UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
( ) 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.
---------------------------------------------------------------
(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.)
1007 Glen Cove Avenue, Suite 1, Glen Head, New York 11545
--------------------------------------
(Address of principal executive offices)
516-656-0059
-------------------------
(Issuer's telephone number)
(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 No X
----- -----
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
stock, as of the last practicable date.
OUTSTANDING AS OF NOVEMBER 8, 2005
CLASS Common
----- ------
Par value $0.001 per share 178,738,154
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
WATER CHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 1
At September 30, 2005
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 2
For the Three Months Ended September 30, 2005 and 2004
For the Nine Months Ended September 30, 2005 and 2004
For the Period January 1, 2002 to
September 30, 2005
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 3-4
For the Nine Months Ended September 30, 2005
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 5
For the Nine Months Ended September 30, 2005 and 2004
For the Period January 1, 2002 to
September 30, 2005
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 6-8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION 9-10
ITEM 3 - CONTROLS AND PROCEDURES 10
PART II - OTHER INFORMATION:
ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF
EQUITY SECURITIES 11
ITEM 6 - EXHIBITS 11
SIGNATURE 12
CERTIFICATIONS
i
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 2005
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 2,883
Inventory 30,000
Prepaid expenses 8,754
------------
TOTAL CURRENT ASSETS 41,637
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $8,334 17,721
Other assets 3,162
------------
TOTAL OTHER ASSETS 20,883
------------
TOTAL ASSETS $ 62,520
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 222,307
Accrued expenses and other current liabilities 1,346,938
Notes payable (including accrued interest of $518,850) 1,187,072
Accrued dividends payable 146,732
Customer deposit 115,000
------------
TOTAL CURRENT LIABILITIES 3,018,049
LONG-TERM LIABILITIES:
Loans payable to stockholder (including accrued interest
of $123,122) 495,903
------------
TOTAL LIABILITIES 3,513,952
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 237,773 shares issued and outstanding,
(liquidation preference $1,112,250) 238
Common stock - $.001 par value; 190,000,000 shares
authorized; 177,304,697 shares issued and 177,300,297
shares outstanding 177,305
Additional paid-in capital 20,559,577
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 (9,651,188)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (3,451,432)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 62,520
============
See notes to condensed financial statements.
1
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended For the Period
September 30, September 30, January 1,2002
----------------------------- --------------------------- to September 30,
2005 2004 2005 2004 2005
------------ ------------ ----------- ------------ ------------
SALES $ -- $ -- $ 260,000 $ 56,290 $ 356,290
COST OF SALES 21,000 24,000 2,000 77,250 38,680
------------ ------------ ------------ ------------ ------------
GROSS (LOSS) PROFIT (21,000) (24,000) 218,000 (20,960) (82,390)
SELLING, GENERAL AND ADMINISTRATIVE -
Including stock based compensation of $0
and $0 for the three months ended September
30, 2005 and 2004 and $18,000 and $311,037
for the nine month ended September 30, 2005
and 2004, and $741,563 for the period
January 1, 2002 to September 30, 2005,
respectively 275,299 428,357 920,505 985,037 3,823,515
NON-DILUTION AGREEMENT TERMINATION COST -- -- -- (223,860) 2,462,453
INTEREST EXPENSE - including interest expense
to a related party of $5,967 and $17,901 for
three and nine months ended September 30, 2005
and 2004, respectively and $89,505 for the period
January 1, 2002 through September 30, 2005 37,182 37,557 112,296 112,671 594,113
LOSS ON SETTLEMENT OF DEBT -- -- -- 2,313,716 2,519,866
FINANCING COST - EXTENSION OF WARRANTS -- -- 74,700 94,151 168,851
STOCK APPRECIATION RIGHTS - REDUCTION IN VALUE -- -- (121,340) -- --
------------ ------------ ------------ ------------ ------------
NET LOSS (333,481) (489,914) (768,161) (3,302,675) (9,651,188)
DEEMED DIVIDEND ON PREFERRED STOCK -- -- -- (2,072,296) (2,072,296)
PREFERRED STOCK DIVIDENDS (34,909) (47,398) (121,552) (173,356) (521,782)
------------ ------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (368,390) $ (537,312) $ (889,713) $ (5,548,327) $(12,245,266)
============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.00) $ (0.00) $ (0.01) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 168,354,650 142,188,759 161,884,506 111,529,245
============ ============ ============ ============
See notes to condensed financial statements.
