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 The Company is the parent of Verity Farms II, Inc. ("Verity Farms II"), AquaLiv, Inc., and Focus Systems, Inc. ("Focus Systems"). Verity Farms II is dedicated to providing consumers with safe, high-quality and nutritious food sources through sustainable crop and livestock production. AquaLiv, Inc.'s technology alters the behavior of organisms, including plants and humans, without chemical interaction. From increased crop yields to drug-free medicine, AquaLiv, Inc. is providing innovative, ingredient-free solutions to the world's largest problems.

The company's platform technology influences biological processes naturally and without chemical interaction. To date, AquaLiv, Inc. has released products in the industries of water treatment, skincare, and agriculture. The company is primarily known for the AquaLiv Water System product which also produces the majority of the Company's revenue. Focus Systems is a technology company providing customers with remote desktop services and Voice over Internet Protocol (VoIP) phone services. Focus Systems maintains servers that house data and applications that its customers can access remotely without the need for the customers to maintain a server. The company's VoIP service utilizes the internet for phone service rather than through a traditional telecommunications company.

Verity Farms II, Inc.

On December 31, 2012, the Company entered into that certain share exchange agreement (the "Share Exchange Agremeent") by and among the Company, Verity Farms II, AquaLiv, Inc., and Focus Systems, pursuant to which the Company acquired 100% of the outstanding stock of Verity Farms II. Verity Farms II is dedicated to providing consumers with safe, high quality and nutritious food sources through sustainable crop and livestock production. Verity Farms II has built the foundation for expansion that is diversified into three distinct, yet interlinked, divisions operating six business units. The three divisions: Soil Preservation, Verity Water Systems and Consumer Products. Soil Preservation consists of Verity Farms and Verity Turf; Verity Water Systems comprises its own division; and, Consumer Products will consist of Verity Meats, Verity Produce and Verity Grains. The common goal within each business unit of Verity Farms II is to decrease chemical dependency, diminish the need for genetic modification, preserve the family farm, and ultimately, provide a nutritious, high-quality food source to consumers. Revenues generated from Verity Farms II's products for the three months ended December 31, 2012 were $0, due to the closing of the transaction occurring on the last day of the quarter and no revenue being recognized on that date.

(11) Table of Contents Verity Farms Since the 1970's, farmers associated with Verity Farms II and its subsidiaries and predecessors have dedicated their farming practices to healthy soil and crop production based upon natural practices and limited chemical usage. Since June 2011, substantial resources of people and facilities have been applied to build the organizational model to expand those efforts into an effective and efficient growth of natural healthy food products.

Verity Turf Verity Farms II has developed an environmentally friendly Organic Materials Review Institute ("ORMI") approved fertilizer to provide a natural, weed-free lawn that is safe to use and good for the environment. This product is people and pet friendly. It nurtures your grass by enhancing the natural biology of your soil.

Verity Water Systems Verity Water Systems units are maintenance-free products designed to be used directly in water lines to both revitalize the water at the molecular level and to increase water's energy-carrying capability. Different models are designed according to the water capacity needed either for personal or commercial usage.

Water unit prices run from $200 to $5000 each depending on the application.

Some of the potential benefits of Verity Water Systems include: healthier livestock and poultry through improved hydration, oxygenation and energy; plants require less water; increase in nutrient content of seed crops and produce; plants withstand extremes in hot and freezing temperatures better; significantly increased bio-availability of nutrients; longer shelf life of agricultural produce and cut flowers; decreased seed germination time; greatly improved aerobic bacterial activity; significantly reduced anaerobic bacteria; eliminates mineral deposits like calcium, iron & aragonite; reduced bio-availability of pollutants and toxins; and increased life span of water valves, pipes, hot water heaters, swamp-coolers and humidifiers.

Verity Meats Verity Meats is proud to offer all-natural meat products born & raised with pride by American Family Farmers. Working with only a core group of dedicated livestock producers throughout South Dakota, Minnesota and Iowa, Verity Farms II was able to tailor production protocols directly to end-product needs. By knowing the importance of using quality inputs for quality results, our producers follow a program that utilizes the best of animal nutrition, health, technology, and economics along with many years of practical knowledge and scientific principles. Verity Family Farmers follow defined protocols for the production of their grain. The protocols require proper preparation of the ground. Following up to three years of conditioning and cleansing of the soil, the soil is tested and must be free of more than 250 chemical residues. The grain used to feed the livestock must pass the same test before qualifying as feed for Verity livestock. The result is the highest quality meats available - raised for Verity Farms II's customer's total eating enjoyment and health.

