UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
¨ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Quarterly report for the period ended March 31,2004
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-21753
ULTRAGUARD WATER SYSTEMS CORP.
Name of Small Business Issuer in Its Charter
NEVADA | 88-0263701 |
State of Incorporation | I.R.S. Employer |
Identification No. | |
918 SHERWOOD AVENUE | |
COQUITLAM B.C. CANADA | V3K 1A6 |
Address of Principal Executive Offices | Zip code |
604-540-8282 | 604-540-8289 |
Issuer's Telephone Number | Issuer's Facsimile Number |
2nd Floor – 5763 203 A Street, Langley B.C., V3A 1W7
Former Address of Registrant
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Title of class
APPLICABLE ONLY TO CORPORATE ISSURER
The number of shares outstanding of the issuer's only class of Common Stock $.001 par value was
23,228,565 on May 19,2004
1
INDEX
2
UltraGuard Water Systems Corp.
Consolidated Balance Sheets
(Expressed in US dollars)
March 31, | December 31, | |||
2004 | 2003 | |||
$ | $ | |||
(unaudited) | (audited) | |||
ASSETS | ||||
Current Assets | ||||
Cash | 2,578 | 1,834 | ||
Accounts receivable | 15,496 | 2,971 | ||
Prepaid expenses and deposits | 62,462 | 63,613 | ||
Total Current Assets | 80,536 | 68,418 | ||
Property and Equipment (Note 4) | 197 | 204 | ||
Manufacturing Technology (Note 3) | 1,108,452 | 1,104,852 | ||
Total Assets | 1,189,185 | 1,173,474 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current Liabilities | ||||
Accounts payable | 195,436 | 194,080 | ||
Accrued liabilities | 56,820 | 55,747 | ||
Wages and vacation pay payable | 1,687 | 3,004 | ||
Loans payable (Note 5) | 349,576 | 310,542 | ||
Amounts owing to related parties (Note 6) | 220,451 | 202,223 | ||
Total Current Liabilities | 823,970 | 765,596 | ||
Stockholders’ Equity | ||||
Common stock, (Note 7) | ||||
100,000,000 shares authorized, with a par value of $ 0.001 | ||||
23,328,565 and 22,453,565 issued and outstanding respectively | 23,329 | 22,454 | ||
Additional paid-in capital | 11,292,863 | 11,212,638 | ||
Donated capital | 31,928 | 31,928 | ||
Stock based compensation | 527,636 | 499,269 | ||
Deferred compensation | (257,041 | ) | (320,700 | ) |
Deficit | (11,253,500 | ) | (11,037,711 | ) |
Total Stockholders’ Equity | 365,215 | 407,878 | ||
Total Liabilities and Stockholders’ Equity | 1,189,185 | 1,173,474 | ||
Contingencies (Notes 1 and 9) | ||||
Subsequent Events (Note 10) |
(See Accompanying Notes to the Consolidated Financial Statements)
3
UltraGuard Water Systems Corp.
Consolidated Statements of Operations and Deficit
(Expressed in US dollars)
(unaudited)
Three Months | ||||
Ended | Three Months | |||
March 31, | Ended | |||
2004 | March 31, 2003, | |||
$ | $ | |||
Project Revenue | 14,419 | 23,438 | ||
Project Costs | 728 | 18,812 | ||
Total Gross Profit | 13,691 | 4,626 | ||
Expenses | ||||
General and administrative | 193,367 | 120,406 | ||
Interest | 7,745 | 12,437 | ||
Stock based compensation expense | 28,368 | 28,368 | ||
Total Expenses | 229,480 | 161,211 | ||
Net Loss for the Period | 215,789 | 156,585 | ||
Net Loss per Share | (0.01 | ) | (0.01 | ) |
Weighted Average Number of Shares Outstanding | 23,037,000 | 11,186,000 | ||
(Diluted loss per share has not been presented as the result is anti-dilutive) |
(See Accompanying Notes to the Consolidated Financial Statements)
4
UltraGuard Water Systems Corp.
Consolidated Statements of Cash Flows
(Expressed in US dollars)
(unaudited)
Three Months | Three Months | |||
Ended | Ended | |||
March 31, | March 31, | |||
2004 | 2003 | |||
$ | $ | |||
Cash Flows to Operating Activities | ||||
Net Loss | (215,789 | ) | (156,585 | ) |
Adjustments to reconcile net loss to cash | ||||
Depreciation | 7 | 21 | ||
Foreign exchange | 39 | 112 | ||
Common stock issued for expenses | 141,159 | 113,400 | ||
Accrual of interest | 5,034 | 7,845 | ||
Stock based compensation | 28,368 | 28,368 | ||
Change in non-cash working capital items | ||||
(Increase) in accounts receivable | (12,525 | ) | (3,865 | ) |
Decrease in inventory and contract work in progress | – | 441 | ||
(Increase) decrease in prepaid expenses and deposits | 1,151 | (81,588 | ) | |
Increase in accounts payable, accrued liabilities and wages and vacation pay | ||||
payable | 1,072 | 7,773 | ||
Net Cash Used in Operating Activities | (51,484 | ) | (84,078 | ) |
Cash Flows To Investing Activities | ||||
Manufacturing technology option payments | – | (6,776 | ) | |
Net Cash Used in Investing Activities | – | (6,776 | ) | |
Cash Flows From Financing Activities | ||||
Increase in loans payable | 34,000 | 30,949 | ||
Increase in amounts owing to related parties | 18,228 | 28,346 | ||
Net Cash Provided By Financing Activities | 52,228 | 59,295 | ||
Increase (Decrease) in Cash | 744 | (31,559 | ) | |
Cash - Beginning of the Period | 1,834 | 40,206 | ||
Cash - End of the Period | 2,578 | 8,647 | ||
Non-Cash Financing Activities: | ||||
Shares issued for asset purchase | 3,600 | 71,200 | ||
Shares issued for expenses | 77,500 | 113,400 | ||
Supplementary Information | ||||
Cash paid for interest | 2,711 | 4,592 | ||
Cash paid for income taxes | – | – |
(See Accompanying Notes to the Consolidated Financial Statements)
5
1. | Nature of Operations and Continuance of Business Up to February 2002 the Company focused its activities on the manufacturing and marketing of its Ultra GuardÚ ultra violet based patented water treatment system through its wholly-owned Canadian subsidiary, UV Systems Technology Inc. (“UVS”). These products and systems were sold primarily for municipal waste disinfection treatment. During the period from acquiring UVS in August 1996 to February 2002, operating activities had not generated profitability. In January 2001, the Company ceased manufacturing operations, reduced level of staff in production, engineering and support and moved its offices to Langley. On February 5, 2002, the Company reached an agreement with the Clearwater Group (“Clearwater”) to assume the UVS manufacturing responsibilities of any new Ultra GuardÚ water treatment systems to be supplied to UVS’s strategic alliance partner, US Filter. Clearwater would also provide warranty services on any previously sold UltraGuardÚ water treatment systems. At a special meeting held on November 15, 2002 the Company performed a reorganization whereby the issued shares were consolidated on a 1:50 basis, the authorized capital was increased to 100,000,000 shares and the name of the Company was changed to UltraGuard Water Systems Corp. During fiscal 2002, the Company commenced designing and developing the home use Point of Use and Point of Entry UV disinfection systems for drinking water. Point of Use systems are installed under a sink and Point of Entry units are installed at the water supply entry into the building. These UV products may include dual filtration cartridges in advance of the UV system. In December 2002, the Company divested itself of the UVS operations while retaining any royalty or other revenues that may be received from the sale or use of the UVS patented Ultra GuardÚ technology. Also in December 2002, the Company purchased Innovative Fuel Cell Technologies Inc. (“IFCT”) (see Note 3), the holder of an option to purchase worldwide rights to manufacture and market a Magnesium Air Fuel Cell to power UV drinking water and ancillary systems. IFTC owns 100% of the shares of an Austrian company, UltraGuard Water Systems GmbH (“UG GmbH”). UG GmbH was to be the manufacturer and marketer the UV and Fuel Cell products for the European and African market. During fiscal 2003, due to lack of finances, the Company discontinued its operation in Europe and closed UG GmbH and will concentrate its efforts on the North American market where its UV products and fuel cell products will be manufactured through subcontractors and will be marketed in North America through the Internet, wholesalers and sales representatives. These consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at March 31, 2004, the Company has not recognized significant revenue, has a working capital deficit of $743,434, and has accumulated operating losses of $11,253,500 since its inception. The continuation of the Company is dependent upon the continuing financial support of creditors, obtaining additional short-term and long-term equity or debt financing, the completion of product development of its newly acquired technology and achieving profitability. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty. |
