a fair-value-based measurement method to account for stock-based compensation. The Company uses the Binomial valuation formula, which is a closed-form model that uses an equation to determine the estimated fair value of stock options.  Stock-based compensation expense recognized for the three month period ended March 31, 2011 and 2010 was $42,087 and $49,256, respectively, related to employee stock options issued and vesting during the period.


12





EAU TECHNOLOGIES, INC.





CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 8 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Basic and Fully Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period.





For the Three Months EndedMarch 31,2011


2010Net Loss (numerator)

$
(700,830
)

$
(223,271
)Shares (denominator)


20,006,168



19,926,835Per share amount

$
(0.04
)

$
(0.01
)





The Company’s outstanding stock options and warrants have been excluded from the basic net loss per share calculation for the three month period ended March 31, 2011 and 2010, because they are anti-dilutive.





The following table is a summary of the status of the warrants and options granted and outstanding at March 31, 2011:


Number


Weightedof Options


Average Exerciseand Warrants


PriceOutstanding at beginning of period


9,185,991


$
0.32Granted


-



-Exercised


-



-Forfeited


-



-Expired


-



-Outstanding at end of period


9,185,991


$
0.32





A summary of the status of the warrants outstanding at March 31, 2011 is presented below:





Warrants Outstanding


Warrants ExercisableRange of




Weighted-Average

Weighted-Average





Weighted-AverageExercise


Number

Remaining

Exercise


Number


ExercisePrices


Outstanding

Contractual Life

Price


Exercisable


Price$.01-.50



9,135,991

4.9 years

$
0.31



8,942,426


$
0.311.00-2.00



50,000

0.3 years


1.88



50,000



1.88$.01-2.00



9,185,991

4.9 years

$
0.32



8,992,426


$
0.32





The fair value of each warrant granted is estimated on the date granted using the Binomial pricing model, with the following assumptions used for the grants: risk-free interest rate of 1.15%, expected dividend yield of zero, expected lives of five years and expected volatility of 246%.


13


EAU TECHNOLOGIES, INC.





CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 9 – SUBSEQUENT EVENTS





In April 2011, the Company signed a purchase agreement with Fonterra Co-Operative Group Limited, New Zealand for a Dairy Drinking Water System to be used in a new 3,000 cow dairy in Yutian, China.  The system is expected to be installed by the end of the year.





In accordance with ASC 855, management evaluated events subsequent to March 31, 2011 and concluded there were no other events or transactions during this period that required recognition or disclosure in its financial statements.


14


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis provides information, which management believes is relevant to an assessment and understanding of the Company’s condensed results of operations and financial condition. The discussion should be read in conjunction with the financial statements included in our annual report on Form 10-K, and notes thereto.





Overview




EAU TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc. (referred to herein sometimes as “EAU,”  “we,” “us,” or the “Company”), is in the business of developing, manufacturing and marketing equipment that uses water electrolysis to create non-toxic cleaning and disinfecting fluids for food safety applications as well as dairy drinking water. These fluids have various commercial applications and may be used in commercial food processing and agricultural products that clean, disinfect, remediate and hydrate. The processes for which these fluids may be used are referred to in this Report (the “Report”) as the “EW Technology.”  For example, we believe that our food and agricultural treatment products may be used to systemically treat various facets and phases of the food chain, from soil to animal feed to meat processing, by eliminating dangerous and unhealthy pathogens from the food chain with organically based and highly effective solutions. We make the claim that our products are “non-toxic”. We can do this because at the levels we employ our technology in commercial applications, as well as studies both internal and through third parties shows no toxicity.  At the levels employed, the fluids and products are environmentally safe and non-toxic and do not contain or leave harmful residues.  The electrolyzed water fluids created by the EW Technology (referred to herein sometimes as the “EW Fluids” or “Empowered WaterTM”) generated by our specialized equipment can be used in place of many of the traditional products used in commercial, industrial and residential disinfecting and cleaning.





Our focus is on our three core competencies which are, producing high volumes of electrolyzed water, controlling the properties of the water and using our application knowledge.  Because of our ability to produce high volumes of water and control the water properties, our target market is in commercial applications where we believe we can add value by generating measurable productivity and efficiency gains.  We will continue to use a disciplined stage gate development process that drives ideas to commercial test installations that turn into revenues.  Once we have developed an application we will attempt to find strategic partners that would be able to assist us with a large scale commercial roll-out of the technology.





We have identified the following industries for early stage sales and marketing focus: 1) clean in place (“CIP”) for food and beverage processing, 2) dairy production and processing, 3) meat and poultry processing and 4) agricultural grow-out and processing (“Primary Markets”).  As of the date of this Report, the Company was focused on these markets because we believe that for each of these markets we have a competitive advantage, the potential ability to attract a leading strategic industry partner, or we can provide an attractive value-added proposition.  To penetrate these markets, EAU is conducting trials and completing commercial installations that will lead to partnerships with enterprises that can assist in rolling the technology out on a large scale.





Clean in Place.In 2008 we installed our equipment to test a clean-in-place (CIP) application with an international beverage bottling company for use with cold beverages.  This test is complete and was a success. There were three stages of this trial that were conducted simultaneously: 1) Syrup tanks; 2) Bag in box; 3) Bottling. The purpose of the trial was to identify whether EAU’s non-toxic ambient temperature Empowered Waters could replace current 3-5 step CIP processes. In order to become an approved technology for this bottling company, EAU had to show good antimicrobial efficacy, water savings, and improved CIP efficiency.


15


Results showed Empowered WaterTM was able to improve current cleaning and sanitizing efficacy, minimizing the use of commercial chemicals while complying with microbiological integrity and sensory testing requirements. Testing also identified water and energy consumption savings as well as timesaving that can increase bottling production line availability.





In August 2010, the Company received its first purchase orders from the international beverage company.  EAU installed its environmentally friendly Empowered WaterTM CIP Systems at three of the company’s bottling plants during the first three months ended March 31, 2011.  The Company recorded revenue from the sale of these systems during the first quarter 2011.





Dairy Cattle.The Company commenced hydration and production tests on dairy cattle in 2006.  Initial results indicate an increase in milk production and milk fat while maintaining the protein content.  In August 2008, we reached an agreement with a dairy located in Georgia to begin paying for the use of our equipment.    During the first quarter of 2009, the Company installed a second unit at the dairy located in Georgia to provide our fluids to all of the cows on the dairy.  EAU is currently receiving minimal revenues in a commercial capacity.  We will continue to do more clinical research and field testing in the dairy market in order to support a full industry rollout.





In April 2011, the Company signed a purchase agreement with Fonterra Co-Operative Group Limited, New Zealand for a Dairy Drinking Water System to be used in a new 3,000 cow dairy in Yutian, China.  The system is expected to be installed by the end of the year.  We expect to recognize revenues from this installation in the second half of 2011.





Poultry.In 2005, we began testing of our EW Technology and EW Fluids (the “EW System”) in Tyson Food’s Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EW System trial was completed. The trial yielded significant results in killing salmonella on the processed poultry. Independent testing analysis conducted by ABC Research, Inc., in Gainesville, Florida, revealed pre-chill microbial reduction was significantly below the Food Safety Inspection Services (the enforcement arm of the USDA) allowable limit.





From these results we successfully completed Phase I of our USDA Online Reprocessing (“OLR”) Certification. The EAU Technologies OLR intervention also tested well showing a statistically significant difference between control and test groups.





In 2008, EAU signed a lease agreement with Fieldale Farms, a large poultry producer in northern Georgia, to install our equipment at their facility.  We completed the OLR data gathering stage and submitted our findings to the USDA for OLR approval.  EAU received a letter from the USDA approving our fluids for use in the plant for OLR applications.





