UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017March 31, 2019

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-55825

 

WATER NOW, INC.

(Exact name of registrant as specified in its charter)

 

Texas 81-1419236
(State or other jurisdiction of incorporation)incorporation or organization) (I.R.S. Employer Identification No.)
   

4555 Village Creek Road

2840 Bryan Avenue, Fort Worth, Texas

 7611976104
(Address of Principal Executive Office)Offices) (Zip Code)

 

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.

 

   Large accelerated filer  ¨Accelerated filer  ¨ 
   
  Non-accelerated filer ¨ Smaller reporting company þ 
 Emerging growth companyþ  

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. Yes ¨No  þ

 

At November 9, 2017,May 7, 2019, there were 30,000,00037,739,692shares 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. 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.

 

 

 

 

ii 
 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

  PageNo.
   
Item 1.Financial Statements 
 Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2019 (unaudited) and December 31, 2016201841
 Condensed Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2017March 31, 2019 and 2016and for the nine months ended September 30, 2017 and the period commencing February 10, 2016 (date of inception) through September 30, 2016 (unaudited)201852
 Condensed Consolidated Statements of Cash Flows (unaudited) for the ninethree months ended September 30, 2017March 31, 2019 and the period commencing February 10, 2016 (date of inception) through September 30, 2016 (unaudited)201863
 Notes to Condensed Consolidated Financial Statements (unaudited)74
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1312
Item 3.Quantitative and Qualitative Disclosures About Market Risk2117
Item 4.Controls and Procedures2218
  
PART II. OTHER INFORMATION
  
Item 1.Legal Proceedings2319
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2319
   
Signatures2420
Index to Exhibits2521

 

iii 
 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Water Now, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

 

 September 30,  December 31,  March 31,  December 31, 
 2017  2016  2019  2018 
 (Unaudited)     (Unaudited)    
ASSETS            
Current Assets            
Cash $301,955  $336  $65,941  $53,106 
Accounts receivable  4,400      70,921   1,250 
Other receivables  36,000    
Inventory  204,294      515,393   506,845 
Prepaid expenses  541,130    
Total Currents Assets  510,649   336   1,229,385   561,201 
            
Other Assets      
Property and equipment - net  1,034,001   382,551  
Operating lease right-of-use assets  140,340    
Distributorship agreement, net  916,667   966,667 
Security deposit  9,149      34,330   10,849 
      
Total Assets $519,798  $336  $3,354,723  $1,921,268 
          
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)     
LIABILITIES AND STOCKHOLDERS' DEFICIT     
Current Liabilities          
Outstanding checks in excess of bank balance $  $2,500 
Accounts payable and accrued expenses  73,447  80,000 
Advance from related party  59,615   21,000 
Accounts payable $174,175  $417,972 
Accrued expenses  352,533  598,564 
Distributorship accrued expense  250,000   650,000 
Advances from related parties  42,497   302,497 
Current portion of operating lease liabilities  82,438    
Current portion of convertible notes payable  620,470   428,257 
Notes payable – stockholders     100,000   300,000    
        
Total Current Liabilities  1,822,113   2,397,290 
Long-term convertible notes payable    82,519 
Operating lease liabilities  52,994   
Revenue sharing liabilities  2,482,500   319,500 
Total Liabilities  133,062   203,500     4,357,607  2,799,309 
               
Commitments and Contingencies - Note 7  —   —  
Commitments and Contingencies  —   —  
              
Stockholders' Equity (Deficit)       
Preferred stock – no par value, 10,000,000 shares authorized, zero issued and outstanding at September 30, 2017 and December 31, 2016     
Common Stock - no par value, 90,000,000 shares authorized, 30,000,000 shares and 28,349,500 shares issued as of September 30, 2017 and December 31, 2016, respectively and 30,000,000 shares and 28,349,500 shares outstanding as of September 30, 2017 and December 31, 2016, respectively  3,570,205  1,680,000 
Stockholders' Deficit       
Preferred stock – no par value, 10,000,000 shares authorized, zero issued and outstanding at March 31, 2019 and December 31, 2018     
Common stock - no par value, 90,000,000 shares authorized, 36,678,384 and 36,013,000 shares issued and 36,482,192 and 35,816,808 shares outstanding as of March 31, 2019 and December 31, 2018, respectively  7,055,313  6,463,705 
Additional paid-in capital  1,561,635  687,431 
Subscription receivable  (50,000) (50,000)
Accumulated deficit  (3,183,469)  (1,883,164)  (9,569,832)  (7,979,177)
Total Stockholders' Equity (Deficit)  386,736    (203,164)
Total Stockholders' Deficit  (1,002,884  (878,041
Total Liabilities and Stockholders' Deficit $3,354,723  $1,921,268 
            
Total Liabilities and Stockholders' Equity (Deficit) $519,798  $336 
      

 

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

41 
 


Water Now, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

 

 For the Three Months Ended
 

For the three

months ended

 For the nine months ended For the period from February 10, 2016 (inception) through    
 

September

30,

 September 30, September 30, September 30,  March 31,   March 31, 
 2017  2016  2017  2016  2019   2018 
         
Revenues, net$4,400 $- $4,400 $- $78,552  $128,130 
         
Cost of goods sold 2,400 -  2,400 -  68,880   60,332 
               
Gross Profit 2,000 - 2,000 -  9,672   67,798 
         
Operating expenses         
Reorganization expenses - 50,000 - 50,000
Research and development expenses 571,557 20,500 854,624 654,647
General and administrative expenses 326,615 31,256 440,681 359,609
Salaries and wages  322,628   298,927 
Professional fees  293,644   312,043 
Selling, general and administrative  365,881   271,180 
Gain on sale of assets  (4,070)  —   
               
Total operating expenses 898,172 101,756 1,295,305 1,064,256  978,083   882,150 
         
Loss from operations (896,172) (101,756) (1,293,305) (1,064,256)  (968,411)  (814,352)
         
Other expense         
Interest expense (1,000)  -  (7,000)  -  (605,595)  (3,360)
Loss on extinguishment of debt  (21,563)  —   
Total other expense (1,000) - (7,000) -  (627,158)  (3,360)
         
Loss before provision for income taxes (897,172) (101,756) (1,300,305) (1,064,256)  (1,595,569)  (817,712)
         
Provision for income taxes -  -  -  -  —     —   
         
Net Loss$(897,172) $(101,756) $(1,300,305) $(1,064,256) $(1,595,569) $(817,712)
         
Loss per share         
basic and fully diluted$(0.03) $(0.00) $(0.04) $(0.04) $(0.04) $(0.03)
         
Weighted-average number of shares of common stock         
basic and fully diluted 29,372,413  27,035,587  29,382,240  26,595,337  35,962,919   31,386,597 
         

 

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

52 
 


Water Now, Inc. and Subsidiary

Condensed StatementConsolidated Statements of Cash Flows

(Unaudited)

 

