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AWGI > SEC Filings for AWGI > Form 10-Q on 25-Oct-2013All Recent SEC Filings

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Form 10-Q for AWG INTERNATIONAL WATER CORP


25-Oct-2013

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.

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 delivery of the Model 2500 Atmospheric Water Generator in August 2012.
During 2012, we shipped product to our Philippine distributor. Having received the ETL mark clearance, we began shipments to our U.S. distributor during 2013.
We intend to follow with the introduction of 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.

WaterPro 100

We plan to manufacture the WaterPro 100 model in Spokane, Washington. A prototype of this model is under final construction. The design and development of this model is based on a joint collaboration between the Company and the Spokane manufacturer. We are currently negotiating the terms of a joint collaboration agreement.

WaterPro 400

The WaterPro 400 model is in the developmental design phase with a manufacturer in Michigan. A prototype of this model is complete. The design and development of this model is based on a joint collaboration between the Company and the Michigan manufacturer. The Company is actively working with our distributors to locate an ideal field testing site which we anticipated would be selected during the third quarter but this was not completed. The Company is continuing its efforts to conduct a field trial of the WaterPro 400 at the earliest opportunity.


The Company plans to market its products through independent domestic and international wholesale distributors. We do not plan to sell directly to consumers or end-users. 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.

Discussion and Analysis of Financial Condition and Results of Operations

Revenues

Revenue from sales to date has been modest. For the next few quarters, the Company projects minimal sales as we build the distribution network and introduce the commercial product. For the quarter ending September 30, 2013, we had $45,300 in Sales compared to $15,802 in sales for the quarter ending September 30, 2012. The revenue resulted from a single order of our Model 2500 units from our Philippines distributor, who has seen an increase in interest in the product in their region. For the years ended December 31, 2012 and December 31, 2011, we had revenue of $19,675 and $54,640, respectively. This revenue was generated from the sale of the G2 product, which is no longer available for sale. The decrease in revenue was attributable to lack of product availability from our manufacturer, inability to ship to the U.S. as the Company waited on the ETL mark certification, and the Company's focus on resolving intellectual property issues. Currently, we are focusing sales efforts on the Model 2500 product.

Costs and Expenses

Our primary costs going forward are related to ongoing sales and marketing, professional fees, administrative payroll and legal fees associated with patent maintenance. For the quarter ending September 30, 2013, we had $659,561 in general and administrative expenses compared with $505,728 for the quarter ending September 30, 2012. This increase of approximately $154,000 in general and administrative expenses was the result an increase in the non-cash amortization of stock options and warrants issued of approximately $102,000, an increase in payroll and benefits of approximately $45,000, an increase in sales and marketing expenses of approximately $23,000, an increase in miscellaneous expense of approximately $9,000, and decreases of approximately $21,000 and $4,000 in professional fees and consulting, respectively. For the year ended December 31, 2012, we had $857,090, excluding $612,500 of non-cash amortization associated with stock option compensation, in general and administrative expenses compared to $515,917 in general and administrative expenses for the year ended December 31, 2011. 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, 2012 and December 31, 2011 were $74,634 and $38,205, respectively. The $36,429 increase was due to additional development work on the Model 2500. The legal and intellectual property expenses for the years ending December 31, 2012 and December 31, 2011 were $143,469 and $41,536, respectively. The $101,933 increase was primarily related to the Business Combination transaction costs and patent assignment defect resolution costs. The consulting and general professional fees expenses for the years ending December 31, 2012 and December 31, 2011 were $493,205 and $321,972, respectively. The $171,232 increase was primarily related to the consulting contracts with Green Wise Energy and Frontier Mutual. The accounting and public reporting expenses for the years ending December 31, 2012 and December 31, 2011 were $45,201 and $14,286, respectively. The $30,915 increase was related to the Business Combination transaction costs and related SEC filing costs, the SEC comment letter resolution process and on-going quarterly public reporting costs. The other general and administrative operating costs for the years ending December 31, 2012 and December 31, 2011 were $100,582 and $99,937, respectively. The $645 increase was related to immaterial fluctuations in sales and marketing, benefits, administrative and travel.

The Company reported minimal gross profits since inception on March 18, 2010.
The gross profit was the result of shipping units internationally and miscellaneous parts globally.


