UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934  

For the Quarterly Period ended September 30, 2013

OR

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

For the transition period from _____________ to   _____________

Commission file number:      333-141927

AWG INTERNATIONAL WATER CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA		20-4047619
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

7721 East Trent Ave. Spokane Valley, WA		99212
(Address of principal executive offices)		(Zip Code)

(509) 474-9451

(Issuer's telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.  Yes    [X]     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    [X]     No [  ]

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

Large accelerated filer [   ]	Accelerated filer                  [   ]
Non-accelerated filer   [   ]	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.)  

Yes    [   ]     No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:   October 25, 2013 there were 112,721,016 shares of the Company’s common stock were issued and outstanding.

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AWG INTERNATIONAL WATER CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2013

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

3

ITEM 1.  FINANCIAL STATEMENTS

3

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

AND RESULTS OF OPERATIONS

21

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

ITEM 4.  CONTROLS AND PROCEDURES

26

PART II – OTHER INFORMATION

27

ITEM 1.  LEGAL PROCEEDINGS

27

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

27

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

27

ITEM 4.  MINE SAFETY DISCLOSURES

27

ITEM 5.  OTHER INFORMATION

28

ITEM 6.  EXHIBITS

28

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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

AWG International Water Corporation

(A Development Stage Company)

Consolidated Financial Statements

Quarter ended September 30, 2013

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AWG INTERNATIONAL WATER CORPORATION (A Development Stage Company) Consolidated Balance Sheets As of September 30, 2013 and December 31, 2012
	September 30, 2013		December 31, 2012
	(unaudited)
ASSETS
Current assets
Cash	$                          41,743		$                     1,402
Accounts receivable	700		4,653
Deposit on product (Note 5)	73,709		119,567
Inventory (Note 6)	132,168		38,953
Prepaid assets (Note 7)	10,309		-
Total current assets	258,629		164,575
Fixed assets, net (Note 8)	11,603		10,328
Other assets
Technology acquisition (Note 9)	37,772		41,969
Total assets	$                       308,004		$                216,872
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current liabilities
Accounts payable	$                         27,258		$                101,841
Accrued liabilities (Note 10)	106,729		219,575
Notes payable (Note 11)	-		145,000
Total current liabilities	133,987		466,416
Commitments & contingencies (Note 12)	-		-
SHAREHOLDERS' EQUITY(DEFICIT)
Preferred stock, par value $0.001, 100,000,000 shares authorized     no shares issued or outstanding at September 30, 2013 or     December 31, 2012, respectively. (Note 14)	-		-
Common stock, par value $0.001, 500,000,000 shares authorized,     112,471,016 and 120,276,375 shares issued  and outstanding at     September 30, 2013 and December 31, 2012, respectively. (Note 14)	112,471		120,276
Additional paid-in-capital	4,371,608		2,140,979
Deficit accumulated during the development stage	(4,310,062)		(2,510,799)
Total shareholders' equity(deficit)	174,017		(249,544)
Total liabilities and shareholders' equity(deficit)	$                       308,004		$                216,872

The accompanying notes are an integral part of these financial statements

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AWG INTERNATIONAL WATER CORPORATION
(A Development Stage Company)
Consolidated Statements of Operations
For the Three and Nine months ended September 30, 2013 and 2012 and Accumulated since Date of Inception (March 18, 2010)
		Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended		March 18, 2010 to
		September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012		September 30, 2013
		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Sales		$                45,300		$             15,802		$         137,200		$           18,445		$          221,650
Cost of sales		30,975		12,053		87,810		26,845		164,831
Gross profit (loss)		14,325		3,750		49,390		(8,400)		56,819
GENERAL & ADMINISTRATIVE EXPENSES
Travel & entertainment		10,542		8,502		20,329		46,986		174,673
Professional fees		252,879		178,619		713,773		484,314		2,189,121
Stock option compensation (non-cash)		332,505		306,250		955,635		306,250		1,568,135
Other		63,635		12,357		132,041		50,958		327,528
Total General & Administrative Expenses		659,561		505,728		1,821,778		888,508		4,259,457
Operating loss		(645,236)		(501,979)		(1,772,388)		(896,908)		(4,202,638)
OTHER INCOME/(EXPENSE)
Miscellaneous income		-		2,500		-		2,500		26,589
Interest income		-		303		-		303		3,298
Miscellaneous expense		-		(80,906)		(19,500)		(80,906)		(100,406)
Interest expense		-		(3,750)		(7,375)		(12,185)		(36,905)
Net loss		$             (645,236)		$         (583,832)		$    (1,799,263)		$       (987,196)		$      (4,310,062)
Net loss per common share:
Basic and fully diluted		$                   (0.01)		$               (0.01)		$           (0.02)		$           (0.01)
Weighted average number of common shares:
Basic and fully diluted		111,804,349		116,201,375		109,184,204		90,317,380

The accompanying notes are an integral part of these financial statements

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AWG INTERNATIONAL WATER CORPORATION (A Development Stage Company) Consolidated Statements of Cash Flows For the nine months ended September 30, 2013 and 2012 and Accumulated since Date of Inception (March 18, 2010)
	Nine Months Ended September 30, 2013		Nine Months Ended September 30, 2012		Accumulated from March 18, 2010 to June 30, 2013
Cash flows from operating activities:
Net loss	$      (1,799,263)		$         (987,195)		$      (4,310,062)
Depreciation and amortization	7,002		-		7,384
Change in fair value of warrants	-		67,076		67,076
Stock issued for services	-		18,380		162,879
Stock based compensation	955,635		306,250		1,568,135
Vesting of stock warrants for services	221,723		-		221,723
Changes in assets and liabilities:
Accounts receivable	3,953		(2,553)		(700)
Deposits	35,549		(2,945)		(83,423)
Inventory	(93,215)		(24,084)		(132,168)
Interest receivable	-		-		(2,923)
Accounts payable	(74,582)		(80,534)		(24,979)
Other accruals	(112,846)		190,620		104,025
Net cash (used) by operating activities	(856,044)		(514,985)		(2,423,033)
Cash flows from investing activities:
Fixed assets	(4,080)		(4,590)		(14,790)
Technology acquisition	-		(5,753)		(5,753)
Notes receivable	-		-		(30,317)
Cash proceeds from acquisition	-		157,597		157,597
Net cash provided (used) by investing activities	(4,080)		147,254		106,737
Cash flows from financing activities:
Common stock issued for cash	1,045,465		51,000		1,864,974
Payments on notes payable	(175,000)		(1,445)		(176,445)
Borrowings on notes payable	30,000		357,639		668,065
Notes payable - related party receipts	-		-		8,622
Notes payable - related party payments	-		-		(7,177)
Net cash provided by financing activities	900,465		407,194		2,358,039
Increase/(Decrease) in cash	40,341		39,463		41,743
Cash, beginning of period	1,402		439		-
Cash, end of period	$             41,743		$             39,902		$             41,743
Non-cash investing and financing activities:
Discount on financing	$               19,500		$                       -		$               19,500
Cancellation of common stock by shareholders	$               18,308		$                       -		$               18,308
Capital contribution of notes payable - related party	$                          -		$                       -		$               22,817
Supplemental disclosure of cash flow information
Interest paid	$                 4,750		$             10,700		$               29,169

