UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended SeptemberJune 30, 20172020

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,August 14, 2020, there were 30,000,00078,042,560 shares 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. and Subsidiary

Condensed StatementConsolidated Statements of Cash FlowsChanges in Stockholders’ Equity

(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)

SeptemberJune 30, 20172020 and 2019

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, 2016.2019.

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 DescriptionSee Note 13 regarding the Company's prospective sale of Businesssubstantially all of its assets subsequent to June 30, 2020.

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 accordance withliabilities at June 30, 2020 and 2019.

The Derivative liabilities are Level 3 fair value measurements.

The following is a summary of activity of Level 3 liabilities during the bankruptcy plan,six months ended June 30, 2020:

At June 30, 2020, the Company issued an aggregatefair value of 900,000 sharesthe derivative liabilities of convertible notes was estimated using the following weighted-average inputs: the price of the Company’s common stock (the “Plan Shares”) to the Claim Holders as full settlementof $0.05; a risk-free interest rate of 0.18%, and satisfaction of their respective claims. As provided in the bankruptcy plan, the Plan Shares were issued pursuant to Section 1145expected volatility of the United States Bankruptcy Code. As a resultCompany’s common stock of 266.81%, and the merger, the separate corporate existence of VCAB was terminated. The Company entered into the merger in order to increase its shareholder base in order to, among other things, assist in satisfying the listing standards of a National securities exchange. The Company recorded total restructuring expenses of $615,000, including $165,000 of consulting fees in cash and $450,000 for the issuance of the Plan Shares for settlement of claims heldvarious estimated reset exercise prices weighted by the Claim Holders.probability.

2. Going Concern

At SeptemberJune 30, 2017,2020, the Company had $301,955approximately $9,000 in cash and had net working capital deficit of $377,587.approximately $10,939,000. The Company, which generated a net loss of $1,300,305approximately $4,414,000 and $1,064,256$3,712,000 for the nine-monthssix months ended SeptemberJune 30, 20172020 and for the period from February 10, 2016 (inception) to September 30, 2016,2019, 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 oil sales 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 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.

4. Distributorship Agreement

On October 31, 2018, the Company entered into an Exclusive Sales Distribution Agreement (the “Agreement”) with African Horizon Technologies (Pty) Ltd (“AHT”) whereby the Company will be AHT’s exclusive distributor of the Hydraspin Hydro Cyclone technology in the United States of America. The Company paid AHT $500,000 in cash and issued AHT 500,000 shares valued at $250,000 based on the closing price of the Company’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 the commencement date of the Agreement or the sale of 50 units to the Company. The Company will also pay AHT a royalty of 2% of total net profits generated by the Company from the sale of oil generated using the Hydraspin units. The term of the Agreement is for five years with an automatic renewal term of five years unless terminated earlier. The Company recorded the value of the Agreement of $1,000,000 as an other asset and

3. Summaryis amortizing the asset to expense over the life of Significant Accounting Policiesthe Agreement of five years. As of June 30, 2020, the 500,000 shares remaining to be issued are recorded as distributorship accrued expense in the amount of $250,000 and Recent Accounting Pronouncementsare required to be issued prior to October 31, 2020. Amortization expense amounted to $100,000 and $100,000 for the six months ended June 30, 2020 and 2019, respectively.

Cash and Cash Equivalents5. Notes Payable

Cash and cash equivalents consist primarilyDuring 2020 the Company entered into additional short-term loans with lenders. Total principal borrowed during 2020 was $50,000. Repayments of deposit accounts with original maturities$25,000 were made during the six months ended June 30, 2020. The remaining $529,000 of three monthsprincipal was repaid or less.extended as of August 19, 2020. The notes are generally unsecured.

