(Former name, former address
and former fiscal year, if changed since last report)
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 [ ] No
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [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 [ ] No [X]
At April 6, 2021, there were 80,890,981 shares outstanding of Common Stock, no par value.
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:
There are statements in
this Report that 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 in this Report will 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.
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 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.
PART I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
Water Now, Inc. and Subsidiary
Condensed Consolidated
Balance Sheets
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
30,908
|
|
|
$
|
66,042
|
|
Accounts receivable
|
|
|
250
|
|
|
|
118,250
|
|
Inventory
|
|
|
513,589
|
|
|
|
517,849
|
|
Prepaid expenses
|
|
|
—
|
|
|
|
21,264
|
|
Total Currents Assets
|
|
|
544,747
|
|
|
|
723,405
|
|
|
|
|
|
|
|
|
|
|
Property and equipment - net
|
|
|
2,155,916
|
|
|
|
2,137,272
|
|
Operating lease right-of-use assets
|
|
|
549,030
|
|
|
|
753,432
|
|
Distributorship agreement, net
|
|
|
616,667
|
|
|
|
766,667
|
|
Security deposit
|
|
|
23,481
|
|
|
|
34,330
|
|
Total Assets
|
|
$
|
3,889,841
|
|
|
$
|
4,415,106
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,382,295
|
|
|
$
|
1,285,214
|
|
Accrued expenses
|
|
|
811,278
|
|
|
|
532,512
|
|
Distributorship accrued expense
|
|
|
250,000
|
|
|
|
250,000
|
|
Derivative liability
|
|
|
746,049
|
|
|
|
508,323
|
|
Advances from related parties
|
|
|
53,591
|
|
|
|
4,407
|
|
Deposits received on sale of assets
|
|
|
625,000
|
|
|
|
—
|
|
Current portion of operating lease liabilities
|
|
|
190,213
|
|
|
|
247,070
|
|
Current portion of convertible notes payable, net of debt discounts
|
|
|
2,050,696
|
|
|
|
2,143,369
|
|
Current portion of notes payable
|
|
|
835,414
|
|
|
|
504,000
|
|
Current portion of revenue sharing liabilities
|
|
|
3,795,258
|
|
|
|
—
|
|
Total Current Liabilities
|
|
|
10,739,794
|
|
|
|
5,474,895
|
|
Long-term notes payable
|
|
|
101,189
|
|
|
|
—
|
|
Operating lease liabilities
|
|
|
374,994
|
|
|
|
520,137
|
|
Revenue sharing liabilities
|
|
|
2,041,389
|
|
|
|
5,042,455
|
|
Total Liabilities
|
|
|
13,257,366
|
|
|
|
11,037,487
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Preferred stock – no par value, 10,000,000 shares authorized, zero issued and outstanding at September 30, 2020 and December 31, 2019
|
|
|
|
|
|
|
|
|
Common stock – no par value, 90,000,000 shares authorized, 77,242,560 and 55,663,191 shares issued and 77,046,368 and 55,466,999 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
|
|
|
9,376,224
|
|
|
|
9,071,943
|
|
Additional paid-in capital
|
|
|
5,208,650
|
|
|
|
2,813,464
|
|
Subscription receivable
|
|
|
(50,000
|
)
|
|
|
(50,000
|
)
|
Treasury stock, at cost (100,000 shares held as of September 30, 2020 and December 31, 2019)
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Accumulated deficit
|
|
|
(23,892,399
|
)
|
|
|
(18,447,788
|
)
|
Total Stockholders’ Deficit
|
|
|
(9,367,525
|
)
|
|
|
(6,622,381
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
3,889,841
|
|
|
$
|
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 Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
2,970
|
|
|
$
|
20,092
|
|
|
$
|
7,635
|
|
|
$
|
334,393
|
|
Cost of goods sold
|
|
|
2,133
|
|
|
|
16,553
|
|
|
|
4,260
|
|
|
|
281,080
|
|
Gross Profit
|
|
|
837
|
|
|
|
3,539
|
|
|
|
3,375
|
|
|
|
53,313
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
218,958
|
|
|
|
398,579
|
|
|
|
620,701
|
|
|
|
1,310,049
|
|
Professional fees
|
|
|
255,871
|
|
|
|
271,661
|
|
|
|
424,847
|
|
|
|
812,417
|
|
Selling, general and administrative
|
|
|
213,751
|
|
|
