Attached files
| file | filename |
|---|---|
| EX-32 - CERTIFICATION - Ambient Water Corp | ex322.htm |
| EX-31 - CERTIFICATION - Ambient Water Corp | ex312.htm |
| EX-31 - CERTIFICATION - Ambient Water Corp | ex311.htm |
| EX-32 - CERTIFICATION - Ambient Water Corp | ex321.htm |
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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 June 30, 2015
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
AMBIENT 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)
(Former name, former address and former fiscal year if changed since last report)
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: July 31, 2015 there were 145,776,948 shares of the Company’s common stock were issued and outstanding.
1
AMBIENT WATER CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2015
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMBIENT WATER CORPORATION Consolidated Balance Sheets As of June 30, 2015 and December 31, 2014 | ||||
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|
|
| June 30, 2015 |
|
|
|
| (unaudited) |
| December 31, 2014 |
|
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|
|
|
ASSETS |
|
|
|
|
Current assets |
|
|
|
|
Cash |
| $ 24,446 |
| $ 56,121 |
Accounts receivable |
| 690 |
| 5,051 |
Deposit on product (Note 2) |
| 24,936 |
| 74,170 |
Inventory (Note 3) |
| 29,356 |
| 62,697 |
Prepaid asset |
| 6,567 |
| 16,127 |
Total current assets |
| 85,995 |
| 214,166 |
|
|
|
|
|
Fixed assets (Note 4) |
| 44,005 |
| 51,692 |
|
|
|
|
|
Other assets |
|
|
|
|
Technology acquisition (Note 1) |
| 23,083 |
| 27,280 |
Total assets |
| $ 153,083 |
| $ 293,138 |
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT) |
|
|
|
|
Current liabilities |
|
|
|
|
Accounts payable |
| $ 13,725 |
| $ 26,940 |
Accrued liabilities (Note 5) |
| 401,541 |
| 280,110 |
Notes payable - current portion (Note 6) |
| 831,250 |
| 435,000 |
Derivative liability - current portion (Note 6) |
| 2,196,057 |
| 1,192,287 |
Total current liabilities |
| 3,442,573 |
| 1,934,337 |
|
|
|
|
|
Notes payable (Note 6) |
| 100,000 |
| 300,000 |
Accrued interest |
| 4,219 |
| 7,232 |
Derivative liability (Note 6) |
| 241,769 |
| 899,444 |
Total long-term liabilities |
| 345,988 |
| 1,206,676 |
|
|
|
|
|
Total liabilities |
| 3,788,561 |
| 3,141,013 |
|
|
|
|
|
Commitments & contingencies (Note 7) |
| - |
| - |
|
|
|
|
|
SHAREHOLDERS' DEFICIT |
|
|
|
|
Preferred stock, par value $0.001, 100,000,000 shares authorized no shares issued or outstanding at June 30, 2015 and December 31, 2014, respectively (Note 10) |
| - |
| - |
Common stock, par value $0.001, 500,000,000 shares authorized, 145,776,948 and 129,941,970 shares issued and outstanding at June 30, 2015 and December 31, 2014 respectively (Note 10) |
| 145,777 |
| 129,942 |
Paid-in-capital |
| 7,926,151 |
| 6,818,278 |
Retained deficit |
| (11,707,406) |
| (9,796,095) |
Total shareholders' deficit |
| (3,635,478) |
| (2,847,875) |
|
|
|
|
|
Total liabilities and shareholders' deficit |
| $ 153,083 |
| $ 293,138 |
The accompanying notes are an integral part of these consolidated financial statements.
