Ambient Water Corp - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATION - Ambient Water Corp	ex322.htm
EX-32 - CERTIFICATION - Ambient Water Corp	ex321.htm
EX-31 - CERTIFICATION - Ambient Water Corp	ex312.htm
EX-31 - CERTIFICATION - Ambient Water Corp	ex311.htm

OMB APPROVAL

OMB Number: 3235-0070

Expires: September 30, 2018

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 September 30, 2016

[ ] 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: November 2, 2016 there were 1,245,346,702 shares of the Company’s common stock were issued and outstanding.

AMBIENT WATER CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2016

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. MINE SAFETY DISCLOSURES

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


AMBIENT WATER CORPORATION Consolidated Balance Sheets As of September 30, 2016 and December 31, 2015
	September 30, 2016
	(unaudited)	December 31, 2015
ASSETS
Current assets
Cash	$ 300	$ 820
Accounts receivable	11,207	13,765
Deposit on product (Note 2)	41,483	51,959
Inventory (Note 3)	6,334	1,497
Prepaid asset	23,399	15,658
`
Total current assets	82,723	83,699

Fixed assets (Note 4)	20,697	33,789

Other assets
Technology acquisition (Note 1)	26,074	18,886

Total assets	$ 129,494	$ 136,374

LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current liabilities
Accounts payable	$ 103,904	$ 54,629
Accounts payable - related parties (Note 8)	31,228	2,485
Accrued liabilities (Note 5)	96,587	84,116
Accrued liabilities - related parties (Note 8)	224,868	370,000
Notes payable - current portion (Note 6)	100,000	142,529
Derivative liability - current portion (Note 6)	673,360	76,955

Total current liabilities	1,229,947	730,714

Notes payable (Note 6)	585,100	768,454
Accrued interest	125,713	102,884
Derivative liability (Note 6)	4,593,762	748,757

Total long-term liabilities	5,304,575	1,620,095

Total liabilities	6,534,522	2,350,809

Commitments & contingencies (Note 7)	-	-

SHAREHOLDERS' DEFICIT
Preferred stock, par value $0.0001, 400,000,000 shares authorized 72,800,920 and -0- shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively (Note 10)	7,280
Preferred stock, Series B, par value $10.00, 1 share authorized no shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively (Note 10)	-	-
Common stock, par value $0.0001, 2,000,000,000 shares authorized, 1,132,779,030 and 177,407,091 shares issued and outstanding at September 30, 2016 and December 31, 2015 respectively (Note 10)	113,278	17,741
Paid-in-capital	10,379,311	8,800,842
Retained deficit	(16,904,897)	(11,033,018)
Total shareholders' deficit	(6,405,028)	(2,214,435)

Total liabilities and shareholders' deficit	$ 129,494	$ 136,374

See accompanying condensed notes to the interim consolidated financial statements.


AMBIENT WATER CORPORATION Consolidated Statements of Operations For the three and nine months ended September 30, 2016 and 2015
	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
	September 30, 2016	September 30, 2015	September 30, 2016	September 30, 2015
	(unaudited)	(unaudited)	(unaudited)	(unaudited)

Sales	$ 20,121	$ 80,127	$ 26,826	$ 124,173
Cost of sales	15,150	46,487	18,519	73,116

Gross profit	4,971	33,640	8,307	51,057

GENERAL AND ADMINISTRATIVE EXPENSES:
Travel and entertainment	521	13,415	6,006	35,994
Professional fees	31,628	60,354	124,081	188,545
Executive compensation	60,000	87,500	180,000	262,500
Stock option compensation (non-cash)	10,313	157,006	324,325	1,061,268
Other	35,577	56,333	98,941	170,811

Total General and Administrative Expenses	138,039	374,608	733,353	1,719,118

Operating loss	(133,068)	(340,968)	(725,046)	(1,668,061)

OTHER INCOME(EXPENSE):
Finance charge	-	-	-	(15)
Interest and penalties	(17,517)	(33,839)	(64,472)	(72,588)
Loss on deposit cancellation	-	-	-	(57,795)
Gain (loss) on derivative instruments	(2,941,715)	143,210	(5,082,361)	(344,448)
Net loss before income taxes	(3,092,300)	(231,597)	(5,871,879)	(2,142,907)
Income taxes	-	-	-	-
Net loss	$ (3,092,300)	$ (231,597)	$ (5,871,879)	$ (2,142,907)

Net loss per common share:
Basic and fully diluted	$ -	$ -	$ (0.01)	$ (0.02)

Weighted average number of common shares:
Basic and fully diluted	951,671,045	147,407,848	583,174,946	141,297,669

See accompanying condensed notes to the interim consolidated financial statements.


AMBIENT WATER CORPORATION Consolidated Statements of Cash Flows For the nine months ended September 30, 2016 and 2015
	Nine Months Ended	Nine Months Ended
	September 30, 2016	September 30, 2015
	(unaudited)	(unaudited)

Cash flows from operating activities:
Net loss	$ (5,871,879)	$ (2,142,907)
Adjustments to reconcile net loss:
Depreciation and amortization	19,690	21,852
Stock issued for accrued liability	310,132	-
Stock based compensation	324,325	1,061,268
Loss on deposit cancellation	-	57,795
Loss on derivative liability	5,082,361	344,448
Changes in assets and liabilities:
Accounts receivable	2,558	2,317
Deposits	2,735	(16,273)
Inventory	(4,837)	60,561
Accounts payable	(11,748)	(4,054)
Other accruals	22,829	207,919

