sec document
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 2007
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WATER CHEF, INC.
(Name of small business issuer in its charter)
Delaware 3850 86-0515678
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial Identification Number)
organization) Classification Code Number)
68 South Service Road, Suite 100
Melville, New York 11747
(631) 577-7915
(Address and telephone number of principal executive offices)
Leslie J. Kessler
President
Water Chef, Inc.
68 South Service Road, Suite 100
Melville, New York 11747
(631) 577-7915
(Name, address and telephone number of agent for service)
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Copies to:
Kenneth A. Schlesinger, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
(212) 451-2300
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Approximate Date of Proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
=====================================================================================
Proposed
Maximum Proposed
Title of Each Class of Offering Maximum Amount of
Securities To Be Amount To Be Price Per Aggregate Registration
Registered Registered (1) Unit Offering Price Fee
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Common Stock, par value 12,718,971 (2) $0.066 (3) $839,452 $25.77
$.001 per share
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Common Stock, par value 1,384,786 (4) $0.096 (5) $132,940 $4.08
$.001 per share
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Common Stock, par value 1,136,364 (6) $0.0876 (7) $99,545 $3.06
$.001 per share
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Common Stock, par value 1,250,000 (8) $0.0655 (9) $81,875 $2.51
$.001 per share
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TOTAL 16,490,121 $1,153,812 $35.42
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(1) In the event of a stock split, stock dividend or similar transaction
involving the Registrant's common stock, $.001 par value, the shares
registered hereby shall automatically be increased or decreased pursuant to
Rule 416 of the Securities Act of 1933, as amended.
(2) Represents 150% of (i) the number of shares of our common stock issuable
upon an assumed conversion as of October 15, 2007 of notes issued to
Southridge Partners LP and Southshore Capital Fund Ltd. on September 7,
2007, (ii) our good faith estimate of the number of shares of our common
stock issuable upon an assumed conversion as of October 15, 2007 of
additional notes to be issued to Southridge Partners LP and Southshore
Capital Fund Ltd. on the date that is five days after this registration
statement is declared effective, and (iii) interest on the notes and
additional notes that would be accrued thereon through Maturity. If the
number of shares issuable upon conversion of the notes exceeds the
registered amount, we will not rely on Rule 416 to cover the additional
shares, but will instead file a new registration statement.
(3) Represents the conversion price as of October 15, 2007 of the (a) notes
issued to Southridge Partners LP and Southshore Capital Fund Ltd. on
September 7, 2007, (b) additional notes issuable to Southridge Partners LP
and Southshore Capital Fund Ltd., and (c) interest on the notes and
additional notes (assuming, solely for the purpose of calculating the
registration fee, that all such notes were outstanding as of October 15,
2007).
(4) Represents the number of shares of our common stock issuable upon the
exercise of warrants issued to Southridge Partners LP and Southshore Capital
Fund Ltd. on September 7, 2007.
(5) Represents the exercise price as of September 7, 2007 of the warrants issued
to Southridge Partners LP and Southshore Capital Fund Ltd. on September 7,
2007.
(6) Represents our good faith estimate of the number of shares of our common
stock issuable upon the exercise of warrants to be issued to Southridge
Partners LP and Southshore Capital Fund Ltd. on the date that is five days
after this registration statement is declared effective.
(7) Represents the exercise price as of October 15, 2007 of the warrants to be
issued to Southridge Partners LP and Southshore Capital Fund Ltd. on the
date that is five days after this registration statement is declared
effective (assuming, solely for the purpose of calculating the registration
fee, that all such warrants were outstanding as of October 15, 2007).
(8) Represents the number of shares of our common stock to be issued to
Occidental Engineering Consultants pursuant to our settlement agreement
dated October 11, 2007.
(9) In accordance with Rule 457(g)(3) of Regulation C, the maximum offering
price represents the offering price of securities of the same class included
in the registration statement. The maximum offering price has been estimated
solely for the purpose of determining our registration fee pursuant to Rule
457(c) as the average of the high and low sales prices of our common stock
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on October 15, 2007, as quoted on the OTC Bulletin Board by the National
Association of Securities Dealers, Inc.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. The
selling securityholders may not sell these securities or accept any offer to buy
these securities until the registration statement filed with the Securities and
Exchange Commission becomes effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 16, 2007
PROSPECTUS
16,490,121 SHARES OF COMMON STOCK
WATER CHEF, INC.
This prospectus relates to the resale of up to 16,490,121 shares of our
common stock which may be issued from time to time as follows:
o up to 12,718,971 shares of our common stock, representing 150% of the
shares of our common stock that are issuable pursuant to our
convertible promissory notes due March 5, 2008, all or a portion of the
principal amount and accrued interest of which may be converted after
the maturity date into shares of our common stock at a conversion price
for each share of common stock 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 (each of which
amounts is subject to adjustment in the event of certain capital events
or if we enter into subsequent transactions meeting certain criteria);
o up to 1,384,786 shares of our common stock are issuable upon the
exercise of warrants with an exercise price of $0.096 per share;
o up to 1,136,364 shares of our common stock are issuable upon the
exercise of additional warrants with an estimated exercise price of
$0.072 per share to be issued on the date that is five days after the
actual effective date of this registration statement; and
o 1,250,000 shares of our common stock to be issued to Occidental
Engineering Consultants pursuant to our settlement agreement dated
October 11, 2007.
The selling security holders may offer or sell all or a portion of its
shares publicly or through private transactions at prevailing market prices or
at negotiated prices. We will not receive any of the proceeds from the sale of
the securities owned by the selling security holders.
Our common stock is traded and quoted on the Over the Counter Bulletin
Board (the "OTCBB") under the symbol "WTER.OB." On October 15, 2007, the last
reported sale price of our common stock was $0.073 per share. As of October 12,
2007 we had 190,191,843 shares of common stock outstanding.
Our executive offices are located at 68 South Service Road, Suite 100,
Melville, NY 11747 and our telephone number is (631) 577-7915.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 4, WHICH DESCRIBES THE MATERIAL RISKS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is ___________ , 2007.
TABLE OF CONTENTS
Prospectus Summary...........................................................1
The Company..................................................................1
Risk Factors.................................................................3
Special Note Regarding Forward-Looking Statements............................7
Use of Proceeds..............................................................7
Market for Our Common Stock and Related Shareholder Matters..................8
Management's Discussion and Analysis or Plan of Operation....................8
Selling Securityholders.....................................................10
Plan of Distribution........................................................11
Business....................................................................13
Description of Property.....................................................17
Legal Proceedings...........................................................17
Directors, Executive Officers, Promoters and Control Persons................17
Limitation of Liability and Indemnification Matters.........................20
Security Ownership of Certain Beneficial Owners and Management..............20
Description of Capital Stock................................................22
Legal Matters...............................................................24
Experts.....................................................................24
Where You Can Find More Information.........................................24
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS A SUMMARY, IT
MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD
READ THIS PROSPECTUS CAREFULLY AND SHOULD CONSIDER, AMONG OTHER THINGS, THE
MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 4 BEFORE MAKING AN
INVESTMENT DECISION. UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES IN THIS
PROSPECTUS TO "THE COMPANY," "OUR COMPANY," "WE," "OUR," "US" AND SIMILAR
EXPRESSIONS REFER TO WATER CHEF, INC., A DELAWARE CORPORATION, AND ITS
PREDECESSORS AND ITS SUBSIDIARIES.
THE COMPANY
Water Chef, Inc. ("Water Chef") designs and markets water purification
equipment. 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, which manufactured and marketed water coolers and filters. 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 the PureSafe Water Station (the "PureSafe"), its patented line of
water purification systems. The PureSafe is a turn-key unit that converts
"gray," or bathing grade, water into United States Environmental Protection
Agency ("EPA") grade drinking water.
An investment in our stock involves a substantial degree of risk. See
"Risk Factors."
Our principal executive offices are located at 68 South Service Road,
Suite 100, Melville, NY 11747 and our telephone number is (631) 577-7915.
RECENT DEVELOPMENTS
On October 11, 2007, Water Chef entered into a settlement agreement with
Occidental Engineering Consultants Limited ("Occidental") pursuant to which,
among other things, Water Chef is obligated to make payments of $75,000 on, or
before, each of December 31, 2007 and June 30, 2008 and to issue 2,500,000
million shares of common stock to Occidental as settlement for that certain
secured promissory note, dated May 4, 2001, in the original principal amount of
$400,000.
On September 7, 2007, Water Chef entered into a securities purchase
agreement with Southridge Partners LP and Southshore Capital Fund Ltd., dated as
of August 27, 2007 (the "Loan Agreement"), pursuant to which Water Chef borrowed
an aggregate of $250,000 (the "Loan") at an interest rate of 10% per annum. In
consideration for the Loan, Water Chef issued warrants for an aggregate of
1,384,786 shares of its common stock at an exercise price of $0.096 per share.
The warrants contain a cashless exercise provision. The outstanding principal
amount of the Loan and all accrued and unpaid interest are due and payable 180
days after the closing of the loan, or March 5, 2008. The holders of the notes
are entitled to convert all or a portion of the Loan into shares of Water Chef's
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 (each of which amounts is subject
to adjustment in the event of certain capital events or if Water Chef enters
into subsequent transactions meeting certain criteria). Water Chef may in its
discretion, but subject to certain conditions, pay accrued interest in shares of
its common stock at the applicable conversion price. The notes and warrants
provide the rights of the holders to convert its note or exercise its warrant is
limited to such actions that will not result in the holder being the beneficial
owner of more than 4.99% of the Company's outstanding common stock at that time.
The Loan Agreement provides that the two lenders are obligated to loan
Water Chef an additional aggregate amount of $150,000 when this registration
statement is declared effective. The maturity date of that loan will be 180 days
after the second closing. The investors will also be issued warrants to purchase
a proportionate number of shares of Water Chef's common stock. Such warrants
will contain a cashless exercise provision. The exercise price of the warrants
issued on the second closing date will be based on 120% of the closing bid price
of Water Chef's common stock immediately before that closing. Otherwise the
substantive terms and conditions of the notes and warrants to be issued on the
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second closing date will be same as those in the notes and warrants issued on
September 7, 2007.
On September 7, 2007, Water Chef entered into a private equity credit
agreement (the "Equity Agreement") with Brittany Capital Management Limited
pursuant to which Water Chef may, at its discretion, periodically sell to
Brittany Capital Management Limited shares of Water Chef's common stock for a
total purchase price of up to $5.0 million. For each share of common stock
purchased under the Equity Agreement, Brittany Capital Management Limited will
pay Water Chef 94% of the three lowest closing bid prices during the valuation
period of Water Chef's common stock on the Over-the-Counter Bulletin Board or
other principal market on which Water Chef's common stock is traded for the 5
trading days immediately following the notice date. Brittany Capital Management
Limited's obligation to purchase shares of Water Chef's common stock under the
Equity Agreement is subject to certain conditions, including volume limitations,
Water Chef's 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 Brittany Capital Management Limited's being
the beneficial owner of more than 4.99% of Water Chef's outstanding common stock
at that time.
THE OFFERING
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SECURITIES OFFERED: We are registering the resale of up to
16,490,121 shares which may be issued from
time to time of:
o Up to 12,718,971shares of common stock,
representing 150% of the shares of our
common stock that are issuable pursuant
to our convertible promissory notes due
March 5, 2008, all or a portion of the
principal amount and accrued interest of
which may be converted after the
maturity date into shares of our 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.
o Up to 1,384,786 shares of common stock
issuable upon the exercise of warrants
with an exercise price of $0.096 per
share.
o Up to 1,136,364 shares of our common
stock are issuable upon the exercise of
additional warrants with an estimated
exercise price of $0.072 per share to be
issued on the date that is five days
after the actual effective date of this
registration statement.
o 1,250,000 shares to be issued to
Occidental pursuant to our settlement
agreement dated October 11, 2007.
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COMMON STOCK OUTSTANDING AFTER 206,681,964 shares, based on 190,191,843
OFFERING: shares outstanding as of October 12, 2007
and assuming exercise of the warrant and
conversion of the convertible promissory
note.
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PROCEEDS: We will not receive any of the proceeds
from the sale of the shares owned by the
selling securityholders. We may receive
proceeds of up to approximately $214,757
less expenses in connection with the
exercise of warrants, the underlying shares
of which we may in turn be sold by the
Selling securityholders. We expect to use
the net proceeds, if any, for general
corporate purposes including working
capital, repayment of debt, repurchase of
common stock, temporary investment and/or
the financing of possible acquisitions or
business expansion.
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TICKER SYMBOL:
Common Stock WTER.OB
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING UNDER "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS," BEFORE MAKING AN INVESTMENT IN OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES. WE COULD CONTINUE TO INCUR LOSSES IN THE
FUTURE, AND WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
We had net losses of $2.1 million and $1.2 million for the years ended
December 31, 2006 and 2005, respectively. We had a net loss of $1.2 million for
the six months ended June 30, 2007. Our accumulated deficit as of June 30, 2007
was approximately $27.9 million. We were not profitable during the last two
years and we may not be profitable in fiscal 2007. Uncertainties still exist
regarding whether or not we will attain profitability in the future. We can
provide no assurance that we will be able to achieve profitable operations in
the future.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE EXISTING OBLIGATIONS AND TO FUND
OUR OPERATIONS AND GROWTH, AND WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL
UNDER TERMS ACCEPTABLE TO US OR AT ALL.
Our capital requirements in connection with our marketing efforts,
continuing product development and purchases of inventory and parts are expected
to be significant for the foreseeable future. In addition, unanticipated events
could cause our revenues to be lower and our costs to be higher than expected,
therefore, creating the need for additional capital. Historically, cash
generated from operations has not been sufficient to fund our capital
requirements, and we have relied upon sales of securities to fund our
operations. We cannot assure you that we will have sufficient funds available to
meet our working capital requirements, or that we will be able to obtain
additional capital to finance operations on favorable terms or at all. If we do
not have, or are otherwise unable to secure, necessary working capital, we may
be unable to fund the manufacture of PureSafe systems, and we may have to delay
or abandon some or all of our development and expansion plans or otherwise
forego market opportunities, any of which could harm our business.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS HAVE STATED IN THEIR REPORT
THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
We have limited cash resources and have a working capital deficit. Our
independent registered public accountants have stated in their report that they
have a substantial doubt about our ability to continue as a going concern. By
being categorized in this manner, we may find it more difficult in the short
term to either locate financing for future projects or to identify lenders
willing to provide loans at attractive rates, which may require us to use our
cash reserves in order to expand. Should this occur, and unforeseen events also
require greater cash expenditures than expected, we could be forced to cease all
or a part of our operations. As a result, you could lose your total investment.
OUR REVENUES ARE DEPENDENT UPON SALES OF A SINGLE PRODUCT, AND OUR BUSINESS
WILL FAIL IF WE DO NOT INCREASE SALES OF THAT PRODUCT.
Our revenues are derived from sales of a single product, the PureSafe. If
we are not able to increase sales of this product, our business will fail. The
PureSafe is a relatively new product in the emerging market for water
purification systems and it is difficult to predict when or if sales of the
PureSafe will increase substantially or at all. We face a substantial risk that
our sales will continue to not cover our operating expenses and that we will
continue to incur operating losses.
WE DEPEND ON OUR KEY PERSONNEL AND THE LOSS OF THEIR SERVICES WOULD ADVERSELY
AFFECT OUR OPERATIONS.
If we are unable to maintain our key personnel and attract new employees
with high levels of expertise in those areas in which we propose to engage,
without unreasonably increasing our labor costs, the execution of our business
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strategy may be hindered and our growth limited. We believe that our success is
largely dependent on the continued employment of our senior management and the
hiring of strategic key personnel at reasonable costs. If our current chief
executive officer was unable or unwilling to continue in her present position,
or we were unable to attract a sufficient number of qualified employees at
reasonable rates, our business, results of operations and financial condition
may be materially adversely affected.
WE PLAN TO EXPAND AND WE MAY BE UNABLE TO MANAGE OUR GROWTH.
We intend to grow our business, but we cannot be sure that we will
successfully manage our growth. In order to successfully manage our growth, we
must:
o expand and enhance our administrative infrastructure;
o improve our management, financial and information systems and
controls;
o expand, train and manage our employees effectively; and
o successfully retain and recruit additional employees.
Continued growth could place a further strain on our management,
operations and financial resources. We cannot assure you that our operating and
financial control systems, administrative infrastructure, facilities and
personnel will be adequate to support our future operations or to effectively
adapt to future growth. If we cannot manage our growth effectively, our business
may be harmed.
DIFFICULTIES PRESENTED BY INTERNATIONAL FACTORS COULD NEGATIVELY AFFECT OUR
BUSINESS.
A component of our strategy is to expand our international sales revenues.
We believe that we face risks in doing business abroad that we do not face
domestically. Among the international risks we believe are most likely to affect
us are:
o export license requirements for our products;
o exchange rate fluctuations or currency controls;
o the difficulty in managing a direct sales force from abroad;
o the financial condition, expertise and performance of our
international distributors and any future international distributors;
o domestic or international trade restrictions; and
o changes in tariffs.
Any of these factors could damage our business results.
TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS
OBSOLETE.
