UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 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,April 6, 2021, there were 30,000,00080,890,981 shares outstanding of Common Stock, no par value.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.

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 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 Changes 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)

September 30, 20172020 and 2019

1. Basis of presentation, Background and Description of Business

Basis of presentation

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 3 regarding the Company's prospective sale of Businesssubstantially all of its assets subsequent to September 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, andfair value of the asset or liability along with other information, including the gain or loss recognized in accordance with the bankruptcy plan, the Company issued an aggregate of 900,000 shares of common stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfaction of their respective claims. As providedincome in the bankruptcy plan,period the Plan Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code. As a result of 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 held by the Claim Holders.remeasurement occurred.

2. Going ConcernThe Company did not have any Level 1 or Level 2 assets and liabilities at September 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 nine months ended September 30, 2020:

At September 30, 2017,2020, 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 $0.09; a risk-free interest rate of 0.11%, and expected volatility of the Company’s common stock of 242.37%, and the various estimated reset exercise prices weighted by probability.

At September 30, 2020, the Company had $301,955approximately $31,000 in cash and had net working capital deficit of $377,587.approximately $9,983,000. The Company, which generated a net loss of $1,300,305approximately $5,445,000 and $1,064,256$7,575,000 for the nine-monthsnine months ended September 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.

On July 31, 2020, the Company entered into an Asset Sale and Purchase Agreement (the “Agreement”) to sell substantially all of its assets to RigMax H20, LLC (the “Buyer”) for a total purchase price of $30.0 million in cash, subject to certain adjustments and credits. On November 24, 2020, the Company exercised its right to unilaterally terminate the Agreement. The termination of the Agreement was the result of the Buyer’s inability to fund the purchase price. The Company continues to evaluate the matter with the Buyer.​ As of September 30, 2020, the Company received $625,000 in advance deposits related to the sale of these assets.

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.

3. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

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 will be 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 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 make estimates and assumptions that affect the amounts reported inCompany. The Company will also pay AHT a royalty of 2% of total net profits generated by the financial statements and accompanying notes.

Actual results could differCompany from those estimates.the sale of oil generated using the Hydraspin units. The most significant estimates and assumptions made by management related to determiningterm of the Agreement is for five years with an automatic renewal term of five years unless terminated earlier. 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, 2020, the 500,000 shares remaining to be issued are recorded as distributorship accrued expense in the amount of $250,000 and are required to be issued prior to October 31, 2020. The Company has not issued the 5000,000 shares as of April 6, 2021. Amortization expense amounted to $150,000 and $150,000 for the nine months ended September 30, 2020 and 2019, respectively.

During 2020 the Company entered into additional short-term loans with lenders. Total principal borrowed during 2020 was $50,000. Repayments of $40,000 were made during the nine months ended September 30, 2020. The remaining $514,000 of principal was repaid or extended as of April 6, 2021. The notes are generally unsecured.

Income TaxesOn 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 disbursement date, including payroll costs, payment of interest on a covered obligation, rent and utilities. The principal balance at September 30, 2020 is $290,400.

Income taxes are accounted for under

The Company borrowed $50,000 from a lender on January 14, 2020. The note bears interest at 18% and is payable in one lump sum on June 14, 2020, at which time the assetentire amount of principal and liability method. Deferred tax assetsaccrued interest is due and liabilities are recognized forpayable. The note is unsecured. The outstanding principal and interest amount is convertible by the estimated future tax consequences attributable to differences betweenholder into shares of 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 assetsCompany’s common stock at any time prior to the amounts more likely than not to be realized.maturity date at the conversion price of $0.50 per share. The principal balance at September 30, 2020 is $50,000. The note is currently in default as of September 30, 2020.

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,borrowed $37,500 from a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits basedlender on the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First, the Company must determine whether any amountFebruary 5, 2020. The note is an extension of the tax benefit may be recognized. Second,existing Amended and Restated Secured Convertible Promissory Note dated June 18, 2018. The total principal due under the Company determines how muchnote 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 the tax benefit should be recognized (this would only applyprincipal balance is paid prior to tax positions that qualifyMay 5, 2020 and the 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 the 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 recognition). No additional liabilities have been recognizedthe ten 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 result of the implementation. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions.

Stock-Based Expenses

derivative liability. The Company accounts for stock-based expenses underestimated the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of expense for stock-based awards made to employees and directors based on estimated fair values on the grant date. The stock-based compensation awards to employees, directors and non-employees during the period from February 10, 2016 (inception) to 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. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the shorter of the period over which services are to be received or the vesting period.

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

price of the Company’s common stock of $0.05, a risk-free interest rate of 1.57% and expected volatility of the Company’s common stock of 232.73%, and the various estimated reset exercise prices weighted by probability. 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) toprincipal balance at September 30, 2017 based on prices paid by unrelated third-parties for the purchases2020 is $100,000. The note is currently in default as of its common stock during this period, which amounted to $0.50 per share.September 30, 2020.

The Company borrowed $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 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 $263,000, 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 $0.10, a risk-free interest rate of 0.11% and expected volatility of the Company’s common stock of 254.43%, and the various estimated reset exercise prices weighted by probability. In addition, the Company paid $17,500 as a discount on the note and paid $3,500 for debt issuance costs. The principal balance at September 30, 2020 is $175,000. The note is currently in default as of September 30, 2020.