Net cash used by operating activities	(123,834)	(407,074)

Cash flows from investing activities:
Fixed assets	-	(2,570)
Technology acquisition	(13,786)	-

Net cash used by investing activities	(13,786)	(2,570)

Cash flows from financing activities:
Borrowings on notes payable	137,100	359,762

Net cash provided by financing activities	137,100	359,762

Increase (decrease) in cash	(520)	(49,882)

Cash, beginning of period	820	56,121

Cash, end of period	$ 300	$ 6,239

Supplemental disclosure of cash flow information:
Interest paid	$ -	$ 15

Non-cash investing and financing activities:
Stock issued for note and interest conversion	$ 1,046,830	$ 396,408

See accompanying condensed notes to the interim consolidated financial statements.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

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 drought relief 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, 2015 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2016. The interim unaudited condensed consolidated financial statements as of and for the three (3) months and nine (9)) months ended September 30, 2016 and 2015, respectively should be read in conjunction with those financial statements included in the Form 10-K. In the opinion of management, all adjustments considered 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 have been made. Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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 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.

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.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

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 $17 million in net operating losses, which raises substantial doubt about the ability of the Company to continue as a going concern. The Company is dependent upon achieving positive cash flow from operations and obtaining additional 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 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.

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.

The Company is reviewing the effects of following recent updates. The Company has no expectation that any of these items will have a material effect upon the financial statements.

Update 2015-16 - Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

Update 2015-15 – Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update)

Update 2015-14 - Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

Update 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory

Update 2015-08 - Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update)

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

Update No. 2015-03 – Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

Update 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

Update 2016-01 - Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

Update No. 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis

Update 2016-09 - Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting

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.

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.

On January 12, 2016, the Australian Government, accepted Patent application Number 2010321841. The Patent is effective from November 19, 2010 through November 19, 2030. The cost to acquire the Patent was $8,891. Amortization expense for the nine month periods ending September 30, 2016 and 2015, were $304 and $0. The Patent will be amortized over the remaining effective life.

Additionally, for the quarter ending September 30, 2016, the Company has capitalized $4,895 of expenses in this account. The Company will continue to capitalize expenses in this account for Patents being pursued. At such time the patent is granted, the Company will begin to amortize over the useful life. If patents are denied, the Company will expense the costs associated with pursuing the patent.

The technology rights are being amortized over expected lives of five to twenty 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.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

Warranty Expense

In 2014, the Company established a product warranty reserve, set at five percent (5%) of sales. For the nine month periods ending September 30, 2016 and 2015, the Company charged $1,361 and $6,430, respectively to the expense line Sales Reserve and increased the corresponding liability - Product Warranty Reserve in the same amount. At September 30, 2016 and December 31, 2015, there was a balance of $14,397 and $13,036, respectively in the product warranty reserve account which is shown in accrued liabilities. Additionally, during the nine month periods ended September 30, 2016 and 2015, the Company charged $1,919 and $14,333, respectively to the expense line warranty expense shown under other general and administrative expense.

NOTE 2: DEPOSITS ON PRODUCT

At September 30, 2016 and December 31, 2015, there was a balance of $41,483 and $51,959, respectively in deposits on product. Deposits on product represent amounts paid to the Company’s Korean contract manufacturer.

NOTE 3: INVENTORY

At September 30, 2016 and December 31, 2015, the Inventory balance was $6,334 and $1,497, respectively, valued at the lower of cost or fair market value less any allowances for obsolescence. The Company strives to maintain 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 Company had one Model 2500 unit in inventory at September 30, 2016 and no Model 2500 units in inventory at December 31, 2015.

NOTE 4: FIXED ASSETS

At September 30, 2016 and December 31, 2015, the net Fixed Assets balance was $20,697 and $33,789, 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 September 30, 2016 and December 31, 2015, the Company has recognized $43,421 and $30,329, respectively, of accumulated depreciation. For the three month periods ending September 30, 2016 and 2015, the Company recognized $4,279 and $5,299 for depreciation expenses, respectively. Additionally, for the nine month periods ending September 30, 2016 and 2015, the Company recognized $13,093 and $15,556 for depreciation expenses, respectively.

NOTE 5: ACCRUED LIABILITIES

At September 30, 2016 and December 31, 2015, the Accrued Liabilities balance was $96,587 and $84,116, respectively. The Company accrues unpaid wages, consulting costs, accrued notes payable interest and accrued Internal Revenue Service penalty and interest in Accrued Liabilities. See Note 8 - Related Party Transactions.

NOTE 6: CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES

On March 21, 2014, the Company entered into a financing transaction with an accredited investor (“Lender”) under which the Company may 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 was extended from18 months to 60 months as described below. 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. Also, on August 28, 2015 the Lender converted $58,000 of the outstanding principal and associated interest into 4,413,024 common shares. Again on December 22, 2015 the Lender converted $9,000 of the outstanding principal and associated interest into 5,237,586 common shares. During the quarter ended March 31, 2016, the Lender converted $28,710 of the outstanding principal and associated interest into 36,000,713 common shares. During the quarter ended June 30, 2016, the Lender converted $55,710 of the outstanding principal and associated interest into 232,401,697 common shares. During the quarter ended September 30, 2016, the Lender converted $28,480 of the outstanding principal and associated

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

interest into 353,461,713 common shares. The outstanding principal on this Note is $585,100 and $698,000, at September 30, 2016 and December 31, 2015, respectively. The current portion of this note payable is $-0- and $-0-, at September 30, 2016 and December 31, 2015, 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.

