UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 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. |
914 SHERWOOD AVENUE | |
COQUITLAM B.C.CANADA | V3K 1A6 |
Address of Principal Executive Offices | Zip code |
604-540-8282
Issuer's Telephone Number
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
Check whether the issuer: (1) filed all reports required to be filed by Section13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation SB is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB ¨
The number of shares outstanding of the issuer's only class of Common Stock $.001 par value was 25,528,565 on November 22, 2004.
INDEX
(See Accompanying Notes to the Consolidated Financial Statements)
UltraGuard Water Systems Corp.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in US dollars)
(Restated – | ||||
Note 11) | ||||
September 30, | December 31, | |||
2004 | 2003 | |||
$ | $ | |||
(unaudited) | (audited) | |||
ASSETS | ||||
Current Assets | ||||
Cash | 3,028 | 1,834 | ||
Accounts receivable | 2,841 | 2,971 | ||
Prepaid expenses and deposits | 30,714 | 63,613 | ||
Total Current Assets | 36,583 | 68,418 | ||
Property and Equipment (Note 4) | 157 | 204 | ||
Manufacturing Technology (Note 3) | 83,161 | 79,561 | ||
Total Assets | 119,901 | 148,183 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||
Current Liabilities | ||||
Accounts payable | 198,361 | 194,080 | ||
Accrued liabilities | 56,832 | 55,747 | ||
Wages and vacation pay payable | 1,711 | 3,004 | ||
Loans payable (Note 5) | 373,157 | 310,542 | ||
Amounts owing to related parties (Note 6) | 290,101 | 202,223 | ||
Total Current Liabilities | 920,162 | 765,596 | ||
Contingencies (Notes 1 and 9) | ||||
Subsequent Events (Note 10) | ||||
Stockholders’ Equity (Deficit) | ||||
Common Stock (Note 7) | ||||
100,000,000 shares authorized, with a par value of $ 0.001 | ||||
25,528,565 and 22,453,565 issued and outstanding respectively | 25,529 | 22,454 | ||
Additional paid-in capital | 572,252 | 420,227 | ||
Deferred compensation | (69,792 | ) | (320,700 | ) |
Deficit | (1,328,250 | ) | (739,394 | ) |
Total Stockholders’ Equity (Deficit) | (800,261 | ) | (617,413 | |
Total Liabilities and Stockholders’ Equity (Deficit) | 119,901 | 148,183 |
(See Accompanying Notes to the Consolidated Financial Statements)
UltraGuard Water Systems Corp.
(A Development Stage Company)
Consolidated Statements of Operations and Deficit
(Expressed in US dollars)
(unaudited)
Accumulated | |||||||||
from | (Restated- | (Restated- | |||||||
September 30, | Note 11) | Note 11) | |||||||
2002 (Date of | Three Months | Three Months | Nine Months | Nine Months | |||||
Inception) to | Ended | Ended | Ended | Ended | |||||
September 30, | September 30, | September 30, | September 30, | September 30 | |||||
2004 | 2004 | 2003 | 2004, | 2003, | |||||
$ | $ | $ | $ | $ | |||||
Project Revenue | 48,538 | 1,350 | 9,231 | 15,869 | 32,669 | ||||
Project Costs | 34,696 | – | 8,000 | 728 | 26,812 | ||||
Total Gross Profit | 13,842 | 1,350 | 1,231 | 15,141 | 5,857 | ||||
Expenses | |||||||||
Foreign exchange loss | 20,100 | – | – | – | – | ||||
General and administrative | 1,175,954 | 179,029 | 208,809 | 580,031 | 437,768 | ||||
Interest | 78,081 | 7,913 | 10,377 | 23,964 | 32,110 | ||||
Provision for lawsuit | 27,000 | – | – | – | – | ||||
Total Expenses | 1,301,135 | 186,942 | 219,186 | 603,995 | 469,878 | ||||
Net Loss From Operations | 1,287,293 | 185,592 | 217,955 | 588,854 | 464,021 | ||||
Other: | |||||||||
Loss from discontinued operations | 40,957 | – | – | – | 28,534 | ||||
Net Loss For the Period | 1,328,250 | 185,592 | 217,955 | 588,854 | 492,555 | ||||
Basic and Diluted Net Loss per Share | (0.01 | ) | (0.02 | ) | (0.02 | ) | (0.04 | ) | |
Weighted Average Number of Shares | |||||||||
Outstanding | 25,529,000 | 13,268,000 | 24,340,000 | 12,227,000 |
(See Accompanying Notes to the Consolidated Financial Statements)
UltraGuard Water Systems Corp.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in US dollars)
(unaudited)
Nine Months Ended | Nine Months Ended | |||
September 30, | September 30, | |||
2004 | 2003 | |||
$ | $ | |||
Cash Flows Used In Operating Activities | ||||
Net Loss | (588,854 | ) | (492,555 | ) |
Adjustments to reconcile net loss to cash | ||||
Depreciation and amortization | 47 | 61 | ||
Shares issued for consulting and legal services | 388,408 | 207,190 | ||
Loan interest accrued | 13,615 | 27,480 | ||
Accrual of related party wages | 87,878 | 122,476 | ||
Changes in operating assets and liabilities | ||||
(Increase) decrease in accounts receivable | 128 | (8,931 | ) | |
Decrease in inventory and contract work in progress | – | (262 | ) | |
(Increase) decrease in prepaid expenses and deposits | 46,899 | (14,289 | ) | |
Increase in accounts payable, accrued liabilities, wages and | ||||
vacation pay payable and customers’ deposits | 4,073 | 81,151 | ||
Net Cash Used in Operating Activities | (47,806 | ) | (77,679 | ) |
Cash Flows Used in Investing Activities | ||||
Manufacturing technology acquired | – | (6,776 | ) | |
Net Cash Used in Investing Activities | – | (6,776 | ) | |
Cash Flows Provided By Financing Activities | ||||
Proceeds from loans | 49,000 | 45,384 | ||
Net Cash Provided by Financing Activities | 49,000 | 45,384 | ||
Increase (Decrease) in Cash | 1,194 | (39,701 | ) | |
Cash - Beginning of the Period | 1,834 | 40,206 | ||
Cash - End of the Period | 3,028 | 1,135 | ||
Non-Cash Investing and Financing Activities: | ||||
Shares issued for manufacturing technology | 3,600 | 71,200 | ||
Shares issued to settle debt | – | 137,164 | ||
Shares issued for notes receivable and expenses | – | 110,000 | ||
3,600 | 318,364 | |||
Supplementary Information | ||||
Cash paid for interest | – | 4,592 | ||
Cash paid for income taxes | – | – |
(See Accompanying Notes to the Consolidated Financial Statements)
1. | Reverse Acquisition, Nature of Operations and Continuance of Business On December 31, 2002 (“the acquisition date”), UltraGuard Water Systems Corp. (“UltraGuard”) acquired all of the outstanding stock of Innovative Fuels Cell Technologies Inc (“IFCT”). UltraGuard issued 5,000,000 common shares to the shareholders of IFCT to acquire IFCT and its wholly-owned Austrian incorporated subsidiary UltraGuard Water Systems GmbH (“UG GmbH”). UltraGuard also issued 1,000,000 common shares to UG GmbH as part of the transaction. These shares are considered treasury shares and are not outstanding. For accounting purposes the acquisition was treated as the acquisition of UltraGuard by IFCT with IFCT as the accounting acquirer (reverse acquisition). As a result, the historical financial statements prior to the acquisition date are those of IFCT from September 30, 2002 (date of inception of IFCT). See Note 3 for Operations of UltraGuard prior to the reverse acquisition. UltraGuard and IFCT, as at December 31, 2002, reverted back to being a development stage Company. IFCT is a Nevada corporation incorporated on September 30, 2002. IFCT is the holder of an option (“the Option Agreement”) 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 UltraGuard’s Point of Use Ultraviolet Water Purification System and for ancillary uses. IFCT was assigned the Option Agreement on October 1, 2002 from a related party. The only cost incurred by the related party was a Cnd$2,500 down payment for the Option Agreement. A balance owing of Cnd$97,500 is payable and 400,000 shares of UltraGuard is to be issued to complete the Option Agreement. On March 14, 2003, a 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 of UltraGuard to be issued to 500,000. On March 6, 2003, UltraGuard 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 