Attached files

file filename
EX-32 - CERTIFICATION - Ambient Water Corpex322.htm
EX-32 - CERTIFICATION - Ambient Water Corpex321.htm
EX-31 - CERTIFICATION - Ambient Water Corpex311.htm
EX-31 - CERTIFICATION - Ambient Water Corpex312.htm
EXCEL - IDEA: XBRL DOCUMENT - Ambient Water CorpFinancial_Report.xls




OMB APPROVAL

OMB Number: 3235-0416

Expires: April 30, 2015

Estimated average burden

hours per response   187.43

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 March 31, 2014

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:   May 13, 2014 there were 118,059,962 shares of the Company’s common stock were issued and outstanding.






1



AWG INTERNATIONAL WATER CORPORATION

FORM 10-Q


For the Quarter Ended March 31, 2014


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

25

ITEM 4.  CONTROLS AND PROCEDURES

25

PART II – OTHER INFORMATION

26

ITEM 1.  LEGAL PROCEEDINGS

26

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

26

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

26

ITEM 4.  MINE SAFETY DISCLOSURES

26

ITEM 5.  OTHER INFORMATION

26

ITEM 6.  EXHIBITS

27

SIGNATURES

28








2



PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS
















AWG International Water Corporation


(A Development Stage Company)

Consolidated Financial Statements

Period ended March 31, 2014






















3




AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Consolidated Balance Sheets

As of March 31, 2014 and December 31, 2013

 

 

 

 

 

 

 

 

March 31, 2014

(unaudited)

 

December 31, 2013

 

 

 

 

 

ASSETS

 

 

 

 

Current assets

 

 

 

 

Cash

 

$                          27,304

 

$                           4,864

Accounts receivable

 

6,611

 

3,168

Deposit on product (Note 5)

 

43,585

 

68,370

Inventory (Note 6)

 

124,174

 

129,163

Prepaid asset

 

7,208

 

17,021

Total current assets

 

208,882

 

222,586

Fixed Assets (Note 7)

 

10,115

 

10,370

Other assets

 

 

 

 

Technology acquisition (Note 2)

 

33,575

 

35,674

Total assets

 

$                        252,572

 

$                       268,630

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)

 

 

 

 

Current liabilities

 

 

 

 

Accounts payable

 

$                            1,631

 

$                         19,316

Accrued liabilities (Note 8)

 

253,121

 

189,500

Total current liabilities

 

254,752

 

208,816


Long-term Liabilities

Convertible note payable (Note 9)

 

200,000

 

-

Derivative liability (Note 9)

 

125,000

 

-

Total long-term liabilities

 

325,000

 

-

Total liabilities

 

579,752

 

208,816

 

 

 

 

 

Commitments & contingencies (Note 10)

 

-

 

-

 

 

 

 

 

SHAREHOLDERS' EQUITY(DEFICIT)

 

 

 

 

Preferred stock, par value $0.001, 100,000,000 shares authorized no shares issued or outstanding at March 31, 2014 or December 31, 2013, respectively. (Note 13)

 

-

 

-

Common stock, par value $0.001, 500,000,000 shares authorized,118,059,962 and 113,881,016 shares issued  and outstanding at March 31, 2014 and December 31, 2013, respectively. (Note 13)

 

118,060

 

113,881

Paid-in-capital

 

5,418,383

 

4,930,988

Deficit accumulated during the development stage

 

(5,863,623)

 

(4,985,055)

Total shareholders' equity(deficit)

 

(327,180)

 

59,814

 

 

 

 

 

Total liabilities and shareholders' equity(deficit)

 

$                        252,572

 

$                        268,630


The accompanying notes are an integral part of these financial statements



4




AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Consolidated Statements of Operations

For the three months ended March 31, 2014 and 2013 and Accumulated since Date of Inception (March 18, 2010)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated from

 

 

Three Months Ended

 

Three Months Ended

 

March 18, 2010 to

 

 

March 31, 2014

(unaudited)

 

March 31, 2013

(unaudited)

 

March 31, 2014

(unaudited)

 

 

 

 

 

 

 

Sales

 

$                         45,094

 

$                         91,900

 

$                     271,680

Cost of sales

 

27,944

 

56,835

 

201,119

 

 

 

 

 

 

 

Gross profit (loss)

 

17,150

 

35,065

 

70,561

 

 

 

 

 

 

 

GENERAL & ADMINISTRATIVE EXPENSES

 

