WATER NOW, INC. The following discussion should be read in conjunction with our consolidated
financial statements and related notes thereto included in this quarterly
report, and the audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended
OverviewWater Now, Inc. was incorporated inTexas onFebruary 10, 2016 to develop and commercialize a gas/diesel and electric powered, portable device that processes and purifies contaminated water. Our water purification product lines consist of portable units capable of providing a cost-effective, safe and efficient method of water purification. We have also developed a flameless heating technology that allows us to manufacture an electronically powered portable heating platform. The platform uses no combustion or electronic heating elements. By avoiding traditional heating elements, the product is ideal for facilities that generate vapors or dust, such as paint and body shops, furniture manufacturers, fuel depots and grain elevators. Our technology is anticipated to allow for the efficient heating of large spaces such as warehouses and garages. We introduced to the market our initial product offering, HydraHeat, inJune 2019 , but have yet to generate revenue. The first product that we will make available to the market will heat approximately 1,000 square feet. We are currently in the process of obtaining a UL certification for the product. OnOctober 23, 2018 , the Company formedHydraSpin USA, Inc. , aTexas corporation ("HydraSpin"), as a wholly-owned subsidiary. HydraSpin is engaged in the installation and operation of oil recovery systems deployed at saltwater disposal wells associated with the oil industry. The utilized technology developed byAfrican Horizon Technologies (Pty) Ltd ("AHT") allows for the separation of residual oil from water contained in the disposal sites so as to minimize environmental contamination from the fluids containing oil. OnOctober 31, 2018 , the Company entered into an Exclusive Sales Distribution Agreement (the "AHT Agreement") with AHT whereby the Company serves as AHT s exclusive distributor of the Hydraspin Hydro Cyclone technology inthe United States of America . Pricing is established in accordance with the AHT Agreement. Products are paid 50% upon order and the balance being due FOB the port. Typical lead-time to have a machine ready for deployment after it is ordered is sixty (60) days. The Company, through HydraSpin, contracts with owners of saltwater injection wells to reclaim oil using systems manufactured by AHT but owned and operated by HydraSpin. We derive revenue from sharing the proceeds of the oil recovered and sold with the owner of the applicable disposal location, typically on a 50/50 basis. As of the current date, we have ordered 13 systems from AHT, of which we have received six units. These units are currently not in operation but expect to start operations inJune 2021 . There is currently no timeframe for receiving the remaining seven units from the manufacturer. OnNovember 12, 2019 , the Company, through its HydraSpin subsidiary, signed an Exclusive Distributor Agreement (the "Agreement") in which the other party to the agreement (the "Distributor") agrees to become the exclusive distributor of HydraSpin products in certainTexas andNew Mexico territories. HydraSpin shall provide the products to the Distributor at no cost but HydraSpin will receive certain net revenues from the sale of hydrocarbons produced by the deployed units. HydraSpin s share will be 92% of Net Revenues, as that term is defined in the Agreement, for the first 10 installed products and 85% for the eleventh product installed and those products installed subsequently. In order for the Distributor to maintain the exclusivity granted in the Agreement, it must deploy products in 25 new locations during each 12-month period following the effective date and all customer locations in the aggregate must generate an average of 7,500 barrels of water with at least 2% oil content in each per day. If the Agreement is extended beyond the initial term of five years, the number of customer locations to be secured to maintain exclusivity shall be increased
to 50 per year. 15
Oil prices have fallen dramatically in 2020, causing many producers to stop exploration activities. This situation and the global pandemic have effectively temporarily eliminated our ability to produce revenues from our HydraSpin activities.
OnJuly 31, 2020 , we entered into an Asset Sale and Purchase Agreement (the "Agreement") to sell substantially all of our assets toRigMax H20, LLC (the "Buyer"). OnNovember 24, 2020 , we exercised our right to unilaterally terminate the Agreement. The termination of the Agreement was the result of the Buyer's inability to fund the purchase price. We continue to evaluate the matter with the Buyer and will provide additional information as it becomes
available. Financial Overview Revenue
For the nine months ended
Research and Development Expenses
The Company expenses R&D costs as incurred. The Company's R&D activities related to activities undertaken to commercialize our water purification and heater products.
General and Administrative Expenses
General and administrative ("G&A") expenses consist primarily of salaries and
related costs for personnel, including stock-based compensation expense.
