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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 September 30, 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
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
68 South Service Road, Suite 100, Melville, New York 11747
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(Address of Principal Executive Offices)
631-577-7915
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(Issuer's Telephone Number, Including Area Code)
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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 November 12, 2007
CLASS Common
----- ------
Par value $0.001 per share 193,351,401
Transitional small business disclosure format (check one) Yes No X
----- -----
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WATER CHEF, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION:
ITEM 1: FINANCIAL STATEMENTS:
Condensed Balance Sheet (Unaudited)
At September 30, 2007 2-3
Condensed Statements of Operations (Unaudited)
For the Three Months Ended September 30, 2007 and 2006
For the Nine Months Ended September 30, 2007 and 2006
For the Period January 1, 2002 to September 30, 2007 4
Condensed Statement of Stockholders' Deficiency (Unaudited)
For the Nine Months Ended September 30, 2007
5-6
Condensed Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
For the Period January 1, 2002 to September 30, 2007 7-8
Notes to Condensed Financial Statements (Unaudited) 9-18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 19-22
ITEM 3: CONTROLS AND PROCEDURES 23-24
PART II: OTHER INFORMATION:
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
ITEM 6: EXHIBITS 26
SIGNATURE 27
1
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2007
ASSETS
CURRENT ASSETS:
Cash $140,495
Prepaid expenses and other current assets 22,714
--------
Total Current Assets 163,209
--------
FIXED ASSETS:
Property and equipment net of accumulated
depreciation of $1,508 32,338
--------
OTHER ASSETS
Patents and trademarks, net of accumulated
amortization of $12,415 39,183
Deferred financing fees, net of accumulated amortization
of $1,225 6,275
Other assets 6,360
--------
Total Other Assets 51,818
--------
TOTAL ASSETS $247,365
========
See notes to condensed financial statements.
2
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2007
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 476,176
Accrued compensation 162,000
Accrued consulting and director fees 166,000
Convertible notes payable to officer and director
(including accrued interest of $5,329) 105,329
Notes and convertible notes payable
(net of unamortized discount $169,750
and accrued interest of $415,749) 1,085,754
Fair value of detachable warrants and options 279,300
Fair value of embedded conversion options 299,300
Accrued dividends payable 190,084
------------
TOTAL CURRENT LIABILITIES 2,763,943
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Preferred stock $.001 par value; 10,000,000 shares
Authorized; 185,819 shares issued and outstanding,
(liquidation preference $2,348,575) 186
Common stock $.001 par value; 340,000,000 shares authorized;
190,196,243 shares issued and 190,191,843 shares outstanding 190,191
Additional paid-in capital 25,380,216
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 (13,549,807)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,516,578)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 247,365
============
See notes to condensed financial statements.
3
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the period
For the Three Months Ended For the Nine Months Ended January 1, 2002
September 30, September 30, to September 30,
------------- ------------- -------------
2007 2006 2007 2006 2007
------------- ------------- ------------- ------------- -------------
SALES $ -- $ -- $ -- $ 115,000 $ 471,290
------------- ------------- ------------- ------------- -------------
COST OF SALES -- 21,000 23,000 93,000 575,680
SELLING, GENERAL AND ADMINISTRATIVE
Including stock based compensation of
