UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 20172019

OR

Commission File No. 000-55825

WATER NOW, INC.

(Exact name of registrant as specified in its charter)

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

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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.  ¨[X] Yes   þ[  ] 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  þ[X] No¨ [  ]

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

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

[X]

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[X]

At November 9, 2017,15, 2019, there were 30,000,00052,410,817shares 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, and its wholly-owned subsidiary (“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.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Water Now, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

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

Water Now, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

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

Water Now, Inc.

Condensed Statement of Cash Flows

(Unaudited)

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

Water Now, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

Water Now, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 20172019 and 2018

1. Basis of presentation, BackgroundPresentation and DescriptionSummary of Business

Basis of presentationSignificant Accounting Policies

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 September 30, 2018 have been reclassified to conform with the current period presentation.

On September 27, 2016,Fair Value Measurements

ASC Topic 820, “Fair Value Measurement”, requires that certain financial instruments be recognized at their fair values at our balance sheet dates. However, other financial instruments, such as debt obligations, are not required to be recognized at their fair values, but GAAP provides an option to elect fair value accounting for these instruments. GAAP requires the Company consummated a transaction whereby VCAB One Corporation, a Texas corporation (“VCAB”), merged with and into the Company. At the timedisclosure of the merger VCAB was subjectfair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our balance sheets. For financial instruments recognized at fair value, GAAP requires the disclosure of their fair values by type of instrument, along with other information, including changes in the fair values of certain financial instruments recognized in income or other comprehensive income. For financial instruments not recognized at fair value, the disclosure of their fair values is provided below under“Financial Instruments.”

Nonfinancial assets, such as property, plant and equipment, and nonfinancial liabilities are recognized at their carrying amounts in the Company’s balance sheets. GAAP does not permit nonfinancial assets and liabilities to a bankruptcy proceedingbe remeasured at their fair values. However, GAAP requires the remeasurement of such assets and had minimal assets, no equity ownersliabilities to their fair values upon the occurrence of certain events, such as the impairment of property, plant 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 toequipment. In addition, if such an event occurs, GAAP requires the termsdisclosure of the merger,fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.

The Company did not have any Level 1 or Level 2 assets and in accordanceliabilities at September 30, 2019 and 2018.

The Derivative liabilities are Level 3 fair value measurements.

The following is a summary of activity of Level 3 liabilities during the nine months ended September 30, 2019:

At September 30, 2019, the fair value of the derivative liabilities of convertible notes was estimated using the following weighted-average inputs: the price of the Company’s common stock of $0.16, a risk-free interest rate of 1.88%, and expected volatility of the Company’s common stock of 213.76%, and the various estimated reset exercise prices weighted by probability.

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, we adopted the Financial 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 modified 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 issuancenine-month period ended September 30, 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 10.

2. Going Concern

At September 30, 2017,2019, the Company had $301,955approximately $127,000 in cash and had net working capital deficit of $377,587.approximately $4,845,000. The Company, which generated a net loss of $1,300,305approximately $7,575,000 and $1,064,256$2,777,000 for the nine-monthsnine months ended September 30, 20172019 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. Revenues

The Company’s revenues are generated from the sales of water purification products and the sales of hydrocarbons derived from the deployment and operation of Company owned oil recovery systems. The Company obtains purchase orders from its water purification customers for the sale of its products which sets forth the general terms and conditions including line item pricing and payment terms (generally due upon receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment) and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.

The Company earns revenue each month that the oil recovery systems are in place and operating. The Company generally receives 50% of the proceeds of the sales of oil recovered using its systems.

Water purification products that have been sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable and reasonably estimated. The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.

The Company included shipping and handling fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer. These costs are accounted for as a fulfillment cost and are included in cost of goods sold.

Revenues, as disaggregated by revenue type and reportable segment (see Note 12), are shown below.

3. Summary of Significant Accounting Policies and Recent Accounting Pronouncements4. Distributorship Agreement

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of deposit accountsOn October 31, 2018, the Company entered into an Exclusive Sales Distribution Agreement (the “Agreement”) with original maturities of three months or less.

Inventory

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

Use of Accounting Estimates

The preparationCompany serves as AHT’s exclusive distributor of the financial statements in conformity with accounting principles generally acceptedHydraspin Hydro Cyclone technology in the United States of America (“GAAP”) requires managementAmerica. The Company was obligated to make estimatespay AHT $500,000 and assumptions that affectissue AHT 500,000 shares valued at $250,000 based on the amounts reported inclosing price of the financial statements and accompanying notes.

