--------------------------------------------------------------------------------
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, 2006
( ) 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 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
stock, as of the last practicable date.
OUTSTANDING AS OF November 3, 2006
CLASS Common
----- ------
Par value $0.001 per share 198,977,497
--------------------------------------------------------------------------------
Page 1
--------------------------------------------------------------------------------
WATER CHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 3
At September 30, 2006
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 4
For the Three Months Ended September 30, 2006 and 2005
For the Nine Months Ended September 30, 2006 and 2005
For the Period January 1, 2002 to September 30, 2006
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 5-6
For the Nine Months Ended September 30, 2006
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 7
For the Nine Months Ended September 30, 2006 and 2005
For the Period January 1, 2002 to September 30, 2006
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 8-12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 13
OF OPERATION
ITEM 3 - CONTROLS AND PROCEDURES 14
PART II - OTHER INFORMATION:
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 16
ITEM 5 - OTHER EVENTS 16
ITEM 6 - EXHIBITS 17
SIGNATURE 18
CERTIFICATIONS
i
--------------------------------------------------------------------------------
Page 2
--------------------------------------------------------------------------------
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 2006
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 26,117
Prepaid expenses 5,988
------------
TOTAL CURRENT ASSETS 32,105
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $10,188 15,867
Other assets 3,162
------------
TOTAL OTHER ASSETS 19,029
------------
TOTAL ASSETS $ 51,134
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 187,316
Accrued expenses and other current liabilities 175,017
Accrued compensation 532,417
Accrued consulting and director fees 421,833
Notes payable (including accrued interest of $318,654) 970,552
Accrued dividends payable 189,871
------------
TOTAL CURRENT LIABILITIES 2,477,006
LONG-TERM LIABILITIES:
Loans payable to stockholder (including accrued interest
of $146,990) 519,771
------------
TOTAL LIABILITIES 2,996,777
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000
shares authorized; 188,917 shares issued and outstanding,
(liquidation preference $2,159,500) 189
Common stock - $.001 par value; 340,000,000 shares
authorized; 198,977,497 shares issued and 198,973,097
shares outstanding 198,977
Additional paid-in capital 23,125,664
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 (11,733,109)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,945,643)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 51,134
============
See notes to condensed financial statements.
3
--------------------------------------------------------------------------------
Page 3
----------------------------------------------------------------------------------------------------------------------------------
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
2006 2005 2006 2005 30, 2006
------------- ------------- ------------- ------------- -------------
SALES $ -- $ -- $ 115,000 $ 260,000 $ 471,290
------------- ------------- ------------- ------------- -------------
COST OF SALES 21,000 21,000 93,000 42,000 531,680
SELLING, GENERAL AND ADMINISTRATIVE -
including stock based compensation of
$0, and $0 for the three months ended
September 30, 2006 and 2005 and $767,699 and
$18,000 for the nine months ended
September 30, 2006 and 2005, and $1,545,089
for the period January 1, 2002 to
September 30, 2006, respectively 118,335 275,299 1,282,272 920,505 5,379,859
NON-DILUTION AGREEMENT TERMINATION COST -- -- -- -- 2,462,453
INTEREST EXPENSE (Including interest expense to
related party of $5,967 and $17,901 for the
three and nine months ended September 30, 2006
and 2005, respectively and $113,373 for the
period January 1, 2002 to September 30, 2006 43,018 37,182 234,882 112,296 960,890
FINANCING COST - EXTENSION OF WARRANTS -- -- -- 74,700 74,700
LOSS ON SETTLEMENT OF DEBT -- -- -- -- 2,614,017
STOCK APPRECIATION RIGHTS - REDUCTION IN VALUE -- -- -- (121,340) --
CHANGE IN FAIR VALUE OF WARRANTS AND EMBEDDED
CONVERSION OPTION -- -- 186,600 -- 180,800
------------- ------------- ------------- ------------- -------------
182,363 333,481 1,796,754 1,028,161 12,204,399
------------- ------------- ------------- ------------- -------------
NET LOSS (182,363) (333,481) (1,681,754) (768,161) (11,733,109)
------------- ------------- ------------- ------------- -------------
DEEMED DIVIDEND ON PREFERRED STOCK -- -- -- -- (2,072,296)
PREFERRED STOCK DIVIDENDS -- (34,909) (42,401) (121,552) (509,067)
------------- ------------- ------------- ------------- -------------
-- (34,909) (42,401) (121,552) (2,581,363)
------------- ------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (182,363) $ (368,390) $ (1,724,155) $ (889,713) $ (14,314,472)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 198,795,306 168,354,650 191,550,874 161,884,506
============= ============= ============= =============
See notes to condensed financial statements.