$46,539 and $0 for the three months
ended September 30, 2007 and 2006 and
$550,377 and $767,699 for the nine months
ended September 30,2007 and 2006, and
$2,085,466 for the period January 1, 2002
to September 30, 2007, respectively 346,873 118,335 1,267,128 1,282,272 6,924,179
NON-DILUTION AGREEMENT TERMINATION COST -- -- -- -- 2,462,453
INTEREST EXPENSE Including interest expense
to related parties of $2,466 and $5,967 for
the three months ended September 30, 2007
and 2006 and $5,329 and $5,967 for the nine
months ended September 30, 2007 and 2006,
and $124,669 for the period January 1, 2002
through September 30, 2007, respectively 38,057 43,018 177,257 234,882 1,283,818
RESEARCH AND DEVELOPMENT 75,000 -- 75,000 -- 75,000
FINANCING COSTS - EXTENSION OF WARRANTS -- -- -- -- 74,700
LOSS ON SETTLEMENT OF DEBT -- -- -- -- 2,614,017
INTEREST EXPENSE - CONVERSION PROVISION 22,550 -- 135,550 -- 135,550
CHANGE IN FAIR VALUE OF WARRANTS
AND EMBEDDED CONVERSION OPTION (270,800) -- (252,400) 186,600 (124,300)
------------- ------------- ------------- ------------- -------------
211,680 182,353 1,425,535 1,796,754 14,021,097
------------- ------------- ------------- ------------- -------------
NET LOSS (211,680) (182,353) (1,425,535) (1,681,754) (13,549,807)
------------- ------------- ------------- ------------- -------------
DEEMED DIVIDEND ON PREFERRED STOCK -- -- -- -- (2,072,296)
PREFERRED STOCK DIVIDENDS -- -- ( 213) ( 42,401) ( 509,280)
------------- ------------- ------------- ------------- -------------
-- -- ( 213) ( 42,401) ( 2,581,576)
------------- ------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (211,680) $ (182,353) $( 1,425,748) $ (1,724,155) $ (16,131,383)
------------- ------------- ------------- ------------- -------------
BASIC AND DILUTED LOSS PER COMMON SHARE $( 0.00) $ (0.00) $( 0.01) $( 0.01)
------------- ------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING BASIC AND DILUTED 190,196,243 198,795,306 188,606,912 191,550,874
------------- ------------- ------------- -------------
See notes to condensed financial statements.
4
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------- ------------- ------------- ------------- -------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
BALANCE - JANUARY 1, 2007 188,917 $ 189 198,977,497 $ 198,977 $ 22,836,764
Proceeds from Sale of Common Stock:
($0.090 per share) May 10, 2007 -- -- 1,111,112 1,111 98,889
($0.083 per share) May 10, 2007 -- -- 2,409,640 2,409 197,591
($0.090 per share) May 31, 2007 -- -- 555,555 555 49,445
($0.083 per share) June 26, 2007 -- -- 1,203,080 1,203 98,797
Stock for compensation:
($0.110 per share) May 2, 2007 -- -- 2,500,000 2,500 272,500
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
($0.095 per share) April 4, 2007 -- -- 546,901 547 51,354
($0.086 per share) May 1, 2007 -- -- 908,885 909 77,345
Stock for late payment penalty:
($0.100 per share) May 22, 2007 -- -- 100,000 100 9,900
Preferred stock converted to common stock:
During the quarter ended March 31, 2007 ( 2,848) ( 3) 113,920 114 ( 111)
During the quarter ended June 30, 2007 ( 250) -- 10,000 10 ( 10)
Cancellation of debt for no consideration -- -- -- -- 1,327,321
Surrender and cancellation of common stock -- -- (20,000,000) ( 20,000) 20,000
Reclassification of derivative liability
to equity upon conversion of debt -- -- -- -- 140,000
Reclassification of options to non employees to
derivative liability -- -- -- -- (247,100)
Reclassification of derivative liability to
equity upon conversion of preferred stock -- -- -- -- 3,200
Amortization of warrants and option
over the vesting period for employees and
non employees -- -- -- -- 265,377
Stock to be issued for settlement of debt -- -- -- -- --
Preferred stock dividend -- -- -- -- ( 213)
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE - SEPTEMBER 30, 2007 185,819 $ 186 190,191,843 $ 190,191 $ 25,380,216
============= ============= ============= ============= =============
See notes to condensed financial statements.
