UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended SeptemberJune 30, 20172018

OR

Commission File No. 000-55825

WATER NOW, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:(817) 908-6382900-9184

Not applicable

(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, and (2) has been subject to such filing requirements for the past 90 days.  ¨Yes  þYes  ¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þNo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨No  þ

At November 9, 2017,August 10, 2018, there were 30,000,00033,080,616shares outstanding of Common Stock, no par value.

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Water Now, Inc., a Texas corporation (“Water Now”).

Readers should consider the following information as they review this Report:

Forward-Looking Statements

There are statements inthis Reportthat are not historical facts. These “forward-looking statements” can be identified by use of terminology suggesting a belief in future performance and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire Report carefully.carefully, as well as the Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2017. Although management believes that the assumptions underlying the forward-looking statements included in this Report are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. The assumptions used for purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained inthis Reportwill in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake any obligation to update or revise any forward-looking statements.

Document Summaries

Descriptions of documents and agreements contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Registration Statement on Form 10 filed on October 13, 2017, other periodic and current reports we have filed with the SEC or this Report.

Access to Filings

Access to our reports and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://www.waternowinc.com) as soon as reasonably practicable after we have filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Water Now, Inc.

Condensed Balance Sheets

The accompanying notes are an integral part of these condensed financial statements.

Water Now, Inc.

Condensed Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these condensed financial statements.

Water Now, Inc.

Condensed Statement of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these condensed financial statements.

Water Now, Inc.

Condensed Statement of Operations

(Unaudited)

The accompanying notes are an integral part of these condensed financial statements.

Water Now, Inc.

Condensed Statement of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these condensed financial statements.

Water Now, Inc.

Notes to Condensed Financial Statements (unaudited)

SeptemberJune 30, 20172018

1. Basis of presentation, Background and Description of Business

Basis of presentation

The accompanying unaudited financial statements of Water Now, Inc. (the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements for the period ended December 31, 2016.2017.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month period have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms “Company”, “we”, “us” or “our” mean Water Now, Inc.

Background and Description of Business

On September 27, 2016, the Companywe consummated a transaction whereby VCAB One Corporation, a Texas corporation (“VCAB”), merged with and into the Company.us. At the time of the merger VCAB was subject to a bankruptcy proceeding and had minimal assets, no equity owners and no liabilities, except for approximately 1,500 holders of Class 5 Allowed General Unsecured Claims and a holder of allowed administrative expenses (collectively, “Claim Holders”). Pursuant to the terms of the merger, and in accordance with the bankruptcy plan, the Companywe issued an aggregate of 900,000703,808 shares of our common stock (the “Plan Shares”) to the Claim Holders whose claims had been approved as of the time of issuance as full settlement and satisfaction of their respective claims. As provided in the confirmed bankruptcy plan, the Plan Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code. An additional 196,192 Plan Shares are held in reserve in the Company’s treasury for issuance to Claim Holders whose claims have yet to be either approved or denied by the court. The treasury shares will be issued once a Claim Holder’s claim has been approved or disapproved. If disapproved the shares will be distributed to approved Claim Holders on a pro rata basis. As a result of the merger, the separate corporate existence of VCAB was terminated. The CompanyWe entered into the merger in order to increase itsour shareholder base in order to, among other things, assist us in satisfying the listing standards of a Nationalnational securities exchange. The Company recorded total restructuring expenses of $615,000, including $165,000 of consulting fees in cash and $450,000 for the issuance of the Plan Shares for settlement of claims held by the Claim Holders.

2. Going Concern

At SeptemberJune 30, 2017,2018, the Company had $301,955approximately $64,000 in cash and had a net working capital deficit of $377,587.approximately $493,000. The Company, which generated a net losslosses of $1,300,305approximately $1,791,000 and $1,064,256$403,000 for the nine-monthssix-months ended SeptemberJune 30, 20172018 and for the period from February 10, 2016 (inception) to September 30, 2016,2017, respectively, may not have sufficient cash to fund its current and future operations. There is no assurance that future operations will result in profitability. No assurance can be given that management will be successful in its efforts to raise additional capital from present or future shareholders. The failure to raise additional capital needed to achieve its business plans will have a material adverse effect on the Company’s financial position, results of operations, and ability to continue as a going concern.

3. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of deposit accounts with original maturities of three months or less.

Inventory

Inventory includes manufacturing parts and work in process for the Company’s water purification equipment. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value.

Use of Accounting Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Actual results could differ from those estimates. The most significant estimates and assumptions made by management related to determining the value of stock-based expenses.

Revenue

The Company had a reversal of a sale totaling $116,880 during the three months ended June 30, 2018 due to the customer notifying the Company that it would not take possession of the goods because of customs related issues. 

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

The Company accounts for uncertain tax positions in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740-10, “Income Taxes”. ASC 740-10 provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First, the Company must determine whether any amount of the tax benefit may be recognized. Second, the Company determines how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition). No additional liabilities have been recognized as a result of the implementation. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions.

Stock-Based Expenses

The Company accounts for stock-based expenses under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of expense for stock-based awards made to employees and directors based on estimated fair values on the grant date. The stock-based compensation awards to employees, directors and non-employees during the period from February 10, 2016 (inception) to Septembersix months ended June 30, 20172018 consisted of the grants of restricted stock. The restrictions on the shares granted related to regulatory restrictions as well as service and milestone based restrictions that prevented the sale of the stock granted. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the shorter of the period over which services are to be received or the vesting period.

The Company accounts for stock-based expenses awards to non-employees in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees”. In accordance with ASC 505-50, the Company determines the fair value of stock-based expenses awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

The Company estimated the fair value of stock-based awards issued to employees, directors and non-employees during the period from February 10, 2016 (Inception) to Septembersix months ended June 30, 2018 and 2017 based on prices paid by unrelated third-parties for the purchases of its common stock during this period, which amounted to $0.50 per share.

The components of stock-based compensation related to stock awards in the Company’s StatementStatements of Operations for the three months ended SeptemberJune 30, 20172018 and 2016, and for the nine months ended September 30, 2017, and for the period from February 10, 2016 (inception) to Septembersix months ended June 30, 20162018 and 2017 are as follows (rounded to nearest thousand):

Research and development costs

The Company expenses research and development costs as incurred in accordance with ASC 730, “Research and Development”. The Company’s research and development activities related to activities undertaken to adapt the water purification technology contributed by its founder for commercial-scale manufacturing.manufacturing and to develop new products. Research and development expenses were $571,557$228,183 and $20,500,$186,372, for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. Research and development expenses were $854,624$492,394 and $654,647,$283,067, for the ninesix months ended SeptemberJune 30, 2018 and 2017, and for the period from February 10, 2016 (inception) to September 30, 2016, respectively.

Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents such as outstanding stock options and warrants. Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss) per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective period presented or the date of issuance, whichever is later.

Recently Accounting Pronouncements

Going Concern — In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15 – “Presentation of Financial Statements – Going Concern – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The updated accounting guidance was effective for the Company on December 31, 2016. We have implemented this new accounting standard and we will update our liquidity disclosures as necessary.

Revenue — In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluatingimplementation of this standard did not have a material impact on the impact of the new guidance.Company’s accompanying financial statements.

Leases— In February 2016, the FASB issued ASU 2016-02, “Leases”. This standard will require entities that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The accounting by entities that own the assets leased by the lessee—also known as lessor accounting—will remain largely unchanged from current GAAP. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Modified retrospective application is required, with optional practical expedients available. The Company is currently evaluating the impact of the new guidance.

Debt Issuance Costs - In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

Stock Compensation- In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows of (i) excess tax benefits to be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and2016. The implementation of this standard did not have a material effectimpact on the Company’s accompanying financial position, resultsstatements.

Statement of operations, but had an effectCash Flows — In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the classificationEmerging Issues Task Force”. ASU 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash paid to taxing authorities arising fromflows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The implementation of this standard did not have a material impact on the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.Company’s accompanying financial statements.