2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 2005 614,413 $ 615 155,885,727 $ 155,886 $ 20,258,617
Proceeds from sale of common stock
($0.05 per share) - March 21, 2005 -- -- 200,000 200 9,800
($0.06 per share) - May 12, 2005 -- -- 500,000 500 29,500
($0.05 per share) - May 12, 2005 -- -- 200,000 200 9,800
($0.07 per share) - July 14, 2005 -- -- 714,286 714 49,286
($0.08 per share) - July 14, 2005 -- -- 312,500 313 24,687
($0.10 per share) - July 14, 2005 -- -- 1,000,000 1,000 99,000
($0.07 per share) - August 5, 2005 -- -- 428,571 429 29,571
Common stock issued for services
($0.05-$0.10 Per share) - March 21, 2005 -- -- 230,000 230 17,770
Common stock issued in repayment of debt
($0.07 per share) - July 14, 2005 -- -- 571,428 571 39,429
Preferred stock converted to common stock
During the quarter ended March 31, 2005 (55,970) (56) 2,518,800 2,519 (2,463)
During the quarter ended June 30, 2005 (34,020) (34) 1,360,800 1,361 (1,327)
During the quarter ended September 30, 2005 (286,650) (287) 13,382,585 13,382 (13,095)
Extension of 1,666,667 warrants - June 7, 2005 -- -- -- -- 74,700
Preferred stock dividend -- -- -- -- (65,698)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2005 237,773 $ 238 177,304,697 $ 177,305 $ 20,559,577
============ ============ ============ ============ ============
See notes to condensed financial statements
3
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
(Continued)
Deficit Deficit
Accumulated Accumulated
Through During Total
Treasury December Development Stockholders'
Stock 31, 2001 Stage Deficiency
------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 2005 $ (5,768) $(14,531,596) $ (8,883,027) $ (3,005,273)
Proceeds from sale of common stock
($0.05 per share) - March 21, 2005 -- -- -- 10,000
($0.06 per share) - May 12, 2005 -- -- -- 30,000
($0.05 per share) - May 12, 2005 -- -- -- 10,000
($0.07 per share) - July 14, 2005 -- -- -- 50,000
($0.08 per share) - July 14, 2005 -- -- -- 25,000
($0.10 per share) - July 14, 2005 -- -- -- 100,000
($0.07 per share) - August 5, 2005 -- -- -- 30,000
Common stock issued in for services
($0.05-$.10 per share) - March 21, 2005 -- -- -- 18,000
Common stock issued in repayment of debt
($0.07 per share) - July 14, 2005 -- -- -- 40,000
Preferred stock converted to common stock
During the quarter ended March 31, 2005 -- -- -- --
During the quarter ended June 30, 2005 -- -- -- --
During the quarter ended September 30, 2005 -- -- -- --
Extension of 1,666,667 warrants - June 7, 2005 -- -- -- 74,700
Preferred stock dividend -- -- -- (65,698)
Net loss -- -- (768,161) (768,161)
------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2005 $ (5,768) $(14,531,596) $ (9,651,188) $ (3,451,432)
============ ============ ============ ============
See notes to condensed financial statements.
4
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended For the Period
September 30, January 1, 2002
-------------------------- (Inception) to
2005 2004 September 30, 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (768,161) $(3,302,675) $(9,651,188)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of patents 1,390 1,391 6,952
Non-cash stock-based compensation 18,000 311,037 741,563
Non-dilution agreement termination cost -- (223,860) 2,462,453
Financing cost - warrant extension 74,700 94,151 168,851
Loss on settlement of debt -- 2,313,716 2,519,866
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Changes in assets and liabilities:
Inventory (30,000) 26,500 (30,000)
Prepaid expenses 8,359 (10,025) 47,746
Accounts payable, accrued expenses, accrued
dividends and customer deposits 341,863 125,523 1,391,652
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (353,849) (664,242) (2,161,055)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable 20,000 -- 65,700
Proceeds from sale of preferred stock -- 412,756 1,130,127
Proceeds from sale of common stock 255,000 207,600 732,600
Proceeds from sale of common stock
to be issued -- -- 200,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 275,000 620,356 2,128,427
----------- ----------- -----------
NET DECREASE IN CASH (78,849) (43,886) (32,628)
CASH AT BEGINNING OF PERIOD 81,732 102,831 35,511
----------- ----------- -----------
CASH AT END OF PERIOD $ 2,883 $ 58,945 $ 2,883
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Common stock issued for repayment of debt $ 40,000 $ -- $ 40,000
=========== =========== ===========
See notes to condensed financial statements.