 

 

 

 

 

Travel & entertainment

 

4,333

 

6,421

 

181,143

Professional fees

 

244,163

 

205,317

 

2,393,446

Stock option compensation (non-cash)

 

476,573

 

306,250

 

2,697,422

Other

 

44,900

 

17,985

 

406,076

 

 

 

 

 

 

 

Total General & Administrative Expenses

 

769,969

 

535,973

 

5,678,087

 

 

 

 

 

 

 

Operating loss

 

(752,819)

 

(500,908)

 

(5,607,526)

 

 

 

 

 

 

 

OTHER INCOME/(EXPENSE)

 

 

 

 

 

 

Miscellaneous income

 

-

 

-

 

26,589

Interest income

 

-

 

-

 

3,298

Finance charge

 

(201)

 

(2,600)

 

(83,531)

Interest and penalties

 

(548)

 

(4,750)

 

(77,453)

Loss on derivative instruments

 

(125,000)

 

-

 

(125,000)

 

 

 

 

 

 

 

Net loss

 

$                    (878,568)

 

$                    (508,258)

 

$               (5,863,623)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

Basic

 

$                          (0.01)

 

$                           (0.00)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

Basic

 

115,824,962

 

109,037,914

 

 

 

 

 

 

 

 

 





The accompanying notes are an integral part of these financial statements



5




AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Consolidated Statements of Cash Flows

For the three months ended March 31, 2014 and 2013 and Accumulated since Date of Inception (March 18, 2010)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated from

 

 

 

Three Months Ended

 

Three Months Ended

 

March 18, 2010 to

 

 

 

March 31, 2014

(unaudited)

 

March 31, 2013

(unaudited)

 

March 31, 2014

(unaudited)

 

 

 

 

 

 

 

 

 Cash flows from operating activities:

 

 

 

 

 

 

 

   Net loss

 

 

$                  (878,568)

 

$                   (508,258)

 

$          (5,863,623)

      Depreciation and amortization

 

 

3,374

 

3,493

 

14,087

      Change in fair value of warrants

 

 

-

 

-

 

67,076

      Stock issued for services

 

 

-

 

-

 

251,124

      Stock issued for a loss

 

 

-

 

-

 

13,830

      Stock based compensation

 

 

476,573

 

356,805

 

2,697,422

      Loss on derivative liability

 

 

125,000

 

-

 

125,000

   Changes in assets and liabilities:

 

 

 

 

 

 

 

        Accounts receivable

 

 

(3,443)

 

4,653

 

(6,611)

        Deposits

 

 

34,598

 

44,505

 

(50,198)

        Inventory

 

 

4,989

 

(27,217)

 

(124,174)

        Interest receivable

 

 

-

 

-

 

(2,923)

        Accounts payable

 

 

(17,687)

 

(57,430)

 

(50,606)

        Other Accruals

 

 

78,622

 

(27,788)

 

265,418

 

 

 

 

 

 

 

 

           Net cash used by operating activities

 

 

(176,540)

 

(211,237)

 

(2,664,178)

 

 

 

 

 

 

 

 

 Cash flows from investing activities:

 

 

 

 

 

 

 

        Fixed assets

 

 

(1,020)

 

-

 

(15,810)

        Technology acquisition

 

 

-

 

-

 

(5,753)

        Notes receivable

 

 

-

 

-

 

(30,316)

        Cash proceeds from acquisition

 

 

-

 

-

 

157,597

 

 

 

 

 

 

 

 

           Net cash provided (used) by investing activities

 

 

(1,020)

 

-

 

105,718

 

 

 

 

 

 

 

 

 Cash flows from financing activities:

 

 

 

 

 

 

 

     Common stock issued for cash

 

 

-

 

274,000

 

1,892,699

     Payments on notes payable

 

 

-

 

-

 

(146,445)

     Borrowings on notes payable

 

 

200,000

 

30,000

 

838,065

     Notes payable - related party receipts

 

 

-

 

-

 

8,622

     Notes payable - related party payments

 

 

-

 

-

 

(7,177)

 

 

 

 

 

 

 

 

           Net cash provided by financing activities

 

 

200,000

 

304,000

 

2,585,764

 

 

 

 

 

 

 

 

 Increase/(Decrease) in cash

 

 

22,440

 

92,763

 

27,304

 

 

 

 

 

 

 

 

 Cash, beginning of period

 

