The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements (unaudited)
March 31, 2020 and 2019
1. Basis of Presentation
The accompanying unaudited financial
statements of Water Now, Inc. and subsidiary (collectively, the “Company”) have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Regulation S-X. Certain
information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been or omitted from these statements pursuant to such rules and regulations and,
accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read
in conjunction with our audited financial statements for the year ended December 31, 2019.
In the opinion of the management of
the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month
period have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected
for the entire fiscal year. When used in these notes, the terms “Company”, “we”, “us” or “our”
mean Water Now, Inc. and subsidiary.
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 March 31, 2020 and 2019. The derivative liabilities are Level 3 fair value measurements.
The following is a summary of activity of Level 3 liabilities
during the three months ended March 31, 2020:
Derivative liability balance at December 31, 2019
|
|
$
|
508,323
|
|
Additions to derivative liability for new debt
|
|
|
764,990
|
|
Reclass to equity upon conversion/cancellation
|
|
|
(622,781
|
)
|
Change in fair value
|
|
|
(550,726
|
)
|
Balance at March 31, 2020
|
|
$
|
1,201,258
|
|
At March 31, 2020, the fair value
of the derivative liabilities of convertible notes was estimated using the following weighted-average inputs: the price of the
Company’s common stock of $0.02, a risk-free interest rate of 0.15%, and expected volatility of the Company’s common stock of 242.48%,
and the various estimated reset exercise prices weighted by probability.
2. Going Concern
At March 31, 2020, the Company had approximately
$405 in cash and had net working capital deficit of approximately $8,528,000. The Company, which generated a net loss of approximately
$2,190,000 and $1,596,000 for the three months ended March 31, 2020 and 2019, respectively, may not have sufficient cash to fund
its current and future operations. There is no assurance that future operations will result in profitability. No assurance can
be given that management will be successful in its efforts to raise additional capital. The failure to raise additional capital
needed to achieve its business plans will have a material adverse effect on the Company’s financial position, results of
operations, and ability to continue as a going concern.
3. Revenues
The Company’s revenues
are generated from the sales of water purification products and the sales of hydrocarbons derived from the deployment and operation
of Company owned oil recovery systems. The Company obtains purchase orders from its water purification customers for the sale of
its products which sets forth the general terms and conditions including line item pricing and payment terms (generally due upon
receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon
shipment) and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the
Company s only performance obligation.
The Company earns revenue each
month that the oil recovery systems are in place and operating. The Company generally receives 50% of the proceeds of the 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.
|
|
For the Three Months
|
|
|
Ended March 31,
|
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
Water purification products
|
|
$
|
2,995
|
|
|
$
|
78,552
|
|
Oil recovery machines
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,995
|
|
|
$
|
78,552
|
|
|
|
|
|
|
|
|
|
|
4.
Distributorship Agreement
On October 31, 2018, the Company entered into
an Exclusive Sales Distribution Agreement (the “Agreement”) with African Horizon Technologies (Pty) Ltd (“AHT”)
whereby the Company will be AHT’s exclusive distributor of the Hydraspin Hydro Cyclone technology in the United States of
America. The Company paid AHT $500,000 in cash and issued AHT 500,000 shares valued at $250,000 based on the closing price of the
Company’s shares of $0.50 on the date of the Agreement. In addition, the Company will issue AHT 500,000 shares at the earlier
of 24 months from the commencement date of the Agreement or the sale of 50 units to the Company. The Company will also pay AHT
a royalty of 2% of total net profits generated by the Company from the sale of oil generated using the Hydraspin units. The term
of the Agreement is for five years with an automatic renewal term of five years unless terminated earlier. The Company recorded
the value of the Agreement of $1,000,000 as an other asset and is amortizing the asset to expense over the life of the Agreement
of five years. As of March 31, 2020, the 500,000 shares remaining to be issued are recorded as distributorship accrued expense
in the amount
of $250,000 and are required to be issued prior
to October 31, 2020. Amortization expense amounted to $50,000 and $50,000 for the three months ended March 31, 2020 and 2019, respectively.