The water purification industry continues to undergo rapid change,
competition is intense and we expect it to increase. Competitors may succeed in
developing technologies and products that are more effective or affordable than
any that we are developing or that would render our technology and products
obsolete or noncompetitive. Many of our competitors have substantially greater
experience, financial and technical resources and production and development
capabilities than we have. Accordingly, some of our competitors may succeed in
obtaining regulatory approval for products more rapidly or effectively than we
can for technologies and products that are more effective and/or affordable than
any that we are developing.
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IF OUR SOLE-SOURCE SUPPLIER IS UNABLE TO MEET OUR DEMANDS, OUR BUSINESS
RESULTS WILL SUFFER.
We purchase certain key components for some of our products from a single
contract management supplier. For some of these components, there are relatively
few alternative sources of supply. Establishing additional or replacement
suppliers for any of the numerous components used in our products, if required,
may not be accomplished quickly and may involve significant additional costs.
Any supply interruption from our supplier or failure to obtain alternative
vendors for any of the components used to manufacture our products would limit
our ability to manufacture our products. Any such limitation on our ability to
manufacture our products would cause our business results to suffer.
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY.
We face an inherent business risk of exposure to product liability and
other claims and lawsuits in the event that the development or use of our
technology or prospective products is alleged to have resulted in adverse
effects. We may not be able to avoid significant liability exposure. Although we
believe our insurance coverage to be adequate, we may not have sufficient
insurance coverage, and we may not be able to obtain sufficient coverage at a
reasonable cost. An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of our products. A product
liability claim could hurt our financial performance. Even if we avoid liability
exposure, significant costs could be incurred that could hurt our financial
performance and condition.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY FORCE US TO
INCUR UNANTICIPATED COSTS.
Our success will depend, in part, on our ability to obtain and maintain
protection in the United States and other countries for certain intellectual
property incorporated into our water purification systems and our proprietary
methodologies. We may be unable to obtain patents relating to our technology.
Even if issued, patents may be challenged, narrowed, invalidated or
circumvented, which could limit our ability to prevent competitors from
marketing similar solutions that limit the effectiveness of our patent
protection and force us to incur unanticipated costs. In addition, existing laws
of some countries in which we may provide services or solutions may offer only
limited protection of our intellectual property rights.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES,
AND THIRD PARTIES MAY INFRINGE OUR PROPRIETARY RIGHTS, EITHER OF WHICH MAY
RESULT IN LAWSUITS, DISTRACTION OF MANAGEMENT AND THE IMPAIRMENT OF OUR
BUSINESS.
As the number of patents, copyrights, trademarks and other intellectual
property rights in our industry increases, products based on our technology may
increasingly become the subject of infringement claims. Third parties may assert
infringement claims against us in the future. Infringement claims with or
without merit could be time consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, might not be available
on terms acceptable to us. We may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Litigation to determine the validity of any claims,
whether or not the litigation is resolved in our favor, may result in
significant expense to us and divert the efforts of our technical and management
personnel from productive tasks. If there is an adverse ruling against us in any
litigation, we may be required to pay substantial damages, discontinue the use
and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to infringing technology. Our
failure to develop or license a substitute technology may prevent us from
selling our products.
RISK FACTORS RELATING TO OUR COMMON STOCK
EXERCISE OF OUR WARRANTS OR THE ISSUANCE OF SHARES OF OUR COMMON STOCK UNDER
A CREDIT LINE OR CONVERSION OF OUR CONVERTIBLE PREFERRED STOCK WILL DILUTE
THE OWNERSHIP INTEREST OF EXISTING STOCKHOLDERS.
The exercise of our warrants into shares of our common stock or the
issuance of shares of our common stock under our line of credit with Brittany
Capital Management Limited will dilute the ownership interests of existing
5
stockholders. Any sales in the public market of the shares of our common stock
issuable upon exercise of our warrants or conversion of our convertible
preferred stock could adversely affect prevailing market prices of our common
stock. In addition, the existence of the warrants or the convertible preferred
stock may encourage short selling by market participants due to this dilution or
facilitate trading strategies involving the notes and our common stock.
FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD
ADVERSELY AFFECT THE TRADING PRICE OF SHARES OF OUR COMMON STOCK AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Future sales of substantial amounts of shares of our common stock in the
public market, or the perception that such sales are likely to occur, could
affect prevailing trading prices of our common stock and, as a result, the value
of the notes. As of October 12, 2007, we had 190,191,843 shares of common stock
outstanding.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE, WHICH
COULD ADVERSELY AFFECT THE PRICE OF OUR STOCK.
We, by reason of our anticipated financial status and our contemplated
financial requirements, do not contemplate or anticipate paying any dividends on
our common stock in the foreseeable future. Any payment of cash dividends in the
future will be dependent upon the amount of funds legally available, the
earnings, financial conditions, capital requirements and other factors that the
board of directors may think are relevant. As a result, you may never receive a
stream of cash payments from dividends, which could adversely affect the price
of our stock.
ALTHOUGH WE ARE SUBJECT TO THE INFORMATION AND REPORTING REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, OUR COMMON STOCK IS NOT QUOTED OR TRADED ON
A NATIONAL EXCHANGE AND INVESTORS IN OUR COMMON STOCK WILL BE SUBJECT TO
RISKS ASSOCIATED WITH THE PUBLIC TRADING MARKET GENERALLY.
We cannot predict the extent to which a trading market will develop or how
liquid that market might become. If you exercise your warrants and receive
common stock, you will pay a price that was not established in the public
trading markets. You may suffer a loss of your investment.
A SIGNIFICANT NUMBER OF OUR SHARES WILL BE AVAILABLE FOR FUTURE SALE AND
COULD DEPRESS THE MARKET PRICE OF OUR STOCK.
As of October 12, 2007, there were 190,191,843 shares of common stock
outstanding, outstanding warrants to purchase 2,500,000 shares of our common
stock at an exercise price of $0.15 per share, outstanding warrants to purchase
1,384,786 shares of our common stock at an exercise price of $0.096 per share,
outstanding warrants to purchase 7,100,000 shares of our common stock at an
exercise price of $0.11 per share, outstanding warrants to purchase 4,000,000
shares of our common stock at an exercise price of $0.10 per share, outstanding
warrants to purchase 430,000 shares of our common stock at $0.14 per share,
2,000,000 shares of our common stock at an exercise price of $0.1175, and
outstanding warrants to purchase 882,352 shares of our common stock at $0.085
per share, all of them fully vested and 1,612,760 shares of common stock
issuable upon conversion of our Series F convertible preferred stock. Sales of
large amounts of our common stock in the market could adversely affect the
market price of the common stock and could impair our future ability to raise
capital through offerings of our equity securities. A large volume of sales by
holders exercising the warrants or stock appreciation rights or converting
outstanding promissory notes could have a significant adverse impact on the
market price of our common stock.
WE MAY NOT HAVE SUFFICIENT AUTHORIZED SHARES FOR THE CONVERSION OF OUR
AUTHORIZED CONVERTIBLE SECURITIES.
As of June 30, 2007, we had outstanding notes convertible into an
undeterminable amount of shares of our common stock. In addition, we have
outstanding warrants to purchase shares of our common stock. As a result, we may
not have sufficient authorized shares for the conversion of our outstanding
convertible debt or the exercise of our outstanding warrants.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, LEADING TO THE POSSIBILITY
OF ITS VALUE BEING DEPRESSED AT A TIME WHEN YOU WANT TO SELL YOUR HOLDINGS.
The market price of our common stock has in the past been, and may in the
future continue to be, volatile. For instance, between January 1, 2005 and
October 15, 2007, the closing bid price of our common stock has ranged between
$0.065 and $0.274. Many factors could cause the market price of our common stock
to fluctuate substantially, including:
6
o future announcements concerning us, our competitors or other companies
with whom we have business relationships;
o changes in government regulations applicable to our business;
o changes in market conditions for our industry;
o overall volatility of the stock market and general economic
conditions;
o changes in our earnings estimates or recommendations by analysts; and
o changes in our operating results from quarter to quarter.
In addition, the stock market in recent years has experienced significant
price and volume fluctuations for reasons unrelated to operating performance.
These market fluctuations may adversely affect the price of our common stock at
a time when you want to sell your interest in us.
YOUR ABILITY TO INFLUENCE CORPORATE DECISIONS MAY BE LIMITED BECAUSE OUR
MAJOR STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR COMMON STOCK.
Our significant stockholders own a substantial portion of our outstanding
stock. As a result of their stock ownership, if these stockholders were to
choose to act together, they would be able to control all matters submitted to
our stockholders for approval, including the election of directors and approval
of any merger, consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an acquisition of our
Company on terms that other stockholders may desire. In addition, as the
interests of our majority and minority stockholders may not always be the same,
this large concentration of voting power may lead to stockholder votes that are
inconsistent with your best interests or the best interests of us as a whole.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements. When used or incorporated by reference in this prospectus,
statements which are not historical in nature, including the words "may,"
"will," "should," "continue," "future," "potential," "believe," "expect,"
"anticipate," "project," "plan," "intend," "seek," "estimate" and similar
expressions are intended to identify forward-looking statements.
The forward-looking statements in this prospectus are based upon our
management's beliefs, assumptions and expectations of our future operations and
economic performance, taking into account the information currently available to
us. These statements are not statements of historical fact. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or financial
condition to be materially different from any future results expressed or
implied by these statements. Such factors include, among other things, the risks
discussed in this prospectus under the caption "Risk Factors."
In light of these and other uncertainties, the forward-looking statements
included or incorporated by reference in this prospectus should not be regarded
as a representation by us that our plans and objectives will be achieved. You
should not place undue reliance on any forward-looking statements, and we
undertake no obligation to publicly update or revise any forward-looking
statements after the date of this prospectus, whether as a result of new
information, future events or otherwise.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares owned
by the selling securityholders. We may receive proceeds of up to approximately
$214,757 less expenses in connection with the exercise of warrants, the
underlying shares of which may in turn be sold by the selling securityholder.
Although the amount and timing of our receipt of any such proceeds are
uncertain, such proceeds, if received, will be used for general corporate
purposes, including, without limitation, the following (in order of priority):
7
o working capital;
o the repayment of debt;
o the repurchase of our common stock;
o temporary investment; and/or
o the financing of possible acquisitions or business expansion.
To the extent that proceeds are available following repayment of our debt,
we reserve the right to reallocate or change the specific use of the net
proceeds to respond to fluctuations in our business and to take advantage of
opportunities which may be complementary to our operations.
MARKET FOR OUR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the OTCBB under the symbol WTER.OB. As of
October 12, 2007, there were approximately 800 holders of record of our common
stock. The following table sets forth the high and low bid prices for our common
stock for the periods indicated as reported by the OTCBB. The prices state
inter-dealer quotations, which do not include retail mark-ups, mark-downs or
commissions. Such prices do not necessarily represent actual transactions.
Fiscal Year-Ended December 31, 2007 High Low
---- ---
First Quarter $ 0.19 $ 0.01
Second Quarter 0.13 0.10
Third Quarter 0.12 0.06
Fourth Quarter (through October 15, 2007) 0.08 0.06
Fiscal Year-Ended December 31, 2006 High Low
---- ---
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, 2005 High Low
---- ---
First Quarter $ 0.28 $ 0.14
Second Quarter 0.21 0.11
Third Quarter 0.29 0.13
Fourth Quarter 0.17 0.06
We have not paid any dividends on our common stock and do not anticipate
declaring or paying any cash dividends in the foreseeable future. We currently
expect to retain future earnings, if any, to finance the growth and development
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 convertible preferred stock
(See "Description of Securities"), the holders of our common stock are entitled
to dividends when and if declared by our Board of Directors from legally
available funds.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
DEVELOPMENT OF THE COMPANY
Until the fourth quarter of 2001, Water Chef was engaged in the
manufacture and marketing of water coolers and water purification and filtration
products. In the fourth quarter of 2001, the Company completed the sale of this
business in order to focus its activities on its PureSafe line of business. The
PureSafe Water Station has been designed by the Company to meet the needs of
communities which either do not have access to municipal water treatment
8
systems, or for those which systems have been compromised, either by
environmental factors or by faulty design or maintenance.
RESULTS OF OPERATIONS
Sales for the six months ended June 30, 2007 and 2006 were $0 and
$115,000, respectively. During the six months ended June 30,2006, the Company
recognized the sale of two PureSafe Water Station Systems.
Cost of sales for the six month period ended June 30, 2007 and 2006 was
$23,000 and $72,000, respectively. An analysis of the components of cost of
sales in the 2007 and 2006 periods follows:
Cost of Sales Product Rent and Overhead
Period CGS Payments to Manufacturer Total
--------------------------- ----------- ------------------------------ ---------
For the six months ended $ -- $23,000 $23,000
June 30, 2007
For the six months ended $30,000 $42,000 $72,000
June 30, 2006
Selling, general and administrative expenses for the six months ended June
30, 2007 were $920,255 compared to $1,163,937 for the six months ended June 30,
2006, a decrease of 21%.
The net loss for the six months ended June 30, 2007 was $1,213,855
compared to $1,499,401 in the same period ended June 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2007, the Company had a working capital deficiency of
approximately $2,386,000. In addition, the Company continues to suffer recurring
losses from operations and has an accumulated deficit since inception of
approximately $27,870,000. The accompanying financial statements have been
prepared assuming that that the Company will continue as a going concern. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters include
restructuring its existing debt, raising additional capital through future
issuances of stock and/or equity, and finding sufficient profitable markets for
its products to generate sufficient cash to meet its business obligations.
However, there can be no assurance that the Company will be able to obtain
sufficient funds to continue the development of its product, marketing plan and
distribution network. The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
In March 2007, the Chief Executive Officer and a Director each made bridge
loans of $50,000 to the Company. The loans pay simple interest at the rate of
10% per annum and are due and payable in 90 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. The note are
convertible into an undeterminable amount of shares. As such the Company may not
have enough authorized shares for the conversion of the debt or for the exercise
of any outstanding warrants.
The loans to the Chief Executive Officer and the Director carry an option
that if the loans are not repaid by June 14, 2007 and June 29, 2007,
respectively, such option will entitle the lenders to convert their debt to
common stock at a price equal to 50% of the average closing price of the
Company's common stock over the three previous business days before demand for
conversion is made. The Company recorded a charge of $113,000 during the second
quarter ended June 30, 2007 for the embedded conversion option.
As of October 16, 2007, the notes have not been repaid by the Company
or converted to shares of commons stock by the holders of the notes.
9
SELLING SECURITYHOLDERS
The following table sets forth the names of the selling securityholders,
the number of shares beneficially owned by the selling securityholders, the
number of shares that may be offered under this prospectus and the number of
shares of common stock owned by the selling securityholders after the offering
is completed. None of the selling securityholders have been an officer, director
or had any material relationship with us within the past three years.
Beneficial ownership is determined in accordance with the SEC rules and
includes voting or investment power with respect to the securities currently
owned or for which the selling stockholder has the right to acquire within 60
days. Additionally, each of the selling stockholders identified in the table
below with an asterisk (*) is subject to certain limitations on the conversion
on such stockholder's convertible notes and the exercise of such stockholder's
warrants. The most significant limitation is that such selling stockholder may
not convert the holder's convertible notes or exercise the holder's warrants, if
such conversion or exercise would cause such holder's beneficial ownership of
our Common Stock (excluding shares underlying any of their unconverted
convertible notes or unexercised warrants) to exceed 4.99% of the outstanding
shares of Common Stock immediately after the conversion or exercise. (If the
holder subsequently disposes of some or all of its holdings, the holder can
again convert the holder's notes or exercise the holder's warrants, subject to
the same limitation.) The table below also includes the number of shares which
might be issuable on the occurrence of certain events, such as the accrual of
interest, which have not yet occurred and may not occur. Therefore, although
they are included in the table below, the number of shares of Common Stock for
the selling shareholders may include shares that are not subject to purchase
during the 60-day period.
Number of Common
Shares/Percentage
Number of Common of Class to Be
Shares Owned Number of Owned After
Prior to the Common Shares Completion of
Name Offering to be Offered the Offering
Occidental Engineering 2,600,000 1,250,000 1,350,000/ #
Consultants Ltd. (1)
*Southshore Capital Fund Ltd. (2) 3,048,024 3,048,024 0/0%
*Southridge Partners LP (3) 12,192,097 12,192,097 0/0%
---------- ----------
TOTAL: 17,840,121 16,490,121
# Less than 1%
(1) Efsthasios Basios, the principal of Occidental Engineering Consultants,
Ltd., has voting and dispositive power over the shares of common stock
held by Occidental Engineering Consultants, Ltd.
(2) Represents up to 2,543,794 shares to be issued pursuant to a convertible
promissory note due March 5, 2008 and a promissory note to be issued
following the effectiveness of this Registration Statement, and 276,957
shares to be issued upon the exercise of warrants currently outstanding
and up to 227,273 shares to be issued upon exercise of warrants to be
issued following the effectiveness of this Registration Statement. David
Sims, the director of Navigator Management Limited, which is the
Director of Southshore Capital Fund Ltd., has voting power over the
shares of common stock held by Southshore Capital Fund Ltd. David Sims
and Stephen Hicks, the President of Southridge Capital Management LLC,
which is the investment manager for of Southshore Capital Fund Ltd.,
share dispositive power over the shares of common stock held by
Southshore Capital Fund Ltd.
