U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from ________________ to _________________
Commission file number 0-30544
WATERCHEF, INC.
--------------------------------------------------------------
(Exact name of small business issuer as specified in it 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 last practicable date.
OUTSTANDING AS OF November 17, 2003
Class Common
----- ------
Par value $0.001 per share 89,559,886
WATERCHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 2
At September 30, 2003
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Nine Months Ended September 30, 2003 and 2002
For the Three Months Ended September 30, 2003 and 2002
For the Period January 1, 2002 to September 30, 2003
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 4 - 5
For the Nine Months Ended September 30, 2003
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 6
For the Nine Months Ended September 30, 2003 and 2002
For the Period January 1, 2002 to September 30, 2003
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7 - 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 14
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 - REPORTS ON FORM 8-K 14
SIGNATURE 15
INDEX OF EXHIBITS 16
i
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
AT SEPTEMBER 30, 2003
ASSETS
------
CURRENT ASSETS:
Cash $ 29,335
Prepaid expenses 6,000
Inventory 26,500
------------
TOTAL CURRENT ASSETS 61,835
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $4,625 21,430
Security deposits 3,162
------------
TOTAL OTHER ASSETS 24,592
------------
TOTAL ASSETS $ 86,427
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 269,413
Accrued expenses and other current liabilities 1,073,478
Notes payable (including accrued interest of $361,505) 1,044,727
Common stock to be issued 2,361,034
------------
TOTAL CURRENT LIABILITIES 4,748,652
LONG-TERM LIABILITIES:
Loans payable to shareholder (including accrued interest
of $75,386) 448,167
------------
TOTAL LIABILITIES 5,196,819
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 719,441 shares issued and outstanding 719
Common stock - $.001 par value; 90,000,000 shares
authorized; 89,564,286 shares issued and 89,559,886
shares outstanding 89,564
Additional paid-in capital 13,189,739
Subscription receivable (21,800)
Treasury stock, at cost - 4,400 shares of common stock (5,768)
Accumulated deficit through December 31, 2001 (14,531,596)
Deficit accumulated during development stage (3,831,250)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (5,110,392)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 86,427
============
See notes to condensed financial statements.
2
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended For the Period
September 30, September 30, January 1, 2002
---------------------------- ---------------------------- to September 30,
2003 2002 2003 2002 2003
------------ ------------ ------------ ------------ ------------
SALES $ -- $ -- $ -- $ 40,000 $ 40,000
COST OF SALES 24,000 12,000 72,000 63,680 318,430
------------ ------------ ------------ ------------ ------------
GROSS (LOSS) PROFIT (24,000) (12,000) (72,000) (23,680) (278,430)
GENERAL AND ADMINISTRATIVE
EXPENSES 216,094 150,460 621,884 518,797 1,411,004
NON-DILUTION AGREEMENT
TERMINATION COST 1,044,677 (149,240) 1,432,699 447,718 1,641,635
LOSS ON SETTLEMENT OF DEBT -- 21,900 -- 206,150 206,150
INTEREST EXPENSE 39,807 37,868 114,921 140,493 294,031
------------ ------------ ------------ ------------ ------------
NET LOSS (1,324,578) (72,988) (2,241,504) (1,336,838) (3,831,250)
PREFERRED STOCK DIVIDENDS (39,912) (27,075) (106,357) (81,225) (220,799)
------------ ------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCK $ (1,364,490) $ (100,063) $ (2,347,861) $ (1,418,063) $ (4,052,049)
============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.02) $ (0.00) $ (0.03) $ (0.02)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND
DILUTED 89,559,886 89,559,886 89,559,886 88,372,478
============ ============ ============ ============
See notes to condensed financial statements.