Actual results could differCompany’s shares of $0.50 on the date of the Agreement. In addition, the Company will issue AHT 500,000 shares at the earlier of 24 months from those estimates.the commencement date of the Agreement or the sale of 50 units to the Company. The most significant estimates and assumptions madeCompany will also pay AHT a royalty of 2% of total net profits generated by management relatedthe Company from the sale of oil generated using the Hydraspin units. The term of the Agreement is for five years with an automatic renewal term of five years unless terminated prior to determiningthe expiration of the current term. The Company 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 September 30, 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.5. 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 benefit to be recognized inprincipal and any accrued interest was due and payable. The notes are unsecured, and the financial statements. First,$200,000 note is guaranteed by the Company must determine whether any amountCompany’s Chief Executive Officer. As of September 30, 2019, the tax benefit may be recognized. Second,$100,000 note was paid and 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.$200,000 note remains outstanding.

Stock-Based Expenses6. 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 stock granted. The valueaverage of the portionlowest two trading prices of the award that is ultimately expectedCompany’s common stock for the twenty trading days prior to vest is recognized as expense over the shorterconversion date. This note was paid in full on January 3, 2019 and the Company recorded a gain on extinguishment of the period over which services arethis debt of $19,114. The Company has no further obligations with respect to be received or the vesting period.this loan.

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”.the conversion date. In accordance with ASC 505-50,addition, the Company determines the fair value of stock-based expenses awards granted as either the fair value60,000 shares of the consideration received orCompany’s common stock valued at $53,400 based on the fair valueCompany’s share price on the date of the equity instruments issued, whichever is more reliably measurable.note agreement, paid $34,400 as a discount for interest on the note, and paid $5,000 for debt issuance costs. Through September 30, 2019, the Company paid $142,000 of principal and prepayment penalties of $58,000 recorded as interest expense. The lender converted the remaining $58,000 of principal into 332,500 shares of the Company’s common stock. The Company has no further obligations with respect to this loan.

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 fair valueentire amount of stock-based awards issued to employees, directorsprincipal and non-employees during the period from February 10, 2016 (Inception) to September 30, 2017 based on prices paid by unrelated third-parties for the purchases of its common stock during this period, which amounted to $0.50 per share.

accrued interest is

due and payable. The componentsnote is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of stock-based compensation related to stock awards in the Company’s Statementcommon stock at any time prior to the maturity date at the conversion price of Operations for$0.50 per share.  This note was converted into 200,000 shares of 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)Company’s common stock on March 28, 2019. The Company has no further obligations with respect to September 30, 2016 are as follows (rounded to nearest thousand):

Research and development coststhis loan.

The Company expenses researchborrowed $42,500 from a lender on October 15, 2018. The note bears interest at 8% and development costs as incurredis payable in accordance with ASC 730, “Researchone lump sum on October 15, 2019, 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 170 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, 2017twenty trading days prior to the conversion date. In addition, the Company paid $2,500 for debt issuance costs. This note was paid in full on March 26, 2019 and 2016, respectively. Researchthe Company recorded a loss on extinguishment of this debt of $17,841. The Company has no further obligations with respect to this loan.

The Company borrowed $86,500 from a lender on January 2, 2019. The note bears interest at 8% and development expenses were $854,624is payable in one lump sum on January 2, 2020, at which time the entire amount of principal and $654,647,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 nine months ended September 30, 2017twenty trading days prior to the conversion date. In addition, the Company paid $2,500 for debt issuance costs. This note was paid in full on July 8, 2019 and the Company recorded a loss on extinguishment of this debt of $32,592. The Company has no further obligations with respect to this loan.

The 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 period from February 10, 2016 (inception)twenty trading days prior to September 30, 2016, respectively.the conversion date. In addition, the Company paid $2,500 for debt issuance costs. This note was paid in full on August 20, 2019 and the Company recorded a gain on extinguishment of this debt of $38,143. The Company has no further obligations with respect to this loan.

Earnings (Loss) Per Share

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) bylowest trading price of the weighted-average number of shares ofCompany’s common stock for the fifteen trading days prior to the conversion date. The conversion feature meets the definition of a derivative and common stock equivalents suchtherefore requires bifurcation and is accounted for as outstanding stock options and warrants. Common stock equivalents representa derivative liability. The Company estimated the dilutive effectaggregate fair value of the assumed exercise ofconversion feature derivatives embedded in 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 warrantsdebenture 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 aboutdebt becomes convertible at $164,490, based on weighted probabilities of assumptions used in the entity’s ability to continueBlack Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.23, a risk-free interest rate of 2.00% and expected volatility of the Company’s common stock of 178.56%, and the various estimated reset exercise prices weighted by probability. This resulted in the calculated fair value of the debt discount being greater than the face amount of the debt, and the excess amount of $64,490 was immediately expensed as a going concern. The updated accounting guidance was effective forfinancing costs. In addition, the Company paid $5,000 for debt issuance costs. Through September 30, 2019, the Company paid $85,000 of principal, prepayment penalties and accrued interest totaling $45,000 recorded as interest expense, and recorded a loss on December 31, 2016. We have implementedextinguishment of this new accounting standarddebt of $42,629. The lender also converted $15,748 of principal and we will update our liquidity disclosures as necessary.interest into 159,070 shares of the Company’s common stock. The Company has no further obligations with respect to this loan.

