The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
Notes to Condensed Financial Statements (unaudited)
September 30, 2018
1. Basis of presentation, Background
and Description of Business
Basis of presentation
The accompanying unaudited financial
statements of Water Now, Inc. (the “Company”) have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission, or the SEC, including the instructions to Regulation S-X. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States
of America have been or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include
all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited
financial statements for the period ended December 31, 2017.
In the opinion of the management of
the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month
period have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected
for the entire fiscal year. When used in these notes, the terms “Company”, “we”, “us” or “our”
mean Water Now, Inc.
Background and Description of Business
On September 27, 2016, we consummated
a transaction whereby VCAB One Corporation, a Texas corporation (“VCAB”), merged with and into us. At the time of the
merger VCAB was subject to a bankruptcy proceeding and had minimal assets, no equity owners and no liabilities, except for approximately
1,500 holders of Class 5 Allowed General Unsecured Claims and a holder of allowed administrative expenses (collectively, “Claim
Holders”). Pursuant to the terms of the merger, and in accordance with the bankruptcy plan, we issued an aggregate of 703,808
shares of our common stock (the “Plan Shares”) to the Claim Holders whose claims had been approved as of the time of
issuance as full settlement and satisfaction of their respective claims. As provided in the confirmed bankruptcy plan, the Plan
Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code. An additional 196,192 Plan Shares are held in
reserve in the Company’s treasury for issuance to Claim Holders whose claims have yet to be either approved or denied by
the court. The treasury shares will be issued once a Claim Holder’s claim has been approved or disapproved. If disapproved
the shares will be distributed to approve Claim Holders on a pro rata basis. As a result of the merger, the separate corporate
existence of VCAB was terminated. We entered into the merger in order to increase our shareholder base in order to, among other
things, assist us 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.
2. Going Concern
At September 30, 2018, the Company had approximately
$19,000 in cash and had net working capital deficit of approximately $306,000. The Company, which generated a net loss of approximately
$2,777,000 and $1,300,000 for the nine-months ended September 30, 2018 and 2017, respectively, may not have sufficient cash to
fund its current and future operations. There is no assurance that future operations will result in profitability. No assurance
can be given that management will be successful in its efforts to raise additional capital from present or future shareholders.
The failure to raise additional capital needed to achieve its business plans will have a material adverse effect on the Company’s
financial position, results of operations, and ability to continue as a going concern.
3. Summary of Significant Accounting
Policies and Recent Accounting Pronouncements
Cash and Cash Equivalents
Cash and cash equivalents consist primarily
of deposit accounts with original maturities of three months or less.
Inventory
Inventory includes manufacturing parts and
work in process for the Company’s water purification equipment. Inventories are carried at the lower of cost (on a first-in,
first-out (“FIFO”) basis), or net realizable value.
Use of Accounting Estimates
The preparation of the financial statements
in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those
estimates. The most significant estimates and assumptions made by management related to determining the value of stock-based expenses.
Revenue
The Company had a reversal of sale
totaling $23,995 during the three months ended September 30, 2018 due to the Company writing off the sale as a charitable donation.
Income Taxes
Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rate is recognized
in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts more likely than not to be realized.
The Company accounts for uncertain
tax positions in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification
(“ASC”) 740-10, “
Income Taxes
”. ASC 740-10 provides several clarifications related to uncertain
tax positions. Most notably, a “more likely-than-not” standard for initial recognition of tax positions, a presumption
of audit detection and a measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent
likelihood of realization. ASC 740-10 applies a two-step process to determine the amount of tax benefit to be recognized in the
financial statements. First, the Company must determine whether any amount of the tax benefit may be recognized. Second, the Company
determines how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition).
No additional liabilities have been recognized as a result of the implementation. Accordingly, the Company has not recognized any
penalty, interest or tax impact related to uncertain tax positions.
Stock-Based Expenses
The Company accounts for stock-based
expenses under the provisions of ASC 718, “
Compensation—Stock Compensation
”, which requires the measurement
and recognition of expense for stock-based awards made to employees and directors based on estimated fair values on the grant date.
The stock-based compensation awards to employees, directors and non-employees during the nine months ended September 30, 2018 consisted
of the grants of restricted stock. The restrictions on the shares granted related to regulatory restrictions as well as service
and milestone based restrictions that
prevented the sale of the stock granted. The value of the portion of the award that is ultimately expected to vest is recognized
as expense over the shorter of the period over which services are to be received or the vesting period.
The Company accounts for stock-based
expenses awards to non-employees in accordance with ASC 505-50, “
Equity-Based Payments to Non-Employees
”. In
accordance with ASC 505-50, the Company determines the fair value of stock-based expenses awards granted as either the fair value
of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
The Company estimated the fair value
of stock-based awards issued to employees, directors and non-employees during the nine months ended September 30, 2018 and 2017
based on prices paid by unrelated third-parties for the purchases of its common stock during this period, which amounted to $0.50
per share.
The components of stock-based compensation
related to stock awards in the Company’s Statement of Operations for the three months ended September 30, 2018 and 2017,
and for the nine months ended September 30, 2018 and 2017 are as follows (rounded to nearest thousand):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
265,000
|
|
|
$
|
362,500
|
|
|
$
|
440,000
|
|
|
$
|
437,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
50,000
|
|
|
|
102,675
|
|
|
|
565,000
|
|
|
|
102,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based expense
|
|
$
|
315,000
|
|
|
$
|
465,175
|
|
|
$
|
1,005,000
|
|
|
$
|
540,175
|
|
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 and to develop new products. Research and development expenses were $506,340 and $571,557, for the three months ended
September 30, 2018 and 2017, respectively. Research and development expenses were $998,734 and $854,624, for the nine months ended
September 30, 2018 and 2017, 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 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 implementation of this standard did not have a material impact on the Company’s
accompanying financial statements.
Leases
— In February 2016,
the FASB issued ASU 2016-02, “
Leases
”. This standard will require entities that lease assets—referred
to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. The accounting by entities that own the assets leased by the lessee—also known as lessor accounting—will
remain largely unchanged from current GAAP. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Modified
retrospective application is required, with optional practical expedients available. The Company is currently evaluating the impact
of the new guidance.
Debt Issuance Costs
— In April
2015, the FASB issued ASU 2015-03, “
Simplifying the Presentation of Debt Issuance Costs
”. The new standard will
more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation
under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet
as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no
longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability.
Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and
amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method.
Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation
of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance,
which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03.
ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within
those fiscal years.
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. The implementation of this
standard did not have a material impact on the Company’s accompanying financial statements.
Statement of Cash Flows
— In August
2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies
how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will adopt ASU No. 2016-15
commencing in the first quarter of fiscal 2019. The Company does not believe this standard will have a material impact on its financial
statements or the related footnote disclosures.
4. Note Payable – Stockholder
The Company borrowed $112,000 from
a shareholder on November 2, 2017. The note bears interest at 12% and is payable monthly interest-only through April 30, 2019,
at which time the entire amount of principal and any
accrued interest is due and payable.
The note is collateralized by all equipment owned by the Company and is guaranteed by the Company’s President. The interest
expense incurred on the note payable - stockholder was $10,080 and $0, for the nine months ended September 30, 2018 and 2017, respectively.
5. Convertible Notes Payable
The Company borrowed
$187,500 from three shareholders on June 18, 2018. The notes bear interest at 10% and are payable in one lump sum on June 18, 2019,
at which time the entire amount of principal and accrued interest is due and payable. The notes are unsecured. The
outstanding principal and interest amount is convertible by the holders into shares of the Company’s common stock at any
time 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 the ten trading days prior to the conversion date. The principal balance at September 30, 2018 is $187,500.
The interest expense incurred on the notes payable was approximately $5,500 and $0, for the nine months ended September
30, 2018 and 2017, respectively. The Company’s chief executive officer has guaranteed the shareholder notes. The
value of the embedded beneficial conversion feature on the notes payable was estimated to be $187,500. For the nine
months ended September 30, 2018, the Company recorded $54,687 of interest expense related to the value
of the embedded beneficial conversion feature.
The Company borrowed
$120,000 from a shareholder on August 27, 2018. The note bears interest at 8% and is payable in one lump sum on February 27, 2019,
at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal
and interest amount is convertible by the holder into shares of the Company’s common stock at any time prior to the maturity
date at the conversion price of $0.50 per share. The principal balance at September 30, 2018 is $120,000. The interest expense
incurred on the note payable was approximately $800 and $0, for the nine months ended September 30, 2018 and 2017, respectively. The
value of the embedded beneficial conversion feature on the note payable was estimated to be $88,800. For the nine months ended September
30, 2018, the Company recorded $14,800 of interest expense related to the value of the embedded beneficial conversion feature.
The Company borrowed
$68,000 from a lender on September 4, 2018. The note bears interest at 8% and is payable in one lump sum on September 4, 2019,
at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The
outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock beginning
170 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the average
of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date. The
principal balance at September 30, 2018 is $68,000. The interest expense incurred on the note payable was approximately
$450 and $0, for the nine months ended September 30, 2018 and 2017, respectively. The value of the embedded beneficial conversion
feature on the note payable was estimated to be $39,748. For the nine months ended September 30, 2018, the Company recorded
$3,510 of interest expense related to the value of the embedded beneficial conversion feature.
The Company borrowed
$50,000 from a shareholder on September 13, 2018. The note bears interest at 10% and is payable in one lump sum on March 13, 2019,
at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal
and interest amount is convertible by the holder into shares of the Company’s common stock at any time prior to the maturity
date at the conversion price of $0.50 per share. The principal balance at September 30, 2018 is $50,000. The interest expense incurred
on the note payable was approximately $200 and $0, for the nine months ended September 30, 2018 and 2017, respectively. The value of
the embedded beneficial conversion feature on the note payable was estimated to be $42,000. For the nine months ended September 30, 2018,
the Company recorded $3,500 of interest expense related to the value of the embedded beneficial conversion feature.
The Company borrowed
$200,000 from a lender on September 17, 2018. The note bears interest at 10% and is payable monthly through the maturity date,
September 17, 2021, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured.
The outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock at any
time prior to the maturity date at a
price
per share equal to $0.75 per share if before 180 days after the issuance date, or if 180 days after the issuance date, the lesser
of $0.75 per share or seventy percent of the second lowest trading price of the Company’s common stock for the twenty trading
days prior to the conversion date. The principal balance at September 30, 2018 is $200,000. The interest expense incurred
on the note payable was approximately $800 and $0, for the nine months ended September 30, 2018 and 2017, respectively. The value
of the embedded beneficial conversion feature on the note payable was estimated to be $37,333. In addition, the Company
granted 60,000 shares of the Company’s common stock valued at $53,400 based on the Company’s share price on the date
of the note agreement and paid $5,000 for debt issuance costs. For the nine months ended September 30, 2018, the Company recorded
$1,330 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.
6. Advances From Related Party
The Company has received non-interest
bearing advances without a specified maturity date from a stockholder of the Company. The Company owed approximately $53,000 and
$32,000, respectively, at September 30, 2018 and December 31, 2017 to the stockholder.
7. Equity Transactions
From January 1, 2017 to December 31,
2017, the Company issued 2,922,000 shares to investors at $0.50 per share for cash, with total proceeds of $1,436,030.
The Company also issued 200,000 shares
to shareholders to convert the Convertible Notes amounting to $100,000 in August 2017.
From July 1, 2017 to December 31, 2017,
the Company issued 1,230,350 shares to executives, employees working in research and development at the Company and consultants.
The value of these shares at $0.50 per share was $615,175. In addition, there were 600,000 shares of common stock issued in 2016
which vested in January, 2017.
In May 2017 and September 2017, the
Company’s principal shareholder surrendered an aggregate of 2,779,850 shares of common stock to the Company, which were recorded
as treasury stock with a $0 value. All surrendered shares were used to issue stock by the Company during the year.
From January 1, 2018 to March 31, 2018, the
Company issued 1,656,000 shares to investors at $0.50 per share for cash, with total proceeds of $828,000. In addition, the Company
issued 610,000 shares to executives, employees working in research and development at the Company and consultants. The value of
these shares at $0.50 per share was $305,000.
From April 1, 2018 to June 30, 2018, the Company
issued 625,000 shares to investors at $0.50 per share for cash, with total proceeds of $312,500. In addition, the Company issued
770,000 shares to executives, employees working in research and development at the Company and consultants. The value of these
shares at $0.50 per share was $385,000. Also see Note 8 regarding shares returned during June 2018 as a result of a lawsuit settlement.
From July 1, 2018 to September 30, 2018, the
Company issued 660,000 shares to investors at $0.50 per share for cash, with total proceeds of $330,000. In addition, the Company
granted 705,000 shares to executives, employees working in research and development at the Company and consultants. The value of
these shares at $0.50 per share was $352,500. Also see Note 5 regarding shares issued for debt issuance costs in September 2018.
8. 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 $9,000.
As of September 30, 2018, future minimum lease
payments to Peleton Properties LLC required under the non-cancellable operating lease are as follows (rounded to nearest thousand):
Year ending December 31,
|
|
|
2018
|
|
|
26,000
|
|
|
2019
|
|
|
102,000
|
|
|
2020
|
|
|
85,000
|
|
|
Total minimum payments
|
|
$
|
213,000
|
|
Contractual Commitments
Effective as of May 1, 2016, the Company entered
into a three-year employment agreement with the Company’s President. The agreement calls for monthly payments of $7,000 per
month through April 2017 and $15,000 per month thereafter. The employment agreement also provided for the grant of 500,000 shares
of common stock, which were fully vested 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 subject to satisfactory employment through December 2017. These shares were issued in September 2017. The Company expensed
$250,000 for these shares during the year ended December 31, 2017 in accordance with ASC 718.
The Company has entered into a two-year accounting
consulting services agreement with a financial consultant. The accounting consulting services agreement provided for a grant of
100,000 shares of common stock, which fully vested at January 2, 2017. The Company expensed $50,000 for these shares during the
period ended December 31, 2016 in accordance with ASC 505-50. The Company shall pay to the consultant 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 period ended December 31, 2016 in accordance with ASC 718.
We may become involved in, or have
been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot
predict the timing or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows
due to defense costs, and divert management resources. Currently, except as set forth below, we are not involved in any arbitration
and/or other legal proceeding that could have a material effect on our business, financial condition, results of operations and
cash flows.
We accrue for a liability when it is
both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgement
is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition,
in the event we determine that a loss is not probable, but is reasonably possible, and it becomes possible to develop what we believe
to be a reasonable range of possible loss, then we will include disclosure related to such a matter as appropriate and in compliance
with ASC 450. The accruals or estimates, if any, are reviewed at least quarterly and adjusted to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. To the extent
there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, as applicable, adjust the
accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the
estimate is immaterial to our financial statements as a whole, or, if the amount of such adjustment cannot be reasonably estimated,
disclose that an estimate cannot be made.
Litigation
On May 30, 2018,
the Company reached an amicable resolution by way of a settlement agreement and release (the “Settlement Agreement”)
with Cloudburst Solutions, LLC (“CS”) with respect to the Manufacturing and Licensing Agreement entered into on July
1, 2016 (“Agreement”). Neither party admitted liability and each agreed to finally and forever, settle and compromise
all disputes and matters of controversy between them.
CS has agreed
to dismiss the lawsuit filed, fully release, acquit, and forever discharge the Company and David King from any claims related to
the Agreement, render the Agreement null and void in all respects, and to cancel 1,250,000 shares held by CS in the Company’s
stock. The Company has agreed to fully release, acquit, and forever discharge CS from any claims related to the Agreement and has
agreed that the Agreement is null and void and neither party owes any duties or obligations thereunder. The Company has agreed
to pay CS $700,000.00 in four installments. The first payment of $150,000 was paid on June 20, 2018. The second payment of $150,000
was paid to CS within 30 days of the first payment. The third payment of $150,000 was paid to CS within 30 days of the second payment.
The final payment of $250,000 was to be paid to CS within 30 days of the third payment. At September 30, 2018, $175,000 remains
to be paid by the Company to CS. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility
by any of the parties.
9. 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 2018 and 2017 annual effective tax rate was 0% for the U.S. federal and state statutory tax rates. The
Company reviews tax uncertainties in light of changing facts and circumstances and adjusts them accordingly. As of September 30,
2018 and December 31, 2017, there were no tax contingencies recorded.
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting,
and the amounts recognized for income tax purposes.
We had a net operating loss carry-forward
for federal and state tax purposes of approximately $6,400,000 at September 30, 2018, that is potentially available to offset future
taxable income. 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 now be limited to 80 percent of taxable income.
For financial reporting purposes, no
deferred tax asset was recognized at September 30, 2018 and December 31, 2017 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 allowances were approximately $207,000
and $442,000 for the three months ended September 30, 2018 and 2017, respectively.
10. Subsequent Events
The Company has evaluated all material events or transactions that
occurred after September 30, 2018 up to November 14, 2018, the date these financial statements were available to be issued and
noted no material subsequent events which would require disclosure.
On October 28, 2018, the Company entered into
an Exclusive Sales Distribution Agreement (the Distribution Agreement) with African Horizon Technologies (Pty) Ltd (AHT), a South
African company. The Distribution Agreement provides that the Company will become an exclusive distributor in the United States
for the Hydraspin technology owned by AHT. The Hydraspin technology removes oil from water. The cost of the distributor rights
will be $500,000 in cash, plus 500,000 shares of the Company’s common stock, with an additional 500,000 common shares upon
the earlier of 24 months from the execution of the agreement or the sale of 50 units to the Company. The common shares may not
be sold for a period of 12 months from date of issuance. Also payable under the agreement will be a royalty of 2% of total net
profits, as defined, generated by the Company from sale of oil generated by the products acquired during the term of the agreement.
The agreement has a 5-year term, and it automatically renews for five years unless terminated earlier by mutual agreement of the
parties. The agreement contains certain quotas during each 12-month period during the term.
The Company formed a new subsidiary, Hydraspin
USA, Inc., on October 24, 2018, as the entity to be the distributor of the products.