 For the nine months ended  For the period from February 10, 2016 (inception) through  For the Three Months Ended
 September 30,  September 30,  March 31,
 2017  2016  2019 2018
Cash flows from operating activities:              
Net loss $(1,300,305) $(1,064,256) $(1,595,569) $(817,712)
Adjustments to reconcile net loss to net cash used in operating activities:             
Common stock issued as payment for services and employee compensation 540,175  885,000 
Common stock issued as payment for services and employees compensation  —     305,000 
Depreciation of equipment  63,403   6,902 
Non-cash interest expense  480,296   —   
Gain on sale of assets  (4,070)  —   
Loss on extinguishment of debt  21,563   —   
Changes in operating working capital items:             
Accounts payable and accrued expenses (6,553) 20,000 
Accounts receivable  (69,671)  (118,130)
Other receivables  (6,000)  —   
Inventory  (8,548)  (7,927)
Prepaid expenses  (49,522)  —   
Security deposit (9,149)    (23,481)  (1,700)
Accounts receivable (4,400)  
Inventory (204,294)  
Accounts payable  (243,797)  (39,298)
Accrued expenses  (277,986)  17,726 
Net cash used in operating activities  (984,526)  (159,256)  (1,713,382)  (655,139)
        
Cash flows from investing activities:        
Purchases of property and equipment  (720,783)  —   
Proceeds from sale of assets  30,000   —   
Payment for distributorship agreement  (400,000)  —   
Net cash used in investing activities  (1,090,783)  —   
             
Cash flows from financing activities:             
Outstanding checks in excess of bank balance  (2,500)     —     (6,597)
Advances from related party  38,615   100,000 
Borrowings on notes payable stockholders  300,000   —   
Net advances from related party  (260,000)  (47,000)
Borrowings on convertible notes payable  1,041,500   —   
Payments on convertible notes payable  (310,500)  —   
Issuances of common stock  1,250,030   125,000   —     778,000 
Borrowings on revenue sharing liabilities  2,046,000   —   
Net cash provided by financing activities  1,286,145   225,000   2,817,000   724,403 
             
Net increase in cash 301,619  65,744   12,835   69,264 
Cash at beginning of period  336      53,106   2,049 
Cash at end of period $301,955  $65,744  $65,941  $71,313 
             
Supplemental Disclosure of Interest and Income Taxes Paid:             
Interest paid during the period $7,000  $  $99,632  $2,000 
Income taxes paid during the period $  $  $—    $—   
               
Non-cash disclosures:               
Conversion of convertible notes payable to 200,000 common shares $100,000  $ 
Conversion of convertible note payable into 200,000        
common shares $100,000  $—   
Issuance of common stock for prepaid interest $491,608  $—   
Beneficial debt conversion feature $959,467  $—   
        

  

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

63 
 

Water Now, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2017March 31, 2019 and 2018

 

1. Basis of presentation, Background and Description of Business

Basis of presentationPresentation 

 

The accompanying unaudited financial statements of Water Now, Inc. (theand subsidiary (collectively, 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 periodyear ended December 31, 2016.2018.

 

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. and subsidiary.

 

Background and DescriptionCertain amounts in our Condensed Consolidated Statement of BusinessOperations for the period ended March 31, 2018 have been reclassified to conform with the current period presentation.

 

On September 27, 2016,Recently Adopted Accounting Pronouncements

Effective January 1, 2019, we adopted the Company consummatedFinancial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a transaction whereby VCAB One Corporation, a Texas corporation (“VCAB”), merged with and into the Company. 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 accordancemodified retrospective basis with the bankruptcy plan,earliest period presented. In August 2018, the CompanyFASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an aggregateoption to not restate comparative periods in transition and elect to use the effective date of 900,000 sharesASC 842, Leases, as the date of common stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfactioninitial application of their respective claims. As provided in the bankruptcy plan, the Plan Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code.transition, which we elected. As a result of the merger, the separate corporate existenceadoption of VCAB was terminated.ASC 842 on January 1, 2019, we recorded both operating lease right-of-use (“ROU”) assets of $159,433 and lease liabilities of $154,518. The Company entered into the merger in order to increase its shareholder base in order to, among other things, assist in satisfying the listing standardsadoption of a National securities exchange. The Company recorded total restructuring expensesASC 842 had an immaterial impact on our Condensed Consolidated Statement of $615,000, including $165,000Operations and Condensed Consolidated Statement of consulting fees in cash and $450,000Cash Flows for the issuancethree-month period ended March 31, 2019. In addition, we elected the package of practical expedients permitted under the Plan Shares for settlement of claims held bytransition guidance within the Claim Holders.new standard which allowed us to carry forward the historical lease classification.

 

Additional information and disclosures required by this new standard are contained in Note 9.

2. Going Concern

 

At September 30, 2017,March 31, 2019, the Company had $301,955approximately $66,000 in cash and had net working capital deficit of $377,587.approximately $593,000. The Company, which generated a net loss of $1,300,305approximately $1,596,000 and $1,064,256$818,000 for the nine-monthsthree months ended September 30, 2017March 31, 2019 and for the period from February 10, 2016 (inception) to September 30, 2016,2018, 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.capital. 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. Distributorship Agreement

 

On October 31, 2018, the Company entered into an Exclusive Sales Distribution Agreement (the “Agreement”) with African Horizon Technologies (Pty) Ltd (“AHT”) whereby the Company serves as AHT’s exclusive distributor of the Hydraspin Hydro Cyclone technology in the United States of America. The Company is obligated

74 
 

3. Summaryto pay AHT $500,000 and issue AHT 500,000 shares valued at $250,000 based on the closing price 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 carriedshares of $0.50 on the date of the Agreement. In addition, the Company will issue AHT 500,000 shares at the lowerearlier of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value.

Use of Accounting Estimates

The preparation24 months from the commencement date of the financial statements in conformityAgreement or the sale of 50 units to the Company. The Company will also pay AHT a royalty of 2% of total net profits generated by the Company from the sale of oil generated using the Hydraspin units. The term of the Agreement is for five years with accounting principles generally accepted inan automatic renewal term of five years unless terminated prior to the United Statesexpiration 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.current term. The most significant estimates and assumptions made by management related to determiningCompany recorded the value of stock-based expenses.the Agreement of $1,000,000 as an other asset and is amortizing the asset to expense over the life of the Agreement of five years. As of March 31, 2019, $500,000 was paid and the remaining 500,000 shares to be issued is included as an accrued expense.

 

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.4. Notes Payable – Stockholders

 

The Company accounts for uncertain tax positions in accordance with 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 detectionborrowed $200,000 and a measurement of recognized tax benefits based$100,000 from two stockholders on March 25, 2019. The notes bear interest at 18% and are payable beginning on April 25, 2019, at which time the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process to determine theentire amount of tax benefitprincipal and any accrued interest is due and payable. The notes are unsecured, and the $200,000 note is guaranteed by the Company’s Chief Executive Officer. Subsequent to be recognized in the financial statements. First,March 31, 2019, 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.paid $100,000 on these notes and $200,000 remains outstanding.