3
AMBIENT WATER CORPORATION Consolidated Statements of Operations For the three and six months ended June 30, 2015 and 2014 | |||||||
|
|
| |||||
| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| Six Months Ended |
| June 30, 2015 |
| June 30, 2014 |
| June 30, 2015 |
| June 30, 2014 |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
|
|
|
|
|
|
|
|
Sales | $ 13,729 |
| $ 16,489 |
| $ 44,045 |
| $ 61,583 |
Cost of sales | 7,290 |
| 10,829 |
| 26,628 |
| 38,773 |
|
|
|
|
|
|
|
|
Gross profit | 6,439 |
| 5,660 |
| 17,417 |
| 22,810 |
|
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|
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|
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GENERAL AND ADMINISTRATIVE EXPENSES: |
|
|
|
|
|
|
|
Travel and entertainment | 13,450 |
| 2,669 |
| 22,579 |
| 7,002 |
Professional fees | 70,624 |
| 95,545 |
| 128,190 |
| 120,958 |
Executive compensation | 87,500 |
| 87,500 |
| 175,000 |
| 306,250 |
Stock option compensation (non-cash) | 321,719 |
| 360,990 |
| 904,262 |
| 837,563 |
Impairment loss on inventory | - |
| 25,923 |
| - |
| 25,923 |
Other | 38,882 |
| 40,170 |
| 114,480 |
| 85,069 |
|
|
|
|
|
|
|
|
Total General and Administrative Expenses | 532,175 |
| 612,797 |
| 1,344,511 |
| 1,382,765 |
|
|
|
|
|
|
|
|
Operating loss | (525,736) |
| (607,137) |
| (1,327,094) |
| (1,359,955) |
|
|
|
|
|
|
|
|
OTHER INCOME(EXPENSE): |
|
|
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|
|
|
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Finance charge | - |
| (101) |
| (15) |
| (302) |
Interest and penalties | (18,899) |
| (8,082) |
| (38,749) |
| (8,630) |
Loss on deposit cancellation | (57,795) |
| - |
| (57,795) |
| - |
Loss on derivative instruments | (305,014) |
| (375,000) |
| (487,658) |
| (500,000) |
Net loss before income taxes | (907,444) |
| (990,320) |
| (1,911,311) |
| (1,868,887) |
Income taxes | - |
| - |
| - |
| - |
Net loss | $ (907,444) |
| $ (990,320) |
| $ (1,911,311) |
| $ (1,868,887) |
|
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Net loss per common share: |
|
|
|
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|
|
|
Basic and fully diluted | $ (0.01) |
| $ (0.01) |
| $ (0.01) |
| $ (0.02) |
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|
Weighted average number of common shares: |
|
|
|
|
|
|
|
Basic and fully diluted | 141,874,936 |
| 118,059,962 |
| 141,208,670 |
| 116,314,842 |
The accompanying notes are an integral part of these consolidated financial statements.
4
AMBIENT WATER CORPORATION Consolidated Statements of Cash Flows For the six months ended June 30, 2015 and 2014 | |||||
|
| Six Months Ended |
|
| Six Months Ended |
|
| June 30, 2015 |
|
| June 30, 2014 |
|
| (unaudited) |
|
| (unaudited) |
|
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|
|
Cash flows from operating activities: |
|
|
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|
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Net loss |
| $ (1,911,311) |
|
| $ (1,868,887) |
Adjustments to reconcile net loss: |
|
|
|
|
|
Depreciation and amortization |
| 14,454 |
|
| 6,789 |
Stock issued for services |
| - |
|
| 15,000 |
Stock based compensation |
| 904,262 |
|
| 837,564 |
Impairment loss on inventory |
| - |
|
| 25,923 |
Loss on deposit cancellation |
| 57,795 |
|
| - |
Loss on derivative liability |
| 487,658 |
|
| 500,000 |
Changes in assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| 4,361 |
|
| 1,357 |
Deposits |
| 999 |
|
| 37,758 |
Inventory |
| 33,341 |
|
| 15,456 |
Accounts payable |
| (13,215) |
|
| (14,834) |
Other accruals |
| 126,301 |
|
| 83,380 |
|
|
|
|
|
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Net cash used by operating activities |
| (295,355) |
|
| (360,494) |
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Cash flows from investing activities: |
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|
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Fixed assets |
| (2,570) |
|
| (2,040) |
|
|
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|
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Net cash used by investing activities |
| (2,570) |
|
| (2,040) |
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Cash flows from financing activities: |
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Borrowings on notes payable |
| 266,250 |
|
| 500,000 |
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Net cash provided by financing activities |
| 266,250 |
|
| 500,000 |
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Increase (decrease) in cash |
| (31,675) |
|
| 137,466 |
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Cash, beginning of period |
| 56,121 |
|
| 4,864 |
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Cash, end of period |
| $ 24,446 |
|
| $ 142,330 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
| $ 15 |
|
| $ 302 |
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Non-cash investing and financing activities: |
|
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|
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Stock issued for note and interest conversion |
| $ 219,445 |
|
| $ - |
Stock issued for accrued liability |
| $ - |
|
| $ 15,000 |
The accompanying notes are an integral part of these consolidated financial statements.
5
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
NOTE 1: DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On June 23, 2014, AWG International Water Corporation changed its corporate name to Ambient Water Corporation by amending articles of incorporation with the Nevada Secretary of State. This corporate action was recommended by the board of directors and approved by written consent of majority shareholders in lieu of a special meeting. The Company also changed the name of its wholly owned subsidiary to Ambient Water, Inc. from AWG International, Inc. Both name change amendments were filed with the Nevada Secretary of State's office on June 23, 2014.
Ambient Water Corporation (“AWGI” or “the Company”), 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 is one of the pioneers of 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.
