Washington, D.C. 20549
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o
YES
x
NO
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o
YES
x
NO
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x
YES
o
NO
Indicate by check mark whether the registrant
has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
x
YES
o
NO
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
x
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:
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act).
o
YES
x
NO
The aggregate market value of the voting
and non-voting common equity held by non-affiliates 17,830,158 shares of common stock, no par value) as of June 30, 2018 was $8,915,079
(computed by reference to the price at which the common stock was last sold ($.50 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 March 29, 2019, 36,282,192 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 favorable 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.
Our water purification product lines consist
of portable units capable of providing a cost-effective, safe and efficient method of water purification. Our products require
no pre- or post-treatment of the source water, no filters, no membranes and no chemicals. The quality of water purified by our
products has been tested to meet or exceed the World Health Organization’s (“WHO”) drinking water standards.
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 anticipate introducing to the market our
initial product offering in May 2019. The first product that we will make available to the market will heat approximately 1,000
square feet.
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 machines deployed at salt water 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 “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 machines 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 March 31, 2019 we have purchased 13 machines from AHT, of which one is in operation.
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 2018, we sold approximately
100 Aqua 125 and six Aqua 1000 models.
Warranty.
We have entered into
an Administration Agreement with Datacom Warranty Corp., a third-party warranty administrator, to administer warranty claims. We
expect that all significant components of our products will have warranties from the respective manufacturer. We have retained
Datacom to administer warranty claims with the responsible component supplier. Our cost to have Datacom administer warranty claims
on our behalf under the Administration Agreement is $8.00 per unit shipped by us.
Customers.
As of December 31,
2018, the Company had back-log orders of approximately $65,000, all of which were filled in January 2019.
HydraSpin USA
As of March 31, 2019 we have executed contracts
with two owners of two salt water disposal wells located in Oklahoma and Wyoming, respectively. We are currently in negotiations
with approximately four additional owners to service approximately 17 wells during fiscal 2019.
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 highly competitive.
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 such certifications are
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 2018, we expended an aggregate of
approximately $1.4 million research and development (“R&D”) activities as compared to approximately $1.0 million
during fiscal 2017.
We anticipate a material reduction in R&D
activities in fiscal 2019.
As of December 31, 2018, we had 15 employees,
all of whom were employed on a full-time basis.
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
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
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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 24% 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 36,282,192 outstanding
shares of common stock as of March 29, 2019, which includes 196,192 Plan Shares held in treasury for future issuance. Of our issued
and outstanding shares, 10,826,088 shares are freely tradable and 25,456,104 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 current monthly rent for these facilities and
land is $7,597 plus taxes, insurance and other operating expenses, with the next scheduled increase to occur on
November 1, 2019. The lease terminates on October 30, 2020. It is our intention to terminate the lease at this location and
move our corporate and manufacturing operations to the facility described in the following paragraph. We do not expect to
incur any early termination penalties.
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 are to commence 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.
Notes to Consolidated Financial Statements
December 31, 2018
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.
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 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, 2018, the Company had $53,106
in cash and had a net working capital deficit of approximately $1,836,000. The Company, which generated net losses of approximately
$4,370,000 and $1,726,000 for the years ended December 31, 2018 and 2017, respectively, may not have sufficient cash to fund its
current and future operations. There is no assurance that future operations will result in profitability. No assurance can be given
that management will be successful in its efforts to raise additional capital from present or future shareholders. The failure
to raise additional capital needed to achieve its business plans will have a material adverse effect on the Company’s financial
position, results of operations, and ability to continue as a going concern.
3. Summary of Significant
Accounting Policies and Recent Accounting Pronouncements
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. There was no allowance at December 31, 2018 and
2017.
Inventory
Inventory includes manufacturing parts and
finished goods for the Company’s water purification equipment. Finished goods and raw materials inventory was $303,644 and
$203,201, respectively, as of December 31, 2018. All inventory was raw materials as of December 31, 2017. 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 5 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
$28,000 and $6,000 for the years ended December 31, 2018 and 2017, respectively. Accumulated depreciation totaled approximately
$34,000 and $6,000 as of December 31, 2018 and 2017, 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.
