UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 2007
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number: 0-30544
WATER CHEF, INC
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(Name of small business issuer in its charter)
DELAWARE 86-0515678
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
68 South Service Road, Suite 100
MELVILLE, NY 11747
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(Address of principal executive offices) (Zip Code)
(516) 577-7915
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(Issuer's telephone number)
Securities registered under section 12(b) of the Exchange Act: None.
Securities registered under section 12 (g) of the Exchange Act: Common
stock, Par value $.001
Redeemable Common Stock Purchase Warrants.
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The issuer's net sales for the most recent fiscal year were $00.00.
The aggregate market value of the voting stock held by non-affiliates based upon
the last sale price on April 9, 2008 was approximately, $20,093,000.
As of April 9, 2008, the Registrant had 230,410,181 shares of its Common Stock,
$0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE None
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
WATER CHEF, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS ................................... 3
ITEM 2. DESCRIPTION OF PROPERTY.................................... 7
ITEM 3. LEGAL PROCEEDINGS.......................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................................... 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION............................................... 8
ITEM 7. FINANCIAL STATEMENTS....................................... 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 13
ITEM 8A(T) CONTROLS AND PROCEDURES.................................. 13
ITEM 8B. OTHER INFORMATION........................................... 14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT........................................ 15
ITEM 10. EXECUTIVE COMPENSATION..................................... 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............. 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 18
ITEM 13. EXHIBITS .................................................. 18
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..................... 21
SIGNATURES ........................................................... 22
2
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Water Chef, Inc. (the "Company," "Water Chef") was originally incorporated under
Arizona law in 1985 and merged into a Delaware corporation in 1987. Water Chef
designs and markets water purification equipment. Water coolers and filters were
a substantial part of the Company's business from 1993 until the fourth quarter
of 2001, at which time this business was sold so that Water Chef could
concentrate on the further development, manufacturing, and marketing of their
patented line of "PureSafe" water purification systems. In 2007, the Company
signed a contract with Bircon Ltd, to design the "First Response Water Trauma
System" line of new water decontamination systems.
The Company has generated nominal revenues to date; accordingly, the Company is
considered a development stage enterprise and is subject to a number of risks
similar to those of other companies in an early stage of development. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company believes the First Response Water
Trauma System (FRWTS) will be the product by which the Company's first
significant sales be produced since 2001. The Company expects to recognize
initial sales of the FRWTS in the fourth quarter of 2008. At which time the
Company will cease being a development stage enterprise.
PRODUCTS
In 1998, searching for a "killer application," Water Chef management focused on
the worldwide need for safe drinking water for populations who are not served by
municipal water treatment facilities, or are served by municipal systems that
have malfunctioned because of improper maintenance or faulty design. The result
of that activity is the PureSafe Water Station, a turn-key unit that converts
"gray," or bathing grade, water into EPA grade drinking water. The PureSafe
Water Station eliminates all living pathogens that pollute non-processed water -
bacteria, cysts, viruses, parasites, etc. - at an affordable cost for the
emerging economies of the world.
In 2001 the Company decided to concentrate its efforts on the further
development, manufacturing and marketing of the PureSafe Water Station (the
"PureSafe"), because although Water Chef believed that its water dispensers and
its wide variety of consumer oriented water filtration products met or exceeded
the design, quality and performance of competitive products, market
considerations were such as to limit the opportunities for profit and growth.
While the PureSafe system gained considerable attention and approval by various
governmental and non-governmental agencies, it became clear that the economics
of the system, primarily the power requirements to operate the unit, made sales
much more difficult than anticipated.
In 2007 new management made a strategic decision that the existing PureSafe
System had not produced any significant sales. New management further recognized
that the existing unit required significantly more engineering. Identified
markets such as third world countries were exceedingly difficult to operate in
from a sales, security, economic, and maintenance perspective. In 2007, the
Company signed a contract with Bircon ltd, an Israel based engineering
consulting company to design our new FRWTS. The FRWTS unit is an extension of
the Company's patented technology which incorporates additional purification
techniques in a mobile, trailerable and self-contained unit. This simple,
reliable system is designed to provide clean, potable water in all situations
requiring immediate response.
The technologies of this unit include:
o Open water pumping/ Municipal water usage
o Pre Filteration (practical removal)
o Pre Treatment (biological contamination)/Ozonation
o Clorination
o Anti Scalant / Water Softening
o Reverse Osmosis (R/O)
o Ozone sterilization
o Ultra filtration
o Post Filtration
o UV
o Mineralization
Installed on a light trailer that can be towed by a light truck or emergency
vehicle and lifted by helicopter, the system can decontaminate most types of
water, including:
o sea water
o river / lake
o Contaminated municipal water
o well / reservoirs / swimming pool
o brackish water
o sewage polluted water
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A basic unit is capable of producing 10,000 gallons per day (37,850 liters) of
high quality drinking water, exceeding the standard of regular drinking water in
a bottled or container format. Larger units can handle up to 40,000 gallons per
day (151,400 liters per day). Given that the World Health Organization
recommends 5 liters (1.3 gallons) per person per day immediately after
catastrophes, Our system can provide safe drinking water to approximately 7,600
people for the basic unit and up to 30,000 people for larger units per day.
The drinking water is supplied in disinfected bottles or expandable container,
on the spot, and the containers can be delivered to the affected neighborhood or
area. All models include 2 bottle washing stations capable of high quality
disinfection of bottles or containers and 5 water filling and capping stations.
The systems are optionally designed to serve as mobile decontamination units,
utilizing high concentration of ozonated water to decontaminate first response
equipment, field hospitals, and food preparation areas.
MANUFACTURING
The Company plans to initially contract out the manufacturing process of its new
FRWTS until units sales dictate economic benefits of the Company's own
manufacturing facility.
On April 8, 2008, the Company signed a seven-year lease for a 5,300 square foot
facility in Plainview, New York that will serve as a combination of executive
offices, showroom and assembly area beginning in June, 2008.
RAW MATERIALS
Our FRWTS system has been designed as part of its patented technology to utilize
readily available off-the-shelf components and sub-systems. Sub-systems and
components are available from multiple manufacturers. Therefore, the Company
does not believe that obtaining raw materials will be a problem.
COMPETITION
Water Chef produces a turnkey solution that produces pure water to meet U.S. EPA
drinking water standards. This is a far different market than that addressed by
the segment of the industry which has concentrated on the multi-billion dollar
municipal water treatment sector, or the equally large residential sector. The
municipal solution requires significant investment for infrastructure
development (building plants and laying miles of distribution pipes). Products
for residential markets do not offer the performance or features to meet the
needs of First Response Market or the needs of the underdeveloped nations of the
world.
The Company intends to compete in the world markets with several established
companies. The main competitors are:
o Nirosoft - Israel based, privately owned company established in 1990,
specializes in the design, manufacture, installation, operation and
maintenance of advanced water and wastewater treatment systems and services
for fixed and mobile applications. According to Nirosoft own sources, the
company produced and sold already over 350 trailers mostly for 3rd world
countries when the cost was covered by the United Nations and other relief
agencies.
o Global Water Group - US based, Global Water Group is a manufacturer of
water purification, wastewater processing, and wastewater-effluent
recycling equipment for municipalities, military, disaster relief agencies,
industry, remote villages, homes and new residential and industrial
developments. Since 1990, Global has specialized in mobile, self-contained
and fixed base water purification systems for disaster relief and military
use.
o LifeKeeper - Sweden based, LifeKeeper provides compact disaster relief
equipment which provides electricity, water to drink and water for
disinfection and sanitation. The smallest unit will supply emergency
drinking water for 300 people on a daily basis.
o General Electric / Zenon - Zenon is the brand name used by the GE Water &
Process Technologies unit of GE Infrastructure, a global supplier of water
treatment, wastewater treatment and process systems solutions. For
emergency water treatment or temporary mobile water filtration needs, Zenon
offers a line of containerized membrane systems.
o Tesla / Viwa. Czech Republic based Tesla offers Viwa branded automatic
mobile drinking water treatment plant designed as a provisional source of
drinking water. The unit represents an integrated system, installed in a
modified 20ft ISO 1 C container, with a capacity of 5000 liters per hour.
4
The Company recognizes that its potential competitors may have far more
resources. However, the company believes its combined capability of water
decontamination and delivery system are unique amongst its competitors.
MARKETING
The market for the PureSafe Water Station and First Response Water Trauma System
is substantial in both worldwide and domestic opportunities. As reported by GE
in "GE Infrastructure, Water & process Technologies: Transform your Business"
and by ITT in "ITT Industry's Place in the Cycle of Water: Everything but the
pipes," The total world market for water processing is estimated at $400 billion
in 2007. The same sources also report that the market is expected to grow at a
compounded annual growth rate (CAGR) of 5% to $509 billion by 2012 and that the
global market for UV and Ozone disinfection is estimated at $4.6 billion in 2007
and is expected to grow at a rapid CAGR of 13.8% to $8.8 billion by 2012.
According to studies performed by the World Health Organization (WHO) and the
United Nations, major parts of Africa, the Middle East, Southeast Asia, the
Indian sub-continent, Latin and South America, the Caribbean, and much of
Eastern Europe is in need of adequate supplies of pure water. Parts of Florida,
Georgia, and other regions in the United States have also reported fresh water
deficiencies. Solving this problem has been a question of appropriate technology
to decontaminate water and the capability of delivering pure potable drinking
water to the affected area.
The First Response Water Trauma System market is two pronged. The United States
domestic marketing program will focus on the primary needs of First Responders,
such as Federal, State and Local Agencies entrusted with first response
challenges during times of both national disasters, as well as potential
terrorist attacks.
Governmental organizations include Homeland Security Agencies, the Armed Forces,
National Guard, Municipalities, Fire Departments, the Red Cross, etc.
The market for the Company's products also includes secondary markets, such as
condominium developments, Universities, Hospitals, Hotels, Nursing Homes,
Assisted Living Facilities or any private user that is concerned about the
availability of pure, safe, potable drinking water in times of natural
disasters.
The International Market includes governments who need to address the same needs
as the United States domestic market. The Company's Middle East Division has the
responsibility for the Middle Eastern, Europe, Asia, Africa and Australia market
places.
The Company understands that to be successful, it needs to create an effective
sales organization and promote its brand and product attributes through a
variety of outlets and formats with clear branding messages. With this in mind,
the marketing plan is based on the following key components:
o Strategic Alliances with special advisors and organizations already
integrated in the water industry both domestically and
internationally.
o Direct Marketing and Sales - Water Chef is assembling a highly
qualified sales organization and representatives in the United States
and Israel to market directly to local municipalities, first
responders, national public emergency management agencies, and
military organizations worldwide, responsible for first response
emergency situations, including those involved in planning emergency
preparedness plans.
o Advertising - The Company plans to advertise in leading trade
magazines.
o Trade Show Participations - The Company plans to participate in key
industry tradeshows in the United States, Israel, Europe and other
regions of the world. The Company also plans to participate in Federal
Emergency Management Agency (FEMA) and first responders conferences in
the United States.
o Onsite Demonstration - The Company plans to conduct onsite
demonstrations with potential clients as required and when feasible.
The Company will have demonstration units available in the United
States and Israel for such purposes.
o Web Based Marketing - The Company will utilize pay-per-click as well
as natural Search Engine Optimization (SEO) optimization techniques to
generate traffic to its website, www.waterchef.net. The Company also
plans to publish its website address in its public relations
campaigns. This strategy is expected to generate leads from potential
clients for follow up by the direct sales organization.
5
o Clear Branding Message - The Company plans to convey clear
differentiating brand marketing messages to highlight the Company's
brand and product attributes, on its Internet website, and its
promotional campaigns. The marketing messages will be designed for
decision makers in its targeted markets.
o Public and Investor Relations Campaign - The Company plans to
implement an active public and investor relations campaign as part of
its marketing plan. The Company recognizes that a well coordinated
public relations campaign is as valuable as or more valuable than paid
advertising.
INTELLECTUAL PROPERTY
The Company filed for patent protection on its PureSafe Water Station in October
of 1998 and received formal notification that the patent had been issued on
February 19, 2002. The Company feels that this patent upholds its claims that
the PureSafe system is a unique product. In addition to its U.S. patent, the
Company has filed for patent protection in the countries of the European Union,
and in Canada, Mexico, China, Hong Kong, and Japan. The patent application for
the European Union (01-126 980.0) was filed on November 13, 2001; Canadian
Application No. 2,362,107 was filed on November 3, 2001; Mexican Application No.
PA/a/2001/12042 was filed on November 23, 2001;the Chinese Application No.
01136187.5 was filed on November 21, 2001, and was found to be in compliance on
June 20, 2003; the Hong Kong Application No. 03107837.9 was filed on October 3,
2003. Each of the patent applications has been accepted, Requests for
Examination have been made, and the Company currently has patent protection in
the requested venues. In January 2006, the Chinese State Intellectual Property
Office granted the patent rights for the invention. The patent right for the
European Union was granted by European Patent Office (Patent No. 1 310 462) on
February 21, 2007. The contracting states that are covered under the umbrella
European Union Patent right are Switzerland/Liechtenstein, Germany, Spain,
France, Italy, Netherlands, and Sweden.
The Company is in the process of filing for new patents for the First Response
Water Trauma System.
The name "PureSafe Water Station" and the stylized water droplet mark have been
trademarked in the United States.
