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, 2004
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
---------------- -----------------
Commission file number 001-09478
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 NOVEMBER 2, 2004
CLASS Common
----- ------
Par value $0.001 per share 150,433,227
Transitional Small Business Disclosure Format(Check One) Yes No X
----- -----
WATERCHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 2
At September 30, 2004
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended September 30, 2004 and 2003
For the Nine Months Ended September 30, 2004 and 2003
For the Period January 1, 2002 to September 30, 2004
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 4 - 6
For the Nine Months Ended September 30, 2004
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 7
For the Nine Months Ended September 30, 2004 and 2003
For the Period January 1, 2002 to September 30, 2004
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 8 - 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 13 - 16
OF OPERATIONS
ITEM 3 - CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS N/A
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS 17
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
EXHIBITS
CERTIFICATIONS
1
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 58,945
Prepaid expenses and other current assets 21,245
------------
TOTAL CURRENT ASSETS 80,190
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $6,480 19,575
Other assets 3,162
------------
TOTAL OTHER ASSETS 22,737
------------
TOTAL ASSETS $ 102,927
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 239,192
Accrued expenses and other current liabilities 986,478
Notes payable (including accrued interest of $477,865) 1,161,087
Accrued dividends payable 75,493
------------
TOTAL CURRENT LIABILITIES 2,462,250
LONG-TERM LIABILITIES:
Loans payable to shareholder (including accrued interest
of $99,254) 472,035
------------
TOTAL LIABILITIES 2,934,285
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 679,787 shares issued and outstanding 680
Common stock - $.001 par value; 190,000,000 shares
authorized; 149,439,630 shares issued and 149,435,230
shares outstanding 149,440
Additional paid-in capital 19,983,786
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 (8,427,900)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,831,358)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 102,927
============
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,
2004 2003 2004 2003 2004
------------- ------------- ------------- ------------- -------------
SALES $ -- $ -- $ 56,290 $ -- $ 96,290
COST OF SALES 24,000 24,000 77,250 72,000 411,680
------------- ------------- ------------- ------------- -------------
GROSS (LOSS) PROFIT (24,000) (24,000) (20,960) (72,000) (315,390)
GENERAL AND ADMINISTRATIVE EXPENSES 428,357 216,094 985,037 621,884 2,591,782
NON-DILUTION AGREEMENT TERMINATION COST -- 1,044,677 (223,860) 1,432,699 2,462,451
INTEREST EXPENSE 37,557 39,807 112,671 114,921 444,260
LOSS ON SETTLEMENT OF DEBT -- -- 2,407,867 -- 2,614,017
------------- ------------- ------------- ------------- -------------
NET LOSS (489,914) (1,324,578) (3,302,675) (2,241,504) (8,427,900)
------------- ------------- ------------- ------------- -------------
DEEMED DIVIDEND ON PREFERRED STOCK -- -- (2,072,296) -- (2,072,296)
PREFERRED STOCK DIVIDENDS (47,398) (39,912) (93,570) (106,357) (359,434)
------------- ------------- ------------- ------------- -------------
(47,398) (39,912) (2,165,866) (106,357) (2,431,730)
------------- ------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK $ (537,312) $ (1,364,490) $ (5,468,541) $ (2,347,861) $ (10,859,630)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.00) $ (.02) $ (.05) $ (.03)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- BASIC AND DILUTED 142,118,759 89,559,886 111,529,245 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 Nine Months Ended September 30, 2004:
---------------------------------------------
Balance - January 1, 2004 887,166 $ 887 89,564,286 $ 89,564
Proceeds from sale of preferred stock
($0.80 per share) 15,625 15 -- --
($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 -- --
Proceeds from sale of common stock
($0.03 Per share) -- -- 450,000 450
($0.07 Per share) -- -- 666,667 667
($0.08 Per share) -- -- 1,082,500 1,083
($0.15 Per share) -- -- 142,428 142
($0.17 Per share) -- -- 200,000 200
Common stock issued for services
($0.05 Per share) -- -- 1,857,133 1,857
($0.15 Per share) -- -- 357,800 358
Preferred stock dividend -- -- -- --
Common stock issued for satisfaction of liabilities
($0.165 Per share) -- -- 37,786,629 37,787
Preferred stock converted to common stock (405,514) (405) 17,332,187 17,332
Net loss -- -- -- --
---------- ---------- ----------- ----------
Balance - September 30, 2004 679,787 $ 680 149,439,630 $ 149,440
========== ========== =========== ==========
See notes to condensed financial statements.