5
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 Glen Head, New York.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICES
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, these financial
statements do not include all of the information and footnotes required 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 nine-month period ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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 April 6, 2005, for the year ended December 31,
2004.
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 revenue when products are shipped and collection is
reasonably assured.
STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company will continue to account for stock-based compensation according to
Accounting Pronouncement Board ("APB") Opinion No. 25.
The following table summarizes relevant information as to reported results under
the Company's intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provisions of SFAS No.
123 had been applied for the periods ended September 30, 2005 and 2004 as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss applicable to common stockholders,
as reported $ (368,390) $ (537,312) $ (889,713) $(5,548,327)
ADD:
Stock-based employee compensation,
included in reported loss -- -- -- --
LESS:
Stock based employee compensation cost,
net of tax effect under fair value
accounting -- 44,636 -- 125,213
----------- ----------- ----------- -----------
Pro-forma net loss under fair value method $ (368,390) $ (581,968) $ (889,713) $(5,673,540)
=========== =========== =========== ===========
Loss per share - basic and diluted,
as reported $(0.00) $(0.00) $(0.01) $(0.05)
=========== =========== =========== ===========
Pro-forma loss per share - basic and diluted $(0.00) $(0.00) $(0.01) $(0.05)
=========== =========== =========== ===========
6
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - GOING CONCERN
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred recurring
losses from operations, an accumulated deficit since its inception of
approximately $24,183,000 and has a working capital deficiency of approximately
$2,976,000 at September 30, 2005. 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 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 May 2005, the FASB issued SFAS 154 - Accounting Change and Error Corrections
- a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement
replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This statement applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrects errors made in fiscal years
beginning after December 15, 2005. Management is evaluatiOnG the impact of this
pronouncement on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant dates, based on the estimated
number of awards that are expected to vest. This statement is effective for
public entities that file as small business issuers - as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements
NOTE 5 - NET INCOME (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 options, warrants and
conversion of preferred stock for the nine months ended September 30, 2005 and
2004 were 17,256,233 and 37,555,044, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its administrative facilities, located in Glen Head, New
York, on a month-to-month basis.
7
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMON STOCK ISSUED
Cash
----
During the nine months ended September 30, 2005, the Company raised $255,000
through the sale of 3,355,357 shares of common stock.
Services
--------
During the nine months ended September 30, 2005, the Company issued 230,000
shares of common stock for services for a value of $18,000.
Debt
----
During the nine months ended September 30, 2005, the Company issued 571,428
shares of common stock to pay-down $40,000 of its debt and accrued interest.
Conversion of preferred stock into common stock
-----------------------------------------------
During the nine months ended September 30, 2005, the Company issued various
parties 17,262,185 shares of common stock in connection with the conversion of
preferred stock.
Extension of warrants
---------------------
In June 2005, the Company extended the life of 1,666,667 warrants for a period
of 12 months. The warrants will expire in June 2006. The Company recorded a
finance charge of $74,700 for the nine months ended September 30, 2005.
NOTE 8- MAJOR CUSTOMERS/CREDIT RISK
During the nine month period ended September 30, 2005, the Company sold five
units to two customers and recognized revenues of $260,000. During the nine
month period ended September 30, 2004, the Company sold one unit to one customer
and recognized revenues of $56,290. During the three month period ended
September 30, 2005 and 2004, there were no units sold.
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.
At September 30, 2005, the Company did not have cash balances on deposit that
exceeded the federally insured limits.
NOTE 9- SUBSEQUENT EVENTS
Subsequent to September 30, 2005, the Company issued 100,000 shares of its
common stock to a note holder for an agreement to defer requesting payment for a
period of one month. The principal amount of the note is $400,000, and accrued
interest is approximately $423,000. The share issuance will be accounted for as
additional interest expense during the fourth quarter.
Subsequent to September 30, 2005, the Company issued 132,500 shares of common
stock to a vendor for settlement of $6,625 of accounts payable.
Subsequent to September 30, 2005, the Company issued 1,080,357 shares of its
common stock for $75,625 of cash.
Subsequent to September 30, 2005, the Company issued 125,000 shares of its
common stock for services with a value of $7,500.
8
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and related footnotes.