Liquidity and Capital Resources

As of September 30, 2013, the Company had $41,743 of cash, total current assets of $258,629, total current liabilities of $133,987 and total stockholders' equity of $174,017, compared to $1,402 of cash, total current assets of $164,575, total current liabilities of $466,416, and total stockholders' deficit of $249,544 as of December 31, 2012.

The Company experienced negative cash flow used by operations during the nine months ended September 30, 2013 of ($856,044) compared to the nine months ended September 30, 2012 of ($514,985). The Company experienced negative cash flows from investing activities of ($4,080) for the nine months ended September 30, 2013 compared to positive cash flows from investing activity of $147,254 for the nine months ended September 30, 2012. The Company experienced positive cash flows from financing activities of $900,465 for the nine months ended September 30, 2013 compared to $407,194 for the nine months ended September 30, 2012.

The Company's audited financial statements for the year ended December 31, 2012 contained a "going concern" qualification. As discussed in Note 3 of the Notes to Financial Statements, the Company has incurred losses and has not demonstrated the ability to generate cash flows from operations to satisfy its liabilities and sustain operations. Because of these conditions, our independent auditors have raised substantial doubt about our ability to continue as a going concern.

Our financial objective is to make sure the Company has the operating capital 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.

For the year ended December 31, 2012, the Company funded its operations with debt and equity. The Company's funding source was the sale of equity securities and a loan from Coghlan Family Corporation (CFC) in the amount of $150,000. As of December 31, 2012, the balance outstanding on this loan was $125,000.

As of December 31, 2012, the Company had debt of $145,000, which was 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. On May 15, 2013, the Company paid $175,000 to CFC as full satisfaction of the loan agreement. On March 26, 2013, the Company paid $20,000 to the John Hopkins University as full satisfaction of the Mutual Termination Agreement with JHU/APL.

The February 1, 2013 amended CFC note had a principal balance was $175,000, interest rate of 12%, and due date of the sooner of May 1, 2014 or the raising of $500,000 in private equity funds. The amendment required the Company to grant CFC 150,000 common stock purchase warrants with an exercise price of $0.03 per share and an expiration date of three (3) years. The Company utilized the Black Scholes model to determine the discount value associated with the common stock warrants. The discount value applied against the note and to be amortized over the life of the note is $19,500. With the early pay-off of the note on May 15, 2013, the remaining discount was amortized during the period ended June 30, 2013 of $16,900.

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 final disposition of this matter, the common stock was issued to JHU/APL in 2012 and the $20,000 note was paid in full on March 26, 2013.

As of September 30, 2013, AWG International Water Corporation has no long term debt.


At September 30, 2013, the Company had 2,500,000 outstanding warrants with an exercise price of $0.03, which if exercised, could generate $75,000 cash to support ongoing operations. 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.

Management acknowledges that existing capital resources are insufficient to support continuing Company operations. Therefore, the Company needs to obtain additional financing immediately to support existing, as well as, continuing operations. Management plans to pursue additional required capital funding through multiple sources. Management believes that the Company will need approximately $630,000 of additional capital to execute management's plan of operations over the next 6 months, 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 2013. Management continues to attempt to raise approximately $630,000 through the current private, non-public sale of common shares to existing and new accredited shareholders. This private placement was initiated in February 2013 to raise a total of $1,500,000 through the private, non-public sale of 15,000,000 common shares. To date, the Company has raised $870,000. Management may approach prospective lenders for additional debt capital, if necessary. Lastly, the Company forecasts increasing sales in 2013-14 may begin to provide additional capital to support on-going operations. While no assurances can be given regarding the achievement of future results as actual results may differ materially, management anticipates with the fulfillment of the current private placement that adequate capital resources would be available to support continuing operations over the next 12 months through the combination of forecasted sales, 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, 2013, the Company has net operating loss carry forwards of approximately ($4,310,000), which will expire by 2033 and are calculated at an expected tax rate of approximately 34%. As the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately $1,465,000 has been established at September 30, 2013.


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, 2013, the Company has not taken any tax positions that would require disclosure under FASB ASC 740.

Pursuant to FASB ASC 740, income taxes are provided for based upon the liability method of accounting. Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by FASB ASC 740 to allow recognition of such assets. The Company is current in all of its federal and state tax returns.

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, 2013 and December 31, 2012, 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, 2013 and December 31, 2012.


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, 2012.

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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