3
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Preferred Stock Common Stock
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
For the Nine Months Ended September 30, 2003:
---------------------------------------------
Balance - January 1, 2003 270,500 $ 271 89,564,286 $ 89,564
Proceeds from sale of preferred stock
($0.50 Per share) 75,000 75 -- --
($1.00 Per share) 150,000 150 -- --
($1.80 Per share) 11,125 10 -- --
($1.92 Per share) 781 1 -- --
($2.00 Per share) 52,500 53 -- --
($2.40 Per share) 11,250 11 -- --
Preferred stock issued for services
($1.00 Per share) 148,285 148 -- --
Collection of subscription receivable -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance - September 30, 2003 719,441 $ 719 89,564,286 $ 89,564
========== ========== ========== ==========
Additional Stock
Paid-In Subscription Treasury
Capital Receivable Stock
---------- ---------- ---------
For the Nine Months Ended September 30, 2003:
--------------------------------------------
Balance - January 1, 2003 $12,700,894 $ (37,300) $ (5,768)
Proceeds from sale of preferred stock
($0.50 Per share) 37,425 -- --
($1.00 Per share) 149,850 -- --
($1.80 Per share) 20,000 -- --
($1.92 Per share) 1,497 -- --
($2.00 Per share) 104,947 -- --
($2.40 Per share) 26,989 -- --
Preferred stock issued for services
($1.00 Per share) 148,137 -- --
Collection of subscription receivable -- 15,500 --
Net loss -- -- --
----------- ---------- ---------
Balance - September 30, 2003 $13,189,739 $ (21,800) $ (5,768)
=========== ========== =========
See notes to condensed financial statements.
4
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Accumulated Deficit
Deficit Accumulated
Through During Total
December 31, Development Stockholders'
2001 Stage Deficiency
----------- ------------ ------------
For the Nine Months Ended September 30, 2003:
---------------------------------------------
Balance - January 1, 2003 $(14,531,596) $ (1,589,746) $ (3,373,681)
Proceeds from sale of preferred stock
($0.50 Per share) -- -- 37,500
($1.00 Per share) -- -- 150,000
($1.80 Per share) -- -- 20,010
($1.92 Per share) -- -- 1,498
($2.00 Per share) -- -- 105,000
($2.40 Per share) -- -- 27,000
Preferred stock issued for services
($1.00 Per share) -- -- 148,285
Collection of subscription receivable -- -- 15,500
Net loss -- (2,241,504) (2,241,504)
------------ ----------- -----------
Balance - September 30, 2003 $(14,531,596) $(3,831,250) $(5,110,392)
============ =========== ===========
See notes to condensed financial statements.
5
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended For the Period
September 30, January 1, 2002
------------------------- to June 30,
2003 2002 2003
----------- ----------- ---------------
Cash flows from operating activities:
Net loss $(2,241,504) $(1,336,838) $(3,831,250)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 1,390 1,389 3,243
Non-cash compensation 148,283 36,000 184,283
Non-dilution agreement termination cost 1,432,699 447,718 1,641,635
Loss on settlement of debt -- 206,150 206,150
Inventory reserve -- -- 159,250
Changes in assets and liabilities:
Inventory -- (26,250) (26,500)
Prepaid expenses and other current assets (6,000) 56,500 50,500
Accounts payable, accrued expenses
and interest 315,199 299,575 802,303
----------- ----------- -----------
Net cash used IN operating ACTIVITIES (349,933) (315,756) (810,386)
----------- ----------- -----------
Cash flows from financing activities:
Receipt of stock subscription receivable 15,500 22,000 45,700
Proceeds from sale of preferred stock 341,010 -- 458,510
Proceeds from sale of common stock -- 100,000 100,000
Proceeds from sale of common stock to
be issued -- 200,000 200,000
----------- ----------- -----------
Net cash provided by financing
activities 356,510 322,000 804,210
----------- ----------- -----------
Net change in cash and cash equivalents 6,577 6,244 (6,176)
Cash and cash equivalents - Beginning of Period 22,758 35,511 35,511
----------- ----------- -----------
Cash and cash equivalents - End of Period $ 29,335 $ 41,755 $ 29,335
=========== =========== ===========
See notes to condensed financial statements.
6
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
WaterChef, Inc. (the "Company"), is a Delaware Corporation currently engaged in
the design and marketing of water dispensers and purification equipment both
inside and outside the United States.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICES
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly these financial
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary to make the financial statements not misleading have been
included. Operating results for the nine-month period ended September 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. These financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB, filed on May 23, 2003, for the year
ended December 31, 2002.
The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No.
45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the
disclosures requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for our first
quarter ending March 31, 2003. The liability recognition requirements will be
applicable prospectively to all guarantees issued or modified after December 31,
2002.
The FASB issued Statement of Financial Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 replaces the existing guidance provided by EITF 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 is to be applied prospectively to exit or disposal
actives initiated after December 31, 2002.
The FASB issued SFAS No. 148, "Accounting for Stock - Based
Compensation-Transition and disclosure - an amendment of FASB Statement No. 123"
that provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
provision of this Statement is effective for fiscal years ending after December
15, 2002. As of June 30, 2003, the Company has not issued any stock options.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: 1) mandatorily
redeemable financial instruments, 2) obligations to repurchase the issuer's
equity shares by transferring assets, and 3) obligations to issue a variable
number of shares. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003.