 

Stock-Based Expenses5. Convertible Notes Payable

 

The Company accounts for stock-based expenses underborrowed $68,000 from a lender on September 4, 2018. The note bears interest at 8% and matures on September 4, 2019, at which time the provisionsentire amount of ASC 718, “Compensation—Stock Compensation”, which requiresprincipal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by 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 September 30, 2017 consistedholder into shares of the grants of restricted stock. The restrictions onCompany’s common stock beginning 170 days after the shares granted relatedissuance date and prior to regulatory restrictions as well as service and milestone based restrictions that prevented the salematurity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common stock granted.for the twenty trading days prior to the conversion date. The value of the portion ofembedded beneficial conversion feature on the award that is ultimately expected to vest is recognized as expense over the shorter of the period over which services arenote payable was estimated to be received or$39,748. In addition, the vesting period.Company paid $2,500 for debt issuance costs. This note was paid in full on January 3, 2019 and the Company recorded a gain on extinguishment of this debt of $14,351.

 

The Company accountsborrowed $200,000 from a lender on September 17, 2018. The note does not bear interest and matures September 17, 2021, at which time the entire amount of principal is due and payable. The note is unsecured. The outstanding principal amount is convertible by the holder into shares of the Company’s common stock at any time prior to the maturity date at a price per share equal to $0.75 per share if before 180 days after the issuance date, or if 180 days after the issuance date, the lesser of $0.75 per share or seventy percent of the second lowest trading price of the Company’s common stock for stock-based expenses awardsthe twenty trading days prior 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 fairconversion date. The value of the consideration received orembedded beneficial conversion feature on the fairnote payable was estimated to be $37,333. In addition, the Company granted 60,000 shares of the Company’s common stock valued at $53,400 based on the Company’s share price on the date of the note agreement, paid $34,400 as a discount for interest on the note, and paid $5,000 for debt issuance costs. For the period ended March 31, 2019, the Company recorded $86,370 of interest expense related to the value of the equity instruments issued, whichever is more reliably measurable.embedded beneficial conversion feature and debt issuance costs. This note was paid in full on March 25, 2019 and the Company recorded a loss on extinguishment of this debt of $31,111.

 

The Company estimatedborrowed $100,000 from a shareholder on August 30, 2018. The note bears interest at 10% and is payable in one lump sum on March 4, 2019, at which time the fairentire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock at any time prior to the maturity date at the conversion price of $0.50 per share.   The value of stock-based awards issuedthe embedded beneficial conversion feature on the note payable was estimated to employees, directors and non-employees duringbe $72,000.  For the period from February 10, 2016 (Inception)ended March 31, 2019, the Company recorded $26,557 of interest expense related to September 30, 2017 based on prices paid by unrelated third-parties for the purchasesvalue of itsthe embedded beneficial conversion feature. This note was converted into 200,000 shares of the Company’s common stock during this period,on March 28, 2019.

The Company borrowed $42,500 from a lender on October 15, 2018. The note bears interest at 8% and is payable in one lump sum on October 15, 2019, at which amounted to $0.50 per share.

time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into

85 
 

shares of the Company’s common stock beginning 170 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date. The componentsvalue of stock-based compensationthe embedded beneficial conversion feature on the note payable was estimated to be $24,160. In addition, the Company paid $2,500 for debt issuance costs. For the period ended March 31, 2019, the Company recorded $21,745 of interest expense related to stock awardsthe value of the embedded beneficial conversion feature and debt issuance costs. This note was paid in full on March 26, 2019 and the Company’s StatementCompany recorded a loss on extinguishment of Operations for the three months ended September 30, 2017 and 2016, and for the nine months ended September 30, 2017 and for the period from February 10, 2016 (inception) to September 30, 2016 are as follows (rounded to nearest thousand):

  Three Months Ended Nine Months Ended  

For the period from

February 10, 2016 (inception) to

  
  September 30, September 30,  September 30,  
  2017  2016 2017  2016  
             
  Research and development expenses$362,500 $$437,500 $625,000  
             
  General and administrative expenses 102,675   102,675  260,000  
             
 Total stock-based compensation expense$465,175 $$540,175 $885,000  

Research and development coststhis debt of $4,803.

 

The Company expenses researchborrowed $86,500 from a lender on January 2, 2019. The note bears interest at 8% and development costs as incurredis payable in accordance with ASC 730, “Researchone lump sum on January 2, 2020, at which time the entire amount of principal and Development”.accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s researchcommon stock beginning 180 days after the issuance date and development activities relatedprior to activities undertakenthe maturity date at a price per share equal to adaptsixty-five percent of the water purification technology contributed by its founder for commercial-scale manufacturing. Research and development expenses were $571,557 and $20,500,average of the lowest two trading prices of the Company’s common stock for the three months ended September 30, 2017 and 2016, respectively. Research and development expenses were $854,624 and $654,647, fortwenty trading days prior to the nine months ended September 30, 2017 andconversion date. The principal balance at March 31, 2019 is $86,500. The interest expense incurred on the note payable was approximately $1,730 for the period from February 10, 2016 (inception)ended March 31, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated to September 30, 2016, respectively.be $72,334. In addition, the Company paid $2,500 for debt issuance costs. For the period ended March 31, 2019, the Company recorded $18,709 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.

 

Earnings (Loss) Per ShareThe Company borrowed $102,500 from a lender on February 14, 2019. The note bears interest at 8% and is payable in one lump sum on February 14, 2020, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date. The principal balance at March 31, 2019 is $102,500. The interest expense incurred on the note payable was approximately $1,025 for the period ended March 31, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated to be $102,500. In addition, the Company paid $2,500 for debt issuance costs. For the period ended March 31, 2019, the Company recorded $13,125 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.

 

Basic earnings (loss)The Company borrowed $100,000 from a lender on February 20, 2019. The note bears interest at 10%, and is payable in one lump sum on February 20, 2020, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal amount is convertible by the holder into shares of the Company’s common stock beginning six months after the issuance date and prior to the maturity date at a price per share are computed by dividingequal to sixty percent of the net income (loss)lowest trading price of the Company’s common stock for the fifteen trading days prior to the conversion date. The principal balance at March 31, 2019 is $100,000. The interest expense incurred on the note payable was approximately $1,250 for the period ended March 31, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated to be $100,000. In addition, the Company paid $5,000 for debt issuance costs. For the period ended March 31, 2019, the Company recorded $13,071 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.

The Company borrowed $560,000 from a lender on February 21, 2019. The note bears interest at 12% and is payable in one lump sum on August 21, 2019, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the weighted-average number ofholder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the second lowest trade price of the Company’s common stock equivalents such as outstanding stock options and warrants. Common stock equivalents representfor the dilutive effecttwenty trading days prior to the conversion date. The principal balance at March 31, 2019 is $560,000. The interest expense incurred on the note payable was approximately $8,400 for the period ended March 31, 2019. The value of the assumed exerciseembedded beneficial conversion feature on the note payable was estimated to be $560,000. In addition, the Company granted the lender 450,000 shares of the outstandingCompany’s common stock, optionspaid $56,000 as a discount on the note, and warrants, usingpaid $4,000 for debt issuance costs. The shares granted must be returned if the treasury stock method.note is fully repaid and satisfied prior to 180 days after the issuance date. The calculation of fully diluted earnings (loss) per share assumesCompany recorded the dilutive effectvalue 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 evaluating the impact of the new guidance.

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.

shares

96 
 

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 impactat $400,455, based 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 classificationshare price on the Statement of Cash Flows (i) excess tax benefits 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 and did not have a material effect on the Company’s financial position, results of operations, but had an effectdate of the classificationnote agreement, as prepaid interest. For the period ended March 31, 2019, the Company recorded $155,000 of cash paidinterest expense related to taxing authorities arising from the withholdingvalue of shares from employees (treasury stock), classified as cash outflows used in financing activities.

4. Notes Payable – Stockholdersthe embedded beneficial conversion feature and debt issuance costs.

 

The Company had two convertible notesborrowed $42,500 from a lender on March 11, 2019. The note bears interest at 8% and is payable (the “Convertible Notes”) to stockholders in aggregate principalone lump sum on March 11, 2020, at which time the entire amount of $0principal and $100,000 at September 30, 2017accrued interest is due and December 31, 2016, respectively.payable. The Convertible Notes, which matured on August 25, 2017, borenote is unsecured. The outstanding principal and interest at 12% per annum. The holders ofamount is convertible by the Convertible Notes exercised their option to convert the notes to commonholder into shares of the Company at maturity, at $0.50 perCompany’s common share duringstock beginning 180 days after the quarter ended September 30, 2017. The Company granted 200,000 common sharesissuance date and prior to the holdersmaturity date at a price per share equal to sixty-five percent of the Convertible Notes.

Basedaverage of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date. The principal balance at March 31, 2019 is $42,500. The interest expense incurred on the terms of the conversion feature, the Company had determined that the Convertible Notes did not contain a beneficial conversion feature. As such, the entire proceeds of the Convertible Notes were recorded as a liability. The interest expenses incurred and paid on the Convertible Notesnote payable was $7,000 and $0, for the nine months ended September 30, 2017 andapproximately $142 for the period from February 10, 2016 (inception)ended March 31, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated to September 30, 2016, respectively.

5. Advances Duebe $31,556. In addition, the Company paid $2,500 for debt issuance costs. For the period ended March 31, 2019, the Company recorded $1,419 of interest expense related to the value of the embedded beneficial conversion feature and From Related Partydebt issuance costs.

 

The Company borrowed $150,000 from a lender on March 18, 2019. The note bears interest at 12% and is payable in one lump sum on September 18, 2019, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the second lowest trade price of the Company’s common stock for the twenty trading days prior to the conversion date. The principal balance at March 31, 2019 is $150,000. The interest expense incurred on the note payable was approximately $750 for the period ended March 31, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated to be $93,077. In addition, the Company granted 115,384 shares of the Company’s common stock and paid $15,000 as a discount on the note. The shares granted must be returned if the note is fully repaid and satisfied prior to 180 days after the issuance date. The Company recorded the value of the shares at $91,153, based on the Company’s share price on the date of the note agreement, as prepaid interest. For the period ended March 31, 2019, the Company recorded $9,256 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.

6. Advances From Related Parties

The Company has received a non-interest bearing advanceadvances without a specified maturity date from a stockholdercertain stockholders of the Company. The stockholder has a receivable dueCompany owed approximately $42,000 and $302,000, respectively, at March 31, 2019 and December 31, 2018 to the Company of $59,615 at September 30, 2017. The balance outstanding on the stockholder advance at December 31, 2016 was $21,000.stockholders.

 

6.7. Revenue Sharing Agreements

The Company borrowed $50,000 from a lender on November 29, 2018, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the lender to receive five percent of the revenues net of costs generated from the HydraSpin unit. On March 3, 2019, the Company cancelled this original agreement and entered into a new agreement whereby the lender is to receive fifty percent of the revenues net of costs and has guaranteed that the lender would receive $150,000 in net revenues by March 3, 2021, or the Company would pay the lender the difference between the $150,000 and the purchase price of $50,000 on or before March 31, 2021. For the period ended March 31, 2019, the Company recorded $12,500 of interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.

The Company borrowed $264,000 from a lender on December 13, 2018, whereby the proceeds are to be used to purchase certain HydraSpin units. On February 27, 2019, the Company cancelled this original agreement and entered into a new agreement to borrow an additional $66,000, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by

March 3, 2021, or the Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before March 31, 2021. For the period ended March 31, 2019, the Company recorded $1,375 of interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.

The Company borrowed $660,000 from a lender on January 2, 2019, whereby the proceeds were used to purchase certain HydraSpin units in exchange for the lender to receive fifty percent of the revenues net of costs generated from the HydraSpin units. The Company has guaranteed that the lender would receive $990,000 in net revenues by January 2, 2021, or the Company would pay the lender the difference between the $990,000 and the purchase price of $660,000 on or before January 15, 2021. For the period ended March 31, 2019, the Company recorded $41,250 of interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.

The Company borrowed $660,000 from a lender on January 16, 2019, whereby the proceeds were used to purchase certain HydraSpin units in exchange for the lender to receive fifty percent of the revenues net of costs generated from the HydraSpin units. The Company has guaranteed that the lender would receive $990,000 in net revenues by January 15, 2021, or the Company would pay the lender the difference between the $990,000 and the purchase price of $660,000 on or before January 17, 2021. For the period ended March 31, 2019, the Company recorded $34,375 of interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.

The Company borrowed $330,000 from a lender on January 30, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive sixty percent of the revenues net of forty percent of costs generated from the HydraSpin unit until the lender receives revenue equal to 120% of the $330,000 investment, then the lender shall receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by January 30, 2021, or the Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before February 6, 2021. For the period ended March 31, 2019, the Company recorded $13,750 of interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.

The Company borrowed $330,000 from a lender on January 30, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive sixty percent of the revenues net of forty percent of costs generated from the HydraSpin unit until the lender receives revenue equal to 120% of the $330,000 investment, then the lender shall receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by January 30, 2021, or the Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before February 6, 2021. For the period ended March 31, 2019, the Company recorded $13,750 of interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.

8. Equity Transactions

From January 1, 2018 to March 31, 2017,2018, the Company issued 500,0001,656,000 shares to different investors at $0.50 per share for cash, with total proceeds of $227,000 and recorded a$828,000, including subscription receivable of $23,000. Prior to September 30, 2017, such subscription receivable was fully paid.

From April 1 to June 30, 2017,$50,000. In addition, the Company

issued 590,000610,000 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. The value of these shares at $0.50 per share was $75,000.

10

In May 2017Company, 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.

From July 1, 2017 to September 30, 2017, the Company issued 1,360,000 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, the Company issued 930,350 shares to executives, employees engaged in research and development, and certain consultants. The value of these shares at $0.50 per share was $465,175.$305,000.

 

7. Commitments and ContingenciesFrom January 1, 2019 to March 31, 2019, the Company issued 200,000 shares to a lender upon receipt of a conversion notice. The Company also issued 565,384 shares to lenders for debt issuance costs. See Note 5.