4. Notes Payable – StockholdersStockholder

The Company had two convertible notes payable (the “Convertible Notes”) to stockholders in aggregate principal amount of $0 and $100,000 at September 30, 2017 and December 31, 2016, respectively.borrowed $112,000 from a shareholder on November 2, 2017. The Convertible Notes, which matured on August 25, 2017, borenote bears interest at 12% per annum.and is payable monthly interest-only through April 30, 2019, at which time the entire amount of principal and any accrued interest is due and payable. The holders of the Convertible Notes exercised their option to convert the notes to common shares ofnote is collateralized by all equipment owned by the Company at maturity, at $0.50 per common share duringand is guaranteed by the quarterCompany’s chief executive officer. The interest expense incurred on this note was $6,720 and $0, for the six months ended SeptemberJune 30, 2017. The Company granted 200,000 common shares to the holders of the Convertible Notes.2018 and 2017, respectively.

BasedThe Company borrowed $187,500 from three shareholders on the terms of the conversion feature, the Company had determined that the Convertible Notes did not contain a beneficial conversion feature. As such,June 18, 2018. The notes bear interest at 10% and are payable in one lump sum on June 18, 2019, at which time the entire proceedsamount of the Convertible Notes were recorded as a liability.principal and accrued interest is due and payable. The notes are unsecured. The interest expenses incurred and paid on the Convertible Notesthese notes was $7,000approximately $600 and $0, for the ninesix months ended SeptemberJune 30, 2018 and 2017, and for the period from February 10, 2016 (inception) to September 30, 2016, respectively. The Company’s chief executive officer has guaranteed these notes.

5. Advances Due and From Related Party

The Company has received a non-interest bearing advanceadvances without a specified maturity date from a stockholder of the Company. The stockholder has a receivable dueCompany owed approximately $18,000 and $32,000, respectively, at June 30, 2018 and December 31, 2017 to the Company of $59,615 at September 30, 2017. The balance outstanding on the stockholder advance at December 31, 2016 was $21,000.stockholder.

6. Equity Transactions

From January 1, 2017 to MarchDecember 31, 2017, the Company issued 500,0002,922,000 shares to different investors at $0.50 per share for cash, with total proceeds of $227,000 and recorded a subscription receivable of $23,000. Prior$1,436,030.

The Company also issued 200,000 shares to September 30, 2017, such subscription receivable was fully paid.shareholders to convert certain convertible notes amounting to $100,000 in August 2017.

From AprilJuly 1, 2017 to June 30,December 31, 2017, the Company issued 590,0001,230,350 shares to different investors at $0.50 per share for cash, with total proceeds of $295,000. In addition, there were 600,000 shares of common stock vested during the six months ended June 30, 2016.

During the second quarter of 2017, the Company issued 150,000 shares to twoexecutives, employees working in research and development at the Company.and consultants. The value of these shares at $0.50 per share was $75,000.

$615,175. In addition, there were 600,000 shares of common stock issued in 2016 which vested in January, 2017.

In May 2017 and September 2017, the Company’s principal shareholder surrendered an aggregate of 2,779,850 shares of common stock to the Company, which were recorded as treasury stock with a $0 value. All surrendered shares were used to issue stock by the Company during the period.year. 

From JulyJanuary 1, 20172018 to September 30, 2017,March 31, 2018, the Company issued 1,360,0001,656,000 shares to different investors at $0.50 per share for cash, with total proceeds of $680,030.

From July 1, 2017 to September 30, 2017,$828,000. In addition, the Company issued 930,350610,000 shares to executives, employees engagedworking in research and development and certain consultants. The value of these shares at $0.50 per share was $465,175.$305,000.

From April 1, 2018 to June 30, 2018, the Company issued 625,000 shares to investors at $0.50 per share for cash, with total proceeds of $312,500. In addition, the Company issued 770,000 shares to executives, employees working in research and development and consultants. The value of these shares at $0.50 per share was $385,000. Also see Note 7 regarding shares returned during June 2018 as a result of a lawsuit settlement.

7. Commitments and Contingencies

Lease Commitments

Operating Leases – Rental Property

On September 11, 2017, the Company signed a lease agreement with Peleton Properties LLC which commenced on October 15, 2017. The lease is for a term of 36.5 months ending on October 30, 2020, and requires monthly payments of approximately $7,000.$9,000.