Verity Grains Verity Grain comes from the harvest of Verity Farms Crops. These grains originate from only non-GMO seeds which are raised on soil which has tested below detectable limits for 250 known carcinogens and chemicals residues (test performed by independent labs using FDA and EPA test methods/guidelines).

Following harvest, these grains are again tested for the 250 know carcinogens and chemical residues. Those grains which test free from those carcinogens and chemicals are then Verity Farms II certified to be fed to livestock and sold for consumption.

Verity Produce Verity Produce is the newest, and could become one of the most crucial components of Verity Farms II. Verity Produce consists of fruits and vegetables which are raised for human consumption. Verity Produce has been patterned after the Verity Farms crop production program, utilizing the same concept of creating a healthy, balanced soil. This creates an optimum environment for plants to grow and flourish.

(12) Table of Contents AquaLiv, Inc.

AquaLiv, Inc.'s scientists discovered that most substances and compounds have a unique information signature that influences biological processes via a magnetic cellular mechanism (non-chemical). The company's technology records this biologically significant magnetic information (bioinformation) from a compound or substance and allows for the manipulation, combining, and subsequent transmittal to an organism. Bioinformation from a variety of sources are combined and/or altered to produce a bioinformation composite designed to influence specific biological processes. The composite can be transmitted to an organism via a variety of methods, including mineralized water, electromagnetic wave, or magnetic field.

The technology, while still at an early stage of development, already has direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine. Revenues generated from AquaLiv, Inc.'s products for the three months ended December 31, 2012 were $94,199.

AquaLiv Water System The AquaLiv Water System is a water purification and enhancement apparatus that produces a high-quality drinking water. A variety of technologies are utilized in the system to remove impurities from the water, add minerals to the water, alter the molecule to molecule bonding structure of the water molecules, reduce the surface tension, improve the Oxidation Reduction Potential, and increase the pH, dissolved oxygen, and dissolved hydrogen content in the water. Additionally, the water's bioinformation is altered to resemble spring water before processing and treatment. 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 Water System helped them decrease their insulin requirements. AquaLiv Water System testimonials are validated by a 3rd party. The AquaLiv Water System has approximately 400 users and produces approximately 99% of sales revenues.

Infotone Hydrating Mist Infotone Hydrating Mist is a skincare product designed to clear blemishes, fade wrinkles, and even skin tone. Each mister contains a ceramic bead infused with AquaLiv, Inc.'s bioinformation technology. The technology allows simple spring water to activate skin's natural healing ability resulting in clear, youthful, and glowing skin. Infotone Hydrating Mist is refillable for a full year making it an economical and sustainable skincare product. The mist is 100% natural and hypoallergenic and contains no parabens, additives, chemicals, GMOs, fragrances or artificial ingredients. The benefits of using the product are primarily derived through the elimination of a common skin parasite responsible for irritation (found on 50% of all adults), decreasing the production of melanin in cells that are overproducing and increasing skin hydration. The Infortone Hydrating Mist has approximately 850 users and produces approximately 1% of the sales revenues.

AgSmart Rice AgSmart Rice is combined service and product offering that increases rice yields by 30-60% on average (data from actual commercial usage) while decreasing the duration before harvest by approximately one month. Treated rice crops are more resistant to pests, diseases, and wind/hail damage. AgSmart Rice is 100% natural and organic standards compliant and uses no chemical fertilizers, herbicides, or pesticides. AgSmart Rice benefits rice plants by encouraging greater root growth and photosynthesis ability. AgSMart Rice has been available since 2011 and is currently used by 2 farms at no charge for their aid in AgSmart Rice's development. AgSmart Rice is not marketed due to a lack of financial resources and personnel. As of today, AgSmart Rice does not produce any revenue.

AgSmart Potato AgSmart Potato is a combined service and product offering that has shown increases in potato yields by over 100% in market value (calculated using recent size/weight values coupled with average test results between treated and untreated test plots) under initial company testing. Treated potato crops have a consistent number of potatoes compared to untreated crops, however, the average size and weight are significantly increased while the normal counts of waste-sized potatoes are greatly reduced. Treated crops have also shown to be more resistant to pests and diseases caused by bacteria and viruses. AgSmart Potato is 100% natural and organic standards compliant and uses no chemical fertilizers, herbicides, or pesticides. AgSmart Potato benefits potato plants by encouraging greater root growth and photosynthesis ability while controlling bacterial and fungal activity. The Company plans on performing further third party commercial tests of the product prior to commercial distribution. The product is still under development and not yet available to the general public.

NatuRx Medication Alternatives Based on AquaLiv, Inc.'s bioinformation technology, NatuRx formulations utilize bioinformation composites in lieu of active-molecules (drugs) for treatment. The formulations are non-toxic and have no contraindications. NatuRx formulations are in development and not yet available to the general public.