 

Lease Commitments

9. 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 termRight of 36.5 months ending on October 30, 2020, and requires monthly payments of approximately $7,000.

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

Year ending December 31,    
2017 $18,000 
2018  89,000 
2019  92,000 
2020  78,000 
Total minimum payments $277,000 

Contractual Commitments

Effective as of May 1, 2016, the Company entered into a three-year employment agreement with Mark Dyos, our 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 pursuant to generally accepted accounting principles. These shares were issued in September 2017. The Company expensed $250,000 for these shares during the period ended September 30, 2017 in accordance with ASC 718.Use Assets

 

The Company has entered intoan operating lease for office and warehouse space that expires in 2020. Below is a two-year accounting consulting services agreement with Phil Marshall, a consultant tosummary of the Company. The accounting consulting services agreement provided for a grantCompany’s right of 100,000 sharesuse assets and liabilities as of common stock, which fully vested at January 2, 2017. The Company expensed $50,000 for these shares duringMarch 31, 2019:

Right-of-use assets $140,340 
Lease liability obligations, current  $82,438 
Lease liability obligations, less current portion  52,994 
Total lease liability obligations $135,432 
Weighted-average remaining lease term  1.6 years 
Weighted-average discount rate  10% 

During the periodthree months ended DecemberMarch 31, 2016 in accordance with ASC 505-50. The Company shall pay to Mr. Marshall 75,000 shares of common stock per each completed six months of satisfactory service. The first installment shall be payable at such time as2019, the Company generates revenuerecognized approximately $22,798 in operating lease costs and are included in selling, general and administrative expenses in our consolidated statement of operations. During the three months ended March 31, 2019, operating cash flows from the sale of its products. These shares were issued in September 2017. The Company expensed $37,500 for these shares during the quarter ended September 30, 2017 in accordance with ASC 718.operating leases was $22,791.

 

We may become involvedApproximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of March 31, 2019, are as follows:

Year ending December 31,    
2019  $69,000 
2020  78,000 
Total minimum payments $147,000 

As of March 31, 2019, the Company has an additional operating lease for office and warehouse space that has not yet commenced of approximately $956,000. This lease term began in or have been involved in, arbitrations or various other legal proceedings that arise from the normal courseApril 2019, with a term 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.

11

4 years.

 

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, Cloudburst Solutions, LLC (“Cloudburst”) filed suit against 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 also claims that the Company and Mr. King have misappropriated unspecified “intellectual property rights related to water treatment/reclamation processes.” Cloudburst seeks a declaratory judgment and unspecified damages, including $1,536,000 alleged to be owed pursuant to the Manufacturing and Distribution Agreement. The Company has filed special exceptions, and the parties have exchanged discovery requests. The Company intends to vigorously defend against the claims made by Cloudburst. The Company has not accrued any amounts for this litigation because it believes that the resolution of this uncertainty will not have a material effect on the Company’s financial condition.

8.10. 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 20172019 and 20162018 annual effective tax rate is estimated to be a combined 38%was 0% 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 September 30, 2017March 31, 2019 and December 31, 2016,2018, 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$9,500,000 at September 30, 2017,March 31, 2019, 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 September 30, 2017March 31, 2019 and December 31, 20162018 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$334,000 and $68,000$172,000 for the three months ended September 30, 2017March 31, 2019 and for the period from February 10, 2016 (inception) to September 30, 2016,2018, respectively.

 

9.11. Segment Information

The Company sells water purification products and operates oil recovery machines. The Company has identified such reportable segments based on management responsibility and the nature of the Company’s products, services, and costs. To date, the Company primarily sells its water purification products internationally and operates its oil recovery machines in the United States. The Company measures segment profit (loss) as income (loss) from operations. Segment assets are those assets controlled by each reportable segment.

Below is the financial information related to the Company’s segments:

  For the Three Months 
  Ended March 31, 
  2019  2018 
Revenues        
Water purification products $78,552  $128,130 
Oil recovery machines      
  $78,552  $128,130 
         
Loss from operations        
Water purification products $722,554  $718,285 
Oil recovery machines  96,581    
General corporate  149,276   96,067 
  $968,411  $814,352 
         
Capital expenditures        
Water purification products $92,158  $ 
Oil recovery machines  628,625    
General corporate      
  $720,783  $ 
         
  March 31, 2019  December 31, 2018 
Total assets        
Water purification products $733,504  $612,498 
Oil recovery machines  1,829,517   1,244,814 
General corporate  791,702   63,956 
  $3,354,723  $1,921,268 
         

10 

General corporate expenses include corporate salaries, health insurance and social security taxes for officers and corporate employees, corporate insurance, legal and accounting fees, and other corporate costs such as transfer agent and travel costs. Management considers these to be non-allocable costs for segment purposes.

12. Subsequent Events

 

The Company has evaluated all material events or transactions that occurred after September 30, 2017March 31, 2019 up to November 14, 2017,May 15, 2019, the date these financial statements were available to be issued and noted no material subsequent events which would require disclosure.

Financing

The Company borrowed $175,000 from a lender on April 9, 2019. The note bears interest at 12% and is payable in one lump sum on January 9, 2020, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity date at a price per share equal to the lesser of (1) the lowest trading price during the previous twenty-five trading days prior to the date of the note and (2) fifty-five percent of the lowest trading price of the Company’s common stock for the twenty-five trading days prior to the conversion date.

The Company borrowed $102,500 from a lender on April 10, 2019. The note bears interest at 8% and is payable in one lump sum on April 10, 2020, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date.

HydraSpin Contracts

The Company borrowed $330,000 from a lender on April 1, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by April 8, 2021, or the Company would pay the lender the difference between the $495,000 and the net revenues received on or before April 30, 2021.

Lease

The Company has an additional operating lease for office and warehouse space of approximately $956,000. This lease term began in April 2019, with a term of 4 years.

 

1211 
 

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 consolidated 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 resultsnotes thereto included in this quarterly report, and the timing of events could differ materially from those anticipated in these forward-lookingaudited consolidated financial statements as a result of a number of factors, including those set forth under the Risk Factors, Forward-Looking Statements and Business sectionsrelated notes included in our Registration StatementAnnual Report on Form 10 filed with10-K for the SEC on October 13, 2017. 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.year ended December 31, 2018.

 

Overview

 

We have developedWater Now, Inc. was incorporated in Texas on February 10, 2016 to develop and commercialize a patent-pending, gas/diesel operated,or electric powered, portable device that processes and purifies contaminated water. Our business strategy was conceived as a result of the growing global water crisis. Our AquaTM product line is designed to provide a small, portable unitToday, 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. We have two principal reportable segments: water purification products and oil recovery machines.

Our water purification product lines consist of portable units 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 OverviewWe have also developed a flameless heating technology that allows us to manufacture an electronically powered portable heating platform. The platform uses no combustion or electronic heating elements. By avoiding traditional heating elements, the product is ideal for facilities that generate vapors or dust, such as paint and body shops, furniture manufacturers, fuel depots and grain elevators. Our technology is anticipated to allow for the efficient heating of large spaces such as warehouses and garages. We anticipate introducing to the market our initial product offering in May 2019. The first product that we will make available to the market will heat approximately 1,000 square feet.

