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 June 30, 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
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(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 July 27, 2004
CLASS Common
----- ------
Par value $0.001 per share 133,516,378
WATERCHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 2
At June 30, 2004
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended June 30, 2004 and 2003
For the Six Months Ended June 30, 2004 and 2003
For the Period January 1, 2002 to June 30, 2004
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 4 - 5
For the Six Months Ended June 30, 2004
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 6
For the Six Months Ended June 30, 2004 and 2003
For the Period January 1, 2002 to June 30, 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 15
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 16
ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES 16
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
EXHIBITS
CERTIFICATIONS
1
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT JUNE 30, 2004
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 101,874
Inventory 13,250
Prepaid expenses 53,132
------------
TOTAL CURRENT ASSETS 168,256
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $6,016 20,039
Other assets 3,162
------------
TOTAL OTHER ASSETS 23,201
------------
TOTAL ASSETS $ 191,457
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 189,615
Accrued expenses and other current liabilities 998,478
Notes payable (including accrued interest of $456,272) 1,139,497
Accrued dividends payable 50,973
------------
TOTAL CURRENT LIABILITIES 2,378,563
LONG-TERM LIABILITIES:
Loans payable to shareholder (including accrued interest
of $93,286) 466,068
------------
TOTAL LIABILITIES 2,844,631
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 949,051 shares issued and outstanding 949
Common stock - $.001 par value; 190,000,000 shares
authorized; 132,936,381 shares issued and 132,931,981
shares outstanding 132,936
Additional paid-in capital 19,688,291
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 (7,343,284)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,653,174)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 191,457
============
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 Six Months Ended For the Period
June 30, June 30, January 1,2002
------------------------------ ------------------------------ to June 30,
2004 2003 2004 2003 2004
------------- ------------- ------------- ------------- -------------
SALES $ -- $ -- $ 56,290 $ -- $ 96,290
COST OF SALES 24,000 24,000 53,250 48,000 387,680
------------- ------------- ------------- ------------- -------------
GROSS (LOSS) PROFIT (24,000) (24,000) 3,040 (48,000) (291,390)
GENERAL AND ADMINISTRATIVE EXPENSES 270,974 238,160 556,680 405,790 2,163,425
NON-DILUTION AGREEMENT TERMINATION COST (522,339) (149,240) (223,860) 388,022 2,462,451
INTEREST EXPENSE 37,557 37,745 75,114 75,114 406,703
LOSS ON SETTLEMENT OF DEBT 2,407,867 -- 2,407,867 -- 2,614,017
------------- ------------- ------------- ------------- -------------
NET LOSS (2,218,059) (150,665) (2,812,761) (916,926) (7,937,986)
------------- ------------- ------------- ------------- -------------
DEEMED DIVIDEND ON PREFERRED STOCK (2,072,296) -- (2,072,296) -- (2,072,296)
PREFERRED STOCK DIVIDENDS (70,320) (35,340) (125,958) (66,445) (391,822)
------------- ------------- ------------- ------------- -------------
(2,142,616) (35,340) (2,198,254) (66,445) (2,464,118)
------------- ------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK $ (4,360,675) $ (186,005) $ (5,011,015) $ (983,371) $ (10,402,104)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.04) $ (.00) $ (.05) $ (.01)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- BASIC AND DILUTED 102,347,964 89,559,886 96,066,414 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 Six Months Ended June 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 -- --
Common stock issued for services
($0.05 Per share) -- -- 357,133 357
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 (136,250) (136) 5,228,333 5,228
Net loss -- -- -- --
---------- ---------- ----------- ----------
Balance - June 30, 2004 949,051 $ 949 132,936,381 $ 132,936
========== ========== =========== ==========
Additional
Paid-In Treasury
Capital Stock
----------- ----------
For the Six Months Ended June 30, 2004:
-------------------------------------------
Balance - January 1, 2004 $13,513,834 $ (5,768)
Proceeds from sale of preferred stock
($0.80 per share) 12,484 --
($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 --
Common stock issued for services
($0.05 Per share) 17,500 --
Common stock issued for satisfaction of liabilities
($0.165 Per share) 5,635,934 --
Preferred stock dividend (50,973) --
Preferred stock converted to common stock (5,092) --
Net loss -- --
----------- ----------
Balance - June 30, 2004 $19,688,291 $ (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 Six Months Ended June 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
Common stock issued for services
($0.05 Per share) -- -- 17,857
Common stock issued for satisfaction of liabilities
($0.165 Per share) -- -- 5,673,721
Preferred stock dividend (50,973)
Preferred stock converted to common stock -- -- --
Net loss -- (2,218,059) (2,218,059)
------------ ------------ -----------
Balance - June 30, 2004 $(14,531,596) $ (7,343,284) $(2,653,174)
============ ============ ===========
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 Six Months Ended
June 30, For the Period
-------------------------- January 1, 2002
2004 2003 to June 30, 2004
----------- ----------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,218,059) $ (916,926) $(10,010,282)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 927 926 4,634
Non-cash Compensation 182,387 81,250 432,072
Non-dilution agreement termination cost (223,860) 388,022 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 13,250 -- (13,250)
Prepaid expenses and other current assets (41,912) (12,000) 3,368
Accounts payable, accrued expenses
and interest 60,389 313,527 844,180
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (413,713) (145,201) (1,409,464)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable -- -- 45,700
Proceeds from sale of preferred stock 412,756 137,500 1,130,127
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 412,756 137,500 1,475,827
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (957) (7,701) 66,363
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 102,831 22,758 35,511
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 101,874 $ 15,057 $ 101,874
=========== =========== ===========
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 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 six-month period ended June 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 June 30, 2004 and 2003 as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss applicable to common stock $(4,360,675) $ (186,005) $(5,011,015) $ (983,371)
Stock-based employee compensation cost,
net of tax effect, under fair value
accounting 44,656 -- 79,274 --
----------- ----------- ----------- -----------
Pro-forma net loss under fair value method $(4,405,331) $ (186,005) $(5,090,289) $ (983,371)
=========== =========== =========== ===========
Loss per share - basic and diluted $(0.04) $(0.00) $(0.05) $(0.01)
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 $(0.04) $(0.00) $(0.05) $(0.01)
====== ====== ====== ======
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.