Water Chef has also incorporated patented and proprietary technology in the
PureSafe Water Station systems and is confident that it can protect this
intellectual capital throughout the manufacturing and distribution cycle.
The Company is in the process of trade-marking of its new mobile "First Response
Water Trauma System" (FRWTS)
There can be no assurance that any application of the Company's technologies
will not infringe patent or proprietary rights of others, or that licenses which
might be required for the Company's processes or products would be available on
favorable terms. Furthermore, there can be no assurance that challenges will not
be made against the validity of the Company's patent, or that defenses
instituted to protect against patent violation will be successful.
SEASONALITY
The Company does not expect the sales of stationary Pure Safe Water Station to
be influenced by seasonality. The Company does expect that the sales of its
FRWTS system will have some level of fluctuation due to seasonality of water
trauma events such as hurricanes, tornados, Tsunamis, storms, flooding or any
other natural or man-made disasters.
RESEARCH AND DEVELOPMENT
Research and development of our new First Response Water Trauma System takes
place at Shoham, Israel, under the supervision of Gil Tenne, our Chief
Engineering Consultant. As of April 9, 2008, the total cost of the design,
prototyping and development of the FRWTS has been in excess of $500,000.
INSURANCE
The Company maintains Directors' and Officers' Insurance in the aggregate amount
of $4,000,000, and a $4,000,000 general business liability policy. The Company
believes its insurance coverage to be adequate.
EMPLOYEES
As of December 31, 2007, the Company employed two executive officers and one
administrative employee in its headquarters.
6
The Company believes there are a sufficient number of persons available at
prevailing wage rates in or near our manufacturing locations that should
expansion of its production require additional employees, they would be readily
available. The Company has no collective bargaining agreement with any of its
employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently maintains its principal place of business at 68 South
Service Road, Melville, New York 11747. The company leases 275 square feet in an
executive suite at $3,502 per month on an annual basis. On October 25, 2007, the
Company signed a lease with Connecticut Yankee Realty, Inc. for a facility
located at 25 Middlesex Turnpike, Essex, CT. The rent is $1,529 per month. The
term of the lease is one year beginning October 1, 2007 and the Company has two
one-year renewal options to extend this lease with Landlord for the same rent as
is agreed for the first year.
On April 8, 2008, the Company signed a seven-year lease for a 5,300 square foot
facility in Plainview, New York at $5,000 per month on an annual basis. This
facility will replace our current headquarters to serve as executive offices,
showroom and assembly area. The Company expects to move into the new facility by
June, 2008.
ITEM 3. LEGAL PROCEEDINGS
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. On February 9, 2008
the Company prevailed in its counter claim against Funding Group, Inc. by a
decision handed down by the Supreme Court of the State of New York. Summary
Judgment was granted to the Company and the Court dismissed Funding Group,
Inc.'s claim against the Company in its entirety.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Over-The-Counter Electronic Bulletin
Board ("OTCBB") under the symbol WTER.OB. This market is categorized as being
"thin" which means that there is generally a paucity of buyers and sellers as
found in the more heavily traded Small Cap and NASDAQ markets. OTCBB stocks
generally do not have the trading characteristics of more seasoned companies as
they lack the market-makers that will make orderly markets as well as the buyers
and sellers that give depth, liquidity and orderliness to those markets. In
addition, the solicitation of orders and/or the recommendations for purchase of
OTCBB stocks is restricted in many cases by the Financial Industry Regulatory
Authority and by individual brokerage firms as well.
The chart below sets forth the range of high and low prices for the Company's
common stock based on high and low prices during each specified period as
reported by Yahoo Finance.
High Low
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Fiscal Year-Ended December 31, 2006
First Quarter $ 0.19 $ 0.07
Second Quarter 0.23 0.10
Third Quarter 0.13 0.09
Fourth Quarter 0.15 0.07
Fiscal Year-Ended December 31, 2007
First Quarter 0.19 0.11
Second Quarter 0.13 0.10
Third Quarter 0.12 0.06
Fourth Quarter 0.09 0.02
Fiscal Year-Ending December 31, 2008
First Quarter 0.14 0.03
As of the close of business on December 31, 2007, there were 803 common stock
holders of record.
7
DIVIDENDS
We have not paid any cash dividends on our common stock since our inception and
do not anticipate paying any cash dividends in the foreseeable future. We plan
to retain our earnings, if any, to provide funds for the expansion of our
business. Subject to our obligations to the holders of our Series A and Series D
Preferred shares, and to the holders of our Series F convertible preferred
stock, the holders of our common stock are entitled to dividends when and if
declared by our Board of Directors from legally available funds. Our Board of
Directors will determine future dividend policy based upon conditions at that
point, including our earnings and financial condition, capital requirements and
other relevant factors.
RECENT ISSUANCES OF UNREGISTERED SECURITIES
On May 2, 2007, the company issued 2,000,000 shares of common stock to Leslie J.
Kessler as part of her employment package
On May 2, 2007, the company issued 500,000 shares of common stock to Richard
Ayotte as part of his employment package
On May 10, 2007, the company issued 3,520,752 shares of common stock for
$300,000 investment received
On May 31, 2007, the company issued 555,555 shares of common stock for $50,000
investment received
On June 26, 2007, the company issued 1,203,080 shares of common stock for
$100,000 investment received
On November 5, 2007 the company issued 3,159,558 shares of common stock for
$200,000 investment received
On November 13,2007 the company issued 1,675,978 shares of common stock for
$100,000 investment received
On December 21, 2007 the company issued 3,896,104 shares of common stock for
$200,000 investment received
On December 21, 2007 the company issued 1,000,000 shares of common stock to
Terry R. Lazar as part of his employment package
On December 21, 2007 the company issued 1, 973,684 shares of common stock to
Terry R. Lazar for $100,000 investment received
On December 26, 2007 the company issued 2,255,639 shares of common stock for
$100,000 investment received
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
INTRODUCTION
DEVELOPMENT OF THE COMPANY
The Company was originally incorporated under Arizona law in 1985 and merged
into a Delaware corporation in 1987. In 1993, the Company, then known as Auto
Swap, U.S.A., entered into a reverse merger with Water Chef, Inc., a Nevada
corporation that manufactured and marketed water coolers and filters.
Plan for 12 Months
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The plan for the next twelve months includes:
1. The completion of the prototype First Response Water Trauma System,
with full operational capability.
2. Filing of all required patents for the First Response Water Trauma
System.
3. Certification of the system.
4. Continuing Capital raise with a total maximum target of $ 10,000,000
capital for the next 12 months.
5. Completion of improvements on new leased premises in Plainview Long
Island and Grand opening, including introduction to the First Response
Water Trauma System.
6. Hiring of new Director of Sales.
7. Initial penetration into target markets.
8. Adding special advisors to the Company as targeted resource personnel.
9. Concluding agreement with a strategic partner for target marketing.
10. Addition of Board Members.
11. Establishment of new facility in Israel for executive offices,
showroom, sales, research and development and production.
12. Some Revenue produced by sales of the First Response Water Trauma
System. 13. Hiring a Chief Technical Officer to oversee production of
the FRWTS for the U.S. market.
8
o Type of Research
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1. Continuing improvements in the First Response Water Trauma System .
2. Research and development to create a stationary system that can be
adapted to both domestic and international market needs.
o Funding
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Funding has thus far been provided by private investors. It is expected that the
next level of capital raise will come from a combination of private equity
investors and investment banking institutions.
o When Plan to Cease development Stage
------------------------------------
The Company believes that it will cease to be a development stage Company by the
4th quarter of 2008.
RESULTS OF OPERATIONS
Sales for the years ended December 31, 2007 and 2006 were $0 and $115,000,
respectively. During the year ended December 31, 2006, the Company recognized
the sale of two PureSafe Water Station Systems.
The new management of the Company made a strategic decision to focus the
Company's efforts and capital to produce a new technology that can penetrate the
market place with a water purification and delivery system when natural and
man-made disasters occur. In the past there was very little capital invested in
product development. The sales in 2006 of two pure safe water system units did
not assure new management that there was an ongoing market for the existing
system. The $ 115,000 in 2006 sales was an anomaly, not a reflection of a
Company coming out of the Development Stage. While the marketplace has a demand
for a permanent solution, management believes that significant re-engineering
will be required to create a permanent solution from the existing Pure Safe
Water System.
The year 2007 was primarily focused on identifying a market need and the
methodology to serve that market with a new and unique product. The strategic
relationship with Bircon and Gil Tenne started in the third quarter of 2007. As
previously indicated, the Company believes that the 4th quarter of 2008 will be
the defining time when the First Response Water Trauma System achieves sales.
The Company will re-address the permanent system in 2009.
Cost of sales decreased from $114,000 for the year ended December 31, 2006, to
$23,000 for the year ended December 31, 2007, a decrease of $91,000, or 80%.
Even though the Company generated no sales in 2007, we paid monthly payments
from January 2007 through April 2007 to Davis, Water Systems, our OEM facility
for storing our units. An analysis of the components of cost of sales follows:
Cost of Sales Product Rent and Overhead Total Cost
Period CGS Payments to Manufacturer of Sales
2007 $ -- $23,000 $ 23,000
2006 $30,000 $84,000 $114,000
Selling, general and administrative expenses for the year ended December 31,
2007 were $1,356,895 compared to $1,559,464 for the year ended December 31,
2006, a decrease of $202,569 or 13%. The cause of the decrease in Selling,
General and administrative expenses are the combinations of various factors. For
example, Legal and Accounting has increased $95,366, a 44 percentage increase
compare with 2006; consultation fees has increased $176,000 from 2006; Salaries
decreased $280,000 from 2006; Travel & Entertainment has increased $59,000;
Directors Fees decreased $33,300 Interest expense for the year ended December
31, 2007 was $ 430,067 compared to $380,553 for the year ended December 31,
2006, an increase of $49,514 or 13%. The Company does not expect the spending on
Research and Development in 2008 to be at the same level as 2007 once the
project of developing the FRWTS prototype is complete.
The negative changes in fair value of warrants and embedded conversion option
and stock based compensation are the result of decline of our stock price in
2007.
The net loss for the year ended December 31, 2007 was $1,701,125 compared to
$2,072,917 for the year ended December 31, 2006, a decrease of $371,792.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2007, the Company had a stockholders' deficiency of $2,029,215
and a working capital deficiency of $2,098,454. In addition, the Company had a
net loss of $1,701,125 and $2,072,917 for the years ended December 31, 2007 and
2006, respectively. The financial statements have been prepared assuming that
the Company will continue as a going concern. The Independent Registered Public
Accounting Firm's report on our financial statements included elsewhere herein
contains an explanatory paragraph about conditions that 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 and
9
raising additional capital through future issuances of stock and/or debt. The
Company plans to raise an additional 10 million dollars in the next twelve
months to fund the completion of the FRWTS prototype, to launch the new
marketing program, to establish sales and marketing network, to start production
and build inventory units, and to provide on-going working capital. The
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. In December
2007, the Chief Executive Officer exercised her option to convert her loan and
accrued interest into shares of common stock which were issued in January 2008.
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. In January
2008, the note holder exercised its option to convert the entire principal
amount of the note plus $8,851 of accrued interest into common stock.
Under the terms of the agreement the Company was required to file a registration
statement (SEC File No. 333-146742) covering the resale of the shares issuable
under the agreement by October 17, 2007. The registration was declared effective
on December 26, 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. As
of April 9, 2008, the Company has not drawn the additional $150,000.
The Company, during 2007 and 2006, raised $1,150,000 and $568,000, respectively,
through the sale of its common stock.
During 2007, the Company negotiated to settle certain promissory notes with an
aggregate principal balance of $400,000 plus accrued interest of $302,933. The
Agreement calls for the company to pay the note holder $150,000 payments in two
installments of $75,000 each on or before December 31, 2007 and June 30, 2008.
In addition, the Company will issue 2,500,000 shares of common stock of which
1,250,000 shares of common stock has been issued. The note holder agreed that it
shall restrict its sale of Water Chef's common stock to the lower of no more
than 25% of the previous day's trading volume or current day's trading volume or
125,000 shares per day.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet debt nor did we have any transactions,
arrangements, obligations (including contingent obligations) or other
relationships with any entities or other persons that may have a material
current or future effect on financial conditions, changes in financial
conditions, result of operations, liquidity, capital expenditures, capital
resources, or significant components of revenue or expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparation of the
statements in accordance with these principles requires that we make estimates,
using available data and our judgment, for such things as valuing assets,
accruing liabilities and estimating expenses. The Company is currently in
development stage as defined by SFAS No. 7. The following is a list of what we
believe are the most critical estimations that we make when preparing our
financial statements.
Development Stage Company
The Company discontinued its water cooler and filtration operations in November
2001. As a result, the Company has refocused its efforts on raising capital and
developing markets for its proprietary technology. Pursuant to the provisions of
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting by
Development Stage Enterprises" (SFAS 7), we are considered a development stage
company. We are subject to a number of risks similar to those of other early
development stage companies.
10
Stock-Based Compensation
The Company reports stock based compensation under Statements of Financial
Accounting Standards ("SFAS") No. 123R ("123R") "Share Based Payment." 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. During the year ended December 31, 2007 and 2006, we issued 3,500,000
and 866,666 shares of common stock and incurred a stock based compensation
charge of approximately $ 315,000 and $62,500, respectively based on the fair
value on the date of the award.