The accompanying notes are an integral part of these financial statements

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 1:  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

AWG International Water Corporation (“AWGI”) designs and sells Atmospheric Water Generation products.  These products harvest water from the humidity in the atmosphere to produce pure drinkable water.  AWGI utilizes contract manufacturers to assemble its products.  AWGI markets and sells its products through a network of domestic and international distributors with clearly identified geographic territories.

BASIS OF PRESENTATION:

The accompanying unaudited consolidated financial statements of AWG International Water Corporation and subsidiaries (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") (See Management Statement regarding Going Concern in Note 3).  Accordingly, the unaudited consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements.  In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation.  Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2013 or for any other interim period.  The unaudited consolidated financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended December 31, 2012 filed on April 12, 2013.

On July 10, 2012, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") by and among AWG International Water Corporation and AWG International, Inc.  On July 10, 2012, AWG International Water Corporation acquired AWG International, Inc. (the “Business Combination”), which became a wholly owned subsidiary of AWG International Water Corporation.  The Business Combination was accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisitions whereby the financial statements subsequent to the date of the Business Combination are presented as a continuation of AWG International, Inc.  Under reverse acquisition accounting AWG International, Inc. (subsidiary) will be treated as the accounting parent (acquirer) and AWG International Water Corporation (parent) will be treated as the accounting subsidiary (acquiree).  All outstanding shares have been restated to reflect the effect of the Business Combination, which includes a 67.1522 for 1 issuance of AWG International Water Corporation shares to AWG International, Inc. shareholders.

Although the Share Exchange Agreement was completed on July 10, 2012, the effective date for accounting purposes was June 30, 2012, and all of the necessary accounting adjustments were fully reflected in the June 30, 2012 financial statements.

On June 12, 2012, AWG International Water Corporation filed a Certificate of Amendment to Articles of Incorporation with the Secretary of State of Nevada changing its name from MIP Solutions, Inc. to AWG International Water Corporation and increasing the Capital Stock to consist of 500,000,000 shares of common stock, $0.001 par value and 100,000,000 of preferred stock, $0.001 par value

The Company’s year-end is December 31.  The Company is classified as a Development Stage Company.  The Company will not be deemed operating until it successfully launches its commercial product line and achieves two contiguous quarters of revenue.   

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2:  SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies is presented to assist in understanding the financial statements.  The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

The Company’s business continues to be in the development stage as defined in FASB ASC 915-10-20.  The Company has devoted substantially all of its efforts to business planning and product development.  The Company is now focusing its efforts toward establishing distribution channels and transitioning from development stage to commercialization.  

A.  Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reported period.  Actual results could differ materially from the estimates.

B.  Reclassification

Certain amounts in the historical financial statements have been reclassified to conform to the current 2013 presentation.  These reclassifications have no effect on net loss, total assets, or shareholders’ equity as previously reported.

C.  Cash and Cash Equivalents

At September 30, 2013 and December 31, 2012, cash and cash equivalents consisted of checking accounts.

D.  Long-Lived Assets

Long-lived assets of the Company, including Technology Acquisition, are reviewed for impairment when changes in circumstances indicate their carrying value has become impaired, pursuant to guidance established in FASB ASC 410-20.  See Note 2(I), Impairment of Long-Lived Assets.

E.  Revenue Recognition

The Company recognizes revenues when earned which shall be as products are shipped and services are delivered to customers or distributors.  The Company shall also record accounts receivable for revenue earned but not yet collected.

F.  Income Taxes

Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25 Income Taxes – Recognition.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by FASB ASC 740-10-25-5.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

G.  Earnings (Loss) Per Share (“EPS”)

FASB ASC 260, Earnings per Share provides for calculation of "basic" and "diluted" earnings per share.  Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share.  Basic and diluted losses per share were the same, at the reporting dates, as there were no common stock equivalents outstanding.

The following stock equivalents were deemed to be anti-dilutive.  As of September 30, 2013, the Company had outstanding options exercisable for 32,439,000 shares of its common stock and warrants exercisable for 2,500,000 shares of its common stock.  At September 30, 2012, the Company had outstanding options exercisable for 28,689,000 shares of its common stock and warrants exercisable for 6,300,000 shares of its common stock.  See Note 15 – Common Stock Options and Note 16 – Common Stock Warrants.

H.  Derivative Instruments

FASB ASC 815, Derivatives and Hedging establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction.  For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

At September 30, 2013 and December 31, 2012, the Company had not engaged in any transactions that would be considered derivative instruments or hedging activities.

I.  Impairment of Long-Lived Assets

Long-lived assets of the Company, including the Technology Rights, are reviewed at least annually for impairment or when changes in circumstances indicate their carrying value has become impaired, pursuant to guidance established in FASB ASC 410-20.  Management considers assets to be impaired if the carrying amount of an asset exceeds the future projected cash flows from related operations (undiscounted and without interest charges).  If impairment is deemed to exist, the asset will be written down to fair value, and a loss is recorded as the difference between the carrying value and the fair value.  Fair values are determined based on quoted market values, discounted cash flows, or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.  Management has determined that there was no impairment as of September 30, 2013 and December 31, 2012.

J.  Fair Value of Financial Instruments

The Company's financial instruments as defined by FASB ASC 825-10-50 include cash, trade accounts receivable, and accounts payable and accrued expenses.  All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at September 30, 2013 and December 31, 2012.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1:  Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities;

Level 2:  Applies to assets or liabilities for which there are inputs other than the quoted prices in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data; and

Level 3:  Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities, which may include the reporting entity to develop its own assumptions.

