Quest Water Global, Inc. - Quarter Report: 2014 September (Form 10-Q)
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, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 333-168895
QUEST WATER GLOBAL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 27-1994359 | |
| (State or other
jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1590 Bellevue Avenue, Suite 203 West Vancouver, British Columbia, Canada |
V7V 1A7 | |
| (Address of principal executive offices) | (Zip Code) |
(604) 281-2446
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 Act.
| 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 in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 14, 2014, the registrant’s outstanding common stock consisted of 92,163,194 shares.
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
QUEST WATER GLOBAL, INC.
Consolidated
Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
Index | |
| Consolidated Balance Sheets | F-1 |
| Consolidated Statements of Operations | F-2 |
| Consolidated Statements of Cash Flows | F-3 |
| Notes to the Consolidated Financial Statements | F-4 |
| 3 |
Consolidated Balance Sheets
(Expressed in US dollars)
| September 30, 2014 | December 31, 2013 | |||||||
| $ | $ | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | 184 | 1,605 | ||||||
| Amounts receivable | – | 1,293 | ||||||
| Prepaid expenses and deposits | 1,913 | 7,835 | ||||||
| Total current assets | 2,097 | 10,733 | ||||||
| Equipment (Note 3) | 8,144 | 11,269 | ||||||
| Total assets | 10,241 | 22,002 | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | 385,908 | 360,766 | ||||||
| Accrued liabilities | – | 3,344 | ||||||
| Convertible notes payable, net of unamortized discount of $nil (2013 - $22,292) (Note 4) | 175,000 | 152,708 | ||||||
| Due to related parties (Note 5) | 670,846 | 980,248 | ||||||
| Total liabilities | 1,231,754 | 1,497,066 | ||||||
| Nature of operations and continuance of business (Note 1) | ||||||||
| Commitments (Note 9) | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock, 5,000,000 shares authorized, $0.000001 par value, 2 shares issued and outstanding | 1 | 1 | ||||||
| Common stock, 95,000,000 shares authorized, $0.000001 par value, 92,163,194 and 85,749,860 shares issued and outstanding, respectively | 5,147 | 5,140 | ||||||
| Additional paid-in capital | 6,127,686 | 4,749,609 | ||||||
| Common stock issuable (Note 6) | 40,025 | 23,000 | ||||||
| Deferred compensation (Note 6) | (31,945 | ) | – | |||||
| Deficit | (7,362,427 | ) | (6,252,814 | ) | ||||
| Total stockholders’ deficit | (1,221,513 | ) | (1,475,064 | ) | ||||
| Total liabilities and stockholders’ deficit | 10,241 | 22,002 | ||||||
(The accompanying notes are an integral part of these consolidated financial statements)
| F-1 |
Consolidated Statements of Operations
(Expressed in US dollars)
(unaudited)
| Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Expenses | ||||||||||||||||
| Advertising and promotion | 664 | 261 | 43,315 | 28,216 | ||||||||||||
| Amortization | 1,053 | 14,641 | 3,125 | 43,925 | ||||||||||||
| Automotive | 6,419 | 5,008 | 17,469 | 14,774 | ||||||||||||
| Consulting fees (Notes 6 and 8) | 47,251 | 3,121 | 354,932 | 21,338 | ||||||||||||
| Foreign exchange loss (gain) | (12,119 | ) | 5,246 | (11,348 | ) | (2,783 | ) | |||||||||
| Management fees (Notes 5 and 8) | 75,000 | 75,000 | 557,731 | 225,000 | ||||||||||||
| Office and miscellaneous | 4,875 | 10,257 | 17,291 | 21,411 | ||||||||||||
| Professional fees | 15,271 | 12,649 | 71,622 | 84,035 | ||||||||||||
| Rent | 5,815 | 3,333 | 16,717 | 18,313 | ||||||||||||
| Telephone | 3,619 | 4,116 | 9,379 | 12,028 | ||||||||||||
| Transfer agent and filing fees | 3,273 | 1,595 | 9,949 | 2,414 | ||||||||||||
| Travel | 226 | 9,673 | 483 | 29,501 | ||||||||||||
| Total expenses | 151,347 | 144,900 | 1,090,665 | 498,172 | ||||||||||||
| Loss before other income (expense) | (151,347 | ) | (144,900 | ) | (1,090,665 | ) | (498,172 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Accretion of discounts on convertible notes payable | (1,042 | ) | (15,937 | ) | (22,292 | ) | (47,815 | ) | ||||||||
| Gain on settlement of debt | – | – | 3,344 | – | ||||||||||||
| Interest expense | – | (1,260 | ) | – | (3,428 | ) | ||||||||||
| Total other income (expense) | (1,042 | ) | (17,197 | ) | (18,948 | ) | (51,243 | ) | ||||||||
| Net loss | (152,389 | ) | (162,097 | ) | (1,109,613 | ) | (549,415 | ) | ||||||||
| Net loss per share, basic and diluted | – | – | (0.01 | ) | (0.01 | ) | ||||||||||
| Weighted average number of shares outstanding, basic and diluted | 91,234,570 | 85,182,360 | 87,951,154 | 85,151,598 | ||||||||||||
(The accompanying notes are an integral part of these consolidated financial statements)
| F-2 |
Consolidated Statements of Cash Flows
(Expressed in US dollars)
(unaudited)
| Nine months ended September 30, 2014 | Nine months ended September 30, 2013 | |||||||
| $ | $ | |||||||
| Operating Activities: | ||||||||
| Net loss for the period | (1,109,613 | ) | (549,415 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Accretion of discounts on convertible notes payable | 22,292 | 47,815 | ||||||
| Amortization | 3,125 | 43,925 | ||||||
| Gain on settlement of debt | (3,344 | ) | – | |||||
| Stock-based compensation | 703,164 | 2,700 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Amounts receivable | 1,293 | – | ||||||
| Prepaid expenses and deposits | 5,922 | – | ||||||
| Accounts payable | 25,142 | 68,888 | ||||||
| Accrued liabilities | – | (5,490 | ) | |||||
| Due to related parties | 303,971 | 360,055 | ||||||
| Net cash used in operating activities | (48,048 | ) | (31,522 | ) | ||||
| Financing Activities: | ||||||||
| Advances from related parties | 46,627 | – | ||||||
| Proceeds from issuance of common stock | – | 30,000 | ||||||
| Net cash provided by financing activities | 46,627 | 30,000 | ||||||
| Decrease in cash | (1,421 | ) | (1,522 | ) | ||||
| Cash, beginning of period | 1,605 | 1,732 | ||||||
| Cash, end of period | 184 | 210 | ||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued to settle amounts due to related parties | 660,000 | – | ||||||
| Supplemental disclosures: | ||||||||
| Interest paid | – | – | ||||||
| Income tax paid | – | – | ||||||
(The accompanying notes are an integral part of these consolidated financial statements)
| F-3 |
Notes to the Consolidated Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
| 1. | Basis of Presentation |
The accompanying consolidated interim financial statements of Quest Water Global, Inc. (the “Company”) should be read in conjunction with the consolidated financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. In the opinion of management, the accompanying financial statements reflect all adjustments of a recurring nature considered necessary to present fairly the Company’s financial position and the results of its operations and its cash flows for the periods shown.
The preparation of the consolidated interim financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. The results of operations and cash flows for the periods shown are not necessarily indicative of the results to be expected for the full year.
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As at September 30, 2014, the Company has a working capital deficiency of $1,229,657 of which $670,846 is owed to the two principal shareholders (Note 5), and an accumulated deficit of $7,362,427. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue to develop its business and ultimately on the attainment of profitable operations. The Company is in the process of arranging additional capital financing that may assist in addressing these issues; however, these factors continue to raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 2. | Significant Accounting Policies |
| (a) | Principles of Consolidation |
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States (“US GAAP”), and are expressed in US dollars. These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Quest; Quest’s wholly owned subsidiary, Quest Water Solutions Inc., a company incorporated under the laws of the Province of British Columbia, Canada; and its 88% owned inactive subsidiaries Agua Cuilo Lda., Cuilo Embalnages, Lda., and Cuilo Comercial, Lda. All inter-company balances and transactions have been eliminated on consolidation.
| (b) | Recent Accounting Pronouncements |
The Company has limited operations and is considered to be in the development stage. In the period ended September 30, 2014, the Company elected to early adopt Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. The adoption of this ASU allows the Company to remove the inception to date information and all references to development stage.
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
| F-4 |
QUEST WATER GLOBAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
| 3 | Equipment |
| Cost | Accumulated Amortization | Net Carrying Value September 30, 2014 | Net Carrying Value December 31, 2013 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Computer equipment | 25,971 | 20,866 | 5,105 | 7,696 | ||||||||||||
| Furniture and equipment | 7,426 | 4,387 | 3,039 | 3,573 | ||||||||||||
| 33,397 | 25,253 | 8,144 | 11,269 | |||||||||||||
| 4. | Convertible Notes Payable |
| (a) | On May 9, 2012, the Company received proceeds of $150,000 and issued a convertible note which is non-interest bearing, unsecured, and due on May 9, 2014. The unpaid amount can be converted at any time at the holder’s option at $0.50 per share of common stock, which must not be less than $25,000 of unpaid principal. In accordance with ASC 470-20, “Debt with Conversion and Other Options” (“ASC 470-20”), the Company recognized the intrinsic value of the embedded beneficial conversion feature of $90,000 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible note up to its face value of $150,000. For the nine months ended September 30, 2014, $15,000 (2013 - $33,750) had been accreted, increasing the carrying value to $150,000 (December 31, 2013 - $135,000). |
| (b) | On July 30, 2012, the Company received proceeds of $25,000 and issued a convertible note which is non-interest bearing, unsecured, and due on July 30, 2014. The unpaid amount can be converted at any time at the holder’s option at $0.50 per share of common stock. In accordance with ASC 470-20, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $25,000 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible note up to its face value of $25,000. For the nine months ended September 30, 2014, $7,292 (2013 - $9,375) had been accreted, increasing the carrying value to $25,000 (December 31, 2013 - $17,708). |
| 5. | Related Party Transactions |
| (a) | As at September 30, 2014, a total of $207,642 (December 31, 2013 - $404,193) is owed to the President of the Company, which is non-interest bearing, unsecured, and due on demand. Refer to Note 6(d). | |
| (b) | As at September 30, 2014, a total of $463,204 (December 31, 2013 - $576,055) is owed to the Vice President of the Company, which is non-interest bearing, unsecured, and due on demand. Refer to Note 6(d). | |
| (c) | For the nine months ended September 30, 2014, the Company incurred a total of $225,000 (2013 - $225,000) in management fees to the President and the Vice President of the Company. The Company also incurred stock-based compensation of $332,731 (2013 - $nil) for stock options granted to the President and the Vice President of the Company during the nine months ended September 30, 2014, which is included in management fees. |
| 6. | Common Stock |
| (a) | On February 18, 2014, the Company issued 30,000 shares of common stock with a fair value of $6,900 pursuant to a consulting agreement. | |
| (b) | On February 18, 2014, the Company issued 500,000 shares of common stock with a fair value of $110,000 pursuant to a consulting agreement, of which $78,055 (2013 - $nil) was expensed as consulting fees which reflects the pro-rata portion of the services provided to September 30, 2014. As of September 30, 2014, the remaining amount of $31,945 was recorded as deferred compensation and will be expensed as consulting fees pro-rata over the term of the agreement which ends on January 14, 2015. The fair value of the shares was determined based on the closing price of the Company’s common stock at $0.22 per share on February 18, 2014. | |
| (c) | On February 18, 2014, the Company issued 200,000 shares of common stock with a fair value of $38,280 pursuant to a consulting agreement, of which 100,000 shares of common stock with a fair value of $18,000 was included in common stock issuable as at December 31, 2013. |
| F-5 |
QUEST WATER GLOBAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
| 6. | Common Stock (continued) |
| (d) | On July 14, 2014, the Company issued 5,500,000 shares of common stock with a fair value of $0.12 per share to settle accrued management fees of $660,000 owing to the President and the Vice President of the Company. | |
| (e) | On August 5, 2014, the Company issued 100,000 shares of common stock with a fair value of $7,000 pursuant to a consulting agreement. Refer to Note 9(f). | |
| (f) | On August 27, 2014, the Company issued 83,334 units at a price of $0.06 per share for proceeds of $5,000, which was included in common stock issuable as at December 31, 2013. Each unit consisted of one share of common stock and one non-transferable share purchase warrant to purchase an additional share of common stock at a price of $0.20 per share until July 2, 2016. | |
| (g) | As at September 30, 2014, the Company had 250,000 shares of common stock issuable with a fair value of $27,500 pursuant to a marketing agreement. Refer to Note 9(e). | |
| (h) | As at September 30, 2014, the Company had 250,000 shares of common stock issuable with a fair value of $12,525 pursuant to a consulting agreement. Refer to Note 9(g). |
| 7. | Share Purchase Warrants |
The following table summarizes the continuity of share purchase warrants:
| Number of warrants | Weighted average exercise price $ | |||||||
| Balance, December 31, 2013 | 3,056,500 | 0.53 | ||||||
| Granted | 83,334 | 0.20 | ||||||
| Balance, September 30, 2014 | 3,139,834 | 0.52 | ||||||
As at September 30, 2014, the following share purchase warrants were outstanding:
| Number of warrants outstanding | Exercise price $ | Expiry date | |||||
| 2,398,000 | 0.50 | January 6, 2015 | |||||
| 310,000 | 0.50 | February 10, 2015 | |||||
| 286,000 | 0.75 | July 15, 2015 | |||||
| 62,500 | 0.65 | October 15, 2015 | |||||
| 83,334 | 0.20 | July 2, 2016 | |||||
| 3,139,834 | |||||||
| 8. | Stock Options |
| Number of options | Weighted average exercise price $ | |||||||
| Outstanding, December 31, 2013 | 5,050,000 | 0.90 | ||||||
| Granted | 3,750,000 | 0.19 | ||||||
| Forfeited | (3,500,000 | ) | 0.90 | |||||
| Outstanding, September 30, 2014 | 5,300,000 | 0.19 | ||||||
| F-6 |
QUEST WATER GLOBAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
| 8. | Stock Options (continued) |
Additional information regarding stock options outstanding as at September 30, 2014 is as follows:
| Outstanding and exercisable | ||||||||||||||
| Range of exercise prices $ | Number of shares | Weighted average remaining contractual life (years) | Weighted average exercise price $ | |||||||||||
| 0.19 | 5,300,000 | 0.7 | 0.19 | |||||||||||
On February 25, 2014, the Company amended the exercise price of 1,550,000 stock options granted on May 30, 2012 from $0.90 to $0.19 per share. Modifications to the terms of an award are treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the original award immediately before its terms are modified, measured on the share price and other pertinent factors at that date. The Company recognized an incremental compensation cost of $97,240 for these modified stock options, which is included in consulting fees.
The fair values for stock options granted have been estimated using the Black-Scholes option pricing model assuming no expected dividends and the following weighted average assumptions:
| Nine months ended September 30, 2014 | Nine months ended September 30, 2013 | |||||||
| Risk-free Interest rate | 0.11 | % | – | |||||
| Expected life (in years) | 1.3 | – | ||||||
| Expected volatility | 162 | % | – | |||||
During the nine months ended September 30, 2014, the Company recorded stock-based compensation of $453,664 (2013 - $nil) for stock options granted, of which $332,731 was included in management fees and $120,933 was included in consulting fees.
The weighted average fair value of the stock options granted during the nine months ended September 30, 2014 was $0.12 (2013 - $nil) per option.
As at September 30, 2014, the aggregate intrinsic value of stock options outstanding is $nil.
| 9. | Commitments |
| (a) | On November 1, 2011, the Company entered into a management agreement with the President of the Company whereby it is obligated to pay $12,500 per month starting on October 3, 2011 to November 1, 2016. |
The agreement may be terminated by written notice. Upon termination, the President shall receive a termination fee equal to the sum of:
| (i) | Buy-out of any outstanding stock options for a price equal to the fair market value of the Company’s common stock multiplied by the number of shares under options and less the exercise price; plus | |
| (ii) | The greater of: |
| ● | The aggregate remaining fees for the unexpired remainder of the term; or | |
| ● | One annual fee plus one month fee for each year served after November 1, 2011. |
| F-7 |
QUEST WATER GLOBAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
| 9. | Commitments (continued) |
| (b) | On November 1, 2011, the Company entered into a management agreement with the Vice-President of the Company whereby it is obligated to pay $12,500 per month starting on October 3, 2011 to November 1, 2016. |
The agreement may be terminated by written notice. Upon termination, the Vice-President shall receive a termination fee equal to the sum of:
| (i) | Buy-out of any outstanding stock options for a price equal to the fair market value of the Company’s common stock multiplied by the number of shares under options and less the exercise price; plus | |
| (ii) | The greater of: |
| ● | The aggregate remaining fees for the unexpired remainder of the term; or | |
| ● | One annual fee plus one month fee for each year served after November 1, 2011. |
| (c) | On November 19, 2013, the Company entered into a one year agreement for consulting services whereby the Company agreed to pay an annual fee of $45,000 in shares of common stock based on a 40% monthly workload. In connection with this fee, the Company issued 225,000 shares of common stock with a fair value of $49,500. This fee will be reviewed on a monthly basis and will be increased proportionately if the consultant’s workload increases on behalf of the Company. The Company also agreed to pay the consultant a finder’s fee at the following rates: |
| (i) | Based on equity investment: |
| ● | 10% on funds received from finder investors up to $1,000,000; | |
| ● | 7.5% on funds received from finder investors between $1,000,001 to $2,000,000; | |
| ● | 5% on funds received from finder investors over $2,000,000. |
| (ii) | Based on debt investment: |
| ● | 5% on funds received from finder investors up to $1,000,000; | |
| ● | 3.75% on funds received from finder investors between $1,000,001 to $2,000,000; | |
| ● | 2.5% on funds received from finder investors over $2,000,000. |
The finder’s fee shall be paid in cash, or as elected by the finder, a combination of cash and common stock of the Company at the same price per share as the Company’s current financing round.
| (d) | On February 11, 2014, the Company signed a lease for office premises and agreed to pay annual basic rent of Cdn$16,248 plus operating costs up to February 11, 2017. Minimum lease payments over the remaining term of the lease is as follows: |
| Year | Cdn$ | ||||
| 2014 | 4,062 | ||||
| 2015 | 16,248 | ||||
| 2016 | 16,248 | ||||
| 2017 | 2,031 | ||||
| 38,589 | |||||
| (e) | On May 22, 2014, the Company entered into a joint venture (“JV”) marketing agreement with a consultant for marketing services whereby the Company agreed to issue 250,000 restricted shares of common stock to the consultant as a signing bonus. Refer to Note 6(g). The Company also agreed to issue 5,000,000 restricted shares of common stock on an earnout basis based on the JV achieving $20,000,000 in gross sales revenue over the initial three-year period, to be assessed and paid semi-annually. Pursuant to the agreement, ownership of the JV is divided into 55% equity ownership by the Company and 45% equity ownership by the consultant. The Company is committed to contributing $250,000 in a combination of cash and value of demonstration units to the JV. The demonstration units will remain the ownership of the Company until such time that the consultant contributes its $250,000, after which the ownership of the demonstration units become that of the JV. The initial term of the agreement is for three years plus a day from the date the first demonstration unit is installed and properly functioning. The term will renew for three subsequent one year periods unless terminated by either party. |
| F-8 |
QUEST WATER GLOBAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2014
(Expressed in US dollars)
(unaudited)
| 9. | Commitments (continued) |
| (f) | On July 29, 2014, the Company entered into a six month agreement for consulting services whereby the Company agreed to pay a fee of $8,000 in shares of common stock in consideration for investor relations services. In connection with this fee, the Company issued 100,000 shares of common stock with a fair value of $7,000. Refer to Note 6(e). | |
| (g) | On September 10, 2014, the Company entered into a nine month agreement for consulting services whereby the Company agreed to issue 1,000,000 restricted shares of common stock to the consultant as consideration of which 25% are deemed earned upon receipt. Refer to Note 6(h). The remaining restricted shares of common stock are deemed earned on a monthly basis with periods ending the 1st day of each month until the end of the contract. |
| F-9 |
PRESENTATION OF INFORMATION
As used in this quarterly report, the terms “we”, “us”, “our” and the “Company” mean Quest Water Global, Inc. and its consolidated subsidiaries, unless otherwise indicated.
This quarterly report includes our interim unaudited consolidated financial statements as at and for the period ended September 30, 2014. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). All financial information in this quarterly report is presented in U.S. dollars, unless otherwise indicated, and should be read in conjunction with the financial statements and the notes thereto included in this quarterly report.
As disclosed in our current report on Form 8-K dated January 10, 2012, on January 6, 2012, we completed a share exchange with Quest Water Solutions, Inc. (“Quest”), a Nevada corporation that is now our wholly owned subsidiary and operating business (the “Share Exchange”). The Share Exchange was treated as a recapitalization effected through a share exchange, with Quest as the accounting acquirer and the Company as the accounting acquiree. Our consolidated financial statements are therefore, in substance, those of Quest.
FORWARD-LOOKING STATEMENTS
This quarterly report, any supplement to this quarterly report, and any documents incorporated by reference in this quarterly report, include “forward-looking statements”. To the extent that the information presented in this quarterly report discusses financial projections, information or expectations about our business plans, results of operations, products or markets, or otherwise makes statements about future events, such statements are forward-looking. Such forward-looking statements can be identified by the use of words such as “intends”, “anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”, “plans” and “proposes”. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
The forward-looking statements made in this quarterly report relate only to events or information as of the date on which the statements are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this quarterly report and the documents that we reference in this quarterly report and have filed as exhibits with the understanding that our actual future results may be materially different from what we expect. You should not rely upon forward-looking statements as predictions of future events.
| 4 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition has been derived from and should be read in conjunction with our interim unaudited consolidated financial statements and the related notes thereto that appear elsewhere in this quarterly report, as well as the “Presentation of Information” section that appears at the beginning of this quarterly report.
Corporate History and Background
We were incorporated under the laws of Delaware on February 25, 2010. From our inception until the closing of the Share Exchange, we sought to provide dental and other medical professionals with turn-key marketing solutions to generate referrals from existing clients and new business from the general public through our wholly owned subsidiary RPM Dental Systems, LLC (“RPM Kentucky”). RPM Kentucky was formed on September 15, 2009, under the laws of the Commonwealth of Kentucky, and we acquired RPM Kentucky on March 23, 2010.
Prior to the Share Exchange, we had minimal revenue and our operations were limited to capital formation, organization and development of our business plan. As a result of the Share Exchange, we ceased our prior operations and, through Quest, we now operate as an innovative water technology company that provides sustainable and environmentally sound solutions to water-scarce regions.
Quest was incorporated under the laws of Nevada on October 20, 2008 and commenced operations on February 20, 2009. Its operations to date have consisted of business formation, strategic development, marketing, technologies development, negotiations with technologies companies and capital raising activities. Quest has not generated any revenues since its inception.
Acquisition of Quest
On January 6, 2012, we completed the Share Exchange whereby we acquired all of the issued and outstanding capital stock of Quest in exchange for 2,568,493 shares of our common stock (on a pre-forward split basis), or approximately 62.74% of our issued and outstanding common stock as of the consummation of the Share Exchange. Subsequent to the Share Exchange, we completed a 20 for 1 forward split of our common stock (the “Forward Split”) that became effective on March 1, 2012. Pursuant to the Forward Split, the 2,568,493 shares described above increased to 51,369,860 shares.
As a result of the Share Exchange, Quest became our wholly owned subsidiary and John Balanko and Peter Miele became our principal stockholders. The Share Exchange was treated as a recapitalization effected through a share exchange, with Quest as the accounting acquirer and the Company as the accounting acquiree.
In connection with and effective upon the closing of the Share Exchange, Josh Morita, our former President, Chief Executive Officer, director and principal stockholder, and Dr. Laura Sloan, our former director, resigned as members of our Board of Directors and Mr. Morita resigned as our sole officer. Also effective upon the closing of the Share Exchange, John Balanko and Peter Miele were appointed to fill the vacancies on our Board of Directors created by the resignations of Mr. Morita and Ms. Sloan. In addition, our Board of Directors appointed Mr. Balanko as our President and Chief Executive Officer and Mr. Miele as our Vice President and Secretary, all effective upon the closing of the Share Exchange. On April 13, 2012, we also appointed Mr. Miele as our Chief Financial Officer.
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As a result of our acquisition of Quest, Quest became our wholly owned subsidiary and we assumed the business and operations of Quest. We then changed our name from RPM Dental, Inc. to Quest Water Global, Inc. to more accurately reflect our new business operations.
Business Overview
We provide sustainable and environmentally sound solutions to water scarce regions. Our goal is to address the vital issue of water quality and water supply by providing an alternative, sustainable source of pure water at the smallest possible environmental cost to global areas in need, while becoming a leading company in providing turn-key solutions using alternative energy for the purification, desalination and distribution of clean drinking water.
We have developed a proprietary community drinking water station consisting of a self-contained water purification system using either a reverse osmosis membrane or ultrafiltration membrane, powered by photovoltaic solar panels and hosted in modified shipping containers. Each AQUAtapTM unit is energy self-sufficient with minimal operational and maintenance costs. We believe that this product represents the first truly environmentally sound solution to drinking water shortages as it is autonomous, decentralized and sustainable, and because each unit is capable of converting brackish, sea or contaminated surface water into 20,000 litres of high quality drinking water each day, suitable for 1,000 people.
In addition to the solar-powered water purification systems, we have also developed a technology known as WEPSTM (water extraction and purification system) that produces potable water from humidity in the atmosphere. WEPSTM technology works by converting humidity into water, otherwise known as atmospheric water extraction.
To date, we have focused our activities on the fifteen countries of the Southern African Development Community (“SADC”), with specific attention to Angola. There is a vast and increasing demand for a sustainable, cost-effective and decentralized continuous supply of clean drinking water in most areas of the SADC. We provide clean drinking water to end-users utilizing various formats of our water purification and distribution systems that include inexpensive bulk drinking water and government-subsidized community level drinking water. Applications of our systems include rural and urban community water supply, water supply for household needs, remote work site camps and water supply for disaster relief.
We are in the process of negotiating a formal agreement with the Ministry of Industry and Ministry of Energy & Water regarding becoming an official registered supplier for the government of Angola’s $650 million “Water for All” program and for the construction of a facility to assemble the AQUAtap™ stations in that country. In June 2012, our management met with the African Development (“AfDB”) to discuss financing the proposed AQUAtap™ assembly plant(s) to be built in Angola and the level of funding required to carry out such an undertaking. These discussions established that we would require between $5.5-6 million per facility, including construction, inventory and working capital. As a result of the meetings, we received a non-binding letter of intent from the AfDB regarding the funding of the proposed project and the Angolan government indicated that once an agreement had been consummated, they would in turn submit a request for funding to the AfDB on our behalf.
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Our operations to date have consisted of business formation, strategic development, marketing, technologies development, negotiations with technology companies and capital raising activities.
Results of Operations
For the Three Months Ended September 30, 2014
Revenue
We have not generated any revenues since our inception. We anticipate that we will incur substantial losses for the foreseeable future and our ability to generate any revenues in the next 12 months continues to be uncertain.
Expenses
During the three months ended September 30, 2014, we incurred $151,347 in total expenses, including $75,000 in management fees, $47,251 in consulting fees, $15,271 in professional fees, $6,419 in automotive expenses, $5,815 in rent, $4,875 in office and miscellaneous expenses, $3,619 in telephone expenses, $3,273 in transfer agent and filing fees, $1,053 in amortization, $664 in advertising and promotion expenses and $226 in travel expenses, as offset by a foreign exchange gain of $12,119. During the same period in the prior year, we incurred $144,900 in total expenses, including $75,000 in management fees, $3,121 in consulting fees, $12,649 in professional fees, $5,008 in automotive expenses, $3,333 in rent, $10,257 in office and miscellaneous expenses, $4,116 in telephone expenses, $1,595 in transfer agent and filing fees, $14,641 in amortization, $261 in advertising and promotion expenses, $9,673 in travel expenses and $5,246 in foreign exchange loss. The 4% increase in our total expenses during the most recent period resulted primarily from a significant increase in our consulting fees. However, during the three months ended September 30, 2014 our amortization and travel expenses both decreased substantially on a period-to-period basis.
Net Loss
During the three months ended September 30, 2014, we incurred a loss before other expense of $151,347 and a net loss of $152,389, whereas we incurred a loss before other expense of $144,900 and a net loss of $162,097 during the same period in the prior year. The majority of our other expense during each of those periods was related to the accretion of discounts on our convertible notes payable. We did not experience any net loss per share during the three months ended September 30, 2014 or 2013.
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For the Nine Months Ended September 30, 2014
Expenses
During the nine months ended September 30, 2014, we incurred $1,090,665 in total expenses, including $557,731 in management fees, $354,932 in consulting fees, $71,622 in professional fees, $43,315 in advertising and promotion expenses, $17,469 in automotive expenses, $17,291 in office and miscellaneous expenses $16,717 in rent, $9,949 in transfer agent and filing fees, $9,379 in telephone expenses, $3,125 in amortization and $483 in travel expenses, as offset by a foreign exchange gain of $11,348. During the same period in the prior year, we incurred $498,172 in total expenses, including $225,000 in management fees, $21,338 in consulting fees, $84,035 in professional fees, $28,216 in advertising and promotion expenses, $14,774 in automotive expenses, $21,411 in office and miscellaneous expenses, $18,313 in rent, $2,414 in transfer agent and filing fees, $12,028 in telephone expenses, $43,925 in amortization and $29,501 in travel expenses, as offset by a foreign exchange gain of $2,783. The 119% increase in our total expenses during the most recent period resulted primarily from significant increases in two major expense categories, management fees and consulting fees. However, during the nine months ended September 30, 2014 our amortization and travel expenses also both decreased substantially on a period-to-period basis.
Net Loss
During the nine months ended September 30, 2014, we incurred a loss before other expense of $1,090,665 and a net loss of $1,109,613, whereas we incurred a loss before other expense of $498,172 and a net loss of $549,415 during the same period in the prior year. During the nine months ended September 30, 2014 and 2013 we experienced a net loss per share of $0.01.
Liquidity and Capital Resources
As of September 30, 2014, we had $184 in cash, $10,241 in total assets, $1,231,754 in total liabilities and a working capital deficiency of $1,229,657. As of September 30, 2014 we had an accumulated deficit of $7,362,427.
To date, we have experienced negative cash flows from operations and we have been dependent on sales of our common stock and capital contributions to fund our operations. We expect this situation to continue for the foreseeable future, and we anticipate that we will experience negative cash flows during the year ended December 31, 2014.
During the nine months ended September 30, 2014, we spent $48,048 in cash on operating activities, compared to $31,522 in cash spending on operating activities during the same period in the prior year. The 52% increase in our cash spending on operating activities during the nine months ended September 30, 2014 was primarily attributable to the increase in our net loss as described above as well as certain changes in our operating assets and liabilities and a significant stock-based compensation adjustment.
We did not spend any cash on investing activities during the nine months ended September 30, 2014 or 2013.
We received $46,627 in cash from financing activities during the nine months ended September 30, 2014, all of which was in the form of advances from related parties. During the nine months ended September 30, 2013, we received $30,000 in cash from financing activities, all of which was in the form of proceeds from the issuance of our common stock.
During the nine months ended September 30, 2014, our cash decreased by $1,421 as a result of our operating, investing and financing activities, from $1,605 to $184. As of September 30, 2014, we did not have sufficient cash resources to meet our operating expenses for the next month based on our current burn rate.
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Plan of Operations
Our plan of operations over the next 12 months is to continue to address water quality and supply issues in Angola through the installation of our AQUAtapTM community drinking water stations as well as the employment of our WEPSTM technology, and we anticipate that we will require a minimum of $745,000 to pursue those plans. However, as described above, we are currently in the process of negotiating a formal agreement with the Angolan Ministry of Industry and Ministry of Energy & Water regarding becoming an official registered supplier for the “Water for All” program and for the construction of a facility to assemble our AQUAtap™ stations. Our cash requirements will change substantially if we are able to successfully enter into such an agreement, but we expect that the AfDB will fund a large portion of the construction, inventory and working capital costs of the proposed project in those circumstances.
We intend to meet the balance of our cash requirements for the next 12 months through a combination of debt financing and equity financing through private placements. Currently we are active in contacting broker/dealers in Canada and elsewhere regarding possible financing arrangements. However, we do not currently have any arrangements in place to complete any further private placement financings and there is no assurance that we will be successful in completing any such financings. If we are unsuccessful in obtaining sufficient funds through our capital raising efforts, we may review other financing options.
During the next 12 months, we estimate that our planned expenditures will include the following:
| Description | Amount ($) | |||
| Equipment purchases | 10,000 | |||
| Rent | 30,000 | |||
| Management fees | 300,000 | |||
| Consulting fees | 150,000 | |||
| Professional fees | 130,000 | |||
| Advertising and promotion expenses | 15,000 | |||
| Travel and automotive expenses | 60,000 | |||
| General and administrative expenses | 50,000 | |||
| Total | 745,000 | |||
Going Concern
Our financial statements have been prepared on a going concern basis, which implies we will continue to realize our assets and discharge our liabilities in the normal course of business. As at September 30, 2014, we had a working capital deficiency of $1,229,657 and an accumulated deficit of $7,362,427. Our continuation as a going concern is dependent upon the continued financial support from our shareholders, our ability to obtain necessary equity financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies
We have identified certain accounting policies, described below, that are important to the portrayal of our current financial condition and results of operations.
Basis of Presentation and Consolidation
Our consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. Our consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Quest; Quest’s wholly owned subsidiary, Quest Water Solutions Inc., a company incorporated under the laws of the province of British Columbia, Canada; and its 88% owned inactive subsidiaries Agua Cuilo Lda., Cuilo Embalnages, Lda., and Cuilo Comercial, Lda. All inter-company balances and transactions have been eliminated on consolidation. Our fiscal year-end is December 31.
Foreign Currency Translation
Our functional currency is US dollars. Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into US dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.
Our integrated foreign subsidiaries are financially or operationally dependent on us. We use the temporal method to translate the accounts of our integrated operations into US dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
As of the end of the period covered by this report, management, with the participation of our Chief Executive and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, management concluded that our disclosure controls and procedures were not effective due to certain deficiencies in our internal control over financial reporting.
Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the period ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or our officers or directors of those of our subsidiaries’ in their capacities as such, in which an adverse decision could have a material adverse effect.
Not applicable.
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.
None.
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The following documents are filed as a part of this quarterly report.
| Exhibit
Number |
Description of Exhibit | |
| 2.1 | Share Exchange Agreement dated January 6, 2012 with Josh Morita, Quest Water Solutions, Inc. and the shareholders of Quest Water Solutions, Inc. (1) | |
| 3.1 | Articles of Incorporation (2) | |
| 3.2 | Bylaws (2) | |
| 3.3 | Certificate of Designation for Series A Voting Preferred Stock (1) | |
| 3.4 | Certificate of Amendment filed with the Delaware Secretary of State on February 21, 2012 (3) | |
| 10.1 | Agreement of Sale with Josh Morita dated January 6, 2012 (1) | |
| 10.2 | Subscription Agreement dated January 6, 2012 (1) | |
| 10.3 | Form of Warrant dated January 6, 2012 (1) | |
| 10.4 | Registration Rights Agreement dated January 6, 2012 (1) | |
| 10.5 | Form of Lock-Up Agreement dated January 6, 2012 (1) | |
| 10.6(a) | Lock-Up/Leak Out Agreement with John Balanko dated January 6, 2012 (1) | |
| 10.6(b) | Lock-Up/Leak Out Agreement with Peter Miele dated January 6, 2012 (1) | |
| 10.7 | Management Agreement with John Balanko dated November 1, 2011 (1) | |
| 10.8 | Management Agreement with Peter Miele dated November 1, 2011 (1) | |
| 10.9 | Global Cooperation Partner Agreement between Quest Water Solutions, Inc. and Trunz Water Systems AG, dated June 29, 2011 (1) | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 99.1 | Audit Committee Charter (4) | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase |
| (1) | Incorporated by reference from our Current Report on Form 8-K filed with the SEC on January 10, 2012. |
| (2) | Incorporated by reference from our Registration Statement on Form S-1 filed with the SEC on August 17, 2010. |
| (3) | Incorporated by reference from our Current Report on Form 8-K filed with the SEC on March 7, 2012. |
| (4) | Incorporated by reference from our Annual Report on Form 10-K filed with the SEC on April 16, 2012. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 14, 2014 | QUEST WATER GLOBAL, INC. | |
| By: | /s/ John Balanko | |
| John Balanko | ||
| Chairman, President, Chief Executive Officer, Director | ||
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