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. MIP Solutions, Inc. was considered a shell company prior to the business combination.
The Company follows the accounting guidance outlined in the Financial Accounting Standards Board Codification guidelines. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted principles for interim financial information and with the instructions to Form 10-Q of Regulation S-K. They may not include all information and footnotes required by United States generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 20, 2015.
The Company’s financial statements include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.
Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on previously reported losses, total assets, or stockholders equity.
Interim Financial Statements
These unaudited condensed consolidated financial statements as of and for the six (6) months ended June 30, 2015 and 2014, respectively, reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with the accounting principles generally accepted in the United States of America.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2014 and 2013, respectively, which are included in the Company’s December 31, 2014 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 20, 2015. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the six (6) months ended June 30, 2015 are not necessarily indicative of results for the entire year ending December 31, 2015.
6
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
Year End and Principles of Consolidation
These unaudited condensed consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, and are expressed in U.S. dollars. The Company’s consolidated fiscal year-end is December 31.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All inter-company transactions are eliminated.
Going Concern
The Company has not generated positive cash flows since inception and has recognized approximately $12 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 external 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.
Recent Accounting Pronouncements
In June 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014- 10 (“ASU 2014-10”), Development Stage Entities (Topic 915), Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The objective of the amendments in this Update is to improve financial reporting by reducing the cost and complexity associated with incremental reporting requirements for development stage entities. The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity at risk. The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. These amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. The amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities in paragraph 810-10-15-16 should be applied retrospectively for annual reporting periods beginning after December 15, 2015 and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company adopted ASU 2014-10 in the fourth quarter of 2014. This adoption did not have a material impact on its financial condition, results of operations or cash flows.
In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The objective of the amendments in this Update is to provide guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is evaluating the impact of ASU 2014-15 on its financial condition, results of operations and cash flows.
7
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers”. The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. The standard permits the use of either a retrospective or modified retrospective (cumulative effect) transition method. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the method of adoption.
In February 2015, the FASB issued new guidance to improve consolidation guidance for legal entities (Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015 and interim periods within those years and early adoption is permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In June 2014, the FASB issued new guidance on transfers and servicing ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure), effective prospectively for fiscal years beginning after December 15, 2014 and interim periods within those years. The new guidance requires that repurchase-to-maturity transactions and repurchase financing arrangements be accounted for as secured borrowings and provides for enhanced disclosures, including the nature of collateral pledged and the time to maturity. Certain interim period disclosures for repurchase agreements and securities lending transactions are not required until the second quarter of 2015. The adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.
The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company has not yet determined the effect of the adoption of this standard and it is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.
In April 2015, the FASB issued ASU 2015-3, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Technology Acquisition
The technology supporting the Company’s products (“Technology Acquisition”) was obtained from its founders and their related companies.
8
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
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.
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.
On February 14, 2013, AWG International, Inc. assigned the G2 patent assets to the inventors, Rae Anderson and Keith White. Thereafter, Keith White, as co-inventor, assigned the G2 patent assets to AWG International, Inc. As a result of these assignments, AWG International, Inc. 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.
Warranty Expense
In 2014, the Company established a product warranty reserve, set at five percent (5%) of sales. For the quarter ending June 30, 2015, the Company charged $702 to the expense line Sales Reserve and increased the corresponding liability - Product Warranty Reserve in the same amount. At June 30, 2015 and December 31, 2014, there was a balance of $2,734 and $1,800, respectively in the product warranty reserve account which is shown in accrued liabilities. Additionally, during the quarter ended June 30, 2015, the Company charged $3,160 to the expense line warranty expense shown under other general and administrative expense.
NOTE 2: DEPOSITS ON PRODUCT
At June 30, 2015 and December 31, 2014, there was a balance of $24,936 and $74,170, respectively in deposits on product. Deposits on product represent amounts paid to the Company’s Korean contract manufacturer. Effective June 15, 2015, the Company entered into a product supply agreement with the Korean contract manufacturer. In exchange for the rights for sub-assembly of Atmospheric Water Generators (Product) worldwide by the Company, the Company agreed to pay the manufacturer a royalty of 8% on Product purchased. In addition, the Company agreed to cancel a past debt obligation of $57,795 and treat it as a one time settlement charge to change the contractual relationship and the deposit cancellation is shown under the other income (expense) category.
NOTE 3: INVENTORY
At June 30, 2015 and December 31, 2014, the Inventory balance was $29,356 and $62,697, respectively, valued at the lower of cost or fair market value less any allowances for obsolescence. The Company maintains a small inventory of Model 2500 units and an inventory of filters that are used both in the manufacture of new units and as replacements in previously sold units. The inventory represents inventory held for sale.