5
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
(CONTINUED)
Deficit Deficit
Accumulated Accumulated
Common Treasury through During Total
Stock to be Stock December 31, Development Stockholders'
Issued - at cost 2001 Stage Deficiency
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2007
BALANCE - JANUARY 1, 2007 -- $ (5,768) $(14,531,596) $(12,124,272) $ (3,625,706)
Proceeds from Sale of Common Stock:
($0.090 per share) May 10, 2007 -- -- -- -- 100,000
($0.083 per share) May 10, 2007 -- -- -- -- 200,000
($0.090 per share) May 31, 2007 -- -- -- -- 50,000
($0.083 per share) June 26, 2007 -- -- -- -- 100,000
Stock for compensation:
($0.110 per share) May 2, 2007 -- -- -- -- 275,000
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
($0.095 per share) April 4, 2007 -- -- -- -- 51,901
($0.086 per share) May 1, 2007 -- -- -- -- 78,254
Stock for late payment penalty:
($0.100 per share) May 22, 2007 -- -- -- -- 10,000
Preferred stock converted to common stock:
During the quarter ended March 31, 2007 -- -- -- -- --
During the quarter ended June 30, 2007 -- -- -- -- --
Cancellation of debt for no consideration -- -- -- -- 1,327,321
Surrender and cancellation of common stock -- -- -- -- --
Reclassification of derivative liability
to equity upon conversion of debt -- -- -- -- 140,000
Reclassification of options to non
employees to derivative liability -- -- -- -- (247,100)
Reclassification of derivative liability to
equity upon conversion of preferred stock -- -- -- -- 3,200
Amortization of warrants and option over
the vesting period for employees and
non employees -- -- -- -- 265,377
Preferred stock dividend -- -- -- -- ( 213)
Net loss -- -- -- (1,425,535) (1,425,535)
------------ ------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2007 $ -- $ (5,768) $(14,531,596) $(13,549,807) $ (2,516,578)
============ ============ ============ ============ ============
See notes to condensed financial statements.
6
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
For the Nine Months Ended January 1, 2002
September 30, to September 30,
2007 2006 2007
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,425,535) $ (1,681,754) $(13,549,807)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,508 -- 1,508
Amortization of patents 1,763 1,390 11,033
Interest expense - deferred financing 5,942 4,687 16,255
Stock-based compensation 550,377 767,699 2,095,466
Interest expense - conversion provision 135,550 -- 135,550
Accretion of debt discount 81,200 112,800 373,720
Change in fair value of warrants and embedded
conversion option (252,400) 186,600 (124,300)
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:
Inventory -- 30,000 --
Prepaid expenses and other current assets ( 3,432) 16,976 33,786
Other assets ( 3,198) -- ( 3,198)
Accounts payable, accrued expenses and other current
liabilities, accrued compensation, accrued consulting
and director fees, accrued dividends and customer
deposits 273,758 ( 208,914) 1,671,749
------------ ------------ ------------
Net Cash Used in Operating Activities ( 634,467) ( 770,516) ( 4,006,018)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ( 33,846) -- ( 33,846)
Patent Costs ( 25,543) -- ( 25,543)
------------ ------------ ------------
Cash Used in Investing Activities $ (59,389) $ -- $ (59,389)
------------ ------------ ------------
See notes to condensed financial statements.
7
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
For the Nine Months Ended January 1, 2002
September 30, to September 30,
2007 2006 2007
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable $ -- $ -- $ 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 450,000 568,000 1,990,560
Proceeds from sale of common stock to be issued -- -- 200,000
Deferred financing costs (7,530) -- ( 22,530)
Proceeds from convertible promissory notes 250,000 -- 800,000
Proceeds from officers and directors loans 100,000 -- 100,000
Repayment of notes payable ( 57,835) ( 15,962) ( 93,466)
----------- ----------- -----------
Net Cash Provided by Financing Activities 734,635 552,038 4,170,391
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 40,779 ( 218,478) 104,984
CASH AT BEGINNING OF PERIOD 99,716 244,595 35,511
----------- ----------- -----------
CASH AT END OF PERIOD $ 140,495 $ 26,117 $ 140,495
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 9,083 $ -- $ 366,014
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Compensation satisfied by issuance of common stock $ -- $ -- $ 55,250
----------- ----------- -----------
Common stock issued in satisfaction of liabilities $ 311,078 $ 650,563 $ 6,675,362
----------- ----------- -----------
Reclassification of derivative liabilities upon
conversion of debt $ 140,000 $ 368,800 $ 508,800
----------- ----------- -----------
Reclassification of equity instruments to liabilities $ 247,100 $ -- $ 536,000
----------- ----------- -----------
Reclassification of derivative liabilities upon
conversion of preferred stock $ 3,200 $ -- $ 3,200
----------- ----------- -----------
Cancellation of debt for no consideration $ 1,327,321 $ -- $ 1,327,321
----------- ----------- -----------
See notes to condensed financial statements.
8
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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 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 and nine-month periods ended September 30,
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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.
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.
9
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: GOING CONCERN
The accompanying unaudited 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 $28,080,000 and has a working capital deficiency of
approximately $2,600,000 at September 30, 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 unaudited condensed 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 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 is not
expected to 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.
10
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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.
11
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4: RECENT ACCOUNTING STANDARDS (Continued)
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.
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 September 30,
2007, no liability for unrecognized tax benefits was required to be recorded.
The Company recognized a deferred tax asset of approximately $8.5 million as of
September 30, 2007, primarily relating to net operating loss carry-forwards of
approximately $25 million through 2006, available to offset future taxable
income. The ultimate utilization of such net operating losses may be limited as
a result of changes in ownership (section 382 of the Internal Revenue Code) of
the Company.
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.
12
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5: CONVERTIBLE PROMISSORY NOTES
On October 17, 2006, the Company entered into a Convertible Promissory Note and
received proceeds of $300,000. The loan had 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 were convertible at any time after the maturity date into
shares of the Company's common stock at a conversion price equal to 82.5% of the
then current market price. 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 fair
value of the warrants and $161,400 related to the fair value of the embedded
conversion option. The debt discount was charged to interest expense ratably
over the life of the loan. The lender converted the entire note of $300,000 and
$11,078 of interest into 3,211,039 shares of common stock during the six months
ended June 30, 2007. The Convertible Promissory Note was secured by 4,000,000
shares of the Company's common stock held by a former officer of the Company.
Certain security shares pledged as collateral for the note were returned upon
the registration of the common stock underlying the convertible debenture.
13
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5: CONVERTIBLE PROMISSORY NOTES (Continued)
On September 7, 2007, the Company entered into an agreement (the "Loan
Agreement"), pursuant to which the Company issued convertible notes in the
aggregate of $250,000 at an interest rate of 10% per annum. In addition, the
Company issued 1,384,786 warrants to purchase common stock at an exercise price
of $0.096 per share. The notes mature on March 5, 2008. The holders of the notes
are entitled to convert all or a portion of the notes into shares of common
stock at a conversion price equal to the lower of $0.12 per share or 82.5% of
the average of the three lowest closing bid prices for the 10 trading days
immediately preceding the conversion date. The notes and warrants provide rights
to the holders to convert the notes or exercise the warrants. However such
actions cannot result in the holders being the beneficial owner of more than
4.99% of the Company's outstanding common stock at that time.
Under the terms of the agreement the Company is required to file a registration
statement covering the resale of the shares issuable under the agreement by
October 17, 2007. In addition, the Company is obligated to obtain an effective
registration statement by December 16, 2007. If the Company is unable to have
the registration statement declared effective, the Company will incur penalties
of 2% per month of the principal balance. The Company filed the registration
statement on October 17, 2007.
The Loan Agreement provides that the lenders are contingently obligated to lend
the Company an additional aggregate amount of $150,000 when and if the
registration statement is declared effective. The substantive terms and
conditions of the notes and warrants to be issued on the second closing date
will be same as those in the notes and warrants issued on September 7, 2007.
The Company accounted for the September 7, 2007 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.". Accordingly, the
warrants and the embedded conversion option are recorded as derivative
liabilities at their fair market value and are marked to market through earnings
at the end of each reporting period. The gross proceeds of $250,000 were
recorded net of a discount of $203,000. The debt discount consisted of $68,400
related to the fair value of the warrants and $135,300 related to the fair value
of the embedded conversion option. The debt discount is charged to interest
expense ratably over the life of the loan.
