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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 1-09478
WATER CHEF, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 86-0515678
------------------------------ -----------------
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
68 South Service Road, Suite 100, Melville, New York 11747
--------------------------------------
(Address of Principal Executive Offices)
631-577-7915
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(Issuer's Telephone Number, Including Area Code)
1007 Glen Cove Avenue, Glen Head, New York 11545
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(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
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes No X
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date.
OUTSTANDING AS OF May 2, 2007
CLASS Common
----- ------
Par value $0.001 per share 184,802,456
Transitional small business disclosure format (check one): Yes No X
----- -----
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Page 1
WATER CHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 3
At March 31, 2007
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 4
For the Three Months Ended March 31, 2007 and 2006
For the Period January 1, 2002 to March 31, 2007
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 5-6
For the Three Months Ended March 31, 2007
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 7
For the Three Months Ended March 31, 2007 and 2006
For the Period January 1, 2002 to March 31, 2007
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 8-13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 14
OF OPERATION
ITEM 3 - CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION:
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 6 - EXHIBITS 18
SIGNATURE 19
CERTIFICATIONS
i
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Page2
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT MARCH 31, 2007
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 39,388
Prepaid expenses 6,833
------------
TOTAL CURRENT ASSETS 46,221
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $11,115 14,940
Other assets 6,360
------------
TOTAL OTHER ASSETS 21,300
------------
TOTAL ASSETS $ 67,521
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 368,533
Accrued compensation 108,000
Accrued consulting and director fees 140,583
Notes payable to officer and director (including accrued
Interest of $397 100,397
Notes payable (including accrued interest of $373,553) 1,021,144
Convertible promissory note (including accrued interest
of $5,867) 130,867
Fair value of detachable warrants and options 437,600
Fair value of embedded conversion options 61,400
Accrued dividends payable 190,010
------------
TOTAL CURRENT LIABILITIES 2,558,534
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000
shares authorized; 186,069 shares issued and outstanding,
(liquidation preference $2,294,425) 186
Common stock - $.001 par value; 340,000,000 shares
authorized; 180,845,070 shares issued and 180,840,670
shares outstanding 180,847
Additional paid-in capital 24,386,902
Treasury stock, at cost - 4,400 shares of common stock (5,768)
Deficit accumulated through December 31, 2001 (14,531,596)
Deficit accumulated during development stage (12,521,584)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,491,013)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 67,521
============
See notes to condensed financial statements.
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Page 3
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31, For the Period
------------------------------ January 1,2002 to
2007 2006 March 31, 2007
------------- ------------- -------------
Sales $ -- $ 115,000 $ 471,290
------------- ------------- -------------
Costs and Expenses (Income)
COST OF SALES 15,000 51,000 567,680
SELLING, GENERAL AND ADMINISTRATIVE -
Including stock based compensation of
$0 and $15,000 for the three months ended
March 31, 2007 and 2006, respectively and
$1,545,089 for the period January 1, 2002 to
March 31, 2007, respectively 162,537 284,971 5,819,588
NON-DILUTION AGREEMENT TERMINATION COSTS -- -- 2,462,453
INTEREST EXPENSE - including interest expense
to a related party of $397 and $5,967 for the
three months ended March 31, 2007 and 2006,
respectively and $119,737 for the period
January 1, 2002 through March 31, 2007 107,275 155,800 1,213,836
FINANCING COSTS - EXTENSION OF WARRANTS -- -- 74,700
LOSS ON SETTLEMENT OF DEBT -- -- 2,614,017
CHANGE IN FAIR VALUE OF WARRANTS AND EMBEDDED
CONVERSION OPTION 112,500 114,200 240,600
------------- ------------- -------------
397,312 605,971 12,992,874
------------- ------------- -------------
NET LOSS (397,312) (490,971) (12,521,584)
------------- ------------- -------------
DEEMED DIVIDEND ON PREFERRED STOCK -- -- (2,072,296)
PREFERRED STOCK DIVIDENDS (139) -- (509,206)
------------- ------------- -------------
(139) -- (2,581,502)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (397,451) $ (490,971) $ (15,103,086)
============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.00) $ (0.00)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 189,766,250 182,431,046
============= =============
See notes to condensed financial statements.