2. | Significant Accounting Policies Consolidated financial statements These financial statements include the accounts of the Company; its wholly-owned Nevada subsidiary Innovative Fuel Cell Technologies Inc. The Company’s Austrian subsidiary’s operations were discontinued during fiscal 2003. All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents Cash and cash equivalents include cash on hand, in banks and all highly liquid investments with maturity of three months or less when purchased. Property and equipment Property and equipment is recorded at cost. Depreciation is computed on a straight-line method using an estimated useful life of five years. Revenue recognition The Company will recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” Revenue will be recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility is reasonably assured. Product sales are recognized at the time goods ar e shipped. System and project revenue is recognized utilizing the percentage of completion method that recognizes project revenue and profit during construction based on expected total profit and estimated progress towards completion during the reporting period. All related costs are recognized in the |
6
2. | Significant Accounting Policies (continued) period in which they occur. Estimates and assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and accompanying notes. Actual results could differ from these estimates. Foreign currency Revenue, expenses and non-monetary balance sheet items in foreign currencies are translated into US dollars at the rate of exchange prevailing on the transaction dates. Monetary balance sheet items are translated at the rate prevailing at the balance sheet date. The resulting exchange gain or loss is included in general and administration expenses. Basic and Diluted Per Share Information The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share". This statement requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti dilutive. Accounting for Stock-Based Compensation The Company accounts for stock based compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” This statement requires that stock awards granted subsequent to January 1, 1995, be recognized as compensation expense based on fair value at the date of grant. Alternatively, a company may account for granted stock awards to employees under Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation for employees under APB No. 25 and make the required pro forma disclosures for compensation expense in accordance with SFAS No. 123. The Company accounts for stock issued for services to non-employees in accordance with SFAS No. 123. Compensation expense is based on the fair market value of the stock award or fair market value of the goods and services received whichever is more reliably measurable. Comprehensive Loss SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at December 31, 2003, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements. Long-Lived Assets SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” establishes a single accounting model for long-lived assets to be disposed of by sale including discontinued operations. SFAS 144 requires that these long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. An impairment loss is recognized when the carrying amount is not fully recoverable and exceeds fair market value. Financial Instruments The Company’s financial instruments consist of cash, prepaid expenses, accounts payable, accrued liabilities, advances from related and non-related parties. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of cash, accounts payable and accrued liabilities, advances from related parties and other advances approximates their carrying value due to the immediate or short-term maturity of these financial instruments. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of cash. Cash was deposited with a quality credit institution. Recent Accounting Pronouncements In December 2003, the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104), which supersedes SAB 101, "Revenue Recognition in Financial Statements." The |
7
2. | Significant Accounting Policies (continued) primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The requirements of SFAS No. 150 apply to issuers' classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS No. 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of non-public entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position. Interim Financial Statements These interim unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. Manufacturing Technology On December 31, 2002, the Company acquired 100% of the shares of Innovative Fuels Cell Technologies Inc (IFCT). The Company issued 5,000,000 common shares of the Company’s common stock to the shareholders of IFCT to acquire IFCT and its wholly-owned Austrian subsidiary UltraGuard Water Systems GmbH (“UG GmbH”). These shares were valued at $1,007,000. The Company also issued 1,000,000 common shares of the Company to UG GmbH as part of the transaction. These shares are considered treasury shares and are not outstanding. The value placed on these shares was $201,400 which amount has been recorded as a reduction of shareholders’ equity. IFCT is a Nevada corporation incorporated on September 30, 2002. IFCT is the holder of an option to purchase worldwide manufacturing and marketing rights to a 12-volt Magnesium-Air Semi Fuel Cell (Fuel Cell) from MagPower Systems Inc. (“MagPower”) for use with the Company’s Point of Use Ultraviolet Water Purification System and for ancillary uses. IFCT was assigned this option on October 1, 2002 from a related party. IFCT had paid Cnd$2,500 as a down payment for the option with Cnd$97,500 payable and 400,000 shares of the Company were to be issued. On March 14, 2003, the License Agreement was executed between MagPower and IFCT. The terms of the License Agreement included additional rights to use the Fuel Cell for ancillary services to power items such as lighting and radio. As consideration for the additional rights, IFCT increased the option payments to be made to Cnd$100,000 and increased the number of common shares to be issued to 500,000. On March 6, 2003, the Company issued 400,000 shares into trust subject to certain criteria. On signing of the License Agreement, IFCT paid Cnd$5,000 and delivered 200,000 common shares to the vendors. An additional Cnd$5,000 was paid on March 21, 2003 for the payment due on April 1, 2003. Commencing on May 1, 2003, the remaining balance of Cnd$87,500 was payable; Cnd$7,500 on the first of each month thereafter until MagPower delivers the technical drawings, and Cnd$15,000 per month thereafter until the full amount has been paid. Concurrent with the receipt of the technical drawings from the vendor, the remaining 200,000 common shares will be delivered (100,000 common shares from trust and 100,000 common shares from tre asury). These payments were not made; however, the Company delivered 10,000 shares to MagPower on May 1, 2003. On February 2, 2004, the Company and MagPower amended the License Agreement. MagPower now has sublicense rights in certain countries to the Company’s ultraviolet products for sale and use by MagPower (or its sublicenses) with MagPower’s magnesium fuel cell. In addition, the amended License Agreement provided for issuance and delivery of the remaining 200,000 common shares (100,000 common shares from trust and 100,000 common shares from treasury), and cancellation by MagPower any remaining amount owing by the Company as a condition of the original License Agreement. As a condition of IFCT’s Option Agreement, the Company was required to sell a minimum quantity of 2000 Fuel Cell units in fiscal 2003; however, MagPower has not provided the technology necessary to proceed with manufacturing. Once manufacturing commences the capitalized costs will be amortized to operations over its estimated useful life which will be determined at that time. The total consideration paid for the License Agreement as at March 31, 2004 was $1,108,452 which includes, the issuance of 5,000,000 common shares of the Company valued at $1,007,000, the issuance of 500,000 common shares valued at $74,800 cash payments of Cnd$12,500 and certain other organizational and acquisition costs of $18,292. This acquisition was treated as an acquisition of an asset and not a business combination. |