Effective September 21, 2015, we amended our $900,000 note dated March 21, 2014. The following terms were amended:

Section 1 of the Note is hereby revised and restated in its entirety as follows:

1. Maturity Date. The Maturity Date is eighteen (18) months from the Effective Date of each payment of Consideration (the “Maturity Date”) and is the date upon which the Principal Sum of this Note and unpaid interest and fees (the “Note Amount”) shall be due and payable. The Maturity Date is hereby extended, and the Note Amount is payable upon demand by the Lender, but in no event later than sixty (60) months from the Effective Date (the ”Extended Maturity Date”). The Lender shall provide the Borrower with ten (10) days written notice to make a demand for payment (the “Demand Payment Date”), and the Demand Payment Date shall be considered to be the Extended Maturity Date.

Section 6 of the Note is hereby revised and restated in its entirety as follows:

6. Payment. The Borrower may not prepay this Note prior to the Maturity Date or the Extended Maturity Date. Within six (6) days prior to the Maturity Date or Extended Maturity Date, the Borrower shall provide the Lender with a written notice to pay the Note Amount on the Maturity Date or Extended Maturity Date. Within three (3) days of receiving written notice, the Lender shall elect to either (a) accept payment of the Note Amount or (b) convert any part of the Note Amount into shares of Common Stock. If the Lender elects to convert part of the Note Amount into shares of Common Stock, then the Borrower shall pay the remaining balance of the Note Amount by the Maturity Date or Extended Maturity Date. The Borrower may not prepay this Note prior to the Maturity Date or the Extended Maturity Date.

Section 11 of the Note is hereby revised and restated in its entirety as follows:

11. Remedies. In the event of any default, the Note Amount shall become immediately due and payable at the Mandatory Default Amount. The Mandatory Default Amount shall be 150% of the Note Amount. Commencing five (5) days after the occurrence of any event of default that results in the eventual acceleration of this Note, the interest rate on the Mandatory Default Amount shall accrue at a default interest rate equal to the lesser of ten percent (10%) per annum or the maximum rate permitted under applicable law. In connection with such acceleration described herein, the Lender need not provide, and the Borrower hereby waives, any presentment, demand, protest or other notice of any kind, and the Lender may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. While the Mandatory Default Amount is outstanding and default interest is accruing, the Lender shall have all rights as a holder of this Note until such time as the Lender receives full payment pursuant to this paragraph, or has converted all the remaining Mandatory Default Amount and any other outstanding fees and interest into Common Stock under the terms of this Note. In the event of any default and at the request of the Lender, the Borrower shall file a registration statement with the SEC to register all shares of Common Stock issuable upon conversion of this Note that are otherwise not eligible to have their restrictive transfer legend removed under Rule 144 of the Securities Act. Nothing herein shall limit Lender’s right to pursue any other remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Borrower’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof. The Borrower may only pay the full balance of the Mandatory Default Amount, and may not make partial payments unless agreed upon by the Lender. If the Borrower desires to pay the Mandatory Default Amount, then the Borrower shall provide the Lender with six (6) days prior written notice of payment. Within three (3) days of

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

receiving written notice, the Lender shall elect to either (a) accept payment, or (b) convert any part of the payment into shares of Common Stock. If the Lender elects to convert part of the payment into shares of Common Stock, then the Borrower shall pay the remaining balance of the Mandatory Default Amount.

The effect of the Addendum is that the Note will remain in full force and effect except as specifically modified by the Addendum. In the event of a conflict between the Addendum and the Note, the terms of the Addendum will govern.

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. On October 1, 2015, The Lender converted $12,000 of the outstanding principal into 779,221 common shares. Additionally, on October 8, 2015, the Lender converted $15,000 of the outstanding principal into 1,111,111 common shares. Again on October 20, 2015, the Lender converted $15,000 of the outstanding principal into 1,470,488 common shares. Again on October 27, 2015, the Lender converted $6,500 of the outstanding principal and accrued interest into 897,872 common shares. Again on November 16, 2015, the Lender converted $20,000 of the outstanding principal into 2,898,551 common shares. Again on November 24, 2015, the Lender converted $23,000 of the outstanding principal and accrued interest into 3,987,097 common shares. Again on December 28, 2015, the Lender converted $15,000 of the outstanding principal into 6,521,739 common shares. During the quarter ended March 31, 2016, the Lender converted the remaining $23,000 of outstanding principal and accrued interest into 12,094,236 common shares. This note is referred to as Note B in the table below.

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. On December 4, 2015, the Lender converted $4,750 of the outstanding principal and interest into 952,331 common shares. Again on December 18, 2015, the Lender converted $4,000 of the outstanding principal and interest into 1,618,011 common shares. Again on December 28, 2015, the Lender converted $4,000 of the outstanding principal and interest into 1,743,012 common shares. During the quarter ended March 31, 2016, the Lender converted the remaining $24,000 of outstanding principal and associated interest into 14,905,072 common shares. The current portion of the note payable is $-0- and $24,000, at September 30, 2016 and December 31, 2015, respectively. This note is referred to as Note C in the table below.

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 less an original issue discount (OID) of $8,000. During the quarter ended March 31, 2016, the Lender converted $93,629 of outstanding principal and accrued interest into 86,172,894 common shares. During the quarter ended June 30, 2016, the Lender converted the remaining $6,371 of outstanding principal and associated interest into 14,040,790 common shares. The OID has an unamortized balance of -0- and $4,471 at September 30, 2016 and December 31, 2015, respectively. The current portion of the note payable (net of OID) is $-0- and $95,529, at September 30, 2016 and December 31, 2015, respectively. The note is referred to as Note D in the table below.