The Company did not have any assets or liabilities measured at fair value on a recurring basis at September 30, 2013 or December 31, 2012.  The Company did not have any fair value adjustments for assets and liabilities measured at fair value on a nonrecurring basis during the period ended September 30, 2013 or December 31, 2012.

K.  Impact of New Accounting Standards

Pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the financial statements of the Company.

NOTE 3:  GOING CONCERN UNCERTAINTIES

The Company has not generated positive cash flows since inception, which raises substantial doubt about the ability of the Company to continue as a going concern.  The Company is dependent upon achieving positive cash flow from operations and obtaining additional financing to fund ongoing operations.  

To achieve these objectives, the Company continues to seek other sources of financing to support existing operations and expand the range and scope of its business.  However, there are no assurances that such financing can be obtained on acceptable terms and in a timely manner, if at all.  The failure to obtain the necessary working capital would have a material adverse effect on the business and, in the event the Company is unable to execute its business plan, the Company may be unable to continue as a going concern.  

The accompanying financial statements do not include any adjustment to the recorded assets or liabilities that may be necessary should the Company have to curtail operations or be unable to continue operations.

NOTE 4:  BUSINESS COMBINATION

On July 10, 2012, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") by and among AWG International Water Corporation and AWG International, Inc.  On July 10, 2012, AWG International Water Corporation acquired AWG International, Inc. (the “Business Combination”), which became a wholly owned subsidiary of AWG International Water Corporation.  

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

AWG International Water Corporation incorporated on December 19, 2005, under the laws of the State of Nevada, and is headquartered in Spokane Valley, Washington.  The Company previously operated as MIP Solutions, Inc.  This company was considered a shell company prior to the Business Combination.

AWG International, Inc. incorporated on March 18, 2010, under the laws of the State of Nevada, and is headquartered in Spokane Valley, Washington.  This company is in the business of developing, patenting and marketing water manufacturing devices.

Pursuant to the terms and conditions of the Share Exchange Agreement, AWG International Water Corporation acquired 100% of the capital stock, 1,160,514 common shares, of AWG International, Inc. in exchange for 77,931,100 common shares.  At the time the Share Exchange Agreement was executed, this common stock represented 67.38% of the Company’s issued and outstanding capital stock.

Each of the outstanding shares of AWG International, Inc.’s common stock prior to the Business Combination was converted into 67.1522 shares of AWG International Water Corporation’s common stock.  Accordingly, an aggregate of 77,931,100 shares of common stock were issued to the shareholders of AWG International, Inc.

The shares of AWG International Water Corporation’s common stock issued to the former holders of AWG International, Inc.’s common stock in connection with the Business Combination, and the shares of the Company's common stock and warrants issued in the Private Placement, were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act, Regulations D and S promulgated under Securities Act of 1933, as amended, which exempts transactions by an issuer not involving any public offering.  These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.  Certificates representing these shares contain a legend stating the restrictions applicable to such shares.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Business Combination transaction date. The Business Combination transaction was considered a reverse acquisition for accounting purposes.

Cash and cash equivalents	$      157,597
Notes receivable – AWGI	635,142
Prepaid	595
Total identifiable assets	$      793,334
Accounts payable	$     (75,057)
Notes payable	(145,000)
Notes payable – AWGI	(33,012)
Stock to be issued	(59,045)
Total identifiable liabilities	$   (312,114)
Net identifiable assets	$      481,220

As part of the accounting adjustments associated with the reverse acquisition, all intercompany balances were subsequently eliminated.

NOTE 5:  DEPOSITS ON PRODUCT

At September 30, 2013 and December 31, 2012, there was a balance of $73,709 and $119,567, respectively in deposits on product.  Deposits on product represent amounts paid to the Company’s Korean contract manufacturer.  

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 6:  INVENTORY

At September 30, 2013 and December 31, 2012, the Inventory balance was $132,168 and $38,953, respectively, valued at the lower of cost or fair market value less any allowances for obsolescence.  The Company maintains an inventory of finished goods, filters and coil coating materials that are used both in the manufacture of new units and as replacements in previously sold units.

NOTE 7:  PREPAID ASSETS

At September 30, 2013 and December 31, 2012, the Prepaid assets balance was $10,309 and nothing, respectively.  The Company purchases various types of business insurance in the ordinary course of business.  The amount shown here represents the amount that has been paid in advance for the current policies.

NOTE 8:  FIXED ASSETS

At September 30, 2013 and December 31, 2012, the Fixed Assets balance was $11,603 and $10,328, respectively, net from accumulated depreciation.  The Company maintains several demonstration units to be used in soliciting new distributors and marketing efforts.  The Company is depreciating these assets over the appropriately determined estimated useful life of 3 years.  As of September 30, 2013, the Company has recognized $3,187 of accumulated depreciation.

NOTE 9:  TECHNOLOGY ACQUISITION & PATENTS

The Company owns exclusive and non-exclusive rights to manufacture, market and sell certain products covered under individual patents and/or patents pending (“Technology Acquisition”).  

The assigned patents include U.S. Patent No. 7,272,947, U.S. Patent 7,886,557, PCT Patent Application No. PCT/US2005/031948, and all patents and patent applications throughout the world, including any divisions, reissues or continuations. U.S. Patent 7,886,557 represents a patent derived from U.S. Patent No. 7,272,947 or an improvement to the U.S. Patent No. 7,272,947.  These patents are associated with the Company’s Model 2500 product.  The patent describes a device that produces potable water by extracting water from the air and purifying it by way of cooling and condensing water and removing bacteria or preventing the formation of bacteria.  AWG International, Inc. and Rae Anderson each own a one-half undivided interest in these G2 patent assets (“G2 Assets”).

On November 19, 2010, Licensee, the patent application owner, assigned Patent Cooperation Treaty (PCT) application number PCT/US2010/57371 to AWG International, Inc.   On May 18, 2012, AWG International, Inc. filed U.S. patent application number 13/510,757 claiming priority to PCT/US2010/57371.  This patent supports the proposed G3 product line.  At the time of the Technology Acquisition, the Company determined the value of the Technology Acquisition to be $41,969 based upon the actual, verifiable costs associated with securing the patent.  The Company determined the benefit period of the Technology Acquisition to be 5-years and began amortization in the second quarter of 2013.  For the nine month period ended September 30, 2013, the amortization was $4,197.