(3) Represents up to 10,175,177 shares to be issued pursuant to a
convertible promissory note due March 5, 2008 and a promissory note to
be issued following the effectiveness of this Registration Statement,
and 1,107,829 shares to be issued upon the exercise of warrants
currently outstanding and up to 909,091 shares to be issued upon
exercise of warrants to be issued following the effectiveness of this
Registration Statement. Stephen Hicks, the President of the general
partner of Southridge Partners LP, has voting and dispositive power over
the shares of common stock to be issued to upon exercise of the warrants
and conversion of the convertible promissory note held by Southridge
Partners LP.
10
Our registration of the shares included in this prospectus does not
necessarily mean that the selling securityholders will opt to sell any of the
shares offered hereby. The shares covered by this prospectus may be sold from
time to time by the selling securityholders so long as this prospectus remains
in effect.
PLAN OF DISTRIBUTION
We are registering the resale of up to 12,718,971 shares of our common
stock issuable pursuant to our convertible promissory notes due March 5, 2008
all or a portion of the principal amount and accrued interest of which may be
converted after the maturity date into shares of our common stock at a
conversion price for each share of common stock 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. We will not receive any
proceeds from the subsequent sale of this common stock. We will bear all fees
and expenses incident to registering these shares of common stock.
We are also registering the resale of up to 1,384,786 shares of our common
stock issuable, otherwise than through underwriters, upon exercise of warrants.
We anticipate we will receive $0.096 per share upon the exercise of the
warrants. In addition, we are registering the resale of up to 1,136,364 shares
of our common stock issuable, otherwise than through underwriters, upon the
exercise of warrants to be issued on the date that is five days after the actual
effective date of this registration statement. We anticipate we will receive
$0.072 per share upon the exercise of the additional warrants. The warrants and
additional warrants carry a cashless exercise provision. The warrants were
issued in connection with a loan agreement dated as of August 27, 2007 and are
currently exercisable. The warrants expire approximately three years after the
effective date of this registration statement. We will not receive any proceeds
from the subsequent sale of the common stock, although we may receive up to
approximately $214,759, less expenses, if all the warrants and additional
warrants are exercised by the warrant holders. We will bear all fees and
expenses incident to registering the shares of common stock.
We are registering the resale of up to 1,000,000 shares of our common
stock issuable pursuant to our Settlement Agreement dated as of October 11,
2007. We will not receive any proceeds from the subsequent sale of this common
stock. We will bear all fees and expenses incident to registering these shares
of common stock.
Neither we, nor the selling securityholders, have employed an underwriter
for the sale of common stock by the selling securityholder. Each of the selling
securityholders has advised us that it has not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of its securities, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of the shares by such selling
securityholder. We will not receive any proceeds from the subsequent sale of the
shares of common stock. We will bear all expenses in connection with the
preparation of this prospectus and registration of the shares. The selling
securityholders will bear brokerage commissions and similar selling expenses
associated with the sale of its common stock.
If any shares of common stock being registered for resale in the
accompanying registration statement are transferred from a selling
securityholder listed in this prospectus and such transferees wish to rely on
this prospectus to resell these shares, then a prospectus supplement or, if
appropriate, a post-effective amendment to the registration statement of which
this prospectus is a part, would need to be filed with the Securities and
Exchange Commission naming these individuals as selling securityholders.
The selling securityholders may offer its shares of common stock from time
to time directly or through pledgees, donees, transferees or other successors in
interest in one or more of the following transactions (which may include block
transactions):
o On any stock exchange or automated quotation system on which the shares
of common stock may be listed at the time of sale;
o In negotiated transactions;
o In the over-the-counter market;
11
o Put or call option transactions relating to the shares;
o Short sales relating to the shares; or
o In a combination of any of the above transactions.
The selling securityholder may offer its shares of common stock at any of
the following prices, which may reflect discounts from the prevailing market
prices at the time of sale:
o Fixed prices that may be changed;
o Market prices prevailing at the time of sale;
o Prices related to such prevailing market prices;
o At negotiated prices; or
o Varying prices determined at the time of sale.
The selling securityholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from such selling securityholder and/or
the purchasers of shares of common stock for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Any broker-dealer acquiring common stock from a selling securityholder may
sell the shares either directly, in its normal market-making activities, through
or to other brokers on a principal or agency basis or to its customers. Any such
sales may be at prices then prevailing on the OTCBB or at prices related to such
prevailing market prices or at negotiated prices to its customers or a
combination of such methods. A selling securityholder and any broker-dealers
that act in connection with the sale of the common stock hereunder might be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act of 1933, as amended (the "Securities Act") any commissions
received by such broker-dealers and any profit on the resale of shares sold by
them as principals might be deemed to be underwriting discounts and commissions
under the Securities Act. The selling securityholder may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against certain liabilities, including liabilities arising under
the Securities Act.
Because a selling securityholder may be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities Act the selling
securityholders will be subject to the prospectus delivery requirements of the
Securities Act.
The selling securityholder also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
If we are notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of the
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
post-effective amendment to the registration statement of which this prospectus
is a part under the Act disclosing:
o the name of each such selling securityholder and of the
participating broker-dealer(s);
o the number of shares involved;
o the price at which such shares were sold;
12
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
None of the selling securityholders is a broker-dealer or an affiliate of
a broker-dealer.
There can be no assurance that the selling securityholders will sell any
or all of the shares offered by them under this prospectus.
BUSINESS
THE COMPANY
Water Chef, Inc. 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. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.
BACKGROUND
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, which manufactured and marketed water coolers and filters.
PRODUCTS
In 2001 the Company decided to concentrate its efforts on the further
development, manufacturing and marketing of 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.
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 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.
The PureSafe was tested by H2M Labs, Inc. which has been approved by
Nassau and Suffolk counties in New York to perform drinking water testing for
the various municipalities in those counties. The specific test performed was a
total and fecal coliform bacteria test, wherein the source water storage tank
which feeds the PureSafe was tested for the presence of total and fecal coliform
bacteria. The source water tank was found to have 50 colonies of coliform
bacteria present. The source water tank was then "spiked" with a three (3) liter
concentration of laboratory grown and cultured bacteria and the storage tank was
measured again with 80,000,000 colonies of bacteria detected. After being
processed through the PureSafe system, the water was tested again, and "FEWER
THAN 2 COLONIES" were detected. In addition to the laboratory test conducted for
Water Chef by H2M Labs, the available scientific literature, in industry
journals such as Water Technology and Water Conditioning and Purification
International, supports the statement that an ozone system such as the one
utilized in the PureSafe effectively eliminates all living pathogens. Ozone was
13
first used in municipal water treatment in Nice, France in 1904, and then in the
Jerome Park Reservoir in the Bronx, New York in 1906.
The PureSafe is a self-contained, six stage water purification center. It
is housed in the equivalent of a small storage container - approximately four
feet wide, seven feet long, and six and one-half feet high. The unit weighs
approximately eleven hundred pounds (without water) and has been configured for
portability, durability, and easy access to its essentially off-the-shelf
components. It is constructed with weather and UV resistant fiberglass, aluminum
and steel, and is equipped with internal and external lighting.
The core version of the PureSafe can purify and dispense up to 15,000
gallons of water per day for an all-inclusive cost (labor, power, amortization
of the capital cost, replacement filters, cartridges and media) of approximately
one-half cent per gallon. The process wastes very little water, producing
approximately one gallon of pure drinking water for every gallon processed. The
unit can be moved with a single fork-lift and is transportable by truck or
helicopter. Operating the PureSafe is simple and straightforward. Due to its
turn-key design, minimum wage personnel can be trained to operate the unit. A
system of fail-safes is built into the operation, and aside from easily
installable spares such as filters and cartridges, a maintenance and oversight
program established by Water Chef should maintain the operating efficiencies
built into the system. Water Chef warrants each unit for a period of one year so
long as the consumer adheres to required maintenance protocols, using Water Chef
supplied parts, as prescribed in the maintenance manual. The Company also offers
larger stand-alone versions of the PureSafe to provide pure water in quantities
up to 20,000 gallons per hour. To date, there have been no warranty claims for
the PureSafe product operating in the field.
While each unit is configured to respond to the particular water quality
of a particular site, such as arsenic removal, seawater desalination, oil
separation, etc., the typical unit contains the following components:
a. Inlet connection with macro-filter - designed to strain the input water,
removes large particulates and directs water into the system
b. Inlet pump - self-priming pump which maintains water pressure at minimum
40 p.s.i. throughout the system
c. Pre-depth media filter - a multi-media mixed bed to remove pollutants.
Pressure gauges mounted on the exterior front panel of the unit allow for
visible monitoring of system performance.
d. Ozone generator - provides a rich ozone source that effectively kills all
living pathogens such as bacteria, viruses, cysts, parasites, etc. Unused
ozone reverts to oxygen and produces no harmful byproducts.
e. Ozone mixing tank - Water Chef's proprietary process for effectively
mixing the ozone into the water and maintaining the required contact time
to ensure oxidation of contaminants.
f. Process pump - provides optimal operation of the ozone processing.
g. Post-depth media filter - another, different, multi-media mixed bed
designed to filter out oxidized or precipitated pollutants and
contaminants after the ozone treatment. Effectively removes metals,
organics and inorganics. Pressure gauges on the front panel indicate the
need for backwashing to maintain optimal performance.
h. Ultraviolet treatment - provided by a UV lamp as a redundant sterilizer
step to eliminate any surviving pathogens or micro-organisms. The UV lamp
is tuned to a frequency which also converts O3 (ozone) back to O2
(oxygen).
i. KDF filter - an ion exchange media containing a proprietary blend of
copper, zinc and other alloys, effectively absorbs chlorine and
biological, inorganic and metallic contaminants.
14
j. Carbon filter - prevents bacteria re-growth while removing inorganic
compounds and improves water taste and removes odor. The carbon filter
also acts as a redundant ozone destruct mechanism.
k. Mixer - sends ozone treated water to the bottle washing stations.
l. Bottle washing stations - incorporated on the outside front of the unit
for easy access in order to effectively clean bottles used to carry water
treated at the site.
m. Dispensing stations - four individual dispensing lines, each with flow
adjusting valves to help regulate a smooth, steady flow of water into
clean bottles.
MANUFACTURING
Effective October 1, 2007, the Company signed a lease for a showroom and
an assembly facility in Middlesex Turnpike, Essex, Connecticut, and the
Company will assemble and market its new product, First Response Unit, at
this facility.
RAW MATERIALS
The PureSafe has been designed to use, for the most part, readily
available off-the-shelf components, sub-systems and equipment. Inasmuch as each
of the components and sub-systems are available from multiple vendors, the
Company does not believe that obtaining these for its sub-contractor, for
itself, or for others if it chooses to manufacture elsewhere, will be a problem.
COMPETITION
Water Chef's modular, turn-key PureSafe Water Station directly addresses
the drinking water needs of those environs which do not today, and are unlikely
to enjoy access to municipally treated water. The Company has produced 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), and products for
residential markets do not offer the performance or features to meet the needs
of the underdeveloped nations of the world.
Management does recognize that its potential competitors have far more
resources, and that being first to the marketplace is no assurance of success.
It must be assumed that others are working on systems that, if successfully
brought to market, could seriously impact the viability of the Company.
The Company is actively marketing its products to potential customers in
Bangladesh, China, Peru, Egypt, India and Honduras, and to agencies and
departments of the U.S. Government.
MARKETING
The potential market for the PureSafe is substantial and is both worldwide
and domestic. 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 deficits. In part, solving this problem has been a question of
appropriate technology. Secondarily, but just as important, in a vast part of
the world is the need to secure third party financing so that the local populace
can enjoy the benefits of clean water.
Water Chef believes that it has demonstrated that it possesses the
technology. The Company also believes that financing is available for third
world economies from a variety of sources. The challenge for the Company, a
virtual unknown in the industry and with limited capital, is getting its message
in front of decision makers. To this end, Water Chef has enlisted the aid of
15
some of the world's most outstanding experts in water purification, especially
as it relates to the needs of underdeveloped countries.
The Company's Scientific Advisory Board includes Dr. Mohamed M. Salem,
Professor of Occupational and Environmental Medicine, Cairo University; Dr.
Richard Wilson, Mallinckrodt Research Professor of Physics, Harvard University;
and Dr. Mostafa K. Tolba, former Under-Secretary-General of the United Nations
and Director of the U.N.'s Environmental Program.
Not only have the members of the Scientific Advisory Board provided
valuable input and guidance to the Company with respect to system design,
technological input, remediation approaches and a great deal of information
relative to the unique water problems facing many areas of the world, but they
have also been active in introducing Water Chef to commercial opportunities
In September 2006, WaterChef appointed The Marshall Group as exclusive
sales representative of the Company's products for India. With the pure water
demands of its growing middle class and with increased attention being placed on
the contamination of India's ground and surface water resources, the Company
believes that the Indian market for its products is extremely attractive.
PATENTS
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, Korea 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; and the Korean Patent Application No. 10-2001-0070453 was filed on
November 20, 2001. 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, and, in September
2006, WaterChef was advised by patent counsel that the European Patent Office
had decided to grant our patent for the European Union.
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 and is confident that it can protect this intellectual capital
throughout the manufacturing and distribution cycle.
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 PureSafe to be influenced by seasonality.
GOVERNMENT APPROVALS
The Company's marketing efforts to date have been directed to Central and
South America, the Asian sub-continent, China and the Middle East. No specific
government approvals are required, except for the possibility that export
licenses will be required in specific instances.
16
RESEARCH AND DEVELOPMENT
Research and development takes place at the Company's office. Testing,
modeling, simulation and prototype manufacturing are outsourced, with much of
the ongoing development taking place at the Company's contract manufacturing
facilities under the supervision of Davis Water Products. The Company estimates
to date that the design, prototyping, development and marketing of the PureSafe
Water Station has cost in excess of $2 million.
INSURANCE
The Company maintains Directors' and Officers' Insurance in the aggregate
amount of $2,000,000, and a $2,000,000 general business liability policy. The
Company believes its insurance coverage to be adequate.
EMPLOYEES
As of October 16 2007, the Company has four employees, including two
executive officers and one administrative employee in its headquarters.
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.
DESCRIPTION OF PROPERTY
Effective October 1, 2007, the Company has leased an assembly
facility, where it also holds its showroom. The Company will assemble and
market its new product, First Response Unit, at this facility. The facility is
at 25 Middlesex Turnpike, Essex Connecticut. The facility is 3,700 Square Feet
and the lease is $1,529 per month on a month-to-month basis. The lease is for
one year with two one-year options at the same price.
The Company maintains its principal place of business at 68 South Service
Road, Suite 100, Melville, New York 11747. The company leases two offices at
$3,600 per month on a month-to-month basis.
To the extent possible, the Company intends to utilize leased space for
its future needs.
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. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of September 30, 2007, the Company's Directors, Executive Officers and
Scientific Advisory Board Members are:
NAME AGE POSITION(S) WITH THE COMPANY
Leslie J. Kessler 60 Director, Chairman, President, Chief
Executive Officer and Chief
Financial Officer
17
Terry Lazar 64 Director, Chief Financial officer
Mohamed M. Salem + 56 Scientific Advisory Board
Richard Wilson + 81 Scientific Advisory Board
Mostafa K. Tolba + 85 Scientific Advisory Board
+ Members of the Scientific Advisory Board will receive an honorarium, in the
form of cash or common stock, for their service at the discretion of the
Board of Directors.
LESLIE J. KESSLER
Ms. Kessler joined the Company as its President in January 2007 and was
appointed as 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. 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. Since
1999, Mr. Lazar has served as an officer at Knowledge Partners, LLC, a company,
which is engaged in physicians practice management services. Mr. Lazar holds his
B.B.A. from the City University of New York.
MOHAMED M. SALEM (M.D./PH.D.)
Dr. Salem was appointed to the Scientific Advisory Board in early 2001. Dr.
Salem is Professor of Occupational and Environmental Medicine at the Kasr
El-Aini School of Cairo University. An internationally recognized expert on the
health effects of environmental and water contaminants including pesticides,
lead and other metals, Dr. Salem is credited with establishing infectious
disease control programs at medical centers and other public entities throughout
the Middle East. Dr. Salem is a principal of Salem Industries, an import and
export company, which is one of the leading suppliers of chemicals and oil field
equipment in the Middle East. Dr. Salem holds both an M.D. and Ph.D. from Cairo
University.
RICHARD WILSON (PH.D.)
Dr. Wilson was appointed to the Scientific Advisory Board in February 2001. Dr.
Wilson is the Mallinckrodt Research Professor of Physics at Harvard University.
Dr. Wilson is one of the foremost scientific authorities in the fields of water
quality remediation and purification, and is currently Professor of the Energy
Research Group at the University of California. Dr. Wilson is a member of the
Advisory Board of the Atlantic Legal Foundation, and is one of the principal
scientists studying the resolution of the water problems in Chernobyl and in
Bangladesh where toxic levels of arsenic contaminate the water supply. Dr.
Wilson holds his Ph.D. from Oxford University.