4
----------------------------------------------------------------------------------------------------------------------------------
Page 4
----------------------------------------------------------------------------------------------------------------------------------
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
BALANCE - JANUARY 1, 2006 235,585 $ 236 181,779,000 $ 181,779 $ 20,830,154
Proceeds from sale of common stock
($0.07 per share) March 21, 2006 -- -- 3,600,000 3,600 246,400
($0.08 - $0.10 per share) May 8, 2006 -- -- 3,769,230 3,769 276,231
($0.10 per share) June 28, 2006 -- -- 100,000 100 9,900
($0.07 per share) August 17, 2006 -- -- 400,000 400 27,600
Common stock issued for services
($0.06 per share) March 21, 2006 -- -- 250,000 250 14,750
($0.05 per share) May 8, 2006 -- -- 450,000 450 22,050
($0.15 per share) June 6, 2006 -- -- 166,666 166 24,833
Common stock issued in repayment of debt
($0.11 per share) February 13, 2006 -- -- 438,785 439 48,046
($0.08 per share) April 3, 2006 -- -- 614,131 614 50,790
($0.08 per share) April 6, 2006 -- -- 1,959,631 1,960 154,614
($0.10 - $0.15 per share) June 6, 2006 -- -- 3,583,334 3,583 390,517
Preferred stock converted to common stock
during the quarter ended June 30, 2006 (46,668) (47) 1,866,720 1,867 (1,820)
Reclassification of derivative liabilities upon
conversion of debt -- -- -- -- 368,800
4,000,000 Warrants granted for services,
May 18, 2006 -- -- -- -- 464,000
2,500,000 Warrants granted for services,
May 24, 2006 -- -- -- -- 241,200
Preferred stock dividend -- -- -- -- (42,401)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2006 188,917 $ 189 198,977,497 $ 198,977 $ 23,125,664
============ ============ ============ ============ ============
See notes to condensed financial statements.
5
----------------------------------------------------------------------------------------------------------------------------
Page 5
------------------------------------------------------------------------------------------------------------
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
(Continued)
Deficit Deficit
Accumulated Accumulated
Treasury Through During Total
Stock December Development Stockholders'
-at cost 31, 2001 Stage Deficiency
------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
BALANCE - JANUARY 1, 2006 $ (5,768) $(14,531,596) $(10,051,355) $ (3,576,550)
Proceeds from sale of common stock
($0.07 per share) March 21, 2006 -- -- -- 250,000
($0.08 - $0.10 per share) May 8, 2006 -- -- -- 280,000
($0.10 per share) June 28, 2006 -- -- -- 10,000
($0.07 per share) August 17, 2006 -- -- -- 28,000
Common stock issued for services
($0.06 per share) March 21, 2006 -- -- -- 15,000
($0.05 per share) May 8, 2006 -- -- -- 22,500
($0.15 per share) June 6, 2006 -- -- -- 24,999
Common stock issued in repayment of debt
($0.11 per share) February 13, 2006 -- -- -- 48,485
($0.08 per share) April 3, 2006 -- -- -- 51,404
($0.08 per share) April 6, 2006 -- -- -- 156,574
($0.10 - $0.15 per share) June 6, 2006 -- -- -- 394,100
Preferred stock converted to common stock
during the quarter ended June 30, 2006 -- -- -- --
Reclassification of derivative liabilities upon
conversion of debt -- -- -- 368,800
4,000,000 Warrants granted for services, May 18, 2006 -- -- -- 464,000
2,500,000 Warrants granted for services, May 24, 2006 -- -- -- 241,200
Preferred stock dividend -- -- -- (42,401)
Net loss -- -- (1,681,754) (1,681,754)
------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2006 $ (5,768) $(14,531,596) $(11,733,109) $ (2,945,643)
============ ============ ============ ============
See notes to condensed financial statements.
