Washington, D.C. 20549
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:
The aggregate market value of the
voting and non-voting common equity held by non-affiliates 67,555,910 shares of common stock, no par value, as of June 8, 2020
was $3,783,000 (computed by reference to the price at which the common stock was last sold ($.056 per share). For purposes of
the foregoing calculation only directors, executive officers, and holders of 10% or more of the registrant’s common
capital stock have been deemed affiliates.
As of June 8, 2020, 76,746,368 shares of
the registrant’s Common Stock, no par value, were outstanding.
PART I
Special Note Regarding Forward-Looking Statements
In addition to historical
information, this annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, we may also provide oral
or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject
to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The forward-looking statements are not historical
facts, but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs
and assumptions, and include, but are not limited to, statements under the heading “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”. Words such as “anticipate,” “believe,” “estimate,”
“expects,” “intend,” “plan,” “will” and variations of these words and similar expressions
identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties
and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially
(both favorably and unfavorably) from those expressed or forecasted in the forward-looking statements.
Item 1.
Business
Company Overview
Water Now, Inc. was incorporated in Texas on
February 10, 2016 to develop and commercialize a gas/diesel or electric powered, portable device that processes and purifies contaminated
water. Our business strategy was conceived as a result of the growing global water crisis. Today, many countries and regions are
experiencing acute water shortages and we believe our technology and products are capable of generating safe drinking water from
many available water sources. We have two principal reportable segments: water purification products and oil recovery systems.
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.
Water Purification Products
We currently offer three water purification
products: the Aqua 125, the Aqua 1000, and an upgraded Aqua 1000 designed for disaster relief, military and agricultural applications.
The Aqua 125 model is available in both gas and electric versions and is capable of purifying fresh water that is contaminated
primarily with partially dissolved solid material, microorganisms and other pathogens that can be dangerous to humans. The Aqua
125 model has the capacity to purify up to 80 gallons of water per day. The Aqua 1000 model adds the ability to desalinate salt
water, with a capacity of up to 800 gallons per day. The disaster relief configuration, which consists of an upgraded Aqua 1000
unit complemented with a reservoir mounted on a trailer, is also capable of purifying up to 800 gallons of water per day.
Manufacturing and Distribution. We
assemble our Aqua 125 and Aqua 1000 units at our facility in Fort Worth, Texas. Components are purchased from third-party suppliers
and delivered to us for assembly. We do not depend on any single source for materials used in the production of our water purification
products. As currently designed, the components of our Aqua units are available from various sources.
Our distribution strategy is to make our products
available through direct sales and distributors. Our current focus is on selling our products to governmental and non-governmental
organizations both domestically and internationally. Our products are currently sold in seven countries through our distributor
network. We currently have exclusive distributor relationships for the Philippines and South Africa. In fiscal 2019, we sold approximately
100 Aqua 125 and eight Aqua 1000 models.
Warranty. Due to reliable performance
of our systems we have began a self-warranty program in early 2020.
HydraSpin USA
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. We have estimated that we can attain profitability in our HydraSpin
operations if oil prices recover to a minimum of $35 per barrel. With the six HydraSpin units operation, we estimate we can generate
a minimum of $10 million in annual revenues should oil reach a per barrel price of $35.
Competition
There are numerous competitors for the products
and services we provide. We believe that the design of our products have advantages over other similar solutions that are currently
available. However, we expect that competition for our offerings will remain intense.
Governmental Approvals and Regulations
We do not anticipate that we will need to obtain
material governmental approvals for the manufacturing and distribution of any of our products, other than customary permits and
licenses generally applicable to businesses operating in the geographic areas in which we operate. We do not anticipate that obtaining
any such permit or license will impact or hinder our operations in any material respect. We also expect to be subject to regulations
applicable to businesses operating in the areas in which we operate. We do not anticipate that any of such regulations will have
a material effect on our business. Notwithstanding the foregoing, we can give no assurance regarding the impact that governmental
regulations might have on our operations. We do not anticipate that we will be required to incur significant costs and expenses
in order to comply with environmental laws, although certain components incorporated into our products are expected to
require certifications that they satisfy applicable
environmental regulatory requirements. The cost of obtaining requisite certifications is expected to be borne by our suppliers.
Intellectual Property
We have filed domestic and international patent
applications for the design of our water purification technology. Current water purification products typically require disposable
filters and membranes coupled with a heating element driven through a resistive coil that can fail, especially if coming in contact
with the fluids involved. Our design seeks to mitigate these problems by utilizing a water pump fed rotational centrifugal system,
where solid contaminants are held to the interior cylindrical walls of the centrifuge, resulting in water containing fewer contaminants.
We have also filed for domestic patent protection
of our space heating technology and submitted an application to trademark the HydraSpin name.
Research and Development; Employees
For fiscal 2019, we expended an aggregate of
approximately $39,000 in research and development (“R&D”) activities as compared to approximately $1.4 million
during fiscal 2018.
As of December 31, 2019, we had 16 employees,
all of whom were employed on a full-time basis. As of May 1, 2020 we had four full-time employees. We have yet to determine whether
we will increase our full-time work force as we await the full effect of the COVID-19 pandemic on our results of operations.
Implications of Being an Emerging Growth
Company
We are an “emerging growth company,”
as that term is used in the Jumpstart Our Business Startups Act of 2012, or “JOBS Act.” An emerging growth company
may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies,
and we have elected to comply with these reduced reporting and other burdens. These provisions include:
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A requirement to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Result of Operations;
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Exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002; and
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Reduced disclosure about our executive compensation arrangements and an exemption from various shareholder voting requirements with respect to executive compensation arrangements.
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We could remain an emerging growth company
until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the
last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under a registration
statement under the Securities Act of 1933, (iii) the date that we become a “large accelerated filer” as defined in
Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds
$700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have
issued more than $1 billion in non-convertible debt during the preceding three year period. The foregoing amounts are subject to
adjustment for inflation.
In addition, Section 107 of the JOBS Act provides
that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act and Section 13(a) of the Exchange Act for complying with new or revised accounting standards that have different effective
dates for public and private companies until those standards apply to private companies. We have elected to take advantage of
the extended transition period for complying with the revised accounting standards. As a result, our financial statements may
not be comparable to companies that comply with public company effective dates.
Item 1A. Risk Factors
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below and the other information contained herein before
investing in our common stock. If any of the following risks occur, our business, operating results and financial condition could
be seriously harmed. The trading price of our common stock could decline due to any of these risks, and you may lose all or part
of your investment.
Risks Related to Our Business and Industry
An
occurrence of an uncontrollable event such as the COVID-19 pandemic will negatively affect, and has to date negatively affected,
our operations.
The
occurrence of an uncontrollable event such as the COVID-19 pandemic has negatively affected our operations. A pandemic typically
results in social distancing, travel bans and quarantine, and the effects of, and response to, the COVID-19 pandemic has limited
access to our facilities, customers, management, support staff and professional advisors. These, in turn, have not only negatively
impacted our operations, financial condition and demand for our services, but our overall ability to react timely to mitigate
the impact of this event. We anticipate that our first quarter and second quarter 2020 financial results, at a minimum, will be
significantly negatively affected by COVID-19; however, the full effect on our business and operations
is currently unknown.
Our
business has suffered from the severity or longevity of the Coronavirus/COVID-19 Global Outbreak
The
demand for our services relies upon, among other things, (a) the continued drilling for hydrocarbons in regions where our Hydraspin
units are deployed, such as the Permian Basin, and (b) our ability to receive, retro-fit, deploy and maintain our Hydraspin units
for our customers. The decrease in oil prices has resulted in a decline in the utilization of our Hydraspin units by customers
resulting in a corresponding decrease in revenues. Additionally, government mandated ‘stay-at-home’ and similar from
operating altogether. Loss of available employees due to health concerns or the lack of revenue to pay salaries may in the future
limit our ability to operate. Economic recessions, including those brought on by the COVID-19 Outbreak may have a negative effect
on the demand for our services and consequently our operating results. We have also experienced
delays due to the COVID-19 Outbreak in receiving products and supplies which we need to operate. All of the above may be exacerbated
in the future as the COVID-19 Outbreak and the governmental responses thereto continues. All of the above may in the future cause,
and have to date caused, a material adverse effect on our operating results.
There can be no assurance that we can
achieve or maintain profitability.
To date, we have not generated substantial
revenues from the sale of our products and services. Accordingly, we cannot guarantee that we will become profitable. Moreover,
even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable
to either attain, sustain or increase profitability and our failure to do so would adversely affect our business, including our
ability to raise additional funds that may be required to maintain and/or enhance operations.
We will need substantial additional funding
and may be unable to raise capital when needed, which would force us to delay, curtail or cease our efforts.
We will require additional funds over the next
12 months to support our continued activities, including marketing and selling water purification and heating units and purchasing,
deploying and operating HydraSpin units.
Until such time, if ever, as we can generate
a sufficient amount of revenue and achieve profitability, we expect to seek to finance future cash needs through equity or debt
financings and strategic arrangements. We currently have no other commitments or agreements relating to any of these types of transactions
and we cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional
capital, we might have to delay, curtail or eliminate commercializing, marketing and selling our products and services.
Product development is a long, expensive
and uncertain process.
The development of new or the enhancement of
existing water purification and heater products is a costly, complex and time-consuming process, and investments in product development
often involve a long wait until a return, if any, can be achieved on such investment. We might face
difficulties or delays in the development
process that will result in our inability to timely offer products that satisfy the market, which might allow competing products
to emerge during the development process.
Successful technical development of both
our products and implementation of our service offering does not guarantee successful commercialization.
We may fail to achieve commercial success
for a number of reasons, including, among others, the following:
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prohibitive production costs;
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lack of product innovation;
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unsuccessful distribution and marketing;
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insufficient cooperation from our suppliers and distributors; and
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product development that does not align with or meet customer needs.