MOSTAFA K. TOLBA (PH.D.)
Dr. Tolba joined the Scientific Advisory Board in June 2001. Dr. Tolba served as
Under-Secretary-General of the United Nations, and Executive Director of the
United Nations Environmental Program from 1976 to 1992. Dr. Tolba is currently
President of the International Center for Environment and Development
headquartered in Geneva, Switzerland, and Emeritus Professor of Science at the
Kasr El-Aini School of Medicine at Cairo University. He received his Ph.D. in
Macrobiology from Imperial College, London, England.
18
Terry Lazar is the member of the Company's Audit Committee. The Board of
Directors has determined that Mr. Lazar is an "audit committee financial expert"
as defined in Item 401(e) of Regulation S-B.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
All Other
Annual
Name and Compensation
Principal Position Year Salary ($) Bonus ($) ($) Total ($)
------------------- ----- ------------ ----------- ------------- -----------
*David A. Conway 2006 $350,000 -- -- $350,000
President/CEO
* Resigned in January 2007.
EMPLOYMENT AGREEMENTS
Mr. Conway entered into a five-year employment agreement in January 2004.
The agreement provides 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 relinquished his right to unpaid, accrued
salary and to the unexercised stock appreciation rights.
The Company did not issue any stock options or common stock appreciation
rights during fiscal 2006.
The Company has no long-term incentive plans at this time.
Outstanding Equity Awards at Fiscal Year-end
--------------------------------------------------------------------------------------------------------------------
Equity Incentive
Number of Number of Plan Awards;
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying
Options (#) Options (#) Unexercised Option Exercise Option Exercise
Name Exercisable Exercisable Unearned Options Price Date
--------------------- -------------------- ----------------- ------------------- ------------------ ----------------
David A. Conway 3,600,000 1,400,000 0 $0.25 1/6/09
DIRECTORS' COMPENSATION
Fees Earned or Paid
Name in Cash Stock Awards Option Awards Total
-----------------------------------------------------------------------------------------------------
John J. Clarke $ 25,000 $ -- $120,600 $145,600
Marshall S. Sterman $ 25,000 $ -- $120,600 $145,600
Directors of the Company do not receive cash compensation for serving as
members; they are reimbursed for their out of pocket expenses related to
meetings and other Company related activity for which they are called upon. In
the past certain directors have received common stock for service to the
Company.
19
In 2006, Mr. Sterman was compensated at the rate of $6,000 per month for
consulting services performed for the Company. The Company terminated this
agreement in June 2006. There is $317,500 due to him for this service as of
December 31, 2006. On February 12, 2007, Mr. Sterman resigned from the Board of
Directors and waived his rights to any accrued compensation owed to him by the
Company.
Mr. Clarke resigned from the Board of Directors in September 2007.
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.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's amended and restated certificate of incorporation and bylaws
eliminate, in certain circumstances, the liability of Directors for breach of
their fiduciary duty. This provision does not eliminate the liability of a
Director (i) for breach of the Director's duty of loyalty to the Company or its
stockholders (ii) for acts of omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
willful or negligent declaration of an unlawful dividend, stock purchase or
redemption; (iv) for transactions from which the Director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the
effective date of the amended and restated certificate of incorporation.
The Company's amended and restated certificate of incorporation provides
generally for indemnification of the Directors and Officers to the full extent
permitted under Delaware law, and permits indemnification for all other persons
whom the Company is empowered to indemnify.
These provisions do not limit or eliminate our rights or those of any
stockholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a Director's fiduciary duty. These provisions will not
alter a Director's liability under federal securities laws. Our amended and
restated bylaws also contain provisions indemnifying our directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. We
believe that these provisions are necessary to attract and retain qualified
individuals to serve as Directors and officers.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information as of September 28, 2007, concerning stock
ownership of all persons known by the Company to own beneficially 5% or more of
the issued and outstanding common stock of the Company, all Directors, all
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
September 28, 2007.
20
Series a Preferred Series D Preferred Series F Convertible
Common Stock Stock Beneficially Stock Beneficially Preferred Stock
Beneficially Owned(1) Owned(1) Owned(1) Beneficially Owned(1)
Shares % Shares % Shares % Shares %
------ ------ ------ ------ ------ ------ ------ ------
Leslie J. Kessler (2) 6,233,700 3.3% -- -- -- -- -- --
Water Chef, Inc.
68 South Service Road, Suite
100
Melville, NY 11747
Terry Lazar (3) 122,000 * -- -- -- -- -- --
Water Chef, Inc.
68 South Service Road, Suite
100
Melville, NY 11747
Jerome Asher & 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) 16,773,651 8.8% -- -- -- -- -- --
The Goldman Sachs Group, Inc.
85 Broad Street
New York, NY 10004
Peter Hoffman -- -- -- -- -- -- 3,126 7.8%
7035 Vleigh Place
Flushing, NY 11367
Robert Kaszovitz -- -- -- -- -- -- 10,000 24.8%
1621 51st Street
Brooklyn, NY 11204
Olshan Grundman Frome -- -- -- -- -- -- 5,000 12.4%
Rosenzweig & Wolosky LLP
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 and 6,355,700 3.3% -- -- -- -- -- --
directors as a Group (2)
21
* less than 1%
1. A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days after the record date 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 after the record date) have been exercised or converted.
2. Includes 98,400 shares held in an IRA, 100,000 shares held by Ms. Kessler's
spouse and warrants to purchase 4,000,000 shares of common stock which are
currently exercisable.
3. Includes 50,000 shares held by a Profit Sharing Plan Trust.
4. Based on an amendment to a Schedule 13G jointly filed with the Securities
and Exchange Commission on February 12, 2007 by Goldman, Sachs & Co. and The
Goldman Sachs Group, Inc.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 340,000,000 shares of common
stock and 10,000,000 shares of preferred stock, of which 400,000 shares have
been designated Series A Preferred Stock, $.001 par value per share, 400,000
shares have been designated Series C convertible preferred stock, $.001 par
value per share, 400,000 shares have been designated Series D Preferred Stock,
$.001 par value per share, and 1,000,000 shares have been designated Series F
convertible preferred stock, $.001 par value per share.
Except as to certain matters discussed below or as proscribed by
applicable law, the holders of shares of all classes of the capital stock of the
Company vote together as a single class. The holders of our capital stock do not
have cumulative voting rights, which means that the holders of more than 50% of
the outstanding shares, voting for the election of directors, can elect all of
the directors to be elected, if they so choose, and, in that event, the holders
of the remaining shares will not be able to elect any of our directors.
The following description of our capital stock is based upon our restated
certificate of incorporation, amended and restated bylaws and applicable
provisions of law. We have summarized portions of our restated certificate of
incorporation and amended and restated bylaws below. The summary is not
complete. You should read our certificate of incorporation and amended and
restated bylaws for the provisions that are important to you.
DESCRIPTION OF THE COMMON STOCK
As of October 12, 2007 there were 190,191,843 shares of common stock
outstanding which were held of record by approximately 800 shareholders.
Prior to filing the Certificate of Amendment on March 22, 2006 increasing
our authorized capital stock to 350,000,000, we were authorized to issue up to
200,000,000 shares of capital stock, consisting of up to 190,000,000 shares of
common stock, par value $0.001 per share, and up to 10,000,000 shares of
preferred stock. There are presently 190,191,843 shares of common stock
outstanding. Total shares issuable upon the exercise of options, warrants and
conversion of preferred stock and convertible promissory note as of September
30, 2007 were 27,271,317.
VOTING
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the holders of common stock.
22
RIGHTS AND PREFERENCES
The holders of common stock: (i) have equal ratable rights to dividends
from funds legally available if and when declared by our Board of Directors
after all accrued but unpaid dividends have been paid to the holders of the
outstanding capital stock ranking senior to the common stock as to dividends;
(ii) are entitled to share ratably in all of our assets available for
distribution to the holders of common stock upon liquidation, dissolution or
winding up of our affairs; and (iii) do not have preemptive, subscription or
conversion rights, and there are no redemption or sinking fund provisions or
rights.
Our common stock is admitted for trading on the OTCBB under the symbol
"WTER.OB."
The transfer agent and registrar for our common stock is Computershare
Investor Services.
DELAWARE ANTI-TAKEOVER LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law.
Section 203 generally prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless:
o prior to the date of the transaction, the Board of Directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
o the interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding
(i) shares owned by persons who are directors and also officers and
(ii) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or
exchange offer; or
o on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
Section 203 defines a business combination to include:
o any merger or consolidation involving the corporation and the
interested stockholder;
o any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
o subject to exceptions, any transaction that results in the issuance
or transfer by the corporation of any stock of the corporation to
the interested stockholder; or
o the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with, or controlling, or
controlled by, the entity or person. The term "owner" is broadly defined to
include any person that, individually, with or through that person's affiliates
or associates, among other things, beneficially owns the stock, or has the right
to acquire the stock, whether or not the right is immediately exercisable, under
any agreement or understanding or upon the exercise of warrants or options or
otherwise or has the right to vote the stock under any agreement or
23
understanding, or has an agreement or understanding with the beneficial owner of
the stock for the purpose of acquiring, holding, voting or disposing of the
stock.
The restrictions in Section 203 do not apply to corporations that have
elected, in the manner provided in Section 203, not to be subject to Section 203
of the Delaware General Corporation Law or, with certain exceptions, which do
not have a class of voting stock that is listed on a national securities
exchange or authorized for quotation on the Nasdaq Stock Market or held of
record by more than 2,000 stockholders. Our certificate of incorporation and
amended and restated bylaws do not opt out of Section 203.
Section 203 could delay or prohibit mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts to
acquire us even though such a transaction may offer our stockholders the
opportunity to sell their stock at a price above the prevailing market price.
CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of our certificate of incorporation and amended and restated
bylaws may delay or discourage transactions involving an actual or potential
change in our control or change in our management, including transactions in
which stockholders might otherwise receive a premium for their shares, or
transactions that our stockholders might otherwise deem to be in their best
interests. Therefore, these provisions could adversely affect the price of our
common stock. Among other things, our restated certificate of incorporation and
amended and restated bylaws:
o provide that the authorized number of directors may be changed only by
resolution of the board of directors;
o provide that all vacancies, including newly created directorships, may,
except as otherwise required by law, be filled by the affirmative vote
of a majority of directors then in office, even if less than a quorum;
and
o do not provide for cumulative voting rights (therefore allowing the
holders of a majority of the shares of common stock entitled to vote in
any election of directors to elect all of the directors standing for
election, if they should so choose).
LEGAL MATTERS
The validity of the securities offered under this prospectus will be
passed upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York,
New York. As of October 16, 2007, Olshan Grundman Frome Rosenzweig & Wolosky LLP
owns 5,000 shares of the Company's Series F convertible preferred stock.
EXPERTS
Our financial statements as of December 31, 2006, and for the years ended
December 31, 2006 and 2005 included in this registration statement have been
audited by Marcum & Kliegman LLP, an independent registered public accounting
firm, as stated in its report, appearing in this registration statement and have
been so included in reliance upon the report of such firm given upon its
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document that we file at the Public Reference Room of the Securities and
Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. In addition, the
Securities and Exchange Commission maintains an Internet site at
http://www.sec.gov from which interested persons can access the reports, proxy
and information statements and other information that we electronically file
with the Securities and Exchange Commission.
24
You may obtain a copy of these filings at no cost, by writing or
telephoning us at the following:
Water Chef, Inc.
Attention: Investor Relations
68 South Service Road, Suite 100
Melville, New York 11747
Tel: (631) 577-7915
www.WaterChef.net
25
INDEX TO FINANCIAL STATEMENTS OF WATER CHEF, INC.
Audited Financial Statements
----------------------------
Report of Independent Registered Public Accounting Firm.............. F-2
Balance Sheet at December 31, 2006................................... F-3
Statements of Operations for the years ended December 31, 2006 and F-4
2005 and for the period January 1, 2002 to December 31, 2006.........
Statements of Stockholders' Deficiency for the period from January 1, F-5
2002 through December 31, 2006.......................................
Statements of Cash Flows for the years ended December 31, 2006 and F-11
2005 and for the period January 1, 2002 to December 31, 2006.........
Notes to Financial Statements........................................ F-12
Unaudited Financial Statements
------------------------------
Condensed Balance Sheet (unaudited) F-27
at June 30, 2007.....................................................
Condensed Statements of Operations (unaudited) F-29
For the three months ended June 30, 2007 and 2006
For the six months ended June 30, 2007 and 2006
For the period January 1, 2002 to June 30, 2007......................
Condensed Statements of Stockholders' Deficiency (unaudited) F-30
For the six months ended June 30, 2007...............................
Condensed Statements of Cash Flows (unaudited) F-32
For the six months ended June 30, 2007 and 2006
For the period January 1, 2002 to June 30, 2007......................
Notes to Condensed Financial Statements (unaudited).................. F-34
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Water Chef, Inc.
Glen Head, New York
We have audited the accompanying balance sheet of Water Chef, Inc., (a
development stage company) as of December 31, 2006 and the related statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 2006 and 2005 and for the period from January 1, 2002 (commencement as a
development stage company) to December 31, 2006. 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, 2006 and the results of its
operations and its cash flows for the years ended December 31, 2006 and 2005 and
for the period from January 1, 2002 (commencement as a development stage
company) to December 31, 2006 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, 2006. 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
March 19, 2007
F-2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
BALANCE SHEET
DECEMBER 31, 2006
ASSETS
Current Assets:
Cash $ 99,716
Prepaid expenses 19,282
------------
Total Current Assets 118,998
Patents and trademarks, Net 15,403
Deferred financing costs 4,687
Other assets 3,162
------------
TOTAL ASSETS $ 142,250
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 385,975
Accrued compensation 561,583
Accrued consulting and director fees 468,333
Notes payable (including accrued interest of $343,265) 990,856
Convertible promissory note including accrued interest 235,200
of $5,000 and net of debt discount of $69,800)
Fair-value of detachable warrants and options 293,000
Fair-value of embedded conversion option 117,400
Accrued dividends payable 189,871
------------
Total Current Liabilities 3,242,218
Long-Term Liabilities:
Loans payable to stockholder (including accrued
interest of $152,957) 525,738
------------
TOTAL LIABILITIES 3,767,956
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
188,917 shares issued and outstanding,
(liquidation preference $2,267,350) 189
Common stock, $.001 par value;
340,000,000 shares authorized;
198,977,497 shares issued;
198,973,097 shares outstanding 198,977
Additional paid-in capital 22,836,764
Treasury stock, 4,400 common shares, at cost (5,768)
Accumulated deficit through December 31, 2001 (14,531,596)
Deficit accumulated during development stage (12,124,272)
TOTAL STOCKHOLDERS' DEFICIENCY (3,625,706)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 142,250
============
The accompanying notes are an integral part of these financial statements.
