U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB/A
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from..............to.................
Commission file number 0-30544
WATER CHEF, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 86-0515678
------------------------------ -----------------
(State of other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
1007 Glen Cove Avenue, Suite 1, Glen Head, New York 11545
--------------------------------------
(Address of principal executive offices)
516-656-0059
-------------------------
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange act during the past 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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS November 21, 2002
----- -----------------
Common
Par value $0.001 per share 89,564,286
WATERCHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 2
At September 30, 2002
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended September 30, 2002 and 2001
For the Nine Months Ended September 30, 2002 and 2001
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 4
For the Nine Months Ended September 30, 2002 and 2001
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 5 - 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11 - 13
ITEM 3 - CONTROLS AND PROCEDURES 13
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 14
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS N/A
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE 16
CERTIFICATION 17
EXHIBIT
1
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2002
(Unaudited)
ASSETS
(As Restated
See Note 2)
------------
CURRENT ASSETS:
Cash $ 41,753
Inventories 185,500
Prepaid expenses and other current assets 3,163
------------
TOTAL CURRENT ASSETS 230,416
PATENTS AND TRADEMARKS (net of
accumulated amortization of $2,771) 23,284
------------
$ 253,700
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 387,128
Accrued expenses and other current liabilities 640,573
Notes payable (including accrued interest of $224,264) 844,056
Common stock to be issued 1,204,118
------------
TOTAL CURRENT LIABILITIES 3,075,875
LONG-TERM LIABILITIES
Loans payable to shareholder (including accrued interest of $51,518) 424,299
------------
TOTAL LIABILITIES 3,500,174
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
145,500 shares issued and outstanding,
liquidation preference $990,000 146
Common stock, $.001 par value;
90,000,000 shares authorized;
89,564,286 shares issued and outstanding 89,564
Additional paid-in capital 12,583,518
Stock subscription receivable (45,500)
Treasury stock, 4,400 common shares, at cost (5,768)
Accumulated deficit through December 31, 2001 (14,531,596)
Accumulated deficit (1,336,838)
------------
TOTAL STOCKHOLDERS' DEFICIT (3,246,474)
------------
$ 253,700
============
See notes to condensed financial statements.
2
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
(As Restated (As Restated (As Restated (As Restated
See Note 2) See Note 2) See Note 2) See Note 2)
Net Sales $ -- $ -- $ 40,000 $ --
------------ ------------ ------------ -------------
Costs and Expenses
Cost of sales 12,000 28,875 63,680 28,875
Selling, general and administrative 150,460 304,705 518,797 614,999
Research and development -- 53,125 -- 159,375
Non-dilution agreement termination costs (149,240) -- 447,718 --
Loss (gain) on settlement of debt 21,900 (3,390) 206,150 (69,021)
Interest expense 37,868 111,114 140,493 200,946
Loss contingency -- -- -- 242,035
------------ ------------ ------------ -------------
72,988 494,429 1,376,838 1,177,209
------------ ------------ ------------ -------------
Loss from continuing operations (72,988) (494,429) (1,336,838) (1,177,209)
------------ ------------ ------------ -------------
Discontinued operations:
Loss from discontinued operations -- (49,177) -- (36,003)
------------ ------------ ------------ -------------
Net Loss (72,988) (543,606) (1,336,838) (1,213,212)
Preferred stock dividends (27,075) (27,075) (81,225) (81,225)
------------ ------------ ------------ -------------
Net Loss Applicable to
Common Stockholders $ (100,063) $ (570,681) $ (1,418,063) $ (1,294,437)
============ ============ ============ =============
Basic and Diluted Loss Per Common Share:
Continuing operations $ (0.00) $ (0.01) $ (0.02) $ (0.01)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------ ------------ ------------- -------------
$ (0.00) $ (0.01) $ (0.02) $ (0.01)
============ ============ ============= =============
Weighted Average Common Shares Outstanding -
Basic and Diluted 89,564,286 82,776,924 88,372,478 79,054,222
============ ============ ============ =============
See notes to condensed financial statements.