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 borrowed $560,000 from a lender on February 21, 2019. The note bears interest at 12% and is currently evaluatingpayable in one lump sum on August 21, 2019, at which time the impactentire 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 new guidance.

Leases — In February 2016,Company’s common stock beginning 180 days after the FASB issued ASU 2016-02, “Leases”. This standard will require entities that lease assets—referredissuance date and prior 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.

maturity

Debt Issuance Costs - 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 conversion feature meets the definition of a derivative and therefore requires bifurcation and is accounted for as a derivative liability.The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $1,185,397, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.18, a risk-free interest rate of 1.88% and expected volatility of the Company’s common stock of 213.76%, and the various estimated reset exercise prices weighted by probability.In April 2015,addition, the FASB issued ASU 2015-03, “SimplifyingCompany granted the Presentationlender 450,000 shares of Debt Issuance Costs”. The new standard will more closely align the presentation ofCompany’s common stock, paid $56,000 as a discount on the note, and paid $4,000 for debt issuance costs under U.S. generally accepted accounting principlescosts. 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 $400,455, based on the Company’s share price on the date of the note agreement, as interest expense.During the third quarter of 2019, in two separate conversions, the holder converted $151,000 of principal and interest into 2,106,044 shares of common stock of the Company. As a result of the conversions the derivative liability related to the debenture was remeasured immediately prior to the conversions with an overall increase in the fair value of $615,000 recognized, with the presentation under comparable IFRS standards. Debt issuance costsfair value of the derivative liability related to a recognized debt liability will be presentedthe converted portion of $287,000 being reclassified to equity. The key valuation assumptions used consist, in part, of the price of the Company’s common stock on the dates of conversion, of $0.20 and $0.23, a risk-free interest rate of 1.88% and expected volatility of the Company’s common stock, of 213.76%, and the various estimated reset exercise prices weighted by probability. The principal balance sheetat September 30, 2019 is $448,000.

The Company borrowed $42,500 from a lender on March 11, 2019. The note bears interest at 8% and is payable in one lump sum on March 11, 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. In addition, the Company paid $2,500 for debt issuance costs. This note was paid in full on September 9, 2019 and the Company recorded a loss on extinguishment of this debt of $16,689. The Company has no further obligations with respect to this loan.

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 conversion feature meets the definition of a derivative and therefore requires bifurcation and is accounted for as a direct deduction fromderivative liability.The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $433,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.28, a risk-free interest rate of 1.87% and expected volatility of the Company’s common stock of 167.00%, and the various estimated reset exercise prices weighted by probability. During the third quarter of 2019, the holder converted $56,000 of principal and interest into 1,000,000 shares of common stock of the Company. As a result of the conversions the derivative liability similarrelated to the presentationdebenture was remeasured immediately prior to the conversion with an overall decrease in the fair value of debt discounts.$91,000 recognized, with the fair value of the derivative liability related to the converted portion, of $99,000 being reclassified to equity. The costkey valuation assumptions used consist, in part, of issuing debt will no longer be recordedthe price of the Company’s common stock on the date of conversion, of $0.19; a risk-free interest rate of 1.88% and expected volatility of the Company’s common stock, of 213.76%, and the various estimated reset exercise prices weighted by probability. In addition, the Company granted 115,384 shares of the Company’s common stock and paid $15,000 as a separate asset, except when incurred before receiptdiscount 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 funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reportedshares at $91,153, based on the balance sheet as assets and amortizedCompany’s share price on the date of the note agreement, 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,principal balance at September 30, 2019 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.

4. Notes Payable – Stockholders$95,650.

The Company had two convertible notesborrowed $45,000 from a lender on November 6, 2018. The note bears interest at 8% and is payable (the “Convertible Notes”) to stockholders

in aggregate principalone lump sum on November 6, 2019, 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’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. In addition, the Company paid $2,500 for debt issuance costs. This note was paid in full on April 5, 2019 and the Company recorded a loss on extinguishment of this debt of $15,870. The Company has no further obligations with respect to this loan.

The Company borrowed $82,500 from a shareholder on October 11, 2018. The note bears interest at 8% and is payable in one lump sum on April 11, 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 at any time prior to the maturity date at the conversion price of $0.50 per common share duringshare. In addition, the quarter ended September 30, 2017.Company paid $13,500 for debt issuance costs. This note was paid in full on April 12, 2019 and the Company recorded additional interest expense of $38,940. The Company granted 200,000has no further obligations with respect to this loan.

The Company borrowed $100,000 from a lender on December 13, 2018. The note bears interest at 10%, and is payable in one lump sum on December 13, 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 sharesstock beginning six months after the issuance date and prior to the holdersmaturity date at a price per share equal to sixty percent of the Convertible Notes.

