The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements (unaudited)
June 30, 2019 and 2018
1. Basis of Presentation
The accompanying unaudited financial
statements of Water Now, Inc. and subsidiary (collectively, the “Company”) have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Regulation S-X. Certain
information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been or omitted from these statements pursuant to such rules and regulations and,
accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read
in conjunction with our audited financial statements for the year ended December 31, 2018.
In the opinion of the management of
the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month
period have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected
for the entire fiscal year. When used in these notes, the terms “Company”, “we”, “us” or “our”
mean Water Now, Inc. and subsidiary.
Certain amounts in our Condensed Consolidated
Statement of Operations for the period ended June 30, 2018 have been reclassified to conform with the current period presentation.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, we adopted
the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02,
Leases
,
which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases
under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period
presented. In August 2018, the FASB issued ASU 2018-11,
Targeted Improvements to ASC 842
, which included an option
to not restate comparative periods in transition and elect to use the effective date of ASC 842,
Leases
, as the date
of initial application of transition, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded
both operating lease right-of-use (“ROU”) assets of $159,433 and lease liabilities of $154,518. The
adoption of ASC 842 had an immaterial impact on our Condensed Consolidated Statement of Operations and Condensed Consolidated Statement
of Cash Flows for the six-month period ended June 30, 2019. In addition, we elected the package of practical expedients permitted
under the transition guidance within the new standard which allowed us to carry forward the historical lease classification.
Additional information and disclosures
required by this new standard are contained in Note 10.
2. Going Concern
At June 30, 2019, the Company had approximately
$12,000 in cash and had net working capital deficit of approximately $3,066,000. The Company, which generated a net loss of approximately
$3,712,000 and $1,791,000 for the six months ended June 30, 2019 and 2018, respectively, may not have sufficient cash to fund its
current and future operations. There is no assurance that future operations will result in profitability. No assurance can be given
that management will be successful in its efforts to raise additional capital. The failure to raise additional capital needed to
achieve its business plans will have a material adverse effect on the Company’s financial position, results of operations,
and ability to continue as a going concern.
3. Revenues
The Company’s revenues are generated
from the sales of water purification products and from its oil recovery systems. The Company obtains purchase orders from its customers
for the sale of its products which sets forth the general terms and conditions including line item pricing and payment terms (generally
due upon receipt). The
Company recognizes revenue when its customers
obtain control over the assets (generally when the title passes upon shipment) and it is probable that the Company will collect
substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.
The Company earns revenue each month that the
oil recovery systems are in place and operating. The Company generally receives 50% of the proceeds of the oil sales recovered
using its systems.
Products that have been sold are not subject
to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable and reasonably estimated.
The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.
The Company included shipping and handling
fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred
to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Revenues, as disaggregated by revenue type
and reportable segment (see Note 12), are shown below.
|
|
For the three months ended
|
|
For the six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
230,192
|
|
|
$
|
(68,935
|
)
|
|
$
|
308,744
|
|
|
$
|
59,195
|
|
Oil recovery systems
|
|
|
5,557
|
|
|
|
—
|
|
|
|
5,557
|
|
|
|
—
|
|
|
|
$
|
235,749
|
|
|
$
|
(68,935
|
)
|
|
$
|
314,301
|
|
|
$
|
59,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 serves as AHT’s exclusive distributor of the Hydraspin Hydro Cyclone technology in the United States
of America. The Company was obligated to pay AHT $500,000 and issue 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 prior to the expiration
of the current term. The Company recorded the value of the Agreement of $1,000,000 as an other asset and is amortizing the asset
to expense over the life of the Agreement of five years. As of June 30, 2019, $500,000 was paid and the remaining 500,000 shares
to be issued is included as an accrued expense.
5. Notes Payable – Stockholders
The Company borrowed $200,000 and $100,000
from two stockholders 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 was due and payable. The notes are unsecured, and the $200,000 note is
guaranteed by the Company’s Chief Executive Officer. As of June 30, 2019, the $100,000 note was paid and the $200,000 note
remains outstanding.
6. Convertible Notes Payable
The Company borrowed $68,000 from a lender
on September 4, 2018. The note bears interest at 8% and matures on September 4, 2019, at which time the entire amount of principal
and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by
the holder into shares of the
Company’s common stock beginning 170
days after the issuance date and prior to the maturity date at a price per share equal to sixty-five percent of the average of
the lowest two trading prices of the Company’s common stock for the twenty trading days prior to the conversion date. 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. This note was paid in full on January 3, 2019 and the Company recorded a gain on extinguishment
of this debt of $14,351.