The Company adopted the above pronouncements during the current year and there
was no material effect on the Company's financial statements.
7
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - GOING CONCERN
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered recurring
losses and has a working capital deficiency of approximately $4,687,000 at
September 30, 2003. 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 and raising additional capital through future
issuance 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.
NOTE 4 - RECENT ACCOUNTING STANDARDS
The following pronouncements have been issued by the FASB.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement clarifies the accounting guidance on (1) derivative
instruments (including certain derivative instruments embedded in other
contracts) and (2) hedging activities that fall within the scope of the SFAS
133. SFAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in their
entirety or that contain embedded derivatives that warrant separate
accounting.SFAS 149 is effective (1) for contracts entered into or modified
after September 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after September 30, 2003. The guidance is to be applied
prospectively.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's financial statements.
NOTE 5 - 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 value of these shares as
of September 30, 2003 is $1,641,635.
8
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per share of common stock is computed based on the
weighted average number of common shares outstanding during the periods
presented.
Diluted net income per share of common stock is computed based on the weighted
average number of common shares outstanding during the periods presented, plus
any dilutive common stock equivalents. Common stock equivalents consisting of
warrants were not included in the calculation of loss per share for the nine
months ended September 30, 2003 and 2002 because their inclusion would have been
antidilutive. Total shares issuable upon the exercise of warrants and the
conversion of preferred stock for the nine months ended September 30, 2003 and
2002 were 24,982,154 and 1,666,667, respectively. These shares have been
excluded from loss per share calculations as they are antidilutive. In addition,
common stock to be issued upon stockholder approval of the increase in the
authorized stock of the Company, aggregating 36,711,629 shares are also excluded
from the loss per share calculations.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company's lease for its administrative facilities located in Glen Head, New
York expired in September 2001. The Company has been leasing such facilities
since the expiration on a month-to-month basis.
The Company was a defendant in an action, brought by a customer on June 6, 2001,
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 regard to the
operations prior to 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. However, due to the costs in defending the
Company in such a legal action, Company management agreed to a settlement in
2003 as the most cost effective manner to handle this matter. The Company has
agreed to pay the customer $27,500 payable over nine months. In the event the
Company fails to make their settlement payments, a stipulated judgment of
$71,000, less any payment made to such time, would be in effect. The settlement
calls for a pledge of preferred stock to serve as collateral. During the nine
months ended September 30, 2003, $24,500 has been paid.
In May 2001, the Company entered into a distribution agreement with a company
(the "Sub-distributor") based in the County of Jordan. The Sub-distributor has
agreed to purchase no fewer than 100 units of the Company's "Pure Safe Water
Station", in the calendar year commencing January 1, 2002. A minimum purchase of
50 units is 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 were shipped under this agreement. The sale will be recognized when the
Company receives payments. The Company has recorded the cost of the inventory
shipped in cost of sales, since the return of the items is uncertain. The
Sub-distributor agreement has been cancelled by the Company because of failure
to meet pre-established minimum thresholds. A criminal complaint has been lodged
against the former Sub-Distributor, two management employees of the Jordan
National Bank, and the Jordan National Bank for their actions in perpetrating a
fraud. A trial date has not yet been set.
NOTE 8 - PREFERRED STOCK
In April 2003, management authorized the Company to raise up to $550,000 through
a private placement by issuing 10% two-year convertible preferred instruments.
The preferred, designated as Series F, and providing for one million shares in
total, will be convertible into shares of Water Chef's common stock at such time
as the stockholders of the corporation approve an increase in the authorized
capital stock of the corporation. All dividends are payable in shares of the
Company's common stock valued at the then current market price per share, at the
time of maturity, or upon conversion, whichever is earlier. The conversion rate
for shares and accrued dividends payable is 40 shares of common for each 1 share
of preferred stock. The Series F convertible preferred stockholders have voting
rights equal to the common stockholders. The Series F convertible preferred
stock has no stated rights in the assets of the Company upon liquidation.