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Our success will depend largely on our ability
to properly demonstrate our capabilities. Furthermore, even if we do successfully demonstrate commercial liability, potential
customers may be more comfortable doing business with a competitor, or may not feel there is a significant need for the products
and services we develop. As a result, significant revenue from our products and services may not be achieved for a number
of years, if at all.
If our patent applications are not granted,
we could lose our ability to compete in the marketplace.
We have developed certain intellectual property
used in the design of our water purification and heating units. We believe this technology is essential to our ability to be competitive
and successful in the development and distribution of water purification and heating units. Patent protection can be limited and
not all intellectual property can be patented. Even if our patents are granted, our intellectual property rights may be challenged,
invalidated or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of technical information
or other trade secrets by employees or competitors.
Furthermore, our competitors may independently
develop technologies and products that are substantially equivalent or superior to the products manufactured or used by us, which
could result in decreased revenues. Litigation may be necessary to enforce intellectual property rights, which could result in
substantial costs to us and substantial diversion of management’s attention. If our intellectual property is not adequately
protected, our competitors could use it to enhance their products. Our inability to adequately protect these intellectual property
rights could adversely affect our business and financial condition.
Other companies may claim that we infringe
their intellectual property, which could materially increase our costs and harm our ability to generate future revenue and profit.
We do not believe that the technology upon
which our water purification and heating units is based infringes on the proprietary rights of any third party. While we intend
to vigorously defend against such claims, we can give no assurance that we will prevail.
It may be difficult or impossible to identify,
prior to receipt of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third
party, either in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to
obtain a license for the intellectual property rights of third parties. If we are required to obtain licenses to use any third
party technology, we would have to pay royalties, which may significantly reduce any profit on our products. In addition, any such
litigation could be expensive and disruptive to our ability to generate revenue or enter into new market opportunities. If any
of our products were found to infringe other parties’ proprietary rights and we are unable to come to terms regarding a license
with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products
altogether.
The nature of our business involves significant
risks and uncertainties that may not be covered by insurance or indemnification.
We may sell products and services in circumstances
where insurance or indemnification may not be available. We may not be able to maintain insurance to protect against all operational
risks and uncertainties that we confront. Substantial claims resulting from an accident, product failure, or liability arising
from our products in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is not available
or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully covered or
insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete
effectively.
We may incur substantial product liability
claims relating to our products and services.
Defects in our products, including those used
in our oil reclamation service offering, may lead to potential life, health and property risks. In addition, no assurance can
be given that our water purification products will have the capability to remove all contaminants that might be harmful to humans
or animals, even if there are no defects in our products. Any claims against us, regardless of their merit, could severely harm
our financial condition, strain our management and other resources. We are unable to predict if we will be able to obtain or maintain
product liability insurance for any products that may be approved for marketing.
We rely heavily on the industry relationships
and expertise of our Chief Executive Officer, David King, and if he were to leave the Company, our business may suffer.
David King is essential to our ability to continue
to grow our business. If his services were no longer available to us for any reason, our growth strategy would be hindered, which
could limit our ability to increase revenue. We do not maintain key man life insurance on Mr. King.
If we are unable to recruit and retain
key management, technical and sales personnel, our business would be negatively affected.
For our business to be successful, we need
to attract and retain highly qualified technical, management and sales personnel. The failure to recruit additional key personnel
when needed, with specific qualifications, on acceptable terms, might impede our ability to continue to develop, commercialize
and sell our products and render our services. To the extent the demand for skilled personnel exceeds supply, we could experience
higher labor, recruiting and training costs in order to attract and retain such employees. We face competition for qualified personnel
from other companies with significantly more resources available to them and thus may not be able to attract the level of personnel
needed for our business to succeed.
We face a significant risk of failure
because we cannot accurately forecast our future revenues and operating results.
The nature of the markets in which we compete
makes it difficult to accurately forecast our revenues and operating results. Furthermore, we continue to expect our revenues
and operating results to fluctuate in the future due to a number of factors, including the following:
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the timing of sales of our products;
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unexpected delays in introducing new products or rendering our services; and
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increased expenses, whether related to sales and marketing, or administration.
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We may experience delays in receiving shipments
of component materials for our products, as well as delays in shipments of our finished products to distributors and customers
due to circumstances beyond our control. Our revenues and operating results will be impacted by such events, which we are not able
to predict or control.
Rapid technological changes may adversely
affect the market acceptance of our products and services and could adversely affect our business, financial condition and results
of operations.
The market in which we compete is subject to
technological changes, introduction of new products, change in customer demands and evolving industry standards. Our future success
will depend upon our ability to keep pace with technological developments and to timely address the increasingly sophisticated
needs of our customers by supporting existing and new technologies and by developing and introducing enhancements to our current
products and new products. We may not be successful in developing and marketing enhancements to our products that will
respond to technological change, evolving
industry standards or customer requirements. In addition, we may experience difficulties internally or in conjunction with our
contract manufacturers that could delay or prevent the successful development, introduction and sale of such enhancements and such
enhancements may not adequately meet the requirements of the market and may not achieve any significant degree of market acceptance.
If release dates of our new products or enhancements are delayed or, if when released, they fail to achieve market acceptance,
our business, operating results and financial condition may be adversely affected.
Our future results may be affected by
various legal and regulatory proceedings and legal compliance risks, including those involving product liability, intellectual
property, environmental, governmental regulations, the U.S. Foreign Corrupt Practices Act and other anti-bribery, anti-corruption,
or other matters.
The outcome of these legal proceedings may
differ from our expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably
predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables
where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant
judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future
adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect
on our results of operations or cash flows in any particular period.
If we do not receive the governmental
approvals necessary for the sales or export of our products, or if our products are not compliant in other countries, our sales
may be negatively impacted.
Various licenses may be required in the future
to initiate marketing activities. We may also be required to obtain export licenses. We may not be able to receive all the required
permits and licenses for which we may apply in the future. If we do not receive the required permits for which we apply, our revenues
may be negatively impacted. In addition, if government approvals required under these laws and regulations are not obtained, or
if authorizations previously granted are not renewed, our ability to export our products could be negatively impacted, which may
have a negative impact on our revenues and a potential material negative impact on our financial results.
Our ability to manufacture our products
and provide our oil reclamation services may be disrupted if our relationships with our third party assemblers and providers were
to be terminated for any reason.
We expect to be dependent on third-party assemblers
for our heating unit and AHT for the foreseeable future. In the event our relationships with multiple assemblers or AHT are terminated
for any reason, we may be left without the ability to manufacture and distribute our products or provide our oil reclamation services.
This may result in our business, operating results and financial condition being adversely affected.
If we are required to obtain components
included in our products from alternative suppliers we could experience delays in the manufacturing of our products and our financial
results could be adversely affected.
We expect to acquire the components for the
manufacture of our products from suppliers and subcontractors. We have not entered into any long-term agreements or arrangements
with any potential suppliers or subcontractors. Suppliers of some of the components may require us to place orders with significant
lead-times to assure supply in accordance with our manufacturing requirements. Our present lack of working capital may cause us
to delay the placement of such orders and may result in delays in supply. Delays in supply may significantly hurt our ability to
fulfill our contractual obligations and may significantly hurt our business and result of operations. In addition, we may not be
able to continue to obtain such components from these suppliers on satisfactory commercial terms. Disruptions of our manufacturing
operations would ensue if we were required to obtain components from alternative sources, which would have an adverse effect on
our business, results of operations and financial condition.
Breaches of network or information technology
security could have an adverse effect on our business.
Cyber-attacks or other breaches of network
or IT security may cause equipment failures or disrupt our, as well as our manufacturers’, systems and operations. We and
our manufacturers may be subject to attempts to breach the security of applicable networks and IT infrastructure through cyber-attack,
malware, computer viruses and other means of unauthorized access. The potential liabilities associated with these events could
exceed the insurance coverage we or our manufacturers maintain, if any. An inability to operate facilities as a result of
such events, even for a limited period of time, may result in significant expenses or loss of market share to other competitors
in the market we serve. In addition, a failure to protect the privacy of customer and employee confidential data against breaches
of network or IT security could result in damage to our reputation. To date, we have not been subject to cyber-attacks or other
cyber incidents which, individually or in the aggregate, resulted in a material adverse effect on our business, operating results
and financial condition.
The preparation of our financial statements
involves use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates
prove to be inaccurate.
Financial statements prepared in accordance
with generally accepted accounting principles in the United States require the use of estimates, judgments, and assumptions that
affect the reported amounts. Different estimates, judgments, and assumptions reasonably could be used that would have a material
effect on the financial statements, and changes in these estimates, judgments, and assumptions are likely to occur from period
to period in the future. These estimates, judgments, and assumptions are inherently uncertain, and, if they prove to be wrong,
then we face the risk that charges to income will be required.
Worldwide and domestic economic trends
and financial market conditions may adversely affect our operating performance.
We intend to distribute in a number of countries
and derive revenues from both inside and outside the United States. We expect our business will be subject to global competition
and may be adversely affected by factors in the United States and other countries that are beyond our control. Unfavorable global
or regional economic conditions, could adversely impact our business, liquidity, financial condition and results of operations.
We indemnify our officers and directors
against liability to us and our security holders, and such indemnification could increase our operating costs.
Our certificate of formation and bylaws allow
us to indemnify our officers and directors against claims associated with carrying out the duties of their offices. Our bylaws
also allow us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to our officers, directors or control persons, the SEC has advised that such indemnification
is against public policy and is therefore unenforceable.
Risks Associated with our Capital Stock
One of our shareholders beneficially
owns a significant percentage of our outstanding capital stock and will have the ability to influence our affairs.