F-3
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
Years Ended December 31, Company) to
------------------------------- December 31, 2006
2006 2005
--------------- -------------- --------------------
Sales $ 115,000 $ 260,000 $ 471,290
Costs and Expenses (Income):
Cost of sales 114,000 42,000 552,680
Selling, general and administrative - including stock
based compensation of $767,699 and $53,827 for the year
ended December 31, 2006 and 2005, respectively and
$1,545,089 for the period from January 1, 2002 to
December 31, 2006 1,559,464 1,194,577 5,657,051
Non-dilution agreement termination costs -- -- 2,462,453
Interest expense (including interest expense for related
party of $23,868 in both 2006 and 2005 and $119,340
for the period January 1, 2002 to December 31, 2006) 380,553 244,191 1,106,561
Financing costs - extension of warrants -- 74,700 74,700
Loss on settlement of debt -- -- 2,614,017
Stock appreciation rights -- (121,340) --
Change in fair value of warrants and embedded conversion
option 133,900 (5,800) 128,100
------------- ------------- -------------
2,187,917 1,428,328 12,595,562
------------- ------------- -------------
Net loss (2,072,917) (1,168,328) (12,124,272)
Deemed dividend on preferred stock -- -- (2,072,296)
Preferred stock dividends (42,401) (66,436) (509,067)
------------- ------------- -------------
Net loss applicable to
common stockholders $ (2,115,318) $ (1,234,764) $ (14,705,635)
============= ============= =============
Basic and Diluted Loss Per Common Share $ (0.01) $ (0.01)
============= =============
Weighted Average Common Shares Outstanding -
Basic and Diluted 193,408,939 166,132,433
============= =============
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, 2006
Preferred Stock Common Stock
---------------------------- ---------------------------- Additional
Shares Amount Shares Amount Paid-in 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-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, 2006
Additional
Preferred Stock Common Stock Paid-in
---------------------------- ---------------------------- Capital
Shares Amount Shares Amount Shares
-------------- ------------ -------------- ------------- -------------
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-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, 2006
Additional
Preferred Stock Common Stock Paid-in
---------------------------- ---------------------------- Capital
Shares Amount Shares Amount Shares
-------------- ------------ -------------- ------------- -------------
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
============ ============ ============ ============ ============
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, 2006
Accumulated Deficit
Deficit Accumulated
Stock Through During Total
Subscription Treasury December 31, Development Stockholders'
-continued- Receivable Stock 2001 Stage Deficiency
--------------- --------------- --------------- -------------- --------------
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) (14,531,596) (1,589,746) (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) (14,531,596) (5,125,225) (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-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, 2006
Accumulated Deficit
Deficit Accumulated
Stock Through During Total
Subscription Treasury December 31, Development Stockholders'
-continued- Receivable Stock 2001 Stage Deficiency
--------------- --------------- --------------- -------------- --------------
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) $(14,531,596) $ (8,883,027) $ (3,005,273)
Proceeds from sale of common stock
March 31,200
($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) $(14,531,596) $(10,051,355) $ (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-9
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, 2006
Accumulated Deficit
Deficit Accumulated
Stock Through During Total
Subscription Treasury December 31, Development Stockholders'
-continued- Receivable Stock 2001 Stage Deficiency
--------------- --------------- --------------- -------------- --------------
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 the convertible preferred stock
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) $(14,531,596) $(12,124,272) $ (3,625,706)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-10
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,
------------------------------- ----------------------
2006 2005 2006
---------------- -------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,072,917) $ (1,168,328) $(12,124,272)
Adjustments to reconcile net loss to
net cash used in operating activities
Amortization of patents 1,854 1,854 9,270
Interest expense - deferred financing 7,500 2,813 10,313
Stock based compensation 767,699 53,827 1,545,089
Accretion of debt discount 217,320 75,200 292,520
Change in fair value of warrants and
embedded conversion option 133,900 (5,800) 128,100
Loss on settlement of debt -- -- 2,614,017
Non-dilution agreement termination cost -- -- 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing costs - warrant extension -- 74,700 74,700
Change in assets and liabilities
Inventory 30,000 (30,000) --
Prepaid expenses 3,682 (5,851) 37,218
Accounts payable, accrued expenses, accrued dividends,
accrued compensation, accrued consulting and director
fees, customer deposits and other current liabilities (74,148) 422,350 1,397,991
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (985,110) (579,235) (3,371,551)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of stock subscription receivable -- 20,000 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 568,000 494,960 1,540,560
Proceeds from sale of common stock to be issued -- -- 200,000
Deferred financing costs (7,500) (7,500) (15,000)
Proceeds from convertible promissory note 300,000 250,000 550,000
Repayment of notes payable (20,269) (15,362) (35,631)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 840,231 742,098 3,435,756
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (144,879) 162,863 64,205
CASH AT BEGINNING OF YEAR 244,595 81,732 35,511
------------ ------------ ------------
CASH AT END OF YEAR $ 99,716 $ 244,595 $ 99,716
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 312,293 $ 44,638 $ 356,931
============ ============ ============
NON-CASH FINANCING ACTIVITIES:
COMPENSATION SATISFIED BY ISSUANCE OF COMMON STOCK $ -- $ -- $ 55,250
============ ============ ============
COMMON STOCK ISSUED IN SATISFACTION OF LIABILITIES $ 650,563 $ 40,000 $ 6,364,284
============ ============ ============
RECLASSIFICATION OF DERIVATIVE LIABILITIES UPON CONVERSION OF DEBT $ 368,800 $ -- $ 368,800
RECLASSIFICATION OF EQUITY INSTRUMENTS TO LIABILITIES
UPON ISSUANCE OF CONVERTIBLE DEBT $ 288,900 $ -- $ 288,900
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware Corporation currently engaged
in the design, marketing and sale of water dispensers and purification
equipment both in and outside the United States. The Company's corporate
headquarters is in Glen Head, NY.
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, 2006
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 carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company incurred a net loss of $2,072,917 and $1,168,328 for the years ended
December 31, 2006 and 2005, respectively. The Company has a working capital
deficit and a stockholders' deficiency of approximately $3,123,219 and
$3,625,725 at December 31, 2006, 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 accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2006 and 2005, respectively.
Stock-Based Compensation -
Effective January 1, 2006, the Company adopted SFAS 123R which replaces SFAS
123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure is no longer an alternative to financial
statement recognition. The adoption of this standard had no effect on operations
for the year ended December 31, 2006 as the Company did not issue any options
during the period and the Company did not have any vested or unvested options
outstanding.
The Black-Scholes option valuation model is used to estimate the fair value of
the options 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. For example, the expected
F-12
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted. In management's opinion,
this valuation model does not necessarily provide a reliable single measure of
the fair value of its employee stock options. During the year ended December 31,
2006 and 2005, the Company did not issue any employee stock options.
Prior to the adoption of SFAS 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by APB 25 and related
interpretations, to account for its stock options to employees. Under this
method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. As permitted
by SFAS 123, the Company elected to continue to apply the intrinsic-value-based
method of accounting described above, and adopted only the disclosure
requirements of SFAS 123. The fair-value-based method used to determine
historical pro forma amounts under SFAS 123 was similar in most respects to the
method used to determine stock-based compensation expense under SFAS 123R.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
The Company did not incur stock based compensation for issuance of options
during the year ended December 31, 2005. As such, the pro forma net loss is
identical to the net loss as reported in the financial statements of operations.
Revenue Recognition - Revenues are recognized when product is shipped, title
passes and collectibility is reasonably assured. Allowances for estimated bad
debts, sales allowances and discounts are provided when such sales are recorded.
Inventories - Inventories consists of finished goods and are stated at the lower
of cost or market utilizing the first-in, first-out method. As of December 31,
2006, the Company had no inventory on hand.
Shipping and Handling Costs - Shipping and handling costs are expensed as
incurred as part of cost of sales. These costs were deemed to be immaterial
during each of the reporting periods.
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, 2006 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, 2006 and 2005, were 12,719,202 and 21,270,105 respectively.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
F-13
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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. There were no research and development costs incurred during the
years ended December 31, 2006 and 2005, respectively.
Deferred Financing Costs - Costs incurred in conjunction with the convertible
promissory notes have been capitalized and will be amortized over the term of
the notes.
Recent Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board ("FASB") published SFAS
No. 154, "Accounting Changes and Error Corrections - a Replacement of APB
Opinion No. 20 and FASB No. 3" ("SFAS 154"). SFAS 154 establishes new standards
on accounting for changes in accounting principles. Pursuant to the new rules,
all such changes must be accounted for by retrospective application to the
financial statements of prior periods unless it is impracticable to do so. SFAS
154 completely replaces Accounting Principles Bulletin No. 20 and SFAS 3, though
it carries forward the guidance in those pronouncements with respect to
accounting for changes in estimates, changes in the reporting entity, and the
correction of errors. The requirements in SFAS 154 are effective for accounting
changes made in fiscal years beginning after December 15, 2005. The adoption of
this pronouncement did not have an impact on the Company's financial position,
results of operations, or cash flows.
In June 2006, the FASB ratified EITF Issue No. 05-1, "Accounting for the
Conversion of an Instrument That Becomes Convertible upon the Issuer's Exercise
of a Call Option" ("EITF No. 05-1"), which indicates that no gain or loss should
be recognized upon the conversion of an instrument that becomes convertible as a
result of an issuer's exercise of a call option pursuant to the original terms
of the instrument. EITF No. 05-1 became effective for annual or interim periods
beginning after June 28, 2006. The adoption of this pronouncement did not have
an impact on the Company's financial position, results of operations, or cash
flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument" in EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered "conventional" for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 became effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The Company has applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on the Company's financial
position, results of operations, or cash flows.
F-14
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 became effective for the first interim or annual reporting period
beginning after December 15, 2005. The Company adopted EITF No. 05-7 as of the
beginning of the Company's interim reporting period that began on January 1,
2006. The adoption of this pronouncement did not have an impact on the Company's
financial position, results of operations, or cash flows.
In September 2005, the FASB ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"
("EITF No. 05-8"), which addresses the treatment of convertible debt issued with
a beneficial conversion feature as a temporary difference under the guidance in
SFAS 109. In addition, deferred taxes recognized for a temporary difference of
debt with a beneficial conversion feature should be recognized as an adjustment
of additional paid-in capital. Entities should apply the guidance in EITF No.
05-8 in the first interim or annual reporting period that begins after December
15, 2005. Its provisions should be applied retrospectively under the guidance in
SFAS 154 to all convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF No. 00-27 "Application of EITF
Issue No. 98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios." The Company has applied
the requirements of EITF No. 05-8 to all previously existing convertible debt
instruments with a beneficial conversion feature and will apply the requirements
of EITF No. 05-8 for all new convertible debt instruments with a beneficial
conversion feature. The adoption of this pronouncement for new convertible debt
instruments with a beneficial conversion feature did not have an impact on the
Company's financial position, results of operations or cash flows.
In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." The requirements in SFAS 155 are effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The adoption of this pronouncement is
not expected to have an impact on the Company's financial position, results of
operations, or cash flows.
In July 2006, the FASB released Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting and reporting for uncertainty in income tax
law. FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. The provisions of FIN 48
are effective after December 15, 2006. Earlier adoption is permitted as of the
beginning of an enterprise's fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN 48
will be recorded as an adjustment to accumulated deficit as of the beginning of
the period of adoption. The adoption of this pronouncement is not expected to
have an impact on the financial position, results of operations, or cash flows
of the Company.
F-15
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
U.S., and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any cumulative effect
will be recorded as an adjustment to the opening accumulated deficit balance, or
other appropriate component of equity. The adoption of this pronouncement is not
expected to have an impact on the Company's financial position, results of
operations, or cash flows.
In September 2006, the SEC staff issued Staff Accounting Bulleting ("SAB") No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years' financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement is not expected to have an
impact on the Company's financial position, results of operations, or cash
flows.
In October 2005, the FASB issued FSP FAS 123(R)-2, "Practical Accommodation to
the Application of Grant Date as Defined in FASB Statement No. 123(R)", which
provides clarification of the concept of mutual understanding between employer
and employee with respect to the grant date of a share-based payment award. This
FSP provides that a mutual understanding of the key terms and conditions of an
award shall be presumed to exist on the date the award is approved by management
if the recipient does not have the ability to negotiate the key terms and
conditions of the award and those key terms and conditions will be communicated
to the individual recipient within a relatively short time period after the date
of approval. This guidance was applicable upon the initial adoption of SFAS
123(R). The adoption of this pronouncement did not have an impact on the
Company's financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.
SFAS 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009 The adoption of this pronouncement is not expected
to have an impact on the Company's financial position, results of operations or
cash flows.
In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", to include scope exceptions for registration payment arrangements.
FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement is not expected to have an impact on the Company's financial
position, results of operations or cash flows.
F-16
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock'" ("EITF No. 05-4") addresses financial instruments, such as stock
purchase warrants, which are accounted for under EITF No. 00-19 that may be
issued at the same time and in contemplation of a registration rights agreement
that includes a liquidated damages clause. The consensus of EITF No. 05-4 has
not been finalized.
4. PATENTS AND TRADEMARKS
Patents and trademarks as of December 31, 2006 consist of the following:
Patents $ 24,500
Trademarks 1,555
----------
Total cost 26,055
Accumulated amortization (10,652)
----------
Patents and Trademarks, Net $ 15,403
==========
Amortization expense for the years ended December 31, 2006 and 2005 was $1,854
and $1,854, respectively. The following table presents the Company's estimate
for amortization expense for each of the five succeeding years and thereafter.
2007 $ 1,854
2008 1,854
2009 1,854
2010 1,854
2011 1,854
2012 and thereafter 6,133
----------
$ 15,403
==========
5. NOTES PAYABLE
Notes payable and accrued interest at December 31, 2006 consists of the
following:
(a) $ 187,470
(b) 635,933
(c) 167,453
----------
Total $ 990,856
==========
(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 $104,249 interest is $187,470 at December 31, 2006. 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. The amount due on
this note, inclusive of $235,933 in interest, is $635,933 at December 31,
2006.
F-17
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
(c) In November 2000, the Company entered into a Convertible Promissory Note
agreement, whereby 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, 2006, the balance of the
convertible promissory note principal was $167,453 inclusive of interest in
the amount of $3,082.
6. CONVERTIBLE PROMISSORY NOTES
In November 2005, the Company entered into a Convertible Promissory Note
agreement for $250,000 which included 430,000 warrants, which are exercisable at
$0.14 per share and have a life of three years. The warrants carry a cashless
exercise provision. The Convertible Promissory Note bore interest at a rate of
8% per annum and matured in March 2006.
The note included certain conversion features as follows:
o convertible at any time after the maturity date, at the option of
the holder,
o convertible at 85% of the average of the three 3 lowest closing bid
prices for the common stock, for the ten trading days ending on the
trading day immediately before the conversion date.
The Convertible Promissory Note agreement required the Company to file a
registration statement no later than sixty business days from the date of the
agreement for no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or (b) one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date that transpires until the
date that the Company files the registration statement, and
b. for each 30 day period after the effective date that transpires until
such date as the registration statement is declared effective.
The gross proceeds of $250,000 were recorded net of a discount of $188,000. The
debt discount consisted of $47,200 related to the warrants and $140,800 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, View A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option were marked to
market through earnings at the end of each reporting period. The Company
determined that the value of the registration rights was deemed to be de minimis
and the related registration statement became effective in January 2006. The
warrants and the conversion option were valued using the Black-Scholes valuation
model. For the year ended December 31, 2006, the Company reflected a loss of
F-18
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
$186,600 representing the change in the value of the warrants and conversion
option. During the year ended December 31, 2006, the Company charged to interest
expense $112,800 for the accretion of the debt discount.
During the year ended December 31, 2006, the Company issued 3,012,547 shares of
common stock for the settlement of the debt and accrued interest. As a result of
the conversion the Company reclassified to equity $368,800 of the derivative
liabilities.
This Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company. At the date of conversion the officer was released from
the security interest.
On October 17, 2006, the Company entered into a Convertible Promissory Note for
proceeds of $300,000. The loan has a stated interest rate of 8% per annum and
matures on February 17, 2007. The Company issued a warrant for 882,352 shares of
the Company's common stock, exercisable at $0.085 per share and has a life of
three years. The warrant has a cashless exercise provision. The note and accrued
interest is convertible at any time after the maturity date into shares of the
Company's common stock at a conversion price equal to the current market price
multiplied by eighty-five percent.
The Convertible Promissory Note agreement requires the Company to file a
registration statement no later than thirty business days from the date of the
agreement and no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date the transpires until the
date that the Company files the registration statement, and
b. for each 30 day period after the effective date that transpires until
such date as the registration statement is declared effective.
The Company accounted for the above transaction in accordance with EITF issue
No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has determined that
there is an embedded conversion option of the warrants and derivative
liabilities. Accordingly, the warrants and the embedded conversion option are
recorded at fair market value and marked to market through earnings at the end
of each reporting period.
The gross proceeds of $300,000 were recorded net of a discount of $174,200. The
debt discount consisted of $12,800 related to the warrants and $161,400 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, View A "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. The Company
determined that the value of the registration rights was deemed to be de minimis
and the related registration statement became effective in January 2007. The
warrants and the conversion option are valued using the Black-Scholes valuation
model. For the year ended December 31, 2006, the Company reflected a gain of
F-19
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
$85,900 representing the change in the value of the warrants and conversion
option. During the year ended December 31, 2006, the Company charged to interest
expense $104,520 for the accretion of the debt discount.
The Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company.
Under the terms of the note the Company is currently in default, subsequent to
the year end the Company issued 948,670 shares of common stock for the
settlement of $100,000 of principal and $3,249 of accrued interest. The Company
plans to issue additional shares of common stock for the settlement of the
remaining principal an accrued interest.
Under accounting guidance provide by EITF 00-19, the conversion price of the
convertible promissory note did not have a determinable number of shares the
note could be settled in. As a result, previously granted warrants as well as
the embedded conversion option of the Series F Convertible Preferred Stock were
required to be reclassified from equity and presented as a derivative liability
in the amount of $288,900. Accordingly, the warrants, options and conversion
option will be marked to market through earnings at the end of each reporting
period. For the year ended December 31, 2006, the Company incurred an additional
charge of $33,200 representing the change in the fair value of the warrants and
embedded conversion option of the Series F Convertible Preferred Stock.
7. LOANS PAYABLE - STOCKHOLDER
At December 31, 2006, the Company has been obligated to its Chief Executive
Officer who is also a significant stockholder for loans and advances made to the
Company totaling $372,781, plus accrued interest of $152,956. These advances
were accruing interest ranging from 6% to 12% per annum. The loans have no
repayment terms and the stockholder has agreed not to demand payment until
January 1, 2008 at the earliest. The Company reported the obligation as a
long-term liability on the balance sheet. In January 2007, in conjunction with
the resignation of the Chief Executive Officer (Note 15) these loans plus
accrued interest were forgiven.
8. COMMON STOCK ISSUED
On March 14, 2006, at the Company's annual meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred, Series F Preferred
stockholders (together the "Stockholders"), voting as a single class, voted and
approved a proposal to amend the Certificate of Incorporation to increase the
Company's authorized capital stock from 200,000,000 shares to 350,000,000
shares, consisting of 340,000,000 shares of common stock and 10,000,000 shares
of preferred stock.
During the year ended December 31, 2006, the Company recorded the following
transactions:
a. Cash
During the year ended December 31, 2006, the Company raised $568,000 through the
sale of 7,869,230 shares of common stock
b. 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 for past
services. 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.
F-20
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
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.
c. 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.
