Item
1. Financial Statements.
Water Now, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
|
|
June 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,973
|
|
|
$
|
66,042
|
|
Accounts receivable
|
|
|
250
|
|
|
|
118,250
|
|
Inventory
|
|
|
515,722
|
|
|
|
517,849
|
|
Prepaid expenses
|
|
|
1,083
|
|
|
|
21,264
|
|
Total Currents Assets
|
|
|
526,028
|
|
|
|
723,405
|
|
|
|
|
|
|
|
|
|
|
Property and equipment - net
|
|
|
2,180,813
|
|
|
|
2,137,272
|
|
Operating lease right-of-use assets
|
|
|
591,520
|
|
|
|
753,432
|
|
Distributorship agreement, net
|
|
|
666,667
|
|
|
|
766,667
|
|
Security deposit
|
|
|
23,481
|
|
|
|
34,330
|
|
Total Assets
|
|
$
|
3,988,509
|
|
|
$
|
4,415,106
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,199,571
|
|
|
$
|
1,285,214
|
|
Accrued expenses
|
|
|
588,710
|
|
|
|
532,512
|
|
Distributorship accrued expense
|
|
|
250,000
|
|
|
|
250,000
|
|
Derivative liability
|
|
|
2,663,585
|
|
|
|
508,323
|
|
Advances from related parties
|
|
|
173,649
|
|
|
|
4,407
|
|
Current portion of operating lease liabilities
|
|
|
240,541
|
|
|
|
247,070
|
|
Current portion of convertible notes payable, net of debt discounts
|
|
|
1,867,344
|
|
|
|
2,143,369
|
|
Current portion of notes payable
|
|
|
850,414
|
|
|
|
504,000
|
|
Current portion of revenue sharing liabilities
|
|
|
3,631,083
|
|
|
|
—
|
|
Total Current Liabilities
|
|
|
11,464,897
|
|
|
|
5,474,895
|
|
Long-term notes payable
|
|
|
107,844
|
|
|
|
—
|
|
Operating lease liabilities
|
|
|
425,079
|
|
|
|
520,137
|
|
Revenue sharing liabilities
|
|
|
1,940,833
|
|
|
|
5,042,455
|
|
Total Liabilities
|
|
|
13,938,653
|
|
|
|
11,037,487
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
Preferred stock – no par value, 10,000,000 shares authorized, zero issued and outstanding at June 30, 2020 and December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
Common stock - no par value, 90,000,000 shares authorized, 74,942,560 and 55,663,191 shares issued and 74,746,368 and 55,466,999 shares outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
9,501,224
|
|
|
|
9,071,943
|
|
Additional paid-in capital
|
|
|
3,470,893
|
|
|
|
2,813,464
|
|
Subscription receivable
|
|
|
(50,000
|
)
|
|
|
(50,000
|
)
|
Treasury stock, at cost (100,000 shares held as of June 30, 2020 and December 31, 2019)
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Accumulated deficit
|
|
|
(22,862,261
|
)
|
|
|
(18,447,788
|
)
|
Total Stockholders' Deficit
|
|
|
(9,950,144
|
)
|
|
|
(6,622,381
|
)
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
3,988,509
|
|
|
$
|
4,415,106
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
Water Now, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
1,670
|
|
|
$
|
235,749
|
|
|
$
|
4,665
|
|
|
$
|
314,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
195,647
|
|
|
|
2,127
|
|
|
|
264,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,670
|
|
|
|
40,102
|
|
|
|
2,538
|
|
|
|
49,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
85,676
|
|
|
|
588,842
|
|
|
|
401,743
|
|
|
|
911,470
|
|
Professional fees
|
|
|
99,000
|
|
|
|
247,112
|
|
|
|
168,976
|
|
|
|
540,756
|
|
Selling, general and administrative
|
|
|
128,661
|
|
|
|
336,019
|
|
|
|
368,713
|
|
|
|
701,899
|
|
(Gain) Loss on sale of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
19,988
|
|
|
|
(4,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
313,337
|
|
|
|
1,171,973
|
|
|
|
959,420
|
|
|
|
2,150,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(311,667
|
)
|
|
|
(1,131,871
|
)
|
|
|
(956,882
|
)
|
|
|
(2,100,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,153,572
|
)
|
|
|
(980,341
|
)
|
|
|
(2,148,808
|
)
|
|
|
(1,585,937
|
)
|
Loss on derivative liability
|
|
|
(758,952
|
)
|
|
|
—
|
|
|
|
(1,309,678
|
)
|
|
|
—
|
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
895
|
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(4,361
|
)
|
|
|
—
|
|
|
|
(25,924
|
)
|
Total other expense
|
|
|
(1,912,524
|
)
|
|
|
(984,702
|
)
|
|
|
(3,457,591
|
)
|
|
|
(1,611,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(2,224,191
|
)
|
|
|
(2,116,573
|
)
|
|
|
(4,414,473
|
)
|
|
|
(3,712,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,224,191
|
)
|
|
$
|
(2,116,573
|
)
|
|
$
|
(4,414,473
|
)
|
|
$
|
(3,712,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and fully diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and fully diluted
|
|
|
74,019,483
|
|
|
|
38,001,547
|
|
|
|
66,386,451
|
|
|
|
36,982,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Total
|
|
|
Common Stock
|
|
Paid-In
|
|
Subscription
|
|
Treasury
|
|
Accumulated
|
|
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Receivable
|
|
Stock
|
|
Deficit
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
55,466,999
|
|
|
$
|
9,071,943
|
|
|
$
|
2,813,464
|
|
|
$
|
(50,000
|
)
|
|
$
|
(10,000
|
)
|
|
|
(18,447,788
|
)
|
|
$
|
(6,622,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuances as payment for services and compensation
|
|
|
385,000
|
|
|
|
24,600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,600
|
|
Common stock issued for conversion of debt
|
|
|
17,894,369
|
|
|
|
404,681
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
404,681
|
|
Reduction of derivative liability from conversion/ redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
657,429
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
657,429
|
|
Common stock issued as collateral for loan
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,414,473
|
)
|
|
|
(4,414,473
|
)
|
Balance, June 30, 2020
|
|
|
74,746,368
|
|
|
$
|
9,501,224
|
|
|
$
|
3,470,893
|
|
|
$
|
(50,000
|
)
|
|
$
|
(10,000
|
)
|
|
|
(22,862,261
|
)
|
|
|
(9,950,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
35,816,808
|
|
|
$
|
6,463,705
|
|
|
$
|
687,431
|
|
|
$
|
(50,000
|
)
|
|
$
|
—
|
|
|
|
(7,979,177
|
)
|
|
$
|
(878,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuances as payment for services and compensation
|
|
|
825,000
|
|
|
|
286,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286,250
|
|
Common stock issuances for debt issuance costs
|
|
|
465,384
|
|
|
|
491,608
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
491,608
|
|
Common stock issued for conversion of debt
|
|
|
1,489,051
|
|
|
|
296,330
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
296,330
|
|
Beneficial conversion feature
|
|
|
—
|
|
|
|
—
|
|
|
|
477,772
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
477,772
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,712,142
|
)
|
|
|
(3,712,142
|
)
|
Balance, June 30, 2019
|
|
|
38,596,243
|
|
|
$
|
7,537,893
|
|
|
$
|
1,165,203
|
|
|
$
|
(50,000
|
)
|
|
$
|
—
|
|
|
|
(11,691,319
|
)
|
|
|
(3,038,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
2020
|
|
2019
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,414,473
|
)
|
|
$
|
(3,712,142
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Common stock issued as payment for services and employees’ compensation
|
|
|
24,600
|
|
|
|
255,500
|
|
Depreciation and amortization
|
|
|
149,332
|
|
|
|
127,871
|
|
Lease expense
|
|
|
60,325
|
|
|
|
—
|
|
Amortization of discounts
|
|
|
320,811
|
|
|
|
916,452
|
|
Derivative expense at issuance
|
|
|
1,108,013
|
|
|
|
—
|
|
Amortization of interest for revenue sharing agreements
|
|
|
529,461
|
|
|
|
294,708
|
|
Interest converted to common shares
|
|
|
41,345
|
|
|
|
5,486
|
|
Loss (Gain) on sale of assets
|
|
|
19,988
|
|
|
|
(4,070
|
)
|
Change in fair value of derivative liability
|
|
|
1,309,678
|
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
25,924
|
|
Changes in operating working capital items:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
—
|
|
|
|
(295,800
|
)
|
Other receivables
|
|
|
—
|
|
|
|
(15,000
|
)
|
Inventory
|
|
|
2,127
|
|
|
|
27,876
|
|
Prepaid expenses
|
|
|
20,181
|
|
|
|
(24,611
|
)
|
Security deposit
|
|
|
10,849
|
|
|
|
(23,481
|
)
|
Accounts payable
|
|
|
32,357
|
|
|
|
744,876
|
|
Accrued expenses
|
|
|
56,198
|
|
|
|
(165,841
|
)
|
Net cash used in operating activities
|
|
|
(729,208
|
)
|
|
|
(1,842,252
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(30,000
|
)
|
|
|
(1,650,783
|
)
|
Proceeds from sale of assets
|
|
|
59,500
|
|
|
|
60,000
|
|
Payment for distributorship agreement
|
|
|
—
|
|
|
|
(400,000
|
)
|
Net cash provided by (used in) investing activities
|
|
|
29,500
|
|
|
|
(1,990,783
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Outstanding checks in excess of bank balance
|
|
|
—
|
|
|
|
71,474
|
|
Cash advances from related parties
|
|
|
367,036
|
|
|
|
182,000
|
|
Cash repayments to related parties
|
|
|
(197,794
|
)
|
|
|
(421,965
|
)
|
Borrowings on notes payable
|
|
|
340,400
|
|
|
|
365,000
|
|
Payments on notes payable
|
|
|
(28,503
|
)
|
|
|
(165,000
|
)
|
Borrowings on convertible notes payable
|
|
|
241,500
|
|
|
|
1,835,500
|
|
Payments on convertible notes payable
|
|
|
(80,000
|
)
|
|
|
(510,745
|
)
|
Borrowings on revenue sharing liabilities
|
|
|
—
|
|
|
|
2,436,000
|
|
Net cash provided by financing activities
|
|
|
642,639
|
|
|
|
3,792,264
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(57,069
|
)
|
|
|
(40,771
|
)
|
Cash at beginning of period
|
|
|
66,042
|
|
|
|
53,106
|
|
Cash at end of period
|
|
$
|
8,973
|
|
|
$
|
12,335
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Interest and Income Taxes Paid:
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
$
|
37,543
|
|
|
$
|
306,191
|
|
Income taxes paid during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash disclosures:
|
|
|
|
|
|
|
|
|
Conversion of convertible notes payable into common shares
|
|
$
|
363,336
|
|
|
$
|
290,844
|
|
Purchase of property and equipment through issuance of notes payable
|
|
$
|
142,361
|
|
|
$
|
—
|
|
Reclass of derivative upon settlement
|
|
$
|
657,429
|
|
|
$
|
—
|
|
Beneficial debt conversion feature
|
|
$
|
—
|
|
|
$
|
1,078,874
|
|
|
|
|
|
|
|
|
|
|
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)
June 30, 2020 and 2019
1. Basis of Presentation and
Summary of Significant Accounting Policies
The accompanying unaudited financial
statements of Water Now, Inc. and 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 year ended December 31, 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.
See Note 13 regarding the Company's prospective sale of substantially all of its assets subsequent to June 30, 2020.
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 disclosure of the fair 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 be remeasured at their fair values. However, GAAP requires the remeasurement
of such assets and liabilities to their fair values upon the occurrence of certain events, such as the impairment of property,
plant and equipment. In addition, if such an event occurs, GAAP requires the disclosure of the fair value of the asset or liability
along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.
The Company did not have any Level 1 or Level
2 assets and liabilities at June 30, 2020 and 2019.
The Derivative liabilities are Level 3 fair
value measurements.
The following is a summary of activity of Level
3 liabilities during the six months ended June 30, 2020:
Derivative liability balance at December 31, 2019
|
|
$
|
508,323
|
|
Additions to derivative liability for new debt
|
|
|
1,503,013
|
|
Reclass to equity upon conversion/cancellation
|
|
|
(657,429
|
)
|
Change in fair value
|
|
|
1,309,678
|
|
Balance at June 30, 2020
|
|
$
|
2,663,585
|
|
At June 30, 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 $0.05; a risk-free interest rate of 0.18%, and expected volatility of the Company’s common stock of 266.81%, and
the various estimated reset exercise prices weighted by probability.
2. Going Concern
At June 30, 2020,
the Company had approximately $9,000 in cash and had net working capital deficit of approximately $10,939,000. The Company, which
generated a net loss of approximately $4,414,000 and $3,712,000 for the six months ended June 30, 2020
and 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. The failure to raise additional capital needed to achieve its business plans will have a material adverse effect on the
Company’s financial position, results of operations, and ability to continue as a going concern.
3. Revenues
The Company’s revenues are generated
from the sales of water purification products and the sales of hydrocarbons derived from the deployment and operation of Company
owned oil recovery systems. The Company obtains purchase orders from its water purification customers for the sale of its products
which sets forth the general terms and conditions including line item pricing and payment terms (generally due upon receipt). The
Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment) and
it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s
only performance obligation.
The Company earns revenue each month that the
oil recovery systems are in place and operating. The Company generally receives 50% of the proceeds of the oil sales recovered
using its systems.
Water purification products that have been
sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable
and reasonably estimated. The Company’s management reduces revenue to account for estimates of the Company’s credits
and refunds.
The Company included shipping and handling
fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred
to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Revenues, as disaggregated by revenue type
and reportable segment (see Note 12), are shown below.
|
|
For the three months ended
|
|
For the six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
—
|
|
|
$
|
230,192
|
|
|
$
|
2,995
|
|
|
$
|
308,744
|
|
Oil recovery systems
|
|
|
1,670
|
|
|
|
5,557
|
|
|
|
1,670
|
|
|
|
5,557
|
|
|
|
$
|
1,670
|
|
|
$
|
235,749
|
|
|
$
|
4,665
|
|
|
$
|
314,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Distributorship Agreement
On October 31, 2018,
the Company entered into an Exclusive Sales Distribution Agreement (the “Agreement”) with African Horizon Technologies
(Pty) Ltd (“AHT”) whereby the Company will be AHT’s exclusive distributor of the Hydraspin Hydro Cyclone technology
in the United States of America. The Company paid AHT $500,000 in cash and issued AHT 500,000 shares valued at $250,000 based on
the closing price of the Company’s shares of $0.50 on the date of the Agreement. In addition, the Company will issue AHT
500,000 shares at the earlier of 24 months from the commencement date of the Agreement or the sale of 50 units to the Company.
The Company will also pay AHT a royalty of 2% of total net profits generated by the Company from the sale of oil generated using
the Hydraspin units. The term of the Agreement is for five years with an automatic renewal term of five years unless
terminated earlier. The Company recorded the value of the Agreement of $1,000,000 as an other asset and
is amortizing the asset to expense over the
life of the Agreement of five years. As of June 30, 2020, the 500,000 shares remaining to be issued
are recorded as distributorship accrued expense in the amount of $250,000 and are required to be issued
prior to October 31, 2020. Amortization expense amounted to $100,000 and $100,000 for the six months ended June 30, 2020 and 2019,
respectively.
5. Notes Payable
During 2020 the Company entered into
additional short-term loans with lenders. Total principal borrowed during 2020 was $50,000. Repayments of $25,000 were made during
the six months ended June 30, 2020. The remaining $529,000 of principal was repaid or extended as of August 19, 2020. The notes
are generally unsecured.
On April 20, 2020, the Company obtained
a Paycheck Protection Program (PPP) loan from a commercial bank in the amount of $290,400. The loan is unsecured, bears interest
at 1.0% interest and is payable beginning November 20, 2020 in 18 equal installments. Interest accrues during the deferment period.
The loan is subject to potential forgiveness in part or total, depending on the amount of certain costs incurred by the Company
over an 8-week period after the loan’s disbursement date, including payroll costs, payment of interest on a covered obligation,
rent and utilities. The principal balance at June 30, 2020 is $290,400.
6. Convertible Notes Payable
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 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 June 30, 2020 is $50,000. The note is currently in default as of June 30, 2020.
The Company borrowed $37,500 from a lender
on February 5, 2020. The note is an extension of the existing Amended and Restated Secured Convertible Promissory Note dated June
18, 2018. The total principal due under the note 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 principal balance is paid prior to May 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 the 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 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 $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 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
principal balance at June 30, 2020 is $100,000.
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. 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 June 30, 2020 is $175,000.
During the six months ended June 30, 2020,
the Company issued 1,000,000 shares to a lender as collateral held in escrow, to be cancelled upon payment of the debt.
7. Advances From Related Parties
The Company has received non-interest
bearing advances without a specified maturity date from a stockholder of the Company. The Company owed approximately $174,000 and
$4,000 at June 30, 2020 and December 31, 2019, respectively, to the stockholder.
8. Revenue Sharing Agreements
No additional revenue sharing agreements were
entered into during the six months ended June 30, 2020. The Company recorded an additional $529,000 in interest expense during
the six months ended June 30, 2020 related to the existing revenue sharing agreements. No payments have been made on existing revenue
sharing agreements.
As of August 19, 2020, the Company is obligated
to purchase seven HydraSpin units with an aggregate cost of approximately $2 million awaiting shipment from Africa to the Company
and there is approximately $1 million included in accounts payable for unpaid amounts on other units. No payment has been made
on these units.
9. Equity Transactions
From January 1, 2019 to June 30, 2019,
the Company issued 1,489,051 shares to lenders upon receipt of conversion notices. The Company also issued 465,384 shares to lenders
for debt issuance costs. In addition, the Company issued 825,000 shares to employees and consultants valued at the share price
on the date the services were earned.
From January 1, 2020 to June 30, 2020,
the Company issued 17,894,369 shares to lenders upon receipt of conversion notices for total principal, interest and fees of $404,681.
The Company also issued 385,000 shares to employees and consultants valued at $24,600 and issued 1,000,000 shares as collateral
held in escrow, to be cancelled upon payment of the debt.
10. Operating Leases – Right
of Use Assets
The Company has an operating lease for office
and warehouse space that expires in 2023. Below is a summary of the Company’s right of use assets and liabilities as of June
30, 2020:
Right-of-use assets
|
|
$
|
591,520
|
|
Lease liability obligations, current
|
|
$
|
240,541
|
|
Lease liability obligations, less current portion
|
|
|
425,079
|
|
Total lease liability obligations
|
|
$
|
665,620
|
|
Weighted-average remaining lease term
|
|
|
2.9 years
|
|
Weighted-average discount rate
|
|
|
10
|
%
|
During the six months ended June
30, 2020, the Company recognized approximately $82,000 in operating lease costs and are included in selling,
general and administrative expenses in our consolidated statement of operations. During the six months ended June
30, 2020, operating cash flows from operating leases was $116,000.
Approximate future minimum lease payments for
the Company’s right of use assets over the remaining lease periods as of June 30, 2020,
are as follows:
Year ending December 31,
|
|
|
|
2020
|
|
|
$
|
196,000
|
|
|
2021
|
|
|
|
240,000
|
|
|
2022
|
|
|
|
246,000
|
|
|
2023
|
|
|
|
103,000
|
|
|
Total minimum payments
|
|
|
$
|
785,000
|
|
11. Income Taxes
The Company accounts for income taxes
under the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary differences. Deferred
tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income
in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
The Company’s tax provision is
determined using an estimate of an annual effective tax rate adjusted for discrete items, if any, that are taken into account in
the relevant period. The 2020 and 2019 annual effective tax rate is estimated to be 0% for the U.S. federal and state statutory
tax 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 June 30, 2020 and December 31, 2019, 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.
The Company had a net operating loss
carry-forward for federal and state tax purposes of approximately $14,654,000 at June 30, 2020, 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 June 30, 2020 and December 31, 2019 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 $419,000 and $779,000
for the six months ended June 30, 2020 and 2019, respectively.
12. Segment Information
The Company sells water purification products
and operates oil recovery systems. The Company has identified such reportable segments based on management responsibility and the
nature of the Company’s products, services, and costs. To date, the Company primarily sells its water purification products
internationally and operates its oil recovery systems in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment.
Below is the financial information related to the Company’s
segments:
|
|
For the three months ended
|
|
For the six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
—
|
|
|
$
|
230,192
|
|
|
$
|
2,995
|
|
|
$
|
308,744
|
|
Oil recovery systems
|
|
|
1,670
|
|
|
|
5,557
|
|
|
|
1,670
|
|
|
|
5,557
|
|
|
|
$
|
1,670
|
|
|
$
|
235,749
|
|
|
$
|
4,665
|
|
|
$
|
314,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
118,982
|
|
|
$
|
605,739
|
|
|
$
|
320,286
|
|
|
$
|
1,328,293
|
|
Oil recovery systems
|
|
|
74,381
|
|
|
|
248,533
|
|
|
|
343,290
|
|
|
|
345,114
|
|
General corporate
|
|
|
118,304
|
|
|
|
277,599
|
|
|
|
293,306
|
|
|
|
426,874
|
|
|
|
$
|
311,667
|
|
|
$
|
1,131,871
|
|
|
$
|
956,882
|
|
|
$
|
2,100,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,158
|
|
Oil recovery systems
|
|
|
—
|
|
|
|
930,000
|
|
|
|
30,000
|
|
|
|
1,558,625
|
|
General corporate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
930,000
|
|
|
$
|
30,000
|
|
|
$
|
1,650,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Total assets
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
545,917
|
|
|
$
|
749,536
|
|
Oil recovery systems
|
|
|
2,635,455
|
|
|
|
2,576,758
|
|
General corporate
|
|
|
807,137
|
|
|
|
1,088,812
|
|
|
|
$
|
3,988,509
|
|
|
$
|
4,415,106
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses include corporate
salaries, health insurance and social security taxes for officers and corporate employees, corporate insurance, legal and accounting
fees, and other corporate costs such as transfer agent and travel costs. Management considers these to be non-allocable costs for
segment purposes.
13. Subsequent Events
On July 13, 2020, a lender provided the Company
with a Notice of Conversion to convert $78,000 of principal and interest into 3,000,000 shares of common stock.
On July 31, 2020, the Company entered into
an Asset Sale and Purchase Agreement to sell substantially all of its assets to RigMax H20, LLC for a total purchase price of $30.0
million in cash, subject to certain adjustments and credits. The transaction is targeted to close, subject to confirmatory due
diligence and receipt of shareholder and other mandated regulatory approvals, on or before October 31, 2020.
In August 2020 the Company issued 100,000 shares
of common stock to a consultant.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in
conjunction with our consolidated financial statements and related notes thereto included in this quarterly report, and the audited
consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31,
2019.
Overview
Water Now, Inc. was incorporated
in Texas on February 10, 2016 to develop and commercialize a gas/diesel and electric powered, portable device that processes and
purifies contaminated water. Our water purification product lines consist of portable units 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 platform uses no combustion
or electronic heating elements. By avoiding traditional heating elements, the product is ideal for facilities that generate vapors
or dust, such as paint and body shops, furniture manufacturers, fuel depots and grain elevators. Our technology is anticipated
to allow for the efficient heating of large spaces such as warehouses and garages. We introduced to the market our initial product
offering, HydraHeat, in June 2019, but have yet to generate revenue. The
first product that we will make available to the market will heat approximately 1,000 square feet. We are currently in negotiations
with potential third party manufactures of the product and hope to finalize an OEM agreement in late Q4 2020 or early Q1 2021.
Thereafter, we will begin final testing of the retail product offering in hopes of making the product available to the public in
the third quarter of 2021.
On October 23, 2018, the Company
formed HydraSpin USA, Inc., a Texas corporation (“HydraSpin”), as
a wholly-owned subsidiary. HydraSpin is engaged in the installation and operation of oil recovery systems deployed at saltwater
disposal wells associated with the oil industry. The utilized technology developed by African Horizon Technologies (Pty) Ltd (“AHT”) allows for
the separation of residual
oil from water contained
in the disposal sites so as to minimize environmental contamination from the fluids containing oil.
On October 31, 2018, the Company entered into
an Exclusive Sales Distribution Agreement (the “AHT Agreement”) with AHT whereby the Company serves as AHT s exclusive
distributor of the Hydraspin Hydro Cyclone technology in the United States of America. Pricing is established in accordance with
the AHT Agreement. Products are paid 50% upon order and the balance being due FOB the port. Typical lead-time to have a machine
ready for deployment after it is ordered is sixty (60) days.
The Company, through HydraSpin, contracts with
owners of saltwater injection wells to reclaim oil using systems manufactured by AHT but owned and operated by HydraSpin. We derive
revenue from sharing the proceeds of the oil recovered and sold with the owner of the applicable disposal location, typically on
a 50/50 basis. As of the current date, we have ordered 13 systems from AHT, of which we have received six units. These units are
currently in operation. The remaining seven units are expected to be received and placed in operation during 2020.
On November 12, 2019, the Company,
through its HydraSpin subsidiary, signed an Exclusive Distributor Agreement (the “Agreement”) in
which the other party to the agreement (the “Distributor”) agrees
to become the exclusive distributor of HydraSpin products in certain Texas and New Mexico territories. HydraSpin shall provide
the products to the Distributor at no cost but HydraSpin will receive certain net revenues from the sale of hydrocarbons produced
by the deployed units. HydraSpin s share will be 92% of Net Revenues, as that term is defined in the Agreement, for the first 10
installed products and 85% for the eleventh product installed and those products installed subsequently. In order
for the Distributor to maintain the exclusivity granted in the Agreement, it must deploy products in 25 new locations during each
12-month period following the effective date and all customer locations in the aggregate must generate an average of 7,500 barrels
of water with at least 2% oil content in each per day. If the Agreement
is extended beyond the initial term of five years, the number of customer locations to be secured to maintain exclusivity shall
be increased to 50 per year.
Oil prices have fallen dramatically
in 2020, causing many producers to stop exploration activities. This situation and the global pandemic have effectively
temporarily eliminated our ability to produce revenues from our HydraSpin activities.
Financial Overview
Revenue
For the six months ended June 30, 2020, we
generated revenues of approximately $5,000. Our ability to increase revenues will depend on the successful manufacturing and commercialization
of our water purification and heater units and the continued development of contracts with our Hydraspin customers.
Research and Development Expenses
The Company expenses R&D costs as incurred.
The Company’s R&D activities related to activities undertaken to commercialize our water purification 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. Subsequent
to the active trading date of our common stock on August 14, 2018, we have based the fair value of awards on the quoted closing
bid price of our common stock on the OTC Markets on the date of grant. Other G&A expenses include professional fees for legal,
finance, accounting, and 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 of interest incurred
on borrowings including amortization of beneficial conversation features and debt issue costs.
Critical Accounting Policies and Estimates
The preparation of the unaudited consolidated
financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates,
including investment impairment. These estimates are based on management’s historical industry experience and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies
that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which
could, if different judgment or estimates were made, materially affect our reported financial position, results of operations,
or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant
Accounting Policies and Recent Accounting Pronouncements” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019 filed with the SEC on June 16, 2020.
During the six months ended June 30, 2020,
there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that
are disclosed in Note 1 to our consolidated financial statements.
Results of Operations
For the three months ended June
30, 2020 and 2019 (unaudited)
Revenue
We generated revenues of $2,000 and
$236,000 for the three months ended June 30, 2020 and 2019, respectively. We generated revenues of $0 and $2,000 from our water
purification products and oil recovery systems segments, respectively, for the three months ended June 30, 2020. We generated revenues
of $230,000 and $6,000 from our water purification products and oil recovery systems segments, respectively, for the three months
ended June 30, 2019. We continue to aggressively market our water purification products and oil recovery systems and believe that
demand will increase as current customers reorder and new customers are acquired.
Operating expenses
Below is a summary of our operating expenses
for the three months ended June 30, 2020 and 2019:
|
|
For the three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Salaries and wages
|
|
$
|
85,676
|
|
|
$
|
588,842
|
|
|
|
(503,166
|
)
|
|
|
(85
|
)%
|
Professional fees
|
|
|
99,000
|
|
|
|
247,112
|
|
|
|
(148,112
|
)
|
|
|
(60
|
)%
|
Selling, general and administrative
|
|
|
128,661
|
|
|
|
336,019
|
|
|
|
(207,358
|
)
|
|
|
(62
|
)%
|
Total
|
|
$
|
313,337
|
|
|
$
|
1,171,973
|
|
|
|
(858,636
|
)
|
|
|
(73
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
wages decreased during the three months ended June 30, 2020 primarily related to decreases
in the salaries, payroll taxes and benefits due to a decrease in number of employees.
Professional
fees decreased during the three months ended June 30, 2020 primarily related to decreases in
consulting, legal fees, and stock based compensation.
Selling, general
and administrative decreased during the three months ended June 30, 2020 primarily related to
decreases in advertising and marketing, shipping, and insurance.
Segment contribution to loss from operations
is presented in the table below:
|
|
For the Three Months
|
|
|
Ended June 30,
|
|
|
2020
|
|
2019
|
Water purification products
|
|
$
|
118,982
|
|
|
$
|
605,739
|
|
Oil recovery systems
|
|
|
74,381
|
|
|
|
248,533
|
|
General corporate
|
|
|
118,304
|
|
|
|
277,599
|
|
|
|
$
|
311,667
|
|
|
$
|
1,131,871
|
|
Segment loss from operations during the
three months ended June 30, 2020 decreased primarily due to oil prices falling dramatically in 2020 along with the global
pandemic which have effectively temporarily eliminated our ability to produce revenues. Because of these issues in 2020, we have
significantly reduced our headcount and other expenses throughout the company.
Other Expense
Below is a summary of our other expense
for the three months ended June 30, 2020 and 2019:
|
|
For the three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Interest expense
|
|
$
|
1,153,572
|
|
|
$
|
980,341
|
|
|
|
173,231
|
|
|
|
18
|
%
|
Loss on derivative liability
|
|
|
758,952
|
|
|
|
—
|
|
|
|
758,952
|
|
|
|
100
|
%
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
4,361
|
|
|
|
(4,361
|
)
|
|
|
(100
|
)%
|
Total
|
|
$
|
1,912,524
|
|
|
$
|
984,702
|
|
|
|
927,822
|
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense increased primarily related
to amortization of debt issuance costs on the convertible debt issued during the periods. We recorded a loss on the change in fair
value of derivative liability based on the value of the derivatives as of June 30, 2020. We recorded a loss on extinguishment of
debt during the 2019 period due to paying off the convertible notes prior to maturity.
Net Losses
We incurred net losses of $2,224,191 and
$2,116,573 for the three months ended June 30, 2020 and 2019, respectively, because of the factors discussed above.
Net loss per share for the three months
ended June 30, 2020 and 2019 was $(0.03) and $(0.06), respectively, based on the weighted-average number of shares issued and outstanding
during the period.
For the six months ended June
30, 2020 and 2019 (unaudited)
Revenue
We generated revenues of $5,000 and
$314,000 for the six months ended June 30, 2020 and 2019, respectively. We generated revenues of $3,000 and $2,000 from our water
purification products and oil recovery systems segments, respectively, for the six months ended June 30, 2020. We generated revenues
of $308,000 and $6,000 from our water purification products and oil recovery systems segments, respectively, for the six months
ended June 30, 2019. We continue to aggressively market our water purification products and oil recovery systems and believe that
demand will increase as current customers reorder and new customers are acquired.
Operating expenses
Below is a summary of our operating expenses
for the six months ended June 30, 2020 and 2019:
|
|
For the six months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Salaries and wages
|
|
$
|
401,743
|
|
|
$
|
911,470
|
|
|
|
(509,727
|
)
|
|
|
(56
|
)%
|
Professional fees
|
|
|
168,976
|
|
|
|
540,756
|
|
|
|
(371,780
|
)
|
|
|
(69
|
)%
|
Selling, general and administrative
|
|
|
368,713
|
|
|
|
701,899
|
|
|
|
(333,186
|
)
|
|
|
(47
|
)%
|
(Gain) Loss on sale of assets
|
|
|
19,988
|
|
|
|
(4,070
|
)
|
|
|
24,058
|
|
|
|
(591
|
)%
|
Total
|
|
$
|
959,420
|
|
|
$
|
2,150,055
|
|
|
|
(1,190,635
|
)
|
|
|
(55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
wages decreased during the six months ended June 30, 2020 primarily related to decreases
in the salaries, payroll taxes and benefits due to a decrease in number of employees.
Professional
fees decreased during the six months ended June 30, 2020 primarily related to decreases in consulting,
legal fees, and stock based compensation.
Selling, general
and administrative decreased during the six months ended June 30, 2020 primarily related to decreases
in bad debt expense, advertising and marketing, shipping, supplies, and insurance.
We recorded a loss on sale of assets during
the six months ended June 30, 2020 from the sale of our trucks and recorded a gain on sale of assets during the six months ended
June 30, 2019 from the sale of our equipment.
Segment contribution to loss from operations
is presented in the table below:
|
|
For the Six Months
|
|
|
Ended June 30,
|
|
|
2020
|
|
2019
|
Water purification products
|
|
$
|
320,286
|
|
|
$
|
1,328,293
|
|
Oil recovery systems
|
|
|
343,290
|
|
|
|
345,114
|
|
General corporate
|
|
|
293,306
|
|
|
|
426,874
|
|
|
|
$
|
956,882
|
|
|
$
|
2,100,281
|
|
Segment loss from operations during the
six months ended June 30, 2020 decreased primarily due to oil prices falling dramatically in 2020 along with the global pandemic
which have effectively temporarily eliminated our ability to produce revenues. Because of these issues in 2020, we have significantly
reduced our headcount and other expenses throughout the company.
Other Expense
Below is a summary of our other expense
for the six months ended June 30, 2020 and 2019:
|
|
For the six months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Interest expense
|
|
$
|
2,148,808
|
|
|
$
|
1,585,937
|
|
|
|
562,871
|
|
|
|
35
|
%
|
Loss on derivative liability
|
|
|
1,309,678
|
|
|
|
—
|
|
|
|
1,309,678
|
|
|
|
100
|
%
|
Other income
|
|
|
(895
|
)
|
|
|
—
|
|
|
|
(895
|
)
|
|
|
(100
|
)%
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
25,924
|
|
|
|
(25,924
|
)
|
|
|
(100
|
)%
|
Total
|
|
$
|
3,457,591
|
|
|
$
|
1,611,861
|
|
|
|
1,845,730
|
|
|
|
115
|
%
|
Interest expense increased primarily related
to amortization of debt issuance costs on the convertible debt issued during the periods. We recorded a loss on the change in fair
value of derivative liability based on the value of the derivatives as of June 30, 2020. We recorded a loss on extinguishment of
debt during the 2019 period due to paying off the convertible notes prior to maturity.
Net Losses
We incurred net losses of $4,414,473 and
$3,712,142 for the six months ended June 30, 2020 and 2019, respectively, because of the factors discussed above.
Net loss per share for the six months
ended June 30, 2020 and 2019 was $(0.07) and $(0.10), respectively, based on the weighted-average number of shares issued and outstanding
during the period.
Liquidity and Capital Resources
Sources of Liquidity
Through June 30, 2020, we have generated revenues
of $554,000. From February 10, 2016 (inception) through June 30, 2020, we have incurred losses aggregating $22.4 million. As of
June 30, 2020, we had cash and cash equivalents of $9,000. Our auditors issued a going concern opinion with respect to our financial
statements as of
and for the year ended December 31, 2019 due
to the incurrence of significant operating losses, which raise substantial doubt about our ability to continue as a going concern.
We have financed our operations to date primarily
through private placements of our common stock and borrowings. As of June 30, 2020, we had total liabilities of approximately $14
million. We expect to continue to utilize debt and equity to finance our operations until we become profitable.
Cash Flows
The following table sets forth the primary
sources and uses of cash for the period set forth below.
|
|
Six months ended June 30,
|
|
|
2020
|
|
2019
|
Net cash used in operating activities
|
|
$
|
(729,208
|
)
|
|
$
|
(1,842,252
|
)
|
Net cash provided by (used in) investing activities
|
|
$
|
29,500
|
|
|
$
|
(1,990,783
|
)
|
Net cash provided by financing activities
|
|
$
|
642,639
|
|
|
$
|
3,792,264
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
$
|
(57,069
|
)
|
|
$
|
(40,771
|
)
|
Operating activities. Our use of cash
in operating activities resulted primarily from our net loss, as adjusted for certain non-cash items and changes in operating assets
and liabilities. For the six months ended June 30, 2020, non-cash items mainly consisted of non-cash
interest expense, changes in derivative liabilities, and depreciation and amortization, and changes in operating assets and liabilities
mainly consisted of increases in accounts payable and accrued expenses and decreases in prepaid expenses and security deposits.
Investing activities. Cash
provided by investing activities for the six months ended June 30, 2020 consisted of additions to property and equipment and proceeds
from sale of assets.
Financing activities. Cash
provided by financing activities for the six months ended June 30, 2020 consisted primarily of proceeds from the issuance of our
note agreements, convertible note agreements, and advances from related parties, offset by payments on notes payable, convertible
notes payable, and repayments to related parties.
Funding Requirements
We expect to continue to incur significant
expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially
if and as we:
|
•
|
establish a sales, marketing and distribution
infrastructure to commercialize our water purification units and our other products;
|
|
•
|
maintain, expand and protect our intellectual
property portfolio; and
|
|
•
|
add operational and financial personnel to
handle the public company reporting and other requirements to which we will be subject.
|
We expect that we
will require additional capital to fund operations, including hiring additional employees and increasing inventory levels,
during the next twelve (12) month period.
Because of the numerous risks and uncertainties
associated with the development and commercialization of our products, we are unable to estimate the amounts of increased capital
outlays and operating expenses associated with successfully commercializing such products. Our future capital requirements will
depend on many factors, including:
|
•
|
the costs and timing of commercialization activities
for our products, including manufacturing, sales, marketing and distribution;
|
|
•
|
revenues received from sales of our products;
|
|
•
|
the costs of preparing, filing and prosecuting
patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
and
|
|
•
|
our ability to maintain manufacturing and distribution relationships on favorable terms, if at all.
|
Until such time, if ever, as we can generate
substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, and
strategic alliances. We do not have any committed external source of funds. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of
these securities may include liquidation or other preferences that adversely affect the rights of common shareholders. Debt financing,
if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such
as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic
alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies and future
revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through
equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future
commercialization efforts or grant rights to commercialize products that we would otherwise prefer to develop and market ourselves.