 

On October 23, 2018, the Company formed HydraSpin USA, Inc., a Texas corporation (“HydraSpin”), as a wholly-owned subsidiary. HydraSpin is engaged in the installation and operation of oil recovery machines deployed at salt water disposal wells associated with the oil industry. The utilized technology developed by African Horizon Technologies (Pty) Ltd (“AHT”) allows for the separation of residual oil from water contained in the disposal sites so as to minimize environmental contamination from the fluids containing oil.

On October 31, 2018, the Company entered into an Exclusive Sales Distribution Agreement (the “Agreement”) with AHT whereby the Company serves as AHT’s exclusive distributor of the Hydraspin Hydro Cyclone technology in the United States of America. Pricing is established in accordance with the AHT Agreement. Products are paid 50% upon order and the balance being due FOB the port. Typical lead time to have a machine ready for deployment after it is ordered is sixty (60) days.

The Company, through HydraSpin, contracts with owners of saltwater injection wells to reclaim oil using machines manufactured by AHT but owned and operated by HydraSpin. We derive revenue from sharing the proceeds of the oil recovered and sold with the owner of the applicable disposal location, typically on a 50/50 basis. As of March 31, 2019, we have ordered 13 machines from AHT, of which one is in operation.

12 

Financial Overview

Revenue

 

To date,From February 10, 2016 (date of inception) through March 31, 2019, we had generated revenues of approximately $283,000. We have generated nominal revenues.received a purchase order for 50 Aqua 125 units valued at $118,000 which should be delivered to the customer in the second quarter of 2019. 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 activities related to activities undertaken to adapt thecommercialize our water purification technology for commercial-scale manufacturing.and heater products.

 

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. Subsequent to the active trading date of our common stock on August 14, 2018, we have based the fair value of awards on the quoted closing bid price of our common stock on the OTC Markets on the date of grant. 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.borrowings including amortization of beneficial conversation features and debt issue costs.

 

SignificantCritical Accounting Policies and Recent Accounting PronouncementsEstimates

 

13

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 the unaudited consolidated financial statements requires usour management to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-goinga regular basis, we evaluate ourthese 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 ourinvestment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that we believeare believed 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.circumstances. Actual results may differ from these estimates under different assumptions or conditions. Theestimates.

For a description of the accounting estimates and assumptions discussedpolicies that, in this section are those that we consider to bemanagement’s opinion, involve the most critical to an understandingsignificant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial statements because they inherently involve significant judgmentsposition, results of operations, or cash flows, see “Management’s Discussion and uncertainties.  For a discussionAnalysis of our significant accounting policies, refer to Note 3– “SummaryFinancial Condition and Results of Operations – Significant Accounting Policies”Policies and Recent Accounting Pronouncements” in the Notes to our Financial StatementsAnnual Report on Form 10-K for the fiscal year ended December 31, 2016, included in our Registration Statement on Form 102018 filed with the SEC on October 13, 2017. April 1, 2019.

During the three months ended March 31, 2019, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 1 to our consolidated financial statements.

 

Cash and Cash Equivalents

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

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.

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 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.

1413 
 

Research and development costsResults of Operations

 

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.

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—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 evaluating the impact of the new guidance.

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 (i) excess tax benefits 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 and did not have a material effect on the Company’s financial position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

15

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 September 30, 2017March 31, 2019 and 20162018 (unaudited)

 

Revenue

 

We generated nominal revenues and incurred operating expenses of $898,172$978,083 and $101,756$882,150 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. All revenues generated to date are from our water purification products segment.

 

Research and developmentOperating expenses    

     

Below is a summary of our research and developmentoperating expenses for the three months ended September 30, 2017March 31, 2019 and 2016, respectively:2018:

 

  For the three months ended  
  September 30,  
  2017 2016 2017 vs. 2016
            $    % 
Payroll expense $117,215  $10,500   106,715   1,016%
Stock-based compensation expense  362,500   —     362,500   —  %
Travel expense and other miscellaneous expense  91,842   10,000   81,842   818%
                 
Total $571,557  $20,500   551,057   2,688%
  For the three months ended  
  March 31,  
  2019 2018 2019 vs. 2018
            $    % 
Salaries and wages $322,628  $298,927   23,701   8%
Professional fees  293,644   312,043   (18,399)  (6)%
Selling, general and administrative  365,881   271,180   94,701   35%
Gain on sale of assets  (4,070)  —     (4,070)  (100)%
Total $978,083  $882,150   95,933   11%
                 

Payroll expenses related to our R&D functionSalaries and wages increased during the three months ended September 30, 2017March 31, 2019 primarily related to increases in the salaries, payroll taxes and benefits for our employees engageddue to an increase in research and development.number of employees.

 

Stock-based compensation expensesProfessional fees decreased during the three months ended March 31, 2019 primarily related to a decrease in consulting fees offset by an increase in legal fees.

Selling, general and administrative increased during the three months ended September 30, 2017 dueMarch 31, 2019 primarily related to granting stock awards to our employeesan increase in advertising and advisors during the 2017 period.

Generalmarketing offset by a decrease in supplies and administrative expenses

The following is a summary of our general and administrative expenses for the three months ended September 30, 2017 and 2016, respectively:parts.

 

  For the three months ended  
  September 30,  
  2017 2016 2017 vs. 2016
            $    % 
Payroll expenses $37,530  $11,000   26,530   241%
Stock-based compensation expense  102,675   10,000   92,675   927%
Other G&A  87,370   4,795   82,575   1,722%
Audit, legal and professional fees $99,040  $5,461   93,579   1,714%
Total $326,615  $31,256   295,359   945%
                 

Payroll expenses increasedWe recorded a gain on sale of assets during the three months ended September 30, 2017 primarily related to increases in salaries, payroll taxes and benefits for certainMarch 31, 2019 from the sale of our employees.equipment.

16

 

Stock-based compensation expenses increased Segment contribution to loss from operations is presented in the table below:

  For the Three Months 
  Ended March 31, 
  2019  2018 
Water purification products $722,554  $718,285 
Oil recovery machines  96,581    
General corporate  149,276   96,067 
  $968,411  $814,352 

Water purification products loss from operationsduring the three months ended September 30, 2017 due to granting additional stock awards to our employees and advisors during the 2017March 31, 2019remained consistent with prior period.

Other general and administrative expenses increased The increase in oil recovery machines loss from operationsduring the three months ended September 30, 2017 primarily relatedMarch 31, 2019was due to the HydraSpin units being received during the quarter and expenses for setting up the unit, which mainly included payroll, supplies, and travel expenses. The increase in general corporate loss from operationsduring the three months ended March 31, 2019was due to increases in insurance, rental expensespayroll and travel expenses, partially offset by a decrease in professional fees.

