UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2008
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 1-09478
WATER CHEF, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0515678
-------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
68 South Service Road, Suite 100, Melville, New York 11747
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code.)
631-577-7915
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Acceleratedfiler [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 13, 2008, there were 251,435,807 shares of common stock, $0.001
par value per share, outstanding.
WATER CHEF, INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet
At March 31, 2008 (Unaudited)
and December 31, 2007 2-3
Condensed Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2008 and 2007 and
for the Period January 1, 2002 to March 31, 2008 4
Condensed Statement of Stockholders' Deficiency (Unaudited)
For the Three Months Ended March 31, 2008 5-6
Condensed Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2008 and 2007 and
for the Period January 1, 2002 to March 31, 2008 7
Notes to Condensed Financial Statements (Unaudited) 8-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4T. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item. 1A Risk Factors 18-22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
2008 2007
---------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 264,054 $ 415,400
Prepaid expenses and other current assets 37,134 41,988
---------- -------------
Total Current Assets 301,188 457,388
---------- -------------
FIXED ASSETS:
Property and equipment net of accumulated
depreciation of $3,115 and $2,063,
respectively 17,935 18,987
---------- -------------
OTHER ASSETS
Patents and trademarks, net of accumulated
amortization of $14,135 and $13,275 respectively 37,463 38,323
Deferred financing fees, net of accumulated
amortization of $7,530 and $5,020 respectively -- 2,510
Other assets 9,419 9,419
---------- -------------
Total Other Asse 46,882 50,252
---------- -------------
TOTAL ASSETS $ 366,005 $ 526,627
========== =============
See notes to condensed financial statements.
2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
(UNAUDITED)
March 31, December, 31,
2008 2007
------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 334,104 $ 492,825
Accrued compensation 99,000 104,000
Accrued consulting and director fees 178,334 166,000
Convertible notes payable to officer and director
(including accrued interest of $5,000 and 7,425 respectively 55,000 107,425
Notes payable
(including accrued interest of $268,667 and $417,542 592,548 895,077
Respectively)
Convertible promissory note
(including accrued interest of $0 and $7,945 and net of
Debt discount of $0 and $67,900 respectively) -- 190,045
Fair value of detachable warrants and options 771,100 170,900
Fair value of embedded conversion options 155,500 239,300
Accrued dividends payable 190,270 190,270
------------- ---------------
TOTAL CURRENT LIABILITIES $ 2,375,856 $ 2,555,842
------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Preferred stock $.001 par value; 10,000,000 shares
Authorized; 185,194 shares issued and outstanding,
(liquidation preference $2,402,725 and $2,375,650 as of
March 31, 2008 and December 31, 2007, respectively) 185 185
Common stock $.001 par value; 340,000,000 shares authorized;
230,410,181 shares issued and 230,405,781 shares outstanding
As of March 31, 2008; 204,177,806 shares issued and
204,173,406 shares outstanding as of December 31, 2007 230,410 204,177
Additional paid-in capital 27,193,282 26,129,184
Treasury stock, at cost - 4,400 shares of common stock ( 5,768) ( 5,768)
Accumulated deficit (includes 14,356,364 and $13,285,397
of deficit accumulated during development stage as of
March 31, 2008 and December 31, 2007, respectively (29,427,960) (28,356,993)
------------- ---------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 2,009,851) ( 2,029,215)
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 366,005 $ 526,627
============= ===============
See notes to condensed financial statements.
3
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31, For the Period
---------------------------------- January 1,2002 to
2008 2007 March 31, 2008
---------------- ---------------- -------------------
Sales $ -- $ -- $ 471,290
---------------- ---------------- -------------------
Costs and Expenses (Income)
COST OF SALES -- 15,000 575,680
SELLING, GENERAL AND ADMINISTRATIVE
Including stock based compensation of
$107,072 and $0 for the three months ended
March 31, 2008 and 2007, respectively and
$2,289,077 for the period January 1, 2002 to
March 31, 2008, respectively 478,614 162,537 7,492,560
NON-DILUTION AGREEMENT TERMINATION COSTS -- -- 2,462,453
RESEARCH AND DEVELOPMENT 111,521 -- 546,884
INTEREST EXPENSE - including interest expense
to a related party of $1,233 and $397 for the
three months ended March 31, 2008 and 2007,
respectively and $120,970 for the period
January 1, 2002 through March 31, 2008 79,499 107,275 1,503,127
FINANCING COSTS - EXTENSION OF WARRANTS -- -- 74,700
INEREST EXPENSE - CONVERSION PROVISION -- -- 113,000
(GAIN) LOSS ON SETTLEMENT OF DEBT (226,467) -- 2,387,550
CHANGE IN FAIR VALUE OF WARRANTS AND EMBEDDED
CONVERSION OPTION 627,800 112,500 211,700
---------------- ---------------- -------------------
1,070,967 397,312 15,367,654
---------------- ---------------- -------------------
NET LOSS (1,070,967) (397,312) (14,896,364)
---------------- ---------------- -------------------
DEEMED DIVIDEND ON PREFERRED STOCK -- -- (2,072,296)
PREFERRED STOCK DIVIDENDS (27,075) (139) (644,841)
---------------- ---------------- -------------------
(27,075) (139) (2,717,137)
---------------- ---------------- -------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,098,042) $ (397,451) $ (17,613,501)
================ ================ ===================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.01) $ (0.00)
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 218,163,033 189,766,250
================ ================
See notes to condensed financial statements.