 

4,864

 

1,402

 

-

 

 

 

 

 

 

 

 

 Cash, end of period

 

 

$                      27,304

 

$                      94,165

 

$                 27,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Capital contribution of notes payable - related party

 

 

$                                -

 

$                                -

 

$                 22,817

     Stock issued to acquire technology

 

 

$                                -

 

$                                -

 

$                 36,216

     Stock issued for accrued liability

 

 

$                      15,001

 

$                                -

 

$                 15,001

 

 

 

 

 

 

 

 

 Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

     Interest paid

 

 

$                            201

 

$                         4,750

 

$                 31,995

 

 

 

 

 

 

 

 



The accompanying notes are an integral part of these financial statements



6



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.  The Company markets and sells its products through a network of domestic and international distributors with clearly identified geographic territories.  AWGI pioneered atmospheric water generation technology for extracting water from humidity in the air. Drawing from the renewable ocean of water vapor in the air that we breathe, our patented technology cost effectively transforms humidity into an abundant source of clean water near the point of use. Our scalable and modular systems can be configured for a number of water-sensitive applications ranging from oil and gas exploration to vertical farming. Our systems can also be configured to produce high quality drinking water for homes, offices, and communities. For a thirsty planet on the verge of a water crisis, AWGI makes clean water out of thin air.


BASIS OF PRESENTATION:


The accompanying consolidated financial statements of AWG International Water Corporation and its subsidiaries (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America under 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 consolidated financial statements reflect all 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, 2014 or for any other interim period.  The unaudited financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of the year ended December 31, 2013 filed on April 15, 2014.


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.


The Company’s year-end is December 31.



7



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.  In the near term, the Company will focus 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 presentation.  These reclassifications have no effect on net loss, total assets, or shareholders’ equity as previously reported.


C.  Cash and cash equivalents


At March 31, 2014 and December 31, 2013, cash and cash equivalents consisted of checking accounts.


D.  Technology Acquisition


The technology supporting the Company’s products (“Technology Acquisition”) was obtained from its founders and their related companies.


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 filed U.S. patent application number 13/510,757 claiming priority to PCT/US2010/57371.  We refer to this patent as supporting the proposed G3 product line.  In consideration of this assignment, 250,000 shares of AWG common stock were issued to Licensee.  At the time of the technology acquisition, the Company determined the value of the Technology Acquisition to be $36,216 based upon the actual, verifiable costs associated with securing the patent.  




8



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements



The Company’s technology rights also include the assignment of patents which included U.S. Patent No. 7,272,947, U.S. Patent 7,886,557, PCT Patent Application No. PCT/US/2005/031948, 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 our Model 2500 product.


Also, the Company has additional shared patent and license rights which were clarified on February 14, 2013, AWG, as assignee to a license agreement, declared Everest Water, Ltd. insolvent under Paragraph VII (c) of the license agreement.  As a result of this insolvency declaration, AWG took the actions set forth in paragraphs (a) and (b) below and assigned the G2 patent assets as provided for pursuant to  the terms of the license agreement.  Keith White, individually, as co-inventor, took the action set forth in paragraph (c).


(a)

On February 14, 2013, Keith White, on behalf of AWG, executed a Declaration of Assignment whereby the G2 patent assets owned by Everest Water were assigned to AWG.  


(b)

On February 14, 2013, AWG assigned the G2 patent assets to the inventors, Rae Anderson and Keith White.  


(c)

On February 14, 2013, Keith White, as co-inventor, assigned the G2 patent assets to AWG.


As a result of these assignments, AWG and Rae Anderson each own a one-half undivided interest in the G2 patent assets.


On April 19, 2012, Mr. Keith White, the patent owner, assigned Patent application number 61/489.588 titled “Atmospheric Water Generator” to AWG International Inc.  We refer to this patent as supporting the proposed G4 and G5 product lines.


The technology rights are being amortized over an expected life of five years.


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 discussion 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.




9



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 dilutive common stock equivalents outstanding.


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


In March 2014, the Company entered in a financing transaction with an accredited investor which includes certain variable conversion rights attached to the convertible note debt structure.  In accordance with FASB ASC 815-40 Contracts in Entity’s Own Equity, the Company will need to review the possible conversion features under the agreement and disclose any additional derivative liability and the effect of changes in the derivative liability with the issuance of its financial statements.  As of March 31, 2014, the value of the additional stock necessary to settle the contract was $125,000.