InventoryOn April 20, 2020, the Company obtained a Paycheck Protection Program (PPP) loan from a commercial bank in the amount of $290,400. The loan is unsecured, bears interest at 1.0% interest and is payable beginning November 20, 2020 in 18 equal installments. Interest accrues during the deferment period. The loan is subject to potential forgiveness in part or total, depending on the amount of certain costs incurred by the Company over an 8-week period after the loan’s disbursement date, including payroll costs, payment of interest on a covered obligation, rent and utilities. The principal balance at June 30, 2020 is $290,400.

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

Use of Accounting Estimates

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

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

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.6. Convertible Notes Payable

The Company accounts for uncertain tax positionsborrowed $50,000 from a lender on January 14, 2020. The note bears interest at 18% and is payable 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 basedone lump sum on June 14, 2020, 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 accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the financial statements. First, the Company must determine whether any amountholder into shares of the tax benefit may be recognized. Second,Company’s common stock at any time prior to the Company determines how muchmaturity date at the conversion price of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition). No additional liabilities have been recognized$0.50 per share. The principal balance at June 30, 2020 is $50,000. The note is currently in default as a result of the implementation. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions.

Stock-Based ExpensesJune 30, 2020.

The Company accounts for stock-based expensesborrowed $37,500 from a lender on February 5, 2020. The note is an extension of the existing Amended and Restated Secured Convertible Promissory Note dated June 18, 2018. The total principal due under the provisionsnote is $100,000. The note bears interest at 18% and is payable in one lump sum on May 5, 2020. In the event 50% or more of ASC 718, “Compensation—Stock Compensation”, which requires the measurementprincipal balance is paid prior to May 5, 2020 and recognitionthe note is not in default, then the maturity date is extended to August 5, 2020. The required payment was not made by May 5, 2020 and the note is currently in default and outstanding. The outstanding principal and interest amount is convertible by the holder into shares of expensethe Company’s common stock at any time prior to the maturity date at a price per share equal to fifty percent of the average closing price of the Company’s common stock for stock-based awards madethe ten trading days prior to employees and directors based on estimated fair values on the grantconversion date. The stock-based compensation awards to employees, directorsconversion feature meets the definition of a derivative and non-employees duringtherefore requires bifurcation and is accounted for as a derivative liability. The Company estimated the period from February 10, 2016 (inception) to September 30, 2017 consisted of the grants of restricted stock. The restrictions on the shares granted related to regulatory restrictions as well as service and milestone based restrictions that prevented the sale of the stock granted. Theaggregate fair value of the portionconversion feature derivatives embedded in the debenture at the date the debt becomes convertible at $52,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consist, in part, of the award that is ultimately expected to vest is recognized as expense over the shorterprice of the period over which services are to be received orCompany’s common stock of $0.05, a risk-free interest rate of 1.57% and expected volatility of the vesting period.Company’s common stock of 232.73%, and the various estimated reset exercise prices weighted by probability. The principal balance at June 30, 2020 is $100,000.

The Company accountsborrowed $175,000 from a lender on March 4, 2020. The note bears interest at 12% and is payable in one lump sum on September 4, 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 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 determinespaid $17,500 as a discount on the fair value of stock-based expenses awards grantednote and paid $3,500 for debt issuance costs. The principal balance at June 30, 2020 is $175,000.

During the six months ended June 30, 2020, the Company issued 1,000,000 shares to a lender as either the fair valuecollateral held in escrow, to be cancelled upon payment of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.debt.

The Company estimated the fair value of stock-based awards issued to employees, directors and non-employees during the period from February 10, 2016 (Inception) to 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.

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

Research and development costs7. Advances From Related Parties

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

Earnings (Loss) Per Share

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

Recently Accounting Pronouncements

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

Revenue — In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company is currently 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.

4. Notes Payable – Stockholders

The Company had two convertible notes payable (the “Convertible Notes”) to stockholders in aggregate principal amount of $0 and $100,000 at September 30, 2017 and December 31, 2016, respectively. The Convertible Notes, which matured on August 25, 2017, bore interest at 12% per annum. The holders of the Convertible Notes exercised their option to convert the notes to common shares of the Company at maturity, at $0.50 per common share during the quarter ended September 30, 2017. The Company granted 200,000 common shares to the holders of the Convertible Notes.