Subsequent to December 31, 2006, the Company issued to various parties 113,920
shares of its common stock in connection with the conversion of 2,848 shares of
preferred stock.
d. Settlement of debt
During year ended December 31, 2006, the Company issued 6,595,881 shares of
common stock for debt and accrued interest of $650,563.
9. 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, 2006, outstanding preferred shares were as follows:
Liquidation
Current Preference
Annual Total Dividend (including
Authorized Outstanding Par Dividend Dividend Arrearage dividend
Shares Shares Value Requirement Requirement Per Share arrearage)
---------- ----------- ---------- ----------- ----------- ---------- ------------
Series A 400,000 52,500 $ 53 $ 52,500 $ 622,600 $ 11.86 $1,147,600
Series D 400,000 93,000 93 55,800 585,000 6.29 1,119,750
Series F 1,000,000 43,417 43 -- 189,871 -- --
------- ---------- ---------- ---------- ----------
188,917 $ 189 $ 108,300 $1,397,471 $ ,267,350
======= ========== ========== ========== ==========
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.
F-21
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
SERIES C:
During the year ended December 31, 2002, the Company sold Series C 15%
Convertible Preferred stock at $1.00 per share. These shares convert in one
year. All dividends are cumulative and are payable in shares of the Company's
common stock valued at the then-current market price per share, or upon
conversion, whichever is earlier. The conversion rate for shares, and accrued
dividends payable, is 33.33 shares of common for each $1.00 of preferred stock
and dividends payable, or $0.03 for each share of common stock. The Series C
Preferred stockholders have voting rights equal to the common stockholders. The
Series C preferred stock has no stated rights in the assets of the Company upon
liquidation. During 2002, the Company sold 125,000 shares of Series C preferred
stock. For each share of preferred stock purchased, the buyers also receive the
right to receive an additional 33.33 shares of common stock upon conversion, as
the market value of the stock was $0.015 at issuance.
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:
In April 2003, management authorized the Company to raise up to $550,000 through
a private placement by issuing 10% two-year convertible preferred instruments.
The preferred, designated as Series F, and provided for one million shares in
total and can be convertible into shares of Water Chef's common stock at such
time as the stockholders of the corporation approve an increase in the
authorized capital stock of the corporation, which occurred on June 4, 2004. 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.
Although there was a discount upon the issuance of all of the Series F preferred
stock in accordance with EITF 98-5, a security is not yet convertible if certain
contingencies exist which are dependent upon the occurrence of a future event
outside the control of the security holder. In this case, the shares can only be
converted into common stock after the stockholders of the Company approve an
increase in the authorized capital stock of the corporation. In accordance with
EITF 98-5, any beneficial conversion (discount) feature is measured at the
commitment date, but will not be recognized as an adjustment to earnings until
the contingency is resolved, (the date the increase in shares are approved). In
June 2004, the Company voted and approved a proposal to amend the Certificate of
Incorporation to increase the Company's authorized capital stock from
100,000,000 to 200,000,000 shares, consisting of 190,000,000 shares of common
stock and 10,000,000 shares of preferred stock. During June 2004, the Company
recorded the deferred contingent beneficial conversion adjustment of $2,072,296
as a deemed dividend since the contingency was resolved.
In connection with Series F Preferred Stock conversions, the Company recorded
dividends of $42,401 and $66,436 for each of the years ended December 31, 2006
and 2005, respectively.
F-22
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
10. STOCK OPTION, STOCK APPRECIATION RIGHTS AND WARRANT GRANT PLAN
The Company's President and Director were issued in the aggregate 6,000,000
options to purchase common stock of the Company in January 2004. The total
options granted may be converted to common stock at an exercise price of $0.25
and expire in five years. Those options were converted to stock appreciation
rights [the "Conversion"] in November 2004. The Conversion consisted of
5,000,000 stock appreciation rights granted to the President which vest over 5
years and 1,000,000 stock appreciation rights granted to the director which vest
over 2 years.
In March 1997, the Company, in connection with Bridge Loans for $375,000 issued
warrants to purchase 2,500,001 shares of common stock at $.15 per share. These
warrants had a life of five years and were to have expired in March 2002. For
the year ended December 31, 2000, a total of 333,334 common shares were issued
upon the exercise of a like number of warrants, for net proceeds of $50,000. Of
the remaining 2,166,667 un-exercised warrants at March 2002, a total of
1,666,667 warrants had their lives extended for an additional two years until
March 2004 and then later for another twelve months until March 2005. The
remaining balance of 500,000 warrants was not extended and, accordingly, they
have expired. The extension of the exercise date was part of a settlement that
the Company had reached with certain debenture holders that had brought legal
action against the Company. In June 2005, the Company extended for the second
time the life of the warrants for one year. The Company recorded an additional
charge of $74,700, which has been included in the statements of operations.
The fair value of each stock option, or warrant granted, is estimated on the
date of grant using the Black-Scholes option-pricing model. During the year
ended December 31, 2005, the Company granted 433,000 warrants in connection with
the Convertible Promissory Note and 883,000 warrants during the year ended
December 31, 2006.
The following tables illustrate the Company's warrant issuances and balances
outstanding as of, and during the years ended December 31, 2006 and 2005:
Shares
Underlying Weighted Average
Warrants Exercise Price
------------ -----------------
Outstanding at December 31, 2004 1,666,667 $ 0.15
Granted 433,000 0.14
Expired -- --
Exercised -- --
------------ -----------------
Outstanding at December 31, 2005 2,099,667 $ 0.15
Granted 7,382,352 0.12
Expired (1,666,667) (0.15)
Exercised -- --
------------ -----------------
Outstanding at December 31, 2006 7,815,352 $ 0.12
============ =================
F-23
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
The following is additional information with respect to the Company's warrants
as of December 31, 2006:
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
-------- ----------- ----------- -------- ----------- --------------
$0.09 882,352 2.8 years $0.09 882,352 $0.09
$0.10 4,000,000 2.4 years $0.10 4,000,000 $0.10
$0.14 433,000 1.8 years $0.14 433,000 $0.14
$0.15 2,500,000 2.4 years $0.15 2,500,000 $0.15
7,815,352 7,815,352
11. LEASES
The Company's lease for its administrative facilities located in Glen Head, New
York is on a month to month basis. This lease terminated on March 31, 2006.
Rent expense, for the years ended December 31, 2006 and 2005 was $31,935 and
$30,189, respectively.
The Company entered into a month to month lease beginning April 2, 2007 in
Melville, New York for its administrative facilities.
12. 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. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
13. INCOME TAXES
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, 2006 and 2005, 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,
2006 and 2005.
The effective tax rate differs from the statutory rate of 34% due to the
increase of the valuation allowance.
The Company has net operating loss carry-forwards for federal income tax
purposes totaling approximately $23,600,000 at December 31, 2006. These
F-24
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
carry-forwards expire between the years 2009 through 2026. 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 $8,750,000 is provided. The valuation allowance
increased approximately $1,800,000 during 2006 related to increased net
operating losses.
14. MAJOR CUSTOMERS
During the year ended December 31, 2006, the Company sold two systems to one
customer and recognized revenues of $115,000. During the year ended December 31,
2005, the Company sold five systems to two customers and recognized revenue of
$260,000.
15. COMMITMENTS AND CONTINGENCIES
In January 1, 2004, the Company entered into a 5 year employment agreement with
its Chief Executive Officer ("Employee"). The Company agreed to pay to the
Employee for the services to be rendered a base salary at an annual rate of
three hundred and fifty thousand dollars. The Company granted to its employee a
five-year option for 5,000,000 shares of the Company's outstanding common stock
for an option price of $.25 per share. The option will vest in fifty equal,
consecutive monthly increments of 100,000 shares each on the first day of each
month beginning with January of 2004 and ending with February of 2008. Those
options were converted to stock appreciation rights in November 2004. As of
December 31, 2006, approximately $471,600 was owed and is included on the
balance sheet as part of accrued compensation. On January 29, 2007, the
Company's Chief Executive Officer resigned and surrendered his Stock
Appreciation Rights, any severance under his employment agreement, returned
20,000,000 shares of common stock, forgave $525,738 of notes payable and accrued
interest and relinquished his rights to approximately $471,600 of unpaid and
accrued salary. The Company will reclassify to equity in the first quarter ended
2007 approximately $471,600 for the relinquishment of his rights to the unpaid
and accrued salary and $525,738 notes payable and accrued interest. The return
of the shares will be recorded as a retirement and cancellation of the common
stock. The cancellation of the stock appreciation rights did not have an
accounting impact.
On March 9, 2004, the Company extended for two additional years the consulting
agreement with a director. The Company agreed to increase his monthly payment to
$10,000 per month. The Company also gave him the right to purchase one million
shares of the Company's common stock at a price of $0.25 per share, such right
to vest at the rate of 50% per year. Those options were converted to stock
appreciation rights in November 2004. For each of the years ended December 31,
2006 and 2005, the Company incurred a charge of $60,000 and $120,000
respectively, which has been included in the statement of operations as part of
selling general and administrative costs. In addition, the director earned
approximately $25,000 of director fees. On February 12, 2007 the director
resigned from the Board of Directors and waived his rights to any accrued
compensation owed to him by the Company. The Company will reclassify the debt of
approximately $330,000 during the first quarter ended 2007 to equity for the
relinquishment of his rights to the unpaid and accrued consulting and director
fees.
16. CREDIT RISK
The Company maintains its cash in accounts with major financial institutions in
the United States. From time to time, these balances may exceed the amounts of
insurance provided on such deposits. As of December 31, 2006, there were no
uninsured balances.
F-25
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
CONTINUED
17. SUBSEQUENT EVENTS
In January 2007, David Conway resigned as President and Chief Executive Officer
of the Corporation, and as a member of the Board of Directors. In February 2007,
Marshall Sterman resigned as a member of the Board of Directors.
In January 2007, Leslie J. Kessler was appointed as President of the Company. In
connection with her employment, she is to receive a salary of $9,000 per month.
In addition, Ms. Kessler will be issued 2,000,000 shares of the Company's common
stock and a warrant to purchase 2,000,000 shares of the Company's common stock.
The Company plans to implement a performance-based cash incentive plan for Ms.
Kessler as well. The complete terms of the employment agreement have not been
finalized.
In February 2007, Ms. Kessler was appointed Chief Executive Officer and was
elected to the Board of Directors.
In January 2007, Dr. Ronald W. Hart, Chairman of the Company's Board of
Scientific Advisors, was appointed to the Board of Directors of Water Chef, Inc.
Effective with David Conway's resignation, John J. Clarke became Chairman of the
Board, and upon Marshall Sterman's resignation he became Chairman of the Audit
and Compensation Committees of the Board.
F-26
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2007
ASSETS
Current Assets:
Cash $ 215,129
Prepaid expenses and other current assets 30,685
-----------
Total Current Assets 245,814
-----------
Fixed Assets:
Property and equipment - net of accumulated
depreciation of $234 13,806
-----------
Other Assets
Patents and trademarks - net of accumulated
amortization of $11,579 14,476
Other assets 6,360
-----------
Total Other Assets 20,836
-----------
Total Assets $ 280,456
===========
See notes to condensed financial statements.
F-27
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2007
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 401,099
Accrued compensation 135,000
Accrued consulting and director fees 155,833
Notes payable to officer and director (including
accrued interest of $2,863) 102,863
Notes payable (including accrued interest of $393,361) 1,001,314
Fair value of detachable warrants and options 501,800
Fair value of embedded conversion options 143,900
Accrued dividends payable 190,084
------------
TOTAL CURRENT LIABILITIES 2,631,893
------------
COMMITMENTS AND CONTINGENCIES
Stockholder's Deficiency:
Preferred stock - $.001 par value; 10,000,000 shares
Authorized; 185,819 shares issued and outstanding,
(liquidation preference $2,321,500) 186
Common stock - $.001 par value; 340,000,000 shares
authorized; 190,196,243 shares issued and
190,191,843 shares outstanding 190,191
Additional paid-in capital 25,333,677
Treasury stock, at cost - 4,400 shares of common stock (5,768)
Deficit accumulated through December 31, 2001 (14,531,596)
Deficit accumulated during development stage (13,338,127)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,351,437)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 280,456
============
See notes to condensed financial statements.
F-28
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
period
January 1,
For the Three Months Ended For the Six Months Ended 2002 to
June 30, June 30, June 30,
------------------------------ ------------------------------ -------------
2007 2006 2007 2006 2007
------------- ------------- ------------- ------------- -------------
Sales $ -- $ -- $ -- $ 115,000 $ 471,290
------------- ------------- ------------- ------------- -------------
Cost of Sales 8,000 21,000 23,000 72,000 575,680
Selling, General and Administrative -
Including stock based compensation of
aa $503,838 and $727,000 for the three
months ended June 30, 2007 and 2006 and
$503,838 and $767,699 for the six
months ended June 30, 2007 and 2006,
and $2,038,927 for the period January 1,
2002 to June 30, 2007, respectively 757,718 878,966 920,255 1,163,937 6,577,306
Non-Dilution Agreement Termination Cost -- -- -- -- 2,462,453
Interest expense - Including interest
expense to related parties of $2,466 and
$5,967 for the three months ended June 30,
2007 and 2006 and $2,863 and $11,934 for
the six months ended June 30, 2007 and 2006,
and $122,203 for the period January 1, 2002
through June 30, 2007, respectively 31,925 36,064 139,200 191,864 1,245,761
Financing Costs - Extension of Warrants -- -- -- -- 74,700
Loss on Settlement of Debt -- -- -- -- 2,614,017
Interest Expense - Conversion Provision 113,000 113,000 113,000
Change in fair value of warrants and
embedded conversion option (94,100) 72,400 18,400 186,600 146,500
------------- ------------- ------------- ------------- -------------
816,543 1,008,430 1,213,855 1,614,401 13,809,417
------------- ------------- ------------- ------------- -------------
Net Loss (816,543) (1,008,430) (1,213,855) (1,499,401) (13,338,127)
Deemed dividend on Preferred Stock -- -- -- -- (2,072,296)
Preferred Stock Dividends (74) (42,401) (213) (42,401) (509,280)
------------- ------------- ------------- ------------- -------------
(74) (42,401) (213) (42,401) (2,581,576)
------------- ------------- ------------- ------------- -------------
Net Loss Applicable to Common Stockholders $ (816,617) $ (1,050,831) $ (1,214,068) $ (1,541,802) $ (15,919,703)
------------- ------------- ------------- ------------- -------------
Basic and Diluted Loss Per Common Share $ (0.00) $ (0.01) $ (0.01) $ (0.01)
------------- ------------- ------------- -------------
Weighted Average Common Shares
Outstanding - Basic and Diluted 185,852,398 193,303,682 187,799,075 187,869,690
============= ============= ============= ============= =========== =========== =========== ===========
See notes to condensed financial statements.
F-29
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Preferred Stock Common Stock
---------------------------- --------------------------- Additional
Shares Amount Shares Amount Paid-in
FOR THE SIX MONTHS ENDED JUNE 30, 2007 ------------ ------------ ----------- ------------ Capital
------------
Balance - January 1, 2007 188,917 $ 189 198,977,497 $ 198,977 $ 22,836,764
Proceeds from Sale of Common Stock:
($0.090 per share) May 10, 2007 -- -- 1,111,112 1,111 98,889
($0.083 per share) May 10, 2007 -- -- 2,409,640 2,409 197,591
($0.090 per share) May 31, 2007 -- -- 555,555 555 49,445
($0.083 per share) June 26, 2007 -- -- 1,203,080 1,203 98,797
Stock for compensation:
($0.110 per share) May 2, 2007 2,500,000 2,500 272,500
Common stock issued in repayment of debt:
($0.132 per share) February 26, 2007 -- -- 195,212 195 25,534
($0.111 per share) March 8, 2007 -- -- 234,165 234 25,571
($0.107 per share) March 14, 2007 -- -- 256,643 257 25,587
($0.099 per share) March 19, 2007 -- -- 262,650 263 25,608
($0.097 per share) March 23, 2007 -- -- 806,583 807 76,867
($0.095 per share) April 4, 2007 -- -- 546,901 547 51,354
($0.086 per share) May 1, 2007 -- -- 908,885 909 77,345
Stock for late payment penalty:
($0.100 per share) May 22, 2007 -- -- 100,000 100 9,900
Preferred stock converted to common stock:
During the quarter ended March 31, 2007 (2,848) (3) 113,920 114 (111)
During the quarter ended June 30, 2007 (250) -- 10,000 10 (10)
Cancellation of debt for no consideration -- -- -- -- 1,327,321
Surrender and cancellation of common stock -- -- (20,000,000) (20,000) 20,000
Reclassification of derivative liability to -- -- -- -- 140,000
equity upon conversion of debt
Reclassification of options to non employees to -- -- -- -- (247,100)
derivative liability
Reclassification of derivative liability to -- -- -- -- 3,200
equity upon conversion of preferred stock
Amortization of warrants and option over the -- -- -- -- 218,838
vesting period for employees and non
employees
Preferred stock dividend -- -- -- -- (213)
Net loss -- -- -- -- --
------------ ------------ ----------- ------------ ------------
Balance - June 30, 2007 185,819 $ 186 190,191,843 $ 190,191 $ 25,333,677
============ ============ =========== ============ ============
See notes to condensed financial statements.