7
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 of approximately $2,159,000 at June
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 six months ended June 30, 2004, the Company had recorded common stock
issued for the following transactions, which had previously been accounted for
as common stock to be issued:
a. Cash
During 2002, the Company received $200,000 for 4,000,000 shares of its
common stock. These shares were issued during the current quarter upon the
approval by the stockholders of the increase in the number of authorized
common shares of the Company.
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.
8
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 current 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 current quarter upon the approval by the
stockholders of the increase in the number of authorized common shares of
the Company.
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.
9
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 current quarter, the 750,000 shares
were issued.
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 37,786,629.
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 six months ended June 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 six months ended June 30, 2004 and 2003 were 46,863,796 and
15,302,575, 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.
10
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. As of June 30, 2004, 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 $50,973 as of June 30, 2004 in
the condensed balance sheet.
Cash
----
During the six months ended June 30, 2004, the Company issued 145,702 shares and
raised $412,756 through the sale of Series F convertible preferred stock.
Services
--------
During the six months ended June 30, 2004, the Company issued an aggregate of
52,433 shares of its Series F convertible preferred stock for professional
services totaling $164,530.
NOTE 9 - COMMON STOCK ISSUED FOR SERVICES
The Company issued an aggregate of 357,133 shares of its Common stock for
professional services totaling $17,857.
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
---------------------
There were no sales recognized for the three months ended June 30, 2004 and June
30, 2003. Revenue for the six months ended June 30, 2004 and June 30, 2003 were
$56,290 and $0 respectively.
Cost of sales for the three month periods ended June 30, 2004 and June 30, 2003
were $24,000. Cost of sales for the six month periods ended June 30, 2004 and
June 30, 2003 were $53,250 and $48,000 respectively, an increase of 11%. 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
06/30/04 $ 13,250 $ 40,000 $ 53,250
06/30/03 - 48,000 48,000
Selling, general and administrative expenses for the three months ended June 30,
2004 were $270,974, compared to $238,160 for the year earlier period, an
increase of 14%. Selling, general and administrative expenses for the six months
ended June 30, 2004 were $556,680, compared to $405,790 for the year earlier
period, an increase of 27%, primarily due to higher marketing costs and sales
commissions.
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 six-month periods ended June 30, 2004 was
$2,218,059 and $2,812,761, respectively, and $150,665 and $916,926 for the three
and six-month periods ended June 30, 2003, respectively.
12
Liquidity and Capital Resources
-------------------------------
At June 30, 2004 the Company had a working capital deficiency of approximately
$2,159,000. 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 six months ended June 30, 2004 the Company raised $412,756 from the
sale of preferred 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 six months ended June 30, 2004, the Company had recorded common stock
issued for the following transactions, which had previously been accounted for
as common stock to be issued:
a. Cash
During 2002, the Company received $200,000 for 4,000,000 shares of its
common stock. These shares were issued during the current quarter upon the
approval by the stockholders of the increase in the number of authorized
common shares of the Company.
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 current 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 current quarter upon the approval by the
stockholders of the increase in the number of authorized common shares of
the Company.
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.
13
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 extention 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 and the total value of the shares 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 current quarter, the 750,000 shares were issued.
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 37,786,629.
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.
14
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.
15
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 six months ended June 30, 2004, the Company issued 145,792 shares and
raised $412,756 through the sale of Series F convertible preferred stock.
During the six months ended June 30, 2004, the Company issued an aggregate of
52,433 shares of its Series F convertible preferred stock for professional
services totaling $164,530.
During the six months ended June 30, 2004, the Company issued an aggregate of
357,133 shares of its common stock for previous professional services totaling
$17,857.
During the six months ended June 30, 2004, the Company issued: 4,000,000 shares
and raised $200,000, issued an aggregate of 1,075,000 shares of its common stock
for professional services, 14,923,958 shares of its common stock in connection
with the voluntary surrender of a non-dilution agreement and issued an aggregate
of 17,787,671 shares of its common stock in connection with the debenture
liabilities settlement.
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.
On June 4, 2004, the Company convened a special meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred and 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.
ITEM 5 - OTHER INFORMATION
None.
16
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. 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 10.2 to the Company's
Amendment to Annual Report on Form 10K/A for the fiscal year
ended December 31, 2003.
* 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
On June 4, 2004, the Company convened a special meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred and Series F Preferred
stockholders (together the "Stockholders"). The Stockholders, voting as a single
class, voted on 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.
17
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.
8/13/2004 /s/ David A. Conway
Date -----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
18
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.
19