3
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2002 2001
----------- -----------
(As Restated (As Restated
See Note 2) See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,336,838) $(1,213,212)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,389 225
Non-cash compensation 36,000 209,050
Amortization of debt discount -- 62,000
Common stock issued for non-payment
of note and interest payable -- 12,300
Loss on settlement of debt 206,150 (69,021)
Non-dilution agreement termination cost 447,718 --
Change in assets and liabilities
Inventories (26,250) (419,348)
Prepaid expenses and other current assets 56,500 (26,396)
Accounts payable and accrued expenses 262,574 563,392
----------- -----------
Net cash used in continuing operations (352,757) (881,010)
Net cash provided by (used in) discontinued operations -- (275,598)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (352,757) (1,156,608)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment -- (551)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- 450,000
Repayment of notes payable -- (25,000)
Proceeds from sale of preferred and common stock 359,000 621,426
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 359,000 1,046,426
----------- -----------
NET INCREASE (DECREASE) IN CASH 6,243 (110,733)
CASH AT BEGINNING OF PERIOD 35,512 158,100
----------- -----------
CASH AT END OF PERIOD $ 41,755 $ 47,367
=========== ===========
See notes to condensed financial statements.
4
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. The
results of operations for the nine month period ended September 30, 2002,
are not necessarily indicative of the operating results that may be
expected for the year ending December 31, 2002. These financial statements
should be read in conjunction with the Company's December 31, 2001 Form
10-KSB, financial statements and accompanying notes thereto.
In November 2001, the Company sold its water cooler and filter operations
segment. Accordingly, this segment of the Company's business is reported as
discontinued operations for the three and nine months ended September 30,
2002 and 2001. The three and nine months ended September 30, 2001 has been
restated to reflect such operations as discontinued.
The Company's condensed statements of operations and cash flows for the
nine-month period ended September 30, 2002 represent the cumulative from
inception information required by Statement of Financial Accounting
Standards ("SFAS") No. 7, "Development Stage Enterprises."
2. RESTATEMENT
As a result of certain adjustments to the annual 10-KSB financial
statements for the years ended December 31, 2002 and 2001, the Company is
restating its Form 10-QSB filings included in those periods. The September
30, 2002 and 2001 results were restated as a result of such adjustments.
The Company has corrected an error relating to the accrual of non-dilution
agreement termination cost and recording of certain other expenses and
adjustments. The Company recorded a reduction of expenses of $149,241 and
$559,856 for the three and nine months period ended September 30, 2002,
respectively, as a result of these adjustments.
The Company has corrected an error relating to the accrual of loss (gain)
on settlement of debt and recording of certain other expenses and
adjustments. The Company recorded additional expenses of $13,933 and
$165,589 for the three and nine months period ended September 30, 2001,
respectively, as a result of these adjustments
The effect of the preceding adjustments on net loss and net loss per share
for the three and nine-month periods ended September 30, 2002 and 2001 are
as follows:
Three Months Ended September 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
As As
Previously As Previously As
Reported Adjusted Reported Adjusted
----------- ----------- ----------- -----------
Net loss applicable to common stock $ (249,304) $ (100,063) $ (556,748) $ (570,681)
=========== =========== =========== ===========
Net loss per share $ (0.02) $ (0.01) $ (0.00) $ (0.00)
=========== =========== =========== ===========
Nine Months Ended September 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
As As
Previously As Previously As
Reported Adjusted Reported Adjusted
----------- ----------- ----------- -----------
Net loss applicable to common stock $(1,977,919) $(1,418,063) $(1,128,848) $(1,294,437)
=========== =========== =========== ===========
Net loss per share $ (0.02) $ (0.02) $ (0.01) $ (0.01)
=========== =========== =========== ===========
5
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered
recurring losses. Additionally, the Company had working capital and total
capital deficiencies of approximately $2,845,000 and $3,247,000,
respectively, at September 30, 2002. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters include restructuring its
existing debt, settling its existing debt by issuing shares of its common
stock, raising additional capital through future issuances of stock and /
or debentures. The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern.