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 350-30.  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 were no impairments as of March 31, 2014 and December 31, 2013.






10



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements



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 March 31, 2014 and December 31, 2013.


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; and


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 March 31, 2014 and December 31, 2013.  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 March 31, 2014 or December 31, 2013.


K.  Impact of New Accounting Standards


On July 18, 2013 the FASB issued authoritative guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists.  This applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date.  An entity must present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for an NOL carryfoward, a similar tax loss, or a tax credit carryforward except when certain conditions exist.  The amendments are effective for fiscal years beginning after December 15, 2013, and interim periods within those years.  Early adoption is permitted.  The Company does not expect the adoption to have a material impact on its consolidated financial statements.


NOTE 3:  GOING CONCERN UNCERTAINTIES


The Company has not generated positive cash flows since inception and has recognized approximately $5.8 million in net operating losses, which raises 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.  



11



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




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. 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’s previous name was MIP Solutions, Inc.  This company was considered a shell company prior to the Business Combination.


The terms and conditions of this acquisition have been more fully disclosed in our prior annual financial statement filings, which fully disclosed the effects of the stock exchanged and the accounting under the reversed acquisition method.  The Company received net cash resources of $157,597, which is reflected in the investing information in the cash flow financial statement.  As part of the accounting adjustments associated with the reverse acquisition, all intercompany balances were subsequently eliminated in the consolidation.


NOTE 5:  DEPOSITS ON PRODUCT


At March 31, 2014 and December 31, 2013, there was a balance of $43,585 and $68,370, respectively in deposits on product.  Deposits on product represent amounts paid to the Company’s Korean contract manufacturer.


NOTE 6:  INVENTORY


At March 31, 2014 and December 31, 2013, the Inventory balance was $124,174 and $129,163, respectively, valued at the lower of cost or fair market value less any allowances for obsolescence.  The Company maintains an inventory of filters and coil coating materials that are used both in the manufacture of new units and as replacements in previously sold units.  The inventory represents inventory held for sale.



12



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




NOTE 7:  FIXED ASSETS


At March 31, 2014 and December 31, 2013, the net Fixed Asset balance was $10,115 and $10,370, respectively.  The Company purchases 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 March 31, 2014 and December 31, 2013, the Company has recognized $5,695 and $4,420, respectively, of accumulated depreciation.  As of March 31, 2014 and 2013, the Company recognized $1,275 and $893 for depreciation expenses, respectively.


NOTE 8:  ACCRUED LIABILITIES


At March 31, 2014 and December 31, 2013, the Accrued liabilities balance was $253,121 and $189,500, respectively.  The Company accrues unpaid wages,  consulting costs and unpaid interest in Accrued Liabilities.


NOTE 9:  CONVERTIBLE NOTE PAYABLE


On March 21, 2014, the Company entered into a financing transaction with an accredited investor under which the Company intends to borrow up to Nine Hundred Thousand ($900,000) Dollars.  The transaction was structured as a Convertible Promissory Note (the "Note") bearing interest at the rate of Ten (10%) percent per year.  The maturity date is eighteen (18) months from the effective date, when principal sum, unpaid interest and any applicable fees and costs will be due and payable.


The Lender will initially loan the Company $200,000 under the Note. The Lender may loan an additional $700,000 to the Company in such amounts as the Lender may choose, in its sole discretion. The Company will only be required to repay the amount loaned and the Company is not required to repay any unfunded portion of this Note, including any interest or other rights or remedies granted to any unfunded portion of this Note. 


The Lender has the right, at any time, at its election, to convert all or part of the Note Amount into shares of fully paid and non-assessable shares of common stock of the Company. The conversion price (the “Conversion Price”) shall be the lesser of (a) $0.04 per share of Common Stock, (b) Fifty Percent (50%) of the average of the three (3) lowest trade prices of three (3) separate trading days of Common Stock recorded during the twenty five (25) previous trading days prior to conversion, or (c) the lowest effective price per share granted to any person or entity after the Effective Date to acquire Common Stock, or adjust, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire Common Stock or outstanding Common Stock equivalents (the “Conversion Price”), excluding any outstanding warrants or options that have been disclosed in SEC filings prior to the Effective Date.



13



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




Derivative liability


Under FASB ASC 815-40 Contracts in Entity’s Own Equity, the Company must review the possible conversion features under the agreement’s variable price conversion options, which create a derivative in the possible settlement choices of the Lender.   As of March 31, 2014, the stock pricing feature which provides a 50% discount to the market would have increased the additional stock necessary to settle the conversion if requested to approximately 13,333,334 shares.  The Company has calculated the value of this additional liability to be $125,000 and has recognized a change of earnings for this amount.


Under FASB ASC 505-10 Equity: Overall, the Company must disclose that the settlement alternatives are at the control of the Lender and that there is a potential for an infinite number of shares having to be issued, but the Company believes that the net effective downward trading limit of $0.01 would make this potential highly unlikely.


NOTE 10:  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 first payment has been paid.  Effective September 30, 2012, the parties entered into an amendment to the original agreement in which both parties acknowledged there had been no breaches of the original agreement, the remaining $5,000 payment is due on or before June 1, 2013, and all previous and/or future minimum purchase requirements were waived.  The Company has accrued the $5,000 in Accrued liabilities for this obligation.  See discussion Note 8 – Accrued Liabilities.


Other Agreements:  


On February 5, 2013, the Company entered into a new 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 expired on January 31, 2014.



14



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




NOTE 11:  RELATED PARTY TRANSACTIONS


The technology behind the Company’s products, (“Technology Acquisition”) was acquired through an exclusive Irrevocable Patent Assignment.  See discussion Note 2(D) – Technology Acquisition, Note 10 – Commitments and Contingencies.


On February 14, 2013, Keith White, as co-inventor, assigned the G2 patents to AWG International, Inc.  The assigned patents include U.S. Patent No. 7,272,947, U.S. Patent 7,886,557, PCT Patent Application No. PCT/US/2005/031948, and all patents and patent applications throughout the world, including any divisions, reissues or continuations. The U.S. Patent 7,886,557 represents a patent derived from U.S. Patent No. 7,272,947, or an improvement to U.S. Patent No. 7,272,947.  


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. In December 2013, the Board of Directors raised the annual salary for each officer to $175,000.  There are no formal employment agreements with the named executive officers.


On July 10, 2012, the board of directors authorized the issuance of 13,742,000 common stock options to Jeff Stockdale, the Company’s President and Chief Operating Officer and 14,947,000 common stock options to Jeff Mitchell, the Company’s Chief Financial Officer and Secretary.


On May 1, 2013, the board of directors authorized the issuance of 1,500,000 common stock options to Gordon Myers, the Company’s Director of Global Sales and Marketing.  These common stock options have an exercise price of $0.17.


On July 22, 2013, the board of directors authorized the issuance of 750,000 common stock options to Keith White, the Company’s Chief Executive Officer and Chief Technology Officer, Jeff Stockdale, the Company's President and Chief Operating Officer, and Jeff Mitchell, the Company's Chief Financial Officer and Secretary, collectively 2,250,000 common stock options.  These common stock options have an exercise price of $0.11.


The options vest over four (4) years.  After one year, one-quarter (25%) of the options vest.  Thereafter, the options vest 6.25% each quarter.  The options have a ten (10) year term.


Using the Black Scholes model, the Company has assessed the financial statement presentation impact of the value ascribed to the issuance of 32,439,000 stock options to some of its executive management team members as approximately $5,402,500.  The Company will recognize the expense of issuing these options using the straight-line method over the 4-year vesting term of the options.  The estimated annual expense to the Company associated with these options as of March 31, 2014 is:


2014                       $1,012,969

2015                       $1,350,625

2016                       $   738,125

2017                       $    57,334



15



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




As of March 31, 2014, 14,344,500 of these stock options had vested and were exercisable at an average exercise price of $0.18.  As of March 31, 2014, 18,094,500 were expected to be vested over the next four years.


Stock Grant - On December 30, 2013, the Company’s Board of Directors adopted a stock grant program for officers and employees.  The grants will take place in 2014 based upon either performance or employment requirements.  All shares under this grant will be issued by June 15, 2014.  The grant was restricted to 10,515,000 shares.


On March 21, 2014, Jeff Mitchell, Chief Financial Officer and Secretary and the Company entered into a separation agreement whereby Mr. Mitchell resigned his executive officer positions. There were no disagreements between Mr. Mitchell and the Company relating to any of the Company's operations, policies or practices.  Mr. Mitchell is pursuing other business opportunities.  On March 21, the Board of Directors nominated and appointed Michael Wende, a current member of our Board of Directors, to the role of corporate Secretary.  On March 21, 2014, the Board of Directors nominated and appointed Keith White as Chief Financial Officer.


On March 21, 2014, the Board of Directors nominated and appointed Jeff Mitchell to fill a vacancy on the Board of Directors.  Additionally, the Board of Directors appointed Jeff Mitchell to the Audit Committee.  In his role on the Committee, Mr. Mitchell will be responsible for reviewing and monitoring the Company's financial reporting processes.


On March 21, 2014, the Board of Directors approved a separation agreement with Jeff Mitchell.  The separation agreement provides for the payment of $43,750 of unpaid executive compensation, and a Termination Fee of $87,500, payment of health insurance premiums and reimbursement of cell phone expenses.  See the Form 8K filed on March 21, 2014 for additional information.


NOTE 12:  COMMON STOCK WARRANTS


The following warrants for our common stock were issued and outstanding for the years ending March 31, 2014 and December 31, 2013, respectively:


 

 

March 31,

2014

 

December 31,

2013

Warrants outstanding at beginning of period

 

2,340,000

 

3,300,000

Issued

 

-

 

2,650,000

Cancelled

 

-

 

(1,735,167)

Exercised

 

-

 

(1,874,833)

Warrants outstanding at end of period

 

2,340,000

 

2,340,000




16



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




A detail of warrants outstanding on March 31, 2014 is as follows:


 

 

Number of Warrants

 

Expiration Date

Exercisable at $0.03 per share

 

1,340,000

1,000,000

 

2/1/2017

8/1/2017


The Company used the Black-Scholes option price calculation to calculate the change in value of the warrants using the following assumptions:  risk-free interest rate of 1.5%; volatility of 150%; and various applicable terms.


NOTE 13:  COMMON STOCK


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


December 31, 2013

 

Authorized:

100,000,000 preferred shares

 

500,000,000 common shares

 

 

Issued and outstanding:

113,881,016 common shares


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.

 

In February 2013, the Company began a non-public, private placement offering under Regulation D Rule 506 to raise approximately $1,500,000 from accredited investors.  The offering is limited to investors with whom the Company’s management has substantive and pre-existing relationships.  The offering consists of 15,000,000 common shares of stock 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 1,400,000 common shares at $0.06 per share.


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


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



17



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




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


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


On April 17, 2013, the Company issued 400,000 common shares to a refrigerant consultant at approximately $0.26 per share.  This was a non-cash issuance.


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


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


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


On May 22, 2013, the Company issued 100,000 common shares to accredited investors at $0.10 per share.


On May 28, 2013, the Company cancelled 62,500 common shares that had been previously issued to an unnamed shareholder.


On June 12, 2013, the holders 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 issued 250,000 common shares to accredited investors at $0.10 per share.


On July 3, 2013, the Company issued 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 for the purchase of 250,000 common shares at $0.06 per share.


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


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


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


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



18



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




On December 6, 2013, the Company issued 250,000 common shares to an accredited investor at $0.10 per share.


On December 19, 2013, the Company issued 750,000 common shares to an accredited investor at $0.10 per share.


On December 30, 2013, the holder of Common Stock Purchase Warrants exercised for the purchase of 160,000 common shares at $0.03 per share.


March 31, 2014

 

Authorized:

100,000,000 preferred shares

 

500,000,000 common shares

 

 

Issued and outstanding:

118,059,964 common shares


On January 14, 2014, the Company issued 826,446 common shares to an Executive of the Company as compensation in lieu of accrued compensation of $15,000 and approximately $15,000 for the fair value of the stock issuance treated as additional compensation.


On March 26, 2014, the Company issued 3,352,500 common shares per the named executive officer grant authorized on December 30, 2013.


As of March 31, 2014, there were 2,340,000 common stock purchase warrants outstanding.  The common stock purchase warrants are exercisable at three cents ($0.03) per share.  


NOTE 14:  Income Taxes


The Company is subject to taxation in the U.S. and the state of Washington.  At March 31, 2014 and December 31, 2013, AWG International Water Corporation had gross deferred tax assets calculated at the Federal Income Tax rate of 34% of approximately $1,972,000 and $1,695,000, respectively, principally arising from net operating loss carry-forwards for income tax purposes of approximately $5,800,000, 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 $1,972,000 and $1,695,000 has been established at March 31, 2014 and December 31, 2013, respectively.