On April 19, 2012, the inventor and owner, Mr. Keith White, assigned all rights, title and interests of Patent application number 61/489,588 titled “Atmospheric Water Generation System” to AWG International, Inc.  The technology associated with this patent will be used for a future line of proposed G4 and G5 products.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 10:  ACCRUED LIABILITIES

At September 30, 2013 and December 31, 2012, the Accrued liabilities balance was $106,729 and $219,575, respectively.  The Company has incurred $37,500 of unpaid consulting fees with Frontier Mutual, LLC.  The Company has $59,229 of accrued and unpaid payroll and payroll taxes.  Additionally, the Company has accrued $5,000 for maintaining exclusive industry rights with a critical vendor and $5,000 for accrued legal costs.   

NOTE 11:  NOTES PAYABLE

At September 30, 2013 and December 31, 2012, the Notes payable balance was nothing and $145,000, respectively.  The Company has repaid the Coghlan Family Corporation (“CFC”) note in full, which included the $145,000 and an additional amount of $30,000 that was advanced by CFC in a prior quarter.

NOTE 12:  COMMITMENTS AND CONTINGENCIES

On July 29, 2010, the Company entered into a memorandum of understanding to acquire the exclusive rights to utilize a proprietary coating technology in atmospheric water generation applications.  Subsequently, the July 29, 2010 memorandum of understanding was replaced on June 17, 2011.  Under the terms of the agreement, the Company secured the exclusive rights to the coating technology for atmospheric water generation applications.  The term of the agreement is three years and, unless terminated, shall automatically renew for an additional three years on each three year anniversary.  The agreement called for the payment of a license and exclusivity fee of $10,000 in two payments of $5,000 each.  The initial payment has been paid.  Through an amendment dated September 30, 2012, the parties agreed and acknowledged there had been no breaches of the original agreement, extended the timing of the remaining $5,000 payment to June 1, 2013, and waived all previous and/or future minimum purchase requirements.  The Company maintains an accrual of $5,000 in Accrued liabilities for this obligation.  See Note 10 – Accrued Liabilities.

On October 14, 2011, the Company entered into a joint development agreement for the development of a custom, exclusive bacteria static cartridge for new residential/commercial applications.  The budget for this project is $36,852, which the Company agreed to fund.  To date, the expensed costs of this development project have totaled $29,238.

On February 20, 2013, the Company entered into a Stock Cancellation Agreement.  The agreement contains certain benchmarks for raising additional investment capital.  In the event that these benchmarks are not reached, the Company is required to reissue a portion of the cancelled and unsold shares back to the original shareholders at the then current market price.  See Note 14 – Common Stock.

NOTE 13:  RELATED PARTY TRANSACTIONS

The technology behind the Company’s products, (“Technology Acquisition”) was acquired through an exclusive Irrevocable Patent Assignment.  See Note 9 – Technology Acquisition and Patents.

On April 19, 2012, the inventor/applicant of provisional patent application titled, “Atmospheric Water Generation System” Application No. 61/489,588, assigned all rights, title and interests to the Company.  The technology associated with this patent application will be used for a future line of proposed G4 and G5 products.

Effective July 10, 2012, the initial base compensation of the named executive officers, Chief Executive Officer, Chief Operating Officer and Financial Officer was set at $120,000 annually.  There are currently no formal employment agreements with the named executive officers.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

Also see further disclosures of transactions concerning related parties in Note 14—Common Stock and Note 16—Common Stock Warrants.

NOTE 14:  COMMON STOCK

The Company’s Stockholders’ balance contains the following class of Common and Preferred Stock (par value $0.001) as of:

December 31, 2012
Authorized:	100,000,000 preferred shares
	500,000,000 common shares
Issued and outstanding:	120,276,375 common shares

On March 15, 2012, the Company issued 67,151 common shares to a new investor at approximately $0.07 per share as the investor paid some legal expenses for the Company.  This was a non-cash issuance.

On August 8, 2012, the holder of Common Stock Purchase Warrants exercised for the purchase of 100,000 common shares at $0.06 per share.

On September 5, 2012, the holders of Common Stock Purchase Warrants exercised for the purchase of 500,000 common shares at $0.06 per share.

On September 11, 2012, the holder of Common Stock Purchase Warrants exercised for the purchase of 250,000 common shares at $0.06 per share.

On September 30, 2012, the Company administratively issued all stock from prior transactions with John Hopkins University and Mr. C. Jones.  Since the market value of the Company’s shares had changed, the Company recognized an additional loss of $13,830 as the net change in fair market value of the stock.

On October 3, 2012, the holder of Common Stock Purchase Warrants exercised for the purchase of 1,500,000 common shares at $0.06 per share.

On December 6, 2012, the holder of Common Stock Purchase Warrants exercised for the purchase of 1,500,000 common shares at $0.06 per share.

September 30, 2013
Authorized:	100,000,000 preferred shares
	500,000,000 common shares
Issued and outstanding:	112,471,016 common shares

On February 1, 2013, the Company agreed with Coghlan Family Corporation (“CFC”) to a second amendment to the promissory note which increased the principal balance to $175,000, increased the interest rate to 12%, extended the term of the note to the sooner of May 1, 2014 or the raising of $500,000 in private equity funds, and issued 150,000 common stock purchase warrants with an exercise price of $0.03 per share and expiration date of three (3) years.  There were no monetary fees for these extensions.  The balance of this note and accrued interest has been paid in full.  See Note 11 – Notes Payable.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

On February 20, 2013, the Company entered into a Stock Cancellation Agreement with CanAmera Management, Inc., which is owned by Keith White (52.5%) and Robb Perkinson (47.5%), both Affiliates of the Company.  In connection with the Company’s February 2013 private placement transaction, CanAmera Management, Inc. agreed to cancel 18,307,692 common shares.  CanAmera Management, Inc. cancelled 355,575 of the common shares as reimbursement of $47,883 of expenses incurred by the Company to resolve the Everest Water patent assignment.  CanAmera Management, Inc. cancelled the additional 17,952,117 to provide an appropriate pre-financing capital structure for the Company.  This facilitates the Company proceeding with a non-public, private placement offering to raise approximately $1,500,000 from accredited investors through a non-dilutive offering.  See Note 12 – Commitments and Contingencies.

In February 2013, the Company began a non-public, private placement offering under Regulation D paragraph 506 to raise approximately $1,500,000 from accredited investors.  The offering is limited to accredited investors with whom the Company’s management has substantive and pre-existing relationships.  The offering consists of 15,000,000 common shares of stock to be offered to accredited investors at $0.10 per share. 