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Page 4
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2007
BALANCE - JANUARY 1, 2007 188,917 $ 189 198,977,497 $ 198,977 $ 22,836,764
Common stock issued in repayment of debt
($0.132 per share) February 26, 2007 -- -- 195,212 195 25,534
($0.111 per share) March 8, 2007 -- -- 234,165 234 25,571
($0.107 per share) March 14, 2007 -- -- 256,643 257 25,587
($0.099 per share) March 19, 2007 -- -- 262,650 263 25,608
($0.097 per share) March 23, 2007 -- -- 806,583 807 76,867
Preferred stock converted to common stock
during the quarter ended March 31, 2007 (2,848) (3) 113,920 114 (111)
Cancellation of debt for no consideration -- -- -- -- 1,327,321
Surrender and cancellation of commons stock -- -- (20,000,000) (20,000) 20,000
Reclassification of derivative liability
to equity upon conversion of debt -- -- -- -- 20,900
Reclassification of derivative liability
to equity upon conversion of preferred stock -- -- -- -- 3,000
Preferred stock dividend -- -- -- -- (139)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - March 31, 2007 186,069 $ 186 180,846,670 $ 180,847 $ 24,386,902
============ ============ ============ ============ ============
See notes to condensed financial statements.
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Page 5
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
(Continued)
Deficit Deficit
Accumulated Accumulated
Treasury Through During Total
Stock December Development Stockholders'
-at cost 31, 2001 Stage Deficiency
------------ ------------ ------------ ------------
FOR THE THREE MONTHS ENDED March 31, 2007
BALANCE - JANUARY 1, 2007 $ (5,768) $(14,531,596) $(12,124,272) $ (3,625,706)
Common stock issued in repayment of debt
($0.132 per share) February 26, 2007 -- -- -- 25,729
($0.111 per share) March 8, 2007 -- -- -- 25,805
($0.107 per share) March 14, 2007 -- -- -- 25,844
($0.099 per share) March 19, 2007 -- -- -- 25,871
($0.097 per share) March 23, 2007 -- -- -- 77,674
Preferred stock converted to common stock
during the quarter ended March 31, 2007 -- -- -- --
Cancellation of debt for no consideration -- -- -- 1,327,321
Surrender and cancellation of commons stock -- -- -- --
Reclassification of derivative liability
to equity upon conversion of debt -- -- -- 20,900
Reclassification of derivative liability
to equity upon conversion of preferred stock -- -- -- 3,000
Preferred stock dividend -- -- -- (139)
Net loss -- -- (397,312) (397,312)
------------ ------------ ------------ ------------
BALANCE - March 31, 2007 $ (5,768) $(14,531,596) $(12,521,584) $ (2,491,013)
============ ============ ============ ============
See notes to condensed financial statements.
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Page 6
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended For the Period
March 31, January 1, 2002
---------------------------- (Inception) to
2007 2006 March 31, 2007
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (397,312) $ (490,971) $(12,521,584)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of patents 463 463 9,733
Interest expense - deferred financing 4,687 4,687 15,000
Stock-based compensation -- 15,000 1,545,089
Accretion of debt discount 69,800 112,800 362,320
Change in fair value of warrants and
embedded conversion option 112,500 114,200 240,600
Loss on settlement of debt -- -- 2,614,017
Non-dilution agreement termination cost -- -- 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing cost - warrant extension -- -- 74,700
Changes in assets and liabilities:
Prepaid expenses 12,449 (5,705) 49,667
Security deposits (3,198) -- (3,198)
Inventory -- 30,000 --
Accounts payable, accrued expenses, accrued
dividends, accrued compensation, accrued
Consulting and director fees, and
other current liabilities 40,283 (69,546) 1,438,274
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (160,328) (289,072) (3,531,879)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in stock subscription receivable -- -- 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock -- 250,000 1,540,560
Proceeds from sale of common stock
to be issued -- -- 200,000
Deferred financing costs -- -- (15,000)
Proceeds from convertible promissory note -- -- 550,000
Proceeds from officers and director loans 100,000 -- 100,000
Repayment of notes payable -- (8,602) (35,631)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 100,000 241,398 3,535,756
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (60,328) (47,674) 3,877
CASH AT BEGINNING OF PERIOD 99,716 244,595 35,511
------------ ------------ ------------
CASH AT END OF PERIOD $ 39,388 $ 196,921 $ 39,388
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Compensation satisfied by issuance of
common stock $ -- $ -- $ 55,250
============ ============ ============
Common stock issued in
satisfaction of liabilities $ 181,013 $ 48,485 $ 6,545,297
============ ============ ============
Reclassification of derivative liabilities
upon conversion of debt $ 20,900 $ -- $ 389,700
============ ============ ============
Reclassification of derivative liabilities
upon conversion of preferred stock $ 3,000 $ -- $ 3,000
============ ============ ============
Cancellation of debt for no consideration $ 1,327,321 $ -- $ 1,327,321
============ ============ ============
See notes to condensed financial statements.