We accounts for equity instruments issued to non-employees in accordance with
the provisions of SFAS 123R and the Emerging Issues Task Force ("EITF") Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods or Services"
("EITF 96-18") which require that such equity instruments are recorded at their
fair value on the measurement date, which is typically the date the services are
performed.
The Black-Scholes option valuation model is used to estimate the fair value of
the options or their equivalent granted. The model includes subjective input
assumptions that can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options or warrants
that have no vesting restrictions and that are fully transferable. The expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted.
The principal assumptions used in applying the Black-Scholes model along with
the results from the model were as follows:
Years Ended December 31,
2007 2006
---- ----
Assumption:
Risk-free interest rate 5.00 % 4.00 %
Expected life, in years 3 years 3 years
Expected volatility 90% 118%
During the years ended December 31, 2007 and 2006 we granted 14,100,000 and
6,500,000 warrants, respectively, to employees and consultants for services
provided. Accordingly we incurred a charge for stock based compensation of
approximately $315,000 and $705,200, respectively. We have issued equity
instruments in the past to raise capital and as a means of compensation to
employees and for the settlement of debt.
Derivative Financial Instruments
In connection with the issuance of certain convertible promissory notes, the
terms of the convertible notes included an embedded conversion feature which
provided for a conversion of the convertible promissory notes into shares of our
common stock at a rate which was determined to be variable. The Company
determined that the conversion feature was an embedded derivative instrument
pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, and Emerging Issues Task Force ("EITF") Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock."
The accounting treatment of derivative financial instruments requires that we
record the conversion option and related warrants at their fair values as of the
inception date of the convertible debenture agreements and at fair value as of
each subsequent balance sheet date. In addition, under the provisions of EITF
Issue No. 00-19, as a result of entering into the convertible promissory notes,
we were required to reclassify all other non-employee warrants and options as
derivative liabilities and record them at their fair values at each balance
sheet date. Any change in fair value was recorded as non-operating, non-cash
income or expense for each reporting period at each balance sheet date. We
reassesses the classification of the instruments at each balance sheet date. If
the classification required under EITF Issue No. 00-19 changes as a result of
events during the period, the contract is reclassified as of the date of the
event that caused the reclassification.
Registration Payment Arrangements
We account for registration rights agreements in accordance with Financial
Accounting Standards Board ("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.
11
Income taxes
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."
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. 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 December 31, 2007, no
liability for unrecognized tax benefits was required to be recorded.
Effects of Recent Accounting Policies
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 us for financial statements issued after November 15, 2007. The
adoption of this pronouncement did not have a material impact on our 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. 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
as of the beginning of the first fiscal year 2008. The Company is evaluating the
impact SFAS 159 may have on the financial position, results of operations, or
cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). SFAS 141(R) replaces SFAS No. 141, "Business
Combinations", and is effective for us for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. SFAS 141(R) requires the new
acquiring entity to recognize all assets acquired and liabilities assumed in the
transactions; establishes an acquisition-date fair value for acquired assets and
liabilities; and fully discloses to investors the financial effect the
acquisition will have. SFAS 141(R) would have an impact on accounting for any
business acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
noncontrolling interests be treated as equity. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008 with earlier adoption prohibited. The adoption of this
pronouncement is not expected to have a material impact on the financial
position, results of operations and cash flows, however, this pronouncement may
affect future periods.
12
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161 "Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133 "("SFAS 161"). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments. (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows. The
guidance in SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption . At this time,
management is evaluating the implications of SFAS 161 and its impact on the
financial statements has not yet been determined.
The FASB, the Emerging Issues Task Force and the SEC have issued certain other
accounting pronouncement and regulations as of December 31, 2007 that will
become effective in subsequent periods. However we did not believe that any of
those pronouncement would have significantly affected the financial accounting
measures or disclosures had they been in effect during 2007 or 2006, and do not
believe that any of those pronouncements will have a significant impact to the
financial statements at the time they become effective.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements for the years ended December 31, 2007 and
2006 and for the period from January 1, 2002 (commencement as a development
stage company) to December 31, 2007 are included herein and consist of:
Report of Independent Registered Public Accounting Firm.......F-1
Balance Sheet.................................................F-2
Statements of Operations......................................F-3
Statement of Changes in Stockholders' Deficiency..............F-4-9
Statements of Cash Flows......................................F-10
Notes to Financial Statements ................................F-11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the year ended December 31, 2007, no change in accountants occurred and
there were no disagreements with accountants.
ITEM 8A(T). CONTROLS AND PROCEDURES
Management's Evaluation of 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 Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of the end of the period covered by 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 the Securities and
Exchange Commission's rules and forms and that such information is accumulated
and communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Management's Annual Report on Internal Control over Financial Reporting
-----------------------------------------------------------------------
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Exchange
Act. Internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, and effected by the board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with US GAAP including those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable detail,
13
accurately and fairly reflect the transactions and dispositions of the assets of
the company, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with US
GAAP and that receipts and expenditures are being made only in accordance with
authorizations of management and directors of the company, and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies and procedures may deteriorate.
Under the supervision and with the participation of our management we have
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In making this assessment, our management used the
criteria described in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Due to
the inherent issue of segregation of duties in a small company, we have relied
heavily on entity or management review controls to lessen the issue of
segregation of duties. Based on this assessment and those criteria, our
management concluded that the Company did maintain effective internal control
over financial reporting as of December 31, 2007.
The Company does acknowledge the following significant deficiency, which did not
rise to the level of a material weakness. The Company recognizes that it needs
to provide leadership and guidance to its employees, clients and vendors
regarding business ethics and professional conduct. A confidential reporting
mechanism must be in place for anonymous reporting of a breach to these ethics
that will enable prompt and thorough investigation. These policies are being
established and will be posted on the Company's website in the second quarter of
fiscal 2008.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
Changes in Internal Controls
----------------------------
There has been a change in our internal control over financial reporting during
the most recently completed fiscal quarter that will affect or are reasonably
likely to materially affect, our internal control over financial reporting. In
October 2007, the Company hired a Chief Financial Officer who is a certified
public accountant.
ITEM 8B. OTHER INFORMATION
None
14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
As of March 31, 2008, the Company's Directors and Executive Officers are:
Name Age Position(s) with the Company
Leslie J. Kessler 60 Director, Chairman, President, and
Chief Executive Officer
Terry Lazar 64 Director, Chief Financial officer
Malcolm Hoenlein 64 Director
Leslie J. Kessler
Ms. Kessler joined the Company as its President in January 2007 and was
appointed Chief Executive Officer and as a member of the Company's Board of
Directors in February 2007. Since 1994, Ms. Kessler has served as the president
of LIK Capital, which specializes in consulting and assisting companies with
financing their growth and development. In 1996, Ms. Kessler co-founded CPC of
America, Inc. and served on the board of directors. In 1998, CPC of America
became a public traded company in the field of cardiology. Ms. Kessler holds
both a B.A. and an M.A. from Hofstra University.
Terry Lazar
Mr. Lazar joined the Company in September 2007 as the Chief Financial Officer
and a member of the Board of Directors. Mr. Lazar is a senior partner at Lazar
Sanders Thaler & Associates, LLP, Certified Public Accountants and Consultants,
which he founded in 1977. Mr. Lazar has served as a partner and the Chief
Executive Officer of the Ambulatory Surgery Center of Brooklyn since 1987. Mr.
Lazar holds his B.B.A. from the City University of New York.
Malcolm Hoenlein
Mr. Hoenlein was appointed as a member of the Board of Directors in March 2008.
Mr. Hoenlein is the Executive Vice Chairman/CEO of the Conference of Presidents
of Major American Jewish Organizations, the coordinating body on national and
international Jewish concerns for 52 national Jewish organizations. He served on
the editorial board of ORBIS, the Journal of International affairs and as a
Middle East specialist at the Foreign Policy Research Institute. Mr. Hoenlein
serves as an advisor to many public officials and is frequently consulted on
public policy issues. He serves on the boards of various companies including
Keryx Biopharmaceuticals Inc. (NasdaqGM: KERX), Manhattan Pharmaceuticals Inc.
(OTCBB:MHAN.OB) and Bank Leumi USA. Mr. Hoenlein holds a B.A. in Political
Science from Temple University and a Masters degree from the University of
Pennsylvania's Department of International Relations.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and executive officers, and persons who beneficially own more than ten
percent of our common stock, to file reports of ownership of common stock and
other equity securities of our company with the Securities and Exchange
Commission ("SEC"). Officers, directors and more than ten percent stockholders
are required by SEC regulation to furnish us with copies of all Section 16(a)
reports they file. To our knowledge, based solely on review of the copies of
these reports furnished to us during 2007, all required Section 16(a) reports
for our directors, officers and beneficial owners of ten percent of our
outstanding stock were filed on a timely basis except for the following reports
and transactions that were inadvertently reported late: (1) Leslie Kessler
failed to timely file two reports covering three transactions; (2) Terry Lazar
failed to timely file five reports covering twenty eight transactions; and (3)
Malcolm Hoenlein failed to timely file one report covering one transaction.
Code of Ethics
We adopted a code of ethics in 2005 that was filed as Exhibit 14.1 to our
Quarterly Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 15, 2005. The code of ethics applies to each of our
directors and officers, including the chief financial officer and chief
executive officer, and all of our other employees and the employees of our
subsidiaries.
15
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
All
Name and Principal Stock
Position Salary Bonus Awards Total
Year ($) ($) ($) ($)
---- --------- ------ -------- --------
David A. Conway 2006 $350,000 -- -- $350,000
Leslie J. Kessler 2007 $ 99,000 -- $411,900 $510,900
President/CEO
Terry R. Lazar 2007 $15,000 -- $ 40,000 $ 55,000
CFO
--------------------------------------------------
Mr. Conway entered into a five-year employment agreement in January 2004. The
agreement provided for base salary of $350,000 per year, participation in the
Company's employee benefit programs and a life insurance policy in the amount of
$5,000,000 which was never purchased. In addition, Mr. Conway was granted a
stock appreciation right, vesting at 20% per year for five years, for 5,000,000
shares of Water Chef common stock at a strike price of $0.25 per share. Mr.
Conway was originally granted stock options in January 2004 that were later
converted to stock appreciation rights. Under the terms of the Employment
Agreement if the employee is terminated by the Company for other than cause, the
Employee is entitled to receive an amount equal to his monthly base pay
multiplied by 24 months. In the event of a Change of Control the Company is
required to pay to the Employee an amount equal to his monthly base salary
multiplied by thirty-six. Upon his resignation as President and Chief Executive
Officer in January 2007, Mr. Conway 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.
EMPLOYMENT AGREEMENTS
On January 15, 2007, Ms. Kessler was appointed President of the Company. On
February 2, 2007, Ms. Kessler was approved CEO and a member of Board of
Directors. Mr. Kessler's compensation for 2007 was $9,000 per month which she
agreed to defer. In January 2008, she requested and was paid $18,000 of her
deferred compensation. On March 29, 2007, Ms. Kessler was awarded 2,000,000
shares of common stock and a three-year stock purchase warrant for an additional
2,000,000 shares at $0.11 per share.
On September 21, 2007 Mr. Terry Lazar was appointed CFO and a member of the
Board of Directors. Mr. Lazar's compensation is $5,000 per month. During 2007
Mr. Lazar received $10,000 and deferred $5,000. On September 28, 2007 the Board
approved issuance of 2,000,000 shares of common stock to Mr. Lazar of which
1,000,000 shares was issued in 2007. The remaining 1,000,000 shares are to be
issued in September 2008. In addition, the Board approved a three-year stock
purchase warrant for 2,000,000 shares at an exercise price of $0.07.
The Company has no long-term incentive plans at this time.
2007 DIRECTORS' COMPENSATION
-------------------------------------------------------------------------------
Fees Earned or
Name Paid in Cash Stock Awards Option Awards Total
-------------------------------------------------------------------------------
John J. Clarke $16,667 $ -- -- $16,667
-------------------------------------------------------------------------------
Ronald Hart -- -- $50,400 $50,400
-------------------------------------------------------------------------------
On February 12, 2007, Marshall S. Sterman resigned from the Board of Directors
and waived his rights to any accrued compensation owed to him by the Company.
The Company wrote off $330,000 accrued compensation to additional-paid-in
capital in 1st quarter of 2007. On August 31, 2007, the Company received a
letter of resignation from Dr. Ronald W. Hart resigning from his position as a
member of the Company's Board of Directors. On September 5, 2007, John J.
Clarke, Jr. resigned from his position as a member of the Company's Board of
Directors.
The Company's directors have been paid success fees for helping the Company in
various equity and debt financings in previous years. These payments have been
both in cash and common stock, such payments being made based on industry-wide
standards and arms-length transactions.
16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Set forth below is information as of April 9, 2008, concerning stock ownership
of all persons known by the Company to own beneficially 5% or more of the any
class of the securities of the Company, all Directors, the Executive officers,
and all Directors and Executive Officers of the Company as a group based on the
number of shares of common stock issued and outstanding as of the date of this
report. For purposes of the report, beneficial ownership is defined in
accordance with the Rules of the Securities and Exchange Commission and
generally means the power to vote and/or dispose of the securities regardless of
any economic interest.