We began receiving revenues of approximately $27,500 per month from this facility in February 2009.  Per the terms of the agreement, we were to help the plant achieve Category 1 compliance for post-chill microbial performance.  The plant completed a USDA test set October 2009 with the result that it met the Category 1 requirements for that test set.  Fieldale indicated that it was suspending the agreement as of November 23, 2009 and ceased making payments.  In February 2011, the Company filed a complaint in the Superior Court of Cobb County Georgia against Fieldale for breaching the agreement.





Agriculture.In 2006 we made initial sales to Water Science, LLC, a Florida limited liability company (“Water Science”) for the Latin American markets.  Water Science is a major shareholder of the Company and its managing member, Peter Ullrich, is a director of our company.  We have shipped a total of five P-1200s to Ecuador, Mexico, Columbia, Costa Rica and Holland for trials and Water Science internal use.  Water Science is utilizing the technology for its own flower and agricultural endeavors.  Further studies are being done as each country that has the Empowered WaterTM technology ramps up for their own outside sales efforts.





We have obtained patent protection on four separate uses of electrolyzed fluids (cleaning and disinfecting eggs, carpet cleaning, mold remediation and poultry processing).  Those applications are how the fluids are used and how they are stabilized for use in different applications. Additionally, we have a patent pending on the electrolysis equipment and several provisional patent pending applications filed to protect new processes and products, as described herein.


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Financial Position and Results of Operations





The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements.





Financial Position





The Company had $73,536 in cash as of March 31, 2011, compared to $178,992 at December 31, 2010.  The Company has received and recorded $329,630 in advance deposits from Water Science on machine orders at March 31, 2011.  This will be reduced as the Company delivers machines on order to Water Science, a related party.  Water Science, who has exclusive rights to sell our products in Central and South America, is also an affiliate of the Company, and by agreement may purchase machinery from us at cost plus 25 percent.  At March 31, 2011, our stockholders’ deficit was $4,741,019.





Results of Operationsfor the Three months ended March 31, 2011 and 2010





Revenues and Net Income





The Company had total revenues of $630,642 for the three months ended March 31, 2011, which represents an increase from the $162,402 in total revenues for the same period one year earlier.The majority of the revenues are from the sale of our EW systems in the CIP market and leasing revenues from our EW water systems in the dairy market.  We expect our revenues to fluctuate during the upcoming months due to the timing of new systems sold as we continue to ramp up our sales channels.





Net loss from continuing operations for the three months ended March 31, 2011 was $700,830, or a loss of $0.04 per share, compared with a net loss from continuing operations of $223,271, or $0.01 per share for the same period in 2010.  For the three months ended March 31, 2010 the Company recognized a gain of $572,348 due to the change in the fair market value of the derivative liability.  Excluding the gain on the derivative liability the Company would have had a net loss of $795,619, or $0.04 per share in 2010.  The current quarter net loss includes $299,996 in interest expense, compared to $96,265 in 2010.  This is due to interest expense related to the discounting of the notes payable related to certain additional warrants that were issued.  The Company recognized $172,855 in interest expense related to the debt discount for the three months ended March 31, 2011.





General and Administrative Expenses





The Company’s general and administrative expenses decreased approximately 20% as compared to the prior year.  Expenses totaled $599,783 during the three months ended March 31, 2011, compared to $750,332 during the three months ended March 31, 2010.  General and administrative expense for 2011 consists primarily of payroll and other compensation expense of $326,926, legal and professional fees of $66,330, expense related to granting of stock and options of $42,087 and insurance expense of $86,644.





Research and Development





Research and development expenses incurred during the three month period ended March 31, 2011 decreased $63,751, from $66,751 in 2010 to $3,000 in 2011.  We expect to increase our research expense while the Company continues to conduct research to improve its products and their performance.  The Company believes it has developed proven products that have commercial value in its targeted markets.