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Page 7
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware corporation currently engaged in
the design and marketing of water dispensers and purification equipment both
inside and outside the United States. The Company's corporate headquarters are
located in Melville, New York.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
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 interim financial
statements do not include all of the information and footnotes required for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included.
The operating results for the three-month period ended March 31, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007. 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 30, 2007, for the year ended December 31,
2006.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage as defined by Statement of Financial
Accounting Standards ("SFAS") Statement No. 7, "Accounting and Reporting for
Development Stage Companies." To date, the Company has generated limited sales
and has devoted its efforts primarily to developing its products, implementing
its business and marketing strategy and raising working capital through equity
financing or short-term borrowings.
REVENUE RECOGNITION
The Company recognizes its revenues when the product is shipped and or title
passes and collection is reasonably assured.
STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS 123R which replaces SFAS
123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure is no longer an alternative to financial
statement recognition.
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 incurred recurring
losses from operations, an accumulated deficit since its inception of
approximately $27,053,000 and has a working capital deficiency of approximately
$2,512,000 at March 31, 2007. 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. However, there can
be no assurance that the Company will be able to obtain sufficient funds to
continue the development of its product, marketing plan and distribution
network.
The accompanying condensed financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.
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Page 8
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS
In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." The requirements in SFAS 155 are effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006.
The adoption of this pronouncement did not have an impact on the Company's
financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
U.S., and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any cumulative effect
will be recorded as an adjustment to the opening accumulated deficit balance, or
other appropriate component of equity. The adoption of this pronouncement did
not have an impact on the Company's financial position, results of operations or
cash flows.
In September 2006, the SEC staff issued Staff Accounting Bulleting ("SAB") No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years' financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement did not have an impact on
the Company's financial position, results of operations, or cash flows.
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Page 9
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS (continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.
SFAS 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009 The adoption of this pronouncement is not expected
to have an impact on the Company's financial position, results of operations or
cash flows.
In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", to include scope exceptions for registration payment arrangements.
FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement did not have an impact on the Company's financial position,
results of operations or cash flows.
Effective January 1, 2007, the company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as "unrecognized benefits". A liability is recognized (or amount of
net operating loss carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise's potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of FIN 48.
In accordance with FIN 48, interest costs related to unrecognized tax benefits
are required to be calculated (if applicable) and would be classified as
"Interest expense, net" in the consolidated statements of operations. Penalties
would be recognized as a component of "General and administrative expenses".
In many cases the company's uncertain tax positions are related to tax years
that remain subject to examination by relevant tax authorities. The Company
files income tax returns in the United States (federal) and in various state and
local jurisdictions. In most instances, the Company is no longer subject to
federal, state and local income tax examinations by tax authorities for years
prior to 2003.
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Page 10
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS (continued)
The adoption of the provisions of FIN 48 did not have a material impact on the
Company's financial position and results of operations. As of March 31, 2007, no
liability for unrecognized tax benefits was required to be recorded.
The Company recognized a deferred tax asset of approximately $8 million as of
March 31, 2007, primarily relating to net operating loss carryforwards of
approximately $24 million, available to offset future taxable income through
2026.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and tax
planning strategies in making this assessment. At present, the Company does not
have a sufficient history of income to conclude that it is more likely than not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established in the full value of
the deferred tax asset.
A valuation allowance will be maintained until sufficient positive evidence
exists to support the reversal of any portion or all of the valuation allowance
net of appropriate reserves.
NOTE 5 - CONVERTIBLE PROMISSORY NOTES
On October 17, 2006, the Company entered into a Convertible Promissory Note for
proceeds of $300,000. The loan has a stated interest rate of 8% per annum and
matured on February 17, 2007. The Company issued a warrant for 882,352 shares of
the Company's common stock, exercisable at $0.085 per share and has a life of
three years. The warrant has a cashless exercise provision. The note and accrued
interest are convertible at any time after the maturity date into shares of the
Company's common stock at a conversion price equal to the current market price
multiplied by eighty-five percent. After the maturity date, the lender converted
$175,000 of principal and $5,923 of interest to 1,755,253 shares of common stock
in the first quarter.