On March 20, 2013, the holders of Common Stock Purchase Warrants exercised for the purchase of 400,000 common shares at $0.06 per share.

On March 20, 2013, the Company sold 1,500,000 common shares to an accredited investor at $0.10 per share.

On March 22, 2013, the Company sold 400,000 common shares to an accredited investor at $0.10 per share.

On March 29, 2013, the Company sold 600,000 common shares to an accredited investor at $0.10 per share.

On April 10, 2013, the Company sold 600,000 common shares to accredited investors at $0.10 per share.

On April 25, 2013, the Company sold 500,000 common shares to accredited investors at $0.10 per share.

On April 17, 2013, the Company issued 400,000 common shares in lieu of cash in an offshore transaction to Green Wise Energy, a British Columbia company at $0.2552 per share as full satisfaction for consulting services totaling $102,075.  

On May 13, 2013, the Company cancelled 62,500 common shares previously issued to J. Taylor.  The Company had believed that a J. Taylor had been entitled to these shares in connection with a consulting agreement in or about 2008.  These shares had never been physically issued to J. Taylor.  The Company has not been able to locate an agreement, or determine the address or location of J. Taylor.  Based on this lack of information, the Company was unable to escheat the shares to the appropriate state agency.  Due to current law, we are unable to issue and deliver these shares and therefore believe cancellation is appropriate under the circumstances.

On May 15, 2013, the Company sold 1,750,000 common shares to an accredited investor at $0.10 per share.

On May 15, 2013, the holder of Common Stock Purchase Warrants exercised for the purchase of 150,000 common shares at $0.03 per share.  

On May 22, 2013, the Company sold 100,000 common shares to an accredited investor at $0.10 per share.

On June 12, 2013, the holder of Common Stock Purchase Warrants exercised for the purchase of 100,000 common shares at $0.06 per share.  

On June 18, 2013, the Company sold 250,000 common shares to an accredited investor at $0.10 per share.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

On July 3, 2013, the Company sold 1,000,000 common shares to an accredited investor at $0.10 per share.

On July 10, 2013, the holder of Common Stock Purchase Warrants exercised and purchased 250,000 common shares at $0.06 per share.

On July 16, 2013, the holders of Common Stock Purchase Warrants exercised and purchased 814,833 common shares at $0.06 per share.

On July 25, 2013, the Company sold 750,000 common shares to accredited investors at $0.10 per share.

On September 24, 2013, the Company sold 1,000,000 common shares to an accredited investor at $0.10 per share.

NOTE 15:  COMMON STOCK OPTIONS

Under the Company’s Employee Stock Option Plan (the “Plan”), options are available for issuance to employees, officers, directors, consultants and advisors.  The Plan provides that the Board of Directors will determine the exercise price and vesting terms of each option on the date of the grant.  Options granted under the Plan generally expire 10 years from the date of grant.  

The following is a summary of all common stock option activity for the quarter ended September 30, 2013:

		Shares under		Weighted
		Options		Average
		Outstanding		Exercise Price
Outstanding at December 31, 2012		28,689,000		$                     0.18
Options granted		3,750,000		$                     0.13
Options forfeited		-		$                          -
Options exercised		-		$                          -
Outstanding at September 30, 2013		32,439,000		$                    0.17
				Weighted
		Options		Average Exercise
		Exercisable		Price per Share
Exercisable at December 31, 2012		-		$                          -
Exercisable at September 30, 2013		7,172,250		$                    0.18

On July 10, 2012, the board of directors authorized the issuance of 13,742,000 common stock options to the Company’s President and Chief Operating Officer and 14,947,000 common stock options to the Company’s Chief Financial Officer and Secretary.  The options vest over four (4) years.  On July 10, 2013, twenty-five percent (25%) of the options vested.  After July 10, 2013, the options will vest at six and a quarter percent (6.25%) each quarter.  The common stock options have a ten (10) year exercise term.

Using the Black Scholes model, the Company assessed the financial statement presentation impact of the value ascribed to the issuance of the 28,689,000 common stock options as approximately $4,900,000.  The Company will recognize the expense using the straight-line method over the 4-year vesting term of the common stock options.  The estimated annual expense to the Company associated with these common stock options is:

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

2012	$   612,500
2013	$1,225,000
2014	$1,225,000
2015	$1,225,000
2016	$   612,500

During the quarter ended September 30, 2013, the Company expensed $306,250.  For the year to date period ended September 30, 2013 and the year ended December 31, 2012, the Company expensed $918,750 and $612,500, respectively.

On May 1, 2013, the board of directors authorized the issuance of 1,500,000 common stock options to the Company’s Director of Global Sales and Marketing.  The options vest over four (4) years.  On May 1, 2014, twenty-five percent (25%) of the options vest.  Thereafter, the options vest at six and a quarter percent (6.25%) each quarter.  The common stock options have a ten (10) year exercise term.

Using the Black Scholes model, the Company assessed the financial statement presentation impact of the value ascribed to the issuance of the 1,500,000 common stock options as approximately $255,000.  The Company will recognize the expense using the straight-line method over the 4-year vesting term of the common stock options.  The estimated annual expense to the Company associated with these common stock options is:

2013	$42,505
2014	$63,750
2015	$63,750
2016	$63,750
2017	$21,245

During the quarter ended September 30, 2013, the Company expensed $15,938.  For the year to date period ended September 30, 2013, the Company expensed $26,568.

On July 22, 2013, the board of directors authorized the issuance of 750,000 common stock options to each of the following: the Company’s Chief Executive Officer, President and Chief Operating Officer, and Chief Financial Officer and Secretary.  These 2,250,000 options vest over four (4) years.  On July 22, 2014, twenty-five percent (25%) of the options vested.  After July 22, 2014, the options will vest at six and a quarter percent (6.25%) each quarter.  The common stock options have a ten (10) year exercise term.

Using the Black Scholes model, the Company assessed the financial statement presentation impact of the value ascribed to the issuance of the 2,250,000 common stock options as approximately $247,500.  The Company will recognize the expense using the straight-line method over the 4-year vesting term of the common stock options.  The estimated annual expense to the Company associated with these common stock options is:

2013	$25,786
2014	$61,875
2015	$61,875
2016	$61,875
2017	$36,089

During the quarter ended September 30, 2013, the Company expensed $10,318.  For the year to date period ended September 30, 2013, the Company expensed $10,318.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

The Company used the Black-Scholes option price calculation to value the options using the following assumptions:  risk-free interest rate of 1.5%, and volatility of 150%.