Our Chief Executive Officer, David King, beneficially
owns approximately 12.2% of our issued and outstanding capital stock as of the filing date of this Annual Report. By virtue of
his holdings, he may significantly influence, or effectively control, the election of the members of our board of directors, our
management and our affairs, and may prevent us from consummating corporate transactions such as mergers, consolidations or the
sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other shareholders.
The market price of our common stock
may be volatile and may fluctuate in a way that is disproportionate to our operating performance.
Our stock price may experience substantial
volatility as a result of a number of factors, including, among others:
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sales or potential sales of substantial amounts of our common stock;
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announcements about us or about our competitors or new product introductions;
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developments concerning our third-party product manufacturers and distributors;
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the loss or unanticipated underperformance of our global distribution channels;
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litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
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conditions in the water purification, heating and oil industries;
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governmental regulation and legislation;
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variations in our anticipated or actual operating results;
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changes in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations;
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foreign currency values and fluctuations; and
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overall political and economic conditions.
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Many of these factors are beyond our control.
The stock markets have historically experienced substantial price and volume fluctuations. These fluctuations often have been unrelated
or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market
price of our common stock, regardless of our actual operating performance.
Future sales of shares of our common
stock by existing shareholders could depress the market price of our common stock.
We have an aggregate of 76,942,560 issued shares
of common stock as of May 27, 2020, which includes 196,192 Plan Shares held in treasury for future issuance. Of our issued and
outstanding shares, 44,765,648 shares are freely tradable and 31,980,720 may be sold, subject to certain holding period requirements
and volume limitations, pursuant to Rule 144 or other available exemptions.
Also, in the future, we may issue additional
securities in connection with investments and acquisitions. The amount of our common stock issued in connection with an investment
or acquisition could constitute a material portion of our then outstanding stock. Due to these factors, sales of a substantial
number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market
that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
We do not intend to pay cash dividends.
As a result, for the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We currently intend to retain future earnings,
if any, to fund the development and growth of our business. In addition, the terms of future debt agreements may preclude
us from paying dividends. As a result, capital appreciation, if any, of our common stock is anticipated to be your sole
source of gain for the foreseeable future.
Provisions in our amended and restated
certificate of formation, our amended and restated bylaws and Texas law might discourage, delay or prevent a change in control
of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions of our amended and restated certificate
of formation, our amended and restated bylaws and Texas law may have the effect of deterring unsolicited takeovers or delaying
or preventing a change in control of our company or changes in our management, including transactions in which our shareholders
might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the
ability of shareholders to approve transactions that they may deem to be in their best interests. These provisions include the
ability of our board of directors to designate the terms of and issue new series of preferred stock without shareholder approval,
which could include the right to approve an acquisition or other change in our control or could be used to institute a rights plan,
also known as a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions
that have not been approved by our board of directors.
The existence of the forgoing provisions and
anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock.
They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for
your common stock in an acquisition.
FINRA sales practice requirements may
limit a shareholder’s ability to buy and sell our stock.
The Financial Industry Regulatory Authority,
Inc. (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced
securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low priced securities will not be suitable for certain customers. FINRA requirements
will likely make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the
effect of reducing the level of trading activity in the shares, resulting in fewer broker-dealers may be willing to make a market
in our shares, potentially reducing a shareholder’s ability to resell shares of our common stock.
We are eligible to be treated as an “emerging
growth company,” as defined in the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,”
as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from
various reporting and other requirements that are applicable to other public companies that are not emerging growth companies,
including (i) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act,
(ii) reduced disclosure obligations regarding executive compensation in this registration statement and our periodic
reports and proxy statements and (iii) exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause
us to lose that status earlier.
In addition, Section 107 of the JOBS Act provides
that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards that have different effective dates for public and private companies
until those standards apply to private companies. We have elected to take advantage of the extended transition period for complying
with the revised accounting standards. As a result, our financial statements may not be comparable to companies that comply with
effective dates generally applicable to public companies.
Investors may find our common stock less attractive
because we may rely on these exemptions, reduced reporting requirements and extended transition periods. If investors find our
common stock less attractive as a result of any of the foregoing, there may be a less active trading market for our common stock
and our stock price may be more volatile or may decrease.
If securities or industry analysts do
not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our
results of operations do not meet their expectations, our share price and trading volume could decline.
The trading market for our shares will be influenced
by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over
these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could
lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if
analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could
decline.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We currently do not own any real properties.
Effective October 15, 2017, we entered into
a commercial lease agreement with respect to approximately 17,700 square feet of warehouse facilities and approximately 18,700
square feet of adjacent land in Fort Worth, Texas. The monthly rent for these facilities and land was $7,597 plus taxes, insurance
and other operating expenses. The lease was to terminate on October 30, 2020. In December 2018, we moved our corporate and manufacturing
operations to the facility described in the following paragraph, and we stopped paying on the lease in December 2019.
Effective December 28, 2018, we entered into
a commercial lease agreement with respect to approximately 58,826 square feet of warehouse facilities and office space. The lease
has a 50 month term and rental payments commenced on
April 1, 2019. Monthly rates are approximately $19,118 for months 3-12; $19,608 for months 13-24; $20,098 for months 25-36; and
$20,589 for months 37-50 plus taxes, insurance, and other expenses.
We believe suitable replacement facilities
would be available to us if our arrangements for our facilities were to terminate.
Item 3.
Legal Proceedings
We may become involved in, or have been involved
in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot predict the timing
or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or
favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows due to defense
costs, and divert management resources. Currently, we are not involved in any arbitration and/or other legal proceeding that could
have a material effect on our business, financial condition, results of operations and cash flows.
Item 4.
Mine Safety Disclosures
Not applicable.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 2019
1. Business and Organization
Water Now, Inc. was incorporated in Texas on
February 10, 2016. The founding shareholder received 25,929,500 shares of common stock of the Company upon formation. The Company
has filed an application for a patent for the design of its water purification technology with the United States Patent and Trademark
Office.
On September 27, 2016, the Company
consummated a transaction whereby VCAB One Corporation, a Texas corporation (“VCAB”), merged with and into the Company.
At the time of the merger VCAB was subject to a bankruptcy proceeding and had minimal assets, no equity owners and no liabilities,
except for approximately 1,500 holders of Class 5 Allowed General Unsecured Claims and a holder of allowed administrative expenses
(collectively, “Claim Holders”). Pursuant to the terms of the merger, and in accordance with the bankruptcy plan, the
Company issued an aggregate of 900,000 shares of common stock (the “Plan Shares”) to the Claim Holders as full settlement
and satisfaction of their respective claims. As provided in the bankruptcy plan, the Plan Shares were issued pursuant to Section
1145 of the United States Bankruptcy Code. As a result of the merger, the separate corporate existence of VCAB was terminated.
The Company entered into the merger in order to increase its shareholder base in order to, among other things, assist in satisfying
the listing standards of a National securities exchange. The Company recorded total restructuring expenses of $615,000, including
$165,000 of consulting fees in cash and $450,000 for the issuance of the Plan Shares for settlement of claims held by the Claim
Holders.
On October 23, 2018, the Company formed a wholly
owned subsidiary, Hydraspin USA, Inc. (“Hydraspin”). Using the HydroCyclone technology developed by African Horizon
Technologies, and exclusively licensed in the United States to Water Now, HydraSpin provides a highly efficient method for separating crude
oil from waste water produced in the oil extraction process. The operations of Hydraspin are included in the accompanying consolidated
financial statements from the date of its inception.
The Company has also developed a flameless
heating technology that allows it 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. The Company’s product line
of heaters will also allow for the efficient heating of large spaces such as warehouses and garages.
2. Going Concern
At December 31, 2019, the Company had $66,042
in cash and had a net working capital deficit of approximately $4,751,000. The Company, which generated net losses of approximately
$10,074,000 and $4,370,000 for the years ended December 31, 2019 and 2018, respectively, may not have sufficient cash to fund its
current and future operations. There is no assurance that future operations will result in profitability. No assurance can be given
that management will be successful in its efforts to raise additional capital from present or future shareholders. The failure
to raise additional capital needed to achieve its business plans will have a material adverse effect on the Company’s financial
position, results of operations, and ability to continue as a going concern.
3. Summary of Significant
Accounting Policies and Recent Accounting Pronouncements
Basis of Accounting
The accounts are maintained and the
consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated
in consolidation.
Use of Accounting Estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts
in the consolidated financial statements and accompanying notes. Estimates and assumptions are based on historical experience,
forecasted future events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and
assumptions may vary under different circumstances and conditions. We evaluate our estimates and assumptions on an ongoing basis.
We believe the accounting policies below are critical in the portrayal of our financial condition and results of operations.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily
of deposit accounts with original maturities of three months or less.
Accounts Receivable
Accounts receivable are stated at the amount
the Company expects to collect. The Company recognizes allowances for doubtful accounts when, based on management judgment, circumstances
indicate that accounts receivable will not be collected. The Company estimated its allowance for doubtful accounts of $68,000
and $0 at December 31, 2019 and 2018, respectively.
Inventory
Inventory includes manufacturing parts and
finished goods for the Company’s water purification equipment. Finished goods and raw materials inventory was $238,295 and
$279,554, respectively, as of December 31, 2019. Finished goods and raw materials inventory was $303,644 and $203,201, respectively,
as of December 31, 2018. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or
net realizable value.
Plant and Machinery
Plant and machinery are stated at cost less
accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary
from 4 to 7 years. Expenditures for major renewals and betterments that extend the useful lives of property
and equipment are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation expense totaled approximately
$81,000 and $28,000 for the years ended December 31, 2019 and 2018, respectively. Accumulated depreciation totaled approximately
$91,000 and $34,000 as of December 31, 2019 and 2018, respectively.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes
nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard’s
effective date has been deferred by the issuance of ASU No. 2015-14, and is effective for annual periods beginning after December
15, 2017, and interim periods therein. The guidance permits using either of the following transition methods: (i) a full retrospective
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients,
or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). Early application is permitted but not before December 15, 2016, the ASU’s
original effective date. The Company adopted the new revenue recognition standard as of January 1, 2018 using the cumulative effect
method, which did not have a material impact on its consolidated financial statements.
The Company recognizes revenue and related
costs from the sale of its products at the time the products are shipped to the customer. Provisions for returns are
established in the same period the related product sales are recorded.
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.
Income Taxes
Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rate is recognized
in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts more likely than not to be realized.
The Company accounts for uncertain
tax positions in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification
(“ASC”) 740-10, “Income Taxes”. ASC 740-10 provides several clarifications related to uncertain
tax positions. Most notably, a “more likely-than-not” standard for initial recognition of tax positions, a presumption
of audit detection and a measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent
likelihood of realization. ASC 740-10 applies a two-step process to determine the amount of tax benefit to be recognized in the
financial statements. First, the Company must determine whether any amount of the tax benefit may be recognized. Second, the Company
determines how much of the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition).
No additional liabilities have been recognized as a result of the implementation. Accordingly, the Company has not recognized any
penalty, interest or tax impact related to uncertain tax positions.
Stock-Based Expenses
The Company accounts for stock-based
expenses under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement
and recognition of expense for stock-based awards made to employees and directors based on estimated fair values on the grant date.
The stock-based compensation awards to employees, directors and non-employees during the period from February 10, 2016 (inception)
to December 31, 2018 consisted of the grants of restricted stock. The restrictions on the shares granted related to regulatory
restrictions as well as service and milestone based restrictions that prevented the sale of the stock granted. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the shorter of the period over which services
are to be received or the vesting period.
The Company accounts for stock-based
expenses awards to non-employees in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees”. In
accordance with ASC 505-50, the Company determines the fair value of stock-based expenses awards granted as either the fair value
of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
The Company estimated the fair value
of stock-based awards issued to employees, directors and non-employees for the period from January 1, 2018 through August 13, 2018
based on prices paid by unrelated third-parties for the purchases of its common stock prior to its stock being actively traded,
which amounted to $0.50 per share. Subsequent to the active trading date of the Company’s stock price on August 14, 2018
through December 31, 2019, the Company estimated these awards based on share price on date of grant of the award.
The components of stock-based compensation
related to stock awards in the Company’s Consolidated Statements of Operations for the years ended December 31, 2019 and
2018 are as follows:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
—
|
|
|
$
|
558,250
|
|
General and administrative expenses
|
|
|
473,250
|
|
|
|
875,350
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
473,250
|
|
|
$
|
1,433,600
|
|
Research and Development Costs
The Company expenses research and development
costs as incurred in accordance with ASC 730 “Research and Development”. The Company’s research and development
activities related to activities undertaken to adapt the water purification technology contributed by its founder for commercial-scale
manufacturing and to develop its flameless heating technology products. Research and development expenses were approximately $39,000
and $1,370,000 for the years ended December 31, 2019 and 2018, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share are
computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents
such as outstanding stock options and warrants. Common stock equivalents represent the dilutive effect of the assumed exercise
of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss)
per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective
period presented or the date of issuance, whichever is later.
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 December 31, 2019 and 2018.
The Derivative liabilities are Level 3 fair
value measurements.
The following is a summary of activity of Level
3 liabilities during the year ended December 31, 2019:
Derivative liability balance at December 31, 2018
|
|
$
|
—
|
|
Additions to derivative liability for new debt
|
|
|
3,079,511
|
|
Reclass to equity upon conversion/cancellation
|
|
|
(2,519,462
|
)
|
Change in fair value
|
|
|
(51,726
|
)
|
Balance at December 31, 2019
|
|
$
|
508,323
|
|
At December 31, 2019, 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 $0.08, a risk-free interest rate of 1.55%, and expected volatility of the Company’s common stock of 252.50%,
and the various estimated reset exercise prices weighted by probability.
Financial Instruments
The Company’s financial instruments include
cash and cash equivalents, receivables, payables, and debt and are accounted for under the provisions of ASC Topic 825, “Financial
Instruments”. The carrying amount of these financial instruments, with the exception of discounted debt, as reflected
in the consolidated balance sheets approximates fair value.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such
as property, plant, and equipment, and intangible assets subject to amortization, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or changes in circumstances
include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant
changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry
or economic trends. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset
group to the estimated undiscounted cash flows over the estimated remaining useful life of the primary asset included in the asset
group. If the asset group is not recoverable, the impairment loss is calculated as the excess of the carrying value over the fair
value. We define our asset group the same as our segment categorization, which is also our reporting unit or the lowest level for
which cash flows can be identified. Assets to be disposed of are separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell and are no longer depreciated. For assets held for sale, we measure
fair value using an estimation based on quoted prices for similar items in active or inactive markets (level 2) developed using
observable data. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate
asset and liability sections of the balance sheet. The Company has not impaired any assets as of December 31, 2019.
Recently Issued Accounting Pronouncements
Leases — In February 2016,
the FASB issued ASU 2016-02, “Leases”. This standard requires entities that lease assets—referred to as
“lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. The accounting by entities that own the assets leased by the lessee—also known as lessor accounting—will
remain largely unchanged from current GAAP. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Modified
retrospective application is required, with optional practical expedients available. As a result of the adoption of ASC 842 on
January 1, 2019, the Company recorded both operating lease right-of-use (“ROU”) assets of $159,433 and lease
liabilities of $154,518. The adoption of ASC 842 had an immaterial impact on the Company’s Condensed Consolidated Statement
of Operations and Condensed Consolidated Statement of Cash Flows for the year ended December 31, 2019. In addition, the Company
elected the package of practical expedients permitted under the transition guidance within the new standard which allowed the Company
to carry forward the historical lease classification. Additional information and disclosures required by this new standard are
contained in Note 11.
Stock Compensation -- In June 2018,
the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting. This ASU expands the scope of Topic 718, which currently only includes share-based payments issued to employees,
to include share-based payments issued to nonemployees for goods and services. This ASU is effective for the Company for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no
earlier than the Company’s adoption of ASU 2014-09. The implementation of this new standard did not have a material impact
on the Company’s accompanying consolidated financial statements.
Statement of Cash Flows — In August
2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies
how certain cash receipts and payments should be presented in
the statement of cash flows. ASU No. 2016-15
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The implementation
of this new standard did not have a material impact on the Company’s accompanying consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2018-13 modifies the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 820 with certain
removals, modifications, and additions. Eliminated disclosures that may affect the Company include (1) transfers between level
1 and level 2 of the fair value hierarchy, and (2) policies related to valuation processes and the timing of transfers between
levels of the fair value hierarchy. Modified disclosures that may affect the Company include (1) a requirement to disclose the
timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the entity has
communicated the timing publicly for investments in certain entities that calculate net asset value, and (2) clarification that
the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Additional disclosures that may affect the Company include (1) disclosure of changes in unrealized gains and losses for the period
included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period, and
(2) disclosure of the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements.
The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted for any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures
until the effective date. We do not believe this ASU will have a material effect on the Company’s consolidated financial
statements.
4. 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 sales of oil 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. These costs 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.
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
Water purification products
|
|
$
|
206,919
|
|
|
$
|
168,730
|
|
Oil recovery systems
|
|
|
27,003
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
233,922
|
|
|
$
|
168,730
|
|
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 December 31, 2019, 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 $200,000 and
$33,333 for the years ended December 31, 2019 and 2018, respectively.
6. Convertible Notes Payable
The Company borrowed $68,000 from a lender
on September 4, 2018. The note bears interest at 8% and matures on September 4, 2019, at which time the entire amount of principal
and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by
the holder into shares of the Company’s common stock beginning 170 days after the issuance date and prior to the maturity
date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common
stock for the twenty trading days prior to the conversion date. This note was paid in full on January 3, 2019 and the Company recorded
a gain on extinguishment of this debt of $19,114. The Company has no further obligations with respect to this loan.
The Company borrowed $200,000 from a lender
on September 17, 2018. The note does not bear interest and matures September 17, 2021, at which time the entire amount of principal
is due and payable. The note is unsecured. The outstanding principal amount is convertible by the holder into shares of the Company’s
common stock at any time prior to the maturity date at a price per share equal to $0.75 per share if before 180 days after the
issuance date, or if 180 days after the issuance date, the lesser of $0.75 per share or seventy percent of the second lowest trading
price of the Company’s common stock for the twenty trading days prior to the conversion date. In addition, the Company granted
60,000 shares of the Company’s common stock valued at $53,400 based on the Company’s share price on the date of the
note agreement, paid $34,400 as a discount for interest on the note, and paid $5,000 for debt issuance costs. The Company paid
$142,000 of principal and prepayment penalties of $58,000 recorded as interest expense. The lender converted $58,000 of principal
into 332,500 shares of the Company’s common stock. The Company has no further obligations with respect to this loan.
The Company borrowed $100,000 from a shareholder
on August 30, 2018. The note bears interest at 10% and is payable in one lump sum on March 4, 2019, at which time the entire amount
of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible
by the holder into shares of the Company’s common stock at any time prior to the maturity date at the conversion price of
$0.50 per share. This note was converted into 200,000 shares of the Company’s common stock on March 28, 2019. The Company
has no further obligations with respect to this loan.
The Company borrowed $42,500 from a lender
on October 15, 2018. The note bears interest at 8% and is payable in one lump sum on October 15, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 170 days after the issuance date and prior
to the maturity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s
common stock for the twenty trading days prior to the conversion date. In addition, the Company paid $2,500 for debt issuance costs.
This note was paid in full on March 26, 2019 and the Company recorded a loss on extinguishment of this debt of $17,841. The Company
has no further obligations with respect to this loan.