Common Stock Series A Preferred Stock Series D Preferred Stock Series F Convertible
Beneficially Owned(1) Beneficially Owned(1) Beneficially Owned (1) Preferred Stock
Beneficially Owned (1)
Shares % Shares % Shares % Shares %
Leslie J.Kessler (2) 9,181,624 3.9% -- -- -- -- -- --
Water Chef, Inc.
68 S. Service Road
Suite 100
Melville, NY 11747
Terry R. Lazar (3) 2,873,684 1.2% -- -- -- -- -- --
Water Chef, Inc.
68 S. Service Road
Suite 100
Melville, NY 11747
John J. Clarke -- -- -- -- -- -- -- --
Water Chef, Inc.
68 S. Service Road
Suite 100
Melville, NY 11747
Ronald Hart -- -- -- -- -- -- -- --
Water Chef, Inc.
68 S. Service Road
Suite 100
Melville, NY 11747
Jerome and Anne Asher -- -- 5,000 9.5% -- -- -- --
JTWROS
2701 N Ocean Blvd
Apt E-202
Boca Raton, FL 33431
Robert D. Asher -- -- 5,000 9.5% -- -- -- --
72 Old Farm Road
Concord, MA 01742
John A. Borger -- -- -- -- 10,000 10.8% -- --
806 E. Avenida Pico
Suite I PMB #262
San Clemente, CA 92673
C Trade Inc. -- -- -- -- -- -- 9,375 23.3%
25-40 Shore Blvd.,
Ste 9L
Astoria, NY 11102
Goldman, Sachs & Co.(4) 16,593,081 7.6% -- -- -- -- -- --
The Goldman Sachs
Group, Inc.
85 Broad Street
New York
Peter Hoffman -- -- -- -- -- -- 3,126 7.8%
7035 Vleigh Place
Flushing, NY 11367
17
Robert Kaszovitz -- -- -- -- -- -- 10,000 7.8%
1621 51st Street
Brooklyn, NY 11204
Olshan Grundman Frome -- -- -- -- -- -- 5,000 12.4%
Rosenzweig & Wolosky
65 East 55th Street
New York, NY 10022
Shirley M. Wan -- -- -- -- 6,000 6.5% -- --
5455 Chelsen Wood Dr.
Duluth, GA 30155
All Executive Officers 12,055,308 5.1% -- -- -- -- -- --
and Directors as a
Group (2)
1. A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days upon the exercise of options and
warrants and the conversion of convertible securities. Each beneficial
owner's percentage of ownership is determined by assuming that all options,
warrants or convertible securities held by such person (but not those held
by any other person) that are currently exercisable or convertible (i.e.,
that are exercisable or convertible within 60 days) have been exercised or
converted.
2. Includes 98,400 shares held in an IRA, and warrants to purchase 5,000,000
shares of common stock which are currently exercisable.
3. Includes 25,000 shares held by a Profit Sharing Plan Trust, 135,000 shares
held in Mr. Lazar and his wife's IRAs, 175,000 shares held jointly by Mr.
Lazar and his wife, 165,000 shares held in a 401(k).
4. Based on an amendment to a Schedule 13G jointly filed with the Securities
and Exchange Commission on February 6, 2008 by Goldman, Sachs & Co. and The
Goldman Sachs Group, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Beginning on January 1, 2002, Mr. Sterman, a former director of the Company, was
compensated at the rate of $6,000 per month for consulting services performed
for the Company. In 2004 Mr. Sterman's monthly compensation increased to
$10,000. Mr. Sterman's consulting agreement was terminated in June 2006. Mr.
Sterman resigned from the Board of Directors on February 12, 2007 and waived his
right to any accrued compensation and director fees owed to him by the Company.
ITEM 13. EXHIBITS
(a) Exhibits:
Number Description of Exhibit
------ ----------------------
3.1 Amended and Restated By-Laws of Water Chef, Inc. -
Incorporated herein by reference to Exhibit 3(ii) to the
Form 10-KSB/A filed November 17, 2003.
3.2 Amended and Restated Certificate of Incorporation of Water
Chef, Inc. - Incorporated herein by reference to Exhibit 3.2
to the Form SB-2 filed January 24, 2005.
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of Water Chef, Inc. dated August 2, 1993 -
Incorporated herein by reference to Exhibit 3.3 to the Form
SB-2 filed January 24, 2005.
3.4 Certificate of Amendment of Restated Certificate of
Incorporation of Water Chef, Inc. dated August 2, 1992 -
Incorporated herein by reference to Exhibit 3.4 to the Form
SB-2 filed January 24, 2005.
3.5 Certificate for Renewal and Revival of Certificate of
Incorporation - Incorporated herein by reference to Exhibit
3.5 to the Form SB-2 filed January 24, 2005.
3.6 Certificate of Amendment of Restated Certificate of
Incorporation of Water Chef, Inc. dated February 20, 2002 -
Incorporated herein by reference to Exhibit 3.6 to the Form
SB-2 filed January 24, 2005.
18
3.7 Certificate of Correction filed to correct a certain error
in the Certificate of Amendment of the Restated Certificate
of Incorporation of Water Chef, Inc. dated May 7, 2004 -
Incorporated herein by reference to Exhibit 3.7 to the Form
SB-2 filed January 24, 2005.
4.1 Certificate of Designation of Series A Preferred Stock of
Water Chef, Inc. - Incorporated herein by reference to
Exhibit 4.1 to the Form 10-KSB/A filed November 17, 2003.
4.2 Certificate of Designation of Series C convertible preferred
stock of Water Chef, Inc. - Incorporated herein by reference
to Exhibit 4.2 to the Form 10-KSB/A filed November 17, 2003.
4.3 Certificate of Designation of Series D Preferred Stock of
Water Chef, Inc. - Incorporated herein by reference to
Exhibit 4.3 to the Form 10-KSB/A filed November 17, 2003.
4.4 Certificate of Designation of Series F convertible preferred
stock of Water Chef, Inc. - Incorporated herein by reference
to Exhibit 4.4 to the Form SB-2 filed January 24, 2005.
4.5 Series B Warrant to Purchase Common Stock and Allonge to and
Amendment and Extension of Common Stock Purchase Warrant -
Incorporated herein by reference to Exhibit 4.4 to the Form
10-KSB/A filed November 17, 2003.
4.6 Series B Second Allonge to and Amendment and Extension of
Common Stock Purchase Warrant - Incorporated herein by
reference to Exhibit 4.6 to the Form SB-2 filed January 24,
2005.
4.7 Subordinated Debentures - Incorporated herein by reference
to Exhibit 4.5 to the Form 10-KSB/A filed November 17, 2003.
10.1 Loan Agreement, dated as of November 16, 2005, by and
between Water Chef, Inc. and Southridge Partners LP -
Incorporated herein by reference to Exhibit 99.1 to the Form
8-K filed November 23, 2005.
10.2 Registration Rights Agreement, dated as of November 16,
2005, by and between Water Chef, Inc. and Southridge
Partners LP - Incorporated herein by reference to Exhibit
99.2 to the Form 8-K filed November 23, 2005.
10.3 Promissory Note issued by Water Chef, Inc. on November 16,
2005 to Southridge Partners LP for the principal sum of
$250,000 - Incorporated herein by reference to Exhibit 99.3
to the Form 8-K filed November 23, 2005.
10.4 Three Year Warrant issued to Southridge Partners LP, dated
November 16, 2005, to purchase 430,000 shares of common
stock at a price of $0.14 per share - Incorporated herein by
reference to Exhibit 9.4 to the Form 8-K filed November 23,
2005.
10.5 Loan Agreement, dated as of October 11, 2006, by and between
Water Chef, Inc. and Southridge Partners LP - Incorporated
herein by reference to Exhibit 9.4 to the Form 8-K filed
October 19, 2006.
10.6 Registration Rights Agreement, dated as of October 11, 2006,
by and between Water Chef, Inc. and Southridge Partners LP -
Incorporated herein by reference to Exhibit 9.4 to the Form
8-K filed October 19, 2006.
10.7 Promissory Note issued by Water Chef, Inc. on October 11,
2006 to Southridge Partners LP for the principal sum of
$300,00 - Incorporated herein by reference to Exhibit 9.4 to
the Form 8-K filed October 19, 2006.
10.8 Three Year Warrant issued to Southridge Partners LP, dated
October 11, 2006, to purchase 882,352 shares of common stock
at a price of $0.085 per share - Incorporated herein by
reference to Exhibit 9.4 to the Form 8-K filed October 19,
2006.
19
10.9 Securities Purchase Agreement, dated as of August 27, 2007,
by and between Water Chef, Inc., Southridge Partners LP and
Southshore Capital Fund Ltd - Incorporated herein by
reference to Exhibit 99.1 to the Form 8-K filed September 9,
2007.
10.10 Registration Rights Agreement, dated as of August 27, 2007,
by and between Water Chef, Inc. and Southridge Partners LP.
- Incorporated herein by reference to Exhibit 99.2 to the
Form 8-K filed September 9, 2007.
10.11 10% Convertible Promissory Note issued by Water Chef, Inc.
on September 7, 2007 to Southridge Partners LP for the
principal sum of $200,000 - Incorporated herein by reference
to Exhibit 99.3 to the Form 8-K filed September 9, 2007.
10.12 10% Convertible Promissory Note issued by Water Chef, Inc.
on September 7, 2007 to Southshore Capital Fund Ltd. for the
principal sum of $50,000 - Incorporated herein by reference
to Exhibit 99.4 to the Form 8-K filed September 9, 2007.
10.13 Common Stock Purchase Warrant issued to Southridge Partners
LP, dated September 7, 2007, to purchase 1,107, 829 shares
of common stock- Incorporated herein by reference to Exhibit
99.5 to the Form 8-K filed September 9, 2007.
10.14 Common Stock Purchase Warrant issued to Southshore Capital
Fund Ltd., dated September 7, 2007, to purchase 276,957
shares of common stock - Incorporated herein by reference to
Exhibit 99.6 to the Form 8-K filed September 9, 2007.
10.15 Private Equity Credit Agreement, dated as of September 7,
2007, by and between Water Chef, Inc. and Brittany Capital
Management Limited - Incorporated herein by reference to
Exhibit 99.7 to the Form 8-K filed September 9, 2007.
10.16 Registration Rights Agreement, dated as of September 7,
2007, by and between Water Chef, Inc. and Brittany Capital
Management Limited - Incorporated herein by reference to
Exhibit 99.8 to the Form 8-K filed September 9, 2007.
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.
20
ITEM 14. PRINCIPAL ACCOUNTANT FEES
Aggregate fees for professional services rendered for the Company by Marcum
Kliegman LLP, the Company's independent registered public accounting firm, for
the years ended December 31, 2007 and 2006 are set forth bleow.
Year ended
----------
Type of Service 2007 2006
--------------- ---- ----
Audit fees (1) $120,500 $125,000
Audit-Related Fees (2) -- --
Tax Fees (3) -- --
All Other Fees (4) -- --
-------- --------
Total $120,500 $125,000
======== ========
(1) Comprised of the audit of our annual financial statements and reviews of our
quarterly financial statements.
(2) Comprised of assurance services in connection with employee benefit plan
audits, due diligence related to mergers and acquisitions, accounting
consultations related to mergers and acquisitions, internal control reviews,
attest services that are not required by statute or regulation and consultation
concerning financial accounting and reporting standards.
(3) Comprised of services for tax compliance, tax return preparation, tax advice
and tax planning.
(4) Fees related to other filings with the SEC.
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
by the Company's independent accountants must now be approved in advance by the
Audit Committee to assure that such services do not impair the accountants'
independence from the Company. Accordingly, the Audit Committee has adopted an
Audit and Non-Audit Services Pre-Approval Policy (the "Policy") which sets forth
the procedures and the conditions pursuant to which services to be performed by
the independent accountants are to be pre-approved. Pursuant to the Policy,
certain services described in detail in the Policy may be pre-approved on an
annual basis together with pre-approved maximum fee levels for such services.
The services eligible for annual pre-approval consist of services that would be
included under the categories of Audit Fees, Audit-Related Fees, Tax Fees and
All Other Fees in the above table as well as services for limited review of
actuarial reports and calculations. If not pre-approved on an annual basis,
proposed services must otherwise be separately approved prior to being performed
by the independent accountants. In addition, any services that receive annual
pre-approval but exceed the pre-approved maximum fee level also will require
separate approval by the Audit Committee prior to being performed. The Audit
Committee may delegate authority to pre-approve audit and non-audit services to
any member of the Audit Committee, but may not delegate such authority to
management.
All of the engagements and fees for the year ended December 31, 2007 were
approved by the audit committee and its equivalent. Of the total number of hours
expended during M&K's engagement to audit the Company's financial statements for
the year ended December 31, 2007, none of the hours were attributed to work
performed by persons other than M&K's full-time, permanent employees.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATERCHEF, INC.
Date: April 14, 2008 /s/ Leslie J. Kessler
-----------------------------------
Leslie J. Kessler
President, Chief Executive
Officer (Principal Operating
Officer)
Date: April 14, 2008 /s/ Terry R. Lazar
----------------------------------
Terry R. Lazar
Director and Chief Financial
Officer (Principal Financial
and Accounting Officer)
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Water Chef, Inc.