On October 14, 2015, the Company executed a financing transaction with an accredited investor ("Lender”) which loaned the Company $37,100 on a convertible promissory note less an original issue discount (OID) of $2,100. During the quarter ended June 30, 2016, the Lender converted the entire $37,100 of outstanding principal and associated interest into 48,831,119 common shares. The OID has an unamortized balance of $-0- and $1,873 at September 30, 2016 and December 31, 2015, respectively. The current portion of the note payable (net of OID) is $-0- and $35,227, at September 30, 2016 and December 31, 2015, respectively. This note is referred to as Note E in the table below.

On October 14, 2015, the Company executed a financing transaction with an accredited investor ("Lender”) which loaned the Company $37,100 on a convertible promissory note less an original issue discount (OID) of $2,100. During the quarter ended June 30, 2016, the Lender converted the entire $37,100 of outstanding principal and associated interest into 58,165,167 common shares. The OID has an unamortized balance of $-0- and $1,873 at September 30, 2016 and December 31, 2015, respectively. The current portion of the note payable (net of OID) is $-0- and $35,227, at September 30, 2016 and December 31, 2015, respectively. This note is referred to as Note F in the table below.

On February 2, 2016, the Company entered into a financing transaction with an accredited investor (“Lender”) under which the Company may borrow up to Two Hundred Fifty Thousand ($250,000) 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 twelve months from the Effective Date. The Lender has the right, at any time after the Effective Date, at its election, to convert all or part of the Note Amount into shares of common stock. The conversion price shall be the lesser of (a) $0.005

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

per share of common stock or (b) Fifty Percent (50%) of the average of the three lowest trade prices on three separate trading days, or (c) the lowest effective price per share granted to any person or entity, but excluding officers and directors of the Borrower. The Lender has loaned the Company $100,000 through September 30, 2016. The current portion of the note payable is $100,000 and $-0-, at September 30, 2016 and December 31, 2015, respectively. This Note is referred to as Note G in the table below.

On May 3, 2016 the Company received $37,100 on the back end convertible promissory note associated with Note E listed above, less an original issue discount (OID) of $2,100. During the quarter ended June 30, 2016, the Lender converted the entire $37,100 of outstanding principal and associated interest into 99,298,538 common shares. The OID has an unamortized balance of $-0- and $-0- at September 30, 2016 and December 31, 2015, respectively. The current portion of the note payable (net of OID) is $-0- and $-0- at September 30, 2016 and December 31, 2015, respectively. This note is referred to as Note H in the table below.


CONVERTIBLE NOTES PAYABLE

		Current		Current
	Payable	Portion	Payable	Portion
Description	at 9/30/16	at 9/30/16	at 12/31/15	at 12/31/15
Note A	$ 585,100	$ -	$ 698,000	$ -
Note B	-	-	23,000	23,000
Note C	-	-	24,000	24,000
Note D	-	-	95,529	95,529
Note E	-	-	35,227	-
Note F	-	-	35,227	-
Note G	100,000	100,000	-	-
Note H	-	-	-	-
	$ 685,100	$ 100,000	$ 910,983	$ 142,529

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 September 30, 2016, the stock pricing feature for Note A above which provides a 50% discount to the market would have increased the stock necessary to settle the conversion if requested to approximately 10,609,149,000 shares. The Company has calculated the value of this additional liability to be $4,593,762 and has recognized a change of earnings for the effect of such a conversion through September 30, 2016. Additionally, the conversion features on Note G above would have increased the stock necessary to settle the conversion feature on this Note to approximately 1,555,100,000 shares. The Company has calculated the value of this additional liability to be $673,360 and has recognized a change of earnings for the effect of such a conversion through September 30, 2016. Total derivative liability was $5,267,122 and $825,712, as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the derivative liability is classified as $673,360 under current liabilities and $4,593,762 under long-term liabilities. As of December 31, 2015, the derivative liability is classified as $76,955 under current liabilities and $748,757 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. The Lender must give the Company 60 days notice to waive the beneficial ownership limit of less than five percent, which the Company has not received as of this filing. The amount of shares necessary to settle the conversion features of these Notes is subject to change with the trading price of our common stock and by the lowest price of common stock issued to other parties which is currently $0.00017.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

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.

In August 2012, information came to the Company’s attention which raised questions about the enforceability, validity and scope of protection relating to the Everest Water patents, the Everest Water/CanAmera Management License Agreement and subsequent patent assignments ("G2 Asset") which were associated with the License Agreement. For further discussion, see Note 1 on Technology Acquisition.

On September 18, 2015, Ambient Water Corporation (the “Company”) entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with accredited investor, River North Equity, LLC (“River North”). Under the Purchase Agreement, the River North has agreed to purchase from the Company up to an aggregate of $5 million worth of shares of common stock, par value $0.0001 per share (“Common Stock”), of the Company, from time to time, subject to limitations. These agreements were updated and revised on December 11, 2015.

In accordance with the Registration Rights Agreement, the Company has filed with the Securities and Exchange Commission (the “SEC”) a registration statement (the “Registration Statement”) to register for resale under the Securities Act of 1933, as amended (the “Securities Act”), the shares of Common Stock that may be issued to River North under the Purchase Agreement. We did not register 100% of the registerable securities under the Purchase Agreement. We are subject to a registration cap which cannot exceed 30% of our issued and outstanding common shares, less any shares held by Affiliates of the Company, under Registration Rights Agreement. Therefore, the Company has elected to register 20,000,000 common shares which represents approximately $600,000 Dollars of the $5 Million Dollars under the Purchase Agreement.