4. RECENT ACCOUNTING PRONOUNCEMENTS
a. Effective January 1, 2002, the Company adopted SFAS No. 142 "Goodwill
and Other Intangible Assets." Under SFAS No. 142, goodwill acquired in
the acquisition will not be amortized but instead be tested annually
for impairment. The adoption of SFAS No. 142 had no impact on the
Company's financial position or results of operations.
b. In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS 144 superceded Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-lived Assets and Assets to be Disposed of" and the accounting
and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The provisions
of SFAS 144 are effective for fiscal years beginning after December
15, 2001.
The most significant changes made by SFAS 144 are (1) goodwill is
removed from its scope and, therefore, it eliminates the requirements
of SFAS 121 to allocate goodwill to long-lived assets to be tested for
impairment, and (2) it describes a probability-weighted cash flow
estimation approach to apply to situations in which alternative
courses of action to recover the carrying amount of long- lived assets
are under consideration or a range is estimated for the amount of
possible future cash flows. The Company's adoption of SFAS 144 on
January 1, 2002 did not have a material effect on its financial
position or results of operations.
c. On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections." The rescission of SFAS No.4, "Reporting Gains
and Losses from Extinguishments, and SFAS No.64, "Extinguishments of
Debt Made to Satisfy Sinking Fund Requirements," which amended SFAS
No.4 will affect income statement classification of gains and losses
from extinguishment of debt. SFAS No.4 requires that gains and losses
from extinguishment of debt be classified as an extraordinary item, if
material. Under SFAS No. 145, extinguishment of debt is now considered
a risk management strategy by the reporting enterprise and the FASB
does not believe it should be considered extraordinary under the
criteria in APB Opinion No.30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria in APB Opinion No. 30.
SFAS No. 145 will be effective for fiscal years beginning after May
15, 2002. The Company has not yet determined the impact of SFAS No.145
on its financial position and results of operations, if any.
6
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
d. In June 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullified Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when
the liability is incurred. A fundamental conclusion reached by the
FASB in this statement is that an entity's commitment to a plan, by
itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company has not yet determined the impact
of SFAS No.146 on its financial position and results of operations, if
any.
5. PREFERRED STOCK:
- At September 30, 2002, dividends in arrears on preferred stock was
$747,331.
- In September 2002, the Company's Board of Directors approved the
Private Placement Sale of 125,000 shares of One-Year 15% Convertible
Preferred stock at $1.00 per share. These shares convert to the
Company's common stock at $0.03 per share, or 33.33 shares of common
for each $1.00 invested. All accrued dividends payable are payable in
shares of common stock.
In September 2002, the Company sold 37,000 shares for $37,000. These
funds are not refundable to the investor, as such, these amounts have
been recorded as "Stock to be issued" in the accompanying financial
statements.
6. COMMON STOCK
- In February 2002, the Company's Board of Directors approved the
increase in the number of authorized common shares to 190,000,000
pending shareholders' approval.
- During the nine months ended September 30, 2002, the Company sold
2,500,000 shares of its common stock, for net proceeds of $100,000.
7
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. COMMON STOCK (Continued)
- During the nine months ended September 30, 2002, the Company issued an
aggregate of 450,000 shares of its common stock for consulting
services totaling $36,000.
- During the nine months ended September 30, 2002, the Company received
$200,000 for 4,000,000 shares of its common stock to be sold, which
shall be issued upon the approval of the shareholders on the increase
of the authorized capital shares of the Company. These funds are not
refundable to the investor, as such these amounts have been recorded
as "Stock to be issued" in the accompanying financial statements.
These shares are not included for basic and diluted earnings per share
calculations.
- During the nine months ended September 2002, the Company collected
$22,000 of the stock subscription receivable.
7. COMMON STOCK TO BE ISSUED
During the quarter ended September 30, 2002, the Company recorded a
liability for common stock to be issued for the following transactions:
a. Cash
During the year end December 31, 2002, the Company received $200,000 for
4,000,000 shares of its common stock. These shares, will be issued upon the
approval by the stockholders on the increase in the number of authorized
common shares of the Company. These shares are not included in the loss per
share calculations.