9
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - PREFERRED STOCK (Continued)
Although there was a discount upon the issuance of the preferred stock, in
accordance with Emerging Issue Task Force ("EITF") 98-5, a security is not yet
convertible if certain contingencies exist which are dependent upon the
occurrence of a future event outside the control of the security holder. In this
case, the shares can only be converted into common stock after the stockholders
of the Company approve an increase in the authorized capital stock of the
corporation. In accordance with EITF 98-5, any beneficial conversion (discount)
feature is measured at the commitment date, but will not be recognized as an
adjustment to earnings until the contingency is resolved,(the date the increase
in shares are approved). As of September 30, 2003, the deferred contingent
beneficial conversion adjustment was approximately $427,000.
Cash
----
In April 2003, the Company raised $25,000 through the sale of shares Series C
convertible preferred stock.
In April 2003, the Company raised $87,500 through the sale of shares Series F
convertible preferred stock.
In July 2003 and August 2003, the Company raised an additional $75,000 and
$153,500, respectively through the sale of shares Series F convertible preferred
stock.
Services
--------
In January 2003, the Company issued 30,000 shares of its Series C convertible
preferred stock for professional services totaling $30,000.
In April 2003, the Company issued an aggregate of 51,250 shares of its Series C
convertible preferred stock for professional services totaling $51,250.
In August 2003 and September 2003, the Company issued an aggregate of 67,035
shares of its Series F convertible preferred stock for professional services
totaling $67,035.
10
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OR PLAN OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and related Footnotes.
Forward-Looking Statements
--------------------------
Management's discussion and analysis of financial condition and results of
operations and other sections of this Report contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend for the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding the
Company's expected financial position, business and financing plans are
forward-looking statements. Such forward-looking statements are identified by
use of forward-looking words such as "anticipates," "believes," "plans,"
"estimates," "expects," and "intends" or words or phrases of similar expression.
These forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
technology developments affecting the Company's products and to those discussed
in the Company's filings with the Securities and Exchange Commission.
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
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 municipal water treatment systems, or for those
whose systems have been compromised, either by environmental factors or by
faulty design or maintenance.
Results of Operations
---------------------
With the sale of these assets consummated in December 2001, The Company 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.
For the three months ended September 30, 2003 and September 30, 2002, Water Chef
reported no revenues. For the nine months ended September 30, 2003 and September
30, 2002 Water Chef reported revenues of $0 and $40,000 respectively.
Cost of sales for the three and nine-month periods ended September 30, 2003 was
$24,000 and $72,000 respectively, compared to $12,000 and $63,680 in the three
and nine months ended September 30, 2002. The increase is due to rent and
overhead payments made to the contract manufacturer due to the absence of
production orders. An analysis of the components of cost of sales in the 2001
and 2002 periods follows:
Cost of Sales Actual Rent and Overhead
Period CGS Payments to Manufacturer Total
09/30/03 $ - $ 72,000 $ 72,000
09/30/02 37,450 26,230 63,680
Selling, general and administrative expenses for the three months ended
September 30, 2003 were $216,094, compared to $150,460 for the year earlier
period, an increase of 4%; and $621,884 for the nine months ended September 30,
2003 compared to $518,797 for the nine months ended September 30, 2002, an
increase of 19%, primarily due to higher marketing costs.
The net loss for the three and nine months period ended September 30, 2003 was
$1,324,578 and $2,241,504 compared to $72,988 and $1,336,838 in the three and
nine months period ended September 30, 2002.
11
Liquidity and Capital Resources
----------------------------
At September 30, 2003 the Company had a working capital deficiency of
approximately $4,687,000. In addition the Company continues to suffer recurring
losses. The accompanying financial statements have been prepared assuming that
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 matters 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 meet its business 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.
During the nine months ended September 30, 2003 the Company raised $341,010 from
the sale of preferred stock.
We are of the opinion that cash on hand will not be sufficient to meet future
cash requirements. It will be necessary for the Company to raise capital through
the sale of stock or other financing means until the Company has the ability to
generate productive sales. There can be no assurance of the Company's success in
its efforts.
Settlements
-----------
In second quarter 2002 the Company reached a negotiated settlement in an action
brought by certain debenture holders (the "Bridge Lenders") in New Hampshire
Superior Court. The Company and the Bridge Lenders settled this dispute for a
total $497,500 payable in shares of the Company's common stock. The number of
shares of common stock to be paid was determined by dividing $497,500 by the
average daily trading price of WaterChef common over a thirty (30)-day
measurement period. Due to these requirements the Company is obligated to issue
17,037,671 shares of common stock. The total authorized common stock of the
Company does not provide a sufficient number of authorized but unissued shares
to fulfill the terms of the settlement agreement. As such the Company has
recorded these 17,037,671 shares to be issued as a liability in common stock to
be issued for $497,500 as of September 30, 2003.