NOTE 6: EQUITY AGREEMENT
On September 7, 2007, the Company entered into a private equity credit agreement
(the "Equity Agreement") pursuant to which the Company may, at its discretion,
periodically sell shares of the Company's common stock to an investor for a
total purchase price of up to $5.0 million. For each share of common stock
purchased under the Equity Agreement, the investor will pay the Company 94% of
the three lowest closing bid prices during the valuation period of the Company's
common stock for the 5 trading days immediately following the notice date. The
investor's obligation to purchase shares of the Company's common stock under the
Equity Agreement is subject to certain conditions, including volume limitations,
the Company obtaining an effective registration statement for shares of common
stock sold under the Equity Agreement and, among other things, is limited to
purchases that will not result in the investor being the beneficial owner of
more than 4.99% of the Company's outstanding common stock at that time. To date
no funds have been received under this agreement.
Under the terms of the Equity Agreement the Company is required to file a
registration statement and obtain its effectiveness prior to issuing any shares
under the Equity Agreement. Should the Company not maintain the effectiveness of
the registration statement the Company will be obligated to pay damages of 2%
per month of the cost of the outstanding shares held by the investor.
NOTE 7: CONSULTING AGREEMENT
In October 2007, the Company formalized a consulting agreement for services
regarding the development of an international marketing program. The Company
agreed to compensate the consultant at a monthly rate of $8,000. The term of the
consulting agreement is for 36 months commencing from January 1, 2007 renewable
for an additional one year term. Under the terms of the agreement the consultant
is eligible to receive from the Company two million shares of the Company's
common stock (as of September 30, 2007 no shares have been granted). On April 1,
2007, the Company granted to the consultant 2,000,000 warrants to purchase
common stock, having a life of 3 years and exercisable at $0.1175 per share and
carry a cashless exercise provision. The fair value of the warrants of
approximately $121,000 was determined using the black scholes option valuation
model and is charged to operations ratably over the vesting term of the
warrants.
14
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8: 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, convertible preferred stock and convertible notes. 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 and convertible promissory notes
for the nine months ended September 30, 2007 and 2006 were as follows:
September 30,
-------------
2007 2006
---- ----
Warrants 18,297,138 6,930,000
Convertible promissory notes 8,210,375 --
Convertible preferred stock 1,622,760 1,736,680
---------- ---------
Total 28,130,273 8,666,680
========== =========
15
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9: STOCKHOLDERS' DEFICIENCY
Debt
During the nine months ended September 30, 2007, the Company issued 3,211,039
shares of common stock for $300,000 of debt principal and $11,078 of accrued
interest.
Conversion of preferred stock into common stock During the nine months ended
September 30, 2007, the Company issued 123,920 shares of common stock in
connection with the conversion of 3,098 shares of preferred stock.
Cash
During the nine months ended September 30, 2007, the Company raised $450,000
through the sale of 5,279,387 shares of common stock.
Services
During the nine months ended September 30, 2007, the Company issued 100,000
shares of common stock in satisfaction of a late payment penalty to one of its
note holders. The Company recorded a charge of $10,000.
During the nine months ended September 30, 2007, the Company issued 2,500,000
shares of common stock to two management employees for services. The Company
incurred a stock based compensation charge of $275,000.
During the nine months ended September 30, 2007, the Company granted 9,100,000
warrants to various employees and consultants for services. Of this amount
4,100,000 warrant shares fully vested on the date of the grant, and 5,000,000
will vest over the life of the warrant. Each of the warrants has a life of three
years, and is exercisable at $0.11 to $0.1175 per share. The Company incurred a
stock based compensation charge of $265,377.
Relinquishment of common stock
Effective with the resignation of the President and Chief Executive Officer on
January 29, 2007, 20,000,000 shares of common stock were returned to the
Company. The return of the shares were immediately retired and cancelled.
NOTE 10: RELATED PARTY TRANSACTIONS
On January 29, 2007, the Company's President and Chief Executive Officer who
resigned, also surrendered his stock appreciation rights, any unpaid severance
under his employment agreement, forgave $525,738 of notes payable and accrued
interest, and relinquished his rights to $471,583 of unpaid and accrued salary.
The Company recorded the forgiveness of such liabilities as a contribution to
capital. The cancellation of the stock appreciation rights did not have an
accounting impact.