Based on the terms of the conversion feature, the Company had determined that the Convertible Notes did not contain a beneficial conversion feature. As such, the entire proceeds of the Convertible Notes were recorded as a liability. The interest expenses incurred and paid on the Convertible Notes was $7,000 and $0, for the nine months ended September 30, 2017 and for the period from February 10, 2016 (inception) to September 30, 2016, respectively.

5. Advances Due and From Related Party

The Company received a non-interest bearing advanceadvances without a specified maturity date from a stockholder of the Company. The stockholder has a receivable dueCompany owed approximately $174,000 and $4,000 at June 30, 2020 and December 31, 2019, respectively, to the Company of $59,615 at September 30, 2017. The balance outstanding on the stockholder advance at December 31, 2016 was $21,000.stockholder.

6. Equity Transactions8. Revenue Sharing Agreements

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

From April 1 to June 30, 2017, the Company issued 590,000 shares to different investors at $0.50 per share for cash, with total proceeds of $295,000. In addition, thereNo additional revenue sharing agreements were 600,000 shares of common stock vestedentered into during the six months ended June 30, 2016.2020. The Company recorded an additional $529,000 in interest expense during the six months ended June 30, 2020 related to the existing revenue sharing agreements. No payments have been made on existing revenue sharing agreements.

As of August 19, 2020, the Company is obligated to purchase seven HydraSpin units with an aggregate cost of approximately $2 million awaiting shipment from Africa to the Company and there is approximately $1 million included in accounts payable for unpaid amounts on other units. No payment has been made on these units.

9. Equity Transactions

From January 1, 2019 to June 30, 2019, the Company issued 1,489,051 shares to lenders upon receipt of conversion notices. The Company also issued 465,384 shares to lenders for debt issuance costs. In addition, the Company issued 825,000 shares to employees and consultants valued at the share price on the date the services were earned.

From January 1, 2020 to June 30, 2020, the Company issued 17,894,369 shares to lenders upon receipt of conversion notices for total principal, interest and fees of $404,681. The Company also issued 385,000 shares to employees and consultants valued at $24,600 and issued 1,000,000 shares as collateral held in escrow, to be cancelled upon payment of the debt.

10. Operating Leases – Right of Use Assets

The Company has an operating lease for office and warehouse space that expires in 2023. Below is a summary of the Company’s right of use assets and liabilities as of June 30, 2020:

During the second quarter of 2017,six months ended June 30, 2020, the Company issued 150,000 shares to two employees workingrecognized approximately $82,000 in researchoperating lease costs and development atare included in selling, general and administrative expenses in our consolidated statement of operations. During the Company. The valuesix months ended June 30, 2020, operating cash flows from operating leases was $116,000.

Approximate future minimum lease payments for the Company’s right of these shares at $0.50 per share was $75,000.use assets over the remaining lease periods as of June 30, 2020, are as follows:

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

From July 1, 2017 to September 30, 2017, the Company issued 1,360,000 shares to different investors at $0.50 per share for cash, with total proceeds of $680,030.

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

7. Commitments and Contingencies

Lease Commitments

Operating Leases – Rental Property

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

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):

Contractual Commitments

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

The Company has entered into a two-year accounting consulting services agreement with Phil Marshall, a consultant to the Company. The accounting consulting services agreement provided for a grant of 100,000 shares of common stock, which fully vested at January 2, 2017. The Company expensed $50,000 for these shares during the period ended December 31, 2016 in accordance with ASC 505-50. The Company shall pay to Mr. Marshall 75,000 shares of common stock per each completed six 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, 2017 in accordance with ASC 718.