Mellville, New York
We have audited the accompanying balance sheet of Water Chef, Inc., (a
development stage company) as of December 31, 2007 and the related statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 2007 and 2006 and for the period from January 1, 2002 (commencement as a
development stage company) to December 31, 2007. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Water Chef, Inc., (a
development stage company) as of December 31, 2007 and the results of its
operations and its cash flows for the years ended December 31, 2007 and 2006 and
for the period from January 1, 2002 (commencement as a development stage
company) to December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has had recurring losses, and has a working capital and
stockholders' deficiency as of December 31, 2007. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Marcum & Kliegman LLP
-----------------------------
Marcum & Kliegman LLP
New York, New York
April 11, 2008
F-1
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
BALANCE SHEET
DECEMBER 31, 2007
ASSETS
Current Assets:
Cash $ 415,400
Prepaid expenses 41,988
------------
Total Current Assets 457,388
Equipment, net of accumulated depreciation of $2,063 18,987
Patents and trademarks, net 38,323
Deferred financing costs, net 2,510
Other assets 9,419
------------
TOTAL ASSETS $ 526,627
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses 492,825
Accrued compensation 104,000
Accrued consulting and director fees 166,000
Notes and convertible note payable
(including accrued interest of $417,542) 895,077
Convertible promissory note including accrued interest
of $7,945 and net of debt discount of $67,900) 190,045
Loans payable to officers (including accrued interest
Of $7,425) 107,425
Fair-value of detachable warrants and options 170,900
Fair-value of embedded conversion option 239,300
Accrued dividends payable 190,270
------------
TOTAL LIABILITIES $ 2,555,842
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
185,194 shares issued and outstanding,
(liquidation preference $2,375,650) 185
Common stock, $.001 par value;
340,000,000 shares authorized;
204,177,806 shares issued;
204,173,406 shares outstanding 204,177
Additional paid-in capital 26,129,184
Treasury stock, 4,400 common shares, at cost ( 5,768)
Accumulated deficit (includes $13,285,397
of deficit accumulated during the development stage) (28,356,993)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,029,215)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 526,627
============
The accompanying notes are an integral part of these financial statements.
F-2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENTS OF OPERATIONS
For the
period from January 1,
2002 (Date of
Commencement as
a Development
Stage Company)
Years Ended December 31, to December 31,
2007 2006 2007
------------- ------------- -------------
Sales $ -- $ 115,000 $ 471,290
------------- ------------- -------------
Costs and Expenses (Income):
Cost of sales 23,000 114,000 575,680
Selling, general and administrative -
including stock based compensation of
$636,916 and $767,699 for the years
ended December 31, 2007 and 2006, respectively
and $2,182,005 for the period from
January 1, 2002 to December 31, 2007 1,356,895 1,559,464 7,013,946
Non-dilution agreement termination costs -- -- 2,462,453
Research and development 435,363 -- 435,363
Interest expense (including interest expense
for related party of $7,425 and $23,868 for
the years ended December 31, 2007 and 2006,
Respectively and $126,765 for the period
January 1, 2002 to December 31, 2007) 317,067 380,553 1,423,628
Financing costs - extension of warrants -- -- 74,700
Loss on settlement of debt -- -- 2,614,017
Interest expense - conversion provision 113,000 -- 113,000
Change in fair value of warrants and
embedded conversion option ( 544,200) 133,900 ( 416,100)
------------- ------------- -------------
1,701,125 2,187,917 14,296,687
------------- ------------- -------------
Net loss (1,701,125) (2,072,917) (13,825,397)
Deemed dividend on preferred stock -- -- (2,072,296)
Preferred stock dividends ( 108, 699) ( 42,401) ( 617,766)
------------- ------------- -------------
Net loss applicable to
common stockholders $ (1,809,824) $ ( 2,115,318) $ (16,515,459)
============= ============= =============
Basic and Diluted Loss Per Common Share $ ( 0.01) $ ( 0.01)
============= =============
Weighted Average Common Shares Outstanding -
Basic and Diluted 190,285,689 193,408,939
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
WATER CHEF, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from January 1, 2002 (Date of Commencement as a
Development Stage Company) to December 31, 2007
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 2002 145,500 $ 146 86,614,286 $ 86,614 $ 12,339,469
Extension of life of warrants -- -- -- -- 111,000
Proceeds from sale preferred stock
($1.00 per share) 125,000 125 -- -- 117,375
Proceeds from sale of common stock
($0.025 per share) -- -- 2,500,000 2,500 97,500
Common stock issued for services
($0.08 per share) -- -- 450,000 450 35,550
Collection of subscription receivable -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2002 270,500 $ 271 89,564,286 $ 89,564 $ 12,700,894
Proceeds from sale of preferred stock
March 31, 2003
($1.00-$2.00 per share) 62,500 63 -- -- 74,937
June 30, 2003
($0.50 per share) 75,000 75 -- -- 37,425
September 30, 2003
($1.00-$2.40 per share) 163,281 163 -- -- 228,346
December 31, 2003
($1.33-$2.80 per share) 145,450 145 -- -- 258,717
Preferred stock issued for services
March 31, 2003
($1.00 per share) 30,000 30 -- -- 29,970
June 30, 2003
($1.00 per share) 51,250 51 -- -- 51,199
September 30, 2003
($1.00 per share) 67,035 67 -- -- 66,968
December 31, 2003
($1.88-$4.00 per share) 22,150 22 -- -- 65,378
Collection of subscription receivable -- -- -- -- --
Write-off of subscription receivable -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2003 887,166 $ 887 89,564,286 $ 89,564 $ 13,513,834
Proceeds from sale of preferred stock
March 31, 2004
($2.40-$4.80 per share) 130,077 130 -- -- 400,126
June 30, 2004
($0.80 per share) 15,625 16 -- -- 12,484
Preferred stock issued for services
March 31, 2004
($2.00-$4.80 per share) 49,433 49 -- -- 158,483
Proceeds from sale of common stock
September 30,2004
($0.03-$0.15 per share) -- -- 2,541,595 2,541 205,059
December 31, 2004
($0.05-$0.10 per share) -- -- 2,487,500 2,488 187,512
Common stock issued for services
March 31, 2004
($0.05 Per share) -- -- 477,133 477 23,380
September 30,2004
($0.05-$0.15 per share) -- -- 1,857,800 1,858 126,792
December 31, 2004
($0.08-$0.10 per share) -- -- 532,500 533 40,968
Preferred stock dividend -- -- -- -- (81,034)
Common stock issued for satisfaction of liabilities
June 30, 2004
($0.15 per share) -- -- 37,786,629 37,787 5,635,934
December 31, 2004
($0.134 per share) -- -- 411,100 411 54,839
The accompanying notes are an integral part of these financial statements.
F-4
WATER CHEF, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from January 1, 2002 (Date of Commencement as a
Development Stage Company) to December 31, 2007
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Preferred stock converted to common stock
June 30, 2004 (133,250) (133) 5,108,332 5,108 (4,975)
September 30, 2004 (269,263) (269) 12,103,854 12,104 (11,835)
December 31, 2004 (65,375) (65) 3,015,000 3,015 (2,950)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2004 614,413 $ 615 155,885,729 $ 155,886 $ 20,258,617
Proceeds from sale of common stock
March 31,2005
($0.05 per share) -- -- 200,000 200 9,800
June 30,2005
($0.05-$0.06 per share) -- -- 700,000 700 39,300
September 30,2005
($0.07-$0.10 per share) -- -- 2,455,357 2,455 202,545
December 31, 2005
($0.05-$0.07 per share) -- -- 3,879,283 3,879 236,081
Common stock issued for services
March 31, 2005
($0.05-$0.10 per share) -- -- 230,000 230 17,770
December 31, 2005
($0.05-$0.06 per share) -- -- 407,500 408 21,219
Preferred stock dividend -- -- -- -- (66,436)
Extension of 1,666,667 warrants -- -- -- -- 74,700
Common stock issued for satisfaction of
liabilities
September 30, 2005
($0.07 per share) -- -- 571,428 571 39,429
December 31, 2005
($0.142 per share) -- -- 100,000 100 14,100
Preferred stock converted to common stock
March 31, 2005 (55,970) (56) 2,518,800 2,519 (2,463)
June 30, 2005 (34,020) (34) 1,360,800 1,361 (1,327)
September 30, 2005 (286,650) (287) 13,382,583 13,383 (13,096)
December 31, 2005 (2,188) (2) 87,520 87 (85)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2005 235,585 $ 236 181,779,000 $ 181,779 $ 20,830,154
Proceeds from sale of common stock
March 21, 2006
($0.07 per share) -- -- 3,600,000 3,600 246,400
May 8, 2002
($0.08-$0.10 per share) -- -- 3,769,230 3,769 276,231
June 28, 2006
($0.10 per share) -- -- 100,000 100 9,900
August 17, 2006
($0.07 per share) -- -- 400,000 400 27,600
Common stock issued for services
March 21, 2006
($0.06 per share) -- -- 250,000 250 14,750
May 8, 2006
($0.05 per share) -- -- 450,000 450 22,050
June 6, 2006
($0.15 per share) -- -- 166,666 166 24,833
Common stock issued for repayment of debt
February 13, 2006
($0.11 per share) -- -- 438,785 439 48,046
April 3, 2006
($0.08 per share) -- -- 614,131 614 50,790
April 6, 2006
($0.08 Per share) -- -- 1,959,631 1,960 154,614
June 6, 2006
($0.10-$0.15 per share) -- -- 3,583,334 3,583 390,517
Preferred stock converted to common stock (46,668) (47) 1,866,720 1,867 (1,820)
The accompanying notes are an integral part of these financial statements.
F-5
WATER CHEF, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from January 1, 2002 (Date of Commencement as a
Development Stage Company) to December 31, 2007
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
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
Reclassification of warrants
and embedded conversion option upon
issuance of convertible debt -- -- -- -- (288,900)
Preferred stock dividend -- -- -- -- (42,401)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2006 188,917 $ 189 198,977,497 $ 198,977 $ 22,836,764
Proceeds from Sale of Common Stock:
May 10, 2007
($0.090 per share) -- -- 1,111,112 1,111 98,889
May 10, 2007
($0.083 per share) -- -- 2,409,640 2,409 197,591
May 31, 2007
($0.090 per share) -- -- 555,555 555 49,445
June 26, 2007
($0.083 per share) -- -- 1,203,080 1,203 98,797
October 26, 2007
($0.063 per share) -- -- 3,159,558 3,159 196,841
November 7, 2007
($0.059 per share) -- -- 1,675,978 1,676 98,324
December 5, 2007
($0.051 per share) -- -- 1,948,052 1,948 98,052
December 12, 2007
($0.050 per share) -- -- 1,973,684 1,974 98,026
December 13, 2007
($0.051 per share) -- -- 1,948,052 1,948 98,052
December 20, 2007
($0.044 per share) -- -- 2,255,639 2,256 97,744
Stock for compensation:
May 2, 2007
($0.110 per share) -- -- 2,500,000 2,500 272,500
December 14, 2007
($0.040 per share) -- -- 1,000,000 1,000 39,000
Common stock issued in repayment of debt:
February 26, 2007
($0.132 per share) -- -- 195,212 195 25,534
March 8, 2007
($0.111 per share) -- -- 234,165 234 25,571
March 14, 2007
($0.111 per share) -- -- 256,643 257 25,587
March 19, 2007
($0.099 per share) -- -- 262,650 263 25,608
March 23, 2007
($0.097 per share) -- -- 806,583 807 76,867
April 4, 2007
($0.095 per share) -- -- 546,901 547 51,354
May 1, 2007
($0.086 per share) -- -- 908,885 909 77,345
Stock for late payment penalty:
May 22, 2007
($0.100 per share) -- -- 100,000 100 9,900
Preferred stock converted to common stock:
February 16, 2007 ( 2,848) ( 3) 113,920 114 ( 111)
May 4, 2007 ( 250) -- 10,000 10 ( 10)
December 12, 2007 ( 625) ( 1) 25,000 25 ( 24)
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 -- -- -- -- (227,300)
Amortization of warrants and option for
stock based compensation -- -- -- -- 311,916
Common stock to be issued -- -- -- -- 100,000
Preferred stock dividend -- -- -- -- ( 399)
Net loss -- -- -- -- --
------------ ------------- ------------- ------------ -----------
BALANCE - DECEMBER 31, 2007 185,194 $ 185 204,177,806 $ 204,177 $ 26,129,184
============ ============= ============= ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
WATER CHEF, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from January 1, 2002 (Date of Commencement as a
Development Stage Company) to December 31, 2007
Stock Total
Subscription Treasury Accumulated Stockholders'
Receivable Stock Deficit Deficiency
-continued- ------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 2002 $ (67,500) $ (5,768) $(14,531,596) (2,178,635)
Extension of life of warrants -- -- -- 111,000
Proceeds from sale preferred stock
($1.00 per share) -- -- -- 117,500
Proceeds from sale of common stock
($0.025 per share) -- -- -- 100,000
Common stock issued for services
($0.08 per share) -- -- -- 36,000
Collection of subscription receivable 30,200 -- -- 30,200
Net Loss -- -- (1,589,746) (1,589,746)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2002 (37,300) (5,768) (16,121,342) (3,373,681)
Proceeds from sale of preferred stock
March 31, 2003
($1.00-$2.00 per share) -- -- -- 75,000
June 30, 2003
($0.50 per share) -- -- -- 37,500
September 30, 2003
($1.00-$2.40 per share) -- -- -- 228,509
December 31, 2003
($1.33-$2.80 per share) -- -- -- 258,862
Preferred stock issued for services
March 31, 2003
($1.00 per share) -- -- -- 30,000
June 30, 2003
($1.00 per share) -- -- -- 51,250
September 30, 2003
($1.00 per share) -- -- -- 67,035
December 31, 2003
($1.88-$4.00 per share) -- -- -- 65,400
Collection of subscription receivable 15,500 -- -- 15,500
Write-off of subscription receivable 21,800 -- -- 21,800
Net Loss -- -- (3,535,479) (3,535,479)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2003 -- (5,768) ( 19,656,821) (6,058,304)
Proceeds from sale of preferred stock
March 31, 2004
($2.40-$4.80 per share) -- -- -- 400,256
June 30, 2004
($0.80 per share) -- -- -- 12,500
Preferred stock issued for services
March 31, 2004
($2.00-$4.80 per share) -- -- -- 158,532
Proceeds from sale of common stock
September 30,2004
($0.03-$0.15 per share) -- -- -- 207,600
December 31, 2004
($0.05-$0.10 per share) -- -- -- 190,000
Common stock issued for services
March 31, 2004
($0.05 per share) -- -- -- 23,857
September 30,2004
($0.05-$0.15 per share) -- -- -- 128,650
December 31, 2004
($0.08-$0.10 per share) -- -- -- 41,501
Preferred stock dividend -- -- -- (81,034)
Common stock issued for satisfaction of liabilities
June 30, 2004
($0.15 per share) -- -- -- 5,673,721
December 31, 2004
($0.134 per share) -- -- -- 55,250
The accompanying notes are an integral part of these financial statements.