Subsequent to the active trading date of our common stock on August 14, 2018 , we
have based the fair value of awards on the quoted closing bid price of our
common stock on the OTC Markets on the date of grant. Other G&A expenses include
professional fees for legal, finance, accounting, and consulting services,
insurance and rent.
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 including amortization of beneficial conversation features and debt issue costs.
Critical Accounting Policies and Estimates
The preparation of the unaudited consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see "Management s Discussion and Analysis of Financial Condition and Results of Operations Significant Accounting Policies and Recent Accounting Pronouncements" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 filed with theSEC onJune 16, 2020 . 16
During the nine months endedSeptember 30, 2020 , there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 1 to our consolidated financial statements. Results of Operations
For the three months ended
Revenue
We generated revenues of$3,000 and$20,000 for the three months endedSeptember 30, 2020 and 2019, respectively. We generated revenues of$3,000 and$0 from our water purification products and oil recovery systems segments, respectively, for the three months endedSeptember 30, 2020 . We generated revenues of$0 and$20,000 from our water purification products and oil recovery systems segments, respectively, for the three months endedSeptember 30, 2019 . We continue to aggressively market our water purification products and oil recovery systems and believe that demand will increase as current customers reorder and new customers are acquired. Operating expenses Below is a summary of our operating expenses for the three months endedSeptember 30, 2020 and 2019: For the three months ended September 30, 2020 2019 2020 vs. 2019 $ % Salaries and wages$ 218,958 $ 398,579 (179,621 ) (45 )% Professional fees 255,871 271,661 (15,790 ) (6 )%
Selling, general and administrative 213,751 385,772
(172,021 ) (45 )% Total$ 688,580 $ 1,056,012 (367,432 ) (35 )% Salaries and wages decreased during the three months endedSeptember 30, 2020 primarily related to decreases in the salaries, payroll taxes and benefits due to a decrease in number of employees.
Professional fees decreased during the three months ended
Selling, general and administrative decreased during the three months ended
Segment contribution to loss from operations is presented in the table below:
For the Three Months
Ended September 30,
2020 2019
Water purification products $ 177,851 $ 608,469
Oil recovery systems 141,196 196,485
General corporate 368,696 247,519
$ 687,743 $ 1,052,473
Segment loss from operations during the three months ended September 30, 2020
decreased primarily due to oil prices falling dramatically in 2020 along with
the global pandemic which have effectively temporarily eliminated our ability to
produce revenues. Because of these issues in 2020, we have significantly reduced
our headcount and other expenses throughout the company.
17
Other Expense
Below is a summary of our other expense for the three months ended September 30,
2020 and 2019:
For the three months ended
September 30,
2020 2019 2020 vs. 2019
$ %
Interest expense $ 784,712 $ 3,760,191 (2,975,479 ) (79 )%(Gain) Loss on derivative liability (442,317 ) (832,566 ) 390,249 47 % Loss on extinguishment of debt - 130,052
(130,052 ) (100 )% Total$ 342,395 $ 3,057,677 (2,715,282 ) (89 )% Interest expense decreased primarily related to amortization of debt issuance costs on the convertible debt issued during the periods. We recorded a gain on the change in fair value of derivative liability based on the value of the derivatives as ofSeptember 30, 2020 . We recorded a loss on extinguishment of debt during the 2019 period due to paying off the convertible notes prior to maturity. Net Losses
We incurred net losses of
Net loss per share for the three months ended
For the nine months ended
Revenue
We generated revenues of$8,000 and$334,000 for the nine months endedSeptember 30, 2020 and 2019, respectively. We generated revenues of$6,000 and$2,000 from our water purification products and oil recovery systems segments, respectively, for the nine months endedSeptember 30, 2020 . We generated revenues of$308,000 and$26,000 from our water purification products and oil recovery systems segments, respectively, for the nine months endedSeptember 30, 2019 . We continue to aggressively market our water purification products and oil recovery systems and believe that demand will increase as current customers reorder
and new customers are acquired. Operating expenses Below is a summary of our operating expenses for the nine months endedSeptember 30, 2020 and 2019: For the nine months ended September 30, 2020 2019 2020 vs. 2019 $ % Salaries and wages$ 620,701 $ 1,310,049 (689,348 ) (53 )% Professional fees 424,847 812,417 (387,570 ) (48 )%
Selling, general and administrative 582,464 1,087,673 (505,209 ) (46 )% (Gain) Loss on sale of assets 19,988 (4,070 )
24,058 591 %
Total $ 1,648,000 $ 3,206,069 (1,558,069 ) (49 )%
Salaries and wages decreased during the nine months ended September 30, 2020
primarily related to decreases in the salaries, payroll taxes and benefits due
to a decrease in number of employees.