The significant components of the Company’s net deferred tax assets at March 31, 2014 and December 31, 2013 are as follows:


 

 

March 31,

2014

 

December 31,

2013

Net operating loss carry forwards

$

5,800,000

$

4,985,000

Deferred tax asset

 

1,972,000

 

1,695,000

Deferred tax asset valuation allowance

 

(1,972,000)

 

(1,695,000)

Net deferred tax asset

$

-

$

-




19



AWG INTERNATIONAL WATER CORPORATION

(A Development Stage Company)

Notes to Consolidated Financial Statements




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. 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 March 31, 2014, 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 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.


The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had a $40,000 accrual for penalties on its balance sheets at March 31, 2014 and December 31, 2013, and has recognized this as interest and/or penalties in the statement of operations for the years ending December 31, 2013.  Further, the Company currently has no open tax years, subject to audit prior to December 31, 2008.  The Company is current on its federal or state tax returns.


NOTE 15:  SUBSEQUENT EVENTS


The Company evaluated events occurring subsequent to March 31, 2014, identifying those that are required to be disclosed as follows:


On April 22, 2014, the Company received another $100,000 under the Convertible Promissory Note.  See Note 9.





20






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; and

·

other factors discussed in Risk Factors.

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 selling the Model 2500 Atmospheric Water Generator in August 2012 to our Philippine distributor.  In 2013, we initiated product sales to our U.S. distributor.  We intend to follow with the introduction of two commercial products, the WaterPro 100 and WaterPro 400 in the near future.  Our goal is to generate positive cash flow from product sales to fund operations at the earliest opportunity.


The WaterPro 400 is nearing field trial testing.  The WaterPro 100 has experienced development delays and may not be introduced for at least another 6 months.  

Discussion and Analysis of Financial Condition and Results of Operations

Revenues


Revenue from sales to date has been modest.  For the next few quarters we are projecting modest sales as we build our distribution network.  For the quarter ending March 31, 2013, we had revenue of $91,900 compared to $45,094 revenue for the quarter ending March 31, 2014. The decrease resulted from variability in order frequency from our stocking distributors. The Company also experienced some delays in implementing a filter configuration change to provide an improved flavor profile of the dispensed water in the Model 2500 which may have been a contributing factor.




21






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 March 31, 2013, we had $535,973 in general and administrative expenses compared with $769,969 for the quarter ending March 31, 2014.  This increase of $233,996 in general and administrative expenses was primarily the result of the non-cash amortization of stock options increasing in the amount of $170,223.  For the quarter ending on March 31, 2014, the stock and option compensation expenses were $476,573 as compared to the same quarter in 2013, when the Company recognized $306,250 in such expenses.


The legal and intellectual property expenses for the quarters ending March 31, 2014 and March 31, 2013 were $19,157 and $16,118, respectively.  The $3,039 increase was primarily related to ongoing maintenance fees and expenses to maintain the Company’s patent portfolio.


The consulting and general professional fees expenses for the quarters ending March 31, 2014 and March 31, 2013 were $225,006 and $189,199, respectively.  The $35,807 increase was primarily related to changes in compensation programs and the additions to staff.


The Company’s travel expenses were $4,333 for the quarter ended March 31, 2014 which was a decrease of $2,088 as compared to the March 31, 2013 quarter’s activity of $6,421.


The other general and administrative operating costs for the quarters ending March 31, 2014 and March 31, 2013 were $44,900 and $17,985, respectively.  The $26,915 increase was related to increases in general operating expenses, including $1,197 spent on research and development during the current quarter.


During the quarter ending of March 31, 2014, the Company recognized a derivative valuation charge of $125,000 concerning the conversion value of new debt acquired during the quarter.

Liquidity and Capital Resources

As of March 31, 2014, we had $27,304 of cash, total current assets of $208,882, total current liabilities of $254,752 and total stockholders' deficit of $327,180, compared to $4,864 of cash, total current assets of $222,586, total current liabilities of $208,817, and total stockholders' equity of $59,814 as of December 31, 2013.