F-7
WATER CHEF, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from January 1, 2002 (Date of Commencement as a
Development Stage Company) to December 31, 2007
Stock Total
Subscription Treasury Accumulated Stockholders'
Receivable Stock Deficit Deficiency
-continued- ------------ ------------ ------------ -------------
Preferred stock converted to common stock
June 30, 2004 -- -- -- --
September 30, 2004 -- -- -- --
December 31, 2004 -- -- -- --
Net loss -- -- (3,757,802) (3,757,802)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2004 -- (5,768) (23,414,623) (3,005,273)
Proceeds from sale of common stock
March 31,2005
($0.05 per share) -- -- -- 10,000
June 30,2005
($0.05-$0.06 per share) -- -- -- 40,000
September 30,2005
($0.07-$0.10 per share) -- -- -- 205,000
December 31, 2005
($0.05-$0.07 per share) -- -- -- 239,960
Common stock issued for services
March 31, 2005
($0.05-$0.10 per share) -- -- -- 18,000
December 31, 2005
($0.05-$0.06 per share) -- -- -- 21,627
Preferred stock dividend -- -- -- (66,436)
Extension of 1,666,667 warrants -- -- -- 74,700
Common stock issued for satisfaction of liabilities
September 30, 2005
($0.07 per share) -- -- -- 40,000
December 31, 2005
($0.142 per share) -- -- -- 14,200
Preferred stock converted to common stock
March 31, 2005 -- -- -- --
June 30, 2005 -- -- -- --
September 30, 2005 -- -- -- --
December 31, 2005 -- -- -- --
Net loss -- -- (1,168,328) (1,168,328)
------------ ------------ ------------ -------------
BALANCE - DECEMBER 31, 2005 -- (5,768) (24,582,951) (3,576,550)
Proceeds from sale of common stock
March 21, 2006
($0.07 per share) -- -- -- 250,000
May 8, 2006
($0.08-$0.10 per share) -- -- -- 280,000
June 28, 2006
($0.10 per share) -- -- -- 10,000
August 17, 2006
($0.07 per share) -- -- -- 28,000
Common stock issued for services
March 21, 2006
($0.06 per share) -- -- -- 15,000
May 8, 2006
($0.05 per share) -- -- -- 22,500
June 6, 2006
($0.15 per share) -- -- -- 24,999
Common stock issued for repayment of debt
February 13, 2006
($0.11 per share) -- -- -- 48,485
April 3, 2006
($0.08 per share) -- -- -- 51,404
April 6, 2006
($0.08 per share) -- -- -- 156,574
June 6, 2006
($0.10-$0.15 per share) -- -- -- 394,100
Preferred stock converted to common stock -- -- -- --
The accompanying notes are an integral part of these financial statements.
F-8
WATER CHEF, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from January 1, 2002 (Date of Commencement as a
Development Stage Company) to December 31, 2007
Stock Total
Subscription Treasury Accumulated Stockholders'
Receivable Stock Deficit Deficiency
-continued- ------------ ------------ ------------ ------------
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
Reclassification of warrants
and embedded conversion option upon
issuance of convertible debt -- -- -- (288,900)
Preferred stock dividend -- -- -- (42,401)
Net loss -- -- (2,072,917) (2,072,917)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2006 $ -- $ (5,768) $(26,655,868) (3,625,706)
Proceeds from Sale of Common Stock:
May 10, 2007
($0.090 per share) -- -- -- 100,000
May 10, 2007
($0.083 per share) -- -- -- 200,000
May 31, 2007
($0.090 per share) -- -- -- 50,000
June 26, 2007
($0.083 per share) -- -- -- 100,000
October 26, 2007
($0.063 per share) -- -- -- 200,000
November 7, 2007
($0.059 per share) -- -- -- 100,000
December 5, 2007
($0.051 per share) -- -- -- 100,000
December 12, 2007
($0.050 per share) -- -- -- 100,000
December 13, 2007
($0.051 per share) -- -- -- 100,000
December 20, 2007
($0.044 per share) -- -- -- 100,000
Stock for compensation:
May 2, 2007
($0.110 per share) -- -- -- 275,000
December 14, 2007
($0.040 per share) -- -- -- 40,000
Common stock issued in repayment of debt:
February 26, 2007
($0.132 per share) -- -- -- 25,729
March 8, 2007
($0.111 per share) -- -- -- 25,805
March 14, 2007
($0.111 per share) -- -- -- 25,844
March 19, 2007
($0.099 per share) -- -- -- 25,871
March 23, 2007
($0.097 per share) -- -- -- 77,674
April 4, 2007
($0.095 per share) -- -- -- 51,901
May 1, 2007
($0.086 per share) -- -- -- 78,254
Stock for late payment penalty:
May 22, 2007
($0.100 per share) -- -- -- 10,000
Preferred stock converted to common stock:
February 16, 2007 -- -- -- --
May 4, 2007 -- -- -- --
December 12, 2007 -- -- -- --
Cancellation of debt for no consideration -- -- -- 1,327,321
Surrender and cancellation of common stock -- -- -- --
Reclassification of derivative liability -- -- -- (227,300)
Amortization of warrants and op
stock based compensation -- -- -- 311,916
Cash proceeds from common stock subscription
December 26, 2007 -- -- -- 100,000
Preferred stock dividend -- -- -- ( 399)
Net loss -- -- (1,701,125) (1,701,125)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2007 $ -- $ (5,768) $(28,356,993) $ (2,029,215)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-9
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENTS OF CASH FLOWS
For the
Period from January 1,
2002 (Date of
Commencement
as a Development
Stage Company)
Year Ended December 31, to December 31,
2007 2006 2007
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,701,125) $ (2,072,917) $(13,825,397)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 2,063 -- 2,063
Amortization of patents 2,623 1,854 11,893
Interest expense - amortization of deferred financing 9,707 7,500 20,020
Stock based compensation 636,916 767,699 2,182,005
Interest expense - conversion provision 113,000 -- 113,000
Accretion of debt discount 204,901 217,320 497,421
Change in fair value of warrants and
embedded conversion option ( 544,200) 133,900 ( 416,100)
Loss on settlement of debt -- 2,614,017 2,614,017
Non-dilution agreement termination cost -- -- 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing costs - warrant extension -- -- 74,700
Change in assets and liabilities
Inventory -- 30,000 --
Prepaid expenses and other current assets ( 28,962) 3,682 8,256
Accounts payable, accrued expenses, accrued dividends,
accrued compensation, accrued consulting and director
fees, customer deposits and other current liabilities 244,940 ( 74,148) 1,642,931
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,060,137) ( 985,110) ( 4,431,688)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ( 21,050) -- ( 21,050)
Patent costs ( 25,543) -- ( 25,543)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ( 46,593) -- ( 46,593)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of stock subscription receivable -- -- 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 1,150,000 568,000 2,690,560
Proceeds from sale of common stock to be issued 100,000 -- 300,000
Deferred financing costs ( 7,530) ( 7,500) ( 22,530)
Proceeds from convertible promissory note 250,000 300,000 800,000
Proceeds from officers and directors loans 100,000 -- 100,000
Repayment of notes payable ( 170,056) ( 20,269) ( 205,687)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,422,414 840,231 4,858,170
------------ ------------ ------------
NET INCREASE (DECREASE) INCREASE IN CASH 315,684 ( 144,879) 379,889
CASH AT BEGINNING OF YEAR 99,716 244,595 35,511
------------ ------------ ------------
CASH AT END OF YEAR $ 415,400 $ 99,716 $ 415,400
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 10,556 $ 312,293 $ 367,487
============ ============ ============
NON-CASH 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 $ (227,300) $ 368,800 $ 141,500
============ ============ ============
Reclassification of equity instruments to liabilities
upon issuance of debt $ -- $ 288,900 $ 288,900
============ ============ ============
Cancellation of debt for no consideration $ 1,327,321 $ -- $ 1,327,321
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-10
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware Corporation currently engaged in
the design and development of its technology to be used in the marketing and
sale of water purification systems both in and outside the United States. The
Company's corporate headquarters is in Melville, New York.
The Company has generated nominal revenues to date; accordingly, the Company is
considered a development stage enterprise as defined in Financial Accounting
Standards Board No. 7, "Accounting and Reporting for Development Stage
Companies." The Company is subject to a number of risks similar to those of
other companies in an early stage of development.
NOTE 2 - BASIS OF PRESENTATION AND CONTINUED OPERATIONS
Basis of Presentation
The Company discontinued its water cooler and filtration operations in November
2001. As a result, the Company has refocused its efforts on raising capital and
developing markets for its proprietary technology. Therefore, for financial
purposes, the Company has determined that it has re-entered the development
stage commencing January 1, 2002. The Company's statements of operations,
stockholders' deficiency and cash flows for the year ended December 31, 2007
represent the financial information cumulative, from inception/commencement,
required by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Development Stage Enterprises."
Going Concern
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern and the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred a net loss of approximately $1,700,000 and $2,073,000 for
the years ended December 31, 2007 and 2006, respectively. The Company has a
working capital deficit and a stockholders' deficiency of approximately
$2,098,000 and $2,029,000 at December 31, 2007 respectively. 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 and raising additional capital through future issuances of stock
and/or debt. The Management plans to raise an additional 10 million dollars in
the next twelve months to fund the completion of the FRWTS prototype, to launch
the new marketing program, to establish sales and marketing network, to start
production and build inventory units, and to provide on-going working capital.
The management anticipates that by the 4th quarter of 2008, we will be fully
commercially operational and cease to be a development stage entity. However,
should the Company not be successful in obtaining the necessary financing to
fund its operations it would need to curtail certain of its business activities.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Management bases its estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. The
most significant estimates, among other things, are used in accounting for
allowances for deferred income taxes, expected realizable values for long-lived
assets (primarily intangible assets), contingencies, as well as the recording
and presentation of its common stock and related warrants issuances. Estimates
and assumptions are periodically reviewed and the effects of any material
revisions are reflected in the financial statements in the period that they are
determined to be necessary. Actual results could differ from those estimates and
assumptions.
F-11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of
three months or less when purchased to be cash equivalents. As of December 31,
2007 the Company did not have any cash equivalents.
Patents and Trademarks
Patents and trademarks are amortized ratably over 9 to 14 years. The Company
assesses the carrying value of its patents for impairment each year. Based on
its assessments, the Company did not incur any impairment charges for the years
ended December 31, 2007 and 2006, respectively.
Deferred Financing Costs
Cost incurred in conjunction with the debt financing has been capitalized and
will be amortized to interest expense using the straight line method, which
approximates the interest rate method over the term of the debt.
Equipment
Equipment procured in the normal course of business is stated at cost. Equipment
is being depreciated on a straight-line method over the estimated useful lives
of the assets, which generally range from two to seven years. Upon retirement or
other disposition of these assets, the cost and related accumulated depreciation
of these assets are removed from the accounts and the resulting gains or losses
are reflected in the statement of operations. Maintenance and repair expenses
are charged to operations as incurred. As of December 31, 2007, equipment was
primarily comprised of office equipment. Depreciation expense amounted to $2,063
for the year ended December 31, 2007.
Stock-Based Compensation
The Company reports stock based compensation under Statements of Financial
Accounting Standards ("SFAS") No. 123R ("123R") "Share Based Payment." 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.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123R and the Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or
Services" ("EITF 96-18") which require that such equity instruments are recorded
at their fair value on the measurement date, which is typically the date the
services are performed.
The Black-Scholes option valuation model is used to estimate the fair value of
the options or their equivalent granted. The model includes subjective input
assumptions that can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options or warrants
that have no vesting restrictions and that are fully transferable. The expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted.
During the years ended December 31, 2007 and 2006 the Company granted 14,100,000
and 6,500,000 warrants to employees and consultants for services provided.
Accordingly the Company incurred a charge for stock based compensation of
approximately $311,900 and $705,200, respectively.