The Convertible Promissory Note agreement required the Company to file a
registration statement no later than thirty business days from the date of the
agreement for no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
(a) for each 30 day period after the filing date the transpires until the
date that the Company files the registration statement, and
(b) for each 30 day period after the effective date that transpires until
such date as the registration statement is declared effective.
The Company accounted for the above transaction in accordance with EITF issue
No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has determined that
there is an embedded conversion option of the warrants and derivative
liabilities. Accordingly, the warrants and the embedded conversion option are
recorded at fair market value and marked to market through earnings at the end
of each reporting period.
The gross proceeds of $300,000 were recorded net of a discount of $174,200. The
debt discount consisted of $12,800 related to the warrants and $161,400 related
to the embedded conversion option. During the quarter ended March 31, 2007 the
Company charged to interest expense $69,800 for the accretion of the debt
discount.
The warrants and the embedded conversion option were accounted for under EITF
issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" and EITF 05-4, View A "The Effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument." Due to
certain factors and the liquidated damage provision in the registration rights
agreement, the Company determined that the embedded conversion option and the
warrants are derivative liabilities.
--------------------------------------------------------------------------------
Page 11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONVERTIBLE PROMISSORY NOTES (Continued)
Accordingly, the warrants and the embedded conversion option were marked to
market through earnings at the end of each reporting period. The Company
determined that the value of the registration rights was deemed to be de minimis
and the related registration statement became effective in January 2007. The
warrants and the conversion option are valued using the Black-Scholes valuation
model.
The Convertible Promissory Note was secured by 4,000,000 shares of the Company's
common stock held by an officer of the Company.
Under the terms of the note, as of March 31, 2007, the Company is in default.
During the three months ended March 31, 2007, the Company issued 1,755,253
shares of common stock for the settlement of $175,000 of principal and $5,923 of
accrued interest.
Under accounting guidance provide by EITF 00-19, the conversion price of the
convertible promissory note did not have a determinable number of shares the
note could be settled in. As a result, previously granted warrants as well as
the embedded conversion option of the Series F Convertible Preferred Stock were
required to be reclassified from equity and presented as a derivative liability.
Accordingly, the warrants, options and conversion option will be marked to
market through earnings at the end of each reporting period.
For the quarter ended March 31, 2007, the Company reflected a charge of $112,500
representing the change in the fair value of the warrants and the embedded
conversion options.
NOTE 6 - NET LOSS PER SHARE OF COMMON STOCK
Basic loss per share was computed using the weighted average number of
outstanding common shares. Diluted loss per share includes the effect of
dilutive common stock equivalents from the assumed exercise of options, warrants
and convertible preferred stock. Common stock equivalents were excluded in the
computation of diluted loss per share since their inclusion would be
anti-dilutive. Total shares issuable upon the exercise of warrants and
conversion of preferred stock for the three months ended March 31, 2007 and 2006
were 10,476,819 and 11,270,107, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
During April 2007, the Company moved its administrative offices to Melville, New
York subject to a month-to-month lease.
NOTE 8 - COMMON STOCK ISSUED
Debt
----
During the three months ended March 31, 2007, the Company issued 1,755,253
shares of common stock for $175,000 of debt principal and $5,923 of accrued
interest.
Conversion of preferred stock into common stock
-----------------------------------------------
During the three months ended March 31, 2007, the Company issued 113,920 shares
of common stock in connection with the conversion of 2,848 shares of preferred
stock.
Relinquishment of common stock
------------------------------
Effective with his resignation as President and Chief Executive Officer, on
January 29, 2007 David Conway returned to the Company 20,000,000 shares of
common stock owned by him and his affiliates. The return of the shares was
recorded as a retirement and cancellation of the common stock.
NOTE 9 - RELATED PARTY TRANSACTIONS
On January 29, 2007, the Company's President and Chief Executive Officer
resigned and surrendered his stock appreciation rights, any severance under his
employment agreement, returned 20,000,000 shares of common stock, forgave
$525,738 of notes payable and accrued interest, and relinquished his rights to
$471,583 of unpaid and accrued salary.