The componentsCompany borrowed $447,500 from a lender on July 14, 2020, using approximately $338,000 of stock-based compensation relatedthe proceeds to stock awardspay off existing loans in default to the lender. The note bears interest at 12% and becomes due on July 14, 2021. Principal and interest payments of $48,180 are due monthly beginning October 12, 2020. The note is unsecured. The outstanding principal and interest amount is convertible by the holder into shares of the Company’s Statementcommon 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 Operationsthe second lowest trade price of the Company’s common stock for the three months endedtwenty trading days prior to the conversion date. In addition, the Company paid $44,750 as a discount on the note and paid $13,055 for debt issuance costs. The principal balance at September 30, 2017 and 2016, and for2020 is $447,500.

During the nine months ended September 30, 2017 and for2020, the period from February 10, 2016 (inception)Company issued 1,000,000 shares to September 30, 2016 area lender as follows (roundedcollateral held in escrow, to nearest thousand):be cancelled upon payment of the debt.

Research and development costs

The Company expenses research and development costs as incurred in accordance with ASC 730, “Research and Development”. The Company’s research and development activities related to activities undertaken to adapt the water purification technology contributed by its founder for commercial-scale manufacturing. 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 $54,000 and $4,000 at September 30, 2020 and December 31, 2019, respectively, to the stockholder.

No additional revenue sharing agreements were entered into during the nine months ended September 30, 2020. The Company recorded an additional $794,000 in interest expense during the nine months ended September 30, 2020 related to the existing revenue sharing agreements. No payments have been made on existing revenue sharing agreements.

As of April 6, 2021, the Company is obligated to purchase seven HydraSpin units with an aggregate cost of approximately $2 million awaiting shipment from Africa to the Company of $59,615 atand there is approximately $1 million included in accounts payable for unpaid amounts on other units. No payment has been made on these units.

From January 1, 2019 to September 30, 2017.2019, the Company issued 5,672,203 shares to lenders upon receipt of conversion notices for total principal, interest and fees of $585,168. The balance outstandingCompany also issued 1,190,384 shares to lenders for debt issuance costs. In addition, the Company issued 1,125,000 shares to employees and consultants valued at the share price on the stockholder advance at December 31, 2016 was $21,000.

6. Equity Transactionsdate the services were earned and issued 1,180,000 shares to investors for total cash proceeds of $299,387.

From January 1, 2020 to March 31, 2017,September 30, 2020, the Company issued 500,00020,894,369 shares to different investors at $0.50 per sharelenders upon receipt of conversion notices for cash, with total proceedsprincipal, interest and fees 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$482,681. The Company also issued 590,000485,000 shares to different investorsemployees and consultants valued at $0.50 per share for cash, with total proceeds$33,600 and issued 1,000,000 shares as collateral held in escrow, to be cancelled upon payment of $295,000. In addition, there were 600,000 shares of common stock vested during the six months ended June 30, 2016.

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

retired 800,000 shares.

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 intoan operating lease for office and warehouse space that expires in 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, 2020:

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, 20172020, the Company recognized approximately $124,000 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, 2020, operating cash flows from operating leases was $175,000.

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, 2020, 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. 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 September 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$15,413,000 at September 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 September 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$673,000 and $68,000$1,590,000 for the threenine months ended September 30, 20172020 and for the period from February 10, 2016 (inception) to September 30, 2016,2019, respectively.

9. Subsequent Events

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 upidentified 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 November 14, 2017, the dateCompany’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 financial statements were available to be issuednon-allocable costs for segment purposes.

The Company borrowed $605,000 from a lender on January 7, 2021. The note bears interest at 12% and noted no material subsequent eventsis payable in one lump sum on January 7, 2022, at which would require disclosure.time the entire amount of principal and accrued interest is due and payable. The note is unsecured. Upon and event of default, the outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock at a price per share equal to $0.025. In addition, the Company paid $60,500 as a discount on the note and paid $4,500 for debt issuance costs.

ITEM 2. MANAGEMENT’SMANAGEMENT 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 the process of obtaining a UL certification for the product.

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 sourceHydraspin 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 not in operation but expect to start operations in June 2021. There is currently no timeframe for receiving the remaining seven units from the manufacturer.

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.

On July 31, 2020, we entered into an Asset Sale and Purchase Agreement (the “Agreement”) to sell substantially all of our assets to RigMax H20, LLC (the “Buyer”). On November 24, 2020, we exercised our right to unilaterally terminate the Agreement.  The termination of the Agreement was the result of the Buyer’s inability to fund the purchase price. We continue to evaluate the matter with the Buyer and will provide additional information as it becomes available.​

Financial Overview

Revenue

Revenue

To date,For the nine months ended September 30, 2020, we have generated nominal revenues.revenues of approximately $7,600. Our ability to generateincrease revenues will depend on the successful manufacturing and commercialization of our water purification units.and heater units and the continued development of contracts with our Hydraspin customers.

Research and Development Expenses

Reorganization Expenses

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

Research and Development Expenses

The Company expenses R&D costs as incurred. The Company’s R&D activities related to activities undertaken to adapt thecommercialize our water purification technology for commercial-scale manufacturing.and heater products.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense. 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.

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.

ResearchDuring the nine months ended September 30, 2020, there were no significant changes in our accounting policies 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 adaptestimates other than 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 beennewly 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 accompanyingthat are disclosed in Note 1 to our consolidated financial statements.

Results of Operations

For the three months ended September 30, 20172020 and 20162019 (unaudited)

Revenue

We generated nominal revenues of $3,000 and incurred operating expenses of $898,172 and $101,756$20,000 for the three months ended September 30, 20172020 and 2016,2019, respectively. We generated revenues of $3,000 and $0 from our water purification products and oil recovery systems segments, respectively, for the three months ended September 30, 2020. We generated revenues of $0 and $20,000 from our water purification products and oil recovery systems segments, respectively, for the three months ended September 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

Research and development expenses 

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