8
4. | Property and Equipment |
March 31, | December 31, | |||
2004 | 2003 | |||
Accumulated | Net Book | Net Book | ||
Cost | Depreciation | Value | Value | |
$ | $ | $ | $ | |
(unaudited) | (audited) | |||
Office furniture and equipment | 5,533 | 5,336 | 197 | 204 |
5. | Loans Payable | |
a) | Loans payable, totalling $125,000 plus accrued interest of $30,000 was renegotiated in December 2002 as a non-interest bearing loan amount set at $155,000. Payments were to be made totalling $80,000 commencing February 15, 2003 with final payment due June 16, 2002, with the remaining $75,000 to be converted into common shares at a conversion price of 20% below the average bid price between December 7, 2002 and March 7, 2003, to be issued March 10, 2003. No payments have been made. On April 25, 2003, the creditor filed a suit in the Supreme Court of British Columbia against the Company for non-payment of the $155,000 debt. On May 2, 2003, the Company was served with a writ of summons. The Company entered an appearance and filed a defense against this claim and attempted to negotiate a settlement. The creditor filed additional information to support their claim and the Company responded with a “no defense” position and judgment was issued in the amount of $183,944 (C$234,642) including: interest and legal costs. Additional interest accruing during this quarter has increased the amount to $184,937. On April 5, 2004 the Company appeared in Supreme Court to provide to the creditor and the court specific information pertaining to the Company’s assets and its ability to pay the judgment including interest. Also the Court requested additional financial information, which the Company has now provided. | |
b) | Loans payable plus accrued interest totalling $68,576 are unsecured and bear interest at 10% per annum. These loans were repayable at any time or when financing in excess of $250,000 was obtained by the Company but not later than August 19, 2003. At the option of the creditors, the principal portion of the loans can be converted into common shares at $0.30 per share at any time to February 19, 2004. These loans remain unpaid at March 31, 2004. | |
c) | A note payable plus accrued interest totalling $81,283 is unsecured and bears interest at 10% per annum and due on December 31, 2004. | |
d) | Loans payable totalling $14,780 are due on demand, unsecured, and non-interest bearing. | |
6. | Amounts Owing to Related Parties Loans payable, including interest, in the original amount of $261,423 were partially repaid during the year ended December 31, 2003. The security pledged, 50% by West Peak Ventures of Canada Ltd (West Peak) and 50% by the Company’s President to secure the loans was called and taken by the note holder. To compensate West Peak for its losses, the Company issued 1,556,000 common shares to West Peak in full payment for its loss amounting to $130,711. The Company agreed with the President of the Company to set an unsecured loan payable in the amount of $130,712 with interest at 6% per annum as compensation for his losses. In addition to the above, the amounts owing to the President of the Company and the Chief Financial Officer (“CFO”) in the amount of $84,346 represent unpaid wages, expenses and consulting and are also due on demand, unsecured and non-interest bearing. As partial repayment of wages, in fiscal 2003, the President and the CFO were issued 2,400,000 shares of common restricted Rule 144 shares of the Company valued at $81,120. |
9
7. | Common Stock |
Issued | Common | Additional | ||||
Shares | Stock | Paid-in Capital | ||||
# | $ | $ | ||||
Balance, December 31, 2002 | 10,852,565 | 10,853 | 10,221,893 | |||
Issuance of shares for Manufacturing Technology | 400,000 | 400 | 70,800 | |||
Issuance of shares for consulting, wages and directors’ fees | 5,475,000 | 5,475 | 629,387 | |||
Issuance of shares for legal expenses | 600,000 | 600 | 67,400 | |||
Issuance of shares for related party compensation accruals | 2,400,000 | 2,400 | 78,720 | |||
Issuance of shares to settle debt | 70,000 | 70 | 6,383 | |||
Issuance of shares for West Peak Security Loss | 1,556,000 | 1,556 | 129,155 | |||
Issuance of shares for a note receivable | 1,100,000 | 1,100 | 108,900 | |||
Less: funds not yet received | – | – | (100,000 | ) | ||
Balance, December 31, 2003 (audited) | 22,453,565 | 22,454 | 11,212,638 | |||
Issuance of shares for Manufacturing Technology | 100,000 | 100 | 3,500 | |||
Issuance of shares for consulting fees | 775,000 | 775 | 76,725 | |||
Balance, March 31, 2004 (unaudited) | 23,228,565 | 23,329 | 11,292,863 |
(a) | Private Placement On September 25, 2003, pursuant to a private placement, the Company issued 1,100,000 common restricted Rule 144 shares at $.09091 per share for a $100,000 promissory note and interest. The note is non-interest bearing and due on December 29, 2003. If the note is not paid then the shares will be cancelled and returned to Treasury. Subsequent to December 31, 2003, the Company agreed to extend the note until September 29, 2004. | |
(b) | Warrants Outstanding 162,100 Class C warrants with an exercise price of $12.00 per share expiring October 3, 2010 are outstanding as at March 31, 2004. | |
a. | Long-Term Equity Incentive Plan The Plan, registered in 1999, permits the grant of Non-qualified Stock Options and Incentive Stock Options and the issuance of Restricted and Performance Stock. | |
b. | Independent Contractor/Consulting Agreement Plan of UltraGuard Water Systems Corp. On June 11, 2003 the Company registered on Form S-8 1,500,000 shares issued to three consultants for product marketing consulting services amounting to $195,000. | |
c. | Incentive Plan On November 26, 2003, the Company adopted The Incentive Plan of UltraGuard Water Systems Corp. that was registered with the Securities Exchange Commission on December 1, 2003 on Form S-8. Under the plan, the Company may issue shares and/or grant options totalling 5,000,000 shares. On December 3, 2003 the Company issued 1,050,000 shares to a consultant for services valued at $105,000. On December 4, 2003 the Company issued 400,000 shares as a retainer for legal services valued at $40,000. On February 24, 2004 the Company issued 775,000 shares to a consultant for services valued at $77,500. | |
d. | Benefit Plan The common stock underlying the 2003 Benefit Plan, registering 2,400,000 shares for future issuance, was registered with the Securities Exchange Commission on March 28, 2003 on Form S-8. On March 31, 2003, the Company issued 600,000 shares to a consultant for services valued at $113,400. On June 9, 2003, the Company issued 345,000 shares for consulting and legal services valued at $15,990. On July 25, 2003 the Company issued 1,200,000 shares to a consultant and to an employee for services valued at $116,900. On September 25, 2003 the Company issued 1,750,000 shares to three consultants for services valued at $175,000. |
10
Shares | Weighted Average | |||||
Under Option | Weighted Average | Remaining Life of | ||||
# | Option Price $ | Options (Months) | ||||
December 31, 2003 (audited) | 125,000 | .13 | 32 | |||
Granted | – | – | ||||
Expired | – | – | – | |||
Cancelled | – | – | – | |||
March 31, 2004 (unaudited) | 125,000 | .13 | 29 |