There are no dividends expected with these stock options.

NOTE 16:  COMMON STOCK WARRANTS

The following warrants for our common stock were issued and outstanding for the period ending September 30, 2013 and December 31, 2012, respectively:

		September 30, 2013		December 31, 2012
Warrants outstanding at beginning of period		3,300,000		12,650,000
Issued		2,650,000		-
Cancelled		(1,735,167)		(150,000)
Exercised		(1,714,833)		(9,200,000)
Warrants outstanding at end of period		2,500,000		3,300,000

A detail of warrants outstanding on September 30, 2013 is as follows:

		Number of Warrants		Expiration Date
Exercisable at $0.03 per share		1,500,000		February 5, 2016
Exercisable at $0.03 per share		1,000,000		Various - 2016

On February 5, 2013, the Company entered into a Consulting Agreement with Frontier Mutual, LLC, a limited liability company owned and controlled by Mr. Sodorff’s family members commencing on February 1, 2013.  The compensation under this agreement provides for the payment of $10,000 per month, commission of 2% and 1% of Gross Margin resulting from Sales generated by Frontier Mutual, LLC during years 1 and 2, respectively, issuance of 1,500,000 common stock purchase warrants that vest on February 1, 2014 with an exercise price of $0.03 per share and expiration date of three (3) years after vesting, and issuance of 1,000,000 common stock purchase warrants that vest on a prorated basis of Frontier Mutual LLC achieving $1,000,000 of fully collected Sales at a minimum Gross Margin of 35% with an exercise price of $0.03 per share and expiration date of three (3) years after vesting.  The Consulting Agreement was terminated on September 22, 2013 and replaced with a Non-Exclusive Sales Development Agreement.  All terms and conditions remained the same as the cancelled Consulting Agreement other than the elimination of the monthly payment of $10,000 per month, which was eliminated.  The Non-Exclusive Sales Agreement expires on January 31, 2014.  See Note 10 – Accrued Liabilities.

On July 16, 2013, 1,714,833 $0.06 Common Stock Purchase Warrants expired.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 17:  INCOME TAXES

The Company is subject to taxation in the U.S. and the state of Washington.  At September 30, 2013 and December 31, 2012, AWG International Water Corporation had gross deferred tax assets calculated at the Federal Income Tax rate of 34% of approximately $1,465,000 and $854,000, respectively, principally arising from net operating loss carry-forwards for income tax purposes of approximately $4,310,000, which expire in the year 2033.  As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately $1,465,000 and $854,000 has been established at September 30, 2013 and December 31, 2012, respectively.

The significant components of the Company’s net deferred tax assets at September 30, 2013 and December 31, 2012 are as follows:

	September 30, 2013			December 31, 2012
Net operating loss carry forwards	$	4,310,000		$	2,511,000
Deferred tax asset		1,465,000			854,000
Deferred tax asset valuation allowance		(1,465,000)			(854,000)
Net deferred tax asset	$	-		$	-

Due to the reverse acquisition, the Company is restricted in the future use of net operating loss and tax credit carry-forwards generated by AWG International Water Corporation before the effective date of the Business Combination in 2012.  Both of the Companies’ separate loss years’ net operating losses will be subject to possible limitations concerning changes of control and other limitations under the Internal Revenue Code.  The net operating loss carry-forwards are subject to annual limitations which are cumulative until they expire.  The Company is in the process of determining the annual allowable net operating loss deduction should the Company generate taxable income.  Since both of the Companies which were parties to the share exchange have substantial valuation allowances against any components of deferred taxes, management believes that no material differences in tax allocations will arise from the share transaction.

The accounting for the tax benefits of acquired deductible temporary differences and net operating loss carry-forwards, which are not recognized at the acquisition date because a valuation allowance is established and which are recognized subsequent to the acquisition, will be applied first to reduce to zero any goodwill and other non-current intangible assets related to the acquisition. Any remaining benefits would be recognized as a reduction of income tax expense in future periods.

FASB ASC 740 prescribes recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FASB ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  At September 30, 2013, the Company had not taken any tax positions that would require disclosure under FASB ASC 740.

Income taxes are provided based upon the liability method of accounting pursuant to FASB ASC 740-10-25 Income Taxes – Recognition.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by FASB ASC 740-10-25-5.

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AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on its balance sheets at September 30, 2013 or December 31, 2012, and has not recognized interest and/or penalties in the statement of operations for the years ending December 31, 2012 and 2011.  Further, the Company currently has no open tax years, subject to audit prior to December 31, 2007.  The Company is current on all federal or state tax returns through and including 2012.

NOTE 18:  SUBSEQUENT EVENTS

The Company evaluated events occurring subsequent to September 30, 2013, identifying those that are required to be disclosed as follows:

On October 2, 2013, the Company sold 250,000 common shares to an accredited investor at $0.10 per share.

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

Forward Looking Statements

Some of the statements contained in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties.  We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Quarterly Report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses.  No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.  Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

·

our ability to raise capital when needed and on acceptable terms and conditions;

·

our ability to attract and retain management, and to integrate and maintain technical

information and management information systems;

·

the intensity of competition;

·

general economic conditions.

All forward-looking statements made in connection with this Quarterly Report that may be attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Company’s Plans

We began delivery of the Model 2500 Atmospheric Water Generator in August 2012.  During 2012, we shipped product to our Philippine distributor.  Having received the ETL mark clearance, we began shipments to our U.S. distributor during 2013.  We intend to follow with the introduction of two commercial products, the WaterPro 100 and 400 in the future.  Our goal is to generate positive cash flow from product sales to fund operations at the earliest opportunity.

WaterPro 100

We plan to manufacture the WaterPro 100 model in Spokane, Washington.  A prototype of this model is under final construction.  The design and development of this model is based on a joint collaboration between the Company and the Spokane manufacturer.  We are currently negotiating the terms of a joint collaboration agreement.  

WaterPro 400

The WaterPro 400 model is in the developmental design phase with a manufacturer in Michigan.  A prototype of this model is complete.  The design and development of this model is based on a joint collaboration between the Company and the Michigan manufacturer.  The Company is actively working with our distributors to locate an ideal field testing site which we anticipated would be selected during the third quarter but this was not completed.  The Company is continuing its efforts to conduct a field trial of the WaterPro 400 at the earliest opportunity.