As of SeptemberJune 30, 2017,2018, future minimum lease payments to Peleton Properties LLC required under the non-cancelablenon-cancellable operating lease are as follows (rounded to nearest thousand):

Contractual Commitments

Effective as of May 1, 2016, the Company entered into a three-year employment agreement with Mark Dyos, ourthe Company’s President. The agreement calls for monthly payments of $7,000 per month through April 2017 and $15,000 per month thereafter. The employment agreement also provided for the grant of 500,000 shares of common stock, which were fully vested for accounting purposes on January 1, 2017. The Company expensed $250,000 for these shares during the period ended December 31, 2016 in accordance with ASC 718. The employment agreement provides for an additional grant of 500,000 shares of common stock on the first day following the second month during which the Company recognizes revenue pursuantsubject to generally accepted accounting principles.satisfactory employment through December 2017. These shares were issued in September 2017. The Company expensed $250,000 for these shares during the periodyear ended September 30,December 31, 2017 in accordance with ASC 718.

The Company has entered into a two-year accounting consulting services agreement with Phil Marshall, a consultant to the Company.financial consultant. The accounting consulting services agreement provided for a grant of 100,000 shares of common stock, which fully vested at January 2, 2017. The Company expensed $50,000 for these shares during the period ended December 31, 2016 in accordance with ASC 505-50. The Company shall pay to Mr. Marshallthe consultant 75,000 shares of common stock per each completed six months of satisfactory service. The first installment shall bewas payable at such time as the Company generatesgenerated revenue from the sale of its products. These shares were issued in September 2017. The Company expensed $37,500 for these shares during the quarterperiod ended September 30, 2017December 31, 2016 in accordance with ASC 718.

We may become involved in, or have been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows due to defense costs, and divert management resources. Currently, except as set forth below, we are not involved in any arbitration and/or other legal proceeding that could have a material effect on our business, financial condition, results of operations and cash flows.

We accrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgement is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event we determine that a loss is not probable, but is reasonably possible, and it becomes possible to develop what we believe to be a reasonable range of possible loss, then we will include disclosure related to such a matter as appropriate and in compliance with ASC 450. The accruals or estimates, if any, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial to our financial statements as a whole, or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

Litigation

On April 6, 2017,May 30, 2018, the Company reached an amicable resolution by way of a settlement agreement and release (the “Settlement Agreement”) with Cloudburst Solutions, LLC (“Cloudburst”CS”) with respect to the Manufacturing and Licensing Agreement entered into on July 1, 2016 (“Agreement”). Neither party admitted liability and each agreed to finally and forever, settle and compromise all disputes and matters of controversy between them.

CS has agreed to dismiss the lawsuit filed, suit againstfully release, acquit, and forever discharge the Company and David King in the 17th District Court of Tarrant County, Texas. Cloudburst alleges that the Company breached its obligations under a Manufacturing and Distribution Agreement to which the Company and Cloudburst were parties. Cloudburst alsofrom any claims that the Company and Mr. King have misappropriated unspecified “intellectual property rights related to water treatment/reclamation processes.” Cloudburst seeks a declaratory judgmentthe Agreement, render the Agreement null and unspecified damages, including $1,536,000 allegedvoid in all respects, and to be owed pursuant tocancel 1,250,000 shares of the Manufacturing and Distribution Agreement.Company’s common stock held by CS. The Company has filed special exceptions,agreed to fully release, acquit, and forever discharge CS from any claims related to the parties have exchanged discovery requests. The Company intends to vigorously defend againstAgreement and has agreed that the claims made by Cloudburst.Agreement is null and void and neither party owes any duties or obligations thereunder. The Company has agreed to pay CS $700,000.00 in four installments. The first payment of $150,000 was paid on June 20, 2018. The second payment of $150,000 was paid to CS within 30 days of the first payment. The third payment of payment of $150,000 will be paid to CS within 30 days of the second payment. The final payment of $250,000 will be paid to CS within 30 days of the third payment. The Settlement Agreement does not accruedcontain any amounts for this litigation because it believes thatadmission of liability, wrongdoing, or responsibility by any of the resolution of this uncertainty will not have a material effect on the Company’s financial condition.parties.