(13) Table of Contents Focus Systems, Inc.

Remote Desktop and Cloud Computing Focus System's Remote Desktop services provide authorized remote users the ability to connect to resources on an external network owned and managed by Focus Systems from any Internet-connected device. The remote user may access their account from their own device or one leased or purchased from Focus Systems. Once connected, the remote user has access to a number of software packages, made available through Focus Systems as a Microsoft product reseller, for a monthly fee. The remote user may also request that other software packages be installed to the user's virtual server and maintained by Focus Systems. The Company believes that there are inherent benefits of operating in a completely portable desktop office environment. Access to central data and shared recourses can increase productivity and reduce cost for businesses. The remote environment is controlled, managed and updated by Focus Systems 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.

Revenues generated from remote desktop, VoIP phone service, and other services for the three months ended December 31, 2012 were $1,922 and included service to approximately 20 users.

Plan of Operation With the recent acquisition of Verity Farms II, the Company is committed to the sustainability of the "family farm" and a way of life for the American family farmer. Verity Farms II, through sustainable "bio-diversity best practices" soil management programs, decrease chemical dependency and reduce the application of genetic engendered products and byproducts in food production. With the acquisition of Verity Farms II, the Company is now a vertically integrated premium natural food producer and purveyor utilizing innovative and proven food production methodologies that enhance the overall health benefits in plants, animals and human beings while improving taste and fortifying essential nutrition value.

Recent advancements in AquaLiv, Inc.'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, Inc. 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, Inc.

The technology industry, especially as it applies to the small business sector, has slowed drastically during recent years and our business has changed focus.

New service orders for both remote desktop and VoIP products have been slow since acquisition. Management is working to close down Focus Systems to focus more on its core business and reduce further liability.

Results of Operations For the Three Months Ended December 31, 2012 Compared with the Three Months Ended December 31, 2011 Revenues The revenues for the three months ended December 31, 2012 were $96,121 as compared to $139,720 in the three months ended December 31, 2011. Sales revenue as a direct result of AquaLiv, Inc. comprised of 98% of our revenue for the three months ended December 31, 2012, compared to 92.5% of our revenue for the same three months period in 2011. Service revenue, attributed to Focus Systems, accounted for the other 2% and 7.5% of our revenues for the three months ended December 31, 2012 and 2011, 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. The Company anticipates revenues to increase in future quarters due to the acquisition of Verity Farms II.

Cost of Goods Sold Cost of goods sold for the three months ended December 31, 2012 and 2011 were $12,654 (13.1% of total revenues) and $33,671 (24.1% of total revenues), respectively. The improvement in cost of goods sold is associated with outsourcing changes made to operations related to Focus Systems and changes made in the AquaLiv Water System.

Operating Expenses Operating expenses for the three months ended December 31, 2012 were $6,137,777 as compared to $173,271 for the three months ended December 31, 2011. The increase of $159,670 in consulting fees, decrease of $8,860 in management fees, decrease of $5,786 in payroll expense, increase of $44,477 in professional fees, decrease of $887 in research and development, decrease of $4,590 in travel expense, and decrease of $10,453 in general and administrative fees is due in part to the increased costs of running multiple businesses in expansion compared to the three months ended December 31, 2011. The increase of $5,790,922 in loss on goodwill impairment, Verity Farms II, was due to the one time write down of goodwill attributed to the acquisition of that business during the three months ended December 31, 2012. The Company expects operating expenses to remain higher than previously comparable quarters as the Company expands its services and incorporates the acquisition of Verity Farms II.

Other Income and Expense Interest expense for the three months ended December 31, 2012 was $10,000, as compared to $21,469 for the three months ended December 31, 2011. The decrease in interest expense was due to a decrease in net borrowing during a majority of the period and the elimination of the derivative liability of the Company.

(14) Table of Contents Net (Loss) Before Provision for Income Taxes The net loss for the three months ended December 31, 2012 was $6,017,605 as compared to $78,544 for the three months ended December 31, 2011. The increase in net loss is primarily attributed to the increase in our operating expenses and the one time write off of goodwill attributed to the Verity Farms acquisition for the three months ended December 31, 2012.

Liquidity and Capital Resources Operating expenses for the three months ended December 31, 2012 and 2011, were $6,137,777 and $173,271, respectively. The net loss for the three months ended December 30, 2012 and 2011 was $($6,017,605) and $(78,544), respectively.

As of December 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 $1,000,000, with an estimated burn rate of $85,000 per month.

Management has determined that general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy.

Going Concern We have limited working capital and limited revenues from sales of products, services, or licensing. During the three months ended December 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 (the "Board") of the Company 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.

(15) Table of Contents

[ Back To Microsoft News 's Homepage ]