These options were granted for services provided, or to be provided, to the Company. Statement of Financial Accounting Standards No. 123 (“SFAS 123") requires that an enterprise recognize, or at its option, disclose the impact of the fair value of stock options and other forms of stock based compensation in the determination of income. The Company has elected under SFAS 123 to continue to measure compensation cost on the intrinsic value basis set out in APB Opinion No. 25. As options are granted at exercise prices based on the market price of the Company’s shares at the date of grant, no compensation cost is recognized. However, under SFAS 123, the impact on net income and income per share of the fair value of stock options must be measured and disclosed on a fair value based method on a pro forma basis. The fair value of the employee’s purchase rights was estimated using the Black-Scholes model with the following assumptions on the above granted options: risk free interest rate was 5%, expected volatility of 100%, an expected life of 3 years and no expected dividends. During the year, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an Amendment of FASB Statement No. 123” (SFAS 148), to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. | |
(f) | Benefit Plan (continued) If compensation expense had been determined pursuant to SFAS 123, the Company’s net loss and net loss per share would have been as disclosed below. |
Three months | Three months | ||||
ended | ended | ||||
March 31, | March 31, | ||||
2004 | 2003 | ||||
$ | $ | ||||
(unaudited) | (unaudited) | ||||
Net loss | |||||
As reported | (215,789 | ) | (156,584 | ) | |
Stock Based Compensation – as reported | 28,368 | – | |||
Stock Based compensation – determined under fair market value | (29,238 | ) | – | ||
Pro forma | (216,659 | ) | (156,584 | ) | |
Basic net loss per share | |||||
As reported | (.01 | ) | (.01 | ) | |
Pro forma | (.01 | ) | (.01 | ) | |
8. | Segmented Information The business of the Company is carried on in one industry segment (see Note 1). The Company currently operates in two geographic segments. The United States operations only consist of costs associated with debt and equity financing and being a public company. As a result of the disposition of UVS, (see Note 1) the Company now operates in one business segment and one geographical area |
11
Three months ended | Three months ended | |||||||||||||||||
March 31, 2004 | March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
United | United | |||||||||||||||||
Canada | States | Europe | Total | Canada | States | Europe | Total | |||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||
Revenue | – | 14,419 | – | 14,419 | – | 23,438 | – | 23,438 | ||||||||||
Expense | – | 230,208 | – | 230,208 | – | 151,489 | 28,534 | 180,023 | ||||||||||
Loss | – | (215,789 | ) | – | (215,789 | ) | – | (128,051 | ) | (28,534 | ) | (156,585 | ) |
As of | As of | |||||||||||||||||
March 31, 2004 | March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
United | United | |||||||||||||||||
Canada | States | Europe | Total | Canada | States | Europe | Total | |||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||
Identifiable Tangible Assets | – | 80,733 | – | 80,733 | – | 105,700 | 9,846 | 115,546 | ||||||||||
Manufacturing Technology | – | 1,108,452 | – | 1,108,452 | – | 1,010,352 | – | 1,010,352 | ||||||||||
Total Assets | – | 1,189,185 | – | 1,189,185 | – | 1,116,052 | 9,846 | 1,125,898 |
9. | Legal Proceedings | |
i. | On October 20, 1998 a suit was filed in the Supreme Court of British Columbia by Thomas O’Flynn against the Company, Kenneth Fielding (the Company's President and Director), and Charles P. Nield (a former Director and Vice President of the Company), O’Flynn alleges that in April of 1996, he purchased shares of the Common Stock based on a representation that they would be free trading in 40 days of "the filing of a prospectus." He further alleges that in September of 1996 he purchased additional shares of Common Stock based on the representation that the shares would be free trading within 40 days of the Common Stock becoming free trading. O’Flynn alleges that the representation was a warranty and was incorrect. He further alleges that he suffered a loss because the share price decreased while he was holding the shares. He seeks damages for breach of warranty, negligence, misrepresentation and breach of fiduciary duty. The amount claimed is not specified. The Company filed an answer denying the claims and will continues to actively defend the suit. The suit has remained inactive since early 1999. There has been no loss provision set-up pursuant to this action against the Company. | |
ii. | See Note 5(b) for a judgment against the Company to repay loans, interest and legal costs totaling $184,937. On June 6, 2003 a group of shareholders (Shareholder Group) filed a consent resolution, which among other things elected a new board of directors and revised the Company by-laws. The Company refused to accept the consent resolution or by-laws as in the opinion of the Company’s legal counsel, the consent resolutions were not in accordance with Nevada Statutes or the filing requirements of the Security and Exchange Commission. At a directors meeting held June 9, 2003, the Company elected two additional directors; Edward White and Erin Strench to the Company’s Board, bringing the total number of directors to five. On June 16, 2003 the Shareholder Group filed for and obtained a temporary restraining order (TRO) against the Company and its five directors prohibiting the Company from among other things, issuing stock, transferring assets, changing management and other actions that would affect thestatus quoof the Company. In addition, two shareholders issued writs against various directors, alleging breach of fiduciary duty in respect of the issue of certain common shares each to John Gaetz, Ken Fielding and others. On June 24, 2003, in discussions between legal counsel for plaintiff, respondent and the hearing Judge; Judge Adams, the TRO was vacated and July 2, 2003 was the date set for a new TRO hearing to be held in Reno, Nevada. At the July 2, 2003 TRO hearing Judge Adams did not grant a TRO and requested the plaintiff and respondent file a series of three briefs outlining their position. The first brief was filed on July 11, 2003 by the Company’s counsel. The plaintiff responded on July 18, 2003 and our counsel filed the final brief on July 25, 2003. The Judge has not made a ruling on the TRO. The Company’s counsel has responded to the various other suits filed against the Company and its directors. Counsel for the Company was successful in moving these actions from Nevada State jurisdiction to federal jurisdiction. In March 2004 the Company’s legal counsel filed to withdraw from the action as a result of non-payment of legal fees. The court approved the withdrawal on two of the four cases. By April 29, 2004, the Plaintiff and the Defendant must file a proposed pre-trial order with the Federal Court, which upon approval, the Court will set down for trial. On April 28, 2004 the Company applied for and received a 45-day extension to file with the Federal Court the proposed pre-trial order. In the interim the parties to this dispute are attempting to reach a settlement on all matters. | |
i. | The Company has made a provision for a loss of $27,000 in a lawsuit made by a former employee for wrongful dismissal. | |
10. | Subsequent Events a) On April 28, 2004, the Company issued 200,000 common shares for legal services valued at $14,000. b) See Notes 5(b) and 9(c) for ongoing legal proceedings. |
12
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS AND FINACIAL CONDITIONS
The following discussion and analysis should be read in conjunction with our Financial Statements and the Notes attached. Information discussed in this report may include forward-looking statements regarding events or our financial performance and are subject to a number of risks and other factors, which could cause the actual results to differ materially from those, contained in the forward-looking statements. Among such factors are, 1) general business and economic conditions, 2) customer acceptance and demand for our products, 3) our overall ability to design, test and introduce new products on a timely basis,4) the nature of the markets addressed by our products, and, 5) other risk factors listed from time to time in documents filed by our Company with the SEC.