6
------------------------------------------------------------------------------------------------------------
Page 6
-----------------------------------------------------------------------------------------------
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
-------------------------- to September
2006 2005 30, 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,681,754) $ (768,161) $(11,733,109)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of patents 1,390 1,390 8,806
Interest expense - deferred financing 4,687 -- 7,500
Stock-based compensation 767,699 18,000 1,545,089
Accretion of debt discount 112,800 -- 188,000
Change in fair value of warrants and
embedded conversion option 186,600 -- 180,800
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 74,700
Changes in assets and liabilities:
Inventory 30,000 (30,000) --
Prepaid expenses 16,976 8,359 50,512
Accounts payable, accrued expenses and
other current liabilities, accrued
compensation, accrued consulting and
director fees accrued dividends and
customer deposits (208,914) 341,863 1,263,225
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (770,516) (353,849) (3,156,957)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable -- 20,000 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 568,000 255,000 1,540,560
Proceeds from sale of common stock
to be issued -- -- 200,000
Deferred financing costs -- -- (7,500)
Proceeds from convertible promissory note -- -- 250,000
Repayment of notes payable (15,962) -- (31,324)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 552,038 275,000 3,147,563
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (218,478) (78,849) (9,394)
CASH AT BEGINNING OF PERIOD 244,595 81,732 35,511
----------- ----------- -----------
CASH AT END OF PERIOD $ 26,117 $ 2,883 $ 26,117
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Compensation satisfied by issuance of
common stock -- 40,000 55,250
=========== =========== ===========
Common stock issued for settlement of debt
and accrued interest $ 650,563 $ -- $ 6,364,284
=========== =========== ===========
Reclassification of derivative liabilities
upon conversion of debt $ 368,800 $ -- $ 368,800
=========== =========== ===========
See notes to condensed financial statements.
7
-----------------------------------------------------------------------------------------------
Page 7
--------------------------------------------------------------------------------
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware corporation currently engaged in
the design and marketing of water dispensers and purification equipment both
inside and outside the United States. The Company's corporate headquarters are
located in Glen Head, 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 nine-month period ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006. 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 22, 2006, for the year ended December 31,
2005.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage as defined by Statement of Financial
Accounting Standards ("SFAS") Statement No. 7, "Accounting and Reporting for
Development Stage Companies." To date, the Company has generated limited sales
and has devoted its efforts primarily to developing its products, implementing
its business and marketing strategy and raising working capital through equity
financing or short-term borrowings.
REVENUE RECOGNITION
The Company recognizes its revenues when the product is shipped and or title
passes and collection is reasonably assured.
STOCK BASED COMPENSATION
Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principles Board, APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment." This statement is a revision of SFAS No. 123, and supersedes APB
Opinion No. 25, 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 will result in a charge to
operations that will be measured at fair value on the awards grant date, based
on the estimated number of awards expected to vest over the service period.
The Company adopted SFAS No. 123R, "Share Based Payment," using the modified
-prospective-transition method. As of January 1, 2006, the Company had no
unvested employee stock options. During the three and nine months ended
September 30, 2005, the Company did not grant any employee stock options;
therefore, no table has been disclosed to illustrate the effect on the pro forma
Net loss and pro forma net loss per share as if the Company had applied the fair
value recognition provisions of SFAS No. 123.
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 $26,265,000 and has a working capital deficiency of approximately
$2,445,000 at September 30, 2006. 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.
8
--------------------------------------------------------------------------------
Page 8
--------------------------------------------------------------------------------
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, which is an amendment of SFAS No. 133 and 140. This Statement; a)
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, b)
clarifies which interest-only strip and principal-only strip are not subject to
the requirements of SFAS 133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends SFAS
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This Statement is effective
for financial statements for fiscal years beginning after September 15, 2006.
Earlier adoption of this Statement is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management is evaluating if this Statement will
have a significant impact on the financial statements of the Company.
In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS No. 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
This Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes that the adoption of this Statement will not have a
significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements." SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective for the
Company for financial statements issued subsequent to November 15, 2007. The
Company does not expect the new standard to have any material impact on the
financial position and results of operations.