The principal assumptions used in applying the Black-Scholes model along with
the results from the model were as follows:
Years Ended December 31,
2007 2006
---- ----
Assumption:
Risk-free interest rate 5.00 % 4.00 %
Expected life, in years 3 years 3 years
Expected volatility 90% 118%
During the year ended December 31, 2007 and 2006, the Company issued 3,500,000
and 866,666 shares of common stock and incurred a stock based compensation
charge for approximately $325,000 and $62,500, respectively based on the fair
value on the date of the award.
F-12
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs, which are
included in selling, general and administrative expenses, were diminimus for the
years ended December 31, 2007 and 2006, respectively.
Income Taxes
Income taxes are accounted for under SFAS No. 109, "Accounting for Income
Taxes," which is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements or tax
returns. Valuation allowances are established when necessary to reduce deferred
assets to the amounts expected to be realized.
Loss Per Share
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 from the
computation of diluted loss per share since their inclusion would be
anti-dilutive. Total shares issuable upon the exercise of options, warrants and
the conversion of preferred stock and convertible debt for the years ended
December 31, 2007 and 2006, were comprised as follows.
As of December 31,
2007 2006
---------- ----------
Warrants 25,889,331 7,812,352
Convertible debt 13,735,042 6,519,190
Series F preferred stock 1,587,760 1,736,720
---------- ----------
Total common stock equivalents 41,212,133 16,068,262
---------- ----------
F-13
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
The carrying amounts of the financial instruments reported in the balance sheet
approximate their fair market value due to the short-term maturities of these
instruments. The fair value of the Company's long-term debt is estimated using
quoted market prices and estimated rates which would be available to the Company
for debt with similar terms.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an asset may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to fair value is required.
Research and Development
Research and development costs consist of expenditures incurred during the
course of planned research and investigation aimed at the discovery of new
knowledge, which will be useful in developing new products or processes. The
Company expenses all research and development costs as incurred. During the year
ended December 31, 2007 the Company incurred $435,363 of research and
development costs which are included in the statement of operations.
Derivative Financial Instruments
In connection with the issuance of certain convertible promissory notes, the
terms of the convertible notes included an embedded conversion feature; which
provided for a conversion of the convertible promissory notes into shares of the
Company's common stock at a rate which was determined to be variable. The
Company determined that the conversion feature was an embedded derivative
instrument pursuant to SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, and Emerging Issues Task Force ("EITF") Issue
No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock."
The accounting treatment of derivative financial instruments requires that the
Company record the conversion option and related warrants at their fair values
as of the inception date of the convertible debenture agreements and at fair
value as of each subsequent balance sheet date. In addition, under the
provisions of EITF Issue No. 00-19, as a result of entering into the convertible
promissory notes, the Company was required to classify all other non-employee
warrants and options as derivative liabilities and record them at their fair
values at each balance sheet date. Any change in fair value was recorded as
non-operating, non-cash income or expense for each reporting period at each
balance sheet date. The Company reassesses the classification at each balance
sheet date. If the classification required under EITF Issue No. 00-19 changes as
a result of events during the period, the contract is reclassified as of the
date of the event that caused the reclassification.
Registration Payment Arrangements
The Company accounts for registration rights agreements in accordance with
Financial Accounting Standards Board ("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. For the year ended December 31, 2007, the Company has
incurred an additional charge of $5,000 for the registrations penalties as
disclosed in Note 6.
Recent Accounting Pronouncements
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
F-14
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
effective for financial statements issued after November 15, 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. 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
as of the beginning of fiscal year 2009. The Company is evaluating the impact
SFAS 159 may have on the financial position, results of operations, or cash
flows.
F-15
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). SFAS 141(R) replaces SFAS No. 141, "Business
Combinations", and is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 with earlier adoption prohibited.
SFAS 141(R) requires the new acquiring entity to recognize all assets acquired
and liabilities assumed in the transactions; establishes an acquisition-date
fair value for acquired assets and liabilities; and fully discloses to investors
the financial effect the acquisition will have. SFAS 141 ( R) would have an
impact on accounting for any business acquired after the effective date of this
pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
noncontrolling interests be treated as equity. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008 with earlier adoption prohibited. The adoption of this
pronouncement is not expected to have a material impact on the financial
position, results of operations and cash flows.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161 "Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133 "("SFAS 161"). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments. (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows. The
guidance in SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. At this time,
management is evaluating the implications of SFAS 161 and its impact on the
financial statements has not yet been determined.
The FASB, the Emerging Issues Task Force and the SEC have issued certain other
accounting pronouncement and regulations as of December 31, 2007 that will
become effective in subsequent periods. However we did not believe that any of
those pronouncement would have significantly affected the financial accounting
measures or disclosures had they been in effect during 2007 or 2006, and do not
believe that any of those pronouncements will have a significant impact to the
financial statements at the time they become effective.
NOTE 4 - PATENTS AND TRADEMARKS
Patents and trademarks as of December 31, 2007 consist of the following:
Patents $ 50,043
Trademarks 1,555
-------------
Total cost 51,598
Accumulated amortization ( 13,275)
-------------
Patents and Trademarks, Net $ 38,323
=============
Amortization expense for the years ended December 31, 2007 and 2006 was $2,623
and $1,854, respectively. The following table presents the Company's estimate
for amortization expense for each of the five succeeding years and thereafter.
2008 $ 3,557
2009 3,557
2010 3,557
2011 3,557
2012 3,557
2013 and thereafter 20,538
-------------
$ 38,323
=============
F-16
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 5 - NOTES AND CONVERTIBLE NOTE PAYABLE
Notes payable and accrued interest at December 31, 2007 consists of the
following:
(a) $ 197,830
(b) 627,934
(c) 69,313
--------------
Total $ 895,077
==============
(a) These are unsecured notes bearing interest ranging from 10% to 15% per
annum, with no specific due date for repayment. The amount due on these notes,
inclusive of $114,608 of interest is $197,830 at December 31, 2007. No demands
for repayment have been made by the note holder.
(b) In April 2001, the Company issued a $400,000 promissory note at an interest
rate of 2% per month. In consideration for the issuance of this note, 500,000
shares of the Company's common stock were issued to the note holder and a
$74,000 debt discount was recorded and fully amortized in the year ended
December 31, 2001. The principal balance and accrued interest was payable on
September 1, 2001. The Company did not make such payment and was required to
issue an additional 100,000 penalty shares of its common stock to the note
holder. The Company recorded additional interest expense of $12,300 related to
the issuance of these penalty shares. In October 2007, the Company entered into
a settlement agreement with this note holder (See Note 15). Under the agreement,
the Company is obligated to make payments of $75,000 each on or before December
31, 2007 (which was paid) and June 30, 2008. In addition, the Company is
obligated to issue 2,500,000 shares of common stock to the note holder as
settlement for the remaining balance due under the promissory note of $477,934.
The Company issued 1,250,000 shares of the 2,500,000 in January 2008.
(c) In November 2000, the Company entered into a Convertible Promissory Note
agreement with a Company of which a former board of director member has an
ownership interest. Under the terms of the agreement, the Company may be
advanced a maximum of $300,000. The Company was advanced the following: $100,000
in November 2000, $50,000 in December 2000 and $50,000 in January 2001. No
further cash advances were made to the Company. The Convertible Promissory Note
agreement also called for the payment of $100,000 of Company expenses. The
advances bear interest at 10% per annum and were to have been repaid as of
January 15, 2002. A maximum of 6,000,000 shares could have been issued upon
conversion had the full $300,000 been advanced. As of December 31, 2007, the
balance of the convertible promissory note principal was $69,313.
NOTE 6 - 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 year ended
December 31, 2007.
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 6 - 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 was required to file a registration
statement covering the resale of the shares issuable under the agreement by
October 17, 2007. In addition, the Company was obligated to obtain an effective
registration statement by December 16, 2007. If the Company was unable to have
the registration statement declared effective, the Company would have incurred
penalties of 2% per month of the principal balance. The Company filed the
registration statement on October 17, 2007 and obtained effectiveness on
December 26, 2007. The Company accrued $5,000 for penalty.
The Loan Agreement provided that the lenders are contingently obligated to lend
the Company an additional aggregate amount of $150,000 when and if the
registration statement was declared effective. The substantive terms and
conditions of the notes and warrants to be issued on the second closing date
would be same as those in the notes and warrants issued on September 7, 2007. As
of December 31, 2007, the Company has not drawn down from the lender the
$150,000.
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. As of December 31, 2007, the balance
of the convertible promissory note principal and accrued interest was $190,045
net of a debt discount of $67,900. In January, 2008, the Company issued
8,408,670 shares of stock for the settlement of $258,851 which includes $8,851
of accrued interest.
NOTE 7 - 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. As of
December 31, 2007, the Company has not registered the underlying shares and has
not issued any shares or received any proceeds under the equity agreement.
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 8 - 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 16, 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 (On March 13, 2008 the Company issued 1,000,000 shares of common
stock to the consultant ). 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.
This option was initially valued at approximately $121,000 utilizing the Black
Scholes option pricing model and is being charged to operations over the vesting
period in accordance with EITF 96-18. On a quarterly basis, the Company adjusts
the unvested value on a mark-to-market basis, and the cumulative effect of the
adjustment amount on amortization, since inception, is reflected in the current
period amortization. During the year ended December 31, 2007, approximately
$60,000 was charged to operations. As of December 31, 2007, the fair value of
the unamortized portion of the option was approximately $9,000.
NOTE 9 - COMMON STOCK ISSUED
During the year ended December 31, 2006, the Company recorded the following
transactions:
Cash
During the year ended December 31, 2006, the Company raised $568,000 through the
sale of 7,869,230 shares of common stock
Services
During the year ended December 31, 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 who was appointed President in
January 15, 2007 (See Note 12) The warrants fully vested 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
past 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.
Conversion of preferred stock into common stock
During year ended December 31, 2006, the Company issued to various parties
1,866,720 shares of its common stock in connection with the conversion of 46,668
shares of preferred stock. During the year ended December 31, 2007, the Company
recorded the following transactions:
Debt
During the year ended December 31, 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 year ended December 31, 2007, the Company issued 148,920 shares of
common stock in connection with the conversion of 3,723 shares of preferred
stock.
Cash
During the year ended December 31, 2007, the Company raised $1,150,000 through
the sale of 18,240,350 shares of common stock and warrants to purchase 3,043,320
shares of common stock at an exercise price of $0.0532 to $0.076. The warrants
have a life of 3 years.
In December 2007 the Company received $100,000 cash proceeds for the issuance of
2,255,639 shares of common stock and warrant to purchase 451,128 shares of
common stock at an exercise price of $0.0532. The warrants have a life of 3
years. The Company issued these shares and warrants during the first quarter
ended March 31, 2008.
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Services
During the year ended December 31, 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 year ended December 31, 2007, the Company issued 3,500,000 shares of
common stock to two management employees for services. The Company incurred a
stock based compensation charge of $315,000.
During the year ended December 31, 2007, the Company granted 15,100,000 warrants
to various employees and consultants for services. Of this amount 5,100,000
warrant shares fully vested on the date of the grant, and 10,000,000 will vest
over the life of the warrant. Each of the warrants has a life of three years,
and is exercisable at $0.0532 to $0.1500 per share. The Company incurred a stock
based compensation charge of $351,916 related to the vested portion.
Relinquishment of common stock Effective with the resignation of the former
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 - PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of $.001 par value
preferred stock, issuable in series with rights, preferences, privileges and
restrictions as determined by the board of directors.
At December 31, 2007, outstanding preferred shares were as follows:
Liquidation
Current Preference
Annual Total Dividend (including
Authorized Outstanding Par Dividend Dividend Arrearage dividend
Shares Shares Value Requirement Arrearage Per Share arrearage)
Series A 400,000 52,500 $ 53 $ 52,500 $ 675,100 $ 12.85 $1,200,100
Series D 2,000,000 93,000 93 55,800 640,800 6.89 1,175,550
Series F 1,000,000 39,694 39 -- 190,270 -- --
---------- ---------- ---------- ---------- ----------
185,194 $ 185 $ 108,300 $1,506,170 $2,375,650
========== ========== ========== ========== ==========
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 10 - PREFERRED STOCK
Series A:
The Series A preferred stock provides for a 10% cumulative dividend, based on
the $10 per share purchase price, payable annually in the Company's common stock
or cash, at the Company's option. The Series A preferred stock is not
convertible, and is redeemable solely at the Company's option at a price of $11
per share plus accrued dividends. The Series A preferred stockholders have
voting rights equal to common stockholders. In the event of the liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
holders of the Series A preferred stock are entitled to receive out of the
assets of the Company the sum of $10.00 per share of Series A preferred stock
then outstanding, plus a sum equal to all dividends (whether or not earned or
declared) on such shares accrued and unpaid thereon to the date of final payment
or distribution, before any payment or distribution upon dissolution,
liquidation or winding up shall be made on any series or class of capital stock
ranking junior to Series A preferred stock as to such payment or distribution.
Series D:
The Series D preferred stock provides for a 12% cumulative dividend, based on
the $5 per share purchase price, payable semi-annually in the Company's common
stock or cash, at the Company's option. The Series D preferred stock is not
convertible, and is redeemable solely at the Company's option at a price of
$5.75 per share plus accrued dividends. The Series D Preferred stockholders have
voting rights equal to the common stockholders.