BASIS OF PRESENTATION
The financial statements include accounts of Ultraguard Water Systems Corp. and its 100% owned subsidiary, Innovative Fuel Cell Technologies Inc.
MANAGEMENT'S DISCUSSION
Our company was incorporated in Nevada in August 1990 and was inactive until eight Canadian and European individuals acquired it in July 1995. The investor’s intent was to develop the company into the United States marketing arm of UV Systems Technology Inc., which was incorporated in British Columbia, Canada in 1993. Our company issued 1,600,000 shares of its restricted common stock ("Common Stock") to certain individual stockholders and one of our officers, as repayment of cash paid to others for expenses related to the acquisition.
In an effort to further advance our marketing objective, in September 1995, we entered into a marketing distribution agreement (embodying an earlier oral agreement) with UV Systems Technology Inc., for marketing rights for the UltraGuardR system in eight Western states. In July 1996 we entered into a funding agreement with UVS. During this period, we structured an agreement with two principals and certain minority shareholders and exchanged common stock to acquire 50.69% of UVS. Under subsequent agreement dated February 14, 2000 with the two principal shareholders Working Opportunity Fund and MDS Ventures Pacific, Inc., (49.39%) we acquired the remaining 49.31% of common stock and all outstanding preferred stock of UVS.
During the year ended August 31, 1999, the Company entered into a development to reconfigure its UV system. In the quarter ended February 29, 2000, the Company produced the prototype of a new UV product line, the Ultra-Flow SLR. This product, with a designed disinfection capacity of up to 1.0 million gallons per day per lamp, will incorporate the Company’s patented flow reactor chamber, the proprietary low pressure, high intensity UV lamp and the patented flow balanced weir. It encompasses layout flexibility; infinite automatic flow control and monitoring, future expansion can be easily accomplished. The client can monitor system and component performance locally or remotely. Additional features include full password- protected, Internet-based, web-monitored, microprocessor control, which will permit monitoring of the Ultra-Flow SLR UV system from the Company ‘s plant or from any location equipped with an Internet connection.
On January 26, 2001 the Company entered into a Strategic Alliance Agreement, and related agreement with US Filter’s Wallace Tiernan Products Group, under which US Filter has the exclusive right to market the Company’s Ultra Guard®UV system in North, South and Central America, and the Caribbean. See “Our Products: Customers”
13
In September 2001 we licensed the Korean company, VITROSYS, the exclusive rights to manufacture and sell our SLR Ultraviolet disinfection systems within the Republic of Korea and a non-exclusive right to manufacture for sale into other territories not currently represented by the Company’s agents. VITROSYS will pay a royalty on each UV system sold. The royalty fee is variable, dependant on the selling price of the UV system. Under the License Agreement, the Company provided full manufacturing drawings, software technology and expertise, and a specified number of hours of training at the Company’s facilities. As a requirement of the License Agreement, VITROSYS will be required to purchase from the Company, a key component for each SLR system. This key component is defined as the royalty verification component. Its purchase will trigger a sale and resultant royalty payment liability. The Korean market for UV has increased as a result of legislation that requires all municipal and Industrial wastewater to be disinfected.
Royalty revenues are payable by Vitzrosys from the sale of any UV system sold. During the first quarter of 2004 royalties in the amount of $12,500 were received as payment for 25 UV systems manufactured and delivered in Korea during 2003. Additional sales have occurred and marketing of the UV technology is ongoing. These activities provide an expectation that additional royalty revenue will be received in the future.
In September 1999 the formal order for a project in Toronto, Canada was secured for about C$ 685,000 (approximately $466,000). The project is now delivered and operating on demand. As this system is used only when high rainfall and storm runoff occurs, demand for it's operating is infrequent. Since installation, we are informed of two storm events, which required the UV system to be activated. This UV system delivered to Toronto is part of a C$50 million combined storm overflows (CSO) project (the world largest submersible CSO pumping station) and is used for disinfection of CSO before discharge into Lake Ontario. During this quarter, at the request of the customer Clearwater Industries (our product manufacturing licensee) replaced the computer operating system with a Programmable Logic Controller (PLC). This decision was taken to permit service of the UV System to be performed by a number of service companies versed in maintaining PLC control systems. This action provides the customer more flexibility and available service options and reflects the direction being taken by Clearwater on new system sales. Clearwater Industries reports that the UV System remedial work is complete. Final testing will not be conducted until spring 2003 as this site operates only during summer storm events. Tests conducted during 2002 were not successful, as effluent delivered to the UV system did not meet the design standards. The client requested an undertaking by Clearwater Industries to provide assurance of long-term support services. Clearwater was not prepared to provide those assurances although this was a requirement of the Joint Venture Agreements signed by the Company and Clearwater. As a result of that failure, the Client had the UV systems removed from the site.
After successful PDU testing in September & October 1998 at the City of Peterborough wastewater treatment plant, we received an order in March 1999 valued at over C$1,100,000 (approximately $748,000.). The UV system will disinfect effluent flow in excess of 36 million gallons per day. The UV system delivery was completed in January 2002 and installed during February and March for operation starting May 15, 2002. Problems were encountered with the field wiring which affected the operating software. As well, problems were encountered with the installation of some of the structural components. In the second quarter, four of the five channels (48 of the 60 lamps) had been operated for about 30 days using the non-flow paced computer system. Clearwater reported that during this period, performance requirements were being met. Negotiation of the work and guarantees required by the customer to complete the balance of the system was being conducted between the City of Peterborough, Clearwater, our product-manufacturing licensee and with USFilter and Clearwater. These negotiations have been unsuccessful. In November we received notification that the City of Peterborough was cancelling our UV system contract. We have advised the City that we do not accept this cancellation and will strenuously defend our rights under the contract purchased order. We have made the appropriate loss provisions in our financial statements to reflect this cancellation.