Based onlowest trading price of the termsCompany’s common stock for the fifteen trading days prior to the conversion date.The conversion feature meets the definition of a derivative and therefore requires bifurcation and is accounted for as a derivative liability.The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $150,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.29, a risk-free interest rate of 2.40% and expected volatility of the Company’s common stock of 156.33%, and the various estimated reset exercise prices weighted by probability. During June and July 2019, in two separate conversions, the holder converted $36,000 of principal and interest into 333,535 shares of common stock of the Company. As a result of the conversions the derivative liability related to the debenture was remeasured immediately prior to the conversions with an overall decrease in the fair value of $32,000 recognized, with the fair value of the derivative liability related to the converted portion, of $117,000 being reclassified to equity. The key valuation assumptions used consist, in part, of the price of the Company’s common stock on the dates of conversion, of $0.32 and $0.22; a risk-free interest rate of 2.00% and expected volatility of the Company’s common stock, of 146.06%, and the various estimated reset exercise prices weighted by probability.In addition, the Company had determined thatpaid $5,000 for debt issuance costs. Through September 30, 2019, the Convertible Notes did not contain a beneficial conversion feature. As such,Company paid the entire proceedsremaining $65,745 of the Convertible Notes wereprincipal and prepayment penalties of $29,255 recorded as a liability.interest expense. The interest expenses incurred and paid on the Convertible Notes was $7,000 and $0, for the nine months ended September 30, 2017 and for the period from February 10, 2016 (inception)Company has no further obligations with respect to September 30, 2016, respectively.this loan.

5. Advances DueThe Company borrowed $77,000 from a lender on October 12, 2018. The note allows borrowing up to $231,000, bears interest at 12%, and is payable in one lump sum on October 12, 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 prior to the maturity date at a price per share equal to sixty-five percent of the lowest trading price of the Company’s common stock for the twenty trading days prior to the conversion date. If at any time while this note is outstanding, the conversion price is equal to or lower than $0.50, then an additional fifteen percent discount shall be factored into the conversion price until the note is no longer outstanding.The conversion feature meets the definition of a derivative and therefore requires bifurcation and is accounted for as a derivative liability.The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $115,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.33, a risk-free interest rate of 2.56% and expected volatility of the Company’s common stock of 172.94%, and the various estimated reset exercise prices weighted by probability. From Related PartyApril through August 2019, in several separate conversions, the holder converted $89,000 of principal and interest into 921,346 shares of common stock of the Company. As a result of the conversions the derivative liability related to the debenture was remeasured

immediately prior to the conversions with an overall decrease in the fair value of $115,000 recognized, with the fair value of the derivative liability related to the converted portion of $150,000 being reclassified to equity. The key valuation assumptions used consist, in part, of the price of the Company’s common stock on the dates of conversion, of $0.27 to $0.40, a risk-free interest rate of 1.88% and expected volatility of the Company’s common stock, of 213.76%, and the various estimated reset exercise prices weighted by probability. In addition, the Company paid $2,000 for debt issuance costs. On May 20, 2019, the Company borrowed an additional $51,500 on this note. The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $149,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.40, a risk-free interest rate of 2.37% and expected volatility of the Company’s common stock of 154.69%, and the various estimated reset exercise prices weighted by probability. In addition, the Company paid $1,500 for debt issuance costs. The principal balance at September 30, 2019 is $51,500.

The Company borrowed $80,000 from a lender on December 17, 2018. The note bears interest at 10%, and is payable in one lump sum on December 17, 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 prior to the maturity date at a price per share equal to sixty-five percent of the lowest trading price of the Company’s common stock for the fifteen trading days prior to the conversion date.The conversion feature meets the definition of a derivative and therefore requires bifurcation and is accounted for as a derivative liability.The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $160,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.39, a risk-free interest rate of 2.40% and expected volatility of the Company’s common stock of 156.33%, and the various estimated reset exercise prices weighted by probability. From June through August 2019, in several separate conversions, the holder converted $84,000 of principal and interest into 696,503 shares of common stock of the Company. As a result of the conversions the derivative liability related to the debenture was remeasured immediately prior to the conversions with an overall decrease in the fair value of $91,000 recognized, with the fair value of the derivative liability related to the converted portion, of $101,000 being reclassified to equity. The key valuation assumptions used consist, in part, of the price of the Company’s common stock on the dates of conversion, of $0.19 to $0.35, a risk-free interest rate of 2.00% and expected volatility of the Company’s common stock of 145.37% to 156.33%, and the various estimated reset exercise prices weighted by probability.In addition, the Company paid $4,000 for debt issuance costs. The Company has no further obligations with respect to this loan.