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of the Series D preferred stock are
entitled to receive out of the assets of the Company the sum of all dividends
(whether or not earned or declared) on such shares accrued and unpaid thereon to
the date of final payment or distribution, before any payment or distribution
upon dissolution, liquidation or winding up shall be made on any series or class
of capital stock ranking junior to Series D preferred stock as to such payment
or distribution.
Series F:
The Series F 10% convertible preferred stock is a two-year convertible preferred
instrument. All dividends are cumulative and are payable in shares of the
Company's common stock valued at the then current market price per share, at the
time of maturity, or upon conversion, whichever is earlier. The conversion rate
for shares and accrued dividends payable is 40 shares of common for each share
of preferred stock. The Series F convertible preferred stockholders have voting
rights equal to the common stockholders. The Series F convertible preferred
stock has no stated rights in the assets of the Company upon liquidation. In
connection with Series F Preferred Stock conversions, the Company recorded
dividends of $399 and $42,401 for each of the years ended December 31, 2007 and
2006, respectively.
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 11 - STOCK WARRANTS
The following warrants were issued by the Company in connection with Convertible
Promissory Notes:
The year ended December 31, 2005 430,000
The year ended December 31, 2006 882,352
The year ended December 31, 2007 1,384,786
The following warrants were issued by the Company in connection with various
employment and compensation agreements:
The year ended December 31, 2006 6,500,000
The year ended December 31, 2007 14,100,000
During the year ended December 31, 2007, the Company issued 2,592,193 warrants
in connection with a private placement of 12,960,963 shares of common stock.
The following tables illustrate the Company's warrant issuances and balances
outstanding as of, and during the years ended December 31, 2007 and 2006:
Shares Weighted Weighted
Underlying Average Intrinsic Average
Warrants Exercise Price Value Fair Value
----------------- --------------- --------- ------------
Outstanding at December 31, 2005 2,096,667 $ 0.15 $ -- $0.10
Granted 7,382,352 0.12 -- 0.11
Expired (1,666,667) (0.15) -- --
Exercised -- -- -- --
-----------------
Outstanding at December 31, 2006 7,812,352 $ 0.12 $22,059 $0.10
Granted 18,076,979 0.08 -- $0.04
Expired -- -- -- --
Exercised -- -- -- --
-----------------
Outstanding at December 31, 2007 25,889,331 $ 0.11 -- $0.05
================= =============== ========== ==========
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 11 - STOCK WARRANTS (continued)
The following is additional information with respect to the Company's warrants
as of December 31, 2007:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------- -----------------------------
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Exercise Outstanding Contractual Exercise Exercisable Average
Price Warrants Life Price Warrants Exercise Price
--------- ------------ ------------ ------- ------------ --------------
$ 0.053 451,128 3.0 years $0.053 451,128 $0.053
$ 0.054 3,000,000 3.0 years $0.054 -- $ --
$ 0.061 394,737 2.9 years $0.061 394,737 $0.061
$ 0.062 389,610 2.9 years $0.062 389,610 $0.062
$ 0.062 389,610 3.0 years $0.062 389,610 $0.062
$ 0.070 2,000,000 2.7 years $0.070 -- $ --
$ 0.072 335,196 2.9 years $0.072 335,196 $0.072
$ 0.076 631,912 2.8 years $0.076 631,912 $0.076
$ 0.085 882,352 1.8 years $0.085 882,352 $0.085
$ 0.096 1,384,786 2.8 years $0.096 1,384,786 $0.096
$ 0.100 4,000,000 1.4 years $0.100 4,000,000 $0.100
$ 0.110 7,100,000 2.3 years $0.110 3,100,000 $0.110
$ 0.118 2,000,000 2.2 years $0.118 1,000,000 $0.118
$ 0.140 430,000 .9 years $0.140 430,000 $0.140
$ 0.150 2,500,000 1.4 years $0.150 2,500,000 $0.150
--------- ------------ ------------ ------- ------------ --------------
25,889,331 15,889,331
============ ============
NOTE 12 - 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 which aggregated
$947,321 as a contribution to capital. The cancellation of the stock
appreciation rights did not have an accounting impact.
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 which aggregated to $330,000 by the Company. The Company recorded the
forgiveness of such liabilities as a contribution to capital.
In January 2007, the Board of Directors approved the appointment of a new
President and CEO. In connection with this employment, the President and CEO
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
year ended December 31, 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 period. On
September 28, 2007, the Company amended the terms of the warrants previously
granted to the President and CEO to include a cashless exercise provision. As of
December 31, 2007, the terms of the employment agreement have not been executed.
On September 5, 2007, the Board of Directors approved the appointment of a Chief
Financial Officer. In connection with this employment, the Chief Financial
Officer will be paid $5,000 per month. On December 14, 2007 in connection with
the employment the Company granted 2,000,000 shares and issued 1,000,000 shares
of commons stock. The remaining shares are to be issued after the first
anniversary of employment. The Company recorded a stock based compensation
charge of $40,000 for the fair value associated with the 1,000,000 shares. In
addition on September 28, 2007 the Company granted warrants to the Chief
Financial Officers in connection with this employment. The warrants are
exercisable at $0.07 per share and have a cashless exercise provision. The
warrants have a life of 3 years and 1,000,000 shares vest at the first
anniversary of employment and the balance after two years. The fair value of the
warrants of $25,100 will be amortized ratably over the two year vesting period.
The employment agreement will provide for certain performance-based cash
incentives. As of December 31, 2007, the terms of the Chief Financial Officers'
employment agreement have not been executed.
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
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. On the maturity date of the
loan the Company recorded a charge of $113,000 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. In January 2008 the Chief Executive Officer
converted her note plus accrued interest of $53,658 into 2,146,324 shares of the
Company's common stock.
In December 2007, the Company sold to the Chief Financial Officer 1,973,684
shares of common stock and 394,737 warrants to purchase common stock for
proceeds of $100,000 which approximated market value. The warrants are
exercisable at $0.0608 per share and have a life of 3 years.
In April 2007, the Company entered into an employment agreement with theVice
President of sales and marketing. The executive will be compensated at an annual
salary of $84,000 and is eligible for a performance based incentive bonus up to
50% of the employee's most recent base salary. In addition, the Company will
issue in the aggregate 1,500,000 shares of common stock of which 500,000 will
vest immediately and the remaining 1,000,000 shares will vest over three years.
The Company also granted a warrant to purchase 2,000,000 shares of common stock
at an exercise price of $0.11 per share. The warrants will have a life of three
years and vest equally over two years. Under the terms of the employment
agreement, the Company issued 500,000 shares of common stock to the executive
valued at $51,000 and granted warrants the warrants valued at $105,800 using the
Black Scholes option valuation model and will be charged to operations over the
vesting term of two years. On February 8, 2008, the Board of directors
authorized the management team to negotiate a termination agreement with the
executive (See Note 16).
NOTE 13 - INCOME TAXES
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."
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 primarily New York and various
other state and local jurisdictions. 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
December 31, 2007, no liability for unrecognized tax benefits was required to be
recorded.
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the financial
statements and tax basis of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carry forwards. SFAS No.
109 additionally requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets.
For the year ended December 31, 2007 and 2006, no provision for income taxes has
been provided for, as a result of continued net operating losses. The Company is
subject to certain state and local taxes based on capital. The state and local
taxes based on capital were immaterial for each of the years ended December 31,
2007 and 2006.
A reconciliation between the statutory federal income tax rate (34%) and the
Company's effective rate for the years ended December 31, 2007 and 2006 is as
follows:
2007 2006
----------- ------------
Federal statutory rate 34.0% 34.0%
State tax benefit, net of federal tax 6.0 6.0
Permanent differences (4.9) (17.8)
Valuation allowance (35.1) (22.2)
----------- ------------
Effective rate 0.0% 0.0%
=========== ============
The Company has net operating loss carry-forwards for federal income tax
purposes totaling approximately $24,000,000 at December 31, 2007. These
carry-forwards expire between the years 2009 through 2027. Utilization of these
loss carry-forwards may be limited under Internal Revenue Code Section 382. The
deferred tax asset arising from the net operating loss carry-forwards has been
offset by a corresponding valuation allowance.
The valuation allowance primarily relates to the federal and state net operating
losses for which utilization in future periods is uncertain. 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. Based on projections for future
taxable income over the periods that the deferred tax assets are deductible, the
Company believes it is more likely than not that the Company will not realize
the benefits of these deductible differences in the near future and therefore a
full valuation allowance of $9,500,000 is provided. The valuation allowance
increased approximately $750,000 during 2007 related to increased net operating
losses.
NOTE 14 - MAJOR CUSTOMERS / CREDIT RISK
During the year ended December 31, 2007, the Company had no sales. During the
year ended December 31, 2006, the Company sold two units to one customer and
recognized revenues of $115,000.
The Company maintains cash deposits with financial institutions, which from time
to time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk from cash.
As of December 31, 2007, the uninsured cash balance was approximately $347,000.
The Company believes it is not exposed to any significant credit risk for cash.
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company maintains its principal place of business at 68 South Service Road,
Melville, New York 11747. The Company leases 270 square feet in such building at
$3,502 per month on an annual basis, the lease is through March 31, 2008. On
October 25, 2007, the Company signed a lease for a facility located at 25
Middlesex Turnpike, Essex, CT. The rent is $1,529 per month. The term of the
lease is one year beginning October 1, 2007 and the Company has two one-year
renewal options to extend this lease.
For the years ended December 31, 2007 and 2006 rent expense approximated to
$45,000 and $32,000 respectively.
LITIGATION
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. On February 9, 2008
the Company prevailed in its counter claim against Funding Group, Inc. by a
decision handed down by the Supreme Court of the State of New York Summary
Judgment was granted to the Company and the Court dismissed Funding Group, Inc's
claim against the Company in its entirety.
RESEARCH AND DEVELOPMENT
On December 14, 2007, the Company entered into an agreement for services
involving the research and development of its product. The agreement provides
for consideration of $5,000 per month and is for a one year term, the agreement
is automatically renewable on an annual basis. In addition the Company granted
3,000,000 warrants. The warrants are exercisable at $0.054 per share have a life
of 4 years and vest over 3 years. This options was initially valued at
approximately $80,600 utilizing the Black Scholes option pricing model and is
being charged to operations over the vesting period in accordance with EITF
96-18. On a quarterly basis, the Company adjusts the unvested value on a
mark-to-market basis, and the cumulative effect of the adjustment amount on
amortization, since inception, is reflected in the current period amortization.
As of December 31, 2007, the fair value of the unamortized portion of the option
was approximately $80,000.
NOTE 16 - SUBSEQUENT EVENTS
In January 2008, the Company issued 8,408,670 shares of common stock for the
settlement of $258,851 of debt principal and accrued interest.
In January 2008, the Chief Executive Officer converted approximately $53,658 of
notes payable and accrued interest into 2,146,324 shares of common stock.
In January 2008, the Company issued 1,250,000 shares of common stock under the
October 11, 2007 settlement agreement (See Note 5b) for the settlement of
$276,467 of principal and accrued interest. The Company will issue the remaining
1,250,000 shares of common stock under the terms of the settlement agreement
during the second quarter ended June 30, 2008. As of April 11, 2008, the Company
has not issued the remaining 1,250,000 shares of common stock.
In January 2008, the Company issued 2,255,639 shares of common stock for the
$100,000 received in December 2007.
In the first quarter of 2008, the Company issued 10,728,409 shares of common
stock for total $500,000 received through private placement.
On February 8, 2008, the Board of directors authorized the management team to
negotiate a termination agreement (the Agreement) with the Vice President of
sales and marketing. The Agreement was finalized on February 12, 2008. The
Company agreed to pay the Vice President eight months salary by the payment of
the sum of $7,000 each and every month commencing on February 12, 2008. Such
eight months payment constitutes six months severance pay and two months'
regular salary during 60 days notice period. The Company will continue to
contribute 80% of the health insurance premium for the 60 days notice period
and, thereafter, 80% of the health insurance premium due under COBRA for a
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
period of six months following the effective date of termination. One third of
the one million shares (333,333 shares) that the Company granted on April 23,
2007 will vest immediately. The balance of 666,367 shares will be forfeited. On
March 26, 2008, the Company issued 333,333 shares of common stock to the Vice
President per the agreement. The warrant the Company awarded on April 23, 2007
will be voided. In replacement and per the Agreement, the Company will issue a
warrant to purchase 666,666 shares of the Company's common stock at an exercise
price of $0.11 per share with a term of three years, effective from the original
date of grant. The Company agreed to pay the additional sum of $7,000 in two
installments representing repayment for all advances made by the Vice President
on behalf of the Company to the date as of February 12, 2008.
On March 14, 2008, the Board approved the appointment of a Director to the board
of directors. In connection with the appointment, the Director will receive cash
payment of $8,000 annually, 250,000 shares of common stock upon the one year
anniversary of the appointment, and a warrant to purchase 500,000 shares of
company's common stock. The warrant will fully vest on the first anniversary of
the appointment, has a term of three years and is exercisable at $0.0667 per
share.
On March 19, 2008 a Warrant holder requested to exercise the warrant to purchase
110,000 shares of common stock at $0.085 per share. On March 26, 2008, the
Company issued 110,000 shares of common stock for $9,350 of cash proceeds
received.
On April 8, 2008, the Company entered into a seven year lease for 5,300 square
feet of leased space in Plainview Long Island. The facility will replace the
Company's current headquarters to serve as executive offices, showroom and an
assembly area.