NOTE 5 - CONVERTIBLE PROMISSORY NOTES
In November 2005, the Company entered into a Convertible Promissory Note
agreement for $250,000 which included 430,000 warrants, which are exercisable at
$0.14 per share and have a life of three years. The warrants carry a cashless
exercise provision. The Convertible Promissory Note bore interest at a rate of
8% per annum and matured in March 2006.
The note included certain conversion features as follows:
o convertible at any time after the maturity date, at the option of the holder,
o convertible at 85% of the average of the three 3 lowest closing bid prices
for the common stock, for the ten trading days ending on the trading day
immediately before the conversion date.
The Convertible Promissory Note agreement required the Company to file a
registration statement no later than sixty business days from the date of the
agreement and no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or (b) one hundred twenty days.
9
--------------------------------------------------------------------------------
Page 9
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date that transpires until the date
that the Company files the registration statement, and
b. for each 30 day period after the effective date that transpires until such
date as the registration statement is declared effective.
The gross proceeds of $250,000 were recorded net of a discount of $188,000. The
debt discount consisted of $47,200 related to the warrants and $140,800 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, View A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. Due to the fact
that the registration statement became effective on January 30, 2006, the value
10
--------------------------------------------------------------------------------
Page 10
--------------------------------------------------------------------------------
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONVERTIBLE PROMISSORY NOTES (continued)
of the registration rights was deemed to be de minimis. The warrants and the
conversion option are valued using the Black-Scholes valuation model. For the
period ended September 30, 2006, the Company reflected a loss of $186,600
representing the change in the value of the warrants and conversion option.
During the nine months ended September 30, 2006, the Company charged to interest
expense $112,800 for the remaining debt discount.
During the nine months ended September 30, 2006, the Company issued 3,012,547
shares of common stock for the settlement of the debt and accrued interest. As a
result of the conversion the Company recorded a reclass to equity of $368,800
for the derivative liabilities.
This Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company. At the date of conversion the officer was released from
the security interest.
NOTE 6 - NET LOSS PER SHARE OF COMMON STOCK
Basic loss per share was computed using the weighted average number of
outstanding common shares. Diluted loss per share includes the effect of
dilutive common stock equivalents from the assumed exercise of options, warrants
and convertible preferred stock. Common stock equivalents were excluded in the
computation of diluted loss per share since their inclusion would be
anti-dilutive. Total shares issuable upon the exercise of warrants and
conversion of preferred stock for the nine months ended September 30, 2006 and
2005 were 8,666,680 and 17,256,233, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its administrative facilities, located in Glen Head, New
York, on a month-to-month basis.
Consulting Agreement
--------------------
On May 18, 2006, the Company entered into an agreement with a consultant for
services. The agreement provides consideration of $6,000 per month. The term of
the agreement is on a month to month basis. In addition the Company granted
4,000,000 warrants. The warrants fully vested on the date of the grant, have a
life of 3 years and are exercisable at $0.10 per share.
NOTE 8 - COMMON STOCK ISSUED
Cash
----
During the nine months ended September 30, 2006, the Company raised $568,000
through the sale of 7,869,230 shares of common stock.
Services
--------
During the nine months ended September 30, 2006, the Company issued 866,666
shares of common stock for services for a value of $62,499.
On May 18, 2006, the Company granted 4,000,000 warrants to a consultant for
services. The warrants fully vested on the date of the grant, have a life of 3
years and are exercisable at $0.10 per share. The Company incurred a stock based
compensation charge of $464,000.
On May 24, 2006, the Company granted 2,500,000 warrants to two directors for
services. The warrants fully vested on the date of the grant, have a life of 3
years and are exercisable at $0.15 per share. The Company incurred a stock based
compensation charge of $241,200.
Debt
----
During the nine months ended September 30, 2006, the Company issued 6,595,881
shares of common stock for debt and accrued interest of $650,563.
11
--------------------------------------------------------------------------------
Page 11
--------------------------------------------------------------------------------
Conversion of preferred stock into common stock
-----------------------------------------------
During the nine months ended September 30, 2005, the Company issued to various
parties 1,866,720 shares of common stock in connection with the conversion of
46,668 shares of preferred stock.
NOTE 9- MAJOR CUSTOMERS / CREDIT RISK
During the nine months ended September 30, 2006, the Company sold two systems to
one customer and recognized revenues of $115,000. During the nine month period
ended September 30, 2005, the Company sold five systems to two customers and
recognized revenue of $260,000. The Company had no sales during each of the
three months ended September 30, 2006 and 2005.