F-30
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
(CONTINUED)
Deficit Deficit
Accumulated Accumulated
through During Total
Treasury Stock - December 31, Development tockholders'
at cost 2001 Stage Deficiency
---------------- ------------- ------------- ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2007
Balance - January 1, 2007 $ (5,768) $(14,531,596) $(12,124,272) $ (3,625,706)
Proceeds from Sale of Common Stock:
($0.090 per share) May 10, 2007 -- -- -- 100,000
($0.083 per share) May 10, 2007 -- -- -- 200,000
($0.090 per share) May 31, 2007 -- -- -- 50,000
($0.083 per share) June 26, 2007 -- -- -- 100,000
Stock for compensation:
($0.110 per share) May 2, 2007 -- -- -- 275,000
Common stock issued in repayment of debt:
($0.132 per share) February 26, 2007 -- -- -- 25,729
($0.111 per share) March 8, 2007 -- -- -- 25,805
($0.107 per share) March 14, 2007 -- -- -- 25,844
($0.099 per share) March 19, 2007 -- -- -- 25,871
($0.097 per share) March 23, 2007 -- -- -- 77,674
($0.095 per share) April 4, 2007 -- -- -- 51,901
($0.086 per share) May 1, 2007 -- -- -- 78,254
Stock for late payment penalty:
($0.100 per share) May 22, 2007 -- -- -- 10,000
Preferred stock converted to common stock:
During the quarter ended March 31, 2007 -- -- -- --
During the quarter ended June 30, 2007 -- -- -- --
Cancellation of debt for no consideration -- -- -- 1,327,321
Surrender and cancellation of common stock -- -- -- --
Reclassification of derivative liability to -- -- -- 140,000
equity upon conversion of debt
Reclassification of options to non employees to -- -- -- (247,100)
derivative liability
Reclassification of derivative liability to -- -- -- 3,200
equity upon conversion of preferred stock
Amortization of warrants and option over the -- -- -- 218,838
vesting period for employees and non
employees
Preferred stock dividend -- -- -- (213)
Net loss -- -- (1,213,855) (1,213,855)
------------ ------------ ------------ ------------
Balance - June 30, 2007 $ (5,768) $(14,531,596) $(13,338,127) $ (2,351,437)
============ ============ ============ ============
See notes to condensed financial statements.
F-31
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
January 1,
For the Six Months Ended June 2002 to June
30, 30,
----------------------------- ---------------
2007 2006 2007
------------ ------------ ---------------
Cash Flows from Operating Activities:
Net loss $ (1,213,855) $ (1,499,401) $(13,338,127)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 234 -- 234
Amortization of patents 927 927 10,197
Interest expense - deferred financing 4,687 4,687 15,000
Stock-based compensation 503,838 767,699 2,048,927
Interest expense - conversion provision 113,000 -- 113,000
Accretion of debt discount 69,800 112,800 362,320
Change in fair value of warrants and embedded conversion 0
option 18,400 186,600 146,50
Loss on settlement of debt -- -- 2,614,017
Non-dilution agreement termination cost -- -- 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing cost - warrant extension -- -- 74,700
Changes in assets and liabilities:
Inventory -- 30,000 --
Prepaid expenses and other current assets (11,403) 2,394 25,815
Security deposits (3,198) -- (3,198)
Accounts payable, accrued expenses and other current
liabilities, accrued compensation, accrued consulting
and director fees, accrued dividends and customer
deposits 136,661 (189,381 1,534,65
------------ ------------ ------------
Net Cash Used in Operating Activities (380,909) (583,675) (3,752,460)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (14,040) -- (14,040)
------------ ------------ ------------
Net Cash Used in Investing Activities $ (14,040) $ -- $ (14,040)
============ ============ ============
See notes to condensed financial statements.
F-32
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
For the Six Months Ended June 30, January 1, 2002
--------------------------------- to June 30,
2007 2006 2007
----------- ------------- -----------
Cash Flows from Financing Activities:
Stock subscription receivable $ -- $ -- $ 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 450,000 540,000 1,990,560
Proceeds from sale of common stock to be issued -- -- 200,000
Deferred financing costs -- -- (15,000)
Proceeds from convertible promissory notes -- -- 550,000
Proceeds from officers and directors loans 100,000 -- 100,000
Repayment of notes payable (39,638) (15,962) (75,269)
----------- ----------- -----------
Net Cash Provided by Financing Activities 510,362 524,038 3,946,118
----------- ----------- -----------
Net Increase (Decrease) in Cash 115,413 (59,637) 179,618
Cash at Beginning of Period 99,716 244,595 35,511
----------- ----------- -----------
Cash at End of Period $ 215,129 $ 184,958 $ 215,129
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ -- $ -- $ 356,931
=========== =========== ===========
Supplemental Disclosures of Non-Cash INVESTING AND
FINANCING ACTIVITIES
Compensation satisfied by issuance of common stock $ -- $ -- $ 55,250
=========== =========== ===========
Common stock issued in satisfaction of liabilities $ 311,078 $ 48,485 $ 6,675,362
=========== =========== ===========
Reclassification of derivative liabilities upon
conversion of debt $ 140,800 $ -- $ 508,800
=========== =========== ===========
Reclassification of equity instruments to liabilities $ 247,100 $ -- $ 536,000
=========== =========== ===========
Reclassification of derivative liabilities upon
conversion of preferred stock $ 3,200 $ -- $ 3,200
=========== =========== ===========
Cancellation of debt for no consideration $ 1,327,321 $ -- $ 1,327,321
=========== =========== ===========
See notes to condensed financial statements.
F-33
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware corporation currently engaged
in the design and marketing of water purification equipment both inside and
outside the United States. The Company's corporate headquarters are located
in Melville, New York.
NOTE 2: BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, these interim financial
statements do not include all of the information and footnotes required for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included.
The operating results for the six-month period ended June 30, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007. These financial statements should be read in conjunction with
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB, filed on March 30, 2007, for the year ended December 31,
2006 and elsewhere in this filing.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage as defined by Statement of Financial
Accounting Standards ("SFAS") Statement No. 7, "Accounting and Reporting for
Development Stage Companies." To date, the Company has generated limited sales
and has devoted its efforts primarily to developing its products, implementing
its business and marketing strategy and raising working capital through equity
financing or short-term borrowings.
REVENUE RECOGNITION
The Company recognizes its revenues when the product is shipped and or title
passes and collection is reasonably assured.
STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS 123R which replaces SFAS
123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure is no longer an alternative to financial
statement recognition.
NOTE 3: GOING CONCERN
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred recurring
losses from operations, an accumulated deficit since its inception of
approximately $27,870,000 and has a working capital deficiency of approximately
$2,386,000 at June 30, 2007. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect to these matters include restructuring its existing debt, settling its
existing debt by issuing shares of its common stock and raising additional
capital through future issuance of stock and or debentures. However, there can
be no assurance that the Company will be able to obtain sufficient funds to
continue the development of its product, marketing plan and distribution
network. The accompanying condensed financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
F-34
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4: RECENT ACCOUNTING STANDARDS
In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." The requirements in SFAS 155 are effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The adoption of this pronouncement
did not have an impact on the Company's financial position, results of
operations or cash flows.
NOTE 4: RECENT ACCOUNTING STANDARDS (Continued)
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
U.S., and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any cumulative effect
will be recorded as an adjustment to the opening accumulated deficit balance, or
other appropriate component of equity. The adoption of this pronouncement did
not have an impact on the Company's financial position, results of operations or
cash flows.
In September 2006, the SEC staff issued Staff Accounting Bulleting ("SAB") No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years' financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement did not have an impact on
the Company's financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.
SFAS 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009 the adoption of this pronouncement is not expected
to have an impact on the Company's financial position, results of operations or
cash flows.
In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies." FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and No. 150, "Accounting for
F-35
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," to include scope exceptions for registration payment arrangements.
FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement did not have an impact on the Company's financial position,
results of operations or cash flows.
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as "unrecognized benefits." A liability is recognized (or amount of
net operating loss carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise's potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of FIN 48.
NOTE 4: RECENT ACCOUNTING STANDARDS (Continued)
In accordance with FIN 48, interest costs related to unrecognized tax benefits
are required to be calculated (if applicable) and would be classified as
"Interest expense, net" in the consolidated statements of operations. Penalties
would be recognized as a component of "General and administrative expenses."
In many cases the Company's uncertain tax positions are related to tax years
that remain subject to examination by relevant tax authorities. The Company
files income tax returns in the United States (federal) and in various state and
local jurisdictions. In most instances, the Company is no longer subject to
federal, state and local income tax examinations by tax authorities for years
prior to 2003.
The adoption of the provisions of FIN 48 did not have a material impact on the
Company's financial position and results of operations. As of June 30, 2007, no
liability for unrecognized tax benefits was required to be recorded.
The Company recognized a deferred tax asset of approximately $8 million as of
June 30, 2007, primarily relating to net operating loss carry-forwards of
approximately $24 million through 2006, available to offset future taxable
income.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and tax
planning strategies in making this assessment. At present, the Company does not
have a sufficient history of income to conclude that it is more likely than not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established in the full value of
the deferred tax asset.
A valuation allowance will be maintained until sufficient positive evidence
exists to support the reversal of any portion or all of the valuation allowance
net of appropriate reserves.
F-36
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5: CONVERTIBLE PROMISSORY NOTES
On October 17, 2006, the Company entered into a Convertible Promissory Note for
proceeds of $300,000. The loan has a stated interest rate of 8% per annum and
matured on February 17, 2007. The Company issued a warrant for 882,352 shares of
the Company's common stock, exercisable at $0.085 per share and has a life of
three years. The warrant has a cashless exercise provision. The note and accrued
interest are convertible at any time after the maturity date into shares of the
Company's common stock at a conversion price equal to the current market price
multiplied by eighty-five percent. After the maturity date, the lender converted
$300,000 of principal and $11,078 of interest to 3,211,039 shares of common
stock during the six months ended June 30, 2007 in full satisfaction of the note
plus accrued interest
The Convertible Promissory Note agreement required the Company to file a
registration statement no later than thirty business days from the date of the
agreement for no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
(a) for each 30 day period after the filing date the transpires until the date
that the Company files the registration statement, and
(b) for each 30 day period after the effective date that transpires until such
date as the registration statement is declared effective.
The Company accounted for the above transaction in accordance with EITF issue
No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has determined that
there is an embedded conversion option of the warrants and derivative
liabilities. Accordingly, the warrants and the embedded conversion option are
recorded at fair market value and marked to market through earnings at the end
of each reporting period.
The gross proceeds of $300,000 were recorded net of a discount of $174,200. The
debt discount consisted of $12,800 related to the warrants and $161,400 related
to the embedded conversion option. During the six months ended June 30, 2007 the
Company charged to interest expense $69,800 for the accretion of the debt
discount.
NOTE 5: CONVERTIBLE PROMISSORY NOTES (Continued)
The warrants and the embedded conversion option were accounted for under EITF
issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" and EITF 05-4, View A "The Effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument." Due to
certain factors and the liquidated damage provision in the registration rights
agreement, the Company determined that the embedded conversion option and the
warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option were marked to
market through earnings at the end of each reporting period. The Company
determined that the value of the registration rights was deemed to be de minimis
and the related registration statement became effective in January 2007. The
warrants and the conversion option are valued using the Black-Scholes valuation
model.
F-37
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Convertible Promissory Note was secured by 4,000,000 shares of the Company's
common stock held by an officer of the Company. The security shares were
returned upon the registration of the common stock underlying the convertible
debenture.
Under accounting guidance provide by EITF 00-19, the conversion price of the
convertible promissory note did not have a determinable number of shares the
note could be settled in. As a result, previously granted warrants as well as
the embedded conversion option of the Series F Convertible Preferred Stock were
required to be reclassified from equity and presented as a derivative liability.
Accordingly, the warrants, options and conversion option will be marked to
market through earnings at the end of each reporting period.
NOTE 6: NET LOSS PER SHARE OF COMMON STOCK
Basic loss per share was computed using the weighted average number of
outstanding common shares. Diluted loss per share includes the effect of
dilutive common stock equivalents from the assumed exercise of options,
warrants, convertible preferred stock and convertible notes. Common stock
equivalents were excluded in the computation of diluted loss per share since
their inclusion would be anti-dilutive. Total shares issuable upon the exercise
of warrants and conversion of preferred stock for the six months ended June 30,
2007 and 2006 were 20,274,384 and 8,666,720, respectively.
NOTE 7: STOCKHOLDERS' DEFICIENCY
Debt
During the six months ended June 30, 2007, the Company issued 3,211,039
shares of common stock for $300,000 of debt principal and $11,078 of
accrued interest.
Conversion of preferred stock into common stock
During the six months ended June 30, 2007, the Company issued 123,920
shares of common stock in connection with the conversion of 3,098 shares
of preferred stock.
Cash
During the six months ended June 30, 2007, the Company raised $450,000
through the sale of 5,279,387 shares of common stock.
Services
During the six months ended June 30, 2007, the Company issued 100,000
shares of common stock in satisfaction of a late payment penalty to one of
its note holders. The Company recorded a charge of $10,000.
During the six months ended June 30, 2007, the Company issued 2,500,000
shares of common stock to two management employees for services. The
Company incurred a stock based compensation charge of $275,000.
During the six months ended June 30, 2007, the Company granted 9,100,000
warrants to various employees and consultants for services. Of this amount
4,100,000 warrant shares fully vested on the date of the grant, and the
balance vest over the life of the grant. Each of the warrants has a life
of three years, and is exercisable at $0.11 to $0.1175 per share. The
Company incurred a stock based compensation charge of $218,838.
F-38
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7: STOCKHOLDERS' DEFICIENCY (continued)
Relinquishment of common stock
Effective with his resignation as President and Chief Executive Officer,
on January 29, 2007 David Conway returned to the Company 20,000,000 shares
of common stock owned by him and his affiliates. The return of the shares
was recorded as a retirement and cancellation of the common stock.
NOTE 8: RELATED PARTY TRANSACTIONS
On January 29, 2007, the Company's President and Chief Executive Officer
resigned and surrendered his stock appreciation rights, any severance under his
employment agreement, returned 20,000,000 shares of common stock, forgave
$525,738 of notes payable and accrued interest, and relinquished his rights to
$471,583 of unpaid and accrued salary.
The Company reclassified the accrued compensation, notes payable and accrued
interest to equity. The return of the shares was recorded as a retirement and
cancellation of the common stock. The cancellation of the stock appreciation
rights did not have an accounting impact.
On February 12, 2007, Marshall S. Sterman resigned from the Board of Directors
and waived his rights to any accrued consulting and director fees owed to him by
the Company. The Company reclassified the debt of $330,000 during the six months
ended June 30, 2007 to equity.
In January 2007, Leslie J. Kessler was appointed as President of the Company. In
connection with her employment, she is to receive a salary of $9,000 per month.
In addition, Ms. Kessler will be issued 2,000,000 shares of the Company's common
stock and a warrant to purchase 2,000,000 shares of the Company's common stock.
The warrants are exercisable at $0.11 per share, have a life of three years and
vest over two years. In addition, the employment agreement provides for certain
performance-based cash incentives. During the six months ended June 30, 2007,
the Company issued the 2,000,000 shares of common stock at a value of $220,000
and granted the warrants at a value of $125,200. The warrants were valued using
the Black-Scholes option valuation model.
In March 2007, the Chief Executive Officer and a Director each made bridge loans
of $50,000 to the Company. The loans pay simple interest at the rate of 10% per
annum and are due and payable in 90 days.
The loans to the Chief Executive Officer and the Director carry an option that
if the loans are not repaid by June 14, 2007 and June 29, 2007, respectively,
such option will entitle the lenders to convert their debt to common stock at a
price equal to 50% of the average closing price of the Company's common stock
over the three previous business days before demand for conversion is made. The
Company recorded a charge of $113,000 during the second quarter ended June 30,
2007 for the embedded conversion option.
NOTE 9: MAJOR CUSTOMERS / CREDIT RISK
During the six months ended June 30, 2007, the Company had no sales. During the
six months ended June 30, 2006, the Company sold two units to one customer and
recognized revenues of $115,000.
The Company maintains cash deposits with financial institutions, which from time
to time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk from cash.
F-39
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10: CONTINGENCIES
On July 14, 2006, Funding Group, Inc. filed a complaint with the Supreme Court
of the State of New York in New York County seeking damages due to an alleged
breach of contract related to a $25,000 loan made by the plaintiff to the
Company. On October 11, 2006, the Company filed a counter claim against Funding
Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
NOTE 11: SUBSEQUENT EVENTS
On September 5, 2007, Terry Lazar was appointed as the Company's Chief Financial
Officer. The Company is negotiating the terms of Mr. Lazar's employment
agreement and expects to finalize the terms during the fourth quarter ended
2007.
On September 7, 2007, the Company entered into an agreement with Southridge
Partners LP and Southshore Capital Fund Ltd., dated as of August 27, 2007,
pursuant to which the Company entered into 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 the rights of the
holders to convert its note or exercise its warrant is limited to such actions
that will not result in the holder being the beneficial owner of more than 4.99%
of the Company's outstanding common stock at that time.