9
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
NOTE 4: FIXED ASSETS
At June 30, 2015 and December 31, 2014, the net Fixed Assets balance was $44,005 and $51,692, 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 June 30, 2015 and December 31, 2014, the Company has recognized $20,113 and $9,856, respectively, of accumulated depreciation. As of June 30, 2015 and 2014, the Company recognized $10,257 and $5,436 for depreciation expenses, respectively.
NOTE 5: ACCRUED LIABILITIES
At June 30, 2015 and December 31, 2014, the Accrued Liabilities balance was $401,541 and $280,110, respectively. The Company accrues unpaid wages, consulting costs and unpaid interest in Accrued Liabilities.
NOTE 6: CONVERTIBLE NOTES PAYABLE
On March 21, 2014, the Company entered into a financing transaction with an accredited investor (“Lender”) 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 date of borrowing, when principal sum, unpaid interest and any applicable fees and costs will be due and payable. This note is referred to as Note A in the table below.
The Lender has loaned the Company $900,000 through March 31, 2015. On October 6, 2014, The Lender converted $65,000 of the outstanding principal and associated interest into 5,585,006 common shares. Additionally, on April 9, 2015, the Lender converted $40,000 of the outstanding principal and associated interest into 4,728,152 common shares. Again on June 11, 2015 the Lender converted $30,000 of the outstanding principal and associated interest into 4,401,826 common shares. The outstanding principal on this Note is $765,000 and $735,000, at June 30, 2015 and December 31, 2014, respectively. The current portion of this note payable is $665,000 and $435,000, at June 30, 2015 and December 31, 2014, respectively. 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, excluding any outstanding warrants or options that have been disclosed in SEC filings prior to the effective date.
Under the agreement the Lender has limited the conversion of debt into shares such that the lender will never beneficially own more than 4.99% unless the Company is appropriately notified 61 days in advance of a conversion of the debt beyond the 4.99% holding limits.
On March 27, May 6, and June 18, 2015, the Company entered into three financing transactions with an accredited investor ("Lender) which loaned the Company $48,500, $43,000 and $38,000, respectively, on three separate convertible promissory notes totaling $129,500. The current portion of the notes payable is $129,500 and $-0-, at June 30, 2015 and December 31, 2014, respectively. The notes mature on December 3, 2015, February 8, 2016 and March 20, 2016, respectively (the "Maturity Dates") and to pay interest on the unpaid principal balance hereof at the rate of Eight (8%) percent. The Lender has the right to convert the outstanding principal and interest into common shares after 180 days. The conversion price will be variable and based on a 42% discount to the market price. The market price will be the average lowest five trading prices for the common stock during the ten day trading period ending on the latest complete trading day prior to conversion. The Lender has limited its ability to convert the debt into common shares to no more than 4.99% of the Company’s outstanding common stock. The Lender can waive this limitation upon 61 days advance notice. This note is referred to as Note B in the table below.
10
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
On May 27, 2015, the Company entered into a financing transaction with an accredited investor ("Lender) which loaned the Company $36,750 on a convertible promissory note. The current portion of the note payable is $36,750 and $-0-, at June 30, 2015 and December 31, 2014, respectively. The note matures on May 27, 2016 (the "Maturity Date") and to pay interest on the unpaid principal balance hereof at the rate of Eight (8%) percent. The Lender has the right to convert the outstanding principal and interest into common shares at its option, at any time. The conversion price will be variable and based on a 40% discount to the market price. The market price will be the average of the two lowest closing prices for the common stock during the fourteen prior trading days including the day upon which a Notice of Conversion is received by the Company. This note is referred to as Note C in the table below.
CONVERTIBLE NOTES PAYABLE | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
|
| Current |
|
| Payable |
| Portion |
| Payable |
| Portion |
Description |
| at 6/30/15 |
| at 6/30/15 |
| at 12/31/14 |
| at 12/31/14 |
Note A |
| $ 765,000 |
| $ 665,000 |
| $ 735,000 |
| $ 435,000 |
Note B |
| 129,500 |
| 129,500 |
| - |
| - |
Note C |
| 36,750 |
| 36,750 |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
| $ 931,250 |
| $ 831,250 |
| $ 735,000 |
| $ 435,000 |
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 June 30, 2015, the stock pricing feature which provides a 50% discount to the market would have increased the stock necessary to settle the conversion if requested to approximately 79,950,096 shares. The Company has calculated the value of this additional liability to be $2,158,653 and has recognized a change of earnings for the effect of such a conversion through June 30, 2015. Additionally, the conversion feature on the March 27, 2015, May 6, 2015, May 27, 2015 and June 18, 2015 Notes would have increased the stock necessary to settle the conversion feature on this Note to approximately 10,340,000 shares. The Company has calculated the value of this additional liability to be $279,173 and has recognized a change of earnings for the effect of such a conversion through June 30, 2015. Total derivative liability was $2,437,826 and $2,091,731, as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, the derivative liability is classified as $2,196,057 under current liabilities and $241,769 under long-term liabilities. As of December 31, 2014, the derivative liability is classified as $1,192,287 under current liabilities and $899,444 under long-term liabilities.