16
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WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10: RELATED PARTY TRANSACTIONS (Continued)
On February 12, 2007, A Director of the Company 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 recorded the forgiveness of such liabilities
as a contribution to capital.
In January 2007, The Company appointed a new President. In connection with this
employment, the President will be paid $9,000 per month. In addition, the
Company issued 2,000,000 shares of the Company's common stock and granted
warrants 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 will provide for certain
performance-based cash incentives. During the nine months ended September 30,
2007, the Company issued the 2,000,000 shares of common stock at a fair value of
$220,000 and granted the warrants at a fair value of $125,200. The warrants were
valued using the Black-Scholes option valuation model and are charged to
operations ratably over the vesting term of warrants. As of September 30, 2007,
the terms of the President's employment agreement have not been executed. On
September 28, 2007, the Company modified the terms of the warrants previously
granted to the President to include a cashless exercise provision. There was no
accounting impact for this modification.
In March 2007, the Chief Executive Officer and a Director each made loans of
$50,000 each to the Company. The loans pay simple interest at the rate of 10%
per annum and are due and payable in 120 days. The loans to the Chief Executive
Officer and the Director carry an option that if the loans are not repaid by
June 14, 2007 and June 29, 2007, respectively, such option 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. The Company recorded a
charge of $113,000 during the nine months ended September 30, 2007 for the
embedded conversion option. Under accounting guidance provide by EITF 00-19, the
conversion price of the loans did not have a determinable number of shares the
loans could be settled in and as a result, have been presented as a derivative
liability. Accordingly, the conversion option will be marked to market through
earnings at the end of each reporting period. As of September 30, 2007, the
Company has not repaid these loans.
On September 5, 2007, the Company appointed a Chief Financial Officer. The
Company is negotiating the terms of the Chief Financial Officer's employment
agreement and expects to finalize the terms during the fourth quarter of 2007.
NOTE 11: MAJOR CUSTOMERS / CREDIT RISK
During the nine months ended September 30, 2007, the Company had no sales.
During the nine months ended September 30, 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.
As of September 30, 2007, the uninsured cash balance was approximately $41,500.
The Company believes it is not exposed to any significant credit risk for cash.
NOTE 12: COMMITMENTS AND CONTINGENCIES
o 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.
o The Company entered into a lease beginning on October 1, 2007 in
Essex, Connecticut for its showroom and assembly facility. The cost of
the lease is for approximately $1,500 per month and has a term of one
year with two options to extend the lease for additional one year
periods.
17
================================================================================
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13: SUBSEQUENT EVENTS
o On October 11, 2007, the Company entered into a settlement agreement
with a note holder. Under the settlement, the Company is obligated to
make payments of $75,000 on, or before, each of December 31, 2007 and
June 30, 2008 and to issue 2,500,000 shares of common stock to the
note holder as settlement for a secured promissory note, dated May 4,
2001, in the original principal amount of $400,000.
o In October 2007 the Company issued 3,159,558 shares of common stock
and 631,912 warrants to purchase common stock for cash proceeds of
$200,000.
18
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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
Sales for the nine months ended September 30, 2007 and 2006 were $0 and
$115,000, respectively. During the nine months ended September 30, 2006, the
Company recognized the sale of two PureSafe Water Station Systems
Cost of sales for the nine month period ended September 30, 2007 and 2006 was
$23,000 and $93,000, respectively. An analysis of the components of cost of
sales in the 2007 and 2006 periods follows:
Rent and
Overhead
Product Payments to
Costs of Sales Period CGS Manufacturer Total
For the nine months ended
September 30, 2007 $ -- $ 23,000 $ 23,000
For the nine months ended
September 30, 2006 $ 30,000 $ 63,000 $ 93,000
19
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (Continued)
Results of Operations (Continued)
Selling, general and administrative expenses for the nine months ended September
30, 2007 were $1,267,128 compared to $1,282,272 for the nine months ended
September 30, 2006.
The net loss for the nine months ended September 30, 2007 was $1,425, 535
compared to $1,681,754 in the same period ended September 30, 2006.