In addition to the above settlement with Bridge Lenders who participated in the
legal action, the Company settled its obligation with those Bridge Lenders who
did not participate in the legal action. These lenders had total debentures of
$75,000, plus accrued interest of $9,850 for a total of $84,850 as of the
settlement date. In conjunction with the above settlement, the Company settled
these remaining debentures, plus accrued interest, with the issuance of 750,000
shares of common stock valued at $21,900. As of September 30, 2003 the 750,000
shares have not been issued as the Company does not currently have a sufficient
number of authorized and unissued shares to complete the settlement and has
recorded these 750,000 shares to be issued as a liability in common stock to be
issued for $21,900 as of September 30, 2003.
During 2002 the Company agreed to issue stock for the voluntary surrender by the
Company's President and CEO of his anti-dilution agreement. Such cost is
expected to be satisfied by the issuance of 14,923,958 shares of the Company's
common stock, upon approval by the Company's shareholders of the proposed
increase in the authorized common stock of the Company. As such the Company has
recorded these 14,923,958 shares to be issued as a liability in common stock to
be issued for $1,641,634 as of September30, 2003.
The Company intends to request approval of its stockholders for an increase in
the authorized common stock of the Corporation from 100,000,000 to 200,000,000
shares. Upon approval, the issuance of the shares of common stock described
above will increase the outstanding common stock of the Corporation to
approximately 128,000,000 shares, in satisfaction of many of the above
obligations. This increase in the outstanding will dilute the ownership interest
of current shareholders and will adversely earnings per share and may result in
a lower market value for the Company's stock.
12
Recent Accounting Standards
---------------------------
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement clarifies the accounting guidance on (1) derivative
instruments (including certain derivative instruments embedded in other
contracts) and (2) hedging activities that fall within the scope of the SFAS
133. SFAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in their
entirety or that contain embedded derivatives that warrant separate accounting.
SFAS 149 is effective (1) for contracts entered into or modified after September
30, 2003, with certain exceptions, and (2) for hedging relationships designated
after September 30, 2003. The guidance is to be applied prospectively.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's financial statements.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation and Disclosure Controls and Procedures
Based on their evaluation as of the date of the filing of this Form 10-Q, our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as required by Exchange
Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported with the time periods specified by the SEC's rules and
forms.
Changes in Internal Controls
There were no significant changes in our internal controls over financial
reporting that occurred during the quarter ended September 30, 2003 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company was a defendant in an action, brought by a customer, relating to a
series of contracts the Company entered into. These contracts 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
claimed breach of contract, maintaining that the Company shipped goods that did
not meet the customer's specification. The customer sought damages in the form
of lost opportunity and lost business profits. A negotiated settlement was
reached calling for payment by WaterChef of $27,500, with payment of $3,500 in
February and $3,000 per month payable for eight consecutive months thereafter.
During the nine months ended June 30, 2003 $24,500 has been paid.
The Company is plaintiff in a criminal action brought before the court in the
Kingdom of Jordan, seeking full payment for PureSafe Water Stations shipped to a
customer in Jordan, related costs and damages. Jordanian counsel has been
retained and is confident that the Company will prevail.
ITEM 2 - CHANGES IN SECURITIES
In April 2003, the Company raised $25,000 through the sale of Series C
convertible preferred stock.
In April 2003, the Company raised $87,500 through the sale of Series F
convertible preferred stock.
In July 2003 and August 2003, the Company raised an additional $75,000 and
$153,500, respectively through the sale of Series F convertible preferred stock.
In January 2003, the Company issued 30,000 shares of its Series C convertible
preferred stock for professional services totaling $30,000.
In April 2003, the Company issued an aggregate of 51,250 shares of its Series C
convertible preferred stock for professional services totaling $51,250.
In August 2003 and September 2003, the Company issued an aggregate of 67,035
shares of its Series F convertible referred stock for professional services
totaling $67,035.
ITEM 3 - DEFAULT ON SENIOR SECURITIES
None.
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 have been
addressed and resubmitted. 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
(a) Exhibits
Exhibit No. Description
----------- -----------
31 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 8 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
14
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.
November 18,2003 /s/ David A. Conway
Date -----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
15
Index of Exhibits
-----------------
Exhibit No. Description
----------- -----------
31 Certification of Chief Executive Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 8 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
16