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 March 31, 2004
( ) 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, including area code)
(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 APRIL 30, 2004
CLASS Common
----- ------
Par value $0.001 per share 89,917,019
WATERCHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 2
At March 31, 2004
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended March 31, 2004 and 2003
For the Period January 1, 2002 (Inception) to
March 31, 2004
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 4 - 5
For the Three Months Ended March 31, 2004
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 6
For the Three Months Ended March 31, 2004 and 2003
For the Period January 1, 2002 (Inception) to
March 31, 2004
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7 - 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 12 - 14
OF OPERATIONS
ITEM 3 - CONTROLS AND PROCEDURES 14
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 15
ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15 - 16
SIGNATURE 17
CERTIFICATION
EXHIBITS
1
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT MARCH 31, 2004
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 306,363
Inventory 13,250
Prepaid expenses 66,978
------------
TOTAL CURRENT ASSETS 386,591
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $5,552 20,503
Other assets 3,162
------------
TOTAL OTHER ASSETS 23,665
------------
TOTAL ASSETS $ 410,256
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 150,609
Accrued expenses and other current liabilities 1,064,478
Notes payable (including accrued interest of $424,682) 1,107,907
Common stock to be issued 3,184,790
Debenture liabilities 519,400
------------
TOTAL CURRENT LIABILITIES 6,027,184
LONG-TERM LIABILITIES:
Loans payable to shareholder (including accrued interest
of $87,319) 460,101
------------
TOTAL LIABILITIES 6,487,285
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 1,069,676 shares issued and outstanding 1,070
Common stock - $.001 par value; 90,000,000 shares
authorized; 89,921,419 shares issued and 89,917,019
shares outstanding 89,921
Additional paid-in capital 14,095,937
Subscription receivable (6,666)
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 (5,719,927)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (6,077,029)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 410,256
============
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 Period
March 31, January 1,2002
---------------------------- (Inception) to
2004 2003 March 31, 2004
------------ ------------ ------------
SALES $ 56,290 $ -- $ 96,290
COST OF SALES 29,250 24,000 363,680
------------ ------------ ------------
GROSS (LOSS) PROFIT 27,040 (24,000) (267,390)
GENERAL AND ADMINISTRATIVE EXPENSES 285,706 167,630 1,892,451
NON-DILUTION AGREEMENT TERMINATION COST 298,479 537,262 2,984,790
INTEREST EXPENSE 37,557 37,369 369,146
LOSS ON SETTLEMENT OF DEBT -- -- 206,150
------------ ------------ ------------
NET (LOSS) (594,702) (766,261) (5,719,927)
PREFERRED STOCK DIVIDENDS (55,638) (33,168) (321,502)
------------ ------------ ------------
NET (LOSS) APPLICABLE TO COMMON STOCK $ (650,340) $ (799,429) $ (6,041,429)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 89,917,019 89,559,886
============ ============
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 Three Months Ended March 31, 2004:
---------------------------------------------
Balance - January 1, 2004 887,166 $ 887 89,564,286 $ 89,564
Proceeds from sale of preferred stock
($2.00 Per share) 58,334 59 -- --
($2.40 Per share) 3,860 4 -- --
($2.60 Per share) 19,231 19 -- --
($2.80 Per share) 3,000 3 -- --
($4.00 Per share) 3,984 4 -- --
($4.80 Per share) 41,668 42 -- --
Preferred stock issued for services
($2.00 Per share) 17,265 17 -- --
($3.20 Per share) 20,625 21 -- --
($4.00 Per share) 1,000 1 -- --
($4.27 Per share) 9,375 9 -- --
($4.80 Per share) 4,168 4 -- --
Common stock issued for services
($0.05 Per share) -- -- 357,133 357
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance - March 31, 2004 1,069,676 $ 1,070 89,921,419 $ 89,921
========== ========== ========== ==========
Additional Stock
Paid-In Subscription Treasury
Capital Receivable Stock
---------- ---------- ---------
For the Three Months Ended March 31, 2004:
--------------------------------------------
Balance - January 1, 2004 $13,513,834 $ -- $ (5,768)
Proceeds from sale of preferred stock
($2.00 Per share) 116,608 (6,666) --
($2.40 Per share) 9,256 -- --
($2.60 Per share) 49,981 -- --
($2.80 Per share) 8,397 -- --
($4.00 Per share) 15,925 -- --
($4.80 Per share) 199,958 -- --
Preferred stock issued for services
($2.00 Per share) 34,513 -- --
($3.20 Per share) 65,979 -- --
($4.00 Per share) 3,999 -- --
($4.27 Per share) 39,991 -- --
($4.80 Per share) 19,996 -- --
Common stock issued for services
($0.05 Per share) 17,500 -- --
Net loss -- -- --
----------- ---------- ---------
Balance - March 31, 2004 $14,095,937 $ (6,666) $ (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 Three Months Ended March 31, 2004:
---------------------------------------------
Balance - January 1, 2004 $(14,531,596) $ (5,125,225) $ (6,058,304)
Proceeds from sale of preferred stock
($2.00 Per share) -- -- 110,001
($2.40 Per share) -- -- 9,260
($2.60 Per share) -- -- 50,000
($2.80 Per share) -- -- 8,400
($4.00 Per share) -- -- 15,929
($4.80 Per share) -- -- 200,000
Preferred stock issued for services
($2.00 Per share) -- -- 34,530
($3.20 Per share) -- -- 66,000
($4.00 Per share) -- -- 4,000
($4.27 Per share) -- -- 40,000
($4.80 Per share) -- -- 20,000
Common stock issued for services
($0.05 Per share) -- -- 17,857
Net loss -- (594,702) (594,702)
------------ ----------- -----------
Balance - March 31, 2004 $(14,531,596) $(5,719,927) $(6,077,029)
============ =========== ===========
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 Three Months Ended For the Period
March 31, January 1, 2002
-------------------------- (Inception) to
2004 2003 March 31, 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (594,702) $ (766,261) $(5,719,927)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 463 463 4,170
Non-cash Compensation 182,387 30,000 425,407
Non-dilution agreement termination cost 298,479 537,262 2,991,455
Loss on settlement of debt -- -- 206,150
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Changes in assets and liabilities:
Inventory 13,250 -- (13,250)
Prepaid expenses and other current assets (55,758) -- (10,478)
Accounts payable, accrued expenses
and interest (34,177) 150,778 749,614
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (190,058) (47,758) (1,185,809)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable -- -- 45,700
Proceeds from sale of preferred stock 393,590 25,000 1,110,961
Proceeds from sale of common stock -- -- 100,000
Proceeds from sale of common stock
to be issued -- -- 200,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 393,590 25,000 1,456,661
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 203,532 (22,758) 270,852
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 102,831 22,758 35,511
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 306,363 $ -- $ 306,363
=========== =========== ===========
See notes to condensed financial statements.
6
WATERCHEF, INC.
(A Development Stage 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 three-month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. 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 March 12, 2004, for the year
ended December 31, 2003.
Stock-Based Compensation - In December 2002, the FASB issued SFAS No.
148,"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No.123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure requirements apply to all companies for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company will continue to account for
stock-based compensation according to APB Opinion No. 25.
The following table summarizes relevant information as to reported results under
the Company's intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provisions of FAS 123
had been applied for the following periods ended March 31, 2004 and 2003 as
follows:
Period Ended March 31,
------------------------------
2004 2003
----------- -----------
Net loss $ (594,702) $ (766,261)
Stock-based employee compensation cost,
net of tax effect, under fair value
accounting (34,618) -
----------- -----------
Proforma net loss under fair value method $ (629,320) $ (766,261)
=========== ===========
Loss per share - basic and diluted $(0.01) $(0.01)
Per share stock-based employee
compensation cost, net of tax
effect, under fair value accounting - -
------ ------
Proforma loss per share - basic and diluted $(0.01) $(0.01)
====== ======
During the current quarter, the Company has issued 6,000,000 stock options to
purchase common stock of the Company to the president and a director. The total
stock options granted may be converted to common stock at an exercise price of
$0.25 over the defined vesting period which extends up to five years.
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 $5,641,000 at March
31, 2004. 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.
7
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46(R),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46(R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46(R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public small business issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004. Management does not believe that the adoption of this
pronouncement will have a material effect on the Company's financial statements.
NOTE 5 - COMMON STOCK TO BE ISSUED
In February 2002, the Company's Board of Directors approved, pending
stockholder approval, the increase in the number of authorized common
shares to be issued to 190,000,000 shares. Such approval has not yet
been received, although on May 10, 2004, the Company filed a proxy
statement for a special meeting to be held on June 4, 2004 where the
Company will seek the approval of its stockholders to amend the
Company's Articles of Incorporation to reflect such increase.