of UltraGuard to the vendors of MagPower. An additional Cnd$5,000 was paid on March 21, 2003 for the payment due on April 1, 2003. Commencing on May 1, 2003, Cnd$7,500 was due and unpaid, however delivery of additional 100,000 common shares of UltraGuard was made on May 1, 2003. The remaining balance is due on the first of each month thereafter until MagPower delivers the technical drawings at a rate of Cnd$7,500 per month; 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 of UltraGuard will be delivered (100,000 common shares from trust and 100,000 common shares from treasury). The payments due from May 1, 2003 monthly through September 30, 2003 amounting to Cnd$25,000 were not paid as at December 31, 2003. On February 2, 2004, UltraGuard and MagPower amended the agreement to sublicense to MagPower, in certain countries in the world, UltraGuard’s ultraviolet products for sale and use by MagPower (or its sublicenses) with MagPower’s magnesium fuel cell. As well, the February 2, 2004 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 of the remaining C$88,800 owing by UltraGuard and IFCT as a condition of the License Agreement. As a condition of the Option Agreement, IFCT was required to sell a minimum quantity of 2000 Fuel Cell units in fiscal 2003. The drawings and technical information due from MagPower is still incomplete, therefore marketing efforts have not concentrated on product sale but on product awareness. The license will be amortized on a straight-line basis over five years once the option agreement has been completed. Royalties of C$25.00 per cell will be paid to MagPower based on number of units sold. The total consideration paid for the License Agreement, as at September 30, 2004 was $83,161, which includes the value of 500,000 common shares being $74,800. During fiscal 2003, due to lack of finances, UltraGuard and IFCT 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. A loss from discontinued operations of $40,957 was charged to operations. Included in this loss is a write off of an intercompany loan between UltraGuard and UG GmbH of $11,230. There were no other assets or liabilities included in the loss from discontinued operations. 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. In June 2004 the Company commenced with the business of vending bottled water using dispensing equipment to be installed at gas bars, convenience stores, car washes, etc. The first installation was completed on August 12, 2004. During this third quarter the Company has provided advertising and direct mailing information within the local and will evaluate the revenue receipts to establish a plan for additional dispensing systems and whether water dispensing should be a continued activity of the company. |
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1. | Reverse Acquisition, Nature of Operations and Continuance of Business (continued) The Company expects that as the magnesium fuel cell product becomes available for market at the end of the first quarter in year 2005. Marketing will be commenced when the first product delivery is assured. The earliest revenue expected from this activity is estimated to occur in the second to third quarter of year 2005. 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 September 30, 2004, the Company has not recognized significant revenue, has a working capital deficit of $883,580, and has accumulated operating losses of $1,328,250 since inception. The continuation of the Company is dependent upon the continuing financial support of creditors and stockholders and obtaining short-term and long-term financing, the completion of product development and achieving profitability. These conditions raise substantial doubt about UltraGuard’s and IFCT’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 UltraGuard and IFCT (a Nevada Corporation). The operations of IFCT’s Austrian were discontinued during fiscal 2003. All significant intercompany transactions and balances have been eliminated and costs of the closing of UG GmbH have been recorded. On December 31, 2002 (“the acquisition date”), UltraGuard Water Systems Corp. (“UltraGuard”) acquired all of the outstanding stock of Innovative Fuels Cell Technologies Inc (“IFCT”). For accounting purposes the acquisition was treated as the acquisition of UltraGuard by IFCT with IFCT as the accounting acquirer (reverse acquisition). As a result, the historical financial statements prior to the acquisition date are those of IFCT from September 30, 2002 (date of inception of IFCT). See Note 3 for Operations of UltraGuard prior to the reverse acquisition. 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. Cash equivalents are stated at cost, which approximates market. Property and equipment Property and equipment are recorded at cost. Depreciation is computed on a straight-line method using an estimated useful life of five years. Revenue recognition Product sales are recognized at the time goods are shipped by customers. System and project revenue are recognized utilizing the percentage of completion method based upon materials installed and labour costs incurred. All related costs including any contract revisions or changes are recognized in the period in which they occur. UltraGuard recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” 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. Estimates and assumptions The preparation of financial statements in conformity with generally accepted accounting principles used in the United States 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 |
i) | Translation of foreign currency transactions and balances: 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. | |
ii) | Translation of foreign subsidiary balances: Monetary balance sheet items are translated into US dollars at the rate of exchange on the balance sheet date. Non-monetary balance sheet items are translated into US dollars at the rate of exchange prevailing on the transaction dates. The foreign subsidiary’s operating results are translated into US dollars using the average exchange rate for the year with any translation gain or loss and are included separately in operations. |
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2. | Significant Accounting Policies (continued) |
Basic and Diluted Net Income (Loss) Per Share UltraGuard 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 UltraGuard 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 their fair value at the date of grant. Alternatively, a company may account for granted stock awards 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. UltraGuard 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. UltraGuard 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 September 30, 2004, UltraGuard 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. Financial Instruments UltraGuard’s financial instruments consist of cash, prepaid expenses, accounts payable, accrued liabilities and advances from related and non-related parties. Unless otherwise noted, it is management’s opinion that UltraGuard 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 UltraGuard to credit risk consist principally of cash. Cash was deposited with a high credit quality 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 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 UltraGuard's financial statements. | |
2. | Significant Accounting Policies Loss Contingencies |
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2. | Significant Accounting Policies (continued) |