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, although the Lender has elected to limit its beneficial ownership to less than five percent unless the Company receives proper notification that the Lender will at any time convert either part or all of the loan to shares.
NOTE 7: 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 was 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 5 – Accrued Liabilities.
11
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
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. This agreement included 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. The sales related warrants terminated on August 1, 2014, as no sales were attributable to this agreement. In accordance with the Consulting Agreement, the common shares underlying this warrant originated from Keith White and a Stock Cancellation Agreement. The termination of this warrant entitled Keith White to a return of the 1,000,000 cancelled shares. Effective July 1, 2014, 1,000,000 previously cancelled shares were to be reissued to Keith White effectively returning the cancelled shares. These shares were issued on September 12, 2014.
NOTE 8: RELATED PARTY TRANSACTIONS
The technology behind the Company’s products, (“Technology Acquisition”) was acquired through an exclusive Irrevocable Patent Assignment. See discussion Note 1 – Technology Acquisition and Note 7 – 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 then Chief Financial Officer and Secretary. These common stock options have an exercise price of $0.18.
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 had an exercise price of $0.17. These common stock options expired on August 1, 2014.
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 then 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 June 30, 2015 is:
2015 $ 314,012 |
2016 $ 334,637 |
2017 $ 24,059 |
12
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
As of June 30, 2015, 20,726,064 of these stock options had vested and were exercisable at an average exercise price of $0.18. As of June 30, 2015, 5,138,125 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 became effective in 2014 based upon either performance or employment requirements. Originally, the share grants were to be issued by June 15, 2014, however Jeff Stockdale and Keith White elected defer their grants (3,352,500 each) until January 5, 2015 when these shares were issued to each of them.
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. 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. On March 21, 2014, the Board of Directors nominated and appointed Jeff Mitchell to fill a vacancy on the Board of Directors. On July 6, 2015, Jeff Mitchell tendered his resignation as a member of the Board of Directors effective June 30, 2015. Stock options for Jeff Mitchell vest through June 30, 2015. Any unexercised stock options for Jeff Mitchell will expire 90 days past June 30, 2015.
NOTE 9: COMMON STOCK WARRANTS
The following warrants for our common stock were issued and outstanding for the six months and year ending June 30, 2015 and December 31, 2014, respectively:
|
| June 30, 2015 |
| December 31, 2014 |
Warrants outstanding at beginning of period |
| 1,340,000 |
| 2,340,000 |
Issued |
| - |
| - |
Cancelled |
| - |
| (1,000,000) |
Exercised |
| - |
| - |
Warrants outstanding at end of period |
| 1,340,000 |
| 1,340,000 |
A detail of warrants outstanding on June 30, 2015 is as follows:
|
| Number of Warrants |
| Expiration Date |
Exercisable at $0.03 per share |
| 1,340,000 |
| 2/1/2017 |
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 10: 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, 2014 |
|
Authorized: | 100,000,000 preferred shares |
| 500,000,000 common shares |
|
|
Issued and outstanding: | 129,941,970 common shares |
On February 20, 2013, the Company entered into a Stock Cancellation Agreement with CanAmera Management, Inc., (CanAmera) which was 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. cancelled 17,952,117 common shares to provide an appropriate pre-financing capital structure for the Company with an intent to offset any share dilution resulting from the private placement. This facilitated the Company proceeding with a non-public, private placement offering to raise approximately $1,500,000 from accredited investors through a non-dilutive offering.
13
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
The Cancellation Agreement with Keith White, Robb Perkinson and CanAmera entitled them to receive a prorated return of a portion of the cancelled shares if the Private Placement had not raised a minimum of $1,200,000. The private placement raised $970,000 through the end date of June 30, 2014. As a result, the Company reissued 5,300,000 common shares and returned to Keith White and CanAmera these shares which were restored to the issued and outstanding capital stock at current market value. The stock was reissued on September 12, 2014.
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 an Executive of the Company per a grant authorized on December 30, 2013.
On September 12, 2014, the Company issued 6,300,000 common shares at $.03 per share. See discussion Note 7 – Commitments and Contingencies.
As of September 30, 2014, there were 1,340,000 common stock purchase warrants outstanding. The common stock purchase warrants are exercisable at three cents ($0.03) per share.
On January 5, 2015, the Company issued 3,352,500 common shares to Jeff Stockdale and 3,352,000 common shares to Keith White as bonus executive compensation valued at $0.0389 per share.
On April 9, 2015, the Company issued 4,728,152 common shares at $0.00935 per share representing a partial conversion of $40,000 of the principal amount, plus $4,208.22 of accrued interest on the $900,000 Promissory Note described Note 6.
On June 11, 2015, the Company issued 4,401,826 common shares at $0.00765 per share representing a partial conversion of $30,000 of the principal amount, plus $3,673.97 of accrued interest on the $900,000 Promissory Note described Note 6.
Summary Equity Table June 30, 2015 |
|
Authorized: | 100,000,000 preferred shares |
| 500,000,000 common shares |
Issued and outstanding: | 145,776,948 common shares |
NOTE 11: INCOME TAXES
The Company is subject to taxation in the U.S. and the state of Washington. At June 30, 2015 and December 31, 2014, Ambient Water Corporation had gross deferred tax assets calculated at the Federal Income Tax rate of 34% of approximately $3,060,000 and $2,577,000, respectively, principally arising from net operating loss carry-forwards for income tax purposes of approximately $9,000,000, which expire in the year 2034. 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 $3,060,000 and $2,577,000 has been established at June 30, 2015 and December 31, 2014, respectively.
The significant components of the Company’s net deferred tax assets at June 30, 2015 and December 31, 2014 are as follows:
|
| June 30, 2015 |
| December 31, 2014 |
Net operating loss carry forwards | $ | 9,000,000 | $ | 7,580,000 |
Deferred tax asset | $ | 3,060,000 | $ | 2,577,000 |
Deferred tax asset valuation allowance |
| (3,060,000) |
| (2,577,000) |
Net deferred tax asset | $ | - | $ | - |
14
AMBIENT WATER CORPORATION
Condensed Notes to Interim 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 Ambient 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 June 30, 2015, 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 June 30, 2015 and December 31, 2014, and has recognized this as interest and/or penalties in the statement of operations for the years ending December 31, 2014. Further, the Company currently has no open tax years, subject to audit prior to December 31, 2009. The Company is current on its federal and state tax returns.
NOTE 12: LICENSE AGREEMENT
On May 28, 2015, the Company granted an Exclusive License Agreement to Pacific Air Well, Inc. a California corporation. This agreement was entered into in the ordinary course of business with a view toward promoting sales of the Commercial Ambient Water 400 units in the State of California. The license is limited to the geographic boundaries of the State of California.
The agreement provides an opportunity for Pacific Air Well, Inc., a startup enterprise, to sell the commercial units in California. The agreement requires Pacific to sell at least $1,000,000 of products or alternatively pay Ambient no less than $200,000 in product sales royalties during the first year of the contract. During year one, Pacific Air Well will be required to pay royalty fees amounting to Twenty (20%) of total product sales which is the equivalent of no less than $200,000. If Pacific Air’s sales amount to less than $250,000 per quarter in the first year, it will be required to pay at least $50,000 in quarterly royalties. Currently, the Company will not accrue any revenues with this agreement, but will recognize revenues when earned and receivable.
Beginning in the second year, in order to extend the license agreement, Pacific Air Well will be required to pay Ambient a license fee of $200,000 over four quarters. During Year two, the product royalties will increase to Twenty-five (25%) of product sales. If Pacific fails to pay Ambient the $200,000 in royalties during year one or the $2,000,000 during year two, the exclusive license agreement will be terminated.
If Pacific complies with the requirements during the first two years, the exclusive license agreement will run the terms of the underlying intellectual property patents supporting the license agreement.
15
AMBIENT WATER CORPORATION
Condensed Notes to Interim Consolidated Financial Statements
NOTE 13: SUBSEQUENT EVENTS
The Company evaluated events occurring subsequent to June 30, 2015, identifying those that are required to be disclosed as follows:
On July 23, 2015, the Company entered into a financing transaction with an accredited investor ("Lender) which loaned the Company $100,000 on a convertible promissory note. The note matures on July 23, 2016 (the "Maturity Date") and to pay interest on the unpaid principal balance hereof at the rate of Ten (10%) percent. The Lender has the right to convert the outstanding principal and interest into common shares at its option, at any time. The conversion price will be variable and based on a 40% discount to the market price. The market price will be the average of the four lowest trades, tossing out the lowest of the four, for the common stock during the twenty prior trading days to the date of conversion.
16
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. In 2014 we began marketing the Ambient Water 400 as it approached field trial testing. Our Philippine distributor ceased business operations at the end of 2014. We are currently in discussions with several potential distributors globally and intend to continue to service the Philippine market. We intend to follow with the introduction of three commercial/industrial products, Ambient Water 20K, Ambient Water Vertical Farming unit and the Ambient Water 100 in the near future. Our goal is to generate positive cash flow from product sales to fund operations at the earliest opportunity.
The Ambient Water 400 was placed into field trial testing in the fourth quarter of 2014. The Company anticipates publishing the results of 3rd party testing/validation in the near future. The unit has been moved to California for marketing assistance to Pacific Air Well, Inc., presently our exclusive product licensee for the Model 400 in California.
The Ambient Water 100 has experienced development delays and may not be introduced for at least another 6 months.
We are actively working to develop a global 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. We are pursuing additional potential distributors and have several active agents helping to identify new distributors and customers.
Discussion and Analysis of Financial Condition and Results of Operations
Revenues
Revenue from sales to date has been minimal. For the next few quarters we are projecting modest sales as we build our distribution network. For the quarter ending June 30, 2015, we had $13,729 revenue compared to $16,489 revenue for the quarter ending June 30, 2014. We believe that the revenue decline was due to several factors: 1) The relatively slow adoption rate of customers purchasing this new and not inexpensive technology, and 2) The shift in emphasis by the Company from the consumer product line to more focus on the commercial and industrial equipment.
17
Costs and Expenses
Our primary costs going forward are related to ongoing sales and marketing, professional fees, executive compensation, administrative payroll and legal fees associated with patent maintenance.
For the quarter ending June 30, 2015, we had $532,175 in general and administrative expenses compared with $612,797 for the quarter ending June 30, 2014. This decrease of $80,622 in general and administrative expenses was primarily the result of professional fees decreasing in the amount of $24,921, stock option compensation (non-cash) decreasing $39,271, impairment loss on inventory decreasing in the amount of $25,923, travel fees increasing in the amount of $10,781 and other general and administrative operating costs decreasing by $1,288.
Professional fees for the quarters ending June 30, 2015 and June 30, 2014 were $70,624 and $95,545, respectively. The $24,921 decrease was due to legal and Intellectual property expenses increasing by $34,468, accounting and auditing fees decreasing by $7,815, consulting fees decreasing by $71,003 and other professional fees increasing by $19,429.
Executive compensation for the quarter ending June 30, 2015 and June 30, 2014 was $87,500 and $87,500, respectively. There was no change in this category for the quarters ending June 30, 2015 and 2014, respectively.
The legal and intellectual property expenses for the quarter ending June 30, 2015 and June 30, 2014 were $4,574 and $2,887, respectively. The $1,687 increase for the quarter ending June 30, 2015 was primarily related to higher ongoing maintenance fees and expenses to maintain the Company’s patent portfolio in the current quarter ended June 30, 2015.
The stock option compensation (non-cash) expenses for the quarters ending June 30, 2015 and June 30, 2014 were $321,719 and $360,990, respectively. The $39,271 decrease was related to a decrease in stock compensation to a former consultant of $23,333 and a decrease in stock compensation to a former executive and a former employee of $15,938.
The Company’s travel expenses for the quarters ending June 30, 2015 and June 30, 2014 were $13,450 and $2,669, respectively. The $10,781 increase was primarily related to more travel in the quarter ending June 30, 2015.
The other general and administrative operating costs for the quarters ending June 30, 2015 and June 30, 2014 were $38,882 and $40,170, respectively. The $1,288 decrease was related to a decrease in employee benefits of $3,182, and other increases of $1,894.
During the quarter ending of June 30, 2015, the Company recognized a derivative valuation charge of $204,175 related to the conversion value of new debt acquired during the quarter. Additionally, the Company recognized a derivative valuation charge of $100,839 related to the conversion value of the debt entered into through March 2015. (See Note 6 in the financial statements).
Liquidity and Capital Resources
As of June 30, 2015, we had $24,446 cash, total current assets of $85,995, total current liabilities of $3,442,573 and total stockholders' deficit of $3,635,478, compared to $56,121 cash, total current assets of $214,166, total current liabilities of $1,934,337, and total stockholders' deficit of $2,847,875 as of December 31, 2014.
The Company experienced negative cash flow used by operations during the six months ended June 30, 2015 of $295,355 compared to the six months ended June 30, 2014 of $360,494. The Company experienced negative cash flows of $2,570 from investing activities for the six months ended June 30, 2015 compared to negative cash flows from investing activity of $2,040 for the six months ended June 30, 2014. The Company experienced positive cash flows from financing activities of $266,250 for the six months ended June 30, 2015 compared to positive cash flows from financing activity of $500,000 for the six months ended June 30, 2014. During the six months ended June 30, 2015, the Company raised $266,250 through four convertible notes payable described in Note 6-- Convertible Notes Payable-- in the Company’s financial statements.
The Company’s audited financial statements for the year ended December 31, 2014 contained a “going concern” qualification. As discussed in Note 1 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.
18
For the year ended December 31, 2014, the Company funded its operations principally through issuance of debt instruments.
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, future operating cash flow and debt or equity financing.
At June 30, 2015, the Company had 1,340,000 outstanding warrants with an exercise price of $0.03. If the 1,340,000 vested warrants were exercised, $40,200 would be paid to support ongoing capital needs. The Company cannot be assured that the warrant holder 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 $1,000,000 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 2015.
During the quarter ended June 30, 2015, the Company raised no money through the sale of equity.
Additionally, in March 2014, the Company entered into a financing transaction with an accredited investor, ("Lender"). The transaction created a direct company financial obligation in the form of a convertible promissory note for $900,000, ("Loan"). Through June 30, 2015, the Company owed Seven Hundred and sixty five thousand ($765,000) Dollars on the Note. The Lender has the right to convert all or part of the Loan amount into common shares. (See Note 6 in the financial statements).
On March 27, May 6 and June 18, 2015, the Company borrowed $48,500, $43,000 and $38,000, respectively, from a second accredited investor. (See Note 6 in the financial statements)
On May 27, 2015, the Company borrowed $36,750, from a third accredited investor. (See Note 6 in the financial statements)
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, 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.
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.
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At June 30, 2015, the Company has net operating loss carry forwards of approximately ($9,000,000), which will expire in 2034 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 June 30, 2015, 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.
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.
During 2014, the Company entered into a Convertible Promissory Note which included a conversion clause which was deemed to be a derivative liability. As of June 30, 2015 the estimated effect upon the fair market conversion of the outstanding balance on the note of $765,000 was approximately $2,158,653 for the relative fair market conversion of the note to common stock. For further information see Note 6 to the financial statement.
In March, May and June 2015, the Company entered into three different Convertible Promissory Notes with a different accredited investor which included conversion clauses which was deemed to be a derivative liability. As of June 30, 2015 the estimated effect upon the fair market conversion of the outstanding balance on the note of $129,500 was approximately $219,444 for the relative fair market conversion of the note to common stock. For further information see Note 6 to the financial statement
During May 2015, the Company entered into a Convertible Promissory Note with a different accredited investor which included a conversion clause which was deemed to be a derivative liability. As of June 30, 2015 the estimated effect upon the fair market conversion of the outstanding balance on the note of $36,750 was approximately $59,729 for the relative fair market conversion of the note to common stock. For further information see Note 6 to the financial statement.
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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 June 30, 2015 and December 31, 2014.
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 June 30, 2015 and December 31, 2014.
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.
Contracts in Entity’s Own Equity
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 June 30, 2015, the value of the stock necessary to settle the contract was $2,158,653.
In the first and second quarters of 2015, the Company entered in a different financing transaction involving three separate convertible notes 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 June 30, 2015, the value of the stock necessary to settle the contract was $219,444.
In the second quarter of 2015, the Company entered in a different financing transaction involving a separate convertible note 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 June 30, 2015, the value of the stock necessary to settle the contract was $59,729.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
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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.
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 June 30, 2015, 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
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Partial Conversion of Promissory Note into Common Shares:
On April 9, 2015, the Company issued 4,728,152 common shares at $0.00935 per share representing a partial conversion of $40,000 of the principal amount, plus $4,208.22 of accrued interest on the $900,000 Promissory Note described Financial Statement Note 6.
On June 11, 2015, the Company issued 4,401,826 common shares at $0.00765 per share representing a partial conversion of $30,000 of the principal amount, plus $3,673.97 of accrued interest on the $900,000 Promissory Note described Financial Statement Note 6.
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Creation of a Direct Financial Obligation:
On July 27, 2015, the Company executed a financing transaction dated July 23, 2015 with an accredited investor ("Lender) which loaned the Company $100,000 on a convertible promissory note. The note matures on July 23, 2016 (the "Maturity Date") and to pay interest on the unpaid principal balance hereof at the rate of Ten (10%) percent. The Lender has the right to convert the outstanding principal and interest into common shares at its option, at any time. The conversion price will be variable and based on a 40% discount to the market price. The market price will be the average of the four lowest trades, tossing out the lowest of the four, for the common stock during the twenty prior trading days to the date of conversion.
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 June 30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Condensed Notes to Interim Consolidated Financial Statements |
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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: July 31, 2015
Ambient 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)
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