8. Income Taxes

The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.

The Company’s tax provision is determined using an estimate of an annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The 20172018 and 20162017 annual effective tax rate is estimated to be a combined 38%21% for the U.S. federal and state statutory tax rates. The Company reviews tax uncertainties in light of changing facts and circumstances and adjustadjusts them accordingly. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, there waswere no tax contingencies recorded.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting, and the amounts recognized for income tax purposes.

We had a net operating loss carry-forward for federal and state tax purposes of approximately $3,183,000$5.4 million at SeptemberJune 30, 2017,2018, that is potentially available to offset future taxable income, whichincome. The TCJA (Tax Cut and Jobs Act) changes the rules on NOL carryforwards. The 20-year limitation was eliminated, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will beginnow be limited to expire in the year 2036. 80 percent of taxable income.

For financial reporting purposes, no deferred tax asset was recognized because at SeptemberJune 30, 20172018 and December 31, 20162017 because management estimates that it is more likely than not that substantially all of the net operating losses will expire unused. As a result, the amount of the deferred tax assets considered realizable was reduced 100% by a valuation allowance. The change in the valuation allowance wasallowances were approximately $442,000$204,000 and $68,000$95,000 for the three months ended SeptemberJune 30, 2018 and 2017, and for the period from February 10, 2016 (inception) to September 30, 2016, respectively.

9. Subsequent Events

The Company has evaluated all material events or transactions that occurred after SeptemberJune 30, 20172018 up to November 14, 2017,August 20, 2018, the date these financial statements were available to be issued and noted no material subsequent events which would require disclosure.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, and under Forward-Looking Statements and Business sections in our Registration Statement on Form 10 filed with the SEC on October 13, 2017.this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

Overview

We have developedWater Now, Inc. was incorporated in Texas on February 10, 2016 to develop and commercialize a patent-pending, gas/diesel operated,powered, portable device that processes and purifies contaminated water. Our business strategy was conceived as a result of the growing global water crisis. Today, many countries and regions are experiencing acute water shortages and we believe our technology and products are capable of generating safe drinking water from many available water sources.

Our Aqua^TMproduct line islines are designed to provide a small,consist of portable unitunits capable of providing a cost-effective, safe and efficient method of water purification. The Aqua product line requiresOur products require no pre- or post-treatment of the source water, no filters, no membranes and no chemicals. The quality of water purified by our products has been tested to meet or exceed the World Health Organization’s (“WHO”) drinking water standards.

Financial Overview

Revenue

To date,From February 10, 2016 (date of inception) through June 30, 2018, we havehad generated nominal revenues.revenues of approximately $94,765. Our ability to generateincrease revenues will depend on the successful manufacturing and commercialization of our water purification units.

Reorganization Expenses

During 2016, we incurred reorganization expenses in connection with our merger with VCAB, and related transactions, as described under “Business – Merger of VCAB One Corporation into Water Now, Inc.” Reorganization expenses primarily consisted of the fair value of the Plan Shares issued in connection with those transactions, as well as legal expenses incurred in connection therewith. All reorganization expenses in connection with those transactions have been incurred, and no additional expenses with respect thereto are anticipated.

Research and Development Expenses

The Company expenses R&D costs as incurred. The Company’s R&D activitiesefforts related to activities undertaken to adapt the water purification technology contributed by David King for commercial-scale manufacturing.manufacturing and the development of multiple product offerings.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense. To date, we have estimated the fair value of stock-based awards issued to employees, directors and non-employees based on prices paid by unrelated third-parties for the purchases of our common stock. Other G&A expenses include patent costs, and professional fees for legal, finance, accounting services and accounting services.a legal settlement in 2018.

We anticipate that our G&A expenses will increase in future periods to support increases in our research and development activities and as a result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

Interest Expense

Interest expense consists primarily of interest incurred on borrowings.