During the quarter ended March 31, 2004, the Company had recorded
liabilities 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($200,000 is included in common
stock to be issued as of March 31, 2004).
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 value of these shares as of March 31, 2004 is
$2,984,792.
8
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - COMMON STOCK TO BE ISSUED(Continued)
c. Services
During the year ended December 31, 2002, the Company agreed to issue
to various parties an aggregate of 1,329,191 shares of its common
stock in connection with professional services. These shares will be
issued upon the approval by the stockholders of the increase in the
number of authorized common shares of the Company. These shares are
not included in the loss per share calculation.
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 20,253,149.
NOTE 6 - DEBENTURE LIABILITIES
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 plaintiffs 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.
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 a minimum of 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 which was recorded as loss on
settlement of debt 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 March 31, 2004, neither
the 3,000,000 nor the additional shares of 14,037,671 have been
issued, and accordingly the Company has valued these shares at
$497,500, which are recorded in the financial statements as Debenture
Liabilities. These shares are not included in the loss per share
calculations. If at the time the shares are issued, the stock price
exceeds $0.0292 per share, the value of the 17,037,671 shares issued
will exceed $497,500 and the Company will record a loss on settlement
of debt.
9
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - DEBENTURE LIABILITIES(Continued)
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
which was recorded as loss on settlement of debt. As of March 31,
2004, the 750,000 shares have not been issued, and accordingly the
Company has valued these shares at $21,900 which are included in the
financial statements as Debenture Liabilities. 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 17,787,671.
NOTE 7 - 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 three
months ended March 31, 2004 and 2003 because their inclusion would have been
antidilutive. Total shares issuable upon the exercise of options, warrants and
the conversion of preferred stock for the three months ended March 31, 2004 and
2003 were 49,781,309 and 8,025,398, respectively. In addition, common stock to
be issued upon stockholder approval of the increase in the authorized stock of
the Company, aggregating 38,040,820 shares are also excluded from loss per share
calculations.
NOTE 8 - 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.
In May 2001, the Company entered into 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 "Pure Safe 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 had been shipped under this agreement. The sale will be recognized when
the Company receives payments. The Company recorded the cost of the inventory
shipped as a loss contingency of $242,035 during the year ended December 31,
2001, since return of the items is uncertain.
10
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
On November 17, 2000, the Company entered into a three-year master distribution
agreement for their "Pure Safe Water Station" with a distributor based out of
Hong Kong ("the distributor"). Under this agreement, upon meeting minimum
quantities of sales in each of the years of agreement, the distributor will
receive a rebate of 20% of the total price for all products, parts and supplies
purchased from the Company. Furthermore, the distributor, upon meeting these
minimum sales quantities will have the right to purchase up to 30,000,000 shares
of the Company's common stock at $0.05 per share. The sales targets were never
met and the agreement was cancelled on June 17, 2002.
NOTE 9 - PREFERRED STOCK-SERIES F
During 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 cumulative and 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 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.
Although there was a discount upon the issuance of all 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 March 31, 2004, the deferred contingent
beneficial conversion adjustment was approximately $1,966,047.
Cash
----
During the three months ended March 31, 2004, the Company raised $393,590
through the sale of shares Series F convertible preferred stock.
Services
--------
In January 2004, the Company issued an aggregate of 357,133 shares of its Common
stock for professional services totaling $17,857.
In March 2004, the Company issued an aggregate of 52,433 shares of its Series F
convertible preferred stock for professional services totaling $164,530.
11
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
---------------------
Revenue for the three months ended March 31, 2004 and March 31, 2003 were
$56,290 and $0 respectively. During the current quarter, the Company sold one
purification system.
Cost of sales for the three month periods ended March 31, 2004 and March 31,
2003 were $29,250 and $24,000 respectively, an increase of 22%. An analysis of
the components of cost of sales in the 2004 and 2003 periods follows:
Cost of Sales Actual Rent and Overhead
Period CGS Payments to Manufacturer Total
03/31/04 $ 13,250 $ 16,000 $ 29,250
03/31/03 - 24,000 24,000
Selling, general and administrative expenses for the three months ended March
31, 2004 were $285,706, compared to $167,630 for the year earlier period, an
increase of 71%, primarily due to higher marketing costs and sales commissions.
The net loss for the period ended March 31, 2004 was $594,702 compared to
$766,261 in the period ended March 31, 2003.
12
Liquidity and Capital Resources
-------------------------------
At March 31, 2004 the Company had a working capital deficiency of approximately
$5,641,000. 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 three months ended March 31, 2004 the Company raised $393,590 from
the sale of preferred stock.
Settlements
-------------
During 2002 the Company continued the restructuring of its debt. In
the second quarter of 2002 the Company reached a negotiated settlement
in an action brought by certain debenture holders (the "Bridge
Lenders") in New Hampshire Superior Court. The litigants sought
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, damages were sought relating to
the Company's failure to register the shares issued under a related
warrant agreement.
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 trading period, commencing upon the execution of the
settlement agreement. Due to these requirements, the Company is
obligated to issue 17,037,671 shares of common stock, based on an
average price over the measurement period of $0.0292. The total
authorized common stock of the Company does not currently provide a
sufficient number of authorized and 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 Debenture Liabilities for
$497,500 as of March 31, 2004. If at the time the shares are issued,
the stock price exceeds $0.0292 per share, the value of the 17,037,671
shares issued will exceed $497,500 and the Company will record a loss
on settlement of debt.
In addition to the issuance of the above-mentioned shares, attached to
the original Bridge Loans were warrants for the purchase of the
Company's common stock at $0.15 per share. The debenture holders that
participated in the legal action had the lives of their warrants
extended until March 2004 as part of the settlement agreement, and
such warrants have now been extended for a period of twelve months
following the registration of the shares underlying those warrants A
total of 1,666,667 shares of common stock may be purchased under these
extended warrants. In 2002, the Company has recorded a non-cash charge
of $111,000 related to the extension of the lives of these warrants.
Such charge is included in the loss on settlement of debt.
In addition to the above settlement with Bridge Lender who
participated in the legal action, the Company settled its obligation
with debenture holders that did not participate ("non-participating
debenture holders") in the legal action. These non-participating
debenture holders had total debentures of $75,000, plus accrued
interest of $9,850, totaling $84,850 as of the settlement date. 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 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 December 31, 2002, the
750,000 shares have not been issued as the Company does not currently
have a sufficient number of authorized and unissued common shares to
settle these non-participating debentures. As such the Company has
recorded these 750,000 shares to be issued Debenture Liabilities for
$21,900 as of March 31, 2004. In addition the Company recorded charge
of $298,479 in 2004, and $537,262 in 2003 for the voluntary surrender
by the Company's President and CEO of his anti-dilution agreement.
Such cost is expected to be satisfied with the issuance of 14,923,958
shares of common stock, upon approval by the Company's shareholders,
in the number of authorized shares of the Company common stock. As
such the Company has recorded these 14,923,958 shares to be issued as
a liability in common stock to be issued for $2,984,790 as of March
31, 2004.
13
During the year ended 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 of the increase in the number of
authorized common shares of the Company. Therefore the Company has
recorded these 4,000,000 shares to be issued as a liability in common
stock to be issued for $200,000 as of March 31, 2004.
During the year ended December 31, 2002, the Company agreed to issue
to various third parties an aggregate of 1,329,191 shares of its
common stock in connection with professional services. These shares
will be issued upon the approval by the stockholders of the increase
in the number of authorized common shares of the Company. These shares
are not included in the loss per share calculation.
On May 10, 2004 the Company filed a proxy statement for a special
meeting to be held on June 4, 2004 to request approval of its
stockholders for an increase in the authorized shares of the Company
from 100,000,000 shares to 200,000,000 shares. This increase in the
outstanding will dilute the ownership interest of current shareholders
and will adversely affect earnings per share and may result in a lower
market value for the Company's stock.
Failure to obtain shareholder approval of the proposed increase in the
authorized common stock of the Corporation will prevent the Company
from discharging its obligations, as listed above, which will have a
material adverse impact on the Company's financial position, its
operations and its ability to continue as a going concern.
Management is currently attempting to settle or restructure the
remaining debt, and plans to raise additional capital through future
issuances of stock and/or debentures to finance the growth of the
Company.
Recent Accounting Standards
---------------------------
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46(R),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46(R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46(R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public small business issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004.
Management does not believe that the adoption of this pronouncement will have a
material effect on the Company's financial statements.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation and Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e and 15d-15e promulgated under the Exchange Act as of this report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
has concluded that the Company's disclosure controls and procedures were
effective as of the end of the period covered by this report to provide
reasonable assurance that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
Changes in Internal Controls
There have been no changes in internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a Company have been detected.
14
PART 11 - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is plaintiff in a criminal action, brought against I. Salman Import
and Export Trading Establishment and two employees of the Jordan National Bank,
before the Supreme Court of Justice in the Kingdom of Jordan in November 2002
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
During the three months ended March 31, 2004, the Company raised $393,590
through the sale of shares Series F convertible preferred stock.
In January 2004, the Company issued an aggregate of 357,133 shares of its Common
stock for professional services totaling $17,857.
In March 2004, the Company issued an aggregate of 52,433 shares of its Series F
convertible preferred stock for professional services totaling $164,530.
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 10, 2004, the Company filed a definitive proxy statement with the
Securities and Exchange Commission for a special meeting of the Company's
shareholders to amend the Certificate of Incorporation to increase the
authorized capital stock of the Company from 100,000,000 shares to 200,000,000
shares, consisting of 190,000,000 shares of common stock and 10,000,000 shares
of preferred stock, which Certificate of Amendment was approved by the Board of
Directors on August 20, 2002.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Mutual Settlement Agreement and General Release, dated June 20,2002,
by and between the Company: K. Thomas and Callaway Decoster, as
husband and wife; K. Thomas Decoster, Individually; Michael P. and
Roberta S. Gaudette, as husband and wife; Dominic M. Strazzulla; the
Felix A. Hertzka Estate; Claudette L. Gelfand Revocable Trust;
Catherine C. Griffin; Michael B. and Diane L. Hayden, as husband and
wife; Alexander Harris; Holly O. Harris; and Joseph R. Fichtl and the
Joseph R. Fichtl 1995 Trust. Attached as Exhibit 10.1 to the Company's
Amendment to Annual Report on Form 10K/A for the fiscal year ended
December 31, 2003.
10.2 Addendum to Settlement Agreement, dated June 20, 2002, by and between
the Company; K. Thoma and Callaway Decoster, as husband and wife; K.
Thomas Decoster, individually; Michael P. and Roberta S. Gaudette, as
husband and wife; Dominic M. Strazzulla; the Felix A. Hertzka Estate;
Claudette L. Gelfand Revocable Trust; Catherine C. Griffin; Michael B.
and Diane L. Hayden, as husband and wife; Alexander Harris; Holly O.
Harris; and Joseph R. Fichtl and the Joseph R. Fichtl 1995 Trust.
Attached as Exhibit 10.2 to the Company's Amendment to Annual Report
on Form 10K/A for the fiscal year ended December 31, 2003.
15
* 10.3 Form of Second Amendment to Settlement Agreement, dated retroactively
as of June 20, 2002, by and between the Company; K. Thomas and Callway
Decoster, as husband and wife; K. Thomas Decoster, individually;
Michael P. and Roberta S. Gaudette, as husband and wife;Dominic M.
Strazzulla; the Felix A. Hertzka Estate; Claudette L. Gelfand and the
Claudette L Gelfand Revocable Trust; Catherine C. Griffin; Michael
B.and Diane L. Hayden, as husband and wife; Alexander Harris; Holly O.
Harris; and Joseph R. Fichtl and the Joseph R. Fichtl 1995 trust.
*31 Certification of Chief Executive Officer and Chief Financial 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.
* filed herewith
(b) Reports on Form 8-K
16
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.
5/14/2004 /s/ David A. Conway
Date -----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
17
Index of Exhibits
-----------------
Exhibit No. Description
----------- -----------
10.3 Form of Second Amendment, dated retroactively as of June 20,
2002, by and between the Company; K. Thomas and Callaway
Decoster, as husband and wife; K. Thomas Decoster, Individually;
Michael P. and Roberta S. Gaudette, as husband and wife; Dominic
M. Strazzulla; the Felix A. Hertzka Estate; Claudette L. Gelfand
and the Claudette L. Gelfand Revocable Trust; Catherine C.
Griffin; Michael B. and Diane L. Hayden, as husband and wife;
Alexander Harris; Holly O. Harris; and Joseph R. Fichtl and the
Joseph R. Fichtl 1995 Trust.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 30 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.
18