UltraGuard estimates a loss from a loss contingency in accordance with Financial Accounting Standards (“SFAS” No. 5 “Accounting for Contingencies”. UltraGuard accrues the loss by a charge to income when there is information available that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Goodwill and Other Intangibles In July 2001, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives but requires that these assets be reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that could indicate that their value has diminished or been impaired. Other intangible assets will continue to be amortized over their estimated useful lives. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Interim Financial Statements These interim unaudited financial statements have been prepared on the same basis as the annual 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. | |
3. | Operations of UltraGuard Prior to Reverse Acquisition with IFCT Up to February 2002 UltraGuard focused its activities on the manufacturing and marketing of its Ultra Guard® 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. On February 5, 2002, UltraGuard reached an agreement with the Clearwater Group (“Clearwater”) to assume the UVS manufacturing responsibilities of any new Ultra Guard® water treatment systems to be supplied to UVS’s strategic alliance partner, US Filter. Clearwater would also provide warranty services on any previously sold Ultra Guard® water treatment systems. During fiscal 2002, UltraGuard 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; Point of Entry units are installed at the water supply entry into the building. This UV product may include dual filtration cartridges in advance of the UV system. At a special meeting held on November 15, 2002 UltraGuard reorganized. Its shares were consolidated on a 1:50 basis; the authorized capital increased to 100,000,000 shares and the name was changed to UltraGuard. In December 2002, UltraGuard 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 Guard® technology. The debt load being carried by UltraGuard as a result of the UVS operations were impairing UltraGuard’s ability to obtain investment funds or make any other financing arrangements. On December 30, 2002, the Company disposed of its 100% owned asset, UVS. Under the terms of these agreements, UltraGuard sold 100% of the shares of UVS to 659999 BC Ltd, a Canadian private company, in exchange for the transfer and assignment to UltraGuard of all outstanding and future royalties from Clearwater Technologies Inc (“Clearwater”) and any other rights UVS may have under the License Agreement, which covered the UltraGuard® patents and technology. UVS entered into this Licence Agreement with Clearwater on February 5, 2002. No value was placed on this agreement. Full details of these Agreements between UVS and 659999 BC Ltd were filed with the Securities and Exchange Commission on Form 8-K dated January 15, 2003. Clearwater has failed to pay funds due under the various agreements, which they signed and had refused to pay any of the required payments. A writ of summons was issued against Clearwater in July 2003 in specific amounts totalling C$774,366 plus additional amounts for failure to perform, demand for return of leased equipment and cancellation of the Joint Venture Agreements. Clearwater has filed a defence against all claims. UltraGuard is continuing to pursue this action. See Note 1 for IFCT’s reverse acquisition of UltraGuard |
4. | Property and Equipment Property and equipment is stated at cost less accumulated depreciation. |
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September 30, | December 31, | ||||
2004 | 2003 | ||||
Accumulated | Net Book | Net Book | |||
Cost | Depreciation | Value | Value | ||
$ | $ | $ | $ | ||
(unaudited) | (audited) | ||||
Property and equipment | 5,533 | 5,376 | 157 | 204 |
5. | Loans Payable |
a) | Loans payable, including interest, in the 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 UltraGuard’s President, Ken Fielding, to secure the loans, was called and taken by the note holder. To compensate West Peak for its losses, UltraGuard issued 1,556,000 common shares to West Peak in full payment for their losses amounting to $130,711. UltraGuard agreed with Ken Fielding to set an unsecured loan payable in the amount of $130,712 with interest at 6% per annum as compensation for his losses. This amount was transferred from loans payable to amounts owing to related parties. | |
b) | 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, 2003, 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. The payment due February 15, 2003 was not made. No payment was made on March 15, 2003 or subsequently. On April 25, 2003, Chelverton Fund Limited filed a suit in the Supreme Court of British Columbia against UltraGuard for non-payment of debt in the amount of $155,000 and on May 2, 2003, UltraGuard was served with a writ of summons. UltraGuard entered an appearance and filed a defense against this claim and attempted to negotiate a settlement. Chelverton filed additional information to support their claim and UltraGuard 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 has been accruing which has increased the amount to $186,933. On April 5, 2004 UltraGuard appeared in Supreme Court to provide to Chelverton and the court, specific information pertaining to UltraGuard’s assets and its ability to pay the judgment including interest. The hearing was adjourned; UltraGuard was required to provide additional detailed financial information, which it has now provided. No further activity has occurred during this quarter. | |
c) | During fiscal 2003, the Company received cash loans of $61,549. As at September 30, 2004 this amount plus accrued interest of $9,922 were in default. These loans are unsecured and bear interest at 10% per annum. These loans were repayable on demand or when financing in excess of $250,000 was obtained by UltraGuard but not later than August 19, 2003. The Company has not reached a settlement agreement with the lender. | |
d) | During fiscal 2003 Elco Bank & Trust Company Limited loaned $45,174. During the period ended September 30, 2004 additional loans amounting to $47,000 were received bringing the total amount owing to $98,651. The loans are unsecured and bear interest at 10% per annum and are due on December 31, 2004. | |
e) | During fiscal 2003 the Company received loans totalling $14,780. During the period ended September 30, 2004 additional loans of $2,000 were received bringing the total amount owing to $16,103, which are due on demand, unsecured, and non-interest bearing. | |
6. | Amounts Owing to Related Parties These amounts, totalling $290,101, represent unpaid wages and consulting for two officer/directors in the amount of $149,953, which are due on demand, unsecured and non-interest bearing and include an amount of $130,712 plus accrued interest of $9,436 due to Ken Fielding as a result of actions taken discussed in Note 5. Imputed interest on previous non-interest bearing related party loans totalled $31,928 which was recorded as donated capital, calculated at 10% per annum. In fiscal 2003, two officers/directors were issued 2,400,000 shares of common restricted stock of UltraGuard at $0.0338 per share totalling $81,120 for partial payment of wages. |
7. | Common Stock |
(a) | Private Placement On September 25, 2003, pursuant to a private placement, UltraGuard issued 1,100,000 common shares at |
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$.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 UltraGuard. Subsequent to December 31, 2003, UltraGuard agreed to extend the note to Octoberr 29, 2004. Subsequent to this quarter the Company extended the note until November 29, 2004 and reduced the amount to $11,000 to reflect the current market value of the shares. (Note 10) | ||