Other Income (Expense)Expense

 

Below is a summary of our other income (expense)expense for the three months ended September 30, 2017March 31, 2019 and 2016, respectively.2018:

 

  For the three months ended For the period from
February 10, 2016 (inception) to
   
  September 30, September 30,   
   2017  2016 2017 vs. 2016 
       $  % 
Interest Expense$(1,000)$- 1,000 - 
  For the three months ended   
  March 31,   
   2019  2018 2019 vs. 2018 
        
14 

       $  % 
Interest expense$605,595$3,360 602,235 17,924%
Loss on extinguishment of debt 21,563  21,563 100%
Total$627,158$3,360 623,798 18,565%
          

 

There was an increase in interest expenses paidInterest expense increased primarily related to amortization of beneficial conversion features on the note payable – related parties.convertible debt issued during the period. We recorded a loss on extinguishment of debt during the period due to paying off the convertible notes prior to maturity. See Note 45 of the Notes to Condensed Consolidated Financial Statements (unaudited) for the period ended September 30, 2017.March 31, 2019 and 2018.

 

Net Losses

 

We incurred net losses of $897,172$1,595,569 and $101,756$817,712 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively, because of the factors discussed above. 

 

Net loss per share for the three months ended September 30, 2017March 31, 2019 and 20162018 was $0.03$(0.04) and $0.00,$(0.03), respectively, based on the weighted-average number of shares issued and outstanding during the period.

 

It is anticipated that future operating expenses will increase as the Company complies with its periodic reporting requirements. Such expenses would also increase if the Company were to effects a business combination, although there can be no assurance that the Company will be successful in effecting a business combination.Liquidity and Capital Resources

 

For the nine months ended September 30, 2017 and the period from inception to September 30, 2016 (unaudited)

Revenue

We generated nominal revenues and incurred operating expenses of $1,295,305 and $1,064,256 for the nine months ended September 30, 2017 and the period from inception to September 30, 2016, respectively.

17

Research and development expenses    

The following is a summary of our research and development expenses during the nine months ended September 30, 2017 and the period from inception to September 30, 2016, respectively:

  For the nine months ended For the period from February 10, 2016 (inception) to  
  September 30, September 30,  
  2017 2016 2017 vs. 2016
            $    % 
Payroll expense $311,839  $16,750   295,089   1,762%
Stock-based compensation expense  437,500   625,000   (187,500)  (30)%
Travel expense and other miscellaneous expenses  105,285   12,897   92,388   716%
Total $854,624  $654,647   199,977   31%

Payroll expenses related to R&D increased during the nine months ended September 30, 2017 primarily related to increase in the salaries, payroll taxes and benefits for our employees engaged in research and development.

Stock-based compensation expenses decreased during the nine months ended September 30, 2017 due to granting fewer stock awards to our employees and advisors during the first three quarter of fiscal 2017.

General and administrative expenses

The following is a summary of our general and administrative expenses during the nine months ended September 30, 2017 and the period from inception to September 30, 2016, respectively:

  For the nine months ended For the period from February 10, 2016 (inception) to  
  September 30, September 30,  
  2017 2016 2017 vs. 2016
            $    % 
Payroll expenses $101,885  $16,000   85,885   537%
Stock-based compensation expense  102,675   260,000   (157,325)  (61)%
Other G&A  114,784   5,130   109,654   2,138%
Audit, legal and professional fees $121,337  $78,479   42,858   55%
Total $440,681  $359,609   81,072   23%

Payroll expenses increased during the nine months ended September 30, 2017 primarily related to increases in salaries, payroll taxes and benefits relating to our employees engaged in our administrative function.

Stock-based compensation expenses decreased during the nine months ended September 30, 2017 due to granting fewer stock awards to our employees and advisors in the first three quarter of fiscal 2017.

Other general and administrative expenses increased during the nine months ended September 30, 2017 primarily related to increases in insurance, rental expenses and travel expenses, partially offset by a decrease in professional fees.

18

Other Income (Expense)

The following is a summary of our other income (expense) for the nine months ended September 30, 2017 and the period from inception to September 30, 2016 respectively:

  For the nine months ended For the period from February 10, 2016 (inception) to  
  September 30, September 30,  
  2017 2016 2017 vs. 2016
      $ %
Interest Expense $(7,000) $—     7,000   —   

There was an increase in interest expenses paid on the note payable – stockholders. See Note 4 of the Notes to Condensed Financial Statements (unaudited) for the period ended September 30, 2017.

Net Losses

We incurred net losses of $1,300,305 and $1,064,256 for the nine months ended September 30, 2017 and the period from February 10, 2016 (inception) to September 30, 2016, respectively, because of the factors set forth above. 

Net loss per share for the nine months ended September 30, 2017 and the period from inception to September 30, 2016 was $(0.04) for each period based on the weighted-average number of shares issued and outstanding.

It is anticipated that future operating expenses will increase as the Company complies with its periodic reporting requirements. Such expenses would also increase if the Company were to effects a business combination, although there can be no assurance that the Company will be successful in effecting a business combination.

Liquidity and Capital Resources

Sources of Liquidity

 

To date, we have generated nominal revenues. From February 10, 2016 (inception) through December 31, 2016,revenues of $283,000. For fiscal 2018, we had a net loss of $1,883,164,$4,370,056, resulting in an accumulated deficit as of December 31, 2016 in the same amount.2018 of $7,979,177. As of DecemberMarch 31, 2016,2019, we had cash and cash equivalents of $336.$65,941. Our auditors issued a going concern opinion with respect to our financial statements as of and for the period from inception throughfiscal year ended December 31, 20162018 due to the incurrence of significant operating losses, which raise substantial doubt about our ability to continue as a going concern. We have financed our operations to date primarily through private placements of our common stock and borrowings. FromFor the ninethree months ended September 30, 2017,March 31, 2019, we received $1,250,030$1,341,500 in net proceeds from the issuanceborrowings on notes payable and $2,046,000 in net proceeds from borrowings on revenue sharing agreements. As of March 31, 2019, we had total liabilities of approximately $4,400,000. We expect to continue to utilize debt and equity to finance our common stock.operations until we become profitable.

Cash Flows

 

The following table sets forth the primary sources and uses of cash for the period set forth below.

 

 Three months ended March 31,
 Nine months ended September 30, 2017 Period from inception to September 30, 2016 2019 2018
Net cash used in operating activities $(984,526) $(159,256) $(1,713,382) $(655,139)
Net cash used in investing activities —   —    $(1,090,783) $—   
Net cash provided by financing activities $1,286,145 $225,000  $2,817,000  $724,403 
               
Net increase in cash $301,619 $65,744  $12,835  $69,264 

 

19

Operating activities.Our use of cash in operating activities resulted primarily from our net loss, as adjusted for certain non-cash items and changes in operating assets and liabilities. For the ninethree months ended September 30, 2017,March 31, 2019, non-cash items mainly consisted of common stock issued as payment for servicesnon-cash interest expense and employee compensationdepreciation and amortization, and changes in operating assets and liabilities mainly consisted of an increase in inventory, and a decrease insecurity deposit, accounts payable and accrued expenses, partially offset by an increaseexpenses.