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 the lowest trading price of the Company’s common stock for the twenty-five trading days prior to the note issuance date, and the variable conversion price equal to 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. If at any time while this note is outstanding a 3^rd party has the right to convert at a discount to market greater than the conversion price in effect at that time, the lender may utilize such greater discount percentage until the note is no longer outstanding. If at any time while this note is outstanding a 3rd party has a look back period greater than the look back period in effect at that time, the lender may utilize such greater number of look back days until the note is no longer outstanding. In addition, the Company paid $16,250 for debt issuance costs. The principal balance at September 30, 2019 is $175,000.

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. The principal balance at September 30, 2019 is $102,500.

The Company borrowed $400,000 from five lenders on May 20, 2019. The notes bear interest at 10% and are payable in one lump sum on May 20, 2020, at which time the entire amount of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal and interest amount is convertible by the holders into shares of the Company’s common stock at any time after the closing price of the Company’s common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share. There was no value assigned to the beneficial conversion feature on the issuance date of the notes due to the Company’s common stock price being less than $0.75 per share. The principal balance at September 30, 2019 is $400,000.

The Company borrowed $88,500 from a lender on July 8, 2019. The note bears interest at 8% and is payable in one lump sum on July 8, 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 September 30, 2019 is $88,500.

The Company borrowed $103,000 from a lender on July 24, 2019. The note bears interest at 10% and is payable in one lump sum on July 24, 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) $0.22 and (2) sixty-five percent of the lowest trading price of the Company’s common stock for the twenty trading days prior to the conversion date. In addition, the Company paid $15,315 for debt issuance costs. The principal balance at September 30, 2019 is $103,000.

The Company borrowed $100,000 from two lenders on July 26, 2019. The notes bear interest at 10% and are payable in one lump sum on May 20, 2020, at which time the entire amount of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal and interest amount is convertible by the holders into shares of the Company’s common stock at any time after the closing price of the Company’s common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share. There was no value assigned to the beneficial conversion feature on the issuance date of the notes due to the Company’s common stock price being less than $0.75 per share. The principal balance at September 30, 2019 is $100,000.

The Company borrowed $175,000 from a lender on August 26, 2019. The note bears interest at 12% and is payable in one lump sum on February 26, 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 second lowest trade price of the Company’s common stock for the twenty trading days prior to the conversion date. In addition, the Company granted the lender 625,000 shares of the Company’s common stock, paid $17,500 as a discount on the note, and paid $3,000 for debt issuance costs. 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 $81,250, based on the Company’s share price on the date of the note agreement, as debt issuance costs. The principal balance at September 30, 2019 is $175,000.

The Company borrowed $295,000 from a lender on September 4, 2019. The note does not bear interest and matures September 4, 2020, 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 after the closing price of the Company’s common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share. There was no value assigned to the beneficial conversion feature on the issuance date of the notes due to the Company’s common stock price being less than $0.75 per share. The principal balance at September 30, 2019 is $295,000. The Company paid $45,000 as a discount for interest on the note.

The Company borrowed $262,500 from a lender on September 10, 2019. The note bears interest at 10%, and is payable in one lump sum on September 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 on the sixth month anniversary of the note and prior to the maturity date at a price per share equal to sixty percent of the lowest trading price of the Company’s common stock for the fifteen trading days prior to the conversion date. The principal balance at September 30, 2019 is $262,500.

7. 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 due to the Company of $59,615owed approximately $20,000 and $302,000, respectively, at September 30, 2017. The balance outstanding on the stockholder advance at2019 and December 31, 2016 was $21,000.2018 to the stockholders.

6.8. 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. On August 19, 2019, the Company cancelled the March 3, 2019 agreement and entered into a new agreement to borrow an additional $230,000, whereby the proceeds will be 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 November 4, 2021, or the Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before November 30, 2021. For the nine-month period ended September 30, 2019, the Company recorded $27,569 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 nine-month period ended September 30, 2019, the Company recorded $42,625 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 nine-month period ended September 30, 2019, the Company recorded $123,750 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 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 nine-month period ended September 30, 2019, the Company recorded $116,875 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 nine-month period ended September 30, 2019, the Company recorded $55,000 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 nine-month period ended September 30, 2019, the Company recorded $55,000 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 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 purchase price of $330,000 on or before April 30, 2021. For the nine-month period ended September 30, 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 $60,000 from a lender on June 25, 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 $90,000 in net revenues by June 25, 2021, or the Company would pay the lender the difference between the $90,000 and the purchase price of $60,000 on or before July 25, 2021. On August 15, 2019, the Company borrowed an additional $70,000 from the lender. During the quarter, the lender requested the agreement be terminated and $130,000 be returned to the lender. The Company intends to return the amount borrowed during the period ending December 31, 2019. For the nine-month period ended September 30, 2019, the Company recorded $208 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.

9. 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$50,000. In addition, the Company issued 610,000 shares to September 30, 2017, such subscription receivableexecutives, employees working in research and development at the Company, and consultants. The value of these shares at $0.50 per share was fully paid.$305,000.