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Liquidity and Capital Resources





The Company had $73,536 in cash as of March 31, 2011, compared to $178,992 at December 31, 2010.  We have had continuing operating losses of $700,830 for the three months ended March 31, 2011, compared with operating losses of $223,271 for the three months ended March 31, 2010.  The net loss per share for the first three months of 2011 and 2010 was $0.04 and $0.01 per share, respectively.  The majority of the difference attributable to the recording of the derivative liability to fair market value as described above.




Net cash used in operating activities in the three month period ended March 31, 2011 was $507,433, a 63% increase, compared to $311,894 for the same period in 2010.  The majority of the change in cash used for the current period was related to the recording of the debt discount, a decrease in inventory levels and the decrease in advanced deposits due to the sale of equipment and the increase in accrued interest.





At March 31, 2011, the Company’s net inventory was $1,427,149, representing a decrease of approximately $381,000, from the $1,808,084 on hand at December 31, 2010.  The Company has finalized the sale of equipment to an international beverage company and continues to utilize the resources on hand.




The Company used $13,023 in cash flows from investing activities during the period ended March 31, 2011 as compared to $3,153 used in the same period in 2010.  The cash flows from investing activities consisted of expenditures related to intellectual property.





Cash flows from financing activities provided the Company $415,000 for the period ended March 31, 2011 compared with $450,200 provided the Company during the same period in 2010.  The Company received proceeds of $415,000 from the receipt of an advance on an issuance of a convertible note payable to a related party during the three months ended March 31, 2011.





We currently do not have sufficient funds to operate our business without additional funding.  We do not have any written agreements in place for additional funding.Our working capital requirements for the foreseeable future will vary based upon a number of factors, including, our timing in the implementation of our business plan, our growth rate and the level of our revenues.  Our current assets, along with cash generated from anticipated revenues, will not provide us with sufficient funding for the next twelve months.  Our convertible notes payable with Water Science will become due in December 2011, which will require cash of $5,265,000, plus interest, in order to satisfy the debts, if the note is not extended or converted into common stock.  We anticipate that we may need an additional $1,500,000 or more in future funding to execute our business plan over the next twelve months. Moreover, if we able to expand our sale of EW machines as anticipated, we may need significant additional working capital to fund that expansion.  We do not have arrangements in place to provide us with this funding or any additional funding. In light of these circumstances, the ability of the Company to continue as a going concern is in substantial doubt.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.





Critical Accounting Policies





The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require us to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  Note 1 of the notes to consolidated financial statements in Part II, Item 7 of the Company’s Annual Report on Form 10-K, dated December 31, 2010, describes the significant accounting policies and methods used in preparation of our consolidated financial statements.  We base our estimates on historical experience, current trends, future projections, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates.  There were no material changes in our judgments or estimates during the first quarter of 2011.


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Recent Accounting Pronouncements





None





Inflation





We do not expect the impact of inflation on operations to be significant.





Precious Metals





Raw materials used by the Company in the EW Machines include a number of precious metals and minerals. Prices of these materials can be volatile and the Company has no fixed price contracts or arrangements. The Company ordinarily does not attempt to hedge the price risk of its raw materials. Commercial deposits of certain metals that are required for the alloys used in the EW Machines are found in only a few parts of the world, and for certain materials only single sources are readily available. The availability and prices of these metals and other materials may be influenced by private or governmental cartels, changes in world politics, unstable governments in exporting nations, production interruptions, inflation and other factors. Although the Company has not experienced significant shortages of its supplies and raw materials, there can be no assurance that such shortages will not occur in the future. Any such shortages or prices fluctuations could have a material adverse effect on the Company.





