WATER NOW, INC. 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
We have also developed a flameless heating technology that allows us to
manufacture an electronically powered portable heating platform. The platform
uses no combustion or electronic heating elements. By avoiding traditional
heating elements, the product is ideal for facilities that generate vapors or
dust, such as paint and body shops, furniture manufacturers, fuel depots and
grain elevators. Our technology is anticipated to allow for the efficient
heating of large spaces such as warehouses and garages. We anticipate
introducing our initial product offering in
On
Financial Overview Revenue
For fiscal 2019, we generated revenues of approximately
18
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. 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. Subsequent to the active
trading date of our common stock on
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.
Results of Operations
For the Years Ended
Revenue and Cost of Sales
We generated revenues of approximately
19
Research and development expenses
Below is a summary of our research and development expenses for the fiscal year
ended
2019 2018
Payroll expense $ - $ 742,000
Stock-based compensation expense - 558,000
Travel expense and other miscellaneous expense 39,000 70,000
Total$ 39,000 $ 1,370,000
Payroll expenses related to our R&D function decreased during the year ended
Stock-based compensation expenses decreased during the year ended
Operating expenses
The following is a summary of our general and administrative expenses for the
years ended
2019 2018
Salaries and wages $ 2,022,000 $ 1,744,000
Professional fees 1,061,000 1,452,000
Selling, general and administrative 1,539,000 902,000
Gain on sale of assets (4,000 ) -
Total $ 4,618,000 $ 4,098,000 Payroll expenses increased during the fiscal year ended
Professional fees decreased in 2019 primarily related to a decrease in consulting fees and a 2018 settlement of a lawsuit offset by an increase in audit fees.
Selling, general and administrative increased in 2019 primarily related to an increase in advertising and marketing, rent, shipping, and insurance offset by a decrease in supplies and parts.
We recorded a gain on sale of assets in 2019 from the sale of our equipment.
Segment contribution to loss from operations is presented in the table below:
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For the Years
Ended December 31,
2019 2018
Water purification products $ 1,308,383 $ 2,877,514
Oil recovery systems 1,542,250 -
General corporate 1,820,948 1,156,901
$ 4,671,581 $ 4,034,415 Water purification products loss from operations during the year ended
Other Income (Expense)
The following is a summary of our other income (expense) for the years ended
2019 2018
Interest expense $ (5,271,000 ) $ (336,000 )
Change in fair value of derivative liability 52,000 -
Loss on extinguishment of debt (183,000 ) -
Total $ (5,402,000 ) $ (336,000 ) Interest expense increased primarily related to amortization of debt issue costs
on the convertible debt issued during 2019. We recorded a gain on the change in
fair value of derivative liability during 2019 based on the value of the
derivatives as of
Net Losses
We incurred net losses of
Net loss per share for the fiscal year ended
21
Liquidity and Capital Resources
Sources of Liquidity
Through
We have financed our operations to date primarily through private placements of
our common stock and borrowings. During the fiscal year ended
Cash Flows
The following table sets forth the primary sources and uses of cash for the
fiscal year ended
2019 2018
Net cash used in operating activities
Net increase in cash$ 13,000 $ 51,000
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 fiscal year ended
Investing activities. Cash used in investing activities consisted of purchases of property and equipment and payments on the distributorship agreement with AHT.
Financing activities. Cash provided by financing activities consisted primarily of proceeds from the issuance of our common stock in private placements and borrowing in the form of notes payable, advances from related parties and borrowings on revenue sharing liabilities, offset by payments on notes payable and repayments from related parties.
22 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.
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.
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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
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated in consolidation.
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 consolidated financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes. Estimates and assumptions are based on historical experience, forecasted future events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and assumptions may vary under different
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circumstances and conditions. We evaluate our estimates and assumptions on an ongoing basis. We believe the accounting policies below are critical in the portrayal of our financial condition and results of operations.
Plant and Machinery
Plant and machinery are stated at cost less accumulated depreciation and
depreciated on a straight-line basis over the estimated useful lives of the
assets. Such lives vary from 4 to 7 years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Repair and maintenance costs are expensed as incurred. Depreciation
expense totaled approximately
Revenue Recognition
In
The Company recognizes revenue and related costs from the sale of its products at the time the products are shipped to the customer. Provisions for returns are established in the same period the related product sales are recorded.
Water purification products that have been sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable and reasonably estimated. The Company's management reduces revenue to account for estimates of the Company's credits and refunds.
25 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
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. Subsequent to the
active trading date of our common stock on
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Research and development costs
The Company expenses research and development costs as incurred in accordance
with ASC 730 "Research and Development". The Company's research and development
activities related to activities undertaken to adapt the water purification
technology contributed by its founder for commercial-scale manufacturing.
Research and development expenses were approximately
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.
Fair Value Measurements
ASC Topic 820, "Fair Value Measurement", requires that certain financial instruments be recognized at their fair values at our balance sheet dates. However, other financial instruments, such as debt obligations, are not required to be recognized at their fair values, but GAAP provides an option to elect fair value accounting for these instruments. GAAP requires the disclosure of the fair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our balance sheets. For financial instruments recognized at fair value, GAAP requires the disclosure of their fair values by type of instrument, along with other information, including changes in the fair values of certain financial instruments recognized in income or other comprehensive income. For financial instruments not recognized at fair value, the disclosure of their fair values is provided below under "Financial Instruments."
Nonfinancial assets, such as property, plant and equipment, and nonfinancial liabilities are recognized at their carrying amounts in the Company's balance sheets. GAAP does not permit nonfinancial assets and liabilities to be remeasured at their fair values. However, GAAP requires the remeasurement of such assets and liabilities to their fair values upon the occurrence of certain events, such as the impairment of property, plant and equipment. In addition, if such an event occurs, GAAP requires the disclosure of the fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.
Recently Issued Accounting Pronouncements
Leases - In
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largely unchanged from current GAAP. ASU 2016-02 is effective for reporting
periods beginning after
Stock Compensation -- In
Statement of Cash Flows - In
In
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and delay adoption of the additional disclosures until the effective date. We do not believe this ASU will have a material effect on the Company's consolidated financial statements.
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
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