The Company
establishes sales return accruals for anticipated product returns. The Company records the return amounts as a deduction to arrive
at our net product sales. Consistent with revenue recognition accounting guidance, the Company estimates a reserve when the
sales occur for future product returns related to those sales. This estimate is primarily based on historical return rates as well
as specifically identified anticipated returns due to known business conditions and product expiry dates. There were no product
returns as of December 31, 2018 and 2017.
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 during the years ended December 31, 2018 and 2017 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, 2018, 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, 2018 and
2017 are as follows:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
558,250
|
|
|
$
|
512,500
|
|
General and administrative expenses
|
|
|
875,350
|
|
|
|
102,675
|
|
Total stock-based compensation expense
|
|
$
|
1,433,600
|
|
|
$
|
615,175
|
|
Research and Development Costs
The Company expenses research and development
costs as incurred in accordance with ASC 730 “
Research and Development
”. The Company’s research and development
activities related to activities undertaken to adapt the water purification technology contributed by its founder for commercial-scale
manufacturing. Research and development expenses were approximately $1,370,000 and $957,000 for the years ended December 31, 2018
and 2017, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share are
computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents
such as outstanding stock options and warrants. Common stock equivalents represent the dilutive effect of the assumed exercise
of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss)
per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective
period presented or the date of issuance, whichever is later.
Recently Issued Accounting Pronouncements
Leases
— In February 2016,
the FASB issued ASU 2016-02, “
Leases
”. This standard will require entities that lease assets—referred
to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. The accounting by entities that own the assets leased by the lessee—also known as lessor accounting—will
remain largely unchanged from current GAAP. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Modified
retrospective application is required, with optional practical expedients available. The Company is currently evaluating the impact
of the new guidance.
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. We are still evaluating the impact of this ASU on the Company’s
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. 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 will pay 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, 2018, $100,000 was paid and the remaining $400,000 is recorded as an accrued expense
along with the remaining 500,000 shares to be issued.
5. Convertible Notes Payable
The Company had two convertible notes
payable (the “Convertible Notes”) to stockholders in aggregate principal amount of $0 and $100,000 at December 31,
2017 and December 31, 2016, respectively. The Convertible Notes, which matured on August 25, 2017, bore interest at 12% per annum.
The holders of the Convertible Notes exercised their option to convert the notes to common shares of the Company at maturity, at
$0.50 per common share during the year ended December 31, 2017. The Company granted 200,000 common shares to the holders of the
Convertible Notes.
Based on the terms of the conversion
feature, the Company had determined that the Convertible Notes did not contain a beneficial conversion feature. As such, the entire
proceeds of the Convertible Notes were recorded as a liability. The interest expense incurred and paid on the Convertible Notes
was $7,000 for the year ended December 31, 2017.
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, 2018 is $62,500.
The interest expense incurred and paid on the notes payable was approximately $9,375 for the year ended December 31, 2018.
The Company’s chief executive officer has guaranteed the shareholder notes. The value of the embedded beneficial conversion
feature on the notes payable was estimated to be $187,500. For the year ended December 31, 2018, the Company recorded
$96,354 of interest expense related to the value of the embedded beneficial conversion feature.
The
Company borrowed $120,000 from a shareholder on August 27, 2018. The note bears interest at 8% and is payable in one lump sum on
February 27, 2019, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured.
The outstanding principal and interest amount is convertible by the holder into shares of
the Company’s common stock at any time prior to the maturity date at the conversion price of $0.50 per share. The
principal balance at December 31, 2018 is $120,000. The interest expense incurred on the note payable was approximately
$3,200 for the year ended December 31, 2018. The value of the embedded beneficial
conversion
feature on the note payable was estimated to be $88,800. For the year ended December 31, 2018, the Company recorded
$59,200 of interest expense related to the value of the embedded beneficial conversion feature.