The Company experienced negative cash flow used by operations during the three months ended March 31, 2014 of ($176,540) compared to the three months ended March 31, 2013 of ($211,237).  The Company experienced no cash flows from investing activities for the three months ended March 31, 2013 compared to negative cash flows from investing activity of ($1,020) for the three months ended March 31, 2014.  The Company experienced positive cash flows from financing activities of $304,000 for the three months ended March 31, 2013 compared to positive cash flows from financing activity of $200,000 for the three months ended March 31, 2014.  During the three months ended March 31, 2013, the Company raised $304,000 through the sale of private placement stock and exercise of outstanding warrants.  During the three months ended March 31, 2014, the Company raised $200,000 through a convertible note payable described in Note 9-- Convertible Note Payable--in the Company’s financial statements.

The Company’s audited financial statements for the year ended December 31, 2013 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.



22





For the year ended December 31, 2013, the Company funded its operations principally with equity.  AWGI's funding source was the sale of equity securities.

As of March 31, 2014, AWG International Water Corporation has debt of $200,000.  

Our financial objective is to make sure the Company has the cash and debt capacity 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.   

At March 31, 2014, the Company had 2,340,000 outstanding warrants with an exercise price of $0.03, which if exercised, may contribute upwards of $70,200 to support ongoing capital needs.  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.  There are no warrants subject to the Company’s call.

Existing capital resources are insufficient to support continuing operations of the Company over the next 12 months.  Therefore, the Company will need to obtain additional financing to support existing, as well as, continuing operations.  We anticipate that the Company will need approximately $1,500,000 of additional capital over the next 12 months to execute Management’s plan of operations, 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 2014.

During the quarter ended March 31, 2014, the Company raised no money through the sale of equity.

Additionally, March 2014, the Company entered into a financing transaction with an accredited investor, (the "Lender").  The transaction created a direct company financial obligation in the form of a convertible promissory note for $900,000, (the "Loan").   The Lender initially loaned the Company Two Hundred ($200,000) Dollars on the Note. The Lender may loan an additional Seven Hundred Thousand ($700,000) Dollars to the Company in such amounts as the Lender may choose, in its sole discretion. The Company will only required to repay the amount loaned and the Company is not required to repay any unfunded portion of this Note, including any interest or other rights or remedies granted to any unfunded portion of this Note.  The Lender has the right to convert all or part of the Loan amount into common shares. (See Footnote No 9).  

While no assurances can be given regarding the achievement of future results as actual results may differ materially, management anticipates adequate capital resources to support continuing operations over the next 12 months through the combination of the Loan, exercised warrants, the sale of equity, forecasted working capital from operations, 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.



23





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 March 31, 2014, the Company has net operating loss carry forwards of approximately ($1,972,000), which will expire in 2033 and are calculated at an expected tax rate of approximately 34%.  

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 March 31, 2014, 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 has not filed its federal or state tax returns.  The Company is working towards resolving these delinquencies.

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




24





In March 2014, the Company entered in a financing transaction with an accredited investor which includes certain variable conversion rights attached to the convertible note debt structure.  In accordance with FASB ASC 815-40 Contracts in Entity’s Own Equity, the Company will need to review the possible conversion features under the agreement and disclose any additional derivative liability and the effect of changes in the derivative liability with the issuance of its financial statements.  As of March 31, 2014, the value of the additional stock necessary to settle the contract was $125,000.

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 350-30.  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 March 31, 2014 and December 31, 2013.

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 March 31, 2014 and December 31, 2013.

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


Evaluation of Disclosure Controls and Procedures


In connection with the preparation of this report on Form 10-Q, an evaluation was carried out by management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.




25





Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission’s rules and forms, and that such information was not accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.


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.


Changes in Internal Control Over Financial Reporting


During the period ended March 31, 2014, there has been no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.


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


On January 14, 2014, the Company issued 826,446 common shares to an Executive of the Company as compensation in lieu of accrued compensation of $15,000 and approximately $15,000 for the fair value of the stock issuance treated as additional compensation.


On March 26, 2014, the Company issued 3,352,500 common shares to a Company executive officer as additional compensation authorized on December 30, 2013.  The transaction was valued at $100,575.


The issuance of the shares of was made in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “ Securities Act ”).  As such, the shares may not be offered or sold in the United States unless they are registered under the Securities Act, or an exemption from the registration requirements of the Securities Act is available.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.

MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.

OTHER INFORMATION


None.



26






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 March 31, 2014 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.




27






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:  May 13, 2014


AWG International Water Corporation

(Registrant)



           /s/ Keith White

/s/ Keith White


By:________________________________

________________________________

           Keith White

Keith White

           Chief Executive Officer

Chief Financial Officer

           (Principal Executive Officer)

(Principal Accounting Officer)






28