In September 2002, the Company sold 37,000 shares for $37,000. These funds
are not refundable to the investor, as such, these amounts have been
recorded as "Stock to be issued" in the accompanying financial statements.
b. Non-Dilution Agreement Termination Cost
In May 2002, the Company agreed to issue to the Company's President and
Chief Executive Officer, and to related parties of such, an aggregate of
14,923,958 shares of its common stock in connection with the voluntary
surrender of a non-dilution agreement that the President had entered into
with the Company in June 1997. These shares are not included in the loss
per share calculations.
Since the issuance of these shares is subject to stockholder approval, the
measurement date for purposes of valuation will be established when such
stockholder approval has been obtained. Accordingly, the Company is
utilizing variable accounting to determine the value of these shares and
the related liability is included in common stock to be issued. The Company
has recorded the liability of approximately $448,000 based upon the market
price of its shares as of September 30, 2002.
c. Settlement of Debt
The Company was a defendant in an action brought by certain debenture
holders (The "Bridge Loans") in New Hampshire Superior Court seeking
repayment of $300,000 of debenture principal together with interest from
1997, and the issuance of penalty shares for non payment of principal and
interest. In addition, the plaintiff's claim that they had suffered by the
Company's failure to register the shares issued under the warrant
agreement.
The Company had interposed defenses and counterclaims. In June 1997, in
connection with the debentures, the Company had issued 6,667 shares of
common stock for every $1,000 of debt at a price of $0.15 per share. The
Company claimed that it was owed the $300,000 consideration for such
shares. In addition, the Company had issued warrants for the purchase of
2,500,000 shares of common stock at an exercise price of $0.15 per share
exercisable until March 2002.
8
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. COMMON STOCK TO BE ISSUED (Continued)
Furthermore, the Company had issued another 100,000 shares of common stock
to each debenture holder, or 1,300,000 shares, at a price of $0.15 per
share.
In the second quarter of 2002, the Company and the Bridge Lenders
participating in the legal action, settled this dispute requiring the
Company to: (i) Issue 3,000,000 shares of common stock valued at $497,500
in lieu of the principal and interest owed to the debenture holders who
participated ("participants") in this legal action. The Company prior to
the settlement had recorded the debentures at $300,000, plus accrued
interest of $39,400, for a total of $339,400. The difference between the
$497,500 settlement and the $339,400, or $158,100, is recorded as a loss on
settlement of debt. (ii) Extend the warrants attached to the participants'
debentures for another two years until March 2004, for which the Company
has recorded a non cash expense charge of $111,000 (see Note 11) and (iii)
Issue additional shares if the product of the $497,500, as valued for the
3,000,000 shares above, divided by the average daily trading price for the
30 days subsequent to the settlement, is greater than the original
3,000,000 shares. Due to these requirements the Company is obligated to
issue an additional 14,037,671 shares, due to the average trading price of
$0.0292 in the 30 days subsequent to the settlement. As of September 30,
2002, neither the 3,000,000 nor the additional shares of 14,037,671 have
been issued, and accordingly the Company has recorded these shares as
common stock to be issued valued at $497,500. These shares are not included
in the loss per share calculations.
The debenture holders that did not participate ("non-participating
debentures") in the above legal action had total debentures of $75,000,
plus accrued interest of $9,850 as of the settlement date, totaling
$84,850. In conjunction with the above settlement, the Company settled
these outstanding non-participating debentures, plus accrued interest, with
the issuance of 750,000 shares of common stock valued at $0.0292 per share,
or $21,900. The terms of their warrants were not extended, nor are they
entitled to receive additional shares based on the Company's common stock
achieving a certain average trading price 30 days subsequent to the
settlement with the participating debenture holders. The Company has
recorded a $62,950 gain with regard to the settlement of the non-
participating debentures. As of September 30, 2002, the 750,000 shares have
not been issued, and accordingly the Company has recorded these shares as
common stock to be issued valued at $21,900. These shares are not included
in the loss per share calculations.
The total shares to be issued upon stockholder approval of the increase in
the authorized stock of the Company as a result of the transactions
described above aggregate 36,711,629.