Forward-Looking Statements





All forward-looking statements contained herein are deemed by the Company to be covered by and to qualify for the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. Prospective shareholders should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements include our expectations regarding working capital requirements and future funding, our expectations regarding our internal controls,expectations regarding funding commitments,our expectations regarding reductions in deposits from Water Science, future inventory levels, future test results,and plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risks associated with successfully developing our business in evolving markets, our need for additional capital, our continuing operating losses, the ability of our management to conduct distribution activities and sell products, possible failure to successfully develop new products, vulnerability to competitors due to lack of patents on our products, and other risk factors listed in our annual report on Form 10-K for the year ended December 31, 2010 and our other SEC reports. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans will be achieved.


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Item 3.   Quantitative and Qualitative Disclosures About Market Risk





A smaller reporting company is not required to provide the information required by this Item.





Item 4T.   Controls and Procedures





Disclosure Controls and Procedures





The Company has evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2011, pursuant to Exchange Act Rule 15d-15.  Based upon that evaluation, the principal executive and financial officers concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.




A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake.





Changes to Internal Control Over Financial Reporting





There have been no significant changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, or other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation.





PART II – OTHER INFORMATION





Item 1. Legal Proceedings





On February 11, 2011, the Company filed a Verified Complaint for Damages (“Complaint”) in the Superior Court of Cobb County State of Georgia against Fieldale Farms Corporation (“Fieldale”).  The lawsuit seeks approximately $1,100,000 plus interest, which is the amount due under the agreement and an additional amount not less than $100,000 for the costs of EAU’s replacement of Fieldale equipment.  Pursuant to the agreement the Company leased and installed certain equipment to Fieldale.  In exchange, Fieldale agreed to pay the Company a monthly rental fee for a guaranteed term of four (4) years.  Although the Company and the Company’s technology performed in accordance with the agreement, Fieldale Farms cancelled the agreement in the fourth quarter of 2009.  While we are unable at this time to estimate the likelihood of a favorable outcome in this matter, we intend to prosecute vigorously our claims against Fieldale.  In March 2011, the Company received an Answer and Counterclaim, wherein Fieldale alleges that the Company caused damage to other equipment and property of Fieldale and seeks to recover its actual damages estimated at $400,000.  The Company disputes the claim and will vigorously defend against the claim.


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Item 1A. Risk Factors





As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





None





Item 3. Defaults Upon Senior Securities





None





Item 4.  Reserved





Item 5.  Other Information





In January, February and March, 2011, the Company obtained unsecured short term loans of $150,000, $150,000 and $115,000, respectively, from Peter Ullrich a member of the Board of Directors of the Company.  The final agreements to document the loan have not been signed, and the material terms are not final. It is anticipated that the final loan will be at 10% simple interest and conversion rights into Company common stock at an exercise price of $1.00 per share.  The material terms of the final agreement will be disclosed in subsequent filings with the Securities and Exchange Commission.





Item 6. Exhibits





EXHIBIT NO.

DESCRIPTION OF EXHIBIT3(i).1

Certificate of Incorporation (Incorporated by reference from registration statement on Form SB-1 filed with the SEC on July 29, 2002 (File No. 333-86830)3(i).2

Certificate of Amendment of Certificate of Incorporation (Incorporated by reference from registration statement on Form SB-1 filed with the Securities and Exchange Commission on July 29, 2002 (File No. 333-86830)3(i).3

Certificate of Amendment of Certificate of Incorporation (Incorporated by reference from current report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2007)3(ii).1

Amended and Bylaws (Incorporated by reference from registration statement on current report on Form 8-K filed with the Securities and Exchange Commission on September 12, 2007)10.43

Form of Amended Stock Option Agreement for Employees, Officers and a director. (Incorporated by reference to Ex. 10.43 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2011)31.1

Certification by Wade R. Bradley under Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification by Brian D. Heinhold under Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Wade R. Bradley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant cause this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Dated: May 16, 2011





EAU TECHNOLOGIES, INC.By:
/s/ Wade R. BradleyWade R. BradleyChief Executive Officer(Principal Executive Officer)By:
/s/ Brian D. HeinholdBrian D. HeinholdChief Financial Officer(Principal Financial Officer)


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