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

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

Litigation

On April 6, 2017, 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 20172020 and 20162019 annual effective tax rate is estimated to be a combined 38%0% for the U.S. federal and state statutory tax rates.rates because the Company is in a net operating loss position. The Company reviews tax uncertainties in light of changing facts and circumstances and adjust them accordingly. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, 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.

WeThe Company had a net operating loss carry-forward for federal and state tax purposes of approximately $3,183,000$14,654,000 at SeptemberJune 30, 2017,2020, that is potentially available to offset future taxable income, whichincome. The TCJA (Tax Cut and Jobs Act) changes the rules on NOL carryforwards. The 20-year limitation was eliminated, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will beginnow be limited to expire in the year 2036. 80 percent of taxable income.

For financial reporting purposes, no deferred tax asset was recognized because at SeptemberJune 30, 20172020 and December 31, 20162019 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 was approximately $442,000$419,000 and $68,000$779,000 for the threesix months ended SeptemberJune 30, 20172020 and for the period from February 10, 2016 (inception) to September 30, 2016,2019, respectively.

9. Subsequent Events12. Segment Information

The Company sells water purification products and operates oil recovery systems. The Company has evaluated all material events or transactions that occurred after September 30, 2017 up to November 14, 2017,identified such reportable segments based on management responsibility and the nature of the Company’s products, services, and costs. To date, these financial statements were available to be issuedthe Company primarily sells its water purification products internationally and noted no material subsequent events which would require disclosure. 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

On July 13, 2020, a lender provided the Company with a Notice of Conversion to convert $78,000 of principal and interest into 3,000,000 shares of common stock.

On July 31, 2020, the Company entered into an Asset Sale and Purchase Agreement to sell substantially all of its assets to RigMax H20, LLC for a total purchase price of $30.0 million in cash, subject to certain adjustments and credits. The transaction is targeted to close, subject to confirmatory due diligence and receipt of shareholder and other mandated regulatory approvals, on or before October 31, 2020.

In August 2020 the Company issued 100,000 shares of common stock to a consultant.

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, 2019.

Overview

We have developedWater Now, Inc. was incorporated in Texas on February 10, 2016 to develop and commercialize a patent-pending, gas/diesel operated,and electric powered, portable device that processes and purifies contaminated water. Our business strategy was conceived as a resultwater purification product lines consist of the growing global water crisis. Our Aqua^TM product line is designed to provide a small, portable unitunits capable of providing a cost-effective, safe and efficient method of water purification.

We have also developed a flameless heating technology that allows us to manufacture an electronically powered portable heating platform. The Aquaplatform uses no combustion or electronic heating elements. By avoiding traditional heating elements, the product line requires no pre-is ideal for facilities that generate vapors or post-treatmentdust, 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. We are currently in negotiations with potential third party manufactures of the sourceproduct and hope to finalize an OEM agreement in late Q4 2020 or early Q1 2021. Thereafter, we will begin final testing of the retail product offering in hopes of making the product available to the public in the third quarter of 2021.

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

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

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. These units are currently in operation. The remaining seven units are expected to be received and placed in operation during 2020.

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 deployed units. HydraSpin s share will be 92% of Net Revenues, as that term is defined in the Agreement, 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 no filters, no membraneswith 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.

Oil prices have fallen dramatically in 2020, causing many producers to stop exploration activities. This situation and no chemicals.the global pandemic have effectively temporarily eliminated our ability to produce revenues from our HydraSpin activities.

Financial Overview

Revenue

To date,For the six months ended June 30, 2020, we have generated nominal revenues.revenues of approximately $5,000. Our ability to generateincrease revenues will depend on the successful manufacturing and commercialization of our water purification units.

Reorganization Expenses

During 2016, we incurred reorganization expenses in connectionand heater units and the continued development of contracts 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.Hydraspin customers. 