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. The principal balance at December 31, 2018 is
$100,000. The interest expense incurred on the note payable was approximately $3,333 for the year ended December 31, 2018.
The value of the embedded beneficial conversion feature on the note payable was estimated to be $72,000. For the year
ended December 31, 2018, the Company recorded $48,000 of interest expense related to the value of the embedded beneficial conversion
feature.
The Company
borrowed $68,000 from a lender on September 4, 2018. The note bears interest at 8% and is payable in one lump sum on September
4, 2019, at which time the entire amount of principal and accrued interest is due and payable. The note is unsecured. The
outstanding principal and interest amount is convertible by the holder into shares of the Company’s common stock beginning
170 days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the average
of the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date. The
principal balance at December 31, 2018 is $68,000. The interest expense incurred on the note payable was approximately $1,813
for the year ended December 31, 2018. The value of the embedded beneficial conversion feature on the note payable was estimated
to be $39,748. In addition, the Company paid $2,500 for debt issuance costs. For the year ended December 31, 2018, the
Company recorded $14,040 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance
costs. This note was paid in full on January 3, 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, 2018 is
$50,000. The interest expense incurred on the note payable was approximately $1,458 for the year ended December 31, 2018.
The value of the embedded beneficial conversion feature on the note payable was estimated to be $42,000. For the year
ended December 31, 2018, the Company recorded $24,500 of interest expense related to the value of the embedded beneficial conversion
feature. On February 26, 2019, an extension of the maturity date was granted to September 13, 2019.
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. The principal balance at December 31, 2018 is $200,000. The
value of the embedded beneficial conversion feature on the note payable was estimated to be $37,333. In addition, the
Company granted 60,000 shares of the Company’s common stock valued at $53,400 based on the Company’s share price on
the date of the note agreement, paid $34,400 as a discount for interest on the note, and paid $5,000 for debt issuance costs. For
the year ended December 31, 2018, the Company recorded $12,652 of interest expense related to the value of the embedded beneficial
conversion feature and debt issuance costs.
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 principal balance at December
31, 2018 is $77,000. The interest expense incurred on the note payable was approximately $1,925 for the year ended December
31, 2018. The value of the embedded
beneficial
conversion feature on the note payable was estimated to be $77,000. In addition, the Company paid $2,000 for debt issuance
costs. For the year ended December 31, 2018, the Company recorded $16,458 of interest expense related to the value of the embedded
beneficial conversion feature and debt issuance costs.
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. The principal balance at December 31, 2018 is
$82,500. The interest expense incurred on the note payable was approximately $1,375 for the year ended December 31, 2018.
The value of the embedded beneficial conversion feature on the note payable was estimated to be $4,653. In addition,
the Company paid $13,500 for debt issuance costs. For the year ended December 31, 2018, the Company recorded $7,564 of interest
expense related to the value of the embedded beneficial conversion feature and debt issuance costs.
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. The
principal balance at December 31, 2018 is $42,500. The interest expense incurred on the note payable was approximately $708
for the year ended December 31, 2018. The value of the embedded beneficial conversion feature on the note payable was estimated
to be $24,160. In addition, the Company paid $2,500 for debt issuance costs. For the year ended December 31, 2018, the
Company recorded $5,554 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance
costs.
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. The
principal balance at December 31, 2018 is $45,000. The interest expense incurred on the note payable was approximately $600
for the year ended December 31, 2018. The value of the embedded beneficial conversion feature on the note payable was estimated
to be $24,231. In addition, the Company paid $2,500 for debt issuance costs. For the year ended December 31, 2018, the
Company recorded $4,455 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance
costs.