From April 1, 2018 to June 30, 2017,2018, the Company issued 590,000625,000 shares to different investors at $0.50 per share for cash, with total proceeds of $295,000.$312,500. 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 150,000770,000 shares to twoexecutives, employees working in research and development at the Company.Company and consultants. The value of these shares at $0.50 per share was $75,000.

In May 2017 and September 2017, the Company’s principal shareholder surrendered an aggregate$385,000. The Company had 1,250,000 shares returned during June 2018 as a result 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.lawsuit settlement.

From July 1, 20172018 to September 30, 2017,2018, the Company issued 1,360,000660,000 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,$330,000. In addition, the Company issued 930,350granted 705,000 shares to executives, employees engagedworking in research and development at the Company and certain consultants. The value of these shares at $0.50 per share was $465,175.$352,500. Also see Note 5 regarding shares issued for debt issuance costs in September 2018.

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 CommitmentsFrom April 1, 2019 to June 30, 2019, the Company issued 1,289,051 shares to lenders upon receipt of conversion notices. See Note 5. In addition, the Company issued 825,000 shares to employees and consultants valued at the share price on the date the services were performed.

From July 1, 2019 to September 30, 2019, the Company issued 4,183,152 shares to lenders upon receipt of conversion notices. The Company also issued 625,000 shares to a lender for debt issuance costs and 1,502,389 shares to a lender for settlement of a claim. See Note 5. In addition, the Company issued 400,000 shares to employees and consultants valued at the share price on the date the services were performed and issued 1,180,000 shares to investors for total cash proceeds of $294,900.

10. 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):

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 intooperating leases for office and warehouse space that expires in 2020 and 2023. 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 duringSeptember 30, 2019:

During the period ended December 31, 2016 in accordance with ASC 505-50. The Company shall pay to Mr. Marshall 75,000 shares of common stock per each completed sixnine months of satisfactory service. The first installment shall be payable at such time as the Company generates revenue 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, 20172019, the Company recognized approximately $164,000 in accordance with ASC 718.operating lease costs and are included in selling, general and administrative expenses in our consolidated statement of operations. During the nine months ended September 30, 2019, operating cash flows from operating leases was $144,847.

We may become involved in, or have been involved in, arbitrations or various other legal proceedings that arise fromApproximate future minimum lease payments for the normal courseCompany’s right of our business. We cannot predictuse assets over the timing or outcomeremaining lease periods as 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, exceptSeptember 30, 2019, are 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.follows:

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.

8.11. 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, 20172019 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 hadThe Company has a net operating loss carry-forward for federal and state tax purposes of approximately $3,183,000$15,549,000 at September 30, 2017,2019, 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, 20172019 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$1,590,000 and $68,000$583,000 for the three monthsnine-months ended September 30, 20172019 and for the period from February 10, 2016 (inception) to September 30, 2016,2018, respectively.

9.12. Segment Information

The Company sells water purification products and operates oil recovery systems. 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 systems 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:

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.

13. Subsequent Events

The Company has evaluated all material events or transactions that occurred after September 30, 20172019 up to November 14, 2017,19, 2019, the date these financial statements were available to be issuedissued.

On November 12, 2019, the Company, through its HydraSpin subsidiary, signed an Exclusive Distributor Agreement (the “Agreement”) in which the other party to the agreement (the “Distributor”) agrees to become the exclusive distributor of HydraSpin products in certain Texas and notedNew Mexico territories. HydraSpin shall provide the products to the Distributor at no material subsequent events which would require disclosure. cost but HydraSpin will receive certain net revenues from the sale of hydrocarbons produced by the products. HydraSpin’s share of net revenues will be 92% of Net Revenues, as defined for the first 10 installed products and 85% for the eleventh product installed and those products installed subsequently. In order for the Distributor to maintain the exclusivity granted in the agreement, it must deploy products in 25 new locations during each 12-month period following the effective date and all customer locations in the aggregate must generate an average of 7,500 barrels of water with at least 2% oil content in each per day. If the Agreement is extended beyond the initial term of five years, the number of customer locations to be secured to maintain exclusivity shall be increased to 50 per year.

Stock Issuances

During October 2019 and through November 19, 2019, the Company has converted $123,000 of its convertible debt into 4,927,841 shares of common stock.

Settlement Agreements

On November 15, 2019, the Company reached an amicable resolution of any and all obligations owed by it to Auctus Funds, LLC (“AF”) with respect to the Securities Purchase Agreement dated April 9, 2019 and the related Convertible Promissory Note dated April 9, 2019. The Company has agreed to pay AF $270,000 in three installments. The first payment of $50,000 was paid on November 15, 2019. The second payment of $100,000 will be paid to AF on November 22, 2019. The final payment of $120,000 will be paid to AF on November 29, 2019.

On November 15, 2019, the Company reached an amicable resolution of any and all obligations owed by it to Crown Bridge Partners, LLC (“CBP”) with respect to that certain securities purchase agreement and outstanding convertible note with CBP. The Company made a payment of $120,000 to CBP on November 15, 2019, thereby fulfilling any and all obligations to CBP.