5. Notes Payable
During 2020 the Company entered into
an additional short-term loan with a lender. Total principal borrowed during 2020 was $25,000. No repayments were made during the
three months ended March 31, 2020. The remaining $529,000 of principal was repaid or extended as of July 13, 2020. The notes are
generally unsecured.
6. Convertible Notes Payable
The Company borrowed $50,000 from a lender
on January 14, 2020. The note bears interest at 18% and is payable in one lump sum on June 14, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible
by the holder into shares of the Company’s common stock at any time prior to the maturity date at the conversion price of
$0.50 per share. The principal balance at March 31, 2020 is $50,000.
The Company borrowed
$37,500 from a lender on February 5, 2020. The note is an extension of the existing Amended and Restated Secured Convertible Promissory
Note dated June 18, 2018. The total principal due under the note is $100,000. The note bears interest at 18% and is payable in
one lump sum on May 5, 2020. In the event 50% or more of the principal balance is paid prior to May 5, 2020 and the note is not
in default, then the maturity date is extended to August 5, 2020. The required payment was not made by May 5, 2020 and the note
is currently in default and outstanding. The outstanding principal and interest amount is convertible by the holder into shares
of the Company’s common stock at any time prior to the maturity date at a price per share equal to fifty percent of the average
closing price of the Company’s common stock for the ten trading days prior to the conversion date. The conversion
feature meets the definition of a derivative and therefore requires bifurcation and is accounted for as a derivative liability.
The Company estimated the aggregate fair value of the conversion feature derivatives embedded in the debenture at the date the
debt becomes convertible at $52,000, based on weighted probabilities of assumptions used in the Black Scholes pricing model. The
key valuation assumptions used consist, in part, of the price of the Company’s common stock of $0.05, a risk-free interest
rate of 1.57% and expected volatility of the Company’s common stock of 232.73%, and the various estimated reset exercise
prices weighted by probability. The principal balance at March 31, 2020 is $100,000.
The Company borrowed $175,000 from a lender
on March 4, 2020. The note bears interest at 12% and is payable in one lump sum on September 4, 2020, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior
to the maturity date at a price per share equal to sixty-five percent of the second lowest trade price of the Company’s common
stock for the twenty trading days prior to the conversion date. In addition, the Company paid $17,500 as a discount on the note
and paid $3,500 for debt issuance costs. The principal balance at March 31, 2020 is $175,000.
During the quarter ended March 31, 2020, the
Company issued 1,000,000 shares to a lender as collateral held in escrow, to be cancelled upon payment of the debt.
7. Advances From Related Parties
The Company has received non-interest
bearing advances without a specified maturity date from two stockholders of the Company. The Company owed approximately $225,000
and $4,000 at March 31, 2020 and December 31, 2019, respectively, to the stockholders.
8. Revenue Sharing Agreements
No additional revenue sharing agreements were
entered into during the three months ended March 31, 2020. The Company recorded an additional $265,000 in interest expense during
the three months ended March 31, 2020 related to the existing revenue sharing agreements. No payments have been made on existing
revenue sharing agreements.
As of July 13, 2020, the Company is obligated
to purchase seven HydraSpin units with an aggregate cost of approximately $2 million awaiting shipment from Africa to the Company
and there is approximately $1 million included in accounts payable for unpaid amounts on other units. No payment has been made
on these units.
9. Equity Transactions
From January 1, 2019 to March 31, 2019,
the Company issued 200,000 shares to a lender upon receipt of a conversion notice. The Company also issued 465,384 shares to lenders
for debt issuance costs.
From
January 1, 2020 to March 31, 2020, the Company issued 16,894,369 shares to lenders upon receipt of conversion notices for total
principal, interest and fees of $378,681. The Company also issued 385,000 shares to employees
and consultants valued at $24,600 and issued 1,000,000 shares as collateral held in escrow, to
be cancelled upon payment of the debt.