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 principal balance
at December 31, 2018 is $100,000. The interest expense incurred on the note payable was approximately $417 for the year
ended December 31, 2018. The value of the embedded beneficial conversion feature on the note payable was estimated to be $93,548. In
addition, the Company paid $5,000 for debt issuance costs. For the year ended December 31, 2018, the Company recorded $4,106 of
interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.
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 principal balance at December 31, 2018 is $80,000. The
interest expense incurred on the note payable was approximately $333 for the year ended December 31, 2018. The value of the embedded
beneficial conversion feature
on the
note payable was estimated to be $58,958. In addition, the Company paid $4,000 for debt issuance costs. For the year
ended December 31, 2018, the Company recorded $2,623 of interest expense related to the value of the embedded beneficial conversion
feature and debt issuance costs.
6. Notes Payable - Stockholders
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.
7. 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 $302,000
and $32,000, respectively, at December 31, 2018 and 2017 to the stockholders.
8. Revenue Sharing Agreements
The Company borrowed $264,000 from
a lender on December 13, 2018, whereby the proceeds are to be used to purchase certain HydraSpin units. The Company has guaranteed
that the lender would receive $528,000 in net revenues by November 27, 2020, or the Company would pay the lender the difference
between the $528,000 and the net revenues received on or before December 15, 2020. As of December 31, 2018, the Company recorded
the $528,000 as a revenue sharing liability and recorded a discount of $264,000. 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, decrease the guarantee amount to $495,000 and extend the date to March 3, 2021.
The Company borrowed $50,000 from a
lender on November 29, 2018, whereby the proceeds are to be 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. Interest accrues on the principal balance
at a rate of 10% and is to be paid monthly until the unit is paid in full. For the year ended December 31, 2018, the Company recorded
$5,500 of interest expense related to the value of the revenue sharing liability. 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 net revenues received on or before March 31, 2021.
9. Equity Transactions
From January 1, 2017 to December 31,
2017, the Company issued 2,922,000 shares to investors at $0.50 per share for cash, with total proceeds of $1,436,030.
The Company also issued 200,000 shares
to shareholders to convert the Convertible Notes amounting to $100,000 in August 2017.
From July 1, 2017 to December 31, 2017,
the Company issued 1,230,350 shares to executives, employees working in research and development at the Company and consultants.
The value of these shares at $0.50 per share was $615,175. In addition, there were 600,000 shares of common stock issued in 2016
which vested in January 2017.
In May 2017 and September 2017, the
Company’s principal shareholder surrendered an aggregate of 2,779,850 shares of common stock to the Company, which were recorded
as treasury stock with a $0 value. All surrendered shares were used to issue stock by the Company during the year.
From January 1, 2018 to December
31, 2018, the Company issued 2,941,000 shares to investors at $0.50 per share for cash, with total proceeds of $1,470,500.
From January 1, 2018 to December
31, 2018, the Company issued 3,740,000 shares to executives, employees consultants and AHT. The value of these shares was $1,683,600.
See Note 5 regarding shares issued
for debt issuance costs in 2018.
See Note 10 regarding shares returned
during June 2018 as a result of a lawsuit settlement.
10. Commitments and Contingencies
Lease Commitments
Operating Leases – Rental Property
On September 11, 2017, the Company signed a
lease agreement with Peleton Properties LLC which commenced on October 15, 2017. 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.
As of December 31, 2018, future minimum lease
payments required under non-cancelable operating leases are as follows (rounded to nearest thousand):
Year ending December 31,
|
|
|
2019
|
$
|
225,000
|
|
|
2020
|
|
312,000
|
|
|
2021
|
|
240,000
|
|
|
2022
|
|
246,000
|
|
|
2023
|
|
103,000
|
|
|
Total minimum payments
|
$
|
1,126,000
|
|
Contractual Commitments
Effective as of May 1, 2016, the Company
entered into a three-year employment agreement with the Company’s President. The agreement calls for monthly payments of
$7,000 per month through April 2017 and $15,000 per month thereafter. The employment agreement also provided for the grant of 500,000
shares of common stock, which were fully vested on January 1, 2017. The Company expensed $250,000 for these shares during the period
ended December 31, 2016 in accordance with ASC 718. The employment agreement provides for an additional grant of 500,000 shares
of common stock subject to satisfactory employment through December 2017. These shares were issued in September 2017. The Company
expensed $250,000 for these shares during the year ended December 31, 2017 in accordance with ASC 718. In 2018, the Company issued
1,000,000 shares valued at $500,000 in accordance with ASC 718.
The Company has entered into a two-year
accounting consulting services agreement with a financial consultant. The accounting consulting services agreement provided for
a grant of 100,000 shares of common stock, which fully vested at January 2, 2017. The Company expensed $50,000 for these shares
during the period ended December 31, 2016 in accordance with ASC 505-50. The Company shall pay to the consultant 75,000 shares
of common stock per each completed six months of satisfactory service. The first installment shall be payable at such time as the
Company generates revenue from the sale of its products. These shares were issued in September 2017. The Company expensed $37,500
for these shares during the period ended December 31, 2016 in accordance with ASC 718. The Consultant
also received 150,000 shares in each
of the years ended December 31, 2018 and 2017, and the Company expensed $75,000 each year for these shares.
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.
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 2018 and 2017 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, 2018 and 2017, 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 $7,979,000 at December 31, 2018, that is potentially available
to offset future taxable income. The TCJA (Tax Cut and Jobs Act) changes the rules on NOL carryforwards. The 20-year limitation
was eliminated, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after
January 1, 2018, will now be limited to 80 percent of taxable income.
For financial reporting purposes, no
deferred tax asset was recognized at December 31, 2018 and 2017 because management estimates that it is more likely than not that
substantially all of the net operating losses will expire unused. As a result, the amount of the deferred tax assets considered
realizable was reduced 100% by a valuation allowance. The change in the valuation allowance was approximately $918,000 and $716,000
for the years ended December 31, 2018 and 2017, respectively.
12. Subsequent Events
The Company has evaluated all material
events or transactions that occurred after December 31, 2018 up to April 1, 2019, the date these financial statements were available
to be issued and noted no material subsequent events which would require disclosure.
2019
Financing
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.
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 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 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.
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.In
addition, the Company issued 115,384 shares to the lender as a commitment fee.
The
Company borrowed $200,000 and $100,000 from two shareholders on March 25, 2019. The notes bear interest at 18% and are payable
beginning on April 25, 2019, at which time the entire amount of principal and any accrued interest is due and payable. The notes
are unsecured, and the $200,000 note is guaranteed by the Company’s Chief Executive Officer.
The
Company received a conversion notice to convert $100,000 of debt into 200,000 shares of the Company’s common stock on March
28, 2019. The original date of the convertible note was August 30, 2018.
2019 HydraSpin Contracts
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 net revenues received on or before January 15, 2021.
The Company borrowed $660,000 from
a lender on January 16, 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 15, 2021, or the Company would pay the lender the difference between the $990,000
and the net revenues received on or before January 17, 2021.
On January 24, 2019, the Company entered
into a Services Agreement whereby the Company will provide its oil recovery system and services for a period of two years in exchange
for fifty percent of the proceeds from the sale of all hydrocarbons recovered from the wells.
2019 Other Contracts
On January 17, 2019, the Company entered
into a distribution agreement with Asia Pacific Prime Corporation (“APPC”) whereby APPC will be the Company’s
exclusive distributor of the Company’s proprietary water purification systems in the Philippines. The Company will be paid
a royalty of $3,000 for each Aqua 1000 unit sold by APPC and $500 for each Aqua 125 unit sold by APPC if the system is manufactured
by APPC. APPC has agreed to purchase from the Company six Aqua 1000 units for $12,000 per unit and forty Aqua 125 units for $2,100
per electric unit or $2,300 per gas unit. These units are expected to be delivered to APPC no later than April 15, 2019.