8. COMMITMENTS AND CONTINGENCIES
- The Company is a defendant in an action, brought by a customer,
relating to a series of contracts that the Company entered into. These
contracts were with the Company's discontinued water cooler and filter
operation. Such operations were sold in November 2001, however legal
actions with regards to the operations prior to the sale, remain the
Company's responsibility. The customer claims that the Company
breached these contracts by shipping certain goods that did not
conform to the contract. Most of the damages that the customer seeks
consist of lost business profits. Company management, and legal
counsel, believe that the action is without merit. The Company has
made a $5,000 settlement offer to the customer, for the nuisance value
of the lawsuit. The customer has rejected such offer, and has proposed
a $75,000 settlement. No provision has been provided for at September
30, 2002.
9
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
- In May 2001, the Company entered a distribution agreement with a
company (the "Sub distributor") based in the State of Jordan. The Sub
distributor has agreed to purchase no fewer than 100 units of the
Company's "PureSafe Water Station", in the calendar year commencing
January 1, 2001. A minimum purchase of 50 units are required to be
purchased in each of the subsequent years commencing January 1, 2002
and 2003, respectively. During the year ended December 31, 2001, 18
units have been shipped under this agreement. The sale will be
recognized when the Company receives payments. The Company has
recorded the costs of the inventory shipped in cost of sales, since
return of the items is uncertain.
The Company is a plaintiff in a criminal action brought before the
court in the Kingdom of Jordan, claiming the full payment for PureSafe
Water Stations shipped, its related costs and damages. Criminal
charges have been brought against a former sub-distributor and against
two management employees of the Jordan National Bank and against the
Jordan National Bank. A trial date has not yet been set.
9. SUBSEQUENT EVENT
In October 2002 the Company sold an additional $35,500 of their 15%
Convertible Preferred Stock at $1.00 per share.
10
ITEM II: Management's Discussion and Analysis or Plan of Operations
Introduction:
Until the fourth quarter of 2001 Water Chef was engaged in the
manufacture and marketing of water coolers and water purification and
filtration products. In the fourth quarter of 2001, the Company
negotiated the sale of this business in order to focus its activities
on its PureSafe line of business. The PureSafe Water Station has been
designed by the Company to meet the needs of communities who either do
not have access to municipally treated water, or for those whose
municipal systems have been compromised, either by environmental
factors or because of faulty design or maintenance.
Results of Operations
During 2001 Water Chef made the strategic decision to exit the water
cooler and consumer filter segments of its business in order to
concentrate its resources on the development of the market for the
PureSafe Water Station. With the sale of these assets consummated in
December 2001, the Company's water cooler and consumer businesses are
reported as discontinued operations for the three month and nine month
periods ended September 30, 2001, resulting in a loss from discontinued
operations of $49,177 and $36,003 for the three and nine month periods
respectively. The discontinued operations were sold in December 2001,
and no operations existed for theses businesses in 2002.
For the three month periods ended September 30, 2002 and September 30,
2001 Water Chef reported no revenues. For the nine month periods ended
September 30, 2002 and September 30, 2001 the Company reported revenues
of $40,000 and $0 respectively. The PureSafe unit purchased in the
first quarter of 2002 by White Cross Partners for placement in Honduras
was delivered in the Third Quarter, the personnel responsible for its
operation and maintenance were trained, and the Catholic Diocese of
Tegucigalpa is producing pure water for the people on a daily basis.
White Cross Partners expects to purchase additional units in the Fourth
Quarter.
Cost of sales for the three and nine month periods ended September 30,
2002 were $12,000 and $63,680, respectively, compared to $28,875 in the
three and nine month periods ended September 30, 2001.
Selling, general and administrative expenses for the three months ended
September 30, 2002 were $150,460 compared to $304,705 for the three
months ended September 30, 2001, a decrease of $154,245 or 51%; and
$518,797 for the nine months ended September 30, 2002 compared to
$614,999 for the nine months ended September 30, 2001, a decrease of
$96,202 or 16%. The reduction in expenses is primarily due to reduced
staffing and consulting costs and lower rent, business travel and
marketing expenses.
Water Chef has incurred no research and development expense in 2002,
compared to $53,125 and $159,375 for the three and nine month periods
ended September 30, 2001. During the first nine months of 2002 the
Company negotiated the settlement of debt and accrued interest for
stock, which resulted in a reported loss of $206,150 in the nine months
ended September 30, 2002.