4
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
---------- ----------- ----------- ----------- --------------
FOR THE THREE MONTHS ENDED MARCH 31, 2008
BALANCE - JANUARY 1, 2008 185,194 $ 185 204,177,806 $ 204,177 $ 26,129,184
Proceeds from Sale of Common Stock:
($0.0357 per share) February 29, 2008 -- -- 1,401,869 1,402 48,598
($0.0350 per share) March 7, 2008 -- -- 2,857,142 2,857 97,143
($0.0350 per share) March 13, 2008 -- -- 1,428,571 1,429 48,571
($0.0343 per share) March 13, 2008 -- -- 2,912,622 2,913 97,087
($0.0900 per share) March 26, 2008 -- -- 1,666,667 1,667 148,333
($0.1083 per share) March 26, 2008 -- -- 461,538 462 49,538
Stock for compensation:
($0.0500 per share) March 13, 2008 -- -- 1,000,000 1,000 49,000
($0.0400 per share) March 26, 2008 -- -- 333,333 333 13,000
Common stock issued in repayment of debt:
($0.02943 per share) January 9, 2008 -- -- 947,119 947 26,927
($0.02500 per share) January 17, 2008 -- -- 2,146,324 2,146 51,512
($0.22117 per share) January 17, 2008 -- -- 1,250,000 1,250 48,750
($0.03108 per share) January 22, 2008 -- -- 6,899,269 6,899 207,530
($0.02943 per share) February 1, 2008 -- -- 562,282 562 15,986
Reclassification of derivative liability -- -- -- -- 111,400
Amortization of warrants and option
over the vesting period for employees and
non employees -- -- -- -- 43,739
Issuance of common stock for $100,000 of
subscription payable($0.0443 per share)
January 4, 2008 -- -- 2,255,639 2,256 (2,256)
Issuance of shares for the exercise of
Warrants ($0.0850 per share) March 26, 2008 -- -- 110,000 110 9,240
Net loss -- -- -- -- --
---------- ----------- ----------- ----------- --------------
BALANCE - March 31, 2008 185,194 $ 185 230,410,181 $ 230,410 $ 27,193,282
========== =========== =========== =========== ==============
See notes to condensed financial statements.
5
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
(CONTINUED)
Treasury Total
Stock Accumulated Stockholders'
- at cost Deficit Deficiency
----------- ------------- ---------------
FOR THE THREE MONTHS ENDED
MARCH 31, 2008
BALANCE - DECEMBER 31, 2007 $ (5,768) $(28,356,993) $ (2,029,215)
Proceeds from Sale of Common Stock:
($0.0357 per share) February 29, 2008 -- -- 50,000
($0.0350 per share) March 7, 2008 -- -- 100,000
($0.0350 per share) March 13, 2008 -- -- 50,000
($0.0343 per share) March 13, 2008 -- -- 100,000
($0.0900 per share) March 26, 2008 -- -- 150,000
($0.1083 per share) March 26, 2008 -- -- 50,000
Stock for compensation:
($0.0500 per share) March 13, 2008 -- -- 50,000
($0.0400 per share) March 26, 2008 -- -- 13,333
Common stock issued in repayment of debt:
($0.02943 per share) January 9, 2008 -- -- 27,874
($0.02500 per share) January 17, 2008 -- -- 53,658
($0.22117 per share) January 17, 2008 -- -- 50,000
($0.03108 per share) January 22, 2008 -- -- 214,429
($0.02943 per share) February 1, 2008 -- -- 16,548
Surrender and cancellation of common stock -- -- --
Reclassification of derivative liability -- -- 111,400
Amortization of warrants and option over
the vesting period for employees and
non employees -- -- 43,739
Issuance of common stock for $100,000 of
subscription payable($0.0443 per share)
January 4, 2008 -- -- --
Issuance of shares for the exercise of
Warrants($0.0850 per share) March 26, 2008 -- -- 9,350
Net loss -- (1,070,967) (1,070,967)
----------- ------------- ---------------
BALANCE - MARCH 31, 2008 $ (5,768) $(29,427,960) $ (2,009,851)
=========== ============= ===============
See notes to condensed financial statements.
6
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended For the Period
March 31, January 1, 2002
---------------------------------- (Inception) to
2008 2007 March 31, 2008
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,070,967) $ (397,312) $ (14,896,364)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 1,052 -- 3,115
Amortization of patents 860 463 12,753
Interest expense - deferred financing 2,510 4,687 22,530
Stock-based compensation 107,072 -- 2,289,077
Interest expense - conversion provision -- -- 113,000
Accretion of debt discount 67,900 69,800 565,321
Change in fair value of warrants and
embedded conversion option 627,800 112,500 211,700
(Gain)/loss on settlement of debt (226,467) -- 2,387,550
Non-dilution agreement termination cost -- -- 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing cost - warrant extension -- -- 74,700
Changes in assets and liabilities:
Prepaid expenses 4,853 12,449 13,109
Security deposits -- (3,198) --
Inventory -- -- --
Accounts payable, accrued expenses, accrued
dividends, accrued compensation, accrued
Consulting and director fees, and
other current liabilities (146,655) 40,283 1,496,276
---------------- ---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (632,042) (160,328) (5,063,730)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- -- (21,050)
Patent costs -- -- (25,543)
---------------- ---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES -- -- (46,593)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in stock subscription receivable -- -- 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 500,000 -- 3,190,560
Proceeds from sale of common stock
to be issued -- -- 300,000
Proceeds from the exercise of warrants 9,350 -- 9,350
Deferred financing costs -- -- (22,530)
Proceeds from convertible promissory note -- -- 800,000
Proceeds from officers and director loans 100,000 100,000
Repayment of notes payable (28,654) -- (234,341)
---------------- ---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 480,696 100,000 5,338,866
---------------- ---------------- ----------------
NET (DECREASE) INCREASE IN CASH (151,346) (60,328) 228,543
CASH AT BEGINNING OF PERIOD 415,400 99,716 35,511
---------------- ---------------- ----------------
CASH AT END OF PERIOD $ 264,054 $ 39,388 $ 264,054
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Cash paid during the period for:
interest $ 1,868 $ -- $ 369,355
================ ================ ================
Compensation satisfied by issuance of
common stock $ -- $ -- $ 55,250
================ ================ ================
Common stock issued in
satisfaction of liabilities $ 362,509 $ 181,013 $ 7,037,871
================ ================ ================
Reclassification of derivative liabilities
upon conversion of debt $ 111,400 $ 20,900 $ 707,600
================ ================ ================
Reclassification of equity instruments to
liabilities upon issuance of debt $ -- $ -- $ 288,900
================ ================ ================
Reclassification of derivative liabilities
upon conversion of preferred stock $ -- $ 3,000 $ 3,000
================ ================ ================
Cancellation of debt for no consideration $ -- $ 1,327,321 $ 1,327,321
================ ================ ================
See notes to condensed financial statements.