Liquidity and Capital Resources
At September 30, 2007, the Company had a working capital deficiency of
approximately $2,600,000. In addition, the Company continues to suffer recurring
losses from operations and has an accumulated deficit since inception of
approximately $28,080,000. 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 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. 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 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 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. As of
September 30, 2007, the Company has not repaid these loans.
On September 7, 2007, the Company entered into an agreement (the "Loan
Agreement"), pursuant to which the Company issued convertible notes in the
aggregate of $250,000 at an interest rate of 10% per annum. In addition, the
Company issued 1,384,786 warrants to purchase common stock at an exercise price
of $0.096 per share. The notes mature on March 5, 2008. The holders of the notes
are entitled to convert all or a portion of the notes into shares of common
stock at a conversion price equal to the lower of $0.12 per share or 82.5% of
the average of the three lowest closing bid prices for the 10 trading days
immediately preceding the conversion date. The notes and warrants provide rights
to the holders to convert the notes or exercise the warrants and provided that
such actions should not result in the holders being the beneficial owner of more
than 4.99% of the Company's outstanding common stock at that time.
Under the terms of the agreement the Company is required to file a registration
statement covering the resale of the shares issuable under the agreement by
October 17, 2007. In addition the Company is obligated to obtain an effective
registration statement by December 16, 2007. If the Company is unable to have
the registration statement declared effective, the Company will incur penalties
of 2% per month of the principal balance. The Company filed the registration
statement on October 16, 2007.
The Loan Agreement provides that the lenders are contingently obligated to lend
the Company an additional aggregate amount of $150,000 when and if the
registration statement is declared effective. The substantive terms and
conditions of the notes and warrants to be issued on the second closing date
will be same as those in the notes and warrants issued on September 7, 2007.
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.
20
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (Continued)
Recent Accounting Standards (Continued)
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 is not
expected to 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.
21
================================================================================
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (Continued)
Recent Accounting Standards (Continued)
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.
22
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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, have 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 have 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 was a lack of segregation of duties at the
Company due to the small number of employees who were dealing with general
administrative and financial matters. This constituted 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. In addition, on September 5, 2007, the Company
hired a new Chief Financial Officer.
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, the benefit 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 also considered a significant deficiency. In recent
years we have consummated a series of complex debt and equity transactions
involving the application of 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 September 30, 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 nine months ended September 30, 2007 that have materially affected or
that are reasonably likely to affect the internal controls.
23
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ITEM 3: CONTROLS AND PROCEDURES (Continued)
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.
24
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PART II - OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2007, the Company issued 3,211,039
shares of common stock for the settlement of $311,078 of debt and accrued
interest.
During the nine months ended September 30, 2007, the Company issued 123,920
shares of common stock in connection with the conversion of 3,098 shares of
preferred stock.
During the nine months ended September 30, 2007, the Company raised $450,000
through the sale of 5,279,387 shares of common stock.
During the nine months ended September 30, 2007, the Company issued 100,000
shares of common stock in satisfaction of a late payment penalty to one of its
note holders. The Company recorded a charge of $10,000.
During the nine months ended September 30, 2007 the Company issued 2,500,000
shares of common stock to two management employees for services. The Company
incurred a stock based compensation charge of $275,000.
During the nine months ended September 30, 2007, the Company granted 9,100,000
warrants for services. Of this amount 4,100,000 warrant shares fully vested on
the date of the grant, and the balance vest over the life of the grant. Each of
the warrants has a life of three years, and is exercisable at $0.11 to $0.1175
per share. The Company incurred a stock based compensation charge of $265,377.
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 thereunder. These shares were offered to less than 35
"non-accredited" investors and were purchased for investment purposes with no
view to resale.
25
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ITEM 6: EXHIBITS
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 8
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 8
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
26
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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.
Date: November 19, 2007 /s/ Leslie J. Kessler
---------------------------------
Leslie J. Kessler,
President and
Chief Executive Officer,
(Principal Executive Officer)
Date: November 19, 2007 /s/ Terry R. Lazar
----------------------------------
Terry R. Lazar
Director and Chief Financial
Officer (Principal Financial
and Accounting Officer)
27