Under the terms of the agreement the Company is required to file a registration
statement covering the resale of the shares issuable under the agreement by
October 17, 2007 and to obtain an effective registration statement by December
16, 2007. If the Company is unable to file a registration statement by October
17, 2007, the Company will incur penalties of 1% per month of the principal
balance prior to filing the registration statement. If the Company is unable to
have the registration statement declared effective, the Company will incur
penalties of 2% per month of the principal balance.
The agreement provides that the lenders are obligated to loan the Company an
additional amount of $150,000 when the registration statement is declared
effective. The maturity date of that loan will be 180 days after the second
closing. The investors will also be issued warrants to purchase a proportionate
number of shares of the Company's common stock. The exercise price of the
warrants issued on the second closing date will be based on the closing bid
price of the Company's common stock immediately before that closing. 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.
On September 7, 2007, the Company entered into a private equity credit agreement
(the "Equity Agreement") with Brittany Capital Management Limited pursuant to
which the Company may, at its discretion, periodically sell to Brittany Capital
Management Limited shares of the Company's common stock for a total purchase
price of up to $5.0 million. For each share of common stock purchased under the
Equity Agreement, Brittany Capital Management Limited 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. Brittany Capital Management Limited'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 Brittany Capital Management Limited's being the beneficial owner of more than
4.99% of the Company's outstanding common stock at that time.
F-40
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 Brittany Capital
Management Limited.
On September 28, 2007, the Company granted a cashless exercise provision for
6,000,000 of warrants previously granted to the Chief Executive Officer. There
was no accounting impact for this provision.
The Company entered into a month to month lease beginning on October 1, 2007 in
Essex, Connecticut for its showroom and assembly facility. The cost of the
lease is for approximately $1,500 per month and has a term of one year with two
options to extend the lease an additional year.
On October 5, 2007, the Company entered into a consulting agreement effective
January 1, 2007 for services in connection with international marketing. The
term of the agreement is for three years and the Company will provide
consideration of $8,000 per month. The agreement provided the consultant a
cashless exercise provision for 2,000,000 of previously granted warrants. There
was no accounting impact for this provision.
On October 11, 2007, the Company entered into a settlement agreement with
Occidental Engineering Consultants Limited ("Occidental") pursuant to which,
among other things, the Company is obligated to make payments of $75,000 on, or
before, each of December 31, 2007 and June 30, 2008 and to issue 2,500,000
million shares of common stock to Occidental as settlement for a secured
promissory note, dated May 4, 2001, in the original principal amount of
$400,000.
F-41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Section 5.1 of the Registrant's amended and restated bylaws and Section 8 of our
restated certificate of incorporation provide that the Registrant shall
indemnify its directors and officers, and may indemnify its employees and other
agents, to the fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's certificate of incorporation
provides for such limitation of liability.
The Registrant maintains standard policies of insurance under which
coverage is provided (a) to its directors, officers, employees and other agents
against loss rising from claims made by reason of breach of duty or other
wrongful act, and (b) to the Registrant with respect to payments which may be
made by the Registrant to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses (other than selling
commissions and other fees to be paid to the underwriters) which will be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered. With the exception of the Securities and Exchange
Commission ("SEC") registration fee, all amounts shown are estimates.
SEC registration fee $ 35.42
Legal fees and expenses 10,000.00
Accounting fees and expenses 5,000.00
Miscellaneous expenses 4,964.58
-------------
Total $ 20,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
----------------------------------------------------------------------------------------------------------------------------
Price Per Date of # of
Purchaser Share Purchase Amount Class Purchase Shares
----------------------------------------------------------------------------------------------------------------------------
WW Trading Int'l $0.075 Comp. Commissions - Common 10/06/2004 200,000
$15,000
----------------------------------------------------------------------------------------------------------------------------
Annette Hunter $0.075 Comp. Commissions - Common 10/06/2004 100,000
$7,500
----------------------------------------------------------------------------------------------------------------------------
II-1
----------------------------------------------------------------------------------------------------------------------------
Price Per Date of # of
Purchaser Share Purchase Amount Class Purchase Shares
----------------------------------------------------------------------------------------------------------------------------
Rudolf Schindler $0.10 Comp. Accrued Payroll Common 10/29/2004 311,100
- $31,110
----------------------------------------------------------------------------------------------------------------------------
WW Trading Int'l $0.08 $25,000 Common 10/29/2004 312,500
----------------------------------------------------------------------------------------------------------------------------
Raimind Irni $0.05 Commission - $1,000 Common 11/15/2004 20,000
----------------------------------------------------------------------------------------------------------------------------
Nachum Lis $0.05 $40,000 Common 11/16/2004 800,000
----------------------------------------------------------------------------------------------------------------------------
Lyons Capital Partners $0.08 $50,000 Common 11/16/2004 625,000
-----------------------------------------------------------------------------------------------------------------------------
Jason Lyons $0.08 Commission - $5,000 Common 11/24/2004 62,500
-----------------------------------------------------------------------------------------------------------------------------
Richard Barsom $0.08 Comp. Mktg Services - Common 11/24/2004 150,000
$12,000
----------------------------------------------------------------------------------------------------------------------------
Rudolf W. Schindler $0.155 Comp./Accrued Payroll Common 12/17/2004 100,000
- $15,500
----------------------------------------------------------------------------------------------------------------------------
Leonard Cohen $0.10 $35,000 Common 12/17/2004 350,000
----------------------------------------------------------------------------------------------------------------------------
Haichel Esther $0.10 $40,000 Common 12/17/2004 400,000
----------------------------------------------------------------------------------------------------------------------------
Lyons Capital Group LLC $0.05 Commission - $5,000 Common 3/21/2005 100,000
----------------------------------------------------------------------------------------------------------------------------
Leonard Cohen $0.05 $10,000 Common 3/21/2005 200,000
----------------------------------------------------------------------------------------------------------------------------
The Resnick Druckman Group LLC $0.10 Comp. for Accounting Common 3/21/2005 130,000
Fees - $13,000
----------------------------------------------------------------------------------------------------------------------------
Segoes Trading $0.08 $40,000 Common 4/18/05 500,000
----------------------------------------------------------------------------------------------------------------------------
Haichel Esther $.05 Commission - $10,000 Common 5/12/05 200,000
----------------------------------------------------------------------------------------------------------------------------
WWD Intl. Trading $0.08 $25,000 Common 7/6/05 312,500
----------------------------------------------------------------------------------------------------------------------------
LMWW FBO J. Kyle Bass IRA $0.10 $20.000 Common 7/6/05 200.000
----------------------------------------------------------------------------------------------------------------------------
Hayman Partners $0.10 $30,000 Common 7/6/05 300,000
----------------------------------------------------------------------------------------------------------------------------
Ian Wallace $0.10 $25,000 Common 7/7/05 250,000
----------------------------------------------------------------------------------------------------------------------------
H. Partners $0.10 $25,000 Common 7/8/05 250,000
----------------------------------------------------------------------------------------------------------------------------
Steven Kessler $0.07 $25,000 Common 7/11/05 357,143
----------------------------------------------------------------------------------------------------------------------------
4 Clean Waters Ltd $0.07 Reduction of note Common 7/11/05 571,428
payable - $40,000
----------------------------------------------------------------------------------------------------------------------------
II-2
----------------------------------------------------------------------------------------------------------------------------
Price Per Date of # of
Purchaser Share Purchase Amount Class Purchase Shares
----------------------------------------------------------------------------------------------------------------------------
Samuel Glass $0.07 $25,000 Common 7/11/05 357,143
----------------------------------------------------------------------------------------------------------------------------
WWD Trading Intl. $0.07 $30,000 Common 8/2/05 200,000
----------------------------------------------------------------------------------------------------------------------------
William Duncan $0.07 $16,000 Common 8/4/05 228,571
----------------------------------------------------------------------------------------------------------------------------
Salvatore LoBue $0.07 $27,625 Common 10/21/05 394,643
----------------------------------------------------------------------------------------------------------------------------
Anthony Giambrone $0.07 $48,000 Common 10/21/05 685,714
----------------------------------------------------------------------------------------------------------------------------
Roger Borsett $0.06 Commission - $7,500 Common 10/21/05 125,000
----------------------------------------------------------------------------------------------------------------------------
Resnick Druckman Group LLC $0.05 Comp. for Accounting Common 10/21/05 132,500
Fees - $6,625
----------------------------------------------------------------------------------------------------------------------------
Occidental Engr. Consult. N/A Defer demand for note Common 11/1/05 100,000
payable
----------------------------------------------------------------------------------------------------------------------------
Salvatore LoBue $0.07 $24,335 Common 11/08/05 347,643
----------------------------------------------------------------------------------------------------------------------------
Simplified Employee Pension FBO $0.075 $35,000 Common 11/23/05 466,667
Laura A. Fonseca
----------------------------------------------------------------------------------------------------------------------------
James K. Tse $0.065 $25,000 Common 11/29/05 384,616
----------------------------------------------------------------------------------------------------------------------------
KML $0.05 $30,000 Common 12/14/05 600,000
----------------------------------------------------------------------------------------------------------------------------
Max Ollech $0.05 $50,000 Common 12/14/05 1,000,000
----------------------------------------------------------------------------------------------------------------------------
Raimond Irni $0.05 Commission - $7,500 Common 12/14/05 150,000
----------------------------------------------------------------------------------------------------------------------------
Southridge Partners LP $0.11 $48,485 Common 2/7/05 438,785
----------------------------------------------------------------------------------------------------------------------------
Robert Kaszovitz $0.07 $91,000 Common 3/20/06 1,300,000
----------------------------------------------------------------------------------------------------------------------------
Abraham Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
----------------------------------------------------------------------------------------------------------------------------
Isaac Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
----------------------------------------------------------------------------------------------------------------------------
Jacob Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
----------------------------------------------------------------------------------------------------------------------------
Akiva Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
----------------------------------------------------------------------------------------------------------------------------
Chumie Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
----------------------------------------------------------------------------------------------------------------------------
Schaul Neumann $0.07 $17,500 Common 3/20/06 250,000
----------------------------------------------------------------------------------------------------------------------------
Max Ollech $0.07 $56,000 Common 3/20/06 800,000
----------------------------------------------------------------------------------------------------------------------------
II-3
----------------------------------------------------------------------------------------------------------------------------
Price Per Date of # of
Purchaser Share Purchase Amount Class Purchase Shares
----------------------------------------------------------------------------------------------------------------------------
Resnick Druckman Group $0.06 Comp. for Accounting Common 3/20/06 250,000
Fees - $15,000
----------------------------------------------------------------------------------------------------------------------------
Southridge Partners LP $0.08 $51,403 Common 3/24/06 614,131
----------------------------------------------------------------------------------------------------------------------------
Southridge Partners LP $0.08 $156,574 Common 4/5/06 1,959,631
----------------------------------------------------------------------------------------------------------------------------
Robert Kaszovitz $0.065 $90,000 Common 5/5/06 1,384,615
----------------------------------------------------------------------------------------------------------------------------
Max Ollech $0.065 $90,000 Common 5/5/06 1,384,615
----------------------------------------------------------------------------------------------------------------------------
Shaul Kochan $0.10 $100,000 Common 5/5/06 1,000,000
----------------------------------------------------------------------------------------------------------------------------
Raimond Irni $0.067 Commission - $30,000 Common 5/5/06 450,000
----------------------------------------------------------------------------------------------------------------------------
John J. Clarke $0.15 Compensation for Common 6/6/06 75,000
Board service - $11,250
----------------------------------------------------------------------------------------------------------------------------
Marshall S. Sterman $0.15 Compensation for Common 6/6/06 75,000
Board service - $11,250
----------------------------------------------------------------------------------------------------------------------------
Ronald W. Hart $0.15 Compensation for Common 6/6/06 75,000
Advisory Board service
- $11,250
----------------------------------------------------------------------------------------------------------------------------
Occidental Engineering Consultants $0.08 Forebearance Common 6/6/06 3,000,000
Agreement - $242,880
----------------------------------------------------------------------------------------------------------------------------
Jonathan McDermott $0.10 $10,000 Common 6/12/06 100,000
----------------------------------------------------------------------------------------------------------------------------
KML $0.07 $28,000 Common 8/2/06 400,000
----------------------------------------------------------------------------------------------------------------------------
Dwight Grader $0.089 $50,000 Common 5/1/07 555,556
----------------------------------------------------------------------------------------------------------------------------
Michael Florman $0.089 $50,000 Common 5/1/07 555,556
----------------------------------------------------------------------------------------------------------------------------
Jeffrey Morowitz $0.0829 $100,000 Common 5/7/07 1,204,820
----------------------------------------------------------------------------------------------------------------------------
John Twomey $0.0829 $100,000 Common 5/8/07 1,204,820
----------------------------------------------------------------------------------------------------------------------------
Don Finely $0.09 $50,000 Common 5/29/07 555,555
----------------------------------------------------------------------------------------------------------------------------
John Twomey $0.083 $100,000 Common 6/18/07 1,203,080
-------------------------------------- ------------- -------------------------- -------------- ---------------- ------------
The Company issued these shares in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated there under. These shares were offered to less than 35
"non-accredited" investors and were purchased for investment purposes with no
view to resale.
II-4
ITEM 27. 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.
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.
4.8* Warrant issued by Water Chef, Inc. on March 29, 2007 to Shaul Kochan.
5.1* Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP
10.1 Subdistributorship Agreement dated May 18, 2001 between 4 Clean
Waters LTD. and the Company - Incorporated herein by reference to
Exhibit 10.2 to the Form 10-KSB/A filed November 17, 2003.
10.2 Convertible Promissory Note dated November 17, 2000 to 4 Clean -
Lindh Joint Venture by the Company - Incorporated herein by reference
to Exhibit 10.1 to the Form 10-KSB/A filed November 21, 2004.
10.3 Preliminary Agreement, dated September 8, 2004 by, and among, Water
Chef, Inc., Samaritan Group International, and International
Multiracial Shared Cultural Organization (IMSCO) - Incorporated
herein by reference to Exhibit 10.1 to the Form 10-QSB filed November
17, 2004.
10.4 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.
10.5 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.
10.6 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.
II-5
Number Description of Exhibit
--------- ---------------------------------------------------------------------
10.7 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.
10.8 Forbearance Agreement dated as of May 8, 2006, by and between
Occidental Engineering Consultants Limited and Water Chef, Inc. -
Incorporated herein by reference to Exhibit 10.11 to the
Registration Statement on Form SB-2 filed May 15, 2006.
10.9 Registration Rights Agreement dated as of May 8, 2006, by and between
Occidental Engineering Consultants Limited and Water Chef, Inc. -
Incorporated herein by reference to Exhibit 10.11 to the Registration
Statement on Form SB-2 filed May 15, 2006.
10.10 Loan Agreement, dated as of October 11, 2006, by and between Water
Chef, Inc. and Southridge Partners LP - Incorporated herein by
reference to Exhibit 99.1 to the Form 8-K filed October 19, 2006.
10.11 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 99.1 to the Form 8-K filed October 19,
2006.
10.12 Promissory Note issued by Water Chef, Inc. on October 11, 2006 to
Southridge Partners LP for the principal sum of $300,000 -
Incorporated herein by reference to Exhibit 99.1 to the Form 8-K
filed October 19, 2006.
10.13 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 99.1
to the Form 8-K filed October 19, 2006.
10.14 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 10, 2007.
10.15 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
10, 2007.
10.16 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 10, 2007.
10.17 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 10, 2007.
10.18 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 10, 2007.
10.19 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 10, 2007.
10.20 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 10, 2007.
10.21 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 10, 2007.
10.22* Settlement Agreement and Mutual Release, dated October 11, 2007, by
and between Water Chef, Inc. and Occidental Engineering Consultant
Limited.
23.1* Consent of Marcum & Kliegman LLP
23.2* Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (contained
in Exhibit 5.1).
24.1* Powers of Attorney (included on the signature page of this
Registration Statement).
* filed herewith
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
II-6
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) (ss.230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
NOTE: Small business issuers do not need to give the statements in paragraphs
(a)(1)(i) and (a)(1)(ii) of this Item if the registration statement is on Form
S-3 or Form S-8 (ss.ss.239.13 or 239.16b of this chapter), and the information
required to be included in a post-effective amendment is incorporated by
reference from periodic reports filed by the small business issuer under the
Exchange Act.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial BONA
FIDE offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this registration
statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on October 16, 2007.
WATER CHEF, INC.
By: /s/ Leslie J. Kessler
------------------------------------------
Leslie J. Kessler
Chairman of the Board, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Leslie J. Kessler as his true and lawful
attorney-in-fact with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this registration statement,
and any related registration statement filed pursuant to Rule 462(b) of the
Securities Act of 1933, as amended, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes, each acting along, may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------------- ------------------------------ --------------------
/s/ Leslie J. Kessler
-------------------------
Leslie J. Kessler Chairman of the Board, October 16, 2007
President and Chief Executive
Officer (Principal Executive
Officer)
/s/ Terry Lazar
-------------------------
Terry Lazar Director and Chief Financial October 16, 2007
Officer (Principal Financial
and Accounting Officer)
II-8