Purchase orders for two additional UV systems valued at approximately C$150,000 approximately were produced during the 2000-2001 period and delivered into the Province of Ontario. The system in Ontario was removed from the site as a result of the failure of Clearwater to provide the required support and warranty services. Additional orders for shipment to Louisiana and Virginia were received, with an aggregate value of about $258,000. These two systems were delivered in 2001 as part of the USFilter Strategic Alliance. Maintenance and warranty was the responsibility of USFilter and was performed by USFilter. These two systems were tested, accepted and remain in place and in full operation.
During the first quarter of 2002 the Company took actions to reduce its overheads. Having completed the delivery of the UV systems that were produced during 2000 and up to January 26, 2002, we searched for a partner to work with for production of future UV systems orders. The Company identified Clearwater Technologies Inc., based in Langley, B.C. Canada (“Clearwater”) to perform these and other activities. Clearwater is engaged in the water industry, targeting the
14
treatment of potable water for smaller towns to which they provide complete packaged treatment plants. Clearwater agreed to assume the manufacturing of any new UV project sold to our Strategic Alliance partner, USFilter. Clearwater was also required to provide warranty services on the previously delivered UV products discussed in the preceding. The Company was to be paid a royalty on sales, the percentage scaled upward as the total sale volume increases. This association with Clearwater as our manufacturing partner permitted the company to move from its’ factory and reduce staff level in production, engineering and support. A number of key production staff moved to the Clearwater facility to assist in setting up for this manufacturing responsibility. The remaining staff at the Company works in a liaison and support role between USFilter and Clearwater.
This change of manufacturing strategy in the first quarter of 2002 significantly reduced our monthly operational costs. UVS became inactive with no further operations. Activities of UVS were limited to accounting functions, recording of accounts receivable collections and advising Clearwater and USFilter on project completion activities.
The Strategic Alliance Agreement with USFilter referred to above, and various other agreements were entered into on January 25, 2001 with US Filter/Wallace & Tiernan, Inc ("USFilter "). In general, the Strategic Alliance Agreement provides that U.S. Filter will market, offer and sell the Company’s UltraGuard® ultraviolet disinfection systems (the "Systems"), including aftermarket components and spare parts, on an exclusive basis for ten years throughout a territory consisting of North America, Central America (including the Caribbean Zone) and South America (the "Territory"). To insure adequate understanding of this Alliance, reference should be made to the various agreements filed on Form 8-K, February 27, 2001, which provide full details of these agreements.
On October 1, 2002 the directors mandated a debt and corporate restructuring of the Company. This mandate included the disposing of UVS and its associated debt, and the reduction of all other debt carried by the Company. Given the Company’s inability to raise the additional funds necessary to continue the operations of UVS and with UVS liabilities exceeding assets by a significant amount, the board of directors and investors determined that by selling UVS the Company could continue viable operations pursuing a new product focus (see Our Products). On December 31, 2002 the Company entered into various agreements to complete the disposition of UVS and to remove of the excessive UVS liabilities carried on the Company’s financial statements. The reader should refer to the Company’s financial statements attached hereto for a complete understanding. Manufacturing and marketing of the UVS technology had been discontinued by the Company and was licensed to Clearwater Industries in early 2002. The purchasers of UVS were 659999 BC Ltd a corporation controlled by two officers and directors of UltraGuard. Terms of the sale included the transfer by UVS to the Company of all current and future revenue that may accrue as a result of the UVS technology, which was all revenue the Company could have accrued had it not sold UVS. The intent of 659999 BC Ltd is to keep UVS inactive. Full details of these agreements are available on Form 8K filed with the SEC on January 15, 2003.
On December 20, 2002 the Company negotiated the repayment of debt in the amount of $593,077 owed to the Elco Bank Clients in exchange for 593,077 common shares.
On August 27, 2003, prior to the expiration of the three year Termination Period, USFilter advised the Company they were terminating the Agreement, alleging that the Company had breached the Agreement in signing a manufacturing Agreement with Clearwater Technologies Inc and had failed to deliver Trust documents related to the manufacturing technology for the UV system as was required by the Agreements. The Company is reviewing these allegations and has had verbal communication on the matter with USFilter principals. As Clearwater is responsibility for manufacturing and sale of product worldwide and USFilter became Clearwater’s marketing agent, the effect of this termination should be minimum as sales through USFilter have been significantly lower then was anticipated at the time of signing the Strategic Marketing Agreement in January 2001
Future revenue was expected from the wastewater technology through royalties expected from Clearwater, as a result of sales made to USFilter. As a result of the failure of Clearwater to perform in accordance with its contractual requirements, which resulted in USFilter cancelling our Strategic Alliance, royalties will not be received through this venue.
The Company has initiated a law suit amounting to about C$ 675,000 ($514,700) in specified damages against Clearwater, plus unspecified losses to recover monies owed under the Licence Agreement, the Joint Venture as a result of Clearwater’s failure to comply and Clearwater’s breach of the various agreements.
As a result of USFilter’s termination of the Agreement, the Company will explore the possibility of sale of licenses of the
15
Single Lamp Reactor UV wastewater system to others within the terminated territory, which included North America, Central America (including the Caribbean Zone) and South America.
Recent US and world events as well as the increasing worldwide requirement for higher quality water for industry, health and human consumption, is accelerating the use of ultraviolet and other water purifications products. To capitalize on this market opportunity, our Company changed its market focus, moving away from manufacturing of our wastewater products, which we will continue to have marketed by others; to drinking water UV products and purification systems.
During the year 2002 we completed the development of a UV product to be used in drinking water applications. UV units for the drinking water market will target application such as point of entry (POE) and point of use (POU). POE UV systems will treat water at the entry point into residences, industry or any location requiring safe drinking water. POU systems will treat water at selected points within the home or establishment, using a system installed at the water faucet. Both POE and POU may be sold as stand-alone units or in combinations with various filters. Ultraviolet will not penetrate the envelope or the wrappings to disinfect the contents of the package but is applicable to external surface disinfection. Independent testing of the POU UV System, including CSA and UL approval is yet to accomplished. Test tests are to be conducted subject to availability of adequate resources.
On December 30, 2002. the Company issued six million shares of its common stock to the shareholders of Innovative Fuel Cell Technologies Inc (“Innovative”) for 100% of Innovative, a Nevada Incorporated company, the holder of an option to purchase a worldwide license from MagPower Systems Inc (MagPower) for their air magnesium fuel cell technology (Fuel Cell). The purchase price in the option agreement was C$100,000,and 400,000 shares of the Company’s common stock, increased respectively in March 2003 to C$102,500 and 500,000 shares of the Company’s common stock at which time a worldwide License Agreement was signed for the manufacture and sale of the Fuel Cell . The increase in the price and the number of shares of common stock was as a result of negotiations to extend the use right to include ancillary uses among other things lighting and radio in areas where a UV disinfection systems has been installed. The Fuel Cell will provide the necessary power to operate ultraviolet disinfection systems, lighting and radio in areas of the world where no other forms of electrical power is unavailable. The product has applications in remote areas of all countries worldwide. Applications in developing countries such as Africa, some of the Middle East countries and China, where large numbers of the population are not serviced by an electrical grid and do not have a safe water supply, are market areas. As a requirement of the License Agreement, MagPower was to provide the manufacturing technology for then Fuel Cell. Due to delays in MagPower’s development program, this information was incomplete, which curtailed any opportunity the Company may have had to market the products. By the end of 2003 the company had paid a portion of the License fee, leaving C$88,800 remaining unpaid and 200,000 common share not delivered.