The Company borrowed $86,500 from a lender
on January 2, 2019. The note bears interest at 8% and is payable in one lump sum on January 2, 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 average of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion
date. In addition, the Company paid $2,500 for debt issuance costs. This note was paid in full on July 8, 2019 and the Company
recorded a loss on extinguishment of this debt of $32,592. The Company has no further obligations with respect to this loan.
The Company borrowed $102,500 from a lender
on February 14, 2019. The note bears interest at 8% and is payable in one lump sum on February 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 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 average of the lowest two trading prices of the Company’s
common stock for the twenty trading days prior to the conversion date. In addition, the Company paid $2,500 for debt issuance costs.
This note was paid in full on August 20, 2019 and the Company recorded a gain on extinguishment of this debt of $38,143. The Company
has no further obligations with respect to this loan.
The Company borrowed $100,000 from a lender
on February 20, 2019. The note bears interest at 10%, and is payable in one lump sum on February 20, 2020, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal amount is convertible
by the holder into shares of the Company’s common stock beginning six months after the issuance date and prior to the maturity
date at a price per share equal to sixty percent of the lowest trading price of the Company’s common stock for the fifteen
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 $164,490, 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 $0.23, a risk-free interest rate of 2.00% and expected volatility of the Company’s common stock of 178.56%,
and the various estimated reset exercise prices weighted by probability. This resulted in the calculated fair value of the debt
discount being greater than the face amount of the debt, and the excess amount of $69,490 was immediately expensed as financing
costs. In addition, the Company paid $5,000 for debt issuance costs. The Company paid $85,000 of principal, prepayment penalties
and accrued interest totaling $45,000 recorded as interest expense, and recorded a loss on extinguishment of this debt of $42,629.
The lender also converted $15,748 of principal and interest into 159,070 shares of the Company’s common stock. The Company
has no further obligations with respect to this loan.
The Company borrowed $560,000 from a lender
on February 21, 2019. The note bears interest at 12% and is payable in one lump sum on August 21, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 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 $1,185,397, 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 $0.18, a risk-free interest rate of 1.88% and expected volatility of the Company’s
common stock of 213.76%, and the various estimated reset exercise prices weighted by probability. In addition, the Company granted
the lender 450,000 shares of the Company’s common stock, paid $56,000 as a discount on the note, and paid $4,000 for debt
issuance costs. The shares granted must be returned if the note is fully repaid and satisfied prior to 180 days after the issuance
date. The Company recorded the value of the shares at $400,455, based on the Company’s share price on the date of the note
agreement, as interest expense. During 2019, in several separate conversions, the holder converted approximately $320,000 of principal
and interest into 8,111,259 shares of common stock of the Company. As a result of the conversions the derivative liability related
to the debenture was remeasured immediately prior to the conversions with an overall decrease in the fair value of $101,000 recognized,
with the fair value of the derivative liability related to the converted portion of $535,000 being reclassified to equity. The
key valuation assumptions used consist, in part, of the price of the Company’s common stock on the dates of conversion, of
$0.07 to $0.23, a risk-free interest rate of 1.54% to 1.88%, and expected volatility of the Company’s common stock, of 213.76%
to 255.40%, and the various estimated reset exercise prices weighted by probability. The principal balance at December 31, 2019
is $298,428. The note is currently in default as of December 31, 2019.
The Company borrowed $42,500 from a lender
on March 11, 2019. The note bears interest at 8% and is payable in one lump sum on March 11, 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 average of the lowest two trading prices of the Company’s
common stock for the twenty trading days prior to the conversion date. In addition, the Company paid $2,500 for debt issuance
costs. This note was paid in full on September 9, 2019 and the Company recorded a loss on extinguishment of this debt of $16,689.
The Company has no further obligations with respect to this loan.
The Company borrowed $150,000 from a
lender on March 18, 2019. The note bears interest at 12% and is payable in one lump sum on September 18, 2019, at which time
the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and
interest amount is convertible by the holder into shares of the Company’s common stock beginning 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 $433,000, 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 $0.28, a risk-free
interest rate of 1.87% and expected volatility of the Company’s common stock of 167.00%, and the various estimated
reset exercise prices weighted by probability. During 2019, the holder converted $54,350 of principal and interest into
1,000,000 shares of common stock of the Company. As a result of the conversions the derivative liability related to the
debenture was remeasured immediately prior to the conversion with an overall decrease in the fair value of $203,000
recognized, with the fair value of the derivative liability related to the converted portion, of $99,000 being reclassified
to equity. The key valuation assumptions used consist, in part, of the price of the Company’s common stock on the date
of conversion, of $0.06 to $0.19; a risk-free interest rate of 1.65% to 1.88% and expected volatility of the Company’s
common stock, of 213.76% to 226.8%, and the various estimated reset exercise prices weighted by probability. In addition, the
Company granted 115,384 shares of the Company’s common stock and paid $15,000 as a discount on the note. The shares
granted must be returned if the note is fully repaid and satisfied prior to 180 days after the issuance date. The Company
recorded the value of the shares at $91,153, based on the Company’s share price on the date of the note agreement, as
interest expense. This note was paid in full on October 28, 2019. The Company has no further obligations with respect to this
loan.
The Company borrowed $45,000 from a lender
on November 6, 2018. The note bears interest at 8% and is payable in one lump sum on November 6, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 170 days after the issuance date and prior
to the maturity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s
common stock for the twenty trading days prior to the conversion date. In addition, the Company paid $2,500 for debt issuance costs.
This note was paid in full on April 5, 2019 and the Company recorded a loss on extinguishment of this debt of $15,870. The Company
has no further obligations with respect to this loan.
The Company borrowed $82,500 from a shareholder
on October 11, 2018. The note bears interest at 8% and is payable in one lump sum on April 11, 2019, at which time the entire amount
of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible
by the holder into shares of the Company’s common stock at any time prior to the maturity date at the conversion price of
$0.50 per share. In addition, the Company paid $13,500 for debt issuance costs. This note was paid in full on April 12, 2019 and
the Company recorded additional interest expense of $38,940. The Company has no further obligations with respect to this loan.
The Company borrowed $100,000 from a lender
on December 13, 2018. The note bears interest at 10%, and is payable in one lump sum on December 13, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning six months after the issuance date and prior
to the maturity date at a price per share equal to sixty percent of the lowest trading price of the Company’s common stock
for the
fifteen 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 $150,000, 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 $0.29,
a risk-free interest rate of 2.40% and expected volatility of the Company’s common stock of 156.33%, and the various estimated
reset exercise prices weighted by probability. During June and July 2019, in two separate conversions, the holder converted $36,000
of principal and interest into 256,740 shares of common stock of the Company. As a result of the conversions the derivative liability
related to the debenture was remeasured immediately prior to the conversions with an overall decrease in the fair value of $32,000
recognized, with the fair value of the derivative liability related to the converted portion, of $117,000 being reclassified to
equity. The key valuation assumptions used consist, in part, of the price of the Company’s common stock on the dates of conversion,
of $0.22 to $0.37; a risk-free interest rate of 2.00% and expected volatility of the Company’s common stock, of 146.06%,
and the various estimated reset exercise prices weighted by probability. In addition, the Company paid $5,000 for debt issuance
costs. The Company paid the remaining $65,745 of principal and prepayment penalties of $29,255 recorded as interest expense. The
Company has no further obligations with respect to this loan.
The Company borrowed $77,000 from a lender
on October 12, 2018. The note allows borrowing up to $231,000, bears interest at 12%, and is payable in one lump sum on October
12, 2019, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding
principal and interest amount is convertible by the holder into shares of the Company’s common stock prior to the maturity
date at a price per share equal to sixty-five percent of the lowest trading price of the Company’s common stock for the
twenty trading days prior to the conversion date. If at any time while this note is outstanding, the conversion price is equal
to or lower than $0.50, then an additional fifteen percent discount shall be factored into the conversion price until the note
is no longer outstanding. The Company borrowed $175,000 from a lender on April 9, 2019. The note bears interest at 12%, and is
payable in one lump sum on January 9, 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 the lesser
of the lowest trading price of the Company’s common stock for the twenty-five trading days prior to the note issuance date,
and the variable conversion price equal to fifty-five percent of the lowest trading price of the Company’s common stock
for the twenty-five trading days prior to the conversion date. If at any time while this note is outstanding a 3rd
party has the right to convert at a discount to market greater than the conversion price in effect at that time, the lender may
utilize such greater discount percentage until the note is no longer outstanding. If at any time while this note is outstanding
a 3rd party has a look back period greater than the look back period in effect at that time, the lender may utilize such greater
number of look back days until the note is no longer outstanding. 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 $314,283, 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 $0.07, a risk-free interest rate of 1.69% and expected volatility of
the Company’s common stock of 221.60%, and the various estimated reset exercise prices weighted by probability. This resulted
in the calculated fair value of the debt discount being greater than the face amount of the debt, and the excess amount of $139,283
was immediately expensed as financing costs. In addition, the Company paid $16,250 for debt issuance costs. On October 15, 2019,
the holder converted approximately $13,915 of principal and interest into 500,000 shares of common stock of the Company. As a
result of the conversion the derivative liability related to the debenture was remeasured immediately prior to the conversion
with an overall increase in the fair value of $416,000 recognized, with the fair value of the derivative liability related to
the converted portion of $730,000 being reclassified to equity. The key valuation assumptions used consist, in part, of the price
of the Company’s common stock on the date of conversion, of $0.06, a risk-free interest rate of 1.67%, and expected volatility
of the Company’s common stock, of 222.80%, and the various estimated reset exercise prices weighted by probability. On November
15, 2019, the Company reached an amicable resolution of any and all obligations owed by it to Auctus Funds, LLC (“AF”)
with respect to the Securities Purchase Agreement dated April 9, 2019 and the related Convertible Promissory Note dated April
9, 2019. The Company agreed to pay AF $270,000 in three installments. The first payment of $50,000 was paid on November 15, 2019.
The second payment of $100,000 was paid to AF on November 22, 2019. The final payment of $120,000 was paid to AF on November 29,
2019, thereby fulfilling any and all obligations to AF. The Company has no further obligations with respect to this loan.
On November 15, 2019, the Company reached an amicable resolution of any and all obligations owed
by it to Crown Bridge Partners, LLC (“CBP”) with respect to that certain securities purchase agreement and outstanding
convertible note with CBP. The Company issued 1,502,389 shares valued at $585,932 and made a payment of $120,000 to CBP on November
15, 2019, thereby fulfilling any and all obligations to CBP. The Company has no further obligations with respect to this loan.
The Company borrowed $80,000 from a lender
on December 17, 2018. The note bears interest at 10%, and is payable in one lump sum on December 17, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock prior to the maturity date at a price per share equal
to sixty-five percent of the lowest trading price of the Company’s common stock for the fifteen 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 $160,000, 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 $0.39, a risk-free interest rate of 2.40% and expected
volatility of the Company’s common stock of 156.33%, and the various estimated reset exercise prices weighted by probability.
From June through August 2019, in several separate conversions, the holder converted $84,000 of principal and interest into 696,503
shares of common stock of the Company. As a result of the conversions the derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall decrease in the fair value of $59,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $101,000 being reclassified to equity. The key valuation assumptions
used consist, in part, of the price of the Company’s common stock on the dates of conversion, of $0.19 to $0.35, a risk-free
interest rate of 2.00% and expected volatility of the Company’s common stock of 145.37% to 156.33%, and the various estimated
reset exercise prices weighted by probability. In addition, the Company paid $4,000 for debt issuance costs. The Company has no
further obligations with respect to this loan.
The Company borrowed $175,000 from a lender
on April 9, 2019. The note bears interest at 12%, and is payable in one lump sum on January 9, 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 the lesser of the lowest trading price of the Company’s common stock for the twenty-five
trading days prior to the note issuance date, and the variable conversion price equal to fifty-five percent of the lowest trading
price of the Company’s common stock for the twenty-five trading days prior to the conversion date. If at any time while this
note is outstanding a 3rd party has the right to convert at a discount to market greater than the conversion price in
effect at that time, the lender may utilize such greater discount percentage until the note is no longer outstanding. If at any
time while this note is outstanding a 3rd party has a look back period greater than the look back period in effect at that time,
the lender may utilize such greater number of look back days until the note is no longer outstanding. In addition, the Company
paid $16,250 for debt issuance costs. On November 15, 2019, the Company reached an amicable resolution of any and all obligations
owed by it to Auctus Funds, LLC (“AF”) with respect to the Securities Purchase Agreement dated April 9, 2019 and the
related Convertible Promissory Note dated April 9, 2019. The Company agreed to pay AF $270,000 in three installments. The first
payment of $50,000 was paid on November 15, 2019. The second payment of $100,000 was paid to AF on November 22, 2019. The final
payment of $120,000 was paid to AF on November 29, 2019, thereby fulfilling any and all obligations to AF. The Company has no further
obligations with respect to this loan.
The Company borrowed $102,500 from a lender
on April 10, 2019. The note bears interest at 8% and is payable in one lump sum on April 10, 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 average of the lowest two trading prices of the Company’s common
stock for the twenty trading days prior to the conversion date. This note was paid in full on October 10, 2019 and the Company
recorded additional interest related to prepayment penalties of $41,274. The Company has no further obligations with respect to
this loan.
The Company borrowed $400,000 from five lenders
on May 20, 2019. The notes bear interest at 10% and are payable in one lump sum on May 20, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal and interest amount is
convertible by the holders into shares of the Company’s common stock at any time after the closing price of the Company’s
common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share. There was no value assigned to
the beneficial conversion feature on the issuance date of the notes due to the Company’s common stock price being less than
$0.75 per share. The principal balance at December 31, 2019 is $400,000.
The Company borrowed $88,500 from a lender
on July 8, 2019. The note bears interest at 8% and is payable in one lump sum on July 8, 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 average of the lowest two trading prices of the Company’s common
stock for
the twenty trading days prior to the conversion
date. This note was paid in full on November 19, 2019 and the Company recorded additional interest related to prepayment penalties
of $34,432. The Company has no further obligations with respect to this loan.
The Company borrowed $103,000 from a lender
on July 24, 2019. The note bears interest at 10% and is payable in one lump sum on July 24, 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 the lesser of (1) $0.22 and (2) sixty-five percent of the lowest trading price of the Company’s
common stock for the twenty trading days prior to the conversion date. In addition, the Company paid $15,315 for debt issuance
costs. The principal balance at December 31, 2019 is $103,000. The note is currently in default as of December 31, 2019.
The Company borrowed $100,000 from two lenders
on July 26, 2019. The notes bear interest at 10% and are payable in one lump sum on July 26, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal and interest amount is
convertible by the holders into shares of the Company’s common stock at any time after the closing price of the Company’s
common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share. There was no value assigned to
the beneficial conversion feature on the issuance date of the notes due to the Company’s common stock price being less than
$0.75 per share. The principal balance at December 31, 2019 is $100,000.
The Company borrowed $175,000 from a lender
on August 26, 2019. The note bears interest at 12% and is payable in one lump sum on February 26, 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 granted the lender 625,000 shares of the
Company’s common stock, paid $17,500 as a discount on the note, and paid $3,000 for debt issuance costs. The shares granted
must be returned if the note is fully repaid and satisfied prior to 180 days after the issuance date. The Company recorded the
value of the shares at $81,250, based on the Company’s share price on the date of the note agreement, as debt issuance costs.
The principal balance at December 31, 2019 is $175,000. The note is currently in default as of December 31, 2019.
The Company borrowed $295,000 from a lender
on September 4, 2019. The note does not bear interest and matures September 4, 2020, at which time the entire amount of principal
is due and payable. The note is unsecured. The outstanding principal amount is convertible by the holder into shares of the Company’s
common stock at any time after the closing price of the Company’s common stock exceeds $0.75 for 10 consecutive trading days
at a price equal to $0.50 per share. There was no value assigned to the beneficial conversion feature on the issuance date of the
notes due to the Company’s common stock price being less than $0.75 per share. The principal balance at December 31, 2019
is $295,000. The Company paid $45,000 as a discount for interest on the note.
The Company borrowed $262,500 from a
lender on September 10, 2019. The note bears interest at 10%, and is payable in one lump sum on September 10, 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 on the sixth month
anniversary of the note and prior to the maturity date at a price per share equal to sixty percent of the lowest trading
price of the Company’s common stock for the fifteen trading days prior to the conversion date. The principal balance at
December 31, 2019 is $262,500. The Company paid $12,500 as a discount for interest on the note.
The Company borrowed $150,000 from a
lender on November 22, 2019. The note bears interest at 10%, and is payable in one lump sum on November 22, 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 on the sixth month
anniversary of the note and prior to the maturity date at a price per share equal to sixty percent of the lowest trading
price of the Company’s common stock for the fifteen trading days prior to the conversion date. The principal balance at
December 31, 2019 is $150,000. The Company paid $7,500 as a discount for interest on the note.
The Company borrowed $250,000 from a lender
on December 6, 2019. The note bears interest at 12% and is payable in one lump sum on June 6, 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 $25,000 as a discount on the note and paid
$3,500 for debt issuance costs. The principal balance at December 31, 2019 is $250,000. The note is currently in default as of
December 31, 2019.
The Company borrowed $187,500 from
three shareholders on June 18, 2018. The notes bear interest at 10% and are payable in one lump sum on June 18, 2019, at which
time the entire amount of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal
and interest amount is convertible by the holders into shares of the Company’s common stock at any time prior to the maturity
date at a price per share equal to fifty percent of the average closing price of the Company’s common stock for the ten trading
days prior to the conversion date. The principal balance at December 31, 2019 and 2018 is $62,500. The Company’s
chief executive officer has guaranteed the shareholder notes. The note is currently in default as of December 31, 2019. On February
5, 2020, an extension of the maturity and additional principal was borrowed from this shareholder. See Footnote 15. Subsequent
Events.
The Company borrowed $120,000 from a shareholder
on August 27, 2018. The note bears interest at 8% and is payable in one lump sum on February 27, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock at any time prior to the maturity date at the conversion
price of $0.50 per share. The principal balance at December 31, 2019 and 2018 is $120,000. The value of the embedded
beneficial conversion feature on the note payable was estimated to be $88,800. For the year ended December 31, 2019
and 2018, the Company recorded $29,600 and $59,200 of interest expense related to the value of the embedded beneficial conversion
feature, respectively. The note is currently in default as of December 31, 2019.
The Company borrowed $50,000 from a shareholder
on September 13, 2018. The note bears interest at 10% and is payable in one lump sum on March 13, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock at any time prior to the maturity date at the conversion
price of $0.50 per share. The principal balance at December 31, 2019 and 2018 is $50,000. The value of the embedded
beneficial conversion feature on the note payable was estimated to be $42,000. For the year ended December 31, 2019
and 2018, the Company recorded $17,500 and $24,500 of interest expense related to the value of the embedded beneficial conversion
feature, respectively. On February 26, 2019, an extension of the maturity date was granted to September 13, 2019, and on September
13, 2019 an extension of the maturity date was granted to March 13, 2020.
7. Notes Payable
The Company borrowed $112,000 from
a shareholder on November 2, 2017. The note bore interest at 12% and was payable monthly interest-only through April 30, 2018,
at which time the entire amount of principal and any accrued interest was due and payable. The note was collateralized by all equipment
owned by the Company and was guaranteed by the Company’s President. The note was repaid on December 17, 2018.