11
During the nine months ended September 30, 2002 the Company agreed to
issue to the President and Chief Executive Officer, and related
parties, an aggregate 14,923,958 shares of its common stock under the
terms of a non-dilution agreement which the Company and the President
had entered into in 1997. The President subsequently, on behalf of
himself and all related parties, voluntarily surrendered all future
rights under this agreement. This non-cash event was valued at the
then-current market price of $0.03 per share or $447,000, and
represents a non-cash cost to the Company. During the nine months ended
September 30, 2002, the Company did not issue any shares under the
terms of this agreement.
Interest expense for the three months ended September 30, 2002 was
$37,868 compared to $111,114 for the three months ended September 30,
2001, a decrease of $73,246 or 66%. The reduction in interest expenses
for the quarter ended September 30, 2002 as compared to September 30,
2001, is primarily due to the amortization of a debt discount that
occurred in the third as well as the second quarter of 2001. The
Company has interest expense of $140,493 for the nine months ended
September 30, 2002 compared to $200,946 for the nine months ended
September 30, 2001, a decrease of $60,453 or 30%. In the nine months
ended September 30, 2002 the Company settled various notes payable, and
issued additional notes payable, that are currently outstanding as of
September 30, 2002. For the nine months ended September 30, 2001, the
Company's interest expense of $200,946, includes $62,000 of amortized
debt discount. For the nine months ended September 30, 2002, the
Company's interest expense of $140,493 does not include the
amortization of debt discount.
Liquidity and Capital Resources
At September 30, 2002, the Company had a stockholders' deficit of
approximately $3,247,000 and a working capital deficit of approximately
$2,845,000. In addition the Company has incurred losses from continuing
operations of approximately $73,000 and $1,377,000 for the three and
nine month periods ended September 30, 2002. The accompanying financial
statements have been prepared assuming that the Company will continue
as a going concern. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
with respect to these issues include restructuring its existing debt,
raising additional capital through future issuances of stock and/or
equity, and finding sufficient profitable markets for its products to
generate sufficient cash to honor all of its obligations. The
accompanying financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going
concern.
In the second quarter 2002 the Company reached a negotiated settlement
concerning certain debentures and accrued interest payable aggregating
$339,400. The terms of the settlement agreement call for the issuance
of 3,000,000 shares of common stock to be valued at $497,500. The
difference between the $497,500 settlement and the $339,400, or
$158,100, is recorded as a loss on settlement of debt. An additional
14,037,671 shares are to be issued due to Company's per share stock
price over a 30 trading day measurement period, not having achieved the
$0.15 per share value as set by the initial valuation of the 3,000,000
shares at $497,500. The remaining conditions of the settlement,
requires that the Company extend the exercise period for 1,666,666
warrants, attached to these notes payable when originally issued in May
1997, for an additional two years through June 2004, and that the
Company files a registration statement with the Securities and Exchange
Commission within 180 days of the agreement, to register the 17,037,671
shares. As of September 30, 2002, neither the 3,000,000 nor the
additional shares of 14,037,671 have been issued Debenture holders not
12
included in the above settlement. ("non- participating debentures"),
settled their debentures of $75,000, plus accrued interest of $9,850,
with the issuance of 750,000 shares of common stock valued at $0.0292
per share. The terms of their warrants were not extended, nor are they
entitled to receive additional shares based of the Company's common
stock achieving a certain average trading price 30 days subsequent to
the settlement with the participating debenture holders. The Company
has recorded a $62,950 gain with regard to the settlement of the
non-participating debentures. As of September 30, 2002, the 750,000
shares have not been issued.
During the nine months ended September 30, 2002 the Company raised
$100,000 from the sale of 2,500,000 shares of common stock. In
addition, the Company sold non refundable subscriptions to purchase
4,000,000 shares of common stock at $0.05 per share, for a total
receipt of $200,000, and 37,000 shares of 15% Convertible Preferred
stock for $37,000. Since these shares have not been issued, they have
been recorded as "Stock to be issued" in the accompanying financial
statements. These shares are not included for basic and diluted
earnings per share calculations. During the nine months ended September
30, 2002 the Company received payment of $22,000 for shares issued in
2001, which was accounted for as stock subscription receivable.