The Company maintains cash deposits with financial institutions, which from time
to time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk from cash.
NOTE 10 CONTINGENCIES
On July 14, 2006, Funding Group, Inc. filed a complaint with the Supreme Court
of the State of New York in New York County seeking damages due to an alleged
breach of contract related to a $25,000 loan made by the plaintiff to the
Company. On October 11, 2006, the Company filed a counter claim against Funding
Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
NOTE 11 - SUBSEQUENT EVENTS
On October 17, 2006, the Company entered into a Convertible Promissory Note for
proceeds of $300,000. The loan has a stated interest rate of 8% per annum and
matures 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 note and accrued interest is convertible at any time after the
maturity date into shares of the Company's common stock at a conversion price
equal to the current marked price multiplied by eighty-five percent (85%).
The Convertible Promissory Note agreement requires the Company to file a
registration statement no later than thirty business days from the date of the
agreement and no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or (b) one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date that transpires until the date
that the Company files the registration statement, and
b. for each 30 day period after the effective date that transpires until such
date as the registration statement is declared effective.
The Company will account for the above transaction in accordance with EITF issue
No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has determined that
the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option will be recorded at
fair market value and marked to market through earnings at the end of each
reporting period.
This Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company.
12
--------------------------------------------------------------------------------
Page 12
--------------------------------------------------------------------------------
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and related Footnotes.
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-QSB contains "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. All statements regarding the
Company's expected financial position, business and financing plans are
forward-looking statements. Such forward-looking statements are identified by
use of forward-looking words such as "anticipates," "believes," "plans,"
"estimates," "expects," and "intends" or words or phrases of similar expression.
These forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
technology developments affecting the Company's products and to those discussed
in the Company's filings with the Securities and Exchange Commission ("SEC").
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
Introduction
------------
Until the fourth quarter of 2001, Water Chef was engaged in the manufacture and
marketing of water coolers and water purification and filtration products. In
the fourth quarter of 2001, the Company completed the sale of this business in
order to focus its activities on its PureSafe line of business. The PureSafe
Water Station has been designed by the Company to meet the needs of communities
which either do not have access to municipal water treatment systems, or for
those which systems have been compromised, either by environmental factors or by
faulty design or maintenance.
Results of Operations
---------------------
Revenue for the nine months ended September 30, 2006 and 2005 was $115,000 and
$260,000 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, 2006 and 2005 was $93,000 and
$42,000, respectively. An analysis of the components of cost of sales in the
2006 and 2005 periods follows:
Cost of Sales Product Rent and Overhead
Period CGS Payments to Manufacturer Total
------------------- --------- ------------------------- ---------
For the nine months ended
September 30, 2006 $ 30,000 $ 63,000 $ 93,000
For the nine months ended
September 30, 2005 $ -- $ 42,000 $ 42,000
Selling, general and administrative expenses for the nine months ended September
30, 2006 were $1,282,272, compared to $920,505 for the nine months ended
September 30, 2005, an increase of $361,767 or 39%.
The net loss for the nine months ended September 30, 2006 was $1,681,754
compared to $768,161 in the same period ended September 30, 2005.
Selling, general and administrative expenses for the three months ended
September 30, 2006 were $118,335, compared to $275,299 for the three months
ended September 30, 2005, a decrease of $156,964 or 57%.
The net loss for the three months ended September 30, 2006 was $182,363 compared
to $333,481 in the same period ended September 30, 2005.
In the second quarter 2006 the Company entered into a consulting agreement with
a marketing professional and granted three year stock purchase warrants for four
million shares of common stock at an exercise price of $0.10 per share. The
Company incurred a stock-based compensation charge of $464,000 which was charged
to operations during nine months ended September 30, 2006.
In addition the Company granted three-year stock purchase warrants for 1,250,000
shares to each of two independent Directors. The warrants are exercisable at
$0.15 per share. The fair value of the stock purchase warrants estimated on the
date of grant using the Black-Scholes option pricing model is $.19 per share or
$241,200.
The Company issued 866,666 shares of common stock for services provided
primarily by our independent directors and the Chairman of our Scientific
Advisory Board. The Company recorded a charge to operations during the nine
months ended September 30, 2006 of $62,499.