7
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware Corporation engaged in the
design and development of its technology to be used in the marketing and sale of
water purification systems both in and outside the United States. The Company's
corporate headquarters is in Melville, New York.
NOTE 2: BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, these interim financial
statements do not include all of the information and footnotes required for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included.
The operating results for the three month period ended March 31, 2008 is not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008. These financial statements should be read in conjunction with
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB, filed on April 15, 2008, for the year ended December 31,
2007.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage as defined by Statement of Financial
Accounting Standards ("SFAS") Statement No. 7, "Accounting and Reporting for
Development Stage Companies." To date, the Company has generated limited sales
and has devoted its efforts primarily to developing its products, implementing
its business and marketing strategy and raising working capital through equity
financing or short-term borrowings.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Management bases its estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. The
most significant estimates, among other things, are used in accounting for
allowances for deferred income taxes, expected realizable values for long-lived
assets (primarily intangible assets), contingencies, as well as the recording
and presentation of its common stock and related warrants issuances. Estimates
and assumptions are periodically reviewed and the effects of any material
revisions are reflected in the financial statements in the period that they are
determined to be necessary. Actual results could differ from those estimates and
assumptions.
8
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2: BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company reports stock based compensation under Statements of Financial
Accounting Standards ("SFAS") No. 123R ("123R") "Share Based Payment." SFAS
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123R and the Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or
Services" ("EITF 96-18") which require that such equity instruments are recorded
at their fair value on the measurement date, which is typically the date the
services are performed.
The Black-Scholes option valuation model is used to estimate the fair value of
the options or their equivalent granted. The model includes subjective input
assumptions that can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options or warrants
that have no vesting restrictions and that are fully transferable. The expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted.
NOTE 3: GOING CONCERN
The accompanying unaudited condensed financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred recurring losses from operations, an accumulated deficit since its
inception of approximately $29,428,000 and $28,357,000 as of March 31, 2008 and
December 31, 2007, respectively and has a working capital deficiency of
approximately $2,075,000and $2,098,000 as of March 31, 2008 and December 31,
2007, respectively. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plans with respect to these matters include restructuring its
existing debt and raising additional capital through future issuances of stock
and/or debt. The Management plans to raise an additional 10 million dollars in
the next twelve months to fund the completion of the First Response Water Trauma
System ("FRWTS") prototype, to launch the new marketing program, to establish
sales and marketing network, to start production and build inventory units, and
to provide on-going working capital. The management anticipates that by the 4th
quarter of 2008, we will be fully commercially operational and cease to be a
development stage entity. However, should the Company not be successful in
obtaining the necessary financing to fund its operations it would need to
curtail certain of its business activities. The accompanying unaudited condensed
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
9
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4: RECENT ACCOUNTING STANDARDS
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161 "Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133 "("SFAS 161"). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments. (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows. The
guidance in SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. At this time,
management is evaluating the implications of SFAS 161 and its impact on the
condensed financial statements has not yet been determined.
NOTE 5: CONVERTIBLE PROMISSORY NOTES
On September 7, 2007, the Company entered into an agreement (the "Loan
Agreement"), pursuant to which the Company issued convertible notes in the
aggregate of $250,000 at an interest rate of 10% per annum. In addition, the
Company issued 1,384,786 warrants to purchase common stock at an exercise price
of $0.096 per share. The notes mature on March 5, 2008. The holders of the
notes are entitled to convert all or a portion of the notes into shares of
common stock at a conversion price equal to the lower of $0.12 per share or
82.5% of the average of the three lowest closing bid prices for the 10 trading
days immediately preceding the conversion date. The notes and warrants provide
rights to the holders to convert the notes or exercise the warrants. However
such actions cannot result in the holders being the beneficial owner of more
than 4.99% of the Company's outstanding common stock at that time.
The Company accounted for the September 7, 2007 transaction in accordance with
EITF issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock.". Accordingly, the
warrants and the embedded conversion option are recorded as derivative
liabilities at their fair market value and are marked to market through earnings
at the end of each reporting period. The gross proceeds of $250,000 were
recorded net of a discount of $203,000. The debt discount consisted of $68,400
related to the fair value of the warrants and $135,300 related to the fair value
of the embedded conversion option. The debt discount is charged to interest
expense ratably over the life of the loan. In January, 2008, the Company issued
8,408,670 shares of stock for the settlement of $258,851 which includes $8,851
of accrued interest.
NOTE 6: NET LOSS PER SHARE OF COMMON STOCK
Basic loss per share was computed using the weighted average number of
outstanding common shares. Diluted loss per share includes the effect of
dilutive common stock equivalents from the assumed exercise of options,
warrants, convertible preferred stock and convertible notes. Common stock
equivalents were excluded in the computation of diluted loss per share since
their inclusion would be anti-dilutive. Total shares issuable upon the exercise
of warrants and conversion of preferred stock and convertible promissory notes
for the three months ended March 31, 2008 and 2007 were as follows:
March 31,
2008 2007
---------- ---------
Warrants 27,542,806 7,812,350
Convertible promissory notes 1,980,611 4,464,667
Convertible preferred stock 1,587,760 1,622,800
---------- ----------
Total 31,111,177 13,899,817
========== ==========
10
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7: STOCKHOLDERS' DEFICIENCY
Debt
During the three months ended March 31, 2008, the Company issued 10,554,994
shares of common stock for $312,509 of debt principal and accrued interest.
In January 2008, the Company issued 1,250,000 shares of common stock for the
settlement of approximately $276,000 of principal and accrued interest under a
settlement agreement with a note holder. Under accounting guidance provided by
Emerging Issues Task Force ("EITF") No 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments" the Company recognized a gain of approximately $226,000
for the settlement.
Cash
During the three months ended March 31, 2008, the Company raised $500,000
through the sale of 10,728,409 shares of common stock.
On January 4, 2008, the Company issued 2,255,639 shares of common stock for
$100,000 of subscription payable (0.0443 per share).
During the three months ended March 31, 2008, a warrant holder exercised 110,000
shares for cash proceeds of $9,350.
Services
During the three months ended March 31, 2008, the Company issued 1,000,000
shares of common stock to a consultant for services. The Company incurred a
stock based compensation charge of $50,000.
During the three months ended March 31, 2008, the Company issued 333,333 shares
of common stock to an employee per a Termination Agreement dated February 12,
2008. The Company incurred a stock based compensation charge of $13,333.
NOTE 8: RELATED PARTY TRANSACTIONS
In March 2007, the Chief Executive Officer and a Director each made loans of
$50,000 each to the Company. The loans pay simple interest at the rate of 10%
per annum and are due and payable in 120 days. The loans to the Chief Executive
Officer and the Director carry an option that if the loans are not repaid by
June 14, 2007 and June 29, 2007, respectively, such option will entitle the
lenders to convert their debt to common stock at a price equal to 50% of the
average closing price of the Company's common stock over the three previous
business days before demand for conversion is made. Under accounting guidance
provide by EITF 00-19, the conversion price of the loans did not have a
determinable number of shares the loans could be settled in and as a result,
have been presented as a derivative liability. Accordingly, the conversion
option will be marked to market through earnings at the end of each reporting
period. In January 2008 the Chief Executive Officer converted her note plus
accrued interest of $53,658 into 2,146,324 shares of the Company's common stock.
11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8: RELATED PARTY TRANSACTIONS (CONTINUED)
On February 8, 2008, the Board of directors authorized the management team to
negotiate a termination agreement (the Agreement) with the Vice President of
sales and marketing. The Agreement was finalized on February 12, 2008. The
Company agreed to pay the Vice President eight months salary by the payment of
the sum of $7,000 each and every month commencing on February 12, 2008. Such
eight months payment constitutes six months' severance pay and two months'
regular salary during 60 days notice period. The Company will continue to
contribute 80% of the health insurance premium for the 60 days notice period
and, thereafter, 80% of the health insurance premium due under COBRA for a
period of six months following the effective date of termination. One third of
the one million shares (333,333 shares) that the Company granted on April 23,
2007 will vest immediately. The balance of 666,367 shares will be forfeited.
On March 26, 2008, the Company issued 333,333 shares of common stock to the Vice
President per the agreement and recorded a charge to operations of approximately
$13,300. The warrant the Company awarded on April 23, 2007 was voided and in
replacement, the Company will issued a warrant to purchase 666,666 shares of
the Company's common stock at an exercise price of $0.11 per share with a term
of three years, effective from the original date of grant. The replacement
warrant was fully vested on the date of the grant and accordingly the Company
recorded a charge to operations of approximately $8,500. The Company agreed to
pay the additional sum of $7,000 in two installments representing repayment for
all advances made by the Vice President on behalf of the Company to the date as
of February 12, 2008.
On March 14, 2008, Malcolm Hoenlein was appointed as Director to the Company.
In connection with his appointment, he is to receive $8,000 cash compensation
per year. In addition, Mr. Hoenlein will receive 250,000 restricted shares of
the Company's common stock upon the one year anniversary of his appointment and
a Stock Purchase Warrant to purchase 500,000 shares of the Company's common
stock. The warrant is exercisable for a three-year period following the
one-year anniversary of his appointment to the Board at an exercise price of
$0.0667 per share and will vest annually over three years. Accordingly the
Company will amortize the fair value of the warrant of approximately $17,000
over the vesting period.
NOTE 9: CREDIT RISK
The Company maintains cash deposits with financial institutions, which from time
to time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk from cash.
As of March 31, 2008, the uninsured cash balance was approximately $164,000.
The Company believes it is not exposed to any significant credit risk for cash.
NOTE 10: SUBSEQUENT EVENTS
In April 2008, Leslie J. Kessler, the Chief Executive Officer, Terry R. Lazar,
the Chief Financial Officer of the Company and a consultant for the Company,
each and individually entered into Stock Purchase, Loan and Security Agreements
with the Company.
Under the agreements, the Company will loan each individual aggregate amount of
funds. The obligations to repay the Loans are evidenced by the non-recourse
promissory notes signed by each above mentioned individual. The Notes bear
interest at a rate of 6% per annum. The Notes mature in April 2011, at which
time all unpaid principal and interest are due. The funds are to be used
exclusively for the purchase of the Company's common stock. The Purchase Price
of the stock is based on the average closing price of the Common Stock during
the 30 trading days immediately preceding the date of the Agreement which
equaled $0.0843. The following table represents the breakdown of the Notes
amount and number of shares to be purchased per the agreements:
Loan Amount Number of Shares
------------ ----------------
to be purchased
----------------
Leslie J. Kessler, CEO $ 547,950 6,500,000
Terry R. Lazar, CFO $ 547,950 6,500,000
Shaul Kochan $ 337,200 4,000,000
12
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10: SUBSEQUENT EVENTS (CONTINUED)
On April 16, 2008, the Board of the Company approved the appointments of Peter
Hayden and Gal Luft as Special Advisors to the Board. In connection with their
appointments, Mr. Hayden and Mr. Luft will each receive a four year warrant to
purchase 45,000 shares of the Company's common stock. The warrants are to be
vested at the rate of 15,000 warrants per year at each anniversary of the
appointments. The exercise price for both warrants is $0.0853.
Subsequent to March 31, 2008, the Company issued 4,544,657 shares of common
stock and warrants to purchase 908,930 shares of common stock at average price
of $0.01188 per share for total consideration of $450,000 received through
private placement. The warrants have a life of 3 years and are exercisable at
prices from $0.11 to $0.13 per share.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and related Footnotes.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. All statements regarding the
Company's expected financial position, business and financing plans are
forward-looking statements. Such forward-looking statements are identified by
use of forward-looking words such as "anticipates," "believes," "plans,"
"estimates," "expects," and "intends" or words or phrases of similar expression.
These forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
technology developments affecting the Company's products and to those discussed
in the Company's filings with the Securities and Exchange Commission ("SEC").
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
INTRODUCTION
Until the fourth quarter of 2001, Water Chef was engaged in the manufacture and
marketing of water coolers and water purification and filtration products. In
the fourth quarter of 2001, this business was sold so that the Company could
concentrate on the further development, manufacturing, and marketing of their
patented line of "PureSafe" water purification systems. In 2007 new management
made a strategic decision that the existing PureSafe System had not produced any
significant sales. New management further recognized that the existing unit
required significantly more engineering. In 2007, the Company signed a contract
with Bircon Ltd.an Israel based engineering consulting company to design our
new "First Response Water Trauma System" (FRWTS) line of new water
decontamination systems. The Company believes the "FRWTS" will be the product
by which the company's first significant sales be produced since 2001. The
Company expects to recognize initial sales of the FRWTS in the fourth quarter of
2008. At which time the Company will cease being a development stage
enterprise.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and related Footnotes.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. All statements regarding the
Company's expected financial position, business and financing plans are
forward-looking statements. Such forward-looking statements are identified by
use of forward-looking words such as "anticipates," "believes," "plans,"
"estimates," "expects," and "intends" or words or phrases of similar expression.
These forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
technology developments affecting the Company's products and to those discussed
in the Company's filings with the Securities and Exchange Commission ("SEC").
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
INTRODUCTION
Until the fourth quarter of 2001, Water Chef was engaged in the manufacture and
marketing of water coolers and water purification and filtration products. In
the fourth quarter of 2001, this business was sold so that the Company could
concentrate on the further development, manufacturing, and marketing of their
patented line of "PureSafe" water purification systems. In 2007 new management
made a strategic decision that the existing PureSafe System had not produced any
significant sales. New management further recognized that the existing unit
required significantly more engineering. In 2007, the Company signed a contract
with Bircon Ltd.an Israel based engineering consulting company to design our
new "First Response Water Trauma System" (FRWTS) line of new water
decontamination systems. The Company believes the "FRWTS" will be the product
by which the company's first significant sales be produced since 2001. The
Company expects to recognize initial sales of the FRWTS in the fourth quarter of
2008. At which time the Company will cease being a development stage
enterprise.
RESULTS OF OPERATIONS
Sales for the three months ended March 31, 2008 and 2007 were $0 and $0,
respectively. The new management of the Company made a strategic decision to
focus the Company's efforts and capital to produce a new technology that can
penetrate the market place with a water purification and delivery system when
natural and man-made disasters occur. In the past there was very little capital
invested in product development. The sales in 2006 of two pure safe water
system units did not assure new management that there was an ongoing market for
the existing system. While the marketplace has a demand for a permanent
solution, management believes that significant re-engineering will be required
to create a permanent solution from the existing Pure Safe Water System.
The year 2007 was primarily focused on identifying a market need and the
methodology to serve that market with a new and unique product. The strategic
relationship with Bircon and Gil Tenne started in the third quarter of 2007 to
design our new "First Response Water Trauma System" ("FRWTS"). The FRWTS unit
is an extension of the Company's patented technology which incorporates
additional purification techniques in a mobile, trailerable and self-contained
unit. This simple, reliable system is designed to provide clean, potable water
in all situations requiring immediate response. The management of the Company
believes that the 4th quarter of 2008 will be the defining time when the First
Response Water Trauma System achieves sales. The Company will re-address the
permanent system in 2009.
Cost of sales for the three months period ended March 31, 2008 and 2007 was $0
and $15,000, respectively. An analysis of the components of cost of sales in the
2007 and 2006 periods follows:
Rent and
Overhead
Product Payments to
Costs of Sales Period CGS Manufacturer Total
For the three months ended
March 31, 2008 $ -- $ -- $ --
For the three months ended
March 31, 2007 $ -- $ 15,000 $15,000
15
Selling, general and administrative expenses for the three months ended March
31, 2008 were $478,614 compared to $162,537 for the three months ended March 31,
2007, an increase of $316,077 or 194% The increase of selling, general and
administrative expenses are the result of many factors. Comparing with period
ended March 31, 2007, consulting fees increased $66,620 from $9,000 to $75,620;
Audit Fees increased $53,500 from $10,000 to $63,500; Change in fair value of
warrants increased $515,300 from $112,500 to $627,800; Gain on discharge of debt
increased $205,467 from $21,000 to $226,467; For the period ended March 31,
2008, we incurred $107,072 stock based compensation comparing $0 for the same
period ended 2007. Under our service agreement with Bircon, we also incurred
$111,521 in Research and development in the first quarter of 2008 comparing $0
for the same period ended 2007.
The net loss for the three months ended March 31, 2008 was $1,070,967 compared
to $397,312 in the same period ended March 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2008, the Company had a working capital deficiency of approximately
$2,075,000. In addition, the Company continues to suffer recurring losses from
operations and has an accumulated deficit since inception of approximately
$29,428,000. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements
have been prepared assuming that that the Company will continue as a going
concern. Management's plans with respect to these matters include restructuring
its existing debt and raising additional capital through future issuances of
stock and/or debt. The Management plans to raise an additional 10 million
dollars in the next twelve months to fund the completion of the FRWTS prototype,
to launch the new marketing program, to establish sales and marketing network,
to start production and build inventory units, and to provide on-going working
capital. The management anticipates that by the 4th quarter of 2008, we will be
fully commercially operational and cease to be a development stage entity.
However, should the Company not be successful in obtaining the necessary
financing to fund its operations it would need to curtail certain of its
business activities. The accompanying unaudited condensed financial statements
do not include any adjustments that might be necessary should the Company be
unable to continue as a going concern.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161 "Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133 "("SFAS 161"). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments. (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows. The
guidance in SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. At this time,
management is evaluating the implications of SFAS 161 and its impact on the
condensed financial statements has not yet been determined.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market-risk instruments or purchase hedging or
"other than trading" instruments that are likely to expose us to market risk,
whether interest rate, foreign currency exchange rate, commodity price or equity
price risk. We have not purchased options or entered into swaps or forward or
futures contracts and do not use derivative financial instruments for
speculative trading purposes.
16
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer has concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report to
provide reasonable assurance that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. The design of any system of controls is also based in part on certain
assumptions regarding the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Given these and other inherent limitations of
control systems, there is only reasonable assurance that the Company's controls
will succeed in achieving their stated goals under all potential future
conditions.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial
reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act) during the most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company had no legal proceedings during the quarter ended March 31, 2008
other than the dismissal of the Funding Group, Inc.'s claim against the Company
in February 2008, which dismissal was disclosed in Item 3 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2007 and is hereby
incorporated into this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER
INFORMATION IN THIS REPORT, INCLUDING UNDER "FORWARD-LOOKING STATEMENTS" IN ITEM
2 OF PART I OF THIS REPORT, BEFORE MAKING AN INVESTMENT IN OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES. WE COULD CONTINUE TO INCUR LOSSES IN THE
FUTURE, AND WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
We had net losses of $1.7 million and $2.1 million for the years ended
December 31, 2007 and 2006, respectively. We had a net loss of approximately
$1.1 million for the three months ended March 31, 2008. Our accumulated deficit
as of March 31, 2008 was approximately $29.4 million. We were not profitable
during the last two years and we may not be profitable in fiscal 2008.
Uncertainties still exist regarding whether or not we will attain profitability
in the future. We can provide no assurance that we will be able to achieve
profitable operations in the future.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE EXISTING OBLIGATIONS AND TO FUND OUR
OPERATIONS AND GROWTH, AND WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL UNDER
TERMS ACCEPTABLE TO US OR AT ALL.
Our capital requirements in connection with our marketing efforts,
continuing product development and purchases of inventory and parts are expected
to be significant for the foreseeable future. In addition, unanticipated events
could cause our revenues to be lower and our costs to be higher than expected,
therefore, creating the need for additional capital. Historically, cash
generated from operations has not been sufficient to fund our capital
requirements, and we have relied upon sales of securities to fund our
operations. We cannot assure you that we will have sufficient funds available to
meet our working capital requirements, or that we will be able to obtain
additional capital to finance operations on favorable terms or at all. If we do
not have, or are otherwise unable to secure, necessary working capital, we may
be unable to fund the manufacture of PureSafe systems, and we may have to delay
or abandon some or all of our development and expansion plans or otherwise
forego market opportunities, any of which could harm our business.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS HAVE STATED IN THEIR REPORT THAT
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have limited cash resources and have a working capital deficit. Our
independent registered public accountants have stated in their report for the
year ended December 31, 2007 that there exists a substantial doubt about our
ability to continue as a going concern. By being categorized in this manner, we
may find it more difficult in the short term to either locate financing for
future projects or to identify lenders willing to provide loans at attractive
rates, which may require us to use our cash reserves in order to expand. Should
this occur, and unforeseen events also require greater cash expenditures than
expected, we could be forced to cease all or a part of our operations. As a
result, you could lose your total investment.
OUR REVENUES ARE DEPENDENT UPON SALES OF A SINGLE PRODUCT, AND OUR BUSINESS WILL
FAIL IF WE DO NOT INCREASE SALES OF THAT PRODUCT.
Our revenues are derived from sales of a single product, the PureSafe. If
we are not able to increase sales of this product, our business will fail. The
PureSafe is a relatively new product in the emerging market for water
purification systems and it is difficult to predict when or if sales of the
PureSafe will increase substantially or at all. We face a substantial risk that
our sales will continue to not cover our operating expenses and that we will
continue to incur operating losses.
18
WE DEPEND ON OUR KEY PERSONNEL AND THE LOSS OF THEIR SERVICES WOULD ADVERSELY
AFFECT OUR OPERATIONS.
If we are unable to maintain our key personnel and attract new employees
with high levels of expertise in those areas in which we propose to engage,
without unreasonably increasing our labor costs, the execution of our business
strategy may be hindered and our growth limited. We believe that our success is
largely dependent on the continued employment of our senior management and the
hiring of strategic key personnel at reasonable costs. If our current chief
executive officer was unable or unwilling to continue in her present position,
or we were unable to attract a sufficient number of qualified employees at
reasonable rates, our business, results of operations and financial condition
may be materially adversely affected.
WE PLAN TO EXPAND AND WE MAY BE UNABLE TO MANAGE OUR GROWTH.
We intend to grow our business, but we cannot be sure that we will
successfully manage our growth. In order to successfully manage our growth, we
must:
- expand and enhance our administrative infrastructure;
- improve our management, financial and information systems and
controls;
- expand, train and manage our employees effectively; and
- successfully retain and recruit additional employees.
Continued growth could place a further strain on our management, operations
and financial resources. We cannot assure you that our operating and financial
control systems, administrative infrastructure, facilities and personnel will be
adequate to support our future operations or to effectively adapt to future
growth. If we cannot manage our growth effectively, our business may be harmed.
DIFFICULTIES PRESENTED BY INTERNATIONAL FACTORS COULD NEGATIVELY AFFECT OUR
BUSINESS.
A component of our strategy is to expand our international sales revenues.
We believe that we face risks in doing business abroad that we do not face
domestically. Among the international risks we believe are most likely to affect
us are:
- export license requirements for our products;
- exchange rate fluctuations or currency controls;
- the difficulty in managing a direct sales force from abroad;
- the financial condition, expertise and performance of our
international distributors and any future international distributors;
- domestic or international trade restrictions; and
- changes in tariffs.
Any of these factors could damage our business results.
TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE.
The water purification industry continues to undergo rapid change,
competition is intense and we expect it to increase. Competitors may succeed in
developing technologies and products that are more effective or affordable than
any that we are developing or that would render our technology and products
obsolete or noncompetitive. Many of our competitors have substantially greater
experience, financial and technical resources and production and development
capabilities than we have. Accordingly, some of our competitors may succeed in
obtaining regulatory approval for products more rapidly or effectively than we
can for technologies and products that are more effective and/or affordable than
any that we are developing.
19
IF OUR SOLE-SOURCE SUPPLIER IS UNABLE TO MEET OUR DEMANDS, OUR BUSINESS RESULTS
WILL SUFFER.
We purchase certain key components for some of our products from a single
contract management supplier. For some of these components, there are relatively
few alternative sources of supply. Establishing additional or replacement
suppliers for any of the numerous components used in our products, if required,
may not be accomplished quickly and may involve significant additional costs.
Any supply interruption from our supplier or failure to obtain alternative
vendors for any of the components used to manufacture our products would limit
our ability to manufacture our products. Any such limitation on our ability to
manufacture our products would cause our business results to suffer.
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY.
We face an inherent business risk of exposure to product liability and
other claims and lawsuits in the event that the development or use of our
technology or prospective products is alleged to have resulted in adverse
effects. We may not be able to avoid significant liability exposure. Although we
believe our insurance coverage to be adequate, we may not have sufficient
insurance coverage, and we may not be able to obtain sufficient coverage at a
reasonable cost. An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of our products. A product
liability claim could hurt our financial performance. Even if we avoid liability
exposure, significant costs could be incurred that could hurt our financial
performance and condition.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY FORCE US TO INCUR
UNANTICIPATED COSTS.
Our success will depend, in part, on our ability to obtain and maintain
protection in the United States and other countries for certain intellectual
property incorporated into our water purification systems and our proprietary
methodologies. We may be unable to obtain patents relating to our technology.
Even if issued, patents may be challenged, narrowed, invalidated or
circumvented, which could limit our ability to prevent competitors from
marketing similar solutions that limit the effectiveness of our patent
protection and force us to incur unanticipated costs. In addition, existing laws
of some countries in which we may provide services or solutions may offer only
limited protection of our intellectual property rights.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, AND
THIRD PARTIES MAY INFRINGE OUR PROPRIETARY RIGHTS, EITHER OF WHICH MAY RESULT IN
LAWSUITS, DISTRACTION OF MANAGEMENT AND THE IMPAIRMENT OF OUR BUSINESS.
As the number of patents, copyrights, trademarks and other intellectual
property rights in our industry increases, products based on our technology may
increasingly become the subject of infringement claims. Third parties may assert
infringement claims against us in the future. Infringement claims with or
without merit could be time consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, might not be available
on terms acceptable to us. We may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Litigation to determine the validity of any claims,
whether or not the litigation is resolved in our favor, may result in
significant expense to us and divert the efforts of our technical and management
personnel from productive tasks. If there is an adverse ruling against us in any
litigation, we may be required to pay substantial damages, discontinue the use
and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to infringing technology. Our
failure to develop or license a substitute technology may prevent us from
selling our products.
RISKS RELATING TO OUR COMMON STOCK
EXERCISE OF OUR WARRANTS OR THE ISSUANCE OF SHARES OF OUR COMMON STOCK UNDER A
CREDIT LINE OR CONVERSION OF OUR CONVERTIBLE PREFERRED STOCK WILL DILUTE THE
OWNERSHIP INTEREST OF EXISTING STOCKHOLDERS.
The exercise of our warrants into shares of our common stock or the
issuance of shares of our common stock under our line of credit with Brittany
Capital Management Limited will dilute the ownership interests of existing
stockholders. Any sales in the public market of the shares of our common stock
issuable upon exercise of our warrants or conversion of our convertible
preferred stock could adversely affect prevailing market prices of our common
stock. In addition, the existence of the warrants or the convertible preferred
stock may encourage short selling by market participants due to this dilution or
facilitate trading strategies involving the notes and our common stock.
20
FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
AFFECT THE TRADING PRICE OF SHARES OF OUR COMMON STOCK AND OUR ABILITY TO RAISE
FUNDS IN NEW STOCK OFFERINGS.
Future sales of substantial amounts of shares of our common stock in the
public market, or the perception that such sales are likely to occur, could
affect prevailing trading prices of our common stock and, as a result, the value
of the notes. As of March 31, 2008, we had 230,405,781 shares of common stock
outstanding.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE, WHICH
COULD ADVERSELY AFFECT THE PRICE OF OUR STOCK.
We, by reason of our anticipated financial status and our contemplated
financial requirements, do not contemplate or anticipate paying any dividends on
our common stock in the foreseeable future. Any payment of cash dividends in the
future will be dependent upon the amount of funds legally available, the
earnings, financial conditions, capital requirements and other factors that the
board of directors may think are relevant. As a result, you may never receive a
stream of cash payments from dividends, which could adversely affect the price
of our stock.
ALTHOUGH WE ARE SUBJECT TO THE INFORMATION AND REPORTING REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, OUR COMMON STOCK IS NOT QUOTED OR TRADED ON A
NATIONAL EXCHANGE AND INVESTORS IN OUR COMMON STOCK WILL BE SUBJECT TO RISKS
ASSOCIATED WITH THE PUBLIC TRADING MARKET GENERALLY.
We cannot predict the extent to which a trading market will develop or how
liquid that market might become. If you exercise your warrants and receive
common stock, you will pay a price that was not established in the public
trading markets. You may suffer a loss of your investment.
A SIGNIFICANT NUMBER OF OUR SHARES WILL BE AVAILABLE FOR FUTURE SALE AND COULD
DEPRESS THE MARKET PRICE OF OUR STOCK.
As of March 31, 2008, there were 230,405,781 shares of common stock
outstanding, outstanding warrants to purchase 582,524 shares of our common stock
at an exercise price of $0.0412 per share, outstanding warrants to purchase
857,142 shares of our common stock at an exercise price of $0.0420 per share,
outstanding warrants to purchase 280,374 shares of our common stock at an
exercise price of $0.0428 per share, outstanding warrants to purchase 902,256
shares of our common stock at an exercise price of $0.0532 per share,
outstanding warrants to purchase 3,000,000 shares of our common stock at $0.054
per share which will vest over three year period starting on December 14, 2007
at the rate of 1/3 per year , outstanding warrants to purchase 394,737 shares of
our common stock at an exercise price of $0.0608 per share, outstanding warrants
to purchase 389,610 shares of common stock at an exercise price of $0.0616 per
share, outstanding warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.0667 per share which will vest over three year period
starting on March 14, 2009 at the rate of 1/3 per year, outstanding warrants to
purchase 2,000,000 shares of our common stock at an exercise price of $0.0700
per share which 50% of the warrant will vest on September 28, 2008 and 50% will
vest on September 28, 2009, outstanding warrants to purchase 335,196 shares of
our common stock at an exercise price of $0.0716 per share, outstanding warrants
to purchase 631,912 shares of our common stock at an exercise price of $0.076
per share, outstanding warrants to purchase 389,610 shares of our common stock
at an exercise price of $0.0762 per share, outstanding warrants to purchase
772,352 shares of our common stock at an exercise price $0.0850 per share,
outstanding warrants to purchase 1,384,786 shares of our common stock at $0.096
per share, outstanding warrants to purchase 4,000,000 shares of our common stock
at $0.10 per share, outstanding warrants to purchase 333,333 shares of our
common stock at $0.108 per share, outstanding warrants to purchase 2,000,000
shares of our common stock at $0.11 per share which 50% vested on March 29, 2008
and 50% will vest on March 29, 2009, outstanding warrants to purchase 3,766,666
shares of our common stock at $0.11 per share, outstanding warrants to purchase
2,000,000 shares of our common stock at $0.1175 per share, outstanding warrants
to purchase 92,308 shares of our common stock at $0.13 per share, outstanding
warrants to purchase 430,000 shares of our common stock at $0.14 per share, and
outstanding warrants to purchase 2,500,000 shares of our common stock at $0.15
per share. All warrants, unless otherwise specified, fully vested. As of March
3, 2008, there were 1,587,760 shares of common stock issuable upon conversion of
our Series F convertible preferred stocks. As of March 31, 2008 there were
1,980,611 shares of common stock issuable for the conversion of certain
convertible debt. Sales of large amounts of our common stock in the market could
adversely affect the market price of the common stock and could impair our
future ability to raise capital through offerings of our equity securities. A
large volume of sales by holders exercising the warrants or stock appreciation
rights or converting outstanding promissory notes could have a significant
adverse impact on the market price of our common stock.
21
WE MAY NOT HAVE SUFFICIENT AUTHORIZED SHARES FOR THE CONVERSION OF OUR
AUTHORIZED CONVERTIBLE SECURITIES.
As of March 31, 2008, we had outstanding notes convertible into an
undeterminable amount of shares of our common stock. In addition, we have
outstanding warrants to purchase shares of our common stock. As of March 31,
2008 there were 1,980,611 shares of common stock issuable for the conversion of
certain convertible debt. As a result, we may not have sufficient authorized
shares for the conversion of our outstanding convertible debt or the exercise of
our outstanding warrants.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE, LEADING TO THE POSSIBILITY OF
ITS VALUE BEING DEPRESSED AT A TIME WHEN YOU WANT TO SELL YOUR HOLDINGS.
The market price of our common stock has in the past been, and may in the
future continue to be, volatile. For instance, between January 1, 2005 and March
31, 2008, the closing bid price of our common stock has ranged between $0.29 and
$0.01. Many factors could cause the market price of our common stock to
fluctuate substantially, including:
- future announcements concerning us, our competitors or other
companies with whom we have business relationships;
- changes in government regulations applicable to our business;
- changes in market conditions for our industry;
- overall volatility of the stock market and general economic
conditions;
- changes in our earnings estimates or recommendations by analysts; and
- changes in our operating results from quarter to quarter.
In addition, the stock market in recent years has experienced significant
price and volume fluctuations for reasons unrelated to operating performance.
These market fluctuations may adversely affect the price of our common stock at
a time when you want to sell your interest in us.
YOUR ABILITY TO INFLUENCE CORPORATE DECISIONS MAY BE LIMITED BECAUSE OUR MAJOR
STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR COMMON STOCK.
Our significant stockholders own a substantial portion of our outstanding
stock. As a result of their stock ownership, if these stockholders were to
choose to act together, they would be able to control all matters submitted to
our stockholders for approval, including the election of directors and approval
of any merger, consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an acquisition of our
Company on terms that other stockholders may desire. In addition, as the
interests of our majority and minority stockholders may not always be the same,
this large concentration of voting power may lead to stockholder votes that are
inconsistent with your best interests or the best interests of us as a whole.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2008, the Company issued 11,804,994
shares of common stock for $425,000 of debt principal and $163,976 of accrued
interest.
During the three months ended March 31, 2008, the Company raised $500,000
through the sale of 10,728,409 shares of common stock.
During the three months ended March 31, 2008, a warrant holder exercised 110,000
shares for cash proceeds of $9,350.
During the three months ended March 31, 2008, the Company issued 1,000,000
shares of common stock to a consultant for services. The Company incurred a
stock based compensation charge of $50,000.
During the three months ended March 31, 2008, the Company issued 333,333 shares
of common stock to an employee per a Termination Agreement dated February 12,
2008. The Company incurred a stock based compensation charge of $13,333.
On January 4, 2008, the Company issued 2,255,639 shares of common stock for
$100,000 of subscription payable (0.0443 per share).
22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6: EXHIBITS
Exhibit No. Description
----------- ---------------------------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WATER CHEF, INC.
(Company)
Date: May 15, 2008
----------------------------------------
Leslie J. Kessler
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2008
----------------------------------------
Terry R. Lazar
Chief Financial Officer
(Principal Financial and Accounting
Officer)