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. ToSubsequent to the active trading date of our common stock on August 14, 2018, we have estimatedbased the fair value of stock-based awards issued to employees, directors and non-employees based on prices paid by unrelated third-parties for the purchasesquoted closing bid price of our common stock.stock on the OTC Markets on the date of grant. Other G&A expenses include patent costs, and professional fees for legal, finance, accounting, and accounting services.consulting services, insurance and rent.

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

Interest Expense

Interest expense consists primarily of interest incurred on borrowings.borrowings including amortization of beneficial conversation features and debt issue costs.

SignificantCritical Accounting Policies and Recent Accounting PronouncementsEstimates

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 102019 filed with the SEC on October 13, 2017. 

Cash and Cash EquivalentsJune 16, 2020.

CashDuring the six months ended June 30, 2020, there were no significant changes in our accounting policies and cash equivalents consist primarily of deposit accounts with original maturities of three months or less.

Use of Accounting Estimates

The preparation ofestimates other than the financial statementsnewly adopted accounting standards that are disclosed in conformity with GAAP requires managementNote 1 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 theour consolidated 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 SeptemberJune 30, 20172020 and 20162019 (unaudited)

Revenue

We generated nominal revenues of $2,000 and incurred operating expenses of $898,172 and $101,756$236,000 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. We generated revenues of $0 and $2,000 from our water purification products and oil recovery systems segments, respectively, for the three months ended June 30, 2020. We generated revenues of $230,000 and $6,000 from our water purification products and oil recovery systems segments, respectively, for the three months ended June 30, 2019. We continue to aggressively market our water purification products and oil recovery systems and believe that demand will increase as current customers reorder and new customers are acquired.

Research and developmentOperating expenses    

Below is a summary of our research and developmentoperating expenses for the three months ended SeptemberJune 30, 20172020 and 2016, respectively:2019:

Payroll expenses related to our R&D function increasedSalaries and wages decreased during the three months ended SeptemberJune 30 2017, 2020 primarily related to increasesdecreases in the salaries, payroll taxes and benefits for our employees engageddue to a decrease in research and development.number of employees.

Stock-based compensation expenses increasedProfessional fees decreased during the three months ended SeptemberJune 30 2017 due, 2020 primarily related to grantingdecreases in consulting, legal fees, and stock awards to our employees and advisors during the 2017 period.based compensation.

General and administrative expenses

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

Payroll expenses increaseddecreased during the three months ended SeptemberJune 30 2017, 2020 primarily related to increasesdecreases in salaries, payroll taxesadvertising and benefits for certainmarketing, shipping, and insurance.

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

Segment loss from operations during the three months ended June 30, 2020 decreased primarily due to oil prices falling dramatically in 2020 along with the global pandemic which have effectively temporarily eliminated our ability to produce revenues. Because of these issues in 2020, we have significantly reduced our employees.headcount and other expenses throughout the company.

Stock-based compensation expenses increased during the three months ended September 30, 2017 due to granting additional stock awards to our employees and advisors during the 2017 period.

Other 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.

Other Income (Expense)Expense

Below is a summary of our other income (expense)expense for the three months ended SeptemberJune 30, 20172020 and 2016, respectively.2019:

There was an increase in interest expenses paidInterest expense increased primarily related to amortization of debt issuance costs on the note payable – related parties. See Note 4convertible debt issued during the periods. We recorded a loss on the change in fair value of derivative liability based on the value of the Notesderivatives as of June 30, 2020. We recorded a loss on extinguishment of debt during the 2019 period due to Condensed Financial Statements (unaudited) forpaying off the period ended September 30, 2017.convertible notes prior to maturity.

Net Losses

We incurred net losses of $897,172$2,224,191 and $101,756$2,116,573 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, because of the factors discussed above. 