On February 2, 2004, the Company and MagPower entered into a amendment to the License Agreement. Under the amendment the Company agreed to sublicense the Company’s ultraviolet products to MagPower for Africa and the countries of Asia including; India, China, Afghanistan, Kazakhstan, Bangladesh, Indonesia, Malaysia, Singapore, South Korea and Japan (“Territory”), for sale and use by MagPower (or its sublicenses) with MagPower’s magnesium fuel cell. The amendment provided the Company the right to enter into sublicensing agreements in any country within the Territory if MagPower had not previously signed an agreement in that country. As well, the February 2nd, 2004 amendment provided for issuance and delivery of the remaining 200,000 common shares (100,000 common shares from trust and 100,000 common shares from treasury), and cancellation by MagPower of the remaining C$88,800 owing by the Company to MagPower.
Included in the Innovative assets was the Austrian Company, UltraGuard Water Systems GmbH (“GmbH). The incorporation of GmbH was made by Innovative in contemplation of its sale of Innovative to the Company. GmbH is set up to manufacture and market Point of Use UV produces in Germany and the European Union Countries (“EU”) to exploit the EU and other European markets potential. In the third quarter of 2003 the Company closed its GmbH operation and wrote off its investment due to the inability to raise sufficient capital to continue funding the GmbH operations.
During 2004, the Company will focus its efforts on the following markets and products.
- The licensing of the UltraGuard Single Lamp Reactor wastewater UV system
- The Magnesium Air Fuel Cell with UV for remote application
- The Point of Entry and Point of Use UV/Filtration system
- Other water disinfection, cleaning and related business opportunities
16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004.
Three months ended March 31, 2004 compared to Three months ended March 31, 2003.
Revenues. During three months ended March 31, 2004, we reported revenues of $14,418 compared to revenue of $23,438 being reported in the three months of fiscal 2003, a decrease of 38%. The decrease is as a result of very low UV system components sales offset by royalty revenue.
Direct Project Costs. Project costs recorded during the three months of fiscal 2004 amounted to $727 compared to $18,813 recorded during the three months of fiscal 2003, a decrease of 2,588%. The decrease in cost was due to the low direct costs associated with royalty sales.
Gross Profit. Gross profit increased by $9,066 from $13,691during the three months of fiscal 2004, compared to $4,625 recorded during the comparable period of fiscal 2003. The increase was mainly from royalty sales with low direct costs.
General and Administrative Expense. For the three months ended March 31, 2004, we reported general and administrative expense of $193,367, an increase of $723,961 or 61% from $120,406 reported in the comparable period of the prior year. This increase resulted primarily from the increased consulting fees for product marketing.
Interest. For the three months ended March 31, 2004, we reported interest of $7,745, a decrease of $4,692 or 38%, from $12,437 reported in the comparable prior fiscal period. The decrease was as a result of a reduction of the rate of interest on loans outstanding in the three months of 2004 compared to the three month of 2003.
Stock Based Compensation Expense. For the three months ended March 31, 2004, we reported stock compensation expense of $28,368, the same amount as reported in the comparable three months of 2003. Stock based compensation is as a result of the Strategic Alliance signed with USFilter/WT.
Net Loss for the Period. For the three months ended March 31, 2004, we reported a net loss for the period of $215,789, an increase of $59,204, or 58% over $156,585 in the comparable period of fiscal 2003. The increase in net loss was primarily due to the increase cost of general and administrative
Net Loss per Share. For the three months ended March 31, 2004, we reported a net loss per share for the period of $0.01 which is the same as the loss reported for the prior fiscal period.
LIQUIDITY
The nature of our business may be expected to include a normal lag time between the incurring of operating expenses and the collection of contract receivables. In addition, we are dependent on sales by licensees for any royalty revenue and will depend on sales from distributors, licensees and sales agents for product sales. For these and other reasons, we may experience periods of limited working capital and may be expected to require financing for working capital during those periods.
In addition, we will require financing over and above our current resources to sustain our operations and expand our marketing efforts. We cannot assure that the additional financing can be obtained on a timely basis, on terms that are acceptable or if at all.
During the period ended March 31, 2004 we financed our operations in part from short term loans and loans from related parties and minority shareholders of UVS. To fund operations of $51,000 during the quarter, we received $34,000 in demand loans and $18,000 from related party. This resulted in an increase in cash of $744 from $1874 at the beginning of the quarter to $2,578 at the end of the quarter.
We expect that, during fiscal 2004, as and if sales increase, we will continue to depend on receipt of additional funds through public or private equity or debt sales or other lender financing to fund the subcontract manufacturing of products sold, and general operational and sales expenses. Except as previously indicated, no arrangements are currently in place to
17
raise funds, although we actively continue to seek sources. Failure to receive these funds may be expected to have a material adverse effect on our company.
ITEM 3. - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's financial control over financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On October 20, 1998 a suit was filed in the Supreme Court of British Columbia by Thomas O' Flynn against the Company, Kenneth Fielding (the Company's President and Director), and Charles P. Nield (a former Director and Vice President of the Company). O' Flynn alleges that in April of 1996, he purchased shares of the Common Stock based on a representation that they would be free trading in 40 days of "the filing of a prospectus". He further alleges that in September of 1996 he purchased additional shares of Common Stock based on the representation that the shares would be free trading within 40 days of the Common Stock becoming free trading. O' Flynn alleges that the representation was a warranty and was incorrect. He further alleges that he suffered a loss because the share price decreased while he was holding the shares. He seeks damages for breach of warranty, negligence, misrepresentation and breach of fiduciary duty. The amount claimed is not specified. The Company filed an answer denying the claims and continues to actively defend the suit. Examination for discovery of Charles P. Nield was conducted in June 1999; since then there has been no further activity.
On April 25, 2003, Chelverton Fund Limited filed a suit in the Supreme Court of British Columbia against the Company for non-payment of debt in the amount of $155,000. The Company entered an appearance and filed a defense against this claim and attempted to negotiate a settlement. Chelverton filed additional information that supported their claim and the Company responded with a “no defines” position. Judgment was issued in the amount of $183,944 (C$234,642) including interest and legal costs. . Additional interest accruing during this quarter has increased the amount to $184,937. On April 5, 2004 the Company appeared in Supreme Court to provide to Chelverton and the court, specific information pertaining to the Company’s assets and its ability to pay the judgment including interest. At the April 5, 2004 the Court requested additional financial information, which the Company has now provided.