4
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Additional
Paid-In Treasury
Capital Stock
------------ ------------
For the Nine Months Ended September 30, 2004:
--------------------------------------------
Balance - January 1, 2004 $ 13,513,834 $ (5,768)
Proceeds from sale of preferred stock
($0.80 per share) 12,485 --
($2.00 Per share) 116,608 --
($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 --
Proceeds from sale of common stock
($0.03 Per share) 14,950 --
($0.07 Per share) 49,333 --
($0.08 Per share) 85,517 --
($0.15 Per share) 20,858 --
($0.17 Per share) 34,400 --
Common stock issued for services
($0.05 Per share) 91,000 --
($0.15 Per share) 53,292 --
Preferred stock dividend (75,493) --
Common stock issued for satisfaction of liabilities
($0.165 Per share) 5,635,934 --
Preferred stock converted to common stock (16,927) --
Net loss -- --
------------ ------------
Balance - September 30, 2004 $ 19,983,786 $ (5,768)
============ ============
See notes to condensed financial statements.
5
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, 2004:
---------------------------------------------
Balance - January 1, 2004 $(14,531,596) $ (5,125,225) $ (6,058,304)
Proceeds from sale of preferred stock
($0.80 Per share) -- -- 12,500
($2.00 Per share) -- -- 116,667
($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
Proceeds from sale of common stock
($0.03 Per share) -- -- 15,400
($0.07 Per share) -- -- 50,000
($0.08 Per share) -- -- 86,600
($0.15 Per share) -- -- 21,000
($0.17 Per share) -- -- 34,600
Common stock issued for services
($0.05 Per share) -- -- 92,857
($0.15 Per share) -- -- 53,650
Preferred stock dividend (75,493)
Common stock issued for satisfaction of liabilities
($0.165 Per share) -- -- 5,673,721
Preferred stock converted to common stock -- -- --
Net loss -- (3,302,675) (3,302,675)
------------ ------------ ------------
Balance - September 30, 2004 $(14,531,596) $ (8,427,900) $ (2,831,358)
============ ============ ============
See notes to condensed financial statements.
6
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30, For the Period
-------------------------- January 1, 2002
2004 2003 to September 30, 2004
----------- ----------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,302,675) $(2,241,504) $ (8,427,900)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,391 1,390 5,098
Non-cash compensation 311,037 148,283 560,722
Non-dilution agreement termination cost (223,860) 1,432,699 2,462,451
Loss on settlement of debt 2,407,867 -- 2,614,017
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Changes in assets and liabilities:
Inventory 26,500 -- --
Prepaid expenses and other current assets (10,025) (6,000) 35,255
Accounts payable, accrued expenses
and interest 125,523 315,199 909,314
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (664,242) (349,933) (1,659,993)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable -- 15,500 45,700
Proceeds from sale of preferred stock 412,756 341,010 1,130,127
Proceeds from sale of common stock 207,600 -- 307,600
Proceeds from sale of common stock
to be issued -- -- 200,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 620,356 356,510 1,683,427
----------- ----------- -----------
NET CHANGE IN CASH (43,886) 6,577 23,434
CASH - BEGINNING OF PERIOD 102,831 22,758 35,511
----------- ----------- -----------
CASH - END OF PERIOD $ 58,945 $ 29,335 $ 58,945
=========== =========== ===========
See notes to condensed financial statements.