During 2019 the Company entered into
several short-term loans with lenders. Total principal borrowed during 2019 was $1,384,000, of which $880,000 was repaid. The remaining
$504,000 of principal was repaid or extended as of April 23, 2020. The notes are generally unsecured.
8. Advances from Related Party
The Company has received non-interest
bearing advances without a specified maturity date from two stockholders of the Company. The Company owed approximately $4,000
and $302,000, respectively, at December 31, 2019 and 2018 to the stockholders.
9. Revenue Sharing Agreements
The Company borrowed $50,000 from a
lender on November 29, 2018, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender
to receive five percent of the revenues net of costs generated from the HydraSpin unit. On March 3, 2019, the Company
cancelled this original agreement and entered into a new agreement whereby the lender is to receive fifty percent of the
revenues net of costs and has guaranteed that the lender would receive $150,000 in net revenues by March 3, 2021, or the
Company would pay the lender the difference between the $150,000 and the purchase price of $50,000 on or before March 31,
2021. On August 19, 2019, the Company cancelled the March 3, 2019 agreement and entered into a new agreement to borrow an
additional $230,000, whereby the proceeds will be used to purchase a certain HydraSpin unit in exchange for the lender to
receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the
lender would receive $495,000 in net revenues by November 4, 2021, or the Company would pay the lender the difference between
the $495,000 and the purchase price of $330,000 on or before November 30, 2021. For the years ended December 31, 2019 and
2018, the Company recorded $32,000 and $0, respectively, of interest expense related to the value of the revenue sharing
liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its
obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the
operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the
parties.
The Company borrowed $264,000 from a lender
on December 13, 2018, whereby the proceeds were used to purchase certain HydraSpin units. On February 27, 2019, the Company
cancelled this original agreement and entered into a new agreement to borrow an additional $66,000, whereby the proceeds were used
to purchase a certain HydraSpin unit in exchange for the lender to receive fifty percent of the revenues net of costs generated
from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by March 3, 2021, or
the Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before March 31,
2021. For the years ended December 31, 2019 and 2018, the Company recorded $63,000 and $6,000, respectively, of interest expense
related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a)
the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce
same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written
agreement of the parties.
The Company borrowed $660,000 from a lender
on January 2, 2019, whereby the proceeds were used to purchase certain HydraSpin units in exchange for the lender to receive fifty
percent of the revenues net of costs generated from the HydraSpin units. The Company has guaranteed that the lender would receive
$990,000 in net revenues by January 2, 2021, or the Company would pay the lender the difference between the $990,000 and the purchase
price of $660,000 on or before January 15, 2021. For the year ended December 31, 2019, the Company recorded $165,000 of interest
expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier
of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to
enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the
mutual written agreement of the parties.
The Company borrowed $660,000 from a
lender on January 16, 2019, whereby $330,000 of the proceeds were used and $330,000 of the proceeds are to be used to
purchase certain HydraSpin units in exchange for the lender to receive fifty percent of the revenues net of costs generated
from the HydraSpin units. The Company has guaranteed that the lender would receive $990,000 in net revenues by January 15,
2021, or the Company would pay the lender the difference between the $990,000 and the purchase price of $660,000 on or before
January 17, 2021. For the year ended December 31, 2019, the Company recorded $158,000 of interest expense related to the
value of the revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company
is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to enforce same,
(b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the mutual
written agreement of the parties.
The Company borrowed $330,000 from a
lender on January 30, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the
lender to receive sixty percent of the revenues net of forty percent of costs generated from the HydraSpin unit until the
lender receives revenue equal to 120% of the $330,000 investment, then the lender shall receive fifty percent of the revenues
net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net
revenues by January 30, 2021, or
the Company would pay the lender the difference
between the $495,000 and the purchase price of $330,000 on or before February 6, 2021. For the year ended December 31, 2019, the
Company recorded $76,000 of interest expense related to the value of the revenue sharing liability. The agreement remains in full
force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and
action is brought by the lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer
(five years), or (c) the mutual written agreement of the parties.
The Company borrowed $330,000 from a
lender on January 30, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the
lender to receive sixty percent of the revenues net of forty percent of costs generated from the HydraSpin unit until the
lender receives revenue equal to 120% of the $330,000 investment, then the lender shall receive fifty percent of the revenues
net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net
revenues by January 30, 2021, or the Company would pay the lender the difference between the $495,000 and the purchase price
of $330,000 on or before February 6, 2021. For the year ended December 31, 2019, the Company recorded $76,000 of interest
expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the
earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the
lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the manufacturer (five years),
or (c) the mutual written agreement of the parties.
The Company borrowed $330,000 from a
lender on April 1, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the lender
to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the
lender would receive $495,000 in net revenues by April 8, 2021, or the Company would pay the lender the difference between
the $495,000 and the purchase price of $330,000 on or before April 30, 2021. For the year ended December 31, 2019, the
Company recorded $59,000 of interest expense related to the value of the revenue sharing liability. The agreement remains in
full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the
agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the units, as
confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $60,000 from a
lender on June 25, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the lender
to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the
lender would receive $90,000 in net revenues by June 25, 2021, or the Company would pay the lender the difference between the
$90,000 and the purchase price of $60,000 on or before July 25, 2021. On August 15, 2019, the Company borrowed an additional
$70,000 from the lender. During 2019 the lender requested the agreement be terminated and $130,000 be returned to the lender.
$70,000 was paid to the lender on November 5, 2019, with $60,000 remaining to be paid as of December 31, 2019. For the year
ended December 31, 2019, the Company recorded $208 of interest expense related to the value of the revenue sharing
liability.
The Company borrowed $330,000 from a
lender on October 28, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the
lender to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed
that the lender would receive $495,000 in net revenues by December 28, 2021, or the Company would pay the lender the
difference between the $495,000 and the purchase price of $330,000 on or before January 29, 2022. For the year ended December
31, 2019, the Company recorded $12,000 of interest expense related to the value of the revenue sharing liability. The
agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under
the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of
the units, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $350,000 from a
lender on October 28, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the
lender to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed
that the lender would receive $525,000 in net revenues by December 28, 2021, or the Company would pay the lender the
difference between the $525,000 and the purchase price of $350,000 on or before January 29, 2022. For the year ended December
31, 2019, the Company recorded $13,000 of interest expense related to the value of the revenue sharing liability. The
agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under
the terms of the agreement
and action is brought by the lender to enforce
same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the mutual written
agreement of the parties.
The Company borrowed $350,000 from a
lender on November 4, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the
lender to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed
that the lender would receive $525,000 in net revenues by January 4, 2022, or the Company would pay the lender the difference
between the $525,000 and the purchase price of $350,000 on or before February 5, 2022. For the year ended December 31, 2019,
the Company recorded $13,000 of interest expense related to the value of the revenue sharing liability. The agreement remains
in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the
agreement and action is brought by the lender to enforce same, (b) the expiration of the operating life of the units, as
confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $350,000 from a
lender on November 12, 2019, whereby the proceeds are to be used to purchase a certain HydraSpin unit in exchange for the
lender to receive fifty percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed
that the lender would receive $525,000 in net revenues by January 12, 2022, or the Company would pay the lender the
difference between the $525,000 and the purchase price of $350,000 on or before February 12, 2022. For the year ended
December 31, 2019, the Company recorded $10,000 of interest expense related to the value of the revenue sharing liability.
The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its obligations
under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating
life of the units, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
As of June 16, 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.
10. Equity Transactions
For the year ended December 31, 2018,
the Company issued 2,941,000 shares to investors for cash, with total proceeds of $1,470,500. For the year ended December 31, 2019,
the Company issued 1,180,000 shares to investors for cash, with total proceeds of $299,387.
For the year ended December 31,
2018, the Company issued 3,740,000 shares to employees, consultants and AHT. The value of these shares was $1,683,600. For
the year ended December 31, 2019, the Company issued 2,300,000 shares to employees and consultants. The value of these shares
was $473,250. For the year ended December 31, 2019, the Company issued 1,300,000 shares valued at $100,000 for the payment of
leasehold improvements.
See Note 6 regarding shares issued
for debt issuance costs, upon conversion of outstanding convertible debentures, and shares issued as part of a settlement claim.
See Note 12 regarding share transactions
from settlement agreements.
11. Operating Leases – Right
of Use Assets
On September 11, 2017, the Company signed a
lease agreement with Peleton Properties LLC which commenced on October 15, 2017. Under the terms of the lease agreement, the Company
is required to pay all real estate taxes, insurance premiums, common area maintenance, operating expenses, and roof and structural
maintenance expenses. The lease is for a term of 36.5 months ending on October 30, 2020 and requires monthly base rent payments
ranging from $7,376 to $7,825 per month. The Company did not record a deferred rent adjustment to straight line rent expense due
to the adjustment being immaterial.
On December 28, 2018, the Company signed a
lease agreement with TCRG Opportunity XVII, L.L.C. to lease approximately 59,000 square feet of office and warehouse space. Under
the terms of the lease agreement, the Company is required to pay all real estate taxes, insurance premiums, common area maintenance,
and other operating expenses. The lease commences on April 1, 2019 and is for a term of 50 months ending on May 31, 2023. The lease
agreement provides for monthly base rent payments ranging from $19,118 to $20,589 per month.
Below is a summary of the Company’s right
of use assets and liabilities as of December 31, 2019:
Right-of-use assets
|
|
$
|
753,432
|
|
Lease liability obligations, current
|
|
$
|
247,070
|
|
Lease liability obligations, less current portion
|
|
|
520,137
|
|
Total lease liability obligations
|
|
$
|
767,207
|
|
Weighted-average remaining lease term
|
|
|
3.3 years
|
|
Weighted-average discount rate
|
|
|
10
|
%
|
During the year ended December 31, 2019, the
Company recognized approximately $244,000 in operating lease costs and are included in selling, general and administrative
expenses in the consolidated statement of operations. During the year ended December 31, 2019, operating cash flows from operating
leases was approximately $225,000.