(b) | Warrants outstanding as at December 31, 2003: On October 3, 2000, 3,000,000 Class C warrants were issued pursuant to a Strategic Alliance and other agreements with US Filter’s Wallace and Tiernan Products Group, a wholly owned subsidiary of U.S. Filter (“US Filter”) to market and sell under license UltraGuard’s UltraGuard® ultraviolet disinfection technology for water and wastewater applications. The value of the 3,000,000 Class C Warrants issued totalled $656,700. In June 2001, UltraGuard entered into a funding agreement with US Filter/Wallace and Tiernan Products Group. As a term of the funding agreement, the warrant exercise price on the above 3,000,000 warrants was reduced to $0.24 per share. The expiry date of these warrants was changed to October 3, 2010. In addition, 5,105,000 Class C warrants were issued with an exercise price of $0.24 per share and an expiry date of October 3, 2010. These additional warrants were issued because of certain funding criteria being met. The value of the 5,105,000 Class C warrants issued totalled $478,000. An annual amount of $113,470 was being charged to operations prior to the reverse acquisition. As a result of the 1:50 Reverse Split, the total number of C warrants were reduced to 162,100 with an exercise price of $12.00 per share. As a result of the reverse acquisition and the 1:50 Reverse Split, these warrants were considered to have no value to the reorganized operation given the increase in exercise price significantly above fair value of the common shares and the new direction of the Company. As a result, no amount was charged to operations during fiscal 2003. On August 27, 2003 US Filter terminated the Strategic Alliance Agreement for defaults under the terms of the Agreement including failure of Clearwater to enter into a transfer agreement. | |
(d) | Incentive Plan On November 26, 2003, UltraGuard adopted The Incentive Plan that was registered with the Securities Exchange Commission on December 1, 2003 on Form S-8. Under the plan, UltraGuard may issue 5,000,000 shares of common stock or grant options. | |
(e) | 2003 Employee Benefit Plan On March 28, 2003, the Company filed a Form S8 Registration Statement with the U.S. Securities and Exchange Commission to register 2,400,000 shares of common stock pursuant to the Company’s 2003 Employee Benefit Plan (“2003 Plan”). This 2003 Plan is for persons employed or associated with the Company, including without limitation any employee, director, general partner, officer, attorney, accountant, consultant or advisor, is intended to advance the best interests of the Company by providing additional incentive to those persons who have a substantial responsibility for its management, affairs, and growth by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationship with the Company. The determination of those eligible to receive options under the 2003 Plan, and the amount, price, type, timing and vesting of each Stock option and the terms and conditions shall rest at the sole discretion of the Company’s Board of Directors, subject to the provisions of the 2003 Plan. This plan will terminate on the earliest of 5 years or date the last shares issued. |
Shares | Weighted Average | Weighted Average | |||||
Under Option | Option Price | Remaining Life of | |||||
# | $ | Options (Months) | |||||
December 31, 2003 (audited) | 125,000 | .13 | 32 | ||||
Granted | – | – | – | ||||
Expired | – | – | – | ||||
Cancelled | – | – | – | ||||
September 30, 2004 (unaudited) | 125,000 | .13 | 23 |
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7. | Common Stock (continued) |
(d) | 2003 Employee Benefit Plan (continued) The fair value of the employee’s purchase rights under SFAS 123 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. These options were granted for services provided, or to be provided, to UltraGuard. 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. UltraGuard 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 UltraGuard’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. If compensation expense had been determined pursuant to SFAS 123, UltraGuard’s net loss and net loss per share would have been as disclosed below. During fiscal 2003, UltraGuard 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. The pro forma information is as follows: |
As of | As of | ||||
September 30, | September 30, | ||||
2004 | 2003 | ||||
$ | $ | ||||
(unaudited) | (unaudited) | ||||
Net loss | |||||
As reported | (588,854 | ) | (492,555 | ) | |
Stock Based Compensation- as reported | – | ||||
Stock Based Compensation – determined under fair market value | (2,610 | ) | (1,160 | ) | |
Pro forma | (591,464 | ) | (493,715 | ) | |
Basic net loss per share | |||||
As reported | (.02 | ) | (.04 | ) | |
Pro forma | (.02 | ) | (.04 | ) |
(f) | Independent Contractor/Consulting Agreement Plan On June 11, 2003 UltraGuard registered and issued 1,500,000 shares on Form S-8 to three consultants for product marketing consulting expenses. | |
(g) | Long-Term Equity Incentive Plan UltraGuard has allotted 100,000 shares pursuant to a Long-Term Equity Incentive Plan. | |
(h) | Legal Services Plan On March 24, 2003 UltraGuard filed a Form S-8 POS with the SEC, which cancelled the Plan and all remaining shares. | |
(i) | Valuation of Common Stock Issued for Services and Assets The Company applies EITF 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employers for Acquiring, or in Conjunction with Selling, Goods or Services”, in accounting for shares issued to consultants. The value of these shares were based on calculating the fair market value of the stock determined by the stock price of the underlying stock. During the period ending September 30, 2004 UltraGuard issued the following common shares for asset acquisition and consulting services. |
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7. | Common Stock (continued) |
(i) | Valuation of Common Stock Issued for Services and Assets (continued) |
Weighted | ||||||
Average | ||||||
Fair Market | ||||||
Shares | Value | Total | ||||
Issued | Per Share | Fair Value | ||||
# | $ | $ | ||||
Consulting for services to be provided | ||||||
Pursuant to the incentive plan (Note 7(c)) | 775,000 | 0.10 | 77,500 | |||
Pursuant to the incentive plan (Note 7(c)) | 2,000,000 | 0.03 | 60,000 | |||
Legal | ||||||
Pursuant to the incentive plan (Note 7(c)) | 200,000 | 0.07 | 14,000 | |||
For Asset Acquisition | ||||||
Not pursuant to any plan | 100,000 | 0.036 | 3,600 | |||
3,075,000 | .05 | 169,100 |
The terms of some of the agreements for future services are in excess of one year and have various expiry dates. As a result $247,250 has been charged to operations as consulting and legal expenses and the balance of $69,792 has been charged to shareholders’ equity as deferred compensation. |
8. | Segmented Information The business of UltraGuard is carried on in one industry segment (see Note 1). UltraGuard and IFCT currently operate 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 3) UltraGuard and IFCT now operate in one business segment and one geographical area. |
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2004 | September 30, 2003 | |||||||
(unaudited) | (unaudited) | |||||||
United | United | |||||||
States | Europe | Total | States | Europe | Total | |||
$ | $ | $ | $ | $ | $ | |||
Revenue | 15,869 | – | 15,869 | 32,669 | – | 32,669 | ||
Expense | 604,723 | – | 604,723 | 496,690 | 28,534 | 525,224 | ||
Loss | 588,854 | – | 588,854 | 464,021 | 28,534 | 492,555 |
As of | As of | |||||||
September 30, 2004 | September 30, 2003 | |||||||