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, 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.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

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. On January 12, 2016, the Board of Directors voted a reduction in annual executive compensation to $120,000 effective January 1, 2016. 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. Mr. Mitchell’s common stock options expired on September 29, 2015.

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. Mr. Mitchell’s common stock options expired on October 6, 2015.

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. As of March 31, 2016, 17,197,000 of the original 32,439,000 stock options had expired. 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 remaining annual expense to the Company associated with these options as of September 30, 2016 is:

2016 $ 10,313

2017 $ 24,059

As of September 30, 2016, 14,867,000 of these stock options had vested and were exercisable at an average exercise price of $0.18. As of September 30, 2016, 375,000 were expected to be vested over the next two 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 vested through June 30, 2015. All of Mr. Mitchell's unexercised stock options expired on October 6, 2015.

At September 30, 2016 and December 31, 2015, the Company owed reimbursements to Officers of $31,228 and $2,485, respectively. These amounts are listed under the caption Accounts payable -related parties on the Balance Sheets.

Additionally, at September 30, 2016 and December 31, 2015, the Company owed Officer Compensation of $224,868 and $370,000, respectively. These amounts are listed under the caption Accrued liabilities - related parties on the Balance Sheets.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

NOTE 9: COMMON STOCK WARRANTS

The following warrants for our common stock were issued and outstanding for the nine months and year ending September 30, 2016 and December 31, 2015, respectively:


	September 30, 2016	December 31, 2015
Warrants outstanding at beginning of period	1,340,000	1,340,000
Issued	-	-
Cancelled	-	-
Exercised	-	-
Warrants outstanding at end of period	1,340,000	1,340,000

A detail of warrants outstanding on September 30, 2016 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: PREFERRED STOCK AND COMMON STOCK

The Stockholders’ Equity section of the Company contains the following class of Common and Preferred Stock (par value $0.0001) as of:


December 31, 2015
Authorized:	400,000,000 preferred shares
	2,000,000,000 common shares

Issued and outstanding:	177,407,091 common shares

On January 5, 2015, the Company issued 6,705,000 common shares to two Executives per grants authorized on December 31, 2013 at $0.0389 per share.

On April 9, 2015, the Company issued 4,728,152 common shares for partial note payable and accrued interest conversion at $0.0196 per share.

On June 11, 2015, the Company issued 4,401,826 common shares for partial note payable and accrued interest conversion at $0.0288 per share.

On August 28, 2015, the Company issued 4,413,024 common shares for partial note payable and accrued interest conversion at $0.0401 per share.

On October 1, 2015, the Company issued 779,221 common shares for partial note payable and accrued interest conversion at $0.0262 per share.

On October 8, 2015, the Company issued 1,111,111 common shares for partial note payable and accrued interest conversion at $0.0237 per share.

On October 20, 2015, the Company issued 1,470,588 common shares for partial note payable and accrued interest conversion at $0.0165 per share.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

On October 27, 2015, the Company issued 897,872 common shares for partial note payable and accrued interest conversion at $0.0112 per share.

On November 16, 2015, the Company issued 2,898,551 common shares for partial note payable and accrued interest conversion at $0.0178 per share.

On November 24, 2015, the Company issued 3,987,097 common shares for partial note payable and accrued interest conversion at $0.0100 per share.

On December 4, 2015, the Company issued 952,331 common shares for partial note payable and accrued interest conversion at $0.0105 per share.

On December 18, 2015, the Company issued 1,618,011 common shares for partial note payable and accrued interest conversion at $0.0057 per share.

On December 22, 2015, the Company issued 5,237,586 common shares for a partial note payable and accrued interest conversion at $0.00202 per share.

On December 28, 2015, the Company issued 6,521,739 common shares for partial note payable and accrued interest conversion at $0.0052 per share.

On December 28, 2015, the Company issued 1,743,012 common shares for partial note payable and accrued interest conversion at $0.0052 per share.


September 30, 2016
Authorized:	400,000,000 preferred shares, Series A 1 preferred share, Series B
	2,000,000,000 common shares
Issued and outstanding:	72,800,920 preferred shares 1,132,779,030 common shares

On January 12, 2016, the Board of Directors authorized the issuance of 72,800,920 shares of Series “A” Preferred Stock in lieu of payment of $310,131.92 deferred accrued Executive Compensation.

The following compensation was paid to Keith White and Jeff Stockdale:


	Deferred Compensation	Share Price (1)	Number of Shares
Keith White	$130,065.96	$0.00426	30,531,915
Jeff Stockdale	$180,065.96	$0.00426	42,269,005

Note 1. This $0.00426 represents the average market price per share of common stock as quoted over-the-counter for the preceding five (5) days. The Series “A” Preferred has been priced based on the market price of the common stock thereby maintaining price parity.

The accrued executive compensation was paid in the form of Series “A” Preferred shares because the utilization of common stock would have resulted in a deficit of unissued common shares reserved for various convertible notes.

On January 5, 2016, the Company issued 7,704,762 common shares for partial note payable conversion at $0.0021 per share.

On January 5, 2016, the Company issued 2,494,195 common shares for partial note payable and accrued interest conversion at $0.00189 per share.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

On January 6, 2016, the Company issued 4,389,474 common shares for partial note payable and accrued interest conversion at $0.0019 per share.

On January 12, 2016, the Company issued 4,938,381 common shares for partial note payable and accrued interest conversion at $0.00165 per share.