|
385,772
|
|
|
|
582,464
|
|
|
|
1,087,673
|
|
(Gain) Loss on sale of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
19,988
|
|
|
|
(4,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
688,580
|
|
|
|
1,056,012
|
|
|
|
1,648,000
|
|
|
|
3,206,069
|
|
Loss from operations
|
|
|
(687,743
|
)
|
|
|
(1,052,473
|
)
|
|
|
(1,644,625
|
)
|
|
|
(3,152,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(784,712
|
)
|
|
|
(3,760,191
|
)
|
|
|
(2,933,520
|
)
|
|
|
(4,885,981
|
)
|
Gain (Loss) on derivative liability
|
|
|
442,317
|
|
|
|
832,566
|
|
|
|
(867,361
|
)
|
|
|
646,557
|
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
895
|
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(130,052
|
)
|
|
|
—
|
|
|
|
(182,877
|
)
|
Total other expense
|
|
|
(342,395
|
)
|
|
|
(3,057,677
|
)
|
|
|
(3,799,986
|
)
|
|
|
(4,422,301
|
)
|
Loss before provision for income taxes
|
|
|
(1,030,138
|
)
|
|
|
(4,110,150
|
)
|
|
|
(5,444,611
|
)
|
|
|
(7,575,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,030,138
|
)
|
|
$
|
(4,110,150
|
)
|
|
$
|
(5,444,611
|
)
|
|
$
|
(7,575,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and fully diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and fully diluted
|
|
|
77,463,408
|
|
|
|
41,444,725
|
|
|
|
70,078,770
|
|
|
|
38,469,731
|
|
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)
|
|
Common
Stock
|
|
Additional Paid-In
|
|
Subscription
|
|
Treasury
|
|
Accumulated
|
|
Total Stockholders Equity
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Receivable
|
|
Stock
|
|
Deficit
|
|
(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
|
|
|
485,000
|
|
|
|
33,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,600
|
|
Common stock issued for
conversion
of debt
|
|
|
20,894,369
|
|
|
|
482,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482,681
|
|
Reduction of derivative liability
from conversion/ redemption
|
|
|
|
|
|
|
|
|
|
|
2,395,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,395,186
|
|
Common stock issued as collateral
for loan
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock retired
|
|
|
(800,000
|
)
|
|
|
(212,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212,000
|
)
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,444,611
|
)
|
|
|
(5,444,611
|
)
|
Balance, September 30, 2020
|
|
|
77,046,368
|
|
|
$
|
9,376,224
|
|
|
$
|
5,208,650
|
|
|
$
|
(50,000
|
)
|
|
$
|
(10,000
|
)
|
|
$
|
(23,892,399
|
)
|
|
$
|
(9,367,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
35,816,808
|
|
|
$
|
6,463,705
|
|
|
$
|
687,431
|
|
|
$
|
(50,000
|
)
|
|
$
|
—
|
|
|
$
|
(7,979,177
|
)
|
|
$
|
(878,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuances for
cash
|
|
|
1,180,000
|
|
|
|
299,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,387
|
|
Common stock issuances for
services and compensation
|
|
|
1,125,000
|
|
|
|
370,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,275
|
|
Common stock issued for conversion
of debt
|
|
|
5,672,203
|
|
|
|
585,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585,168
|
|
Shares issued for debt issuance
costs
|
|
|
1,190,384
|
|
|
|
572,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572,858
|
|
Shares issued in settlement
claim
|
|
|
1,502,389
|
|
|
|
585,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585,932
|
|
Reduction of derivative liability
from conversion/redemption
|
|
|
|
|
|
|
|
|
|
|
721,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,043
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,575,057
|
)
|
|
|
(7,575,057
|
)
|
Balance, September 30, 2019
|
|
|
46,486,784
|
|
|
$
|
8,877,325
|
|
|
$
|
1,408,474
|
|
|
$
|
(50,000
|
)
|
|
$
|
—
|
|
|
$
|
(15,554,234
|
)
|
|
$
|
(5,318,435
|
)
|
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 Nine Months Ended
September
30,
|
|
|
2020
|
|
2019
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,444,611
|
)
|
|
$
|
(7,575,057
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Common stock issued as payment for services and employee’s compensation
|
|
|
33,600
|
|
|
|
370,275
|
|
Depreciation and amortization
|
|
|
224,229
|
|
|
|
192,338
|
|
Lease expense
|
|
|
2,402
|
|
|
|
—
|
|
Amortization of discounts
|
|
|
507,561
|
|
|
|
1,345,498
|
|
Derivative expense at issuance
|
|
|
1,370,551
|
|
|
|
2,765,228
|
|
Amortization of interest for revenue sharing agreements
|
|
|
794,192
|
|
|
|
1,345,498
|
|
Interest converted to common shares
|
|
|
43,885
|
|
|
|
59,049
|
|
Loss (Gain) on sale of assets
|
|
|
19,988
|
|
|
|
(4,070
|
)
|
Change in fair value of derivative liability
|
|
|
867,361
|
|
|
|
(646,557
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
182,877
|
|
Changes in operating working capital items:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
—
|
|
|
|
(295,800
|
)
|
Other receivables
|
|
|
—
|
|
|
|
(30,000
|
)
|
Inventory
|
|
|
4,260
|
|
|
|
(14,174
|
)
|
Prepaid expenses
|
|
|
21,264
|
|
|
|
(5,663
|
)
|
Security deposit
|
|
|
10,849
|
|
|
|
(23,481
|
)
|
Accounts payable
|
|
|
3,081
|
|
|
|
847,944
|
|
Accrued expenses
|
|
|
278,766
|
|
|
|
(136,581
|
)
|
Net cash used in operating activities
|
|
|
(1,262,622
|
)
|
|
|
(2,505,897
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(30,000
|
)
|
|
|
(1,650,783
|
)
|
Proceeds from sale of assets
|
|
|
684,500
|
|
|
|
60,000
|
|
Payment for distributorship agreement
|
|
|
—
|
|
|
|
(400,000
|
)
|
Net cash provided by (used in) investing activities
|
|
|
654,500
|
|
|
|
(1,990,783
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Cash advances from related parties
|
|
|
367,036
|
|
|
|
417,997
|
|
Cash repayments to related parties
|
|
|
(317,852
|
)
|
|
|
(700,494
|
)
|
Borrowings on notes payable
|
|
|
340,400
|
|
|
|
630,000
|
|
Payments on notes payable
|
|
|
(50,158
|
)
|
|
|
(430,000
|
)
|
Borrowings on convertible notes payable
|
|
|
631,195
|
|
|
|
2,562,935
|
|
Payments on convertible notes payable
|
|
|
(397,633
|
)
|
|
|
(945,122
|
)
|
Issuances of common stock
|
|
|
—
|
|
|
|
299,387
|
|
Borrowings on revenue sharing liabilities
|
|
|
—
|
|
|
|
2,736,000
|
|
Net cash provided by financing activities
|
|
|
572,988
|
|
|
|
4,570,703
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(35,134
|
)
|
|
|
74,023
|
|
Cash at beginning of period
|
|
|
66,042
|
|
|
|
53,106
|
|
Cash at end of period
|
|
$
|
30,908
|
|
|
$
|
127,129
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Interest and Income Taxes Paid:
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
$
|
75,718
|
|
|
$
|
132,507
|
|
Income taxes paid during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash disclosures:
|
|
|
|
|
|
|
|
|
Conversion of convertible notes payable into common shares
|
|
$
|
438,796
|
|
|
$
|
585,168
|
|
Purchase of property and equipment through issuance of notes payable
|
|
$
|
142,361
|
|
|
$
|
—
|
|
Reclass of derivative upon settlement
|
|
$
|
2,395,186
|
|
|
$
|
1,114,472
|
|
Original Issue Discount
|
|
$
|
78,805
|
|
|
$
|
231,565
|
|
Discount from derivative
|
|
$
|
—
|
|
|
$
|
145,000
|
|
Discount from shares issued for issuance costs
|
|
$
|
—
|
|
|
$
|
572,858
|
|
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, 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 3 regarding the Company's
prospective sale of substantially all of its assets subsequent to September 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 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:
Derivative liability balance at December 31, 2019
|
|
$
|
508,323
|
|
Additions to derivative liability for new debt
|
|
|
1,765,551
|
|
Reclass to equity upon conversion/cancellation
|
|
|
(2,395,186
|
)
|
Change in fair value
|
|
|
867,361
|
|
Balance at September 30, 2020
|
|
$
|
746,049
|
|
At September 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 $0.09; 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 approximately $31,000 in cash and had net working capital deficit of approximately $9,983,000. The Company,
which generated a net loss of approximately $5,445,000 and $7,575,000 for the nine months ended September 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.
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.
|
|
For the three months
ended September 30,
|
|
For the nine months
ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
2,970
|
|
|
$
|
—
|
|
|
$
|
5,965
|
|
|
$
|
308,744
|
|
Oil recovery systems
|
|
|
—
|
|
|
|
20,092
|
|
|
|
1,670
|
|
|
|
25,649
|
|
|
|
$
|
2,970
|
|
|
$
|
20,092
|
|
|
$
|
7,635
|
|
|
$
|
334,393
|
|
|
5.
|
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 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.
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 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.
|
7.
|
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 September 30, 2020 is $50,000. The note is currently in default as
of September 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 September 30, 2020 is $100,000. The note is currently in default as of 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 Company borrowed $447,500
from a lender on July 14, 2020, using approximately $338,000 of the proceeds to pay 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 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 $44,750 as a discount on the note and paid $13,055 for debt issuance costs.
The principal balance at September 30, 2020 is $447,500.
During the nine months ended September
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.
|
8.
|
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
$54,000 and $4,000 at September 30, 2020 and December 31, 2019, respectively, to the stockholder.
|
9.
|
Revenue Sharing Agreements
|
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 and 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, 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 Company 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 date the services were earned and issued 1,180,000
shares to investors for total cash proceeds of $299,387.
From January 1, 2020 to
September 30, 2020, the Company issued 20,894,369 shares to lenders upon receipt of conversion notices for total principal, interest
and fees of $482,681. The Company also issued 485,000 shares to employees and consultants valued at $33,600 and issued 1,000,000
shares as collateral held in escrow, to be cancelled upon payment of the debt. The Company retired 800,000 shares.
|
11.
|
Operating Lease 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 September 30, 2020:
Right-of-use assets
|
|
$
|
549,030
|
|
Lease liability obligations, current
|
|
$
|
190,213
|
|
Lease liability obligations, less current portion
|
|
|
374,994
|
|
Total lease liability obligations
|
|
$
|
565,207
|
|
Weighted-average remaining lease term
|
|
|
2.7 years
|
|
Weighted-average discount rate
|
|
|
10
|
%
|
During the nine months
ended September 30, 2020, the Company recognized approximately $124,000 in 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.
Approximate future minimum
lease payments for the Company’s right of use assets over the remaining lease periods as of September 30, 2020, are as follows:
Year ending December 31,
|
|
|
|
2020
|
|
|
$
|
59,000
|
|
|
2021
|
|
|
|
240,000
|
|
|
2022
|
|
|
|
246,000
|
|
|
2023
|
|
|
|
103,000
|
|
|
Total minimum payments
|
|
|
$
|
648,000
|
|
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 September 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 $15,413,000 at September 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 September 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
$673,000 and $1,590,000 for the nine months ended September 30, 2020 and 2019, respectively.
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 September 30,
|
|
For the nine months ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
2,970
|
|
|
$
|
—
|
|
|
$
|
5,965
|
|
|
$
|
308,744
|
|
Oil recovery systems
|
|
|
—
|
|
|
|
20,092
|
|
|
|
1,670
|
|
|
|
25,649
|
|
|
|
$
|
2,970
|
|
|
$
|
20,092
|
|
|
$
|
7,635
|
|
|
$
|
334,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
177,851
|
|
|
$
|
608,469
|
|
|
$
|
498,137
|
|
|
$
|
1,936,762
|
|
Oil recovery systems
|
|
|
141,196
|
|
|
|
196,485
|
|
|
|
484,486
|
|
|
|
541,599
|
|
General corporate
|
|
|
368,696
|
|
|
|
247,519
|
|
|
|
662,002
|
|
|
|
674,395
|
|
|
|
$
|
687,743
|
|
|
$
|
1,052,473
|
|
|
$
|
1,644,625
|
|
|
$
|
3,152,756
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,158
|
|
Oil recovery systems
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
1,558,625
|
|
General corporate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
$
|
1,650,783
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Total assets
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
537,970
|
|
|
$
|
749,536
|
|
Oil recovery systems
|
|
|
2,582,206
|
|
|
|
2,576,758
|
|
General corporate
|
|
|
769,665
|
|
|
|
1,088,812
|
|
|
|
$
|
3,889,841
|
|
|
$
|
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.
The Company borrowed $605,000
from a lender on January 7, 2021. The note bears interest at 12% and is payable in one lump sum on January 7, 2022, at which 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
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 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 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 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 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.
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
For the nine months ended September
30, 2020, we generated revenues of approximately $7,600. 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 nine months ended September 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 September 30, 2020 and 2019 (unaudited)
Revenue
We generated revenues
of $3,000 and $20,000 for the three months ended September 30, 2020 and 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
Below is a summary of our operating
expenses for the three months ended September 30, 2020 and 2019:
|
|
For the three months
ended September 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Salaries and wages
|
|
$
|
218,958
|
|
|
$
|
398,579
|
|
|
|
(179,621
|
)
|
|
|
(45
|
)%
|
Professional fees
|
|
|
255,871
|
|
|
|
271,661
|
|
|
|
(15,790
|
)
|
|
|
(6
|
)%
|
Selling, general and administrative
|
|
|
213,751
|
|
|
|
385,772
|
|
|
|
(172,021
|
)
|
|
|
(45
|
)%
|
Total
|
|
$
|
688,580
|
|
|
$
|
1,056,012
|
|
|
|
(367,432
|
)
|
|
|
(35
|
)%
|
Salaries and wages
decreased during the three months ended September 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 September 30, 2020 primarily related to decreases in consulting and stock-based compensation.
Selling, general and administrative
decreased during the three months ended September 30, 2020 primarily related to decreases in advertising and marketing, shipping,
and travel costs.
Segment contribution to loss from
operations is presented in the table below:
For the Three
Months
Ended September
30,
|
|
2020
|
|
2019
|
Water purification products
|
|
$
|
177,851
|
|
|
$
|
608,469
|
|
Oil recovery systems
|
|
|
141,196
|
|
|
|
196,485
|
|
General corporate
|
|
|
368,696
|
|
|
|
247,519
|
|
|
|
$
|
687,743
|
|
|
$
|
1,052,473
|
|
Segment loss from operations
during the three months ended September 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 September 30, 2020 and 2019:
|
|
|
For the three
months ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Interest expense
|
|
$
|
784,712
|
|
|
$
|
3,760,191
|
|
|
|
(2,975,479
|
)
|
|
|
(79
|
)%
|
(Gain) Loss on derivative liability
|
|
|
(442,317
|
)
|
|
|
(832,566
|
)
|
|
|
390,249
|
|
|
|
47
|
%
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
130,052
|
|
|
|
(130,052
|
)
|
|
|
(100
|
)%
|
Total
|
|
$
|
342,395
|
|
|
$
|
3,057,677
|
|
|
|
(2,715,282
|
)
|
|
|
(89
|
)%
|
Interest expense decreased
primarily related to amortization of debt issuance costs on the convertible debt issued during the periods. We recorded a gain
on the change in fair value of derivative liability based on the value of the derivatives as of September 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 $1,030,138
and $4,110,150 for the three months ended September 30, 2020 and 2019, respectively, because of the factors discussed above.
Net loss per share for the three months ended
September 30, 2020 and 2019 was $(0.01) and $(0.10), respectively, based on the weighted-average number of shares issued and outstanding
during the period.
For the nine months ended September
30, 2020 and 2019 (unaudited)
Revenue
We generated revenues
of $8,000 and $334,000 for the nine months ended September 30, 2020 and 2019, respectively. We generated revenues of $6,000 and
$2,000 from our water purification products and oil recovery systems segments, respectively, for the nine months ended September
30, 2020. We generated revenues of $308,000 and $26,000 from our water purification products and oil recovery systems segments,
respectively, for the nine 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
Below is a summary of our operating expenses for the
nine months ended September 30, 2020 and 2019:
|
|
For the nine months ended September 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Salaries and wages
|
|
$
|
620,701
|
|
|
$
|
1,310,049
|
|
|
|
(689,348
|
)
|
|
|
(53
|
)%
|
Professional fees
|
|
|
424,847
|
|
|
|
812,417
|
|
|
|
(387,570
|
)
|
|
|
(48
|
)%
|
Selling, general and administrative
|
|
|
582,464
|
|
|
|
1,087,673
|
|
|
|
(505,209
|
)
|
|
|
(46
|
)%
|
(Gain) Loss on sale of assets
|
|
|
19,988
|
|
|
|
(4,070
|
)
|
|
|
24,058
|
|
|
|
591
|
%
|
Total
|
|
$
|
1,648,000
|
|
|
$
|
3,206,069
|
|
|
|
(1,558,069
|
)
|
|
|
(49
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages decreased during the nine
months ended September 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 nine months
ended September 30, 2020 primarily related to decreases in consulting and stock-based compensation.
Selling, general and administrative decreased
during the nine months ended September 30, 2020 primarily related to decreases in advertising and marketing, shipping, supplies,
and insurance.
We recorded a loss on sale of assets during the nine
months ended September 30, 2020 from the sale of our trucks and recorded a gain on sale of assets during the nine months ended
September 30, 2019 from the sale of our equipment.
Segment contribution to loss from operations is presented
in the table below:
For the Nine
Months
Ended September
30,
|
|
2020
|
|
2019
|
Water purification products
|
|
$
|
498,137
|
|
|
$
|
1,936,762
|
|
Oil recovery systems
|
|
|
484,486
|
|
|
|
541,599
|
|
General corporate
|
|
|
662,002
|
|
|
|
674,395
|
|
|
|
$
|
1,644,625
|
|
|
$
|
3,152,756
|
|
Segment loss from operations
during the nine months ended September 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
nine months ended September 30, 2020 and 2019:
|
|
For the nine months ended September 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Interest expense
|
|
$
|
2,933,520
|
|
|
$
|
4,885,981
|
|
|
|
(1,952,461
|
)
|
|
|
(40
|
)%
|
(Gain) Loss on derivative liability
|
|
|
867,361
|
|
|
|
(646,557
|
)
|
|
|
1,513,918
|
|
|
|
234
|
%
|
Other income
|
|
|
(895
|
)
|
|
|
—
|
|
|
|
(895
|
)
|
|
|
(100
|
)%
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
182,877
|
|
|
|
(182,877
|
)
|
|
|
(100
|
)%
|
Total
|
|
$
|
3,799,986
|
|
|
$
|
4,422,301
|
|
|
|
(622,315
|
)
|
|
|
(14
|
)%
|
Interest expense decreased
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 September 30, 2020 compared to
a gain recorded as of September 30, 2019. 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 $5,444,611
and $7,575,057 for the nine months ended September 30, 2020 and 2019, respectively, because of the factors discussed above.
Net loss per share for
the nine months ended September 30, 2020 and 2019 was $(0.08) and $(0.20), respectively, based on the weighted-average number of
shares issued and outstanding during the period.
Liquidity and Capital Resources
Sources of Liquidity
Through September 30, 2020,
we have generated revenues of $557,000. From February 10, 2016 (inception) through September 30, 2020, we have incurred losses
aggregating $23.5 million. As of September 30, 2020, we had cash and cash equivalents of $31,000. 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 September 30, 2020, we had total liabilities
of approximately $13.0 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.
|
|
Nine months ended September
30,
|
|
|
2020
|
|
2019
|
Net cash used in operating activities
|
|
$
|
(1,262,622
|
)
|
|
$
|
(2,505,897
|
)
|
Net cash provided by (used in) investing activities
|
|
$
|
654,500
|
|
|
$
|
(1,990,783
|
)
|
Net cash provided by financing activities
|
|
$
|
572,988
|
|
|
$
|
4,570,703
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
(35,134
|
)
|
|
$
|
74,023
|
|
Operating activities.
Our use of cash in operating activities resulted primarily from our net loss, as adjusted for certain non-cash items and changes
in operating assets and liabilities. For the nine months ended September 30, 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 nine months ended September 30, 2020 consisted of additions to property and equipment
and proceeds from sale of assets.
Financing activities.
Cash provided by financing activities for the nine months ended September 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.
Quantitative and Qualitative Disclosures About Market
Risk
We have not utilized any
derivative financial instruments such as futures contracts, options and swaps, forward foreign exchange contracts or interest rate
swaps and futures. We do not have any borrowings and, consequently, we are not affected by changes in market interest rates. We
do not currently have any sales or own assets and operate facilities in countries outside the United States and, consequently,
we are not affected by foreign currency fluctuations or exchange rate changes. Overall, at this time, we believe that our exposure
to interest rate risk and foreign currency exchange rate changes is not material to our financial condition or results of operations.
Off-Balance Sheet Arrangements
We have not entered into any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would
be considered material to investors.
Tax Loss Carryforwards
We had a net operating loss carry-forward
for federal and state tax purposes of approximately $15,413,000 at September 30, 2020, that is potentially available to offset
future taxable income. For financial reporting purposes, no deferred tax asset was recognized because at September 30, 2020 and
December 31, 2019 management estimates that it is more likely than not that substantially all of the net operating losses will
expire unused. As a result, the amount of the deferred tax assets considered realizable was reduced 100% by a valuation allowance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures. The Company’s disclosure controls and procedures are designed to ensure that such information
required to be disclosed by the Company in reports filed or submitted under the Exchange Act, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC s rules and forms. The Company’s disclosure controls
and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal
executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures
are designed to provide such reasonable assurance.
The Company’s management,
with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of September 30, 2020, as required by Rule 13a-15(e) of
the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the
Company’s disclosure controls and procedures were not effective as of September 30, 2020.
Management’s Report
on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining
adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls
over financial reporting were not audited, the Company’s management, including the principal executive and principal financial
officer, assessed the effectiveness of internal controls over financial reporting as of September 30, 2020, based on criteria issued
in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled Internal Control-Integrated
Framework. Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial
reporting were not effective as of September 30, 2020.
Changes in Internal Control Over
Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial
officer, have concluded there were no changes in internal control during the fiscal quarter ended September 30, 2020.
PART II. OTHER INFORMATION