On June 6, 2003 a group of shareholders (Shareholder Group) filed a consent resolution, which among other things elected a new slate of directors and revised the company by-laws. The Company refused to accept the consent resolution or by-laws as in the opinion of the Company’s legal counsel, the consent resolutions were not in accordance with Nevada Statutes or the filing requirements of the Security and Exchange Commission. At a directors meeting held June 9, 2003, the Company elected two additional directors; Edward White and Erin Strench to the Company board, bringing the total number of directors to five. On June 16, 2003 the Shareholder Group filed for and obtained a temporary restraining order (TRO) against the Company and its five directors prohibiting the Company from among other things, issuing stock, transferring assets, changing management and other actions that would affect thestatus quo of the Company. In addition, two shareholders issued writs against various directors, alleging breach of fiduciary duty in respect of the issue of certain common shares each to John Gaetz, Ken Fielding and others. On June 24, 2003, in discussions between legal counsel for plaintiff, respondent and the hearing Judge; Judge Adams, the TRO was vacated and a date of July 2, 2003 was set for a new TRO hearing to be held in Reno, Nevada. At the July 2, 2003 TRO hearing Judge Adams did not grant a TRO and requested the plaintiff and respondent file a series of three briefs outlining their position. The first brief was filed on July 11, 2003 by our counsel. The plaintiff responded on July 18, 2003 and our counsel filed the final brief on July 25, 2003.
18
The Judge has not made a ruling on the TRO. The Company’s counsel has responded to the various other suits filed against the Company and its directors. Counsel for the Company was successful in moving these actions from Nevada State jurisdiction to federal jurisdiction. In March 2004 the Company’s legal counsel filed to withdraw from the action as a result of non-payment of legal fees. The court approved the withdrawal on two of the four cases. By April 29, 2004, the Plaintiff and the Defendant must file a proposed pre-trial order with the Federal Court, which upon approval, the Court will set down for trial. In the interim the parties to this dispute are attempting to reach a settlement on all matters. On April 28, 2004 the Company applied for and received a 45-day extension to file with the Federal Court the proposed pre-trial order.
The Company has made a provision for a loss of $27,000 in a lawsuit made by a former employee for wrongful dismissal.
Item 2. CHANGES IN SECURITIES
During the quarter ended March 31, 2004 the Company issued the following shares for the listed consideration
Date | Shares | Residency/ | Consideration | Exemption |
Citizenship | Valued at | |||
Feb 5/04 | 100,000 | CAN | $3,600 | Reg.144 |
Feb 26/04 | 775,000 | China | $77,500 | S-8 |
*Registered on S-8 on Dec 2, 2003
ITEM 3. Default upon Senior Securities
None
ITEM 4. Submissions of Matters to a vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation SB)
Exhibit Number | Description | Method of Filing | |
(3)(i) | Articles of Incorporation | (1) | |
(3)(ii) | Bylaws, as amended | (2) | |
(10)(iii) | Agreement between Douglas Sommerville and Company dated12/6/96 | (3) | |
(10)(iv) | Agreement between John Gaetz and the Company dated 12/6/96 | (4) | |
(10)(v) | Sample Agreement among minority Shareholders of UV Systems | ||
Technology, Inc. and the Company each dated 2/28/97 | (5) |
19
(10)(vi) | Marketing Distribution Agreement Between UV Systems Technology, Inc. | ||
and the Company | (2) | ||
(10)(vii) | Sales Representation Agreement between UV Systems Technology, | ||
Inc. and "The Representative" | (2) | ||
(10)(viii) | Exclusive Distributorship Agreement Between UV Waterguard Systems, Inc. | ||
and Chiyoda Kohan Co., Ltd., and NIMAC Corporation | (2) | ||
(10)(ix) | 1997 Stock Option Plan | (4) | |
(10)(x) | Interim Funding Agreement between UVS, MDS and WOF | (5) | |
(10)(xi) | Letter Agreement between the Company and Elco Bank and Trust | ||
Company Limited | (5) | ||
(10)(xii) | Loan Agreement between the Company and TD Bank | (6) | |
(10)(xiii) | The Company’s 1999 Long-Term Equity Incentive Plan | (7) | |
(10)(xiv) | Letter Agreement between Service Systems, UVS, MDS and WOF dated | ||
Feb 13, 2000 | (7) | ||
(10)(xv) | Lease dated October 2000 between Service Systems, UV Systems and | ||
Slough Estates Canada Limited | (8) | ||
(10)(xvi) | Legal Services Plan between Rosenfeld, Goldman & Ware, Inc | (9) | |
(10)(xvii) | Post Effective Amendment to Legal Services Plan filed November 19, 2001 | (10) | |
(10xviii) | 2003 Benefit Plan S-8 March 24, 2004 | (11) | |
(10xix) | Independent Contractor/Consulting Agreement | (12) | |
(10xx) | The Incentive Plan of UltraGuard | (13) | |
(31.1) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed Herewith | |
Electronically | |||
(31.2) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed Herewith | |
Electronically | |||
(32.1) | Certification Pursuant to 18 U.S.C. Section 1350, Section 906 of the | Filed Herewith | |
Sarbanes-Oxley Act of 2002. | Electronically | ||
(32.2) | Certification Pursuant to 18 U.S.C. Section 1350, Section 906 of the | Filed Herewith | |
Sarbanes-Oxley Act of 2002. | Electronically |
20
(1) | Incorporated by reference to the Corporation's Form 10SB effective on January 22, 1997 |
(2) | Incorporated by reference to the Corporation's Form S-8 filed with the Commission on October 6, 1997. |
(3) | Incorporation by reference to the Corporation's Form 10Q for the fiscal Year ended February 28, 1997. |
(4) | Incorporation by reference to the Corporation's Form 10KSB for the fiscal Year ended August 31, 1997. |
(5) | Incorporation by reference to the Corporation's Form 10KSB for the fiscal Year ended August 31, 1998. |
(6) | Incorporation by reference to the Corporation's Form 10KSB for the fiscal Year ended August 31, 1999. |
(7) | Incorporation by reference to the Corporation's Form 10KSB for the fiscal Year ended August 31, 2000. |
(8) | Incorporation by reference to the Corporation's Form 10Q for the fiscal Quarter ended November 30, 2000. |
(9) | Incorporated by reference to the Corporation's Form S-8 filed with the Commission on November 19, 2003. |
(10) | Incorporated by reference to the Corporation's S-8 POS filed with the Commission on March 23, 2003. |
(11) | Incorporated by reference to the Corporation's Form S-8 filed with the Commission on March 28, 2003. |
(12) | Incorporated by reference to the Corporation's Form S-8 filed with the Commission on June 11, 2003. |
(13) | Incorporated by reference to the Corporation's Form S-8 filed with the Commission on December 2, 2003. |
(b) Reports on Form 8-K during this quarter
None
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
ULTRAGUARD WATER SYSTEMS CORP
/s/ Kenneth R. Fielding
Kenneth R. Fielding, President
Date: May 20, 2004 | /s/ Ken Fielding |
Ken Fielding, Director | |
Date: May 20, 2004 | /s/ John R Gaetz |
John R Gaetz, Director |
22