The Company also issued 450,000 shares of common stock, in lieu of cash
for consulting services performed.
During the nine month period ended September 30, 2001 the Company
raised $584,770 through the sale of 11,536,246 shares of common stock
and settled accounts payable, notes payable and accrued interest of
$120, 595 with the issuance of 1,210,000 shares of common stock.
In May 2002, the Company issued to its President and Chief Executive
Officer, and related parties, an aggregate 14,923,958 shares of common
stock, in connection with the voluntary surrender of a non- dilution
agreement that the President had entered into with the Company in June
1997.
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures conducted
within 90 days of the date of filing this quarterly report on Form 10-QSB, our
Chief Executive Officer and the Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-(c) and 15d-(c)
promulgated under the Securities Exchange Act of 1934 are effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, and no corrective actions with regard to significant deficiencies
and material weaknesses were taken.
13
Part II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is a defendant in an action brought by a customer relating
to contracts between the Company and the customer. These contracts,
covering the period 1996 to 1998, were with the Company's discontinued
water cooler and consumer filter operation. These segments were sold in
December 2001, however legal actions with regard to these operations
prior to the sale remain the Company's responsibility. The customer
claims breach of contract, maintaining that the Company shipped goods
that did not meet the customer's specification. The customer seeks
damages in the form of lost opportunity and lost business profits. The
Company and its legal counsel believe that the action is without merit.
The Company has made a $5,000 settlement offer, for the nuisance value
of the case. The customer refused the offer, and has proposed a $75,000
settlement. No provision has been provided for at September 30, 2002.
The Company is a plaintiff in a criminal action brought before the
court in the Kingdom of Jordan, claiming the full payment for PureSafe
Water Stations shipped, its related costs and damages. Criminal charges
have been brought against a former sub-distributor and against two
management employees of the Jordan National Bank and against the Jordan
National Bank. A trial date has not yet been set.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
At September 30, 2002, dividends in arrears on preferred stock was
$747,331.
In September 2002, the Company's Board of Directors approved the
Private Placement Sale of 125,000 shares of One-Year 15% Convertible
Preferred stock at $1.00 per share. These shares convert to the
Company's common stock at $0.03 per share, or 33.33 shares of common
for each $1.00 invested. All accrued dividends payable are payable in
shares of common stock.
In September 2002, the Company sold 37,000 shares for $37,000. These
funds are not refundable to the investor, as such, these amounts have
been recorded as "Stock to be issued" in the accompanying financial
statements.
In February 2002, the Company's Board of Directors approved the
increase in the number of authorized common shares to 190,000,000
pending shareholders' approval.
During the nine months ended September 30, 2002, the Company sold
2,500,000 shares of its common stock, for net proceeds of $100,000.
During the nine months ended September 30, 2002, the Company issued an
aggregate of 450,000 shares of its common stock for consulting services
totaling $36,000.
During the nine months ended September 30, 2002, the Company received
$200,000 for 4,000,000 shares of its common stock to be sold, which
shall be issued upon the approval of the shareholders on the increase
of the authorized capital shares of the Company. These funds are not
refundable to the investor, as such these amounts have been recorded as
"Stock to be issued" in the accompanying financial statements. These
shares are not included for basic and diluted earnings per share
calculations.
During the nine months ended September 2002, the Company collected
$22,000 of the stock subscription receivable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
A preliminary Proxy for the purpose of increasing the authorized common
stock of the Corporation was submitted to the SEC, whose questions and
comments are being addressed before resubmission. Upon approval by the
SEC, the proxy will be mailed to the shareholders and a vote by the
shareholders will be scheduled.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
99.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended September 30,
2002.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
WaterChef, Inc.
July 9, 2003 /s/ David A. Conway
Date ----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
16
CERTIFICATION
I, David A. Conway, certify that:
I have reviewed this quarterly report on Form 10-QSB of WaterChef, Inc.;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; Evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in our financial controls; and Any fraud,
whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ David A. Conway
-----------------------
David A. Conway
President and Chief Executive Officer
and Chief Financial Officer
July 9, 2003
17