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The Company plans to market its products through independent domestic and international wholesale distributors.  We do not plan to sell directly to consumers or end-users.  We are actively working to develop an international distributor network, focusing on highly qualified companies with a history of business in the drinking water industry.  Currently, we have one distributor in the Southern United States and one in the Philippines.

Discussion and Analysis of Financial Condition and Results of Operations

Revenues

Revenue from sales to date has been modest.  For the next few quarters, the Company projects minimal sales as we build the distribution network and introduce the commercial product.  For the quarter ending September 30, 2013, we had $45,300 in Sales compared to $15,802 in sales for the quarter ending September 30, 2012.  The revenue resulted from a single order of our Model 2500 units from our Philippines distributor, who has seen an increase in interest in the product in their region.  For the years ended December 31, 2012 and December 31, 2011, we had revenue of $19,675 and $54,640, respectively.  This revenue was generated from the sale of the G2 product, which is no longer available for sale.  The decrease in revenue was attributable to lack of product availability from our manufacturer, inability to ship to the U.S. as the Company waited on the ETL mark certification, and the Company’s focus on resolving intellectual property issues.  Currently, we are focusing sales efforts on the Model 2500 product.  

Costs and Expenses

Our primary costs going forward are related to ongoing sales and marketing, professional fees, administrative payroll and legal fees associated with patent maintenance.  For the quarter ending September 30, 2013, we had $659,561 in general and administrative expenses compared with $505,728 for the quarter ending September 30, 2012.  This increase of approximately $154,000 in general and administrative expenses was the result an increase in the non-cash amortization of stock options and warrants issued of approximately $102,000, an increase in payroll and benefits of approximately $45,000, an increase in sales and marketing expenses of approximately $23,000, an increase in miscellaneous expense of approximately $9,000, and decreases of approximately $21,000 and $4,000 in professional fees and consulting, respectively.  For the year ended December 31, 2012, we had $857,090, excluding $612,500 of non-cash amortization associated with stock option compensation, in general and administrative expenses compared to $515,917 in general and administrative expenses for the year ended December 31, 2011.  This increase in general and administrative expenses was primarily the result of increased spending related to research and development, intellectual property and other general and administrative expenses.  The research and development expenses for the years ending December 31, 2012 and December 31, 2011 were $74,634 and $38,205, respectively.  The $36,429 increase was due to additional development work on the Model 2500.  The legal and intellectual property expenses for the years ending December 31, 2012 and December 31, 2011 were $143,469 and $41,536, respectively.  The $101,933 increase was primarily related to the Business Combination transaction costs and patent assignment defect resolution costs.  The consulting and general professional fees expenses for the years ending December 31, 2012 and December 31, 2011 were $493,205 and $321,972, respectively.  The $171,232 increase was primarily related to the consulting contracts with Green Wise Energy and Frontier Mutual.  The accounting and public reporting expenses for the years ending December 31, 2012 and December 31, 2011 were $45,201 and $14,286, respectively.  The $30,915 increase was related to the Business Combination transaction costs and related SEC filing costs, the SEC comment letter resolution process and on-going quarterly public reporting costs. The other general and administrative operating costs for the years ending December 31, 2012 and December 31, 2011 were $100,582 and $99,937, respectively.  The $645 increase was related to immaterial fluctuations in sales and marketing, benefits, administrative and travel.

The Company reported minimal gross profits since inception on March 18, 2010.  The gross profit was the result of shipping units internationally and miscellaneous parts globally.

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Liquidity and Capital Resources

As of September 30, 2013, the Company had $41,743 of cash, total current assets of $258,629, total current liabilities of $133,987 and total stockholders' equity of $174,017, compared to $1,402 of cash, total current assets of $164,575, total current liabilities of $466,416, and total stockholders' deficit of $249,544 as of December 31, 2012.

The Company experienced negative cash flow used by operations during the nine months ended September 30, 2013 of ($856,044) compared to the nine months ended September 30, 2012 of ($514,985).  The Company experienced negative cash flows from investing activities of ($4,080) for the nine months ended September 30, 2013 compared to positive cash flows from investing activity of $147,254 for the nine months ended September 30, 2012.  The Company experienced positive cash flows from financing activities of $900,465 for the nine months ended September 30, 2013 compared to $407,194 for the nine months ended September 30, 2012.

The Company’s audited financial statements for the year ended December 31, 2012 contained a “going concern” qualification.  As discussed in Note 3 of the Notes to Financial Statements, the Company has incurred losses and has not demonstrated the ability to generate cash flows from operations to satisfy its liabilities and sustain operations.  Because of these conditions, our independent auditors have raised substantial doubt about our ability to continue as a going concern.

Our financial objective is to make sure the Company has the operating capital to fund on-going operating activities, investments and growth.  We intend to fund future capital needs through our current cash position, additional credit facilities, future operating cash flow and debt or equity financing.  We are continually evaluating these options to make sure we have the best mix of capital resources to meet our needs.   

For the year ended December 31, 2012, the Company funded its operations with debt and equity.  The Company’s funding source was the sale of equity securities and a loan from Coghlan Family Corporation (CFC) in the amount of $150,000.  As of December 31, 2012, the balance outstanding on this loan was $125,000.

As of December 31, 2012, the Company had debt of $145,000, which was comprised of the Coghlan Family Corporation (CFC) debt of $125,000 and The John Hopkins University Applied Physics Laboratory (“JHU/APL”) settlement obligation of $20,000.  On May 15, 2013, the Company paid $175,000 to CFC as full satisfaction of the loan agreement.  On March 26, 2013, the Company paid $20,000 to the John Hopkins University as full satisfaction of the Mutual Termination Agreement with JHU/APL.

The February 1, 2013 amended CFC note had a principal balance was $175,000, interest rate of 12%, and due date of the sooner of May 1, 2014 or the raising of $500,000 in private equity funds.  The amendment required the Company to grant CFC 150,000 common stock purchase warrants with an exercise price of $0.03 per share and an expiration date of three (3) years.  The Company utilized the Black Scholes model to determine the discount value associated with the common stock warrants.  The discount value applied against the note and to be amortized over the life of the note is $19,500.  With the early pay-off of the note on May 15, 2013, the remaining discount was amortized during the period ended June 30, 2013 of $16,900.