Forward-Looking Statements
--------------------------
Management's discussion and analysis of financial condition and results of
operations and other sections of this Report contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). We intend for the forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements in these sections. All
statements regarding the Company's expected financial position, business and
financing plans are forward-looking statements. Such forward-looking statements
are identified by use of forward-looking words such as "anticipates,"
"believes," "plans," "estimates," "expects," and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products, technology developments affecting the Company's products and to
those discussed in the Company's filings with the Securities and Exchange
Commission. Accordingly, actual results could differ materially from those
contemplated by the forward-looking statements.
Introduction
------------
Until the fourth quarter of 2001, Water Chef was engaged in the manufacture and
marketing of water coolers and water purification and filtration products. In
the fourth quarter of 2001, the Company 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
who either do not have access to municipal water treatment systems, or for those
whose systems have been compromised, either by environmental factors or by
faulty design or maintenance.
Results of Operations
---------------------
Sales for the nine months ended September 30, 2005 and September 30, 2004 were
$260,000 and $56,290 respectively. During the nine months ended September 30,
2005, the Company recognized the sale of five PureSafe Water Station Systems.
Four of these systems were purchased for use in Ecuador, and the fifth system
was purchased by a humanitarian buyer to be used as part of the tsunami relief
effort in Sri Lanka. In addition, Water Chef received deposits of $115,000
during the first three months of 2005 for relief effort systems that will be
shipped in 2005.
Cost of sales for the nine month periods ended September 30, 2005 and 2004 were
$42,000 and $77,250 respectively. The cost of the units sold during 2005 was
previously written off. An analysis of the components of cost of sales in the
2005 and 2004 periods follows:
Cost of Sales Product Rent and Overhead
Period CGS Payments to Manufacturer Total
For the nine months ended
September 30, 2005 $ -- $ 42,000 $ 42,000
For the nine month ended
September 30, 2004 $ 13,250 $ 64,000 $ 77,250
Selling, general and administrative expenses for the nine months ended September
30, 2005 were $920,505, compared to $985,037 for the nine months ended September
30, 2004, a decrease of 7%.
The net loss for the nine months ended September 30, 2005 was $768,161 compared
to $3,302,675 in the same period ended September 30, 2004.
9
Liquidity and Capital Resources
-------------------------------
At September 30, 2005, the Company had a working capital deficiency of
approximately $2,976,000. In addition, the Company continues to suffer recurring
losses from operations and has an accumulated deficit since inception of
approximately $24,183,000. 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.
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.
Recent Accounting Standards
---------------------------
In May 2005, the FASB issued SFAS 154 - Accounting Change and Error Corrections
- a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement
replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This statement applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provision, those provisions should be followed. This statement is
effective for accounting changes and corrects in errors made in fiscal years
beginning after December 15, 2005. Management is evaluating the impact of this
pronouncement on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant dates, based on the estimated
number of awards that are expected to vest. This statement is effective for
public entities that file as small business issuers - as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation and Disclosure Controls and Procedures
-------------------------------------------------
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e promulgated under the Exchange Act as of this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer has
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report to provide reasonable
assurance that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
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 material weakness in the financial
reporting. However, at this time management has decided that considering the
employees involved and the control procedures in place, the risks associated
with such lack of segregation are insignificant and the potential benefits of
adding additional employees to clearly segregate duties do not justify the
expenses associated with such increases. 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.
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Changes in Internal Controls
----------------------------
There have been no changes in internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Limitations on the Effectiveness of Controls
--------------------------------------------
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a Company have been detected.
PART 11 - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
During the nine months ended September 30, 2005, the Company raised $255,000
through the sale of 3,355,357 shares of common stock.
During the nine months ended September 30, 2005, the Company issued 230,000
shares of common stock for services for a value of $18,000.
During the nine months ended September 30, 2005, the Company issued 571,428
shares of common stock to pay-down $40,000 of its debt and accrued interest.
During the nine months ended September 30, 2005, the Company issued various
parties 17,262,185 shares of common stock in connection with the conversion of
preferred stock.
The Company issued these shares in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated there under. These shares were offered to less than 35
"non-accredited" investors and were purchased for investment purposes with no
view to resale.
ITEM 6 - EXHIBITS
Exhibit No. Description
14.1 Code of Ethics
31 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to 8 U.S.C. Section 1350 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/ David A. Conway
Date November 8, 2005 -----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
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