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 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 six-month period ended June 30, 2019, the Company recorded $86,370 of interest expense related to the value of the embedded
beneficial conversion feature and debt issuance costs. Through June 30, 2019, the Company paid $142,000 of principal, prepayment
penalties of $58,000 recorded as interest expense,
and
recorded a loss on extinguishment of
this debt of $31,111. The lender converted the remaining $58,000 of principal into 332,500 shares of the Company’s common
stock.
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 value of the embedded beneficial conversion feature on the note payable was estimated to be $72,000. For
the six-month period ended June 30, 2019, the Company recorded $26,557 of interest expense related to the value of the embedded
beneficial conversion feature. This note was converted into 200,000 shares of the Company’s common stock on March 28, 2019.
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 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 six-month
period ended June 30, 2019, the Company recorded $5,554 of interest expense related to the value of the embedded beneficial conversion
feature and debt issuance costs. This note was paid in full on March 26, 2019 and the Company recorded a loss on extinguishment
of this debt of $4,803.
The Company borrowed $86,500 from a lender
on January 2, 2019. The note bears interest at 8% and is payable in one lump sum on January 2, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible
by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity
date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common
stock for the twenty trading days prior to the conversion date. The principal balance at June 30, 2019 is $86,500. The interest
expense incurred on the note payable was approximately $3,460 for the six-month period ended June 30, 2019. The value of the embedded
beneficial conversion feature on the note payable was estimated to be $72,334. In addition, the Company paid $2,500 for debt issuance
costs. For the six-month period ended June 30, 2019, the Company recorded $37,417 of interest expense related to the value of the
embedded beneficial conversion feature and debt issuance costs.
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 principal balance at June 30,
2019 is $102,500. The interest expense incurred on the note payable was approximately $3,075 for the six-month period ended June
30, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated to be $102,500. In addition,
the Company paid $2,500 for debt issuance costs. For the six-month period ended June 30, 2019, the Company recorded $39,375 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 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 principal balance at June 30, 2019 is $100,000. The interest expense incurred on
the note payable was approximately $3,750 for the six-month period ended June 30, 2019. The value of the embedded beneficial conversion
feature on the note payable was estimated to be $100,000. In addition, the Company paid $5,000 for debt issuance costs. For the
six-month period ended June 30, 2019, the Company recorded $39,212 of interest expense related to the value of the embedded beneficial
conversion feature and debt issuance costs.
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 September 20, 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 principal
balance at June 30, 2019 is $560,000. The interest expense incurred on the note payable was approximately $25,200 for the
six-month period ended June 30, 2019. The value of the embedded beneficial conversion feature on the note payable was
estimated to be $560,000. In addition, the Company granted the lender 450,000 shares of the Company’s common stock,
paid $56,000 as a discount on the note, and paid $4,000 for debt issuance costs. The shares granted must be returned if the
note is fully repaid and satisfied prior to the maturity date. The Company recorded the value of the shares at
$400,455, based on the Company’s share price on the date of the note agreement, as a decrease to additional paid-in
capital. For the six-month period ended June 30, 2019, the Company recorded $465,000 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 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 principal balance at June 30, 2019 is $42,500. The interest
expense incurred on the note payable was approximately $992 for the six-month period ended June 30, 2019. The value of the embedded
beneficial conversion feature on the note payable was estimated to be $31,556. In addition, the Company paid $2,500 for debt issuance
costs. For the six-month period ended June 30, 2019, the Company recorded $9,933 of interest expense related to the value of the
embedded beneficial conversion feature and debt issuance costs.
The Company borrowed $150,000 from a lender
on March 18, 2019. The note bears interest at 12% and is payable in one lump sum on September 18, 2019, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior
to the maturity date at a price per share equal to sixty-five percent of the second lowest trade price of the Company’s common
stock
for the twenty trading days prior to
the conversion date. The principal balance at June 30, 2019 is $150,000. The interest expense incurred on the note payable
was approximately $5,250 for the six-month period ended June 30, 2019. The value of the embedded beneficial conversion
feature on the note payable was estimated to be $93,077. In addition, the Company granted 115,384 shares of the
Company’s common stock and paid $15,000 as a discount on the note. The shares granted must be returned if the note is
fully repaid and satisfied prior to 180 days after the issuance date. The Company recorded the value of the shares at
$91,153, based on the Company’s share price on the date of the note agreement, as a decrease to additional paid-in capital.