The Company reclassified the accrued compensation, notes payable and accrued
interest to equity. The return of the shares was recorded as a retirement and
cancellation of the common stock. The cancellation of the stock appreciation
rights did not have an accounting impact.
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - RELATED PARTY TRANSACTIONS (continued)
On February 12, 2007, Marshall S. Sterman resigned from the Board of Directors
and waived his rights to any accrued consulting and director fees owed to him by
the Company. The Company reclassified the debt of $330,000 during the first
quarter ended March 31, 2007 to equity.
In January 2007, Leslie J. Kessler was appointed as President of the Company. In
connection with her employment, she is to receive a salary of $9,000 per month.
In addition, Ms. Kessler will be issued 2,000,000 shares of the Company's common
stock and a warrant to purchase 2,000,000 shares of the Company's common stock.
The warrants are exercisable at $0.11 per share, have a life of three years and
vest over two years. In addition, the employment agreement provides for certain
performance-based cash incentives.
Subsequent to March 31, 2007, the Company issued the 2,000,000 shares of common
stock at a value of $204,000 and granted the warrants at a value of $113,000.
The warrants were valued using the Black Scholes option valuation model.
In March 2007, the Chief Executive Officer and a Director each made bridge loans
of $50,000 to the Company. The loans pay simple interest at the rate of 10% per
annum and are due and payable in 120 days. Failure to repay the loans on a
timely basis will entitle the lenders to convert their debt to common stock at a
price equal to 50% of the average closing price of the Company's common stock
over the three previous business days before demand for conversion is made.
NOTE 10 - MAJOR CUSTOMERS / CREDIT RISK
During the three months ended March 31, 2007, the Company had no sales. During
the three months ended March 31, 2006, the Company sold two units to one
customer and recognized revenues of $115,000.
The Company maintains cash deposits with financial institutions, which from time
to time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk from cash.
NOTE 11 - CONTINGENCIES
On July 14, 2006, Funding Group, Inc. filed a complaint with the Supreme Court
of the State of New York in New York County seeking damages due to an alleged
breach of contract related to a $25,000 loan made by the plaintiff to the
Company. On October 11, 2006, the Company filed a counter claim against Funding
Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
NOTE 12 - SUBSEQUENT EVENTS
In April 2007, the Company issued 1,455,746 shares of common stock for
conversion of the remaining $125,000 of principal and $5,156 of accrued interest
for the Convertible Promissory Note dated October 17, 2006. The repayment of the
Note has been fully satisfied.
In April 2007, the Company entered into an employment agreement with Richard
Ayotte as Vice President of sales and marketing. The executive will be
compensated at an annual salary of $84,000 and eligible for a performance based
incentive bonus up to 50% of the employee's most recent base salary. In
addition, the Company will issue in the aggregate 1,500,000 shares of common
stock of which 500,000 will vest immediately and the remaining 1,000,000 shares
will vest over three years. The Company also granted a warrant to purchase
2,000,000 shares of common stock at an exercise price of $0.11 per share. The
warrants will have a life of three years and vest equally over two years.
Subsequent to March 31, 2007, the Company issued 500,000 shares of common stock
to the Vice President valued at $51,000 and granted warrants for 2,000,000
shares of common stock. The warrants were valued at $105,800 using the Black
Scholes option valuation model and will be charged to operations over the
vesting term of two years.
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ITEM 2 - MANAGEMENT'S 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
--------------------------
This quarterly report on Form 10-QSB contains "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. 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 ("SEC").
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 completed 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
which either do not have access to municipal water treatment systems, or for
those which systems have been compromised, either by environmental factors or by
faulty design or maintenance.
Results of Operations
---------------------
Revenue for the three months ended March 31, 2007 and 2006 were $0 and $115,000,
respectively. During the three months ended March 31, 2006, the Company
recognized the sale of two PureSafe Water Station Systems
Cost of sales for the three month period ended March 31, 2007 and 2006 were
$15,000 and $51,000, respectively. An analysis of the components of cost of
sales in the 2007 and 2006 periods follows:
Cost of Sales Product Rent and Overhead
Period CGS Payments to Manufacturer Total
------------------- --------- ------------------------- ---------
For the three months ended
March 31, 2007 $ -- $ 15,000 $ 15,000
For the three months ended
March 31, 2006 $ 30,000 $ 21,000 $ 51,000
Selling, general and administrative expenses for the three months ended March
31, 2007 were $162,537, compared to $284,971 for the three months ended March
31, 2006, a decrease of 43%
The net loss for the three months ended March 31, 2007 was $397,312 compared to
$490,971 in the same period ended March 31, 2006.