(unaudited) | (unaudited) | |||||||
United | United | |||||||
States | Europe | Total | States | Europe | Total | |||
$ | $ | $ | $ | $ | $ | |||
Identifiable assets | 36,740 | – | 36,740 | 46,467 | – | 46,467 | ||
Manufacturing technology | 83,161 | – | 83,161 | 79,561 | – | 79,561 | ||
Total assets | 119,901 | – | 119,901 | 126,028 | – | 126,028 |
9. | Legal Proceedings/Contingency Accrual |
(a) | On October 20, 1998 a suit was filed in the Supreme Court of British Columbia by Thomas O’Flynn against UltraGuard, Kenneth Fielding (UltraGuard's President and Director), and Charles P. Nield (a former Director and Vice President of UltraGuard), O’Flynn alleges that in April of 1996, he purchased common shares of UltraGuard 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 common shares of UltraGuard based on the representation that the shares would be free trading within 40 days of the common shares 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. | |
9. | Legal Proceedings/Contingency Accrual (continued) UltraGuard filed an answer denying the claims and will continue to actively defend the suit. The suit has |
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remained inactive since early 1999. There has been no loss provision accrued pursuant to this action against UltraGuard as the probability of incurring a material loss is remote. | ||
(b) | On April 25, 2003, Chelverton Fund Limited filed a suit in the Supreme Court of British Columbia against UltraGuard for non-payment of debt in the amount of $155,000. UltraGuard 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 UltraGuard responded with a “no defines” position. Judgment was issued in the amount of $183,944 (C$234,642) including interest and legal costs. On April 5, 2004 the Company appeared in the Supreme Court of British Columbia to provide to Chelverton and the court, specific information pertaining to the Company’s assets and its ability to pay the judgment including interest. The hearing was adjourned with a requirement that UltraGuard provide additional detailed financial information. This information has now been provided. No further action has occurred. | |
(c) | 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 UltraGuard’s by-laws. UltraGuard refused to accept the consent resolution or by-laws as in the opinion of UltraGuard’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, UltraGuard elected two additional directors; Edward White and Erin Strench to UltraGuard’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 UltraGuard and its five directors prohibiting UltraGuard, from among other things, issuing stock, transferring assets, changing management and other actions that would affect thestatus quo of UltraGuard. 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 UltraGuard’s counsel. The plaintiff responded on July 18, 2003 and UltraGuard’s counsel filed the final brief on July 25, 2003. The Judge has not made a ruling on the TRO. UltraGuard’s counsel has responded to the various other suits filed against UltraGuard and its directors. Counsel for UltraGuard was successful in moving these actions from Nevada State jurisdiction to federal jurisdiction. In March 2004 UltraGuard’s legal counsel filed to withdraw from the action as a result of non-payment of legal fees. The court approved the withdrawal of the lawyer 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. During this quarter the Company and the Plaintiff requested and received an extension to August 26, 2004 to settle this matter or file the pre-trial order, which upon approval, the Court will set down for trial. On October 28, 2004 we jointly filed a pre-trial notice and on November 15, 2004 in a conference call with the sitting Judge a trial date was set for February 22, 2005. In the interim, the parties to this dispute have reached a settlement on all matters. Agreements are being drafted. No loss provision has been accrued, as the probability of incurring a material loss is remote. | |
(d) | UltraGuard has made a provision for a loss of $27,000 in a lawsuit made by a former employee for wrongful dismissal. This amount represents the total probable loss of the lawsuit and has been fully accrued. | |
10. | Subsequent Events |
(a) | See notes 5(a) and 9(c) for ongoing legal proceedings. | |
(b) | See note 7(a) for revaluation of notes receivable and payment extension | |
11. | Restatements It was determined that the acquisition of Innovative Fuel Cell Technologies, Inc. ("IFCT") was a reverse acquisition of UltraGuard instead of an acquisition of IFCT by UltraGuard as previously reported and the Class “C” warrants were considered to have no value and thus annual charges of $113,470 were terminated as at December 31, 2002. The shareholders of IFCT gained control of UltraGuard on December 31, 2002. Certain disclosures and financial statement amounts have been restated as of December 31, 2002 and 2003. The December 31, 2002 operating results are now those of IFCT from September 30, 2002 (Date of Inception) to December 31, 2002. For the year ended December 31, 2002 net loss has been restated to decrease the loss from $657,617 to $12,292 and net loss per share has been restated to decrease the loss per share from $0.06 per share to nil. For the year ended December 31, 2003 net loss has been restated to decrease the loss from $840,573 to $727,102 and net loss per share remained unchanged at $0.05 per share. The balance sheets as at December 31, 2002 and 2003 were restated to remove $1,025,291 of capitalized manufacturing technology and the stockholders' equity section was revised to eliminate the stockholders' equity of UltraGuard. Previously reported stockholders' equity as at December 31, 2002 of $453,335 has been reduced by $1,025,291 to a stockholders' deficit of $571,956 and the previously reported stockholders' equity as at December 31, 2003 of $407,878 has been reduced by $1,025,291 to a stockholders' deficit of $617,413. There was |
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11. | Restatements (continued) |
no change in stockholders’ equity as a result of the reduced valuation of the warrants. The cash flow statement for the fiscal year ended December 31, 2002 was restated accordingly and only certain disclosures were made for the year ended December 31, 2003. Since IFCT was in the development stage these financial statements were revised to include certain required disclosures for Development Stage Enterprises pursuant to Statement of Financial Accounting Standard ("SFAS") No. 7 including accumulated from inception disclosures for the statement of operations and cash flows and stockholders' equity. Notes 1, 3 and 4 have been significantly revised to reflect the reverse acquisition. |
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Forward-looking statements deal with our current plans, intentions, beliefs and expectations and are statements of future economic performance. Statements containing terms like "believes", "does not believe", "plans", "expects", "intends", "estimates", "anticipates", and other phrases of similar meaning are considered to imply uncertainty and are forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from what is currently anticipated. We make cautionary statements throughout this report and the documents we have incorporated by reference, including those stated under the heading "Risk Factors". You should read these cautionary statements as being applicable to all related forward-looking statements wherever they appear in this report, the materials referred to in this report, and the materials incorporated by reference into this report.
We cannot guarantee our future results, levels of activity, performance or achievements. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this report.
Where we say "we", "us", "our", or "the Company", we mean UltraGuard Water Systems Corp and its subsidiaries.
MANAGEMENT DISCUSSION-OVERVIEW
Vancouver-based UltraGuard Water System Corp (“UltraGuard”) or (“Company”), (formerly Service Systems International, Ltd.), through its previously owned subsidiary UV Systems Technology, Inc. ("UVS") are committed to a legacy of a healthy planet for future generations through the development and commercialization of superior, cost-effective, environmentally friendly, ultraviolet-based water treatment products and systems.
The Company was incorporated in Nevada in August 1990 under the name Service Systems International Ltd and was inactive until eight Canadian and European individuals acquired it in July 1995.
Our offices are located at 914 Sherwood Avenue, Coquitlam British Columbia, Canada, V3K 1A6, our telephone number is (604) 540-8282 and our Internet website address iswww.ultraguard.com. References in this document to we, us, our, and the company include Innovative Fuel Cell Technologies Inc and UltraGuard Water Systems GmbH, unless the context otherwise requires. ULTRA GUARDR and "WAVY LINES & DESIGNS" logo are our registered trademarks. Any other trademarks or trade names referred to in this document are the property of their respective owners.
For the period up to February 2002 we were the designer, manufacturer and marketer of state of the art ultraviolet disinfection systems for wastewater disinfection with additional application possibilities in potable water. During fiscal 2002 the Company’s changed its business focus away from only providing ultraviolet equipment for wastewater disinfection to the treatment of water for drinking and other uses, coupled with ultraviolet and filtration.
In fiscal 2002 our Company discontinued manufacturing of the wastewater products and entered into various agreements to change it business focus. The wastewater business was licensed to Clearwater Industries Ltd.
The emphasis of our business remained in ultraviolet disinfection, however we now target drinking water with systems developed for low-flow drinking water application. The products currently developed and under development are used to disinfect and filter water. The systems identified are, Point of Entry (POE) purification system, which is installed where the water enters the home, and Point of Use (POU) purification system, which is located at the faucet
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During 2002, the Company was unable 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 for the disposition of UVS and the removal of the UVS debt and receivable carried on the Company’s financial statements. Manufacturing and marketing of the UVS technology had been discontinued by the Company and was licensed to Clearwater Industries in February 2002. The purchaser of UVS was 659999 BC Ltd. 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. Full details of these agreements are available on Form 8K filed with the SEC on January 15, 2003.
In December 2002 we added an additional business focus; the manufacturing and marketing of a primary, alternative and emergency power generating Magnesium-Air power cell. Through a reverse acquisition concluded on December 31, 2002 UltraGuard Water Systems Corp. (“UltraGuard”) acquired all of the outstanding stock of Innovative Fuels Cell Technologies Inc (“IFCT”). IFCT is the holder of an option to purchase worldwide manufacturing and marketing rights to a 12-volt Magnesium-Air Semi Fuel Cell from MagPower Systems Inc. for use with UltraGuard’s Point of Use and Point of Entry Ultraviolet Water Purification System, and for ancillary uses such as lighting, radio and other low energy electrical needs.
On March 14, 2003 IFCT exercised the license for the Fuel Cell..
OUR PRODUCTS
Point of Use and Point of Entry
Our Point of Use (POU) and Point of Entry (POE) ultraviolet purification systems with or without filtration are used for the drinking water and water for human contact. The POE is attached to the water supply line at its entry point into a building; the POU is attached under a sink directly in advance of the faucet. These products will meet the needs and requirements of the population of the North American marketplace. In Europe our Austrian company UltraGuard Water Systems GmbH is developing a POU product for the specific and demanding requirements of the European market.
Wastewater Systems
The UV disinfection system is sold under its registered trademark, UltraGuard® SLR System. The UltraGuard® system incorporates: 1) low-pressure, high intensity, high efficiency UV lamps, 2) infinitely variable ultraviolet lamp controllers, 3) a patented high-performance reactor module, 4) patented flow-balanced weirs, and 5) an automatic quartz sheath cleaning system. Currently this product is primarily sold for municipal wastewater disinfection. However, our UV technology can be applied to many treatment needs. These include industrial process water disinfection, potable water disinfection, and other fluid and air disinfection. UV disinfection systems have none of the safety issues with which chlorination systems must deal. UV has the advantage of being relatively simple to operate and maintain. UV disinfection is a physical, rather than chemical process, using UV radiation to permeate bacterial and viral cell walls and prevent the cells from replicating.
On February 5, 2002 we signed an agreement with Clearwater Technologies Inc wherein Clearwater agreed to assume the manufacturing for new UV projects. This agreement included Clearwater’s requirements to supply these products to our Strategic Alliance partner, USFilter and to adhere to the terms and conditions contained within the USFilter Strategic Alliance Agreement. As well, Clearwater was required to provide warranty services on previously delivered UV products. The Company was to be paid a royalty on sales, the percentage scaled upward as the total sale volume increases. Clearwater failed to live up to its commitment, failed to pay the Company funds owed and generally failed to perform its commitments under the USFilter Strategic Alliance Agreement.
On July 23, 2003 UVS issued writ against Clearwater for recovery of amounts owing.
In August 2003 USFilter terminated the Alliance Agreement (and associated agreements).
Magnesium-Air Fuel Cells
In December 2002 we acquired the rights to a magnesium-air fuel cell system developed by MagPower Systems Inc. The magnesium air fuel cells will be manufactured to the specifications and technical data to
17
be furnished by the developer MagPower Systems Inc. The magnesium air fuel cells provide greater safety and cost savings over the better-known hydrogen fuel cells. Both cell produce electricity through an electrochemical reaction but magnesium-based fuel cells are more environmentally friendly, easier to recycle, more versatile and more efficient because they are simpler and safer.
Magnesium-Air Fuel Cells are cleaner; they support the global push for a sustainable environment. They are easily recycled, clean and consume no fossil fuels, produce no toxic emissions, thus reducing harmful greenhouse effects. To recharge the cell, you basically remove the spent magnesium core, replace it with a new core and add salt or seawater electrolyte.
Magnesium-Air Fuel Cells are safer; the simple magnesium anode and natural electrolyte make this cell less combustible than a hydrogen fuel cell. Unlike hydrogen fuel cells, which use pure hydrogen, with magnesium-based fuel cells, no safety sealed fuel storage is required, its fuel can be magnesium or magnesium-alloy. No special safety permits are required for transportation by plane. The magnesium-based fuel cell has an indefinite shelf life because the electrolyte can be removed before storing the cell. When power is needed, the electrolyte is poured back into the cell. Electrolyte in a non-magnesium fuel cell, power generator or battery cannot be removed, stored and reused by the consumer. This sustainability provides a reliable source of power for emergency situations.
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.
The magnesium air fuel cell will be packaged with the UV POU and POE purification systems to provide a permanent or portable purification system for either temporary service application, emergency stand-by or for remote dwellings or villages where electrical power is unavailable.
During 2004, MagPower has signed licensing rights in Australia and China for the Fuel Cell, has completed its prototype development and has leased manufacturing facilities in British Columbia, Canada for the manufacturing of the Fuel Cell. Production units are scheduled to be available in first quarter of 2005. MagPower's progress will be closely monitored. As soon as product is availability the Company can seriously market its point of use UV system with the Fuel cell.
As a result of the reverse takeover of Innovative Fuel Cell Technologies Inc on December 31, 2003, the Company’s status changed to that of a development stage company. Therefore, consolidated balance sheets of UltraGuard Water Systems Corp and the related consolidated statements of operations and cash flows and stockholders’ equity, include operations for the period from September 30, 2002 (Date of Inception) to September 30, 2004.As a development stage company, we have generated total revenue to September 30, 2004 of $48,538. This amount was received for royalty and UV component sales, unrelated to the fuel cell acquisition.
Drinking Water Dispensers
During the quarter ended June 30, 2004, the Company commenced business in the bottled water industry sector. Working with The Water Clinic, a 20 year old company located in Winnipeg, Manitoba, Canada, the Company has purchased and installed its first bottled water-dispensing unit, the AquaPure system. The AquaPure system dispenses pure and safe drinking water, treated by reverse osmosis and disinfected by ultraviolet. The unit is coin operated and configured to refill 4.9 -gallon water bottles. The AquaPure system will be leased to and placed in convenience stores, gas bars, car washes, and other location, which offer ready access for the public. Revenues from the sales are split between the Company and the Leasor; 70% for the Company, 30% to the Leasor. During the quarter-ended September 30, 2004 we continued to test market at the first installation site. Using direct mailing marketing and local newspaper advertising, we contacted households in the immediate area of the installation, providing discounted pricing and free refills. To date results have been running at about 50% of expected sales. The program will continue until the end of December 2004 after which a decision will be taken on whether to go forward with additional units or change our approach to the market. Assuming the program generates reasonable revenues, the Company will sign up other locations that have approached the Company for AquaPure system leases.
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eBay Marketing
In June 2004, the Company instituted a marketing program for its filtration products including point of use reverse osmosis units and various other water treatment systems and components. Using eBay Canada (eBay) as the marketing venue, sales have occurred and are slowly increasing. eBay was chosen as the marketing means to provide wide exposure of the Company's products for the general consumer and to provide an opportunity to the Company's shareholder base, to have direct access to these products. After reviewing the results of the past months, we have determined that this venue better suits a company without facilities, working from a home base with low overhead expenses, and in November, discontinued this method of marketing.
PLAN OF OPERATION
During fiscal 2004, we plan to continue product awareness marketing of the UltraGuard® magnesium fuel cell technology with the point of use and point of entry ultraviolet disinfection systems and filtration products. This marketing will be financed through the sale of equity shares and with common stock issued for services. We are informed by MagPower Systems that fuel cell products will be available at the end of the first quarter of year 2005. Funds for operations and product will be provide through the sale of equity shares and elated party loans. As we get nearer to and see that product will be available a more concerted marketing will commence. Based on this timing we expect that revenue generation can occur starting in the later part of the 2nd quarter 2005 and early 3rd quarter 2005.
The Company will focus its efforts on the following markets and products.
The Magnesium Air Fuel Cell with UV for remote application The Point of Entry and Point of Use UV/Filtration system The licensing of the UltraGuard Single Lamp Reactor wastewater UV system Other water disinfection, cleaning and related business opportunities |
During the period from inception on September 30, 2002 to September 30, 2004 we have incurred aggregate net losses of approximately $1,328,250. We will likely continue to incur significant additional operating losses as marketing efforts continue. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and when revenue is recognized.
BASIS OF PRESENTATION
The financial statements include accounts of Ultraguard Water Systems Corp. and its 100% owned subsidiary, Innovative Fuel Cell Technologies Inc.
RESULTS OF OPERATIONS FOR THE NINE ONTHS ENDED SEPTEMBER 30, 2004
Nine months ended September 30, 2004 compared to the Nine months ended September 30, 2003
Revenues. During the nine months ended September 30, 2004, we reported revenues of $15,869 compared to revenue of $32,669, a decrease of 51% compared to the results being reported in the nine months of fiscal 2003,. The decrease in revenue is as a result of very low UV system and components sales offset somewhat by royalty revenue amounting to $12,500.
Direct Project Costs. Project costs recorded during the nine months ended September 30, 2004 amounted to $728 compared to $26,812 recorded during the nine months ended September 30, 2003. The decrease in cost was due to the low activities in UV and component sales and the low direct costs associated with royalty sales.
Gross Profit. Gross profit increased by $9,284 to $ 15,141, or 159%during the nine months ended September 30, 2004, compared to $5,857 recorded during the nine months ended September 30, 2003. The increase was mainly due to the low direct costs associated with royalty sales.
General and Administrative Expense. For the nine months ended September 30, 2004,, we reported general and administrative expense of $580,031, an increase of $142,263 or 43% from $437,768 reported in the comparable period of the prior year. This increase resulted primarily from increased consulting fees paid contracted under multi-month contracts for awareness marketing.
Interest. For the nine months ended September 30, 2004, we reported interest of $23,964, a decrease of $8,146 or 25%, from $32,110 reported in the comparable prior fiscal period. The decrease was as a result
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of a reduction in the rate of interest on loans outstanding in the six months of 2004 compared to the six month of 2003.
Net Loss for the Period. For the nine months ended September 30, 2004, we reported a net loss for the period of $588,854, an increase of $96,299 or 20% over $492,555 in the comparable period of fiscal 2003. The increase in net loss was primarily due to the increase cost of consulting fees included in general and administrative expense.
Net Loss per Share. For the nine months ended September 30, 2004, we reported a net loss per share for the period of $0.02 compared to $0.04 reported during the comparable period of the prior year. The decrease in loss per shares is primarily as a result of the greater number of shares outstanding at September 30, 2004 over which the loss was shared
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
Three months ended September 30, 2004 compared to the three months ended September 30, 2003
Revenues. During three months ended September 30, 2004, we reported revenues of $ 1,350 compared to revenue of $ 9,231 being reported in the three months ended September 30,2003.
Direct Project Costs. Project costs recorded during the three months ended September 30, 2004 amounted to $nil compared to $8,000 recorded during the comparable three months of fiscal 2003.
Gross Profit. Gross profit increased by $119 for the three months ended September 30, 2004 from $ 1,231 during the comparable three months of fiscal 2003.
General and Administrative. For the three months ended September 30, 2004, we reported general and administrative expense of $179,029, a decrease of $29,780 or 14% from $208,809 reported in the comparable period of the prior year. This decrease resulted primarily from a decreased in legal fees.
Interest. For the three months ended September 30, 2004, we reported interest of $7,913, a decrease of $2,464, or 24%, from $10,377 reported in the comparable prior fiscal period. The Company issued 1,626,000 shares to repay loans on $137,164 and reduced the rate of interest on a loan assumed by a related party during the three months of 2004 compared to the three month of 2003.
Net Loss for the Period. For the three months ended September 30, 2004, we reported a net loss for the period of $185,592, a decrease of $ 32,363 or 15 % over $217,955 in the comparable period of fiscal 2003. The increase in net loss was primarily due to the decrease cost of interest included in general and administrative expense.
Net Loss per Share. For the three months ended September 30, 2004, we reported a net loss per share for the period of $0.01 compared to $0.02 reported during the comparable period of the prior year. The decrease in loss per shares results from the greater number of shares outstanding at September 30, 2004 over which the loss was shared
Item 3. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As at the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic Securities and Exchange Commission ("SEC") filings is recorded, processed and reported within the time periods specified in the SEC's rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as at the end of the period covered by this report, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.
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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 Service Systems, Kenneth Fielding (Service Systems’ 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 Service Systems’ 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 defence 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 and judgment was issued in the amount of $193,944 (C$234,642) including interest and legal costs 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. The Company was required to and has, provided additional detailed financial information.
On June 6th, 2003 a group of shareholders consisting of the original owners of Innovative Fuel Cell Technologies Inc (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 Security and Exchange Commission. At a directors meeting held June 9th, 2003, the Company elected two additional directors; Edward a 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 director 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 the four directors, alleging breach of fiduciary duty in respect of the issue of certain common shares 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. The Company’s counsel has responded to the various other suits filed against the Company and its directors. The Company had attempted during the second quarter to have these cases moved from Nevada State court to federal court and in the third quarter we were advised that these cases would be heard in federal court. Subsequent to December 31, 2003, 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 in 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. During this quarter the Company and the Plaintiff requested and received an extension to August 26, 2004 to settle this matter or file the pre-trial order, which upon approval, the Court will set down for trial. On October 28, 2004 we jointly filed a pre-trial notice and on November 15, 2004 in a conference call with the sitting Judge a trial date was set for February 22, 2005. During this fiscal period, one of the Plaintiffs withdrew from the action In the interim, the parties to this dispute have reached a settlement on all matters. Agreements are being drafted. No loss provision has been accrued, as the probability of incurring a material loss is remote
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULT UPON SENIOR SECURITIES
None
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FROM 8-K
ITEM 13. 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 dated | |||
12/6/96 | (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 | ) | |
(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 |
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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 | (10 | ) |
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 of Kenneth Fielding pursuant | Filed herewith | |
to Sec 302 of the Sarbanes-Oxley Act of 2002 | Electronically | ||
(31.2) | Certification of John R Gaetz pursuant | Filed herewith | |
to Sec 302 of the Sarbanes-Oxley Act of 2002 | Electronically | ||
(32.1) | Certification of Kenneth Fielding pursuant | Filed Herewith | |
Section 906 of the Sarbanes-Oxley Act of 2002 | Electronically | ||
(32.2) | Certification of Kenneth Fielding pursuant | Filed Herewith | |
Section 906 of the Sarbanes-Oxley Act of 2002 | Electronically |
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. |
(b) | Reports on Form 8-K The Company filed two reports on Form 8-K in 2003, On January 15, 2003 reporting the sale of UV Systems Technology Inc to 659999 BC Ltd on Dec 31, 2002. |
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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 |
Date: November 22, 2004 | |
Ken Fielding, Director |
Date: November 22, 2004 | |
John R Gaetz, Director |
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