10. Operating Leases – Right
of Use Assets
The Company has an operating lease for office
and warehouse space that expires in 2023. Below is a summary of the Company’s right of use assets and liabilities as of March
31, 2020:
Right-of-use assets
|
|
$
|
632,930
|
|
Lease liability obligations, current
|
|
$
|
178,116
|
|
Lease liability obligations, less current portion
|
|
|
473,932
|
|
Total lease liability obligations
|
|
$
|
652,048
|
|
Weighted-average remaining lease term
|
|
|
3.2 years
|
|
Weighted-average discount rate
|
|
|
10
|
%
|
During the three months ended March 31, 2020,
the Company recognized approximately $40,000 in operating lease costs and are included in selling, general and administrative
expenses in our consolidated statement of operations. During the three months ended March 31, 2020, operating cash flows from operating
leases was $57,000.
Approximate future minimum lease payments for
the Company’s right of use assets over the remaining lease periods as of March 31, 2020, are as follows:
Year ending December 31,
|
|
|
|
2020
|
|
|
$
|
176,000
|
|
|
2021
|
|
|
|
240,000
|
|
|
2022
|
|
|
|
246,000
|
|
|
2023
|
|
|
|
103,000
|
|
|
Total minimum payments
|
|
|
$
|
765,000
|
|
11. Income Taxes
The Company accounts for income taxes
under the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary differences. Deferred
tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income
in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
The Company’s tax provision is
determined using an estimate of an annual effective tax rate adjusted for discrete items, if any, that are taken into account in
the relevant period. The 2020 and 2019 annual effective tax rate is estimated to be 0% for the U.S. federal and state statutory
tax rates because the Company is in a net operating loss position. The Company reviews tax uncertainties in light of changing facts
and circumstances and adjust them accordingly. As of March 31, 2020 and December 31, 2019, there were no tax contingencies recorded.
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting,
and the amounts recognized for income tax purposes.
The Company had a net operating loss
carry-forward for federal and state tax purposes of approximately $14,243,000 at March 31, 2020, that is potentially available
to offset future taxable income. The TCJA (Tax Cut and Jobs Act) changes the rules on NOL carryforwards. The 20-year limitation
was eliminated, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after
January 1, 2018, will now be limited to 80 percent of taxable income.
For financial reporting purposes, no
deferred tax asset was recognized at March 31, 2020 and December 31, 2019 because management estimates that it is more likely than
not that substantially all of the net operating losses will expire unused. As a result, the amount of the deferred tax assets considered
realizable was reduced 100% by a valuation allowance. The change in the valuation allowance was approximately $236,000 and $334,000
for the three-months ended March 31, 2020 and 2019, respectively.
12. Segment Information
The Company sells water purification products
and operates oil recovery systems. The Company has identified such reportable segments based on management responsibility and the
nature of the Company’s products, services, and costs. To date, the Company primarily sells its water purification products
internationally and operates its oil recovery systems in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment.
Below is the financial information related to the Company’s
segments:
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
Water purification products
|
|
$
|
2,995
|
|
|
$
|
78,552
|
|
Oil recovery machines
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,995
|
|
|
$
|
78,552
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
201,304
|
|
|
$
|
722,554
|
|
Oil recovery machines
|
|
|
268,909
|
|
|
|
96,581
|
|
General corporate
|
|
|
174,979
|
|
|
|
149,276
|
|
|
|
$
|
645,192
|
|
|
$
|
968,411
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
—
|
|
|
$
|
92,158
|
|
Oil recovery machines
|
|
|
30,000
|
|
|
|
628,625
|
|
General corporate
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
30,000
|
|
|
$
|
720,783
|
|
|
|
|
March 31, 2020
|
|
|
|
December 31, 2019
|
|
Total assets
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
666,823
|
|
|
$
|
749,536
|
|
Oil recovery machines
|
|
|
2,691,613
|
|
|
|
2,576,758
|
|
General corporate
|
|
|
859,061
|
|
|
|
1,088,812
|
|
|
|
$
|
4,217,497
|
|
|
$
|
4,415,106
|
|
General corporate expenses include corporate
salaries, health insurance and social security taxes for officers and corporate employees, corporate insurance, legal and accounting
fees, and other corporate costs such as transfer agent and travel costs. Management considers these to be non-allocable costs for
segment purposes.
13. Subsequent Events
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.