Liquidity and Capital Resources
-------------------------------
At March 31, 2007, the Company had a working capital deficiency of approximately
$2,512,000. In addition, the Company continues to suffer recurring losses from
operations and has an accumulated deficit since inception of approximately
$27,053,000. The accompanying financial statements have been prepared assuming
that that the Company will continue as a going concern. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters include restructuring its
existing debt, raising additional capital through future issuances of stock
and/or equity, and finding sufficient profitable markets for its products to
generate sufficient cash to meet its business obligations. However, there can be
no assurance that the Company will be able to obtain sufficient funds to
continue the development of its product, marketing plan and distribution
network.
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The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
In March 2007. the Chief Executive Officer and a Director each made bridge loans
of $50,000 to the Company. The loans pay simple interest at the rate of 10% per
annum and are due and payable in 120 days. Failure to repay the loans on a
timely basis will entitle the lenders to convert their debt to common stock at a
price equal to 50% of the average closing price of the Company common over the
three previous business days before demand for conversion is made.
Recent Accounting Standards
---------------------------
In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." The requirements in SFAS 155 are effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The adoption of this pronouncement
did not have an impact on the Company's financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
U.S., and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any cumulative effect
will be recorded as an adjustment to the opening accumulated deficit balance, or
other appropriate component of equity. The adoption of this pronouncement did
not have an impact on the Company's financial position, results of operations,
or cash flows.
In September 2006, the SEC staff issued Staff Accounting Bulleting ("SAB") No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years' financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement did not have an impact on
the Company's financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.
SFAS 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009 The adoption of this pronouncement is not expected
to have an impact on the Company's financial position, results of operations or
cash flows.
In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
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consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", to include scope exceptions for registration payment arrangements.
FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement did not have an impact on the Company's financial position,
results of operations or cash flows.
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 promulgated under the Securities Exchange Act of 1934, as amended (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.
Management is aware that there is a lack of segregation of duties at the Company
due to the small number of employees dealing with general administrative and
financial matters. This constitutes a significant deficiency in the financial
reporting. Management has mitigated these factors by hiring an outside
accountant/bookkeeper to review and compile the financial statements on a
quarterly and annual basis.
At this time management has decided that considering the employees involved and
the control procedures in place and the potential benefits of adding additional
employees to clearly segregate duties does not justify the additional expense.
Management will periodically reevaluate this situation. If the volume of the
business increases and sufficient capital is secured, it is the Company's
intention to increase staffing to mitigate the current lack of segregation of
duties within the general administrative and financial functions.
The second reportable condition identified is in our inability to ensure that
the accounting for our debt and equity-based transactions is accurate and
complete. This condition is considered a material weakness. In recent years we
have consummated a series of complex debt and equity transactions involving the
application oh highly specialized accounting principles. Although we believe
these events are unique to our Company, we are evaluating certain corrective
measures we may take including the possibility of hiring an outside consultant
to provide us with the guidance we need at such times that we may engage in
these complex transactions.
Changes in Internal Controls
----------------------------
Management has evaluated the effectiveness of the disclosure controls and
procedures as of March 31, 2007. Based on such evaluation, management has
concluded that the disclosure controls and procedures were effective for their
intended purpose described above. There were no changes to the internal controls
during the quarter ended March 31, 2007 that have materially affected or that
are reasonably likely to affect the internal controls.
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. The
Company's disclosure controls and procedures are designed to provide reasonable
assurance of achieving its objectives. The Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective at that reasonable assurance level.
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PART II - OTHER INFORMATION
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2007, the Company issued 1,755,253
shares of common stock for the settlement of $180,923 of debt and accrued
interest.
During the three months ended March 31, 2007, the Company issued 113,920 shares
of common stock in connection with the conversion of 2,848 shares of preferred
stock.
Effective with his resignation as President and Chief Executive Officer on
January 29, 2007, Mr. Conway has returned to the Company 20,000,000 shares of
common stock owned by him and his affiliates.
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.
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ITEM 6 - EXHIBITS
Exhibit No. Description
----------- -----------
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the 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.
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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.
Water Chef, Inc.
/s/ Leslie J. Kessler
Date May 14, 2007 -----------------------------------
Leslie J. Kessler
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
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