On January 20, 2016, the Company issued 7,472,496 common shares for partial note payable and accrued interest conversion at $0.00165 per share.

On January 15, 2016, the Company issued 9,449,488 common shares for partial note payable and accrued interest conversion at $0.00122 per share.

On January 29, 2016, the Company issued 9,649,712 common shares for partial note payable conversion at $0.00156 per share.

On February 10, 2016, the Company issued 9,649,712 common shares for partial note payable conversion at $0.00132 per share.

On February 11, 2016, the Company issued 7,197,534 common shares for partial note payable and accrued interest conversion at $0.001030 per share.

On February 22, 2016, the Company issued 9,649,712 common shares for partial note payable conversion at $0.00108 per share.

On March 1, 2016, the Company issued 9,649,712 common shares for partial note payable conversion at $0.00102 per share.

On March 4, 2016, the Company issued 9,649,712 common shares for partial note payable conversion at $0.000974 per share.

On March 7, 2016, the Company issued 9,564,864 common shares for partial note payable and accrued interest conversion at $0.000780 per share.

On March 8, 2016, the Company issued 9,649,712 common shares for partial note payable conversion at $0.000974 per share.

On March 16, 2016, the Company issued 14,137,311 common shares for partial note payable conversion at $0.000994 per share.

On March 21, 2016, the Company issued 9,788,827 common shares for partial note payable and accrued interest conversion at $0.000770 per share.

On March 23, 2016, the Company issued 14,137,311 common shares for partial note payable conversion at $0.000900 per share.

On April 1, 2016, the Company issued 13,958,137 common shares for a partial note payable and accrued interest conversion at $0.00075 per share.

On April 7, 2016, the Company issued 16,065,753 common shares for a partial note payable and accrued interest conversion at $0.00075 per share.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

On April 7, 2016, the Company entered into an updated and revised Securities Purchase Agreement and a Registration Rights Agreement with accredited investor, River North Equity, LLC. These two agreements replace the identically named agreements that we entered into with River North Equity, LLC on December 11, 2015. These agreements modified language in the Definitions section, updated information concerning our capital structure, our DWAC eligibility, financial information and other changes reflected in our Periodic Reports which we file with the Securities and Exchange Commission. Additionally, the Company has elected to register 90,000,000 common shares as stated in Note 7.

On April 8, 2016, the Company issued 14,040,790 common shares for a partial note payable and accrued interest conversion at $0.00088 per share.

On April 19, 2016, the Company issued 6,307,822 common shares for a partial note payable and accrued interest conversion at $0.0007927 per share.

On April 25, 2016, the Company issued 16,877,589 common shares for a partial note payable and accrued interest conversion at $0.00067 per share.

On May 2, 2016, the Company issued 15,264,929 common shares for a partial note payable and accrued interest conversion at $0.0007927 per share.

On May 2, 2016, the Company issued 17,631,411 common shares for a partial note payable and accrued interest conversion at $0.00067 per share.

On May 3, 2016, the Company issued 13,165,887 common shares for a partial note payable and accrued interest conversion at $0.0007927 per share.

On May 3, 2016, the Company issued 20,185,029 common shares for a partial note payable and accrued interest conversion at $0.0007927 per share.

On May 3, 2016 the Company received $37,100 on the back end convertible promissory note associated with Note E listed in Note 6 above, less an original issue discount (OID) of $2,100. The note matures on October 14, 2017 (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 42% discount to the market price. The market price will be the average of the three lowest trading prices for the common stock during the fifteen prior trading days.

On May 4, 2016, the Company issued 7,073,339 common shares for a partial note payable and accrued interest conversion at $0.0007927 per share.

On May 4, 2016, the Company issued 14,886,459 common shares for a partial note payable and accrued interest conversion at $0.0007927 per share.

On May 4, 2016, the Company issued 12,857,820 common shares for a partial note payable and accrued interest conversion at $0.000812 per share.

On May 6, 2016, the Company issued 13,852,692 common shares for a partial note payable and accrued interest conversion at $0.000754 per share.

On May 10, 2016, the Company issued 15,742,129 common shares for a partial note payable and accrued interest conversion at $0.0004447 per share.

On May 12, 2016, the Company issued 18,288,768 common shares for a partial note payable and accrued interest conversion at $0.000406 per share.

On May 12, 2016, the Company issued 19,704,433 common shares for a partial note payable and accrued interest conversion at $0.000406 per share.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

On May 17, 2016, the Company issued 21,551,724 common shares for a partial note payable and accrued interest conversion at $0.000232 per share.

On May 18, 2016, the Company issued 27,413,793 common shares for a partial note payable and accrued interest conversion at $0.0001933 per share.

On May 18, 2016, the Company issued 25,904,301 common shares for a partial note payable and accrued interest conversion at $0.0001700 per share.

On May 25, 2016, the Company issued 25,985,753 common shares for a partial note payable and accrued interest conversion at $0.0001500 per share.

On June 1, 2016, the Company issued 26,108,000 common shares for a partial note payable and accrued interest conversion at $0.0001500 per share.

On June 10, 2016, the Company issued 26,130,205 common shares for a partial note payable and accrued interest conversion at $0.0001000 per share.

On June 17, 2016, the Company issued 31,221,781 common shares for a partial note payable and accrued interest conversion at $0.0001000 per share.

On June 27, 2016, the Company issued 32,518,767 common shares for a partial note payable and accrued interest conversion at $0.0001000 per share.

On July 6, 2016, the Company issued 38,732,055 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

On July 18, 2016, the Company issued 38,712,329 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

On July 18, 2016, the Company received a $25,000 advance on the convertible promissory note associated with Note G listed in Note 6 above.