Net loss per share for the three months ended SeptemberJune 30, 20172020 and 20162019 was $0.03$(0.03) and $0.00,$(0.06), 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 ninesix months ended SeptemberJune 30, 20172020 and the period from inception to September 30, 20162019 (unaudited)

Revenue

We generated nominal revenues of $5,000 and incurred$314,000 for the six months ended June 30, 2020 and 2019, respectively. We generated revenues of $3,000 and $2,000 from our water purification products and oil recovery systems segments, respectively, for the six months ended June 30, 2020. We generated revenues of $308,000 and $6,000 from our water purification products and oil recovery systems segments, respectively, for the six months ended June 30, 2019. We continue to aggressively market our water purification products and oil recovery systems and believe that demand will increase as current customers reorder and new customers are acquired.

Operating expenses    

Below is a summary of our operating expenses of $1,295,305 and $1,064,256 for the ninesix months ended SeptemberJune 30, 20172020 and 2019:

Salaries and wages decreased during the period from inceptionsix months ended June 30, 2020 primarily related to Septemberdecreases in the salaries, payroll taxes and benefits due to a decrease in number of employees.

Professional fees decreased during the six months ended June 30 2016, respectively., 2020 primarily related to decreases in consulting, legal fees, and stock based compensation.

ResearchSelling, general and development expenses    

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

Payroll expenses related to R&D increased during the nine months ended September 30, 2017, 2020 primarily related to increasedecreases in bad debt expense, advertising and marketing, shipping, supplies, and insurance.

We recorded a loss on sale of assets during the six months ended June 30, 2020 from the sale of our trucks and recorded a gain on sale of assets during the six months ended June 30, 2019 from the sale of our equipment.

Segment contribution to loss from operations is presented in the salaries, payroll taxes and benefits for our employees engaged in research and development.table below:

Stock-based compensation expenses decreased

Segment loss from operations during the ninesix months ended SeptemberJune 30, 20172020 decreased primarily due to granting fewer stock awardsoil prices falling dramatically in 2020 along with the global pandemic which have effectively temporarily eliminated our ability to produce revenues. Because of these issues in 2020, we have significantly reduced our employeesheadcount and advisors duringother expenses throughout the first three quarter of fiscal 2017.

General and administrative expensescompany.

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

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

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

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

Other Income (Expense)Expense

The followingBelow is a summary of our other income (expense)expense for the ninesix months ended SeptemberJune 30, 20172020 and the period from inception to September 30, 2016 respectively:2019:

There was an increase in interest expenses paidInterest expense increased primarily related to amortization of debt issuance costs on the note payable – stockholders. See Note 4convertible debt issued during the periods. We recorded a loss on the change in fair value of derivative liability based on the value of the Notesderivatives as of June 30, 2020. We recorded a loss on extinguishment of debt during the 2019 period due to Condensed Financial Statements (unaudited) forpaying off the period ended September 30, 2017.convertible notes prior to maturity.

Net Losses

We incurred net losses of $1,300,305$4,414,473 and $1,064,256$3,712,142 for the ninesix months ended SeptemberJune 30, 20172020 and the period from February 10, 2016 (inception) to September 30, 2016,2019, respectively, because of the factors set forthdiscussed above.

Net loss per share for the ninesix months ended SeptemberJune 30, 20172020 and the period from inception to September 30, 20162019 was $(0.04) for each period$(0.07) and $(0.10), 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,Through June 30, 2020, we have generated nominal revenues.revenues of $554,000. From February 10, 2016 (inception) through December 31, 2016,June 30, 2020, we had a net loss of $1,883,164, resulting in an accumulated deficit as of December 31, 2016 in the same amount.have incurred losses aggregating $22.4 million. As of December 31, 2016,June 30, 2020, we had cash and cash equivalents of $336.$9,000. Our auditors issued a going concern opinion with respect to our financial statements as of

and for the period from inception throughyear ended December 31, 20162019 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. From the nine months ended SeptemberAs of June 30, 2017,2020, we received $1,250,030 in net proceeds from the issuancehad total liabilities of approximately $14 million. 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 ninesix months ended SeptemberJune 30, 2017,2020, non-cash items mainly consisted of common stock issued as payment for servicesnon-cash interest expense, changes in derivative liabilities, and employee compensationdepreciation and amortization, and changes in operating assets and liabilities mainly consisted of an increase in inventory and a decreaseincreases in accounts payable and accrued expenses partially offset by an increaseand decreases in payroll tax liability. During the period from inception to September 30, 2016, non-cash items consisted primarily of common stock issued as payment for servicesprepaid expenses and employees compensation.security deposits.