18
Professional fees decreased during the nine months ended
Selling, general and administrative decreased during the nine months ended
We recorded a loss on sale of assets during the nine months endedSeptember 30, 2020 from the sale of our trucks and recorded a gain on sale of assets during the nine months endedSeptember 30, 2019 from the sale of our equipment. Segment contribution to loss from operations is presented in the table below: For the Nine Months Ended September 30, 2020 2019 Water purification products$ 498,137 $ 1,936,762 Oil recovery systems 484,486 541,599 General corporate 662,002 674,395$ 1,644,625 $ 3,152,756 Segment loss from operations during the nine months endedSeptember 30, 2020 decreased primarily due to oil prices falling dramatically in 2020 along with the global pandemic which have effectively temporarily eliminated our ability to produce revenues. Because of these issues in 2020, we have significantly reduced our headcount and other expenses throughout the company. Other Expense Below is a summary of our other expense for the nine months endedSeptember 30, 2020 and 2019: For the nine months ended September 30, 2020 2019 2020 vs. 2019 $ % Interest expense$ 2,933,520 $ 4,885,981 (1,952,461 ) (40 )%
(Gain) Loss on derivative liability 867,361 (646,557 ) 1,513,918 234 % Other income (895 ) - (895 ) (100 )% Loss on extinguishment of debt - 182,877
(182,877 ) (100 )%
Total $ 3,799,986 $ 4,422,301 (622,315 ) (14 )%
Interest expense decreased primarily related to amortization of debt issuance
costs on the convertible debt issued during the periods. We recorded a loss on
the change in fair value of derivative liability based on the value of the
derivatives as of September 30, 2020 compared to a gain recorded as of September
30, 2019 . We recorded a loss on extinguishment of debt during the 2019 period
due to paying off the convertible notes prior to maturity.
Net Losses
We incurred net losses of
Net loss per share for the nine months ended
19
Liquidity and Capital Resources
Sources of Liquidity ThroughSeptember 30, 2020 , we have generated revenues of$557,000 . FromFebruary 10, 2016 (inception) throughSeptember 30, 2020 , we have incurred losses aggregating$23.5 million . As ofSeptember 30, 2020 , we had cash and cash equivalents of$31,000 . Our auditors issued a going concern opinion with respect to our financial statements as of and for the year endedDecember 31, 2019 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. As ofSeptember 30, 2020 , we had total liabilities of approximately$13.0 million . We expect to continue to utilize debt and equity to finance our operations until we become profitable. Cash Flows The following table sets forth the primary sources and uses of cash for the period set forth below. Nine months endedSeptember 30, 2020 2019
Net cash used in operating activities$ (1,262,622 ) $ (2,505,897 ) Net cash provided by (used in) investing activities$ 654,500 $ (1,990,783 ) Net cash provided by financing activities$ 572,988
Net increase (decrease) in cash$ (35,134 )
$ 74,023 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 nine months endedSeptember 30, 2020 , non-cash items mainly consisted of non-cash interest expense, changes in derivative liabilities, and depreciation and amortization, and changes in operating assets and liabilities mainly consisted of increases in accounts payable and accrued expenses and decreases in prepaid expenses and security deposits. Investing activities. Cash provided by investing activities for the nine months endedSeptember 30, 2020 consisted of additions to property and equipment and proceeds from sale of assets. Financing activities. Cash provided by financing activities for the nine months endedSeptember 30, 2020 consisted primarily of proceeds from the issuance of our note agreements, convertible note agreements, and advances from related parties, offset by payments on notes payable, convertible notes payable, and repayments to related parties. 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 our other products;
• 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. We expect that we will require additional capital to fund operations, including hiring additional employees and increasing inventory levels, during the next twelve (12) month period. 20 Because of the numerous risks and uncertainties associated with the development and commercialization of our products, 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 products,
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.
© Edgar Online, source
