UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-55825

 

WATER NOW, INC.

(Exact name of registrant as specified in its charter)

 

Texas		81-1419236
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
4555 Village Creek Road Fort Worth, Texas		76119
(Address of Principal Executive Office)		(Zip Code)

 

Registrant’s telephone number, including area code: (817) 908-6382

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  ¨ Yes   þ No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨	Accelerated filer   ¨
Non-accelerated filer ¨	Smaller reporting company  þ
Emerging growth company þ

                                                                                                         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No  þ

 

At May 3, 2018, there were 32,591,808 shares outstanding of Common Stock, no par value.

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

 

Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Water Now, Inc., a Texas corporation (“Water Now”).

 

Readers should consider the following information as they review this Report:

 

Forward-Looking Statements

 

There are statements in this Report that are not historical facts. These “forward-looking statements” can be identified by use of terminology suggesting a belief in future performance and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire Report carefully. Although management believes that the assumptions underlying the forward-looking statements included in this Report are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. The assumptions used for purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this Report will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake any obligation to update or revise any forward-looking statements.

 

Document Summaries

 

Descriptions of documents and agreements contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Registration Statement on Form 10 filed on October 13, 2017, other periodic and current reports we have filed with the SEC or this Report.

 

Access to Filings

 

Access to our reports and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://www.waternowinc.com) as soon as reasonably practicable after we have filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

		Page No.
Item 1.	Financial Statements
	Condensed Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	5
	Condensed Statements of Operations (unaudited) for the three months ended March 31, 2018 and 2017	6
	Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2018 and 2017	7
	Notes to Condensed Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Signatures		26
Index to Exhibits		27

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Water Now, Inc.

Condensed Balance Sheets

 

		March 31,				December 31,
		2018				2017
			(Unaudited)
ASSETS
Current Assets
Cash		$	71,313			$	2,049
Accounts receivable			118,130				—
Inventory			354,028				346,101
Other receivable – related party			14,885				—
Total Currents Assets			558,356				348,150
Plant and machinery - net			125,108				132,010
Security deposit			10,849				9,149
Total Assets		$	694,313			$	489,309
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Outstanding checks in excess of bank balance		$	—			$	6,597
Accounts payable and accrued expenses			94,941				116,513
Advance from related party			—				32,115
Note payable – stockholder			112,000				112,000
Total Liabilities			206,941				267,225
Commitments and contingencies - Note 7			—				—
Stockholders' Equity
Preferred stock – no par value, 10,000,000 shares authorized, zero issued and outstanding at March 31, 2018 and December 31, 2017			—				—
Common Stock - no par value, 90,000,000 shares authorized, 32,788,000 shares and 30,522,000 shares issued and 32,591,808 and 30,325,808 outstanding as of March 31, 2018 and December 31, 2017, respectively			4,964,205				3,831,205
Subscription receivable			(50,000	)			—
Accumulated deficit			(4,426,833	)			(3,609,121	)
Total Stockholders' Equity			487,372				222,084
Total Liabilities and Stockholders' Equity		$	694,313			$	489,309

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

Water Now, Inc.

Condensed Statements of Operations

(Unaudited)

 

		For The Three Months Ended
		March 31,
		2018				2017
Revenues, net		$	128,130			$	—
Cost of goods sold			60,332				—
Gross Profit			67,798				—
Operating expenses
Research and development expenses			264,212				96,694
General and administrative expenses			617,938				31,846
Total operating expenses			882,150				128,540
Loss from operations			(814,352	)			(128,540	)
Other expense
Interest expense			(3,360	)			(3,000	)
Total other expense			(3,360	)			(3,000	)
Loss before provision for income taxes			(817,712	)			(131,540	)
Provision for income taxes			—				—
Net Loss		$	(817,712	)		$	(131,540	)
Loss per share
basic and fully diluted		$	(0.03	)		$	(0.00	)
Weighted-average number of shares of common stock
basic and fully diluted			31,386,597				28,856,641

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

Water Now, Inc.