13
--------------------------------------------------------------------------------
Page 13
--------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
At September 30, 2006, the Company had a working capital deficiency of
approximately $2,445,000. In addition, the Company continues to suffer recurring
losses from operations and has an accumulated deficit since inception of
approximately $26,265,000. 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 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 February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Statement ("SFAS") No. 155, which is an
amendment of SFAS No. 133 and 140. This Statement; a) permits fair value
re-measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of SFAS 133, c) establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation, d) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives, e) amends SFAS 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. This Statement is effective for financial
statements for fiscal years beginning after September 15, 2006. Earlier adoption
of this Statement is permitted as of the beginning of an entity's fiscal year,
provided the entity has not yet issued any financial statements for that fiscal
year. Management is evaluating if this Statement will have an impact on the
financial statements of the Company.
In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS No. 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
This Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes that the adoption of this Statement will not have a
significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements." SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective for the
Company for financial statements issued subsequent to November 15, 2007. The
Company does not expect the new standard to have any material impact on the
financial position and results of operations.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation and Disclosure Controls and Procedures
-------------------------------------------------
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of this report. Based upon that evaluation, the Chief
14
--------------------------------------------------------------------------------
Page 14
--------------------------------------------------------------------------------
Executive Officer and Chief Financial Officer has concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report to provide reasonable assurance that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.
Management is aware that there is a lack of segregation of duties at the Company
due to the small number of employees dealing with general administrative and
financial matters. This constitutes a significant deficiency in the financial
reporting. Management has mitigated these factors by hiring an outside
accountant/bookkeeper to review and compile the financial statements on a
quarterly and annual basis.
15
--------------------------------------------------------------------------------
Page 15
--------------------------------------------------------------------------------
At this time management has decided that considering the employees involved and
the control procedures in place and the potential benefits of adding additional
employees to clearly segregate duties does not justify the additional expense.
Management will periodically reevaluate this situation. If the volume of the
business increases and sufficient capital is secured, it is the Company's
intention to increase staffing to mitigate the current lack of segregation of
duties within the general administrative and financial functions.
Changes in Internal Controls
----------------------------
Management has evaluated the effectiveness of the disclosure controls and
procedures as of September 30, 2006. Based on such evaluation, management has
concluded that the disclosure controls and procedures were effective for their
intended purpose described above. There were no changes to the internal controls
during the quarter ended September 30, 2006 that have materially affected or
that are reasonably likely to affect the internal controls.
Limitations on the Effectiveness of Controls
--------------------------------------------
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. The
Company's disclosure controls and procedures are designed to provide reasonable
assurance of achieving its objectives. The Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective at that reasonable assurance level.
PART II - OTHER INFORMATION
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2006, the Company raised $568,000
through the sale of 7,869,230 shares of common stock.
During the nine months ended September 30, 2006, the Company issued 866,666
shares of common stock for services for a value of $62,499.
During the nine months ended September 30, 2006, the Company issued 6,595,881
shares of common stock to pay-down $650,563 of its debt and accrued interest.
On May 18, 2006, the Company granted 4,000,000 warrants to a consultant for
services. The warrants fully vested on the date of the grant, have a life of 3
years and are exercisable at $0.10 per share. The Company incurred a stock based
compensation charge of $464,000.
On May 24, 2006, the Company granted 2,500,000 warrants to two directors for
services. The warrants fully vested on the date of the grant, have a life of 3
years and are exercisable at $0.15 per share. The Company incurred a stock based
compensation charge of $241,200.
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 5 - OTHER INFORMATION
In September 2006, Lord John Gilbert submitted his notice of resignation from
the Company's Board of Scientific Advisors. His resignation was accepted, and
the Company and the Board of Directors thanked him for his contribution.
16
--------------------------------------------------------------------------------
Page 16
--------------------------------------------------------------------------------
ITEM 6 - EXHIBITS
Exhibit No. Description
----------- -----------
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 8 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
--------------------------------------------------------------------------------
Page 17
--------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
Water Chef, Inc.
/s/ David A. Conway
Date November 6, 2006 -----------------------------------
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
18
--------------------------------------------------------------------------------
Page 18