For the six-month period ended June 30, 2019, the Company recorded $64,795 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 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 six-month
period ended June 30, 2019, the Company recorded $7,054 of interest expense related to the value of the embedded beneficial conversion
feature and debt issuance costs. This note was paid in full on April 5, 2019 and the Company recorded a loss on extinguishment
of this debt of $4,361.
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 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 six-month period ended June 30, 2019, the
Company recorded $10,589 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance
costs. This note was paid in full on April 12, 2019 and the Company recorded additional interest expense of $38,940.
The Company 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 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 six-month period ended
June 30, 2019, the Company recorded $74,732 of interest expense related to the value of the embedded beneficial conversion feature
and debt issuance costs. Through June 30, 2019, the Company paid $65,745 of principal and prepayment penalties of $29,255 recorded
as interest expense. The lender converted $14,997 of principal and accrued interest into 82,275 shares of the Company’s common
stock. The principal balance remaining on the note as of June 30, 2019 was $20,000.
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 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 six-month period ended June 30, 2019, the Company
recorded $59,042 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance costs.
The lender converted $76,089 of principal and
fees into 632,000 shares of the Company’s
common stock. On May 20, 2019, the Company borrowed an additional $51,500 on this note. The value of the embedded beneficial conversion
feature on the note payable was estimated to be $51,500. In addition, the Company paid $1,500 for debt issuance costs. For the
six-month period ended June 30, 2019, the Company recorded $6,625 of interest expense related to the value of the embedded beneficial
conversion feature and debt issuance costs. The principal balance remaining on the note as of June 30, 2019 was $53,911.
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 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. In addition, the Company paid $2,000 for debt issuance costs. For
the six-month period ended June 30, 2019, the Company recorded $32,791 of interest expense related to the value of the embedded
beneficial conversion feature and debt issuance costs. The lender converted $47,244 of principal and accrued interest into 242,276
shares of the Company’s common stock. The principal balance remaining on the note as of June 30, 2019 was $35,000.
The Company borrowed $175,000 from a
lender on April 9, 2019. The note bears interest at 12%, and is payable in one lump sum on January 9, 2020, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior
to the maturity date at a price per share equal to the lesser of the lowest trading price of the Company’s common stock for
the twenty-five trading days prior to the note issuance date, and the Variable Conversion Price equal to fifty-five percent of
the lowest trading price of the Company’s common stock for the twenty-five trading days prior to the conversion date. If
at any time while this note is outstanding a 3
rd
party has the right to convert at a discount to market greater than
the conversion price in effect at that time, the lender may utilize such greater discount percentage until the note is no longer
outstanding. If at any time while this note is outstanding a 3rd party has a look back period greater than the look back period
in effect at that time, the lender may utilize such greater number of look back days until the note is no longer outstanding. The
principal balance at June 30, 2018 is $175,000. The interest expense incurred on the note payable was approximately $5,250 for
the six-month period ended June 30, 2019. The value of the embedded beneficial conversion feature on the note payable was estimated
to be $15,000. In addition, the Company paid $16,250 for debt issuance costs. For the six-month period ended June 30, 2019, the
Company recorded $10,417 of interest expense related to the value of the embedded beneficial conversion feature and debt issuance
costs.
The Company borrowed $102,500 from a
lender on April 10, 2019. The note bears interest at 8% and is payable in one lump sum on April 10, 2020, at which time the entire
amount of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount
is convertible by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior
to the maturity date at a price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s
common stock for the twenty trading days prior to the conversion date. The principal balance at June 30, 2019 is $102,500. The
interest expense incurred on the note payable was approximately $2,050 for the six-month period ended June 30, 2019. The value
of the embedded beneficial conversion feature on the note payable was estimated to be $52,907. In addition, the Company paid $2,500
for debt issuance costs. For the six-month period ended June 30, 2019, the Company recorded $13,852 of interest expense related
to the value of the embedded beneficial conversion feature and debt issuance costs.
The Company borrowed $400,000 from five lenders
on May 20, 2019. The notes bear interest at 10% and are payable in one lump sum on May 20, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal and interest amount is
convertible by the holders into shares of the Company’s common stock at any time after the closing price of the Company’s
common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share. The principal balance at June 30,
2019 is $400,000. The interest expense incurred on the note payable was approximately $4,183 for the
six-month period ended June 30, 2019. There
was no value assigned to the beneficial conversion feature on the issuance date of the notes due to the Company’s common
stock price being less than $0.75 per share. In addition, the Company paid $20,000 for debt issuance costs. For the six-month period
ended June 30, 2019, the Company recorded $1,667 of interest expense related to the amortization of debt issuance costs.
7. Advances From Related Parties
The Company has received non-interest
bearing advances without a specified maturity date from certain stockholders of the Company. The Company owed approximately $63,000
and $302,000, respectively, at June 30, 2019 and December 31, 2018 to the stockholders.
8. Revenue Sharing Agreements
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. On March 3, 2019, the Company cancelled this original
agreement and entered into a new agreement whereby the lender is to receive fifty percent of the revenues net of costs and has
guaranteed that the lender would receive $150,000 in net revenues by March 3, 2021, or the Company would pay the lender the difference
between the $150,000 and the purchase price of $50,000 on or before March 31, 2021. For the six-month period ended June 30, 2019,
the Company recorded $25,000 of interest expense related to the value of the revenue sharing liability. The agreement remains in
full force and effect until the earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement
and action is brought by the lender to enforce same, (b) the expiration of the operating life of the unit, as confirmed by the
manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $264,000 from a lender
on December 13, 2018, whereby the proceeds are to be used to purchase certain HydraSpin units. On February 27, 2019, the Company
cancelled this original agreement and entered into a new agreement to borrow an additional $66,000, whereby the proceeds were used
to purchase a certain HydraSpin unit in exchange for the lender to receive fifty percent of the revenues net of costs generated
from the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by March 3, 2021, or
the Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before March 31,
2021. For the six month period ended June 30, 2019, the Company recorded $22,000 of interest expense related to the value of the
revenue sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy
its obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the
operating life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $660,000 from a lender
on January 2, 2019, whereby the proceeds were used to purchase certain HydraSpin units in exchange for the lender to receive fifty
percent of the revenues net of costs generated from the HydraSpin units. The Company has guaranteed that the lender would receive
$990,000 in net revenues by January 2, 2021, or the Company would pay the lender the difference between the $990,000 and the purchase
price of $660,000 on or before January 15, 2021. For the six-month period ended June 30, 2019, the Company recorded $82,500 of
interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the
earlier of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender
to enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the
mutual written agreement of the parties.
The Company borrowed $660,000 from a lender
on January 16, 2019, whereby 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 purchase
price of $660,000 on or before January 17, 2021. For the six-month period ended June 30, 2019, the Company recorded $75,625 of
interest expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the
earlier of (a) the Company is unable to satisfy its obligations under the terms of
the agreement and action is brought by the
lender to enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or
(c) the mutual written agreement of the parties.
The Company borrowed $330,000 from a lender
on January 30, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive
sixty percent of the revenues net of forty percent of costs generated from the HydraSpin unit until the lender receives revenue
equal to 120% of the $330,000 investment, then the lender shall receive fifty percent of the revenues net of costs generated from
the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by January 30, 2021, or the
Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before February 6, 2021.
For the six-month period ended June 30, 2019, the Company recorded $34,375 of interest expense related to the value of the revenue
sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its
obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating
life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $330,000 from a lender
on January 30, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive
sixty percent of the revenues net of forty percent of costs generated from the HydraSpin unit until the lender receives revenue
equal to 120% of the $330,000 investment, then the lender shall receive fifty percent of the revenues net of costs generated from
the HydraSpin unit. The Company has guaranteed that the lender would receive $495,000 in net revenues by January 30, 2021, or the
Company would pay the lender the difference between the $495,000 and the purchase price of $330,000 on or before February 6, 2021.
For the six-month period ended June 30, 2019, the Company recorded $34,375 of interest expense related to the value of the revenue
sharing liability. The agreement remains in full force and effect until the earlier of (a) the Company is unable to satisfy its
obligations under the terms of the agreement and action is brought by the lender to enforce same, (b) the expiration of the operating
life of the unit, as confirmed by the manufacturer (five years), or (c) the mutual written agreement of the parties.
The Company borrowed $330,000 from a lender
on April 1, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive fifty
percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive
$495,000 in net revenues by April 8, 2021, or the Company would pay the lender the difference between the $495,000 and the purchase
price of $330,000 on or before April 30, 2021. For the six-month period ended June 30, 2019, the Company recorded $20,625 of interest
expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier
of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to
enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the
mutual written agreement of the parties.
The Company borrowed $60,000 from a lender
on June 25, 2019, whereby the proceeds were used to purchase a certain HydraSpin unit in exchange for the lender to receive fifty
percent of the revenues net of costs generated from the HydraSpin unit. The Company has guaranteed that the lender would receive
$90,000 in net revenues by June 25, 2021, or the Company would pay the lender the difference between the $90,000 and the purchase
price of $60,000 on or before July 25, 2021. For the six-month period ended June 30, 2019, the Company recorded $208 of interest
expense related to the value of the revenue sharing liability. The agreement remains in full force and effect until the earlier
of (a) the Company is unable to satisfy its obligations under the terms of the agreement and action is brought by the lender to
enforce same, (b) the expiration of the operating life of the units, as confirmed by the manufacturer (five years), or (c) the
mutual written agreement of the parties.
9. Equity Transactions
From January 1, 2018 to March 31, 2018, the
Company issued 1,656,000 shares to investors at $0.50 per share for cash, with total proceeds of $828,000, including subscription
receivable of $50,000. In addition, the Company issued 610,000 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 $305,000.
From April 1, 2018 to June 30, 2018, the Company
issued 625,000 shares to investors at $0.50 per share for cash,
with total proceeds of $312,500. In addition,
the Company issued 770,000 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 $385,000. The Company had 1,250,000 shares returned during June 2018 as a result
of a lawsuit settlement.
From January 1, 2019 to March 31, 2019,
the Company issued 200,000 shares to a lender upon receipt of a conversion notice. The Company also issued 565,384 shares to lenders
for debt issuance costs. See Note 6.
From April 1, 2019 to June 30, 2019,
the Company issued 1,289,051 shares to lenders upon receipt of conversion notices. See Note 5. In addition, the Company issued
825,000 shares to employees and consultants valued at the share price on the date the services were earned.
10. Operating Leases – Right
of Use Assets
The Company has operating leases for office
and warehouse space that expires in 2020 and 2023. Below is a summary of the Company’s right of use assets and liabilities
as of June 30, 2019:
Right-of-use assets
|
|
$
|
871,879
|
|
Lease liability obligations, current
|
|
$
|
246,270
|
|
Lease liability obligations, less current portion
|
|
|
639,827
|
|
Total lease liability obligations
|
|
$
|
886,097
|
|
Weighted-average remaining lease term
|
|
|
3.7 years
|
|
Weighted-average discount rate
|
|
|
10
|
%
|
During the six months ended June 30, 2019,
the Company recognized approximately $83,833 in operating lease costs and are included in selling, general and administrative
expenses in our consolidated statement of operations. During the six months ended June 30, 2019, operating cash flows from operating
leases was $64,700.
Approximate future minimum lease payments for
the Company’s right of use assets over the remaining lease periods as of June 30, 2019, are as follows:
Year ending December 31,
|
|
2019
|
|
|
$
|
161,000
|
|
|
2020
|
|
|
|
312,000
|
|
|
2021
|
|
|
|
240,000
|
|
|
2022
|
|
|
|
246,000
|
|
|
2023
|
|
|
|
103,000
|
|
|
Total minimum payments
|
|
|
$
|
1,062,000
|
|
11. Income Taxes
The Company accounts for income taxes
under the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary differences. Deferred
tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income
in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
The Company’s tax provision is
determined using an estimate of an annual effective tax rate adjusted for discrete items, if any, that are taken into account in
the relevant period. The 2019 and 2018 annual effective tax rate was 0% for the U.S. federal and state statutory tax rates. The
Company reviews tax uncertainties in light of changing facts and circumstances and adjusts them accordingly. As of June 30, 2019
and December 31, 2018, there were no tax contingencies recorded.
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting,
and the amounts recognized for income tax purposes.
The Company has a net operating loss
carry-forward for federal and state tax purposes of approximately $11,686,000 at June 30, 2019, that is potentially available to
offset future taxable income. The TCJA (Tax Cut and Jobs Act) changes the rules on NOL carryforwards. The 20-year limitation was
eliminated, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January
1, 2018, will now be limited to 80 percent of taxable income.
For financial reporting purposes, no
deferred tax asset was recognized at June 30, 2019 and December 31, 2018 because management estimates that it is more likely than
not that substantially all of the net operating losses will expire unused. As a result, the amount of the deferred tax assets considered
realizable was reduced 100% by a valuation allowance. The change in the valuation allowances were approximately $779,000 and $376,000
for the six months ended June 30, 2019 and 2018, respectively.
12. Segment Information
The Company sells water purification products
and operates oil recovery systems. The Company has identified such reportable segments based on management responsibility and the
nature of the Company’s products, services, and costs. To date, the Company primarily sells its water purification products
internationally and operates its oil recovery systems in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Segment assets are those assets controlled by each reportable segment.
Below is the financial information related to the Company’s
segments:
|
|
For the three months ended
|
|
For the six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
230,192
|
|
|
$
|
(68,935
|
)
|
|
$
|
308,744
|
|
|
$
|
59,195
|
|
Oil recovery systems
|
|
|
5,557
|
|
|
|
—
|
|
|
|
5,557
|
|
|
|
—
|
|
|
|
$
|
235,749
|
|
|
$
|
(68,935
|
)
|
|
$
|
314,301
|
|
|
$
|
59,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
605,739
|
|
|
$
|
680,403
|
|
|
$
|
1,328,293
|
|
|
$
|
1,398,688
|
|
Oil recovery systems
|
|
|
248,533
|
|
|
|
—
|
|
|
|
345,114
|
|
|
|
—
|
|
General corporate
|
|
|
277,599
|
|
|
|
289,284
|
|
|
|
426,874
|
|
|
|
385,351
|
|
|
|
$
|
1,131,871
|
|
|
$
|
969,687
|
|
|
$
|
2,100,281
|
|
|
$
|
1,784,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,158
|
|
|
$
|
—
|
|
Oil recovery systems
|
|
|
930,000
|
|
|
|
—
|
|
|
|
1,558,625
|
|
|
|
—
|
|
General corporate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
930,000
|
|
|
$
|
—
|
|
|
$
|
1,650,783
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Total assets
|
|
|
|
|
|
|
|
|
Water purification products
|
|
$
|
901,852
|
|
|
$
|
612,498
|
|
Oil recovery systems
|
|
|
2,690,367
|
|
|
|
1,244,814
|
|
General corporate
|
|
|
958,155
|
|
|
|
63,956
|
|
|
|
$
|
4,550,374
|
|
|
$
|
1,921,268
|
|
General corporate expenses include corporate
salaries, health insurance and social security taxes for officers and corporate employees, corporate insurance, legal and accounting
fees, and other corporate costs such as transfer agent and travel costs. Management considers these to be non-allocable costs for
segment purposes.
13. Subsequent Events
The Company has evaluated all material events
or transactions that occurred after June 30, 2019 up to August 19, 2019, the date these financial statements were available to
be issued, and noted no material subsequent events which would require disclosure.
Financing
The Company borrowed $88,500 from a lender on July 8, 2019. The
note bears interest at 8% and is payable in one lump sum on July 8, 2020, at which time the entire amount of principal and accrued
interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible by the holder
into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity date at a
price per share equal to sixty-five percent of the average of the lowest two trading prices of the Company’s common stock
for the twenty trading days prior to the conversion date.
The Company borrowed $103,000 from a lender
on July 24, 2019. The note bears interest at 10% and is payable in one lump sum on July 24, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The note is unsecured. The outstanding principal and interest amount is convertible
by the holder into shares of the Company’s common stock beginning 180 days after the issuance date and prior to the maturity
date at a price per share equal to the lesser of (1) $0.22 and (2) sixty-five percent of the lowest trading price of the Company’s
common stock for the twenty trading days prior to the conversion date.
The Company borrowed $100,000 from two lenders
on July 26, 2019. The notes bear interest at 10% and are payable in one lump sum on May 20, 2020, at which time the entire amount
of principal and accrued interest is due and payable. The notes are unsecured. The outstanding principal and interest amount is
convertible by the holders into shares of the Company’s common stock at any time after the closing price of the Company’s
common stock exceeds $0.75 for 10 consecutive trading days at a price equal to $0.50 per share.
Stock Issuances
In July 2019 the Company issued 1,000,000 shares
of common stock for total proceeds of $250,000.
On July 24, 2019 a lender provided the Company
with a Notice of Conversion to convert $20,000 of principal and $1,194.52 of interest into 184,220 shares of common stock.
In August 2019 the Company issued 50,000
shares of common stock to an employee for compensation.