Investing activities. Cash provided by investing activities for the six months ended June 30, 2020 consisted of additions to property and equipment and proceeds from sale of assets.

Financing activities.Cash provided by financing activities for the six months ended June 30, 2020 consisted primarily of proceeds from the issuance of our common stock in private placements. During the nine months ended September 30, 2017note agreements, convertible note agreements, and the periodadvances from inceptionrelated parties, offset by payments on notes payable, convertible notes payable, and repayments to September 30, 2016, we received $1,250,060 and $125,000, respectively, from the issuance of our common stock.related parties.

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 effectedaffected by foreign currency fluctuations or exchange rate changes.  Overall, at this time, we believe that our exposure to interest rate risk and foreign currency exchange rate changes is not material to our financial condition or results of operations.

Off-Balance Sheet Arrangements

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

Tax Loss Carryforwards

We had a net operating loss carry-forward for federal and state tax purposes of approximately $3,183,000$14,654,000 at SeptemberJune 30, 2017,2020, that is potentially available to offset future taxable income, which will begin to expire in the year 2036.income. For financial reporting purposes, no deferred tax asset was recognized because at SeptemberJune 30, 20172020 and December 31, 2016 because2019 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.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

No ApplicableNot Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.   The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to

ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.assurance.

The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of SeptemberJune 30, 2017,2020, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were not effective as of SeptemberJune 30, 2017.2020.

Management’s Report on Internal Control Over Financial Reporting.   The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as ofSeptember June 30,, 2017, 2020, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled“Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were not effective as ofSeptember June 30,, 2017. 2020.

Changes in Internal Control Over Financial Reporting.   The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control during the fiscal quarter ended SeptemberJune 30, 2017.2020.

PART II. – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

On April 6, 2017, Cloudburst Solutions, LLC (“Cloudburst”) filed suit against the Company and David King in the 17th District Court of Tarrant County, Texas. Cloudburst alleges that the Company breached its obligations under a Manufacturing and Distribution Agreement to which the Company and Cloudburst were parties. Cloudburst also claims that the Company and Mr. King have misappropriated unspecified “intellectual property rights related to water treatment/reclamation processes.” Cloudburst seeks a declaratory judgment and unspecified damages, including $1,536,000 alleged to be owed pursuant to Manufacturing and Distribution Agreement. The Company has filed special exceptions, and the parties have exchanged discovery requests. The Company intends to vigorously defend against the claims made by Cloudburst.

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

The following is a summary of our issuances of common stock during the quarter endedSeptemberJune 30, 2017:2020:

On various dates from July 1, 2017 to SeptemberDuring the quarter ended June 30, 2017,2020 the Company issued an aggregatea total of 1,360,0001,000,000 shares to various investors at $0.50 per shareof common stock, which were issued for cash, generating total proceedsconversion of $680,030.debt. The issuance of such shares was in relianceCompany relied on Section 4(a)(2) of the Securities Act of 1933.Act. We believe that the exemption afforded by Section 4(a)(2) was available because none of such issuances involved underwriters, underwriting discounts or commissions; restrictive legends were placed on the certificates representing the shares purchases;issued; and none of such sales were made by general solicitation.

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

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

SIGNATURES

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

WATER NOW, INC.

(Registrant)

Date: November 14, 2017

By:/s/ David King    

David King

Chief Executive Officer and Chief Financial Officer

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