Condensed Statement of Cash Flows

(Unaudited)

 

		For The Three Months Ended
		March 31,
		2018				2017
Cash flows from operating activities:
Net loss		$	(817,712	)		$	(131,540	)
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock issued as payment for services and employees compensation			305,000				—
Depreciation of equipment			6,902				—
Changes in operating working capital items:
Accounts payable and accrued expenses			(21,572	)			(45,058	)
Security deposit			(1,700	)			—
Inventory			(7,927	)			—
Accounts receivable			(118,130	)			—
Net cash used in operating activities			(655,139	)			(176,598	)
Net cash used in investing activities			—				—
Cash flows from financing activities:
Outstanding checks in excess of bank balance			(6,597	)			(2,500	)
Net repayments to related party			(47,000	)			(33,406	)
Repayment of note payable - stockholder			—				—
Issuances of common stock			778,000				227,000
Net cash provided by financing activities			724,403				191,094
Net increase in cash			69,264				14,496
Cash at beginning of period			2,049				336
Cash at end of period		$	71,313			$	14,832
Supplemental Disclosure of Interest and Income Taxes Paid:
Interest paid during the period		$	2,000			$	3,000
Income taxes paid during the period		$	—			$	—

 

 

The accompanying notes are an integral part of these condensed financial statements.

Water Now, Inc.

Notes to Condensed Financial Statements (unaudited)

March 31, 2018

 

1. Basis of presentation, Background and Description of Business

 

Basis of presentation

 

The accompanying unaudited financial statements of Water Now, Inc. (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 period ended December 31, 2017.

 

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.

 

Background and Description of Business

 

On September 27, 2016, we consummated a transaction whereby VCAB One Corporation, a Texas corporation (“VCAB”), merged with and into us. 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, we issued an aggregate of 703,808 shares of our common stock (the “Plan Shares”) to the Claim Holders whose claims had been approved as of the time of issuance as full settlement and satisfaction of their respective claims. As provided in the confirmed bankruptcy plan, the Plan Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code. An additional 196,192 Plan Shares are held in reserve in the Company’s treasury for issuance to Claim Holders whose claims have yet to be either approved or denied by the court. The treasury shares will be issued once a Claim Holder’s claim has been approved or disapproved. If disapproved the shares will be distributed to approve Claim Holders on a pro rata basis. As a result of the merger, the separate corporate existence of VCAB was terminated. We entered into the merger in order to increase our shareholder base in order to, among other things, assist us 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.

 

2. Going Concern

 

At March 31, 2018, the Company had approximately $71,000 in cash and had net working capital of approximately $351,000. The Company, which generated a net loss of approximately $818,000 and $132,000 for the three-months ended March 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

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist primarily of deposit accounts with original maturities of three months or less.

 

Inventory

 

Inventory includes manufacturing parts and work in process for the Company’s water purification equipment. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or net realizable value.

 

Use of Accounting Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

Actual results could differ from those estimates. The most significant estimates and assumptions made by management related to determining the value of stock-based expenses. 

 

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 three months ended March 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 three months ended March 31, 2018 and 2017 based on prices paid by unrelated third-parties for the purchases of its common stock during this period, which amounted to $0.50 per share.

 

The Company estimated the fair value of stock-based awards issued to employees, directors and non-employees during the three months ended March 31, 2018 based on prices paid by unrelated third-parties for the purchases of its common stock during this period, which amounted to $0.50 per share.

 

The components of stock-based compensation related to stock awards in the Company’s Statement of Operations for the three months ended March 31, 2018 and 2017 are as follows (rounded to nearest thousand):

 

		For The Three Months Ended
		March 31,
		2018				2017
Research and development expenses		$	65,000			$	—
General and administrative expenses			240,000				—
Total stock-based compensation expense		$	305,000			$	—

 

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 $264,212 and $96,694, for the three months ended March 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.

 

Recent Accounting Pronouncements

 

Going Concern — In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15 – “Presentation of Financial Statements – Going Concern – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The updated accounting guidance was effective for the Company on December 31, 2016. We have implemented this new accounting standard and we will update our liquidity disclosures as necessary.

 

Revenue — In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company has adopted the new revenue standards on January 1, 2018 using the modified retrospective approach. Based on our analysis, we did not identify a cumulative effect adjustment to the accumulated deficit balance at January 1, 2018.

 

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.

 

Debt Issuance Costs - In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

 

Stock Compensation - In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows (i) excess tax benefits be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and did not have a material effect on the Company’s financial position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

 

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation. The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments When the terms of an award provide that a performance target could be achieved after the requisite service period, which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in

 

 which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of this standard did not have a material impact on the Company’s accompanying 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 Company will adopt ASU No. 2016-15 commencing in the first quarter of fiscal 2019. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.

 

4. Notes Payable – Stockholder

 

The Company borrowed $112,000 from a shareholder on November 2, 2017. The note bears interest at 12% and is payable monthly interest-only through April 30, 2018, at which time the entire amount of principal and any accrued interest is due and payable. The note is collateralized by all equipment owned by the Company and is guaranteed by the Company’s President. The interest expenses incurred on the Stockholder note payable was $3,360 and $0, for the three months ended March 31, 2018 and 2017, respectively.

 

5. Advances From Related Party

 

The Company has received non-interest bearing advances without a specified maturity date from a stockholder of the Company. The Company had a (receivable)/liability to the stockholder of approximately $(14,885) and $32,000, respectively, at March 31, 2018 and December 31, 2017 to the stockholder.

 

6. 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 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.

 See Note 1, Background and Description of Business, for an explanation of the 196,192 shares held in treasury.

 

7. 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. The lease is for a term of 36.5 months ending on October 30, 2020, and requires monthly payments of approximately $9,000, including triple net charges.

 

As of March 31, 2018, future minimum lease payments to Peleton Properties LLC required under the non-cancellable operating lease are as follows (rounded to nearest thousand):

  

Year ending December 31,
2018		$	101,000
2019			103,000
2020			88,000
Total minimum payments		$	292,000

 

 

 

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.

 

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, 2017 in accordance with ASC 718. The second installment was payable in March 2018. These shares were issued at that time. The Company expensed $37,500 for these shares during the period ended March 31, 2018 in accordance with ASC 718.

 

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 April 6, 2017, Cloudburst Solutions, LLC (“Cloudburst”) filed suit against the Company and David King in the 17th District Court of Tarrant County, Texas. Cloudburst alleges that the Company breached its obligations under a Manufacturing and Distribution Agreement to which the Company and Cloudburst were parties. Cloudburst also claims that the Company and Mr. King have misappropriated unspecified “intellectual property rights related to water treatment/reclamation processes.” Cloudburst seeks a declaratory judgment and unspecified damages, including $1,536,000 alleged to be owed pursuant to the Manufacturing and Distribution Agreement. The Company has filed special exceptions, and the parties have exchanged discovery requests. The Company intends to vigorously defend against the claims made by Cloudburst. The Company has not accrued any amounts for this litigation because it believes that the resolution of this uncertainty will not have a material effect on the Company’s financial condition.

 

8. 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 a combined 35% for the U.S. federal and state statutory tax rates. The Company reviews tax uncertainties in light of changing facts and circumstances and adjust them accordingly. As of March 31, 2018 and December 31, 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 significant components of deferred tax assets (at an approximate 21% effective tax rate) as of March 31, 2018 and 2017, respectively,

 

We had a net operating loss carry-forward for federal and state tax purposes of $4,428,000 at March 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 because at March 31, 2018 and December 31, 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 $172,000 and $45,000 for the three months ended March 31, 2018 and 2017, respectively.

 

9. Subsequent Events

 

The Company has evaluated all material events or transactions that occurred after March 31, 2018 up to May 15, 2018, the date these financial statements were available to be issued and noted no material subsequent events which would require disclosure.

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Forward-Looking Statements and Business sections in this registration statement. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

Water Now, Inc. was incorporated in Texas on February 10, 2016 to develop and commercialize a patent-pending, gas/diesel 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 product lines are designed to 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 products has been tested to meet or exceed the World Health Organization’s (“WHO”) drinking water standards.

 

Financial Overview

 

Revenue

 

From February 10, 2016 (date of inception) through March 31, 2018, we had generated revenues of approximately $163,700. Our ability to increase revenues will depend on the successful manufacturing and commercialization of our water purification units.

 

Research and Development Expenses

 

The Company expenses research and development (“R&D”) costs as incurred. The Company’s R&D activities related to activities undertaken to adapt the water purification technology contributed by David King for commercial-scale manufacturing and the development of multiple product offerings.

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense. To date, we have estimated the fair value of stock-based awards issued to employees, directors and non-employees based on prices paid by unrelated third-parties for the purchases of our common stock. Other G&A expenses include patent costs, and professional fees for legal, finance and accounting services.

 

We anticipate that our G&A expenses will increase in future periods to support increases in our research and development activities and as a result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

 

  

Interest Expense

 

Interest expense consists of interest incurred on borrowings.

 

Significant Accounting Policies and Recent Accounting Pronouncements

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, impairment of financing receivables and long-lived assets, valuation of warrants, income taxes and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.  For a discussion of our significant accounting policies, refer to Note 3 – “Summary of Significant Accounting Policies” in the Notes to our condensed Financial Statements for the three months ended March 31, 2018, included in this Annual Report.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist primarily of deposit accounts with original maturities of three months or less.

 

Inventories

 

Inventory includes manufacturing parts and work in process for the Company’s water purification equipment. Inventories are carried at the lower of cost (on a first-in, first-out (“FIFO”)) basis, or net realizable value.

 

 

Use of Accounting Estimates

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The most significant estimates and assumptions made by management related to determining the value of stock-based expenses.

 

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.

 

We account 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, we must determine whether any amount of the tax benefit may be recognized. Second, we determine 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, we have not recognized any penalty, interest or tax impact related to uncertain tax positions.

 

Stock-Based Expenses

 

We account 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 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.

 

We account 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, we determine 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.

 

We estimated the fair value of stock-based awards issued to employees, directors and non-employees based on prices paid by unrelated third-parties for the purchases of our common stock during the applicable period.

 

Research and development costs

 

We expense research and development costs as incurred in accordance with ASC 730, “Research and Development.” Our research and development activities related to activities undertaken to adapt the water purification technology contributed by David King for commercial-scale manufacturing and the development of additional offerings.

 

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 Adopted Accounting Pronouncements

 

Going Concern — In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15 – “Presentation of Financial Statements – Going Concern – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The updated accounting guidance was effective for the Company on December 31, 2016. We have implemented this new accounting standard and we will update our liquidity disclosures as necessary.

 

Revenue — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company has adopted the new revenue standards on January 1, 2018 using the modified retrospective approach. Based on our analysis, we did not identify a cumulative effect adjustment to the accumulated deficit balance at January 1, 2018.

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.

 

Debt Issuance Costs — In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

 

Stock Compensation — In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows (i) excess tax benefits be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and did not have a material effect on the Company’s financial position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

 

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation. The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments When the terms of an award provide that a performance target could be achieved after the requisite service period, which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still

 

be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

 

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 Company will adopt ASU No. 2016-15 commencing in the first quarter of fiscal 2019. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.

 

Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

 

Results of Operations

 

For the three months ended March 31, 2018 and 2017 (unaudited)

 

Revenue

 

We generated nominal revenues and incurred operating expenses of $882,150 and $128,540 for the three months ended March 31, 2018 and 2017, respectively.

 

Research and development expenses    

     

Below is a summary of our research and development expenses for the three months ended March 31, 2018 and 2017, respectively:

 

		For the three months ended
		March 31,
		2018				2017				2018 vs. 2017
											$				%
Payroll expense		$	195,965			$	92,433				103,532				112.0	%
Stock-based compensation expense			65,000				—				65,000				—	%
Travel expense and other miscellaneous expense			3,247				4,261				(1,014	)			(23.8	)%
Total		$	264,212			$	96,694				167,518				173.2	%

 

Payroll expenses related to our R&D function increased during the three months ended March 31, 2018 primarily related to increases in the salaries, payroll taxes and benefits for our employees engaged in research and development.

 

Stock-based compensation expenses increased during the three months ended March 31, 2018 due to granting stock awards to our employees and advisors during the period. 

General and administrative expenses

 

The following is a summary of our general and administrative expenses for the three months ended March 31, 2018 and 2017, respectively: 

 

		For the three months ended
		March 31,
		2018				2017				2018 vs. 2017
										$				%
Payroll expenses		$	37,963			$	29,995				7,968				26.6	%
Stock-based compensation expense			240,000				—				240,000				—	%
Other G&A			267,932				1,851				266,081				14,375.0	%
Audit, legal and professional fees		$	72,043			$	—				72,043				—	%
Total		$	617,938			$	31,846				586,092				1840.4	%

Payroll expenses increased during the three months ended March 31, 2018 primarily related to increases in salaries, payroll taxes and benefits for certain of our employees.

 

Stock-based compensation expenses increased during the three months ended March 31, 2018 due to granting additional stock awards to our employees and advisors during the period.

 

Other general and administrative expenses increased during the three months ended March 31, 2018 primarily related to increases in insurance, rental expenses and travel expenses, partially offset by a decrease in professional fees.

 

Other Income (Expense)

 

Below is a summary of our other income (expense) for the three months ended March 31, 2018 and 2017, respectively.

 

		March 31,				March 31,
		2018				2017				2018 vs. 2017
										$				%
Interest Expense		$	3,360			$	3,000				360				12.0	%

 

There was an increase in interest expenses paid on the note payable – related parties. See Note 4 of the Notes to Condensed Financial Statements (unaudited) for the period ended March 31, 2018.

 

Net Losses

 

We incurred net losses of $817,712 and $131,540 for the three months ended March 31, 2018 and 2017, respectively, because of the factors discussed above. 

 

Net loss per share for the three months ended March 31, 2018 and 2017 was $0.03 and $0.00, respectively, based on the weighted-average number of shares issued and outstanding during the period.

 

It is anticipated that future operating expenses will increase as the Company complies with its periodic reporting requirements. 

 

  

Liquidity and Capital Resources

 

Sources of Liquidity

 

To date, we have generated nominal revenues. For fiscal 2017, we had a net loss of $131,540, resulting in an accumulated deficit as of December 31, 2017 in the same amount. As of March 31, 2018, we had cash and cash equivalents of $71,313. Our auditors issued a going concern opinion with respect to our financial statements as of and for the fiscal year ended December 31, 2017 due to the incurrence of significant operating losses, which raise substantial doubt about our ability to continue as a going concern. We have financed our operations to date primarily through private placements of our common stock and borrowings. For the three months ended March 31, 2018, we received $778,000 in net proceeds from the issuance of our common stock.

 

Cash Flows

 

The following table sets forth the primary sources and uses of cash for the period set forth below.

 

		Three months ended March 31, 2018				March 31, 2017
Net cash used in operating activities		$	(655,139	)		$	(176,598	)
Net cash provided by financing activities		$	724,403			$	191,094
Net increase in cash		$	69,264			$	14,496

 

Operating activities. Our use of cash in operating activities resulted primarily from our net loss, as adjusted for certain non-cash items and changes in operating assets and liabilities. For the three months ended March 31, 2018, non-cash items consisted of common stock issued as payment for services and employee compensation and changes in operating assets and liabilities consisted of an increase in inventory and accounts receivable and a decrease in accounts payable and accrued expenses, partially offset by an increase in payroll tax liability.

 

Financing activities. Cash provided by financing activities consisted primarily of proceeds from the issuance of our common stock in private placements. During the three months ended March 31, 2018 and 2017, we received $778,000 and $227,000, respectively, from the issuance of our common stock.

 

Funding Requirements

 

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

 

	•	establish a sales, marketing and distribution infrastructure to commercialize our water purification units and any other products we successfully develop;
	•	maintain, expand and protect our intellectual property portfolio; and
	•	add operational and financial personnel to handle the public company reporting and other requirements to which we will be subject following effectiveness of our Registration Statement on Form 10 filed with the SEC on October 13, 2017.

We expect that we will require additional capital to fund operations during the next twelve (12) month period. Because of the numerous risks and uncertainties associated with the development and commercialization of our water purification units, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with successfully commercializing such products. Our future capital requirements will depend on many factors, including: 

 

•

the costs and timing of commercialization activities for our water purification units, including manufacturing, sales, marketing and distribution;

 

 

	•	revenues received from sales of our products;
	•	the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and
	•	our ability to maintain manufacturing and distribution relationships on favorable terms, if at all.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, and strategic alliances. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies and future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to commercialize products that we would otherwise prefer to develop and market ourselves.

 

Quantitative and Qualitative Disclosures About Market Risk

 

We have not utilized any derivative financial instruments such as futures contracts, options and swaps, forward foreign exchange contracts or interest rate swaps and futures. We do not have any borrowings and, consequently, we are not affected by changes in market interest rates. We do not currently have any sales or own assets and operate facilities in countries outside the United States and, consequently, we are not affected by foreign currency fluctuations or exchange rate changes.  Overall, at this time, we believe that our exposure to interest rate risk and foreign currency exchange rate changes is not material to our financial condition or results of operations.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

 

Tax Loss Carryforwards

 

We had a net operating loss carry-forward for federal and state tax purposes of approximately $4.4 million at March 31, 2018, that is potentially available to offset future taxable income, which will begin to expire in the year 2036. For financial reporting purposes, no deferred tax asset was recognized because at March 31, 2018 and December 31, 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.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

No Applicable

 

ITEM 4. CONTROLS AND PROCEDURES

  

Evaluation of Disclosure Controls and Procedures.   The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.

 

The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2018, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.

 

Management’s Report on Internal Control Over Financial Reporting.   The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as of March 31, 2018, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled “Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were effective as of March 31, 2018.

 

Changes in Internal Control Over Financial Reporting.   The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control during the fiscal quarter ended March 31, 2018.

 

 

PART II. – OTHER INFORMATION

 

ITEM 1. 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, 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.

 

On April 6, 2017, Cloudburst Solutions, LLC (“Cloudburst”) filed suit against the Company and David King in the 17th District Court of Tarrant County, Texas. Cloudburst alleges that the Company breached its obligations under a Manufacturing and Distribution Agreement to which the Company and Cloudburst were parties. Cloudburst also claims that the Company and Mr. King have misappropriated unspecified “intellectual property rights related to water treatment/reclamation processes.” Cloudburst seeks a declaratory judgment and unspecified damages, including $1,536,000 alleged to be owed pursuant to Manufacturing and Distribution Agreement. The Company has filed special exceptions, and the parties have exchanged discovery requests. The Company intends to vigorously defend against the claims made by Cloudburst.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following is a summary of our issuances of common stock during the quarter ended March 31, 2018:

 

On various dates from January 1, 2018 to March 31, 2018, the Company issued an aggregate of 1,656,000 shares to various investors at $0.50 per share for cash, generating total proceeds of $828,000. The issuance of such shares was in reliance on Section 4(a)(2) of the Securities Act of 1933. We believe that Section 4(a)(2) was available because none of such issuances involved underwriters, underwriting discounts or commissions; restrictive legends were placed on the certificates representing the shares purchases; and none of such sales were made by general solicitation.

 

On various dates from January 1, 2018 to March 31, 2018, the Company issued 610,000 shares to executives, employees and consultants. The issuance of such shares was in reliance on Section 4(a)(2) of the Securities Act of 1933. We believe that Section 4(a)(2) was available because none of such issuances involved underwriters, underwriting discounts or commissions; restrictive legends were placed on the certificates representing the shares purchases; and none of such sales were made by general solicitation.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	WATER NOW, INC.
	(Registrant)
Date:  May 15, 2018
	By: /s/ David King
	David King
	Chief Executive Officer and Chief Financial Officer

 

 

 

 

INDEX TO EXHIBITS

 

 

31*

Certification of David King, Chief Executive Officer and Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32*

Statement of David King, Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Schema Document

101.CAL* XBRL Calculation Linkbase Document

101.DEF*

XBRL Definition Linkbase Document

101.LAB*

XBRL Label Linkbase Document

101.PRE*

XBRL Presentation Linkbase Document

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* Filed or furnished herewith.