Investing activities.Cash used in payroll tax liability. Duringinvesting activities consisted of additions to property and equipment, proceeds from sale of assets, and a payment on the period from inception to September 30, 2016, non-cash items consisted primarily of common stock issued as payment for services and employees compensation.distributorship agreement with AHT.

Financing activities.Cash provided by financing activities consisted primarily of proceeds from the issuance of our common stock in private placements. During the nine months ended September 30, 2017note agreements and the period from inception to September 30, 2016, we received $1,250,060 and $125,000, respectively, from the issuance of our common stock.revenue sharing liabilities.

 

Funding Requirements

 

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate

15 

that our expenses will increase substantially if and as we:

 

 

establish a sales, marketing and distribution infrastructure to commercialize our water purification units and anyour other products we successfully develop;products;

 

 

maintain, expand and protect our intellectual property portfolio; and

 

 

add operational and financial personnel to handle the public company reporting and other requirements to which we will be subject following effectiveness of our Registration Statement on Form 10 filed with the SEC on October 13, 2017.subject.

 

We expect that we will require approximately $2,500,000 in additional capital to fund operations, including hiring additional employees and increasing inventory levels, during the next twelve (12) month period. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.

Because of the numerous risks and uncertainties associated with the development and commercialization of our water purification units,products, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with successfully commercializing such products. Our future capital requirements will depend on many factors, including:

 

 

the costs and timing of commercialization activities for our water purification units,products, including manufacturing, sales, marketing and distribution;

 

 

revenues received from sales of our products;

 

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and

 

 our ability to maintain manufacturing and distribution relationships on favorable terms, if at all.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, and strategic alliances. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies and future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to commercialize products that we would otherwise prefer to develop and market ourselves.

 

20

Quantitative and Qualitative Disclosures About Market Risk

 

We have not utilized any derivative financial instruments such as futures contracts, options and swaps, forward foreign exchange contracts or interest rate swaps and futures. We do not have any borrowings and, consequently, we are not affected by changes in market interest rates. We do not currently have any sales or own assets and operate facilities in countries outside the United States and, consequently, we are not effected by foreign currency fluctuations or exchange rate changes.  Overall, at this time, we believe that our exposure to interest rate risk and foreign currency exchange rate changes is not material to our financial condition or results of operations.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

 

Tax Loss Carryforwards

 

We had a net operating loss carry-forward for federal and state tax purposes of approximately $3,183,000$9,600,000 at September 30, 2017,March 31, 2019, that is potentially available to offset future taxable income, which will begin to expire in the year 2036. For financial reporting purposes, no deferred tax asset was recognized because at September 30, 2017March 31, 2019 and December 31, 2016 because2018 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

16 

the deferred tax assets considered realizable was reduced 100% by a valuation allowance.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

No Applicable

2117 
 

 

ITEM 4. CONTROLS AND PROCEDURES

  

Evaluation of Disclosure Controls and Procedures.   The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.

 

The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2017,March 31, 2019, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.March 31, 2019.

 

Management’s Report on Internal Control Over Financial Reporting.   The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as ofSeptember 30March 31, 2019, 2017, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled“Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were not effective as ofSeptember 30, 201 March 31, 2019.7.

 

Changes in Internal Control Over Financial Reporting.   The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control during the fiscal quarter ended September 30, 2017.March 31, 2019.

 

 

2218 
 

PART II. – OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

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.

On April 6, 2017, Cloudburst Solutions, LLC (“Cloudburst”) filed suit against 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 also claims that the Company and Mr. King have misappropriated unspecified “intellectual property rights related to water treatment/reclamation processes.” Cloudburst seeks a declaratory judgment and unspecified damages, including $1,536,000 alleged to be owed pursuant to Manufacturing and Distribution Agreement. The Company has filed special exceptions, and the parties have exchanged discovery requests. The Company intends to vigorously defend against the claims made by Cloudburst.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following is a summary of our issuances of common stock during the quarter endedSeptember30, 2017:March 31, 2019:

 

On various dates from JulyJanuary 1, 20172019 to September 30, 2017,March 31, 2019, the Company issued an aggregate of 1,360,000200,000 shares to various investors at $0.50 per sharea lender upon receipt of a conversion notice and issued 450,000 and 115,384 shares, respectively, to lenders for cash, generating total proceeds of $680,030. Thedebt issuance of such shares was in reliance on Section 4(a)(2) of the Securities Act of 1933. We believe that Section 4(a)(2) was available because none of such issuances involved underwriters, underwriting discounts or commissions; restrictive legends were placed on the certificates representing the shares purchases; and none of such sales were made by general solicitation.

On various dates from July 1, 2017 to September 30, 2017, the Company issued 930,350 shares to executives, employees and consultants. The issuance of such shares was in reliance on Section 4(a)(2) of the Securities Act of 1933, or Rule 701 promulgated thereunder.We believe that Section 4(a)(2) was available because none of such issuances involved underwriters, underwriting discounts or commissions; restrictive legends were placed on the certificates representing the shares purchases; and none of such sales were made by general solicitation. Alternatively, we believe that Rule 701 is available because such issuance was solely to officer, employees and consultants to the Company, subject to the limitations in such rule.

In August 2017, holders of our outstanding convertible notes payable elected to convert all outstanding amounts under such convertible notes into an aggregate of 200,000 shares of common stock.costs. The issuance of such shares was in reliance on Section 4(a)(2) of the Securities Act of 1933.We believe that Section 4(a)(2) was available because none of such issuances involved underwriters, underwriting discounts or commissions; restrictive legends were placed on the certificates representing the shares purchases; and none of such sales were made by general solicitation.

 

2319 
 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

WATER NOW, INC.

(Registrant)

Date: November 14, 2017

By:/s/ David King    

Date: May 15, 2019WATER NOW, INC.
By: /s/ David King

David King

Chief Executive Officer and Chief Financial Officer

 

 

 

 

 

 

2420 
 

INDEX TO EXHIBITS

 

 

31*31.1*Certification of David King, Chief Executive Officer and Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amendedamended..
32*32.1*Statement of David King,Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002..

EX-101.INS* XBRL Instance Document

101.INS*XBRL Instance Document
101.SCH*XBRL Schema Document

101.CALEX-101.SCH* XBRL Schema Document

EX-101.CAL*XBRL Calculation Linkbase Document

101.DEF*XBRL Definition Linkbase Document
101.LAB*XBRL Label Linkbase Document
101.PRE*XBRL Presentation Linkbase Document

EX-101.DEF* XBRL Definition Linkbase Document

EX-101.LAB* XBRL Label Linkbase Document

EX-101.PRE* XBRL Presentation Linkbase Document

* Filed or furnished herewith.

 

21 
25

Exhibit 31.1

CERTIFICATION

I, David King, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Water Now, Inc.(the “registrant”)for the quarterly period ended March 31, 2019;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.As the sole certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.As the sole certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 15, 2019WATER NOW, INC.
By: /s/ David King

David King

Chief Executive Officer and Chief Financial Officer

 
 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Water Now, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David King,Chief Executive Officer and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 15, 2019WATER NOW, INC.
By: /s/ David King

David King

Chief Executive Officer and Chief Financial Officer