7
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 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 and nine-month period ended September
30, 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 September 30, 2004 and 2003 as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss applicable to common stock $ (537,312) $(1,364,490) $(5,468,541) $(2,347,861)
Stock-based employee compensation cost,
net of tax effect, under fair value
accounting 44,656 -- 125,213 --
----------- ----------- ----------- -----------
Pro-forma net loss under fair value method $ (581,968) $(1,364,490) $(5,593,754) $(2,347,861)
=========== =========== =========== ===========
Loss per share - basic and diluted $(0.00) $(0.02) $(0.05) $(0.03)
Per share stock-based employee
compensation cost, net of tax
effect, under fair value accounting 0.00 0.00 0.00 0.00
------ ------ ------ ------
Pro-forma loss per share - basic and diluted $(0.00) $(0.02) $(0.05) $(0.03)
====== ====== ====== ======
During 2004, 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 and
expire in five years.
8
WATERCHEF, INC.
(A Development Stage 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 at September 30, 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.
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.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
NOTE 5 - COMMON STOCK ISSUED
On June 4, 2004, the Company convened a special meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred, Series F Preferred
stockholders (together the "Stockholders"). The Stockholders, voting as a single
class, voted and approved a proposal to amend the Certificate of Incorporation
to increase the Company's authorized capital stock 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.
During the nine months ended September 30, 2004, the Company recorded the
following transactions:
a. Cash
During 2002, the Company received $200,000 for 4,000,000 shares of its
common stock. These shares were issued during the June 2004 quarter upon
the approval by the stockholders of the increase in the number of
authorized common shares of the Company.
During the September 2004 quarter, the Company received $207,600 for
2,541,595 shares of its common stock.
b. Non-Dilution Agreement Termination Cost
In 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.
9
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - COMMON STOCK ISSUED(Continued)
Since the issuance of these shares was subject to stockholder approval, the
measurement date for purposes of valuation was established when such
stockholder approval was obtained. Accordingly, the Company was utilizing
variable accounting to determine the value of these shares. These shares
were issued during the June 2004 quarter upon the approval by the
stockholders of the increase in the number of authorized common shares of
the Company. The value of these shares was $2,462,451.
c. Services
During 2002, the Company agreed to issue to various parties an aggregate of
1,075,000 shares of its common stock for value of $84,000 in connection
with professional services. These shares were issued during the June 2004
quarter upon the approval by the stockholders of the increase in the number
of authorized common shares of the Company.
During the September 2004 quarter, the Company issue to various parties an
aggregate of 2,214,933 shares of its common stock for value of $146,507 in
connection with professional services. These shares were issued during the
current quarter.
d. 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
originally 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 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 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,
was 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 charge of $111,000;
(iii) In 2004, in connection with the issuance of the Bridge Lender shares,
the Company further extended the term of the warrants for twelve months
until March 2005 and recorded $94,151 as a loss on settlement of debt in
connection with such warrant extension; and (iv) Issued additional shares
since 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, was greater than the original 3,000,000
shares. Due to these requirements, the Company was obligated to issue an
additional 14,037,671 shares. As of June 30, 2004, the Company has issued
the 3,000,000 shares and the additional 14,037,671 shares originally valued
at $497,500. The Company recorded a loss on settlement of debt of
$2,313,716 since the total value of the shares on the date of issuance was
$2,811,216.
10
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - COMMON STOCK ISSUED(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. During the June 2004 quarter, the
750,000 shares were issued.
e. Conversion of preferred stock into common stock
During the June 30, 2004 quarter, the Company agreed to issue to various parties
an aggregate of 5,228,333 shares of its common stock in connection with the
conversion of preferred stock.
During the September 30, 2004 quarter, the Company agreed to issue to various
parties an aggregate of 12,103,854 shares of its common stock in connection with
the conversion of preferred stock.
The total shares issued upon stockholder approval of the increase in the
authorized stock of the Company as a result of the transactions described above
aggregate 59,875,344.
NOTE 6 - NET LOSS PER SHARE OF COMMON STOCK
Basic net 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 and options were not included in the calculation of loss per share for
the three and nine months ended September 30, 2004 and 2003 because their
inclusion would have been antidilutive. Total potential shares issuable upon the
exercise of options, warrants, the conversion of preferred stock, and payment of
accrued dividends for the nine months ended September 30, 2004 and 2003 were
37,555,044 and 24,982,154, respectively.
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.
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.
11
WATERCHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - 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 8 - PREFERRED STOCK-SERIES F & SERIES C
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, which occurred on June 4, 2004. All dividends
are cumulative and are payable in cash or 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 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 could 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). On June 4, 2004, the Company voted
and approved a proposal to amend the Certificate of Incorporation to increase
the Company's authorized capital stock from 100,000,000 to 200,000,000 shares,
consisting of 190,000,000 shares of common stock and 10,000,000 shares of
preferred stock. During the June 2004 quarter, the Company recorded the deferred
contingent beneficial conversion adjustment of $2,072,697 as a deemed dividend
since the contingency was resolved.
In connection with Series F conversions and the maturity of Series C preferred
stock, the Company recorded accrued dividends of $75,493 as of September 30,
2004 in the condensed balance sheet.
Cash
----
During the nine months ended September 30, 2004, the Company issued 145,702
shares and raised $412,756 through the sale of Series F convertible preferred
stock.
Services
--------
During the nine months ended September 30, 2004, the Company issued an aggregate
of 52,433 shares of its Series F convertible preferred stock for professional
services totaling $164,530.
12
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
---------------------
There were no sales recognized for the three months ended September 30, 2004 and
September 30, 2003. Revenue for the nine months ended September 30, 2004 and
September 30, 2003 were $56,290 and $0 respectively.
Cost of sales for the three month periods ended September 30, 2004 and 2003 were
$24,000 (rent and overhead payments to manufacturers). Cost of sales for the
nine month periods ended September 30, 2004 and September 30, 2003 were $77,250
and $72,000 respectively. An analyses 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
09/30/04 $ 13,250 $ 64,000 $ 77,250
09/30/03 - 72,000 72,000
Selling, general and administrative expenses for the three months ended
September 30, 2004 were $428,357, compared to $216,094 for the year earlier
period, an increase of 98%. Selling, general and administrative expenses for the
nine months ended September 30, 2004 were $985,037, compared to $621,884 for the
year earlier period, an increase of 58%, primarily due to higher marketing costs
and sales commissions. In the quarter ended September 30, 2004, expenses
included $75,000 paid to IMSCO (International Multiracial Shared Cultural
Organization) upon approval of the Company's application for certification and
consultant status with IMSCO, an NGO in Specialized status with the Economic and
Social Council of the United Nations. The Company believes that the United
Nations certification of its humanitarian water projects will enhance its
ability to secure the funding needed for the successful completion of its
projects.
In the quarter ended June 30, 2004, The Company recognized a loss on settlement
of debt of $2,407,867.
The net loss for the three and nine month periods ended September 30, 2004 was
$489,914 and $3,302,675, respectively, and $1,324,578 and $2,241,504 for the
three and nine month periods ended September 30, 2003, respectively.
13
Liquidity and Capital Resources
-------------------------------
At September 30, 2004 the Company had a working capital deficiency. In addition
the Company continues to suffer recurring losses. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that that the
Company will 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, 2004 the Company raised $412,756 from
the sale of preferred stock and $207,600 from the sale of common stock.
Common Stock Issued
-------------------
On June 4, 2004, the Company convened a special meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred, Series F Preferred
stockholders (together the "Stockholders"). The Stockholders, voting as a single
class, voted and approved a proposal to amend the Certificate of Incorporation
to increase the Company's authorized capital stock 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.