On July 26, 2016, the Company issued 38,657,644 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

On August 3, 2016, the Company issued 38,788,110 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

On August 11, 2016, our investor and lender of the $900,000 and $250,000 convertible promissory notes (Footnote 6: Notes A and G) waived the "Reservation of Shares" requirement for a period of sixty (60) days. Due to our falling share price, we presently have insufficient authorized common stock capital to meet the "Reservation of Shares" requirements under both notes. During this 60-day period, the company intends to formulate and implement an expedited corporate action which management believes will posture the Company to address the issue.

On August 16, 2016, the Company issued 46,220,616 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

On August 29, 2016, the Company issued 48,530,959 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

On September 13, 2016, the Company filed a Certificate of Designation creating a Series B Preferred Share. Initially, the number of shares will be one (1) share, par value $10.00 per share. The Series B Preferred Stock will have continuing super voting rights which will always represent no less than Fifty-one (51%) percent of all the Company’s voting capital stock. The share of Series “B” Preferred Stock will be issued to Keith White, at par value, who will vote from time to time in favor of increasing the common stock capital for the sole purpose of avoiding a default in any of the outstanding convertible promissory notes.

On September 15, 2016, the Company issued 51,210,685 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

On September 28, 2016, the Company issued 52,619,315 common shares for a partial note payable and accrued interest conversion at $0.0001 per share.

NOTE 11: Income Taxes

The Company is subject to taxation in the U.S. and the state of Washington. At September 30, 2016 and December 31, 2015, Ambient Water Corporation had gross deferred tax assets calculated at the Federal Income Tax rate of 34% of approximately $3,955,000 and $3,295,000, respectively, principally arising from net operating loss carry-forwards for income tax purposes of approximately $11,630,000, which begin to expire in the year 2032. 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 $3,955,000 and $3,295,000 has been established at September 30, 2016 and December 31, 2015, respectively.

The significant components of the Company’s net deferred tax assets at September 30, 2016 and December 31, 2015 are as follows:


		September 30, 2016		December 31, 2015
Net operating loss carry forwards	$	11,630,000	$	9,690,000
Deferred tax asset	$	3,955,000	$	3,295,000
Deferred tax asset valuation allowance		(3,955,000)		(3,295,000)
Net deferred tax asset	$	-	$	-

Due to the reverse acquisition, the Company is restricted in the future use of net operating loss and tax credit carry-forwards generated by 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 September 30, 2016, the Company had not taken any tax positions that would require disclosure under FASB ASC 740.

Ambient Water Corporation

Notes to Financial Statements

September 30, 2016

(Unaudited)

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 September 30, 2016 and December 31, 2015, 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, 2012. The Company is current on its federal returns and State of Idaho income tax return requirements.

NOTE 12: SUBSEQUENT EVENTS

The Company evaluated events occurring subsequent to September 30, 2016, identifying those that are required to be disclosed as follows:

On October 3, 2016, the Company received an additional $25,000 consideration on the convertible note payable dated February 2, 2016.

On October 18, 2016, the Company issued 53,678,174 common shares for a partial note payable and accrued interest conversion at $0.00015 per share.

On October 27, 2016, our investor and lender of the $900,000 and $250,000 convertible promissory notes (Footnote 6: Notes A and G) waived the "Reservation of Shares" requirement until December 15, 2016. Due to our falling share price, we presently have insufficient authorized common stock capital to meet the "Reservation of Shares" requirements under both notes. Prior to December 15, 2016, the company intends to address the issue.

On November 1, 2016, the Company issued 58,889,498 common shares for a partial note payable and accrued interest conversion at $0.00015 per share.

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 primary 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 continue to service the Philippine market through a service contractor and are actively seeking new distribution partners for the territory. We have added several distributors and are working with our agents and other potential distributors in many geographical areas including Latin America, Mexico the Caribbean, Indonesia, Malaysia, and the Middle East. In early 2015 we began to focus more of our R&D efforts on the commercial/industrial bulk water sector. The result has been an entirely new design that is focused solely on bulk water production in comparison to the AW 400 which provides water and Air Conditioning at the same time. We intend to follow with the introduction of two commercial/industrial products, the Ambient Water 800 and the Ambient Water 20K. The introduction of these new container configurations allows quick turnaround at the manufacturing level, ease of shipping, increased water production and streamlined deployment in the field. We are working closely with our partner ACT in Houston Texas to complete the all new AW 800. The pre-production unit is currently in the testing phase. In early 2016 we began to offer the AW 800 and the AW 20K to new and existing customers. We have been working closely with Governments and Corporations and the units have been well received. Unfortunately the sales cycle is significantly longer than we have anticipated and coupled with the rise in the US dollar has delayed the completion of anticipated orders. In addition to the AW 800 and the AW 20K, we have begun preliminary designs for larger systems supplying up to several millions of gallons per day. 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. Testing in Houston, Texas was successful and additional data points were desired to augment the test data gathered. The unit was moved to Sacramento, California where additional testing began but was terminated by Pacific Air Well, our California distribution partner who was conducting the testing. Currently, the Ambient Water 400 is located at the University of California, San Diego being prepared for additional testing. Generator power was used briefly for a demonstration, a suitable location with grid power is being reviewed.

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. 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 modest. For the next few quarters we are projecting modest sales as we build our distribution network. For the quarter ending September 30, 2015, we had $80,127 revenue compared to $20,121 revenue for the quarter ending September 30, 2016. The revenue decrease was due to decreased demand for the Model 2500.