Approximate future minimum lease payments for
the Company’s right of use assets over the remaining lease periods as of December 31, 2019, are as follows:
Year ending December 31,
|
|
|
|
|
|
|
2020
|
|
|
$
|
312,000
|
|
|
2021
|
|
|
|
240,000
|
|
|
2022
|
|
|
|
246,000
|
|
|
2023
|
|
|
|
103,000
|
|
|
Total minimum payments
|
|
|
$
|
901,000
|
|
12. Commitments and Contingencies
Contractual Commitments
Effective
as of May 1, 2016, the Company entered into a three-year employment agreement with the Company’s President. The agreement
calls for monthly payments of $7,000 per month through April 2017 and $15,000 per month thereafter. The employment agreement also
provided for the grant of 500,000 shares of common stock, which were fully vested on January 1, 2017. The Company expensed $250,000
for these shares during the period ended December 31, 2016 in accordance with ASC 718. The employment agreement provides for an
additional grant of 500,000 shares of common stock subject to satisfactory employment through December 2017. These shares were
issued in September 2017. The Company expensed $250,000 for these shares during the year ended December 31, 2017 in accordance
with ASC 718. In 2018, the Company issued 1,000,000 shares valued at $500,000 in accordance with ASC 718. On April 9, 2020 the
Company entered into a definitive Employment Agreement with Mr. King. The current agreement provides for a term expiring on March
31, 2023.. For the period commencing on April 9, 2020 and ending March 31, 2021, the employment agreement provides for an annual
base salary of $240,000 and the issuance of 2,000,000 shares of the Company’s restricted common stock, no par value, to Mr.
King; provided, however, that the issuance of such shares to Mr. King is contingent upon the issuance not being in contravention
of any prior existing understanding, agreement or other arrangement of the Company. As of the date of this report, the 2,000,000
shares have not been issued to Mr. King. For the period commencing on April 1, 2021 and ending March 31, 2023, the employment agreement
provides for an annual base salary of either (i) $240,000, or (ii) two and 50/100 percent (2.50%) of the gross revenues of Water
Now during the fiscal year ending December of the prior year, whichever amount is greater. If, during the Term of Employment, Mr. King’s employment is
terminated by reason of King’s death, disability or by the Company without cause, Water Now shall pay, or cause to be paid,
to King (or King’s heirs, beneficiaries, or representatives, as applicable) in a lump sum in cash, within 30 days after the
date of termination, the sum of (i) $240,000.00; and (ii) any benefits to which King (or his designated beneficiary or legal representative,
as applicable) is entitled or has become vested (or becomes entitled or vested as a result of termination) under the terms of all
employee benefit and compensation plans, agreements and arrangements in which King is a participant as of the date of termination.
The Company has entered into a two-year
accounting consulting services agreement with a financial consultant effective September 8, 2016 whereby the Company shall pay
to the consultant 75,000 shares of common stock per each completed six months of satisfactory service. The Consultant received
150,000 shares during the year ended December 31, 2018, and the Company expensed $75,000 for these shares.
This consulting agreement was extended
for two years on September 3, 2019. The Company shall pay to the consultant 75,000 shares of common stock per each completed six
months of satisfactory service. The Consultant
received 150,000 shares during the
year ended December 31, 2019, and the Company expensed $41,000 for these shares based on the stock price at the date of grant.
We may become involved in, or have
been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot
predict the timing or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either
unfavorable or favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows
due to defense costs, and divert management resources. Currently, except as set forth below, we are not involved in any arbitration
and/or other legal proceeding that could have a material effect on our business, financial condition, results of operations and
cash flows.
We accrue for a liability when it is
both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgement
is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition,
in the event we determine that a loss is not probable, but is reasonably possible, and it becomes possible to develop what we believe
to be a reasonable range of possible loss, then we will include disclosure related to such a matter as appropriate and in compliance
with ASC 450. The accruals or estimates, if any, are reviewed at least quarterly and adjusted to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. To the extent
there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, as applicable, adjust the
accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the
estimate is immaterial to our financial statements as a whole, or, if the amount of such adjustment cannot be reasonably estimated,
disclose that an estimate cannot be made.
Litigation
On May 30, 2018, the Company reached
an amicable resolution by way of a settlement agreement and release (the “Settlement Agreement”) with Cloudburst Solutions,
LLC (“CS”) with respect to the Manufacturing and Licensing Agreement entered into on July 1, 2016 (“Agreement”).
Neither party admitted liability and each agreed to finally and forever, settle and compromise all disputes and matters of controversy
between them.
CS has agreed to dismiss the lawsuit
filed, fully release, acquit, and forever discharge the Company and David King from any claims related to the Agreement, render
the Agreement null and void in all respects, and to cancel 1,250,000 shares held by CS in the Company’s stock. The Company
has agreed to fully release, acquit, and forever discharge CS from any claims related to the Agreement and has agreed that the
Agreement is null and void and neither party owes any duties or obligations thereunder. The Company has agreed to pay CS $700,000.00
in four installments. The first payment of $150,000 was paid on June 20, 2018. The second payment of $150,000 was paid to CS within
30 days of the first payment. The third payment of $150,000 was paid to CS within 30 days of the second payment. The final payment
of $250,000 was to be paid to CS within 30 days of the third payment, of which $75,000 was paid in October 2018 and $25,000 was
paid in December 2018.
On December 5, 2018, the parties entered
into a Second Mutual Release and Settlement Agreement, whereby the Company agreed to pay CS $180,000 with the first payment of
$60,000 to be paid on or before December 7, 2018, the second payment of $60,000 to be paid on or before January 7, 2019, and the
final payment of $60,000 to be paid on or before February 7, 2019. Also, the Company will pay to CS an additional amount of $5,000
to be paid on or before February 7, 2019 as reimbursement for CS’s legal fees. The Company has made all required payments
under this agreement.
On November 15, 2019, the Company
reached an amicable resolution of any and all obligations owed by it to Crown Bridge Partners, LLC (“CBP”) with
respect to that certain securities purchase agreement and outstanding convertible note with CBP. The Company issued 1,502,389
shares valued at $394,468 and made a payment of $120,000 to CBP on November 15, 2019, thereby fulfilling any and all
obligations to CBP. The Company estimated the incremental fair value of the shares issued using a Black-Scholes option pricing model and recorded
a deemed dividend of $394,468 for the year ended December 31, 2019. The significant assumptions used in the Black Scholes
calculations were as follows: risk free rate – 2.3%, volatility – 155% to 168%, expected term – 4.17 years
to 4.77 years.
On November 15, 2019, the Company reached
an amicable resolution of any and all obligations owed by it to Auctus Funds, LLC (“AF”) with respect to the Securities
Purchase Agreement dated April 9, 2019 and the related Convertible Promissory Note dated April 9, 2019. The Company agreed to pay
AF $270,000 in three installments. The first payment of $50,000 was paid on November 15, 2019. The second payment of $100,000 was
paid to AF
on November 22, 2019. The final payment
of $120,000 was paid to AF on November 29, 2019, thereby fulfilling any and all obligations to AF.
On November 21, 2019, the Company entered
into a settlement agreement with Clint Johnson whereby the Company will purchase 100,000 shares held by Clint Johnson for $10,000.
The Company originally filed a lawsuit against Clint Johnson on May 20, 2019 asserting claims for breach of contract, statutory
fraud, and common law fraud inducement.
13. 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 2019 and 2018 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 December 31, 2019 and 2018, there was 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 $13,508,000 at December 31, 2019, 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 December 31, 2019 and 2018 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 $1,510,000 and $918,000
for the years ended December 31, 2019 and 2018, respectively.
14. Segment and Concentration Information
Segments
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 year ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
Water purification products
|
|
$
|
206.919
|
|
|
$
|
168,730
|
|
Oil recovery systems
|
|
|
27,003
|
|
|
|
—
|
|
|
|
$
|
233,922
|
|
|
$
|
168,730
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
1,308,383
|
|
|
$
|
2,877,514
|
|
Oil recovery systems
|
|
|
1,542,250
|
|
|
|
—
|
|
General corporate
|
|
|
1,820,948
|
|
|
|
1,156,901
|
|
|
|
$
|
4,671,581
|
|
|
$
|
4,034,415
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
92,158
|
|
|
$
|
—
|
|
Oil recovery systems
|
|
|
1,572,626
|
|
|
|
—
|
|
General corporate
|
|
|
226,938
|
|
|
|
—
|
|
|
|
$
|
1,891,722
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Total assets
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
749,536
|
|
|
$
|
612,498
|
|
Oil recovery systems
|
|
|
2,576,758
|
|
|
|
1,244,814
|
|
General corporate
|
|
|
1,088,812
|
|
|
|
63,956
|
|
|
|
$
|
4,415,106
|
|
|
$
|
1,921,268
|
|
|
|
|
|
|
|
|
|
|
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.
Concentrations
The Company made sales to companies
representing the following portion of total revenues and accrued receivables for 2019 and 2018.
|
|
2019
|
|
2018
|
|
|
Revenue
|
|
Accounts Receivable
|
|
Revenue
|
|
Accounts Receivable
|
Customer A
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
—
|
|
Customer B
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Subsequent Events
2020 Financing
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 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, 2019. 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 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.
Paycheck Protection Program Loan
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.
Common Share Issuances
Subsequent to December 31,
2019, the Company has issued the following common shares:
- 385,000 shares to employees
- 16,894,369 shares for
conversion of principal and interest on convertible debt
- 1,000,000 shares as
collateral to a lender, to be returned upon payment of the debt
- 3,000,000 shares being held
by the Company and to be cancelled