During the nine months ended September 30, 2004, the Company recorded the
following transactions:
a. Cash
During 2002, the Company received $200,000 for 4,000,000 shares of its
common stock. These shares were issued during the June 2004 quarter upon
the approval by the stockholders of the increase in the number of
authorized common shares of the Company.
During the September 2004 quarter, the Company received $207,600 for
2,541,595 shares of its common stock.
b. Non-Dilution Agreement Termination Cost
In 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.
Since the issuance of these shares was subject to stockholder approval, the
measurement date for purposes of valuation was established when such
stockholder approval was obtained. Accordingly, the Company was utilizing
variable accounting to determine the value of these shares. These shares
were issued during the June 2004 quarter upon the approval by the
stockholders of the increase in the number of authorized common shares of
the Company. The value of these shares was $2,462,451.
c. Services
During 2002, the Company agreed to issue to various parties an aggregate of
1,075,000 shares of its common stock for value of $84,000 in connection
with professional services. These shares were issued during the June 2004
quarter upon the approval by the stockholders of the increase in the number
of authorized common shares of the Company.
During the September 2004 quarter, the Company issue to various parties an
aggregate of 2,214,933 shares of its common stock for value of $146,507 in
connection with professional services. These shares were issued during the
current quarter.
14
d. 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
originally 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 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 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,
was 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 charge of $111,000;
(iii) In 2004, in connection with the issuance of the Bridge Lender shares,
the Company further extended the term of the warrants for twelve months
until March 2005 and recorded $94,151 as a loss on settlement of debt in
connection with such warrant extension; and (iv) Issued additional shares
since 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, was greater than the original 3,000,000
shares. Due to these requirements, the Company was obligated to issue an
additional 14,037,671 shares. As of June 30, 2004, the Company has issued
the 3,000,000 shares and the additional 14,037,671 shares originally valued
at $497,500. The Company recorded a loss on settlement of debt of
$2,313,716 since the total value of the shares on the date of issuance was
$2,811,216.
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. During the June 2004 quarter, the 750,000 shares were issued.
e. Conversion of preferred stock into common stock
During the June 30, 2004 quarter, the Company agreed to issue to various
parties an aggregate of 5,228,333 shares of its common stock in connection
with the conversion of preferred stock.
During the September 30, 2004 quarter, the Company agreed to issue to
various parties an aggregate of 12,103,854 shares of its common stock in
connection with the conversion of preferred stock.
The total shares issued upon stockholder approval of the increase in the
authorized stock of the Company as a result of the transactions described above
aggregate 59,875,344.
15
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.
The adoption of this pronouncement is not expected to 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
16
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004, the Company issued 2,541,595
shares and raised $207,600 through the sale of common stock to two domestic and
one foreign trust and six individual accredited investors. The sale proceeds
were used to pay proxy preparation and mailing expenses, and annual meeting,
legal and accounting expenses, and general operating expenses.
During the three months ended September 30, 2004, the Company issued to various
parties an aggregate of 1,857,800 shares of its common stock for value of
$128,650 in connection with United Nations membership fees, tax return
preparation expense, marketing and professional services.
The Company issued these shares in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated there under. These shares were offered to less than 35
"non-accredited" investors and were purchased for investment purposes with no
view to resale.
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
*10.1 Preliminary Agreement, dated September 8, 2004 by, and
among, WaterChef, Inc., Samaritan Group International, and
International Multiracial Shared Cultural Organization
(IMSCO).
*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.
*99.1 United Nations certification letter-Bangladesh
*99.2 United Nations certification letter-Honduras
* filed herewith
(b) Reports on Form 8-K
None.
18
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.
11/17/2004 /s/ David A. Conway
Date -----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
19
Index of Exhibits
-----------------
Exhibit No. Description
----------- -----------
10.1 Preliminary Agreement, dated September 8, 2004 by, and
among, WaterChef, Inc., Samaritan Group International, and
International Multiracial Shared Cultural Organization
(IMSCO).
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.
99.1 United Nations certification letter-Bangladesh
99.2 United Nations certification letter-Honduras
20