On August 2, 2010, the Company entered into a Mutual Termination Agreement with The John Hopkins University Applied Physics Laboratory (“JHU/APL”) to be released from the terms of a license agreement.  Under the terms of the Mutual Termination Agreement, the Company agreed to pay $20,000 and issue 600,000 restricted common shares, valued at $18,000 to JHU/APL as settlement of all amounts owed, within 20 days of the proposed reverse takeover by AWG International, Inc. as settlement for $131,633 of debt.  As final disposition of this matter, the common stock was issued to JHU/APL in 2012 and the $20,000 note was paid in full on March 26, 2013.

As of September 30, 2013, AWG International Water Corporation has no long term debt.  

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At September 30, 2013, the Company had 2,500,000 outstanding warrants with an exercise price of $0.03, which if exercised, could generate $75,000 cash to support ongoing operations.  The warrants are immediately exercisable at the option of the warrant holders.  The Company cannot be assured that the warrant holders will exercise any warrants.

Management acknowledges that existing capital resources are insufficient to support continuing Company operations.  Therefore, the Company needs to obtain additional financing immediately to support existing, as well as, continuing operations.  Management plans to pursue additional required capital funding through multiple sources.  Management believes that the Company will need approximately $630,000 of additional capital to execute management’s plan of operations over the next 6 months, including the purchase of inventory, general and administrative expenses and expenditures required for the delivery of the Model 2500 and introduction of additional product models in 2013.  Management continues to attempt to raise approximately $630,000 through the current private, non-public sale of common shares to existing and new accredited shareholders.  This private placement was initiated in February 2013 to raise a total of $1,500,000 through the private, non-public sale of 15,000,000 common shares.  To date, the Company has raised $870,000.  Management may approach prospective lenders for additional debt capital, if necessary.  Lastly, the Company forecasts increasing sales in 2013-14 may begin to provide additional capital to support on-going operations.  While no assurances can be given regarding the achievement of future results as actual results may differ materially, management anticipates with the fulfillment of the current private placement that adequate capital resources would be available to support continuing operations over the next 12 months through the combination of forecasted sales, and existing cash reserves.  

 

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenues when earned which shall be as products are shipped and services are delivered to customers or distributors.  The Company shall also record accounts receivable for revenue earned but not yet collected.

Income Taxes

Income taxes are provided based upon the liability method of accounting pursuant to FASB ASC 740-10-25 “Income Taxes – Recognition”.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by FASB ASC 740-10-25-5.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

At September 30, 2013, the Company has net operating loss carry forwards of approximately ($4,310,000), which will expire by 2033 and are calculated at an expected tax rate of approximately 34%.  As the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately $1,465,000 has been established at September 30, 2013.

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FASB ASC 740 prescribes recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FASB ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  At September 30, 2013, the Company has not taken any tax positions that would require disclosure under FASB ASC 740.

Pursuant to FASB ASC 740, income taxes are provided for based upon the liability method of accounting.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by FASB ASC 740 to allow recognition of such assets.  The Company is current in all of its federal and state tax returns.

Earnings (Loss) Per Share (“EPS”)

FASB ASC 260, Earnings per Share provides for calculation of "basic" and "diluted" earnings per share.  Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share.  Basic and diluted losses per share were the same, at the reporting dates, as there were no common stock equivalents outstanding.

Derivative Instruments

FASB ASC 815, Derivatives and Hedging establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction.  For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

At September 30, 2013 and December 31, 2012, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

Impairment of Long-Lived Assets

Long-lived assets of the Company, including the Technology Rights, are reviewed for impairment when changes in circumstances indicate their carrying value has become impaired, pursuant to guidance established in the FASB ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  Management considers assets to be impaired if the carrying amount of an asset exceeds the future projected cash flows from related operations (undiscounted and without interest charges).  If impairment is deemed to exist, the asset will be written down to fair value, and a loss is recorded as the difference between the carrying value and the fair value. Fair values are determined based on quoted market values, discounted cash flows, or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.  Management has determined that there was no impairment as of September 30, 2013 and December 31, 2012.

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Fair Value of Financial Instruments

The Company's financial instruments as defined by FASB ASC 825-10-50 include cash, trade accounts receivable, and accounts payable and accrued expenses.  All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at September 30, 2012 and December 31, 2012.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Inflation

It is our opinion that inflation has not had a material effect on our operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES

Management's Report on Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 Rules 13a-15(b) and 15d-15(b).  Based upon, and as of the date of this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective such that the material information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our Company, particularly during the period when this report was being prepared.  The Company is working on a remediation plan to correct these issues.

The certification required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, to this quarterly report on Form 10-Q.

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Limitations

The Company’s management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company to the knowledge of management.

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

During the quarter ended September 30, 2013, the Company sold 1,064,833 common shares to two (2) accredited investors resulting from the exercise of 1,064,833 common stock purchase warrants for a total consideration of $63,890.  The common shares were priced at $0.06 per share under the terms of the warrant agreements.

During the quarter ended September 30, 2013, the Company sold 2,750,000 common shares to three (3) accredited investors for a total consideration of $275,000.  The common shares were priced at $0.10 per share.

The Company relied on the transaction exemption afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D Rule 506.  The shares are restricted securities which may not be publicly sold unless registered for resale with the Securities and Exchange Commission or exempt from the registration requirements of the Securities Act of 1933, as amended.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5.  OTHER INFORMATION

The Company’s southeastern United States distributor has made considerable progress towards establishing significant accounts, including a major office supply company and cruise line.  The Company’s distributor in the Philippines has been steadily expanding their sub-distributor network to penetrate this island nation of over 7000 islands.  The Company has had extensive and detailed discussions with an interested distributor group with influence throughout the Middle East, specifically Saudi Arabia, Qatar, and United Arab Emirates.  We are in discussions with a prospective distributor in Peru.  Both of these have conducted extensive and successful field trials of the Model 2500 unit.  The Company attended a water based convention and exhibition in Mexico City that has produced a number of qualified leads.  We are pursuing preliminary discussions with prospective distributors in Texas, California, Columbia, and other geographies regarding distributorship opportunities.

ITEM 6.  EXHIBITS

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (iv) Notes to Financial Statements

*

In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  October 25, 2013

AWG International Water Corporation

(Registrant)

           /s/ Keith White

/s/ Jeff R. Mitchell

By:________________________________

________________________________

           Keith White

Jeff R. Mitchell

           Chief Executive Officer

Chief Financial Officer

           (Principal Executive Officer)

(Principal Accounting Officer)

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