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 Aqua^TM 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 systems.

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 introduced to the market our initial product offering, HydraHeat, in June 2019, but have yet to generate revenue. The first product that we will make available to the market will heat approximately 1,000 square feet.

RevenueOn 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 systems 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.

ToOn October 31, 2018, the Company entered into an Exclusive Sales Distribution Agreement (the “AHT 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.

On November 12, 2019, the Company, through its HydraSpin subsidiary, signed an Exclusive Distributor Agreement (the “Agreement”) in which the other party to the agreement (the “Distributor”) agrees to become the exclusive distributor of HydraSpin products in certain Texas and New Mexico territories. HydraSpin shall provide the products to the Distributor at no cost but HydraSpin will receive certain net revenues from the sale of hydrocarbons produced by the products. HydraSpin’s share of net revenues will be 92% of Net Revenues, as defined for the first 10 installed products and 85% for the eleventh product installed and those products installed subsequently. In order for the Distributor to maintain the exclusivity granted in the agreement, it must deploy products in 25 new locations during each 12-month

period following the effective date and all customer locations in the aggregate must generate an average of 7,500 barrels of water with at least 2% oil content in each per day. If the Agreement is extended beyond the initial term of five years, the number of customer locations to be secured to maintain exclusivity shall be increased to 50 per year.

The Company and the Distributor estimate that the first 25 products deployed will produce approximately $40 million in gross revenue annually to HydraSpin.

The Company, through HydraSpin, contracts with owners of saltwater injection wells to reclaim oil using systems 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 the current date, we have ordered 13 systems from AHT, of which we have received six units. Three of these units are currently in operation and three are expected to be in operation by the end of November 2019. The remaining seven units are expected to be received and placed in operation in the 1^st quarter of 2020.

Financial Overview

Revenue

From February 10, 2016 (date of inception) through September 30, 2019, we had generated nominal revenues.revenues of approximately $533,000. Our ability to generateincrease revenues will depend on the successful manufacturing and commercialization of our water purification units.

Reorganization Expensesand heater units and the continued development of contracts with our Hydraspin customers.

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 debt issue costs.

Significant Accounting Policies and Recent Accounting Pronouncements

Critical Accounting Policies and Estimates

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 nine months ended September 30, 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 EquivalentsResults of Operations

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.

Research and development costs

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

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.

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, 20172019 and 20162018 (unaudited)

Revenue

We generated nominal revenues of $20,092 and incurred operating expenses of $898,172 and $101,756$(19,995) for the three months ended September 30, 20172019 and 2016,2018, respectively. We generated revenues of $0 and $20,092 from our water purification products and oil recovery systems segments, respectively, for the three months ended September 30, 2019. During the three months ended September 30, 2019, we did not generate any revenues from the sale of our water purification products as no orders were filled during the period. We continue to aggressively market our water purification products and believe that demand will increase as current customers reorder and new customers are acquired. We had a reversal of a sale totaling $23,995 during the three months ended September 30, 2018 due to writing off the sale as a charitable donation.

Research and developmentOperating expenses    

Below is a summary of our research and developmentoperating expenses for the three months ended September 30, 20172019 and 2016, respectively:2018:

Salaries and wages decreased during the three months ended September 30, 2019 primarily related to a decrease in stock-based compensation.

Payroll expenses related to our R&D functionProfessional fees increased during the three months ended September 30, 20172019 primarily related to increasesan increase in the salaries, payroll taxesconsulting and benefits for our employees engaged in research and development.legal fees.

Stock-based compensation expensesSelling, general and administrative increased during the three months ended September 30, 2017 due2019 primarily related to granting stock awards to our employeesan increase in insurance, rent, shipping, and advisors during the 2017 period.

General 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:travel expenses.

Segment contribution to loss from operations is presented in the table below:

Payroll expenses increased Water purification products loss from operationsduring the three months ended September 30, 2017 primarily related2019decreased mainly due to increasesthe decrease in salaries, payroll, taxesconsulting and benefits for certain of our employees.

Stock-based compensation expenses increased supplies. The increase in oil recovery systems loss from operationsduring the three months ended September 30, 20172019was due to granting additional stock awards to our employeesan increase in expenses for payroll, supplies, and advisorstravel expenses. General corporate loss from operations during the 2017 period.

Otherthree months endedSeptember30, 2019 increased mainly due to the increase in selling, general and administrative expenses increased during the three months ended September 30, 2017 primarily related to increases in insurance, rental expenses and travel expenses, partially offset by a decrease in professional fees.noted above.

Other Income (Expense)Expense

Below is a summary of our other income (expense)expense for the three months ended September 30, 20172019 and 2016, respectively.2018:

There was an increase in interest expenses paidInterest expense increased primarily related to amortization of debt issue costs on the note payable – related parties.convertible debt issued during the period. We recorded a gain on the change in fair value of derivative liability during the period based on the value of the derivatives as of September 30, 2019. 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, 2017.2019 and 2018.

Net Losses

We incurred net losses of $897,172$4,110,150 and $101,756$985,481 for the three months ended September 30, 20172019 and 2016,2018, respectively, because of the factors discussed above. 

Net loss per share for the three months ended September 30, 20172019 and 20162018 was $0.03$(0.10) 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.

For the nine months ended September 30, 20172019 and the period from inception to September 30, 20162018 (unaudited)

Revenue

We generated nominal revenues of $334,393 and incurred operating expenses of $1,295,305 and $1,064,256$39,200 for the nine months ended September 30, 20172019 and the period2018, respectively. We generated $308,744 and $25,649 from inception to September 30, 2016, respectively.

Researchour water purification products and development expenses    

The following is a summary of our research and development expenses duringoil recovery systems segments, respectively, for the nine months ended September 30, 2017 and2019.

Operating expenses    

Below is a summary of our operating expenses for the period from inception tonine months ended September 30, 2016, respectively:2019 and 2018:

Payroll expenses related to R&DSalaries and wages increased during the nine months ended September 30, 20172019 primarily related to increaseincreases 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 nine months ended September 30, 2017 due2019 primarily related to granting fewer stock awards to our employeesa decrease in consulting fees and advisors during the first three quartera 2018 settlement of fiscal 2017.lawsuit offset by an increase in audit fees.

General and administrative expenses

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

Payroll expenses increased during the nine months ended September 30, 20172019 primarily related to increasesan increase in salaries, payroll taxesadvertising and benefits relating to our employees engagedmarketing, rent, shipping, and insurance offset by a decrease in our administrative function.supplies and parts.

Stock-based compensation expenses decreasedWe recorded a gain on sale of assets during the nine months ended September 30, 20172019 from the sale of our equipment.

Segment contribution to loss from operations is presented in the table below:

Water purification products loss from operations during the nine months endedSeptember30, 2019 remained consistent with prior period. The increase in oil recovery systems loss from operations during the nine months endedSeptember30, 2019 was due to granting fewer stock awardsthe HydraSpin units being received during the period and expenses for setting up the unit, which mainly included payroll, supplies, and travel expenses. General corporate loss from operations during the nine months endedSeptember30, 2019 increased mainly due to our employeesincreases in consulting and advisors in the first three quarter of fiscal 2017.payroll.

Other general and administrative expenses increased duringExpense

Below is a summary of our other expense for the nine months ended September 30, 20172019 and 2018:

Interest expense increased primarily related to increasesamortization of debt issue costs on the convertible debt issued during the period. We recorded a gain on the change in insurance, rental expenses and travel expenses, partially offset byfair value of derivative liability during the period based on the value of the derivatives as of September 30, 2019. We recorded a decrease in professional fees.loss on extinguishment of debt during the period due to paying off the convertible notes prior to maturity. See Note 5 of the Notes to Condensed Consolidated Financial Statements (unaudited) for the period

Other Income (Expense)ended September 30, 2019 and 2018.

The following is a summaryNet Losses

We incurred net losses of our other income (expense)$7,575,057 and $2,776,856 for the nine months ended September 30, 20172019 and the period from inception to September 30, 2016 respectively:

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, 2016,2018, respectively, because of the factors set forthdiscussed above.

Net loss per share for the nine months ended September 30, 20172019 and the period from inception to September 30, 20162018 was $(0.04) for each period$(0.20) and $(0.09), respectively, based on the weighted-average number of shares issued and outstanding.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.

LiquidityLiquidity and Capital Resources

Sources of Liquidity

To date, we have generated nominal revenues. From February 10, 2016 (inception) through December 31, 2016,revenues of $533,000. 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 December 31, 2016,September 30, 2019, we had cash and cash equivalents of $336.$127,129. 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 nine months ended September 30, 2017,2019, we received $1,250,030$3,192,935 in net proceeds from the issuanceborrowings on notes payable and $2,736,000 in net proceeds from borrowings on revenue sharing agreements. As of September 30, 2019, we had total liabilities of approximately $9,894,000. 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.

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 nine months ended September 30, 2017,2019, non-cash items mainly consisted of common stock issued as payment for services and employee compensation, non-cash interest expense, change in fair value of derivative liability and depreciation and amortization, and changes in operating assets and liabilities mainly consisted of an increase in inventoryaccounts receivable, other receivables, security deposit, and accounts payable offset by a decrease in accounts payableaccrued expenses.

Investing activities.Cash used in investing activities consisted of additions to property and accrued expenses, partially offset by an increase in payroll tax liability. Duringequipment, 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 note agreements, common stock, in private placements. During the nine months ended September 30, 2017 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 offset by payments on notes payable.

Funding Requirements

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

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:

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.

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.