Significant Accounting Policies and Recent Accounting Pronouncements

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, impairment of financing receivables and long-lived assets, valuation of warrants, income taxes and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.  For a discussion of our significant accounting policies, refer to Note 3–3 – “Summary of Significant Accounting Policies”Policies and Recent Accounting Pronouncements” in the Notes to our condensed Financial Statements for the yearsix months ended December 31, 2016,June 30, 2018, included in our Registration Statement on Form 10 filed with the SEC on October 13, 2017. this Quarterly Report.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of deposit accounts with original maturities of three months or less.

Inventories

Inventory includes manufacturing parts and work in process for the Company’s water purification equipment. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”)) basis, or net realizable value.

Use of Accounting Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The most significant estimates and assumptions made by management related to determining the value of stock-based expenses.

Revenue

We had a reversal of a sale totaling $116,880 during the three months ended June 30, 2018 due to the customer notifying us that it would not take possession of the goods because of customs related issues. 

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

We account for uncertain tax positions in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740-10, “Income Taxes.” ASC 740-10 provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First, we must determine whether any amount of the tax benefit may be recognized. Second, we determine how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition). No additional liabilities have been recognized as a result of the implementation. Accordingly, we have not recognized any penalty, interest or tax impact related to uncertain tax positions.

Stock-Based Expenses

We account for stock-based expenses under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of expense for stock-based awards made to employees and directors based on estimated fair values on the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the shorter of the period over which services are to be received or the vesting period.

We account for stock-based expenses awards to non-employees in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.” In accordance with ASC 505-50, we determine the fair value of stock-based expenses awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

We estimated the fair value of stock-based awards issued to employees, directors and non-employees based on prices paid by unrelated third-parties for the purchases of our common stock during the applicable period.

Research and development costs

We expense research and development costs as incurred in accordance with ASC 730,“Research and Development.” Our research and development activities related to activities undertaken to adapt the water purification technology contributed by David King for commercial-scale manufacturing.manufacturing and the development of additional offerings.

Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents such as outstanding stock options and warrants. Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss) per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective period presented or the date of issuance, whichever is later.

Recently Adopted Accounting Pronouncements

Going Concern—Concern — In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15 –“Presentation of Financial Statements – Going Concern – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”Concern”, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The updated accounting guidance was effective for the Company on December 31, 2016. We have implemented this new accounting standard and we will update our liquidity disclosures as necessary.

Revenue— Revenue — In May 2014, the FASB issued ASU 2014-09 - “Revenue from Contracts with CustomersCustomers””, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluatingimplementation of this standard did not have a material impact on the impact of the new guidance.Company’s accompanying financial statements.

Leases —In— In February 2016, the FASB issued ASU 2016-02 -“LeasesLeases””. This standard will require entities that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The accounting by entities that own the assets leased by the lessee—also known as lessor accounting—will remain largely unchanged from current GAAP. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Modified retrospective application is required, with optional practical expedients available. The Company is currently evaluating the impact of the new guidance.

Debt Issuance Costs —In— In April 2015, the FASB issued ASU 2015-03 -“Simplifying the Presentation of Debt Issuance CostsCosts”.”. The new standard will more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

Stock Compensation —In— In March 2016, the FASB issued ASU 2016-09 - “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment AccountingAccounting””, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows of (i) excess tax benefits to be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and2016. The implementation of this standard did not have a material effectimpact on the Company’s accompanying financial position, results of operations, but had an effectstatements.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation. The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the classificationaward provide that a performance target can be achieved after the requisite service period. This ASU is the final version of cash paidProposed ASU EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to taxing authorities arisingawards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the withholdingrequisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of shares from employees (treasury stock), classified as cash outflows used in financing activities.this standard did not have a material impact on the Company’s accompanying financial statements.

Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

Results of Operations

For the three months ended SeptemberJune 30, 20172018 and 20162017 (unaudited)

Revenue

We generated nominal revenues and incurred operating expenses of $898,172$924,406 and $101,756$268,593 for the three months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively. We had a reversal of a sale totaling $116,880 during the three months ended June 30, 2018 due to the customer notifying us that it would not take possession of the goods because of customs related issues. 

Research and development expenses    

Below is a summary of our research and development expenses for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively: