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AWGI > SEC Filings for AWGI > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for AWG INTERNATIONAL WATER CORP

Form 10-Q for AWG INTERNATIONAL WATER CORP


19-Nov-2012

Quarterly Report


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

Company's Plans

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

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

We are actively working to develop an international distributor network, focusing on highly qualified companies with a history of business in the drinking water industry. Currently, we have one distributor in the Southern United States and one in the Philippines. We are reviewing additional potential distributors.

Discussion and Analysis of Financial Condition and Results of Operations

Revenues

Revenue from sales to date has been negligible. For the next few quarters we are projecting modest sales as we build our distribution network. For the year ended December 31, 2011 we had $57,636 in revenue compared with $7,139 for the year ended December 31, 2010. This revenue was generated from the sale of the G2 product. The increase in revenue was attributable to G2 product availability from our manufacturer. This G2 product is no longer available for sale.
Currently, we are focusing sales efforts on the Model 2500 product. For


the quarter ending September 30, 2012, we had revenue of $15,802 compared to $4,860 revenue for the quarter ending September 30, 2011. The increase resulted from initial shipments to our Philippine distributor.

Costs and Expenses

Our primary costs going forward are related to ongoing research and development, legal fees associated with patent activity, and professional fees. For the year ending December 31, 2011 we had $516,075 in general and administrative expenses compared to $451,695 in general and administrative expenses for the year ending December 31, 2010. This increase in general and administrative expenses was primarily the result of increased spending related to research and development, intellectual property and other general and administrative expenses. The research and development expenses for the years ending December 31, 2011 and December 31, 2010 were $61,991 and $2,593, respectively. The $59,399 increase was due to development work on the Model 2500. The intellectual property costs for the years ending December 31, 2011 and December 31, 2010 were $35,786 and $22,781, respectively. The $13,005 increase was related to patent work on the G3, G4 and G5 product development. The other general and administrative operating costs for the years ending December 31, 2011 and December 31, 2010 were $95,811 and $56,051, respectively. The $39,759 increase was related primarily to increase travel associated with establishing vendor and manufacturing relationship as well as attending some industry conventions.
Professional fees for the years ending December 31, 2011 and December 31, 2010 were $322,487 and $370,270, respectively. The $47,783 decrease was related to a reduction in the use of professional services.

For the quarter ending September 30, 2012, we had $505,728 in general and administrative expenses compared with $100,816 for the quarter ending September 30, 2011. This increase in general and administrative expenses was the result of the non-cash amortization of stock options and increased expenditure for professional fees such as legal fees associated with patent and acquisition matters, technical refrigeration engineering services related to research and development and business professional fees.

The Company reported negative gross profits since inception on March 18, 2010.
The negative gross profits were the result of shipping evaluation products to prospective distributors. The added cost of freight and product returns contributed to the historical negative gross profits. We do not anticipate negative margins going forward.

Liquidity and Capital Resources

For the year ended December 31, 2011, we funded operations with debt. During the fourth quarter of 2011, AWG International, Inc. borrowed $273,853 from AWG International Water Corporation (formerly MIP Solutions, Inc.). AWG International Water Corporation's funding source was a private placement of equity securities and a loan transaction with Coghlan Family Corporation in the amount of $150,000. The balance outstanding on this loan is $125,000.

As of December 31, 2011, we had $439 cash, total current assets of $157,546, total current liabilities of $387,808 and total stockholders' deficit of $194,046, compared to $177,961 cash, total current assets of $186,842, total current liabilities of $189,904, and total stockholders' equity of $33,154 as of December 31, 2010.

The Company experienced negative cash flow used by operations during the fiscal year ended December 31, 2011 of ($598,963) compared to December 31, 2010 of ($240,663). The Company experienced negative cash flows from investing activities of ($22,875) for the year ended December 31, 2011 compared to negative cash flows from investing activity of ($7,441) for the year ended December 31, 2010. The Company experienced positive cash flows from financing activities of $444,316 for the year ended December 31, 2011 compared to $426,065 for the year ended December 31, 2010. The Company experienced negative cash flow used in operations during the nine months ended September 30, 2012 of ($514,985) compared to the nine months ended September 30, 2011 of ($556,927).
The Company experienced positive cash flows from investing activities of $147,254 for the nine months ended September 30, 2012 compared to no cash flows from investing activity for the nine months ended September 30, 2011. The Company experienced positive cash flows from financing


activities of $407,194 for the nine months ended September 30, 2012 compared to $379,551 for the nine months ended September 30, 2011.

The Company's audited financial statements for the year ended December 31, 2011 contain a "going concern" qualification. As discussed in Note 2 of the Notes to Financial Statements, the Company has incurred losses and has not demonstrated the ability to generate cash flows from operations to satisfy its liabilities and sustain operations. Because of these conditions, our independent auditors have raised substantial doubt about our ability to continue as a going concern.

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

Additional sources of capital in the short term may come from forecasted sales and the exercise of outstanding warrants. The Company forecasts that within the next 6 - 12 months product sales will generate sufficient positive cash flow to fund on-going operations.

At September 30, 2012, the Company had 6,300,000 outstanding warrants with an exercise price of $0.06, which if exercised, may contribute upwards of $378,000 to support ongoing capital needs. The warrants are immediately exercisable at the option of the warrant holders. The Company cannot be assured that the warrant holders will exercise any warrants. The warrants are subject to the Company's call. The Company's right to call the warrants is subject to registering the underlying common shares with the Securities and Exchange Commission and the stock trading above $0.08 per share for five consecutive days.

As of September 30, 2012, AWG International Water Corporation has external debt of $145,000, which is comprised of the Coghlan Family Corporation (CFC) debt of $125,000 and The John Hopkins University Applied Physics Laboratory ("JHU/APL") settlement obligation of $20,000.

The CFC note, which was due on August 1, 2012, was amended. The rate was reduced from 12% to 9%, the term was extended to May 1, 2013, and CFC agreed to cancel its 150,000 common stock purchase warrants. The Company agreed to reduce the principal balance outstanding to $100,000 with a principal payment of $25,000. As of September 30, 2012, this additional principal amount has not been paid.

On August 2, 2010, the Company entered into a Mutual Termination Agreement with The John Hopkins University Applied Physics Laboratory ("JHU/APL") to be released from the terms of a license agreement. Under the terms of the Mutual Termination Agreement, the company agreed to pay $20,000 and issue 600,000 restricted common shares, valued at $18,000 to JHU/APL as settlement of all amounts owed, within 20 days of the proposed reverse takeover by AWG International, Inc. as settlement for $131,633 of debt. As of September 30, 2012, the $20,000 note remains outstanding and the common stock has been issued.
The Company intends to cure this payment default by engaging in discussions with JHU/APL for a short-term extension until payment can be arranged. The note does not bear interest.

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 $750,000 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 two additional product models over the next 12 months.

Management plans to pursue additional required capital funding through multiple sources. Management believes that the outstanding warrants could generate as much as $378,000. The warrant exercise period was extended to July 16, 2013.
Management also is approaching prospective lenders for additional capital in the form of debt and/or equity, if necessary. Lastly, the Company forecasts sales beginning in late fourth quarter 2012 may begin to provide additional capital to support on-going operations.


Management makes no assurances that adequate capital resources will be available to support continuing operations over the next 12 months.

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 forecasted sales, existing cash reserves and additionally infused capital through exercised warrants.

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.

The significant Accounting Policies are as follows:

Technology Acquisition

The technology supporting the Company's products ("Technology Acquisition") was obtained as described below. Under the terms of the assignment, and subject to one exception discussed below concerning the G2 Assets, the Company owns the rights to manufacture, market and sell certain products covered under individual patents and/or patents pending. In return, Assignor, CanAmera Management, Inc. received 500,000 Company common shares, as described below.

On or about April 13, 2010, Everest Water, Ltd., ("Licensor") granted CanAmera Management, Inc. ("Licensee"), a corporation organized under the laws of the Republic of Panama, a non-exclusive, royalty bearing license to manufacture, use and sell products under U.S. Patent No. 7,272,947 including any and all U.S. or foreign patents derived and any patent on improvements on the patent, (the "License Agreement"). The patent describes a device that produces potable water by extracting water from the air and purifying it by way of cooling and condensing water and removing bacteria or preventing the formation of bacteria.

On the same date, April 13, 2010, CanAmera Management, Inc. assigned the License Agreement to AWG International, Inc., as successor Licensee. The consideration for the assignment was 250,000 common shares of AWG International, Inc. We refer to this patent as the G2 patent. Mr. Keith White, a Company director, Chief Executive and Technology Officer has shared voting and dispositive control of CanAmera Management, Inc.

On November 19, 2010, CanAmera Management, Inc. assigned Patent Cooperation Treaty (PCT) patent 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 application in reference to our proposed G3 product line. In consideration of this assignment, 250,000 shares of AWGI common stock were issued to CanAmera Management, Inc. 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.

Upon review of the License Agreement, it was noted that Clause VII (c) stated, "In the event Licensor becomes insolvent or Licensor is dissolved or otherwise ceases to be a legal entity without the Licensed Patents being assigned to another legal entity, the license granted herein shall become a fully paid assignment of the Licensed Patent to Licensee effective one day before such condition occurs or is determined by Licensee and Licensee shall by these terms be authorized to record said assignment with the U.S. Patent and Trademark Office and other patent offices of other jurisdictions as appropriate if accompanied by Licensee's sworn statement of the stated condition by Licensee...". According to the Bahamas Corporate Registry, Everest Water, Ltd., the Licensor on the License Agreement had been stricken from the Corporate Registry. Based on Everest's status with the Bahamas Corporate Registry, we determined that Everest was otherwise insolvent, dissolved or ceased to be a legal entity, as described in the License Agreement. Additionally, Everest Water, Ltd. had failed to


assign the patent (U.S. Patent No. 7,272,947 prior to being stricken from the registry. Therefore, the patents and applications underlying the License Agreement were assigned to AWG International, Inc. by operation of law. Clause VII(c) states additionally, that: "Licensee (AWGI as successor to CanAmera Management, Inc.) shall then further assign the licensed patents to the inventors thereof". Therefore, on February 17, 2012, AWGI International assigned the patents to the inventors, Rae Anderson and Keith White.
Immediately following this assignment to the inventors, on February 17, 2012, Keith White assigned his interest in the patents to AWGI International, Inc. for nominal consideration. 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. Until such time as Everest Water, Ltd. is reinstated with the Bahamas Companies Registry, the G2 Asset transfers are defective and invalid under Bahamian corporate law.

Based on the actions taken by the Company, the patent was returned to the original inventors. As a result of the assignments, the Company and Rae Anderson each own a one-half undivided interest in the G2 patent.

In August 2012, information came to our 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, as described above. These questions involve legal issues under the laws of the Commonwealth of the Bahamas. The Company engaged a Bahamian law firm to provide guidance and advice in regard to the legal questions associated with the G2 Asset. The principal legal issue concerning the enforceability and validity of the G2 asset transfers to AWGI involved Everest Waters' ability to deal in its assets when it had been stricken from the Bahamas Companies Registry, (the Everest Water Matter"). On January 2, 2007, Everest Water had been stricken for failure to pay its annual corporate fees.
Bahamas statute law prohibits a company from dealing in its assets while stricken from the Registry. Therefore, the March 12, 2007 assignment of the G2 patent from Everest International, Ltd. and the April 13, 2010 Everest Water license would be considered invalid until such time as Everest Water, Ltd. is reinstated with the Companies Registry. Upon reinstatement, all business activity would be restored retroactively, as though Everest Water had never been stricken. Until such time as Everest Water, Ltd. is reinstated with the Bahamas Companies Registry, the G2 Asset transfers are defective and invalid under Bahamian corporate law.

On November 8, 2012, Keith White, through Bahamas legal counsel, filed a petition with the Supreme Court of the Commonwealth of the Bahamas requesting reinstatement of Everest Water, Ltd. Mr. White anticipates that the petition will be granted in the near future.

Upon reinstatement, with the Bahamas Companies Registry, the March 12, 2007 patent assignment and the April 13, 2010 License Agreement will be restored and validated.

Upon reinstatement AWGI, as assignee to the License Agreement, intends to execute a second set of assignments whereby the G2 patent assets will be assigned to AWG and thereafter AWGI plans to assign the G2 patent assets to the inventors. Thereafter, Keith White will reassign the G2 patent assets to AWGI.
The Company and Rae Anderson will then each own a one-half undivided interest in the G2 patent.

U.S. Patent 7,886,557 represents a patent derived from U.S. Patent No. 7,272,947 or an improvement to the '947 patent. Patent number 7,272,947, a utility patent, has a life of 20 years expiring on September 5, 2025. The CanAmera Management, Inc. license agreement term follows the patent's duration term.

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 the Statement of Financial Accounting Standards FASB ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets."


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, 2012, the Company has net operating loss carry forwards of approximately $1,965,000, which will 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, 2012, 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.


At September 30, 2012 and December 31, 2011, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

Impairment of Long-Lived Assets

Long-lived assets of the Company, including the Technology Rights, are reviewed for impairment when changes in circumstances indicate their carrying value has become impaired, pursuant to guidance established in the FASB ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets." Management considers assets to be impaired if the carrying amount of an asset exceeds the future projected cash flows from related operations (undiscounted and without interest charges). If impairment is deemed to exist, the asset will be written down to fair value, and a loss is recorded as the difference between the carrying value and the fair value. Fair values are determined based on quoted market values, discounted cash flows, or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. Management has determined that there was no impairment as of September 30, 2012 and December 31, 2011.

Fair Value of Financial Instruments

The Company's financial instruments as defined by FASB ASC 825-10-50 include cash, trade accounts receivable, and accounts payable and accrued expenses. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at September 30, 2012 and December 31, 2011.

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.

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