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 September 30, 2015, we had $374,608 in general and administrative expenses compared with $138,039 for the quarter ending September 30, 2016. This decrease of $236,569 in general and administrative expenses was primarily the result of professional fees decreasing in the amount of $28,726 stock option compensation (non-cash) decreasing $146,693, travel fees decreasing in the amount of $12,894 and other general and administrative operating costs decreasing by $20,756.

Professional fees for the quarters ending September 30, 2015 and September 30, 2016 were $60,354 and $31,628, respectively. The $28,726 decrease was due to legal and Intellectual property expenses decreasing by $4,814, accounting and auditing fees increasing by $3,333, legal fees decreasing by $15,374, Public and filing fees decreasing by $7,157 and other professional fees decreasing by $4,714.

Executive compensation for the quarter ending September 30, 2015 and September 30, 2016 was $87,500 and $60,000, respectively. The $27,500 decrease was due to a Board of Directors decision to lower executive pay for 2016.

The legal and intellectual property expenses for the quarter ending September 30, 2015 and September 30, 2016 were $4,814 and $-0-, respectively. The $4,814 decrease for the quarter ending September 30, 2016 was primarily related to capitalizing intellectual property costs rather than expensing these costs awaiting patents being granted or denied in the current quarter ended September 30, 20165.

The stock option compensation (non-cash) expenses for the quarters ending September 30, 2015 and September 30, 2016 were $157,006 and $10,313, respectively. The $146,693 decrease was related to a decrease in stock compensation because certain stock options were completely amortized after the second quarter of 2016.

The Company’s travel expenses for the quarters ending September 30, 2015 and September 30, 2016 were $13,415 and $521, respectively. The $12,894 decrease was primarily related to less travel in the quarter ending September 30, 2016.

The other general and administrative operating costs for the quarters ending September 30, 2015 and September 30, 2016 were $56,333 and $35,577, respectively. The $20,756 decrease was related to a decrease in payroll taxes of $2,295, a decrease in advertising of $7,605, a decrease in research and development of $7,377 and other decreases of $3,479.

During the quarter ending September 30, 2016, the Company recognized a derivative valuation charge of $170,840 related to the conversion value of new debt acquired during the quarter. Additionally, the Company recognized a derivative valuation gain of $2,770,875 related to the conversion value of the debt entered into through June 2016. (See Note 6 in the financial statements).

Liquidity and Capital Resources

As of September 30, 2016, we had $300 cash, total current assets of $82,723, total current liabilities of $1,229,947 and total stockholders' deficit of $6,405,028, compared to $820 cash, total current assets of $83,699, total current liabilities of $730,714, and total stockholders' deficit of $2,214,435 as of December 31, 2015.

The Company experienced negative cash flow used by operations during the nine months ended September 30, 2015 of $407,074 compared to the negative cash flow used by operations during the nine months ended September 30, 2016 of $123,834. The Company experienced negative cash flows of $2,570 from investing activities for the nine months ended September 30, 2015 compared to negative cash flows from investing activity of $13,786 for the nine months ended September 30, 2016. The Company experienced positive cash flows from financing activities of $359,762 for the nine months ended September 30, 2015 compared to positive cash flows from financing activity of $137,100 for the nine

months ended September 30, 2016. During the nine months ended September 30, 2016, the Company raised $137,100 through draws on two separate 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, 2015 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. For the nine months ended September 30, 2016, the Company funded its operations principally through issuance of debt instruments. For the year ended December 31, 2015, 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. There is no assurance that equity or debt capital will be available as necessary to meet the Company's requirements or, if the capital is available, that it will be on terms acceptable to the Company.

At September 30, 2016, 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 2016.

During the quarter ended September 30, 2016, the Company raised no money through the sale of equity.

During the quarter ended September 30, 2016, the Company raised $25,000 through debt financing.

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 September 30, 2016, the Company owed $585,100 Dollars principal plus $125,713 accrued interest 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).

During the quarter ended March 31, 2016, 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 $250,000, ("Loan"). Through September 30, 2016, the Company owed $100,000 principal plus $4,192 accrued interest 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).

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.

At September 30, 2016, the Company has net operating loss carry forwards of approximately ($11,630,000), which will begin to expire in 2032 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 September 30, 2016, 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 2015, 2016 and the quarter ended September 30, 2016, the Company had engaged in transactions that would be considered derivative instruments or hedging activities.

The Company entered into a series of Convertible Promissory Notes which included conversion clauses which are deemed derivative liabilities. As of December 31, 2015 the estimated effect upon the fair market conversion of the outstanding note balances of $910,983 and accrued interest payable of $110,428 was approximately $825,712 for the relative fair market conversion of the note to common stock.

As of September 30, 2016 the estimated effect upon the fair market conversion of the outstanding note balances of $685,100 and accrued interest payable of $129,904 was approximately $5,267,122 for the relative fair market conversion of the note to common stock. For further information see Note 6 to the financial statement.

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 September 30, 2016, the value of the stock necessary to settle the contract was $4,593,762.

In February 2016, 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 September 30, 2016, the value of the stock necessary to settle the contract was $673,360.

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 September 30, 2016 and December 31, 2015.

Fair Value of Financial Instruments

The Company's financial instruments as defined by FASB ASC 825-10-50 include cash, trade accounts receivable, and accounts payable and accrued expenses. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at September 30, 2016 and December 31, 2015.

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.

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 September 30, 2016, 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

During the third quarter, the following shares were issued pursuant to our convertible note agreement: