Item
1. Financial Statements
Quest
Water Global, Inc.
(A
Development Stage Company)
Consolidated
Financial Statements
March 31, 2014
(Expressed
in US dollars)
(unaudited)
QUEST
WATER GLOBAL, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in US dollars)
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March 31, 2014
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December 31, 2013
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$
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$
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(unaudited)
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ASSETS
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Current assets
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Cash
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2,482
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1,605
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Amounts receivable
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|
|
–
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|
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1,293
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|
Prepaid expenses and deposits
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7,237
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7,835
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Total current assets
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9,719
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10,733
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Equipment (Note 3)
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10,216
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11,269
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Total assets
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19,935
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22,002
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities
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Accounts payable
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350,968
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360,766
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Accrued liabilities
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2,262
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3,344
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Convertible notes payable, net of unamortized discount of
$7,917 (2013 - $22,292) (Note 4)
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167,083
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152,708
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Due to related parties (Note 5)
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1,111,340
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980,248
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Total liabilities
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1,631,653
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1,497,066
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Nature of operations and continuance of business (Note 1)
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Commitments (Note 9)
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Subsequent event (Note 10)
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Stockholders’ deficit
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Preferred stock, 5,000,000 shares authorized, $0.000001 par
value, 2 shares issued and outstanding
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1
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1
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Common stock, 95,000,000 shares authorized, $0.000001 par
value, 86,479,860 and 85,749,860 shares issued and outstanding, respectively
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5,141
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5,140
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Additional paid-in capital
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5,455,692
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4,749,609
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Common stock issuable (Note 6)
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5,000
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23,000
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Deferred compensation (Note 6)
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(87,096
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)
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–
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Deficit accumulated during the development stage
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(6,990,456
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)
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(6,252,814
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)
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Total stockholders’ deficit
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(1,611,718
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)
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(1,475,064
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)
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Total liabilities and stockholders’ deficit
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19,935
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22,002
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(The accompanying notes
are an integral part of these consolidated financial statements)
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Expressed in US dollars)
(unaudited)
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Three months ended
March 31, 2014
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Three months ended
March 31, 2013
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Accumulated from
February 20, 2009
(date of inception)
to March 31, 2014
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$
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$
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$
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Expenses
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Advertising and promotion
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748
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27,542
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104,342
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Amortization
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1,053
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14,642
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134,108
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Automotive
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5,200
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5,935
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105,043
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Consulting fees (Notes 6 and 8)
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280,256
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11,209
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1,468,103
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Foreign exchange gain
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(5,392
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)
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(3,184
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)
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(9,486
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)
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Management fees (Note 8)
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407,731
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75,000
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3,507,256
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Office and miscellaneous
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7,646
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6,752
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133,927
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Professional fees
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20,013
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34,815
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680,277
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Rent
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5,160
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7,553
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144,220
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Telephone
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2,606
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4,373
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67,749
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Transfer agent and filing fees
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1,333
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813
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21,771
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Travel
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257
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14,781
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194,791
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Total expenses
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726,611
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200,231
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6,552,101
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Loss before other income (expense)
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(726,611
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)
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(200,231
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)
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(6,552,101
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)
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Other income (expense)
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Accretion of discounts on convertible notes payable
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(14,375
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)
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(15,940
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)
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(247,439
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)
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Gain on settlement of debt (Note 4)
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3,344
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–
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22,887
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Impairment of equipment
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–
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–
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(205,508
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)
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Interest expense
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–
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(908
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)
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(9,370
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)
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Interest income
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–
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–
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1,075
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Total other income (expense)
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(11,031
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)
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(16,848
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)
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(438,355
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)
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Net loss
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(737,642
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)
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(217,079
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)
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(6,990,456
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)
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Net loss per share, basic and diluted
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(0.01
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)
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–
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Weighted average number of shares outstanding , basic and diluted
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86,082,416
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85,089,049
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(The accompanying notes
are an integral part of these consolidated financial statements)
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows
(Expressed in US dollars)
(unaudited)
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Three
months ended
March 31, 2014
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Three
months ended
March 31, 2013
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Accumulated from
February 20, 2009
(date of inception)
to March 31, 2014
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$
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$
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$
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Operating Activities:
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Net loss for the period
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(737,642
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)
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(217,079
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)
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(6,990,456
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Accretion of discount on convertible note payable
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14,375
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15,940
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247,439
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Amortization
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1,053
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14,642
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134,108
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Gain on settlement of debt
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(3,165
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)
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–
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(22,887
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)
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Impairment of equipment
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–
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–
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205,508
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Stock-based compensation
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600,988
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–
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3,469,643
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Changes in operating assets and liabilities:
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Accounts receivable
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1,293
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|
|
–
|
|
|
|
–
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Prepaid expenses
|
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|
598
|
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|
|
–
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|
(7,237
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)
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Accounts payable
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|
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(9,798
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)
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34,360
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366,620
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Accrued liabilities
|
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|
2,083
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21,264
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6,674
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Due to related parties
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93,818
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104,382
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1,073,866
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Net cash provided by (used in) operating activities
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(36,397
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)
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(26,491
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)
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(1,516,722
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)
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Investing Activities:
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Purchase of equipment
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–
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–
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(349,832
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)
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Net cash used in investing activities
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–
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–
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(349,832
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)
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Financing Activities:
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Proceeds from convertible notes payable
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–
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–
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601,320
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Proceeds from loans payable
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–
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|
–
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208,000
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Repayment of loans payable
|
|
|
–
|
|
|
|
–
|
|
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|
(200,000
|
)
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Advances from related parties
|
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37,274
|
|
|
|
–
|
|
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37,274
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Proceeds from issuance of common stock
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–
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25,000
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1,222,442
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Net cash provided by financing activities
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|
37,274
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|
|
|
25,000
|
|
|
|
1,869,036
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Increase (decrease) in cash
|
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|
877
|
|
|
|
(1,491
|
)
|
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|
2,482
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|
Cash, beginning of period
|
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|
1,605
|
|
|
|
1,732
|
|
|
|
–
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Cash, end of period
|
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|
2,482
|
|
|
|
241
|
|
|
|
2,482
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|
|
|
|
|
|
|
|
|
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Non-cash investing and financing activities:
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|
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|
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Common stock issued to settle accounts payable
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–
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–
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11,750
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Quest notes conversion to common stock prior to recapitalization
transaction
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–
|
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|
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–
|
|
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325,500
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Common stock issued pursuant to the conversion of notes payable
|
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|
–
|
|
|
|
–
|
|
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|
89,000
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Common stock issued to settle loans payable
|
|
|
–
|
|
|
|
–
|
|
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|
4,000
|
|
|
|
|
|
|
|
|
|
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Supplemental disclosures:
|
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|
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|
|
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Interest paid
|
|
|
–
|
|
|
|
–
|
|
|
|
1,586
|
|
Income tax paid
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
(The accompanying notes
are an integral part of these consolidated financial statements)
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
1.
|
Nature
of Operations and Continuance of Business
|
On January 6, 2012, Quest Water
Global, Inc. (the “Company”) entered into a series of transactions pursuant to which the Company acquired Quest Water
Solutions, Inc. (“Quest”), a Nevada corporation; spun-out its prior operations to the Company’s former principal
stockholders, directors and officers; and completed a private offering of the Company’s securities for an aggregate purchase
price of approximately $677,000. The following summarizes the foregoing transactions:
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●
|
Acquisition
of Quest.
The Company acquired all of the outstanding capital stock of Quest in exchange for the issuance of 51,369,860
shares of the Company’s common stock pursuant to a Share Exchange Agreement between the Company, the Company’s
former principal stockholder, Quest and the former stockholders of Quest. As a result of this transaction, Quest became the
Company’s wholly owned subsidiary and the former shareholders of Quest became the Company’s controlling stockholders.
The transaction was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein Quest is considered
the acquirer for accounting and financial reporting purposes. Accordingly, the comparative financial statements to that date,
including the disclosures from inception, are those of Quest.
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Two
former shareholders of Quest each received one share of the Company’s newly designated Series A Voting Preferred Stock.
Each share of Series A Voting Preferred Stock entitles the holder thereof to approximately 35% of the voting power of the
Company’s capital stock. Accordingly, the two former principal shareholders of Quest, together, control more than 50%
of the votes eligible to be cast by stockholders in the election of directors and generally .
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●
|
Spin-Out
of RPM Dental Business.
Immediately prior to the acquisition of Quest, the Company spun-out RPM Dental Systems, LLC,
a limited liability company formed in Kentucky and a wholly owned subsidiary, to the Company’s former officer and director
and principal stockholder. As consideration the former director returned 80,000,000 shares of the Company’s common stock
held by that person. These shares were cancelled immediately following the acquisition.
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|
|
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●
|
Financing
Transaction.
Immediately following the acquisition of Quest, the Company completed a private offering of units consisting
of an aggregate of (i) 2,708,000 shares of common stock and (ii) warrants to purchase 2,708,000 shares of common stock. The
warrants have a three-year term and a per share exercise price of $0.50. The aggregate purchase price of the units was $677,000.
|
On the closing of the above transactions,
the Company entered into lock-up agreements with each of the former Quest shareholders who received common stock of the Company
in the share exchange, agreeing not to transfer any of the common stock of the Company for a one year period after the closing.
In addition, the Company entered into lock-up/leak-out agreements with the two officers of the Company, agreeing not to transfer
any of the common stock of the Company for a one year period after the closing and for the six months thereafter to limit any
transfers to 0.5% up to a maximum of 100,000 shares of common stock on any single day.
The Company is an innovative water
technology company that provides solutions to water scarce regions. The Company’s operations to date have been limited primarily
to capital formation, organization, and development of its business plan. As such, the Company is a development stage company,
as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
915, “Development Stage Entities”.
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 March 31, 2014, the Company has a working capital deficiency of $1,621,934 of which $1,111,340
is owed to the two principal shareholders (Notes 5 and 10), and an accumulated deficit of $6,990,456. 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.
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
2.
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Basic
of Presentation and 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. The Company’s fiscal
year-end is December 31.
|
(b)
|
Interim
Financial Statements
|
These interim consolidated financial
statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position,
results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative
of the results expected for a full year or for any future period.
The preparation of these consolidated
financial statements in conformity with US GAAP 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 Company regularly evaluates estimates and assumptions related to the useful life and recoverability of equipment, fair value
of convertible notes payable, fair value of stock-based compensation, and deferred income tax asset valuation allowances. The
Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material
differences between the estimates and the actual results, future results of operations will be affected.
Equipment is stated at cost. The
Company amortizes the cost of equipment over its estimated useful life at the following annual rates:
|
Computer
equipment
|
|
45%
|
|
declining
balance basis
|
|
|
Demonstration
equipment and furniture
|
|
20%
|
|
declining
balance basis
|
|
|
Furniture
and equipment
|
|
20%
|
|
declining
balance basis
|
|
In accordance with ASC 360, “Property,
Plant, and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in
circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include,
but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate
or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction
of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses
associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly
before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair
value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual
disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying
amount exceeds fair value.
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(f)
|
Financial
Instruments and Fair Value Measures
|
ASC 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent,
objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the
fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes
the inputs into three levels that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities
for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar
assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can
be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities
for which there are no observable inputs to the valuation methodology that are relevant to the measurement of the fair value of
the assets or liabilities.
The Company’s financial instruments
consist principally of cash, accounts payable, accrued liabilities, convertible notes payable, and amounts due to related parties.
Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs. The recorded values of all other
financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
The Company computes net loss per
share in accordance with ASC 260, “Earnings per Share”, which requires presentation of both basic and diluted loss
per share (“LPS”) on the face of the income statement. Basic LPS is computed by dividing net loss available to common
shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted LPS gives
effect to all dilutive potential common stock outstanding during the period using the treasury stock method and convertible preferred
stock using the if-converted method. In computing diluted LPS, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted LPS excludes all dilutive potential
shares if their effect is anti-dilutive.
ASC 220, “Comprehensive Income”,
establishes standards for the reporting and presentation of comprehensive income (loss) and its components in the financial statements.
As at March 31, 2014 and December 31, 2013, the Company had no items representing comprehensive income or loss.
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(i)
|
Foreign
Currency Translation
|
The Company’s 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.
The Company’s integrated foreign
subsidiaries are financially or operationally dependent on the Company. The Company uses the temporal method to translate the
accounts of its 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.
The Company accounts for income
taxes using the asset and liability method in accordance with ASC 740, “Income Taxes”. The asset and liability method
provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that
is believed more likely than not to be realized. As of March 31, 2014 and December 31, 2013, the Company did not have any amounts
recorded pertaining to uncertain tax positions.
The Company is required to file
federal and provincial income tax returns in Canada and federal, state and local income tax returns in the US, as applicable.
The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of
three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and US
income tax returns, the open taxation year is 2010. In certain circumstances, the US federal statute of limitations can reach
beyond the standard three year period. US state statutes of limitations for income tax assessment vary from state to state. Tax
authorities of Canada and US have not audited any of the Company’s, or its subsidiaries’, income tax returns for the
open taxation years noted above.
The Company recognizes interest
and penalties related to uncertain tax positions in income tax expense. During the periods ended March 31, 2014 and 2013, there
were no charges or provisions for interest or penalties.
|
(k)
|
Recent
Accounting Pronouncements
|
The Company has implemented all
new accounting pronouncements that are in effect and that may impact its financial statements and 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.
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
March 31, 2014
|
|
|
Net Carrying
Value
December 31, 2013
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
25,971
|
|
|
19,149
|
|
|
6,822
|
|
|
7,696
|
|
Furniture and equipment
|
|
|
7,426
|
|
|
|
4,032
|
|
|
|
3,394
|
|
|
|
3,573
|
|
|
|
|
33,397
|
|
|
|
23,181
|
|
|
|
10,216
|
|
|
|
11,269
|
|
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
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 three months ended March 31, 2014, $11,250
(2013 - $41,250) had been accreted, increasing the carrying value to $146,250 (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 three months ended March 31, 2014, $3,125 (2013 - $17,708)
had been accreted, increasing the carrying value to $20,833 (December 31, 2013 - $17,708).
|
|
|
|
|
(c)
|
On
December 11, 2012, the Company received proceeds of $25,000 and issued a convertible note which bears interest at 10% per
annum, is unsecured, and due on December 11, 2013. The unpaid amount can be converted six months after the date of issuance
at the holder’s option at $0.40 per share of common stock. In accordance with ASC 470-20, the Company recognized the
intrinsic value of the embedded beneficial conversion feature of $6,250 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. On October 15,
2013, the Company issued 62,500 shares of common stock pursuant to the conversion of the note. During the three months ended
March 31, 2014, the interest accrued was forgiven and the Company recorded a gain on settlement of $2,117.
|
|
|
|
|
(d)
|
On
December 18, 2012, the Company received proceeds of $11,820 and issued a convertible note which bears interest at 10% per
annum, is unsecured, and due on December 11, 2013. The unpaid amount can be converted six months after the date of issuance
at the holder’s option at $0.40 per share of common stock. In accordance with ASC 470-20, the Company determined there
was no embedded beneficial conversion feature. During the year ended December 31, 2013, the Company settled the note in full
for $nil payments and recorded a gain on settlement of $11,820. During the three months ended March 31, 2014, the Company
recorded a gain on settlement of the interest accrued of $1,227.
|
5.
|
Related
Party Transactions
|
|
(a)
|
As
at March 31, 2014, a total of $450,043 (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 10.
|
|
|
|
|
(b)
|
As
at March 31, 2014, a total of $661,297 (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 10.
|
|
|
|
|
(c)
|
For
the three months ended March 31, 2014, the Company incurred a total of $75,000 (2013 - $75,000) 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 three months ended March 31, 2014,
which is included in management fees.
|
|
(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 $22,904 (2013 - $nil) was expensed as consulting fees which reflects the pro-rata portion of the services
provided to March 31, 2014. As of March 31, 2014, the remaining amount of $87,096 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.
|
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
6.
|
Common
Stock (continued)
|
|
(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. Refer to Note 9(c).
|
|
|
|
|
(d)
|
As
at March 31, 2014, the Company had received share subscriptions of $5,000 for 83,334 shares of common stock at a price of
$0.06 per share.
|
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 and March 31, 2014
|
|
|
3,056,500
|
|
|
|
0.53
|
|
As at March 31, 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
|
3,056,500
|
|
|
|
|
|
|
|
|
|
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, March 31, 2014
|
|
|
5,300,000
|
|
|
|
0.19
|
|
Additional information
regarding stock options outstanding as at March 31, 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
|
|
|
|
1.2
|
|
|
|
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.
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
8.
|
Stock
Options (continued)
|
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:
|
|
Three months ended
March 31, 2014
|
|
|
Three months ended
March 31, 2013
|
|
|
|
|
|
|
|
|
Risk-free Interest rate
|
|
|
0.11
|
%
|
|
|
–
|
|
Expected life (in years)
|
|
|
1.3
|
|
|
|
–
|
|
Expected volatility
|
|
|
162
|
%
|
|
|
–
|
|
During the three months ended March
31, 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 three months ended March 31, 2014 was $0.12 per option.
As at March 31, 2014, the weighted
average remaining contractual life is 1.2 years and the aggregate intrinsic value of stock options outstanding is $nil.
|
(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.
|
|
(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
October 17, 2013, the Company entered into a six month agreement for consulting services whereby the Company agreed to pay
$4,000 per month. The Company also agreed to issue 100,000 shares of common stock for each three month period that this agreement
is in effect. Shares issued will be considered to have been earned at the beginning of each period that payment is due. Refer
to Note 6(c).
|
QUEST WATER GLOBAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2014
(Expressed in US dollars)
(unaudited)
9.
|
Commitments
(continued)
|
|
(d)
|
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 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.
|
(e)
|
On
January 15, 2014, the Company entered into a six month agreement for consulting services whereby the Company agreed, for any
contract pursuant to which the Company receives monies, directly or indirectly, to pay the consultant a fee of 8% of the first
$1,000,000 in gross proceeds of such financing, 6.5% of the next $1,000,000, 5.5% of the next $2,000,000 and 4.5% of all sums
received above that. The fee is payable when the monies are received from the funding sources.
|
|
|
|
|
(f)
|
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
|
|
|
|
12,186
|
|
2015
|
|
|
|
16,248
|
|
2016
|
|
|
|
16,248
|
|
2017
|
|
|
|
2,031
|
|
|
|
|
|
46,713
|
|
On April 8, 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.
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 March 31, 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.
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.
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.
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
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 March 31, 2014, we incurred $726,611 in total expenses, including $407,731 in management fees, $280,256
in consulting fees, $20,013 in professional fees, $7,646 in office and miscellaneous expenses, $5,200 in automotive expenses,
$5,160 in rent, $2,606 in telephone expenses, $1,333 in transfer agent and filing fees, $1,053 in amortization, $748 in advertising
and promotion expenses and $257 in travel expenses, as offset by a foreign exchange gain of $5,392. During the same period in
the prior year, we incurred $200,231 in total expenses, including $75,000 in management fees, $11,209 in consulting fees, $34,815
in professional fees, $6,752 in office and miscellaneous expenses, $5,935 in automotive expenses, $7,553 in rent, $4,373 in telephone
expenses, $813 in transfer agent and filing fees, $14,642 in amortization, $27,542 in advertising and promotion expenses and $14,781
in travel expenses, as offset by a foreign exchange gain of $3,184. The increase of approximately 263% in our total expenses during
the most recent period resulted primarily from significant increases in our management fees and consulting fees, all of which
were attributable to issuances of our common stock pursuant to consulting agreements and stock-based compensation associated with
the granting of stock options during our most recent fiscal quarter. However, during the three months ended March 31, 2014 our
advertising and promotion, amortization and travel expenses all decreased substantially on a period-to-period basis.
From
our inception on February 20, 2009 to March 31, 2014, we incurred $6,552,101 in total expenses, including $3,507,256 in management
fees, $1,468,103 in consulting fees, $680,277 in professional fees, $194,791 in travel expenses, $144,220 in rent, $134,108 in
amortization, $133,927 in office and miscellaneous expenses, $105,043 in automotive expenses, $104,342 in advertising and promotion
expenses, $67,749 in telephone expenses and $21,771 in transfer agent and filing fees, as offset by a foreign exchange gain of
$9,486. Importantly, a significant portion of the management fees and consulting fees represent stock-based compensation expense
of $1,939,525 and $858,933, respectively, that we incurred during the three months ended June 30, 2012.
Net
Loss
During
the three months ended March 31, 2014, we incurred a loss before other expense of $726,611 and a net loss of $737,642, whereas
we incurred a loss before other expense of $200,131 and a net loss of $217,079 during the same period in the prior year. During
our most recent fiscal quarter our net loss per share was $0.01, whereas we did not experience any net loss per share during the
three months ended March 31, 2013.
From
our inception on February 20, 2009 to March 31, 2014, we incurred a loss before other expense of $6,552,101 and a net loss of
$6,990,456. The majority of our other expense during each of the periods referenced above was related to the accretion of discounts
on our convertible notes payable.
Liquidity
and Capital Resources
As
of March 31, 2014, we had $2,482 in cash, $19,935 in total assets, $1,631,653 in total liabilities and a working capital deficit
of $1,621,934. As of March 31, 2014 we had an accumulated deficit of $6,990,456.
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 three months ended March 31, 2014, we spent $36,397 in cash on operating activities, compared to $26,491 in cash spending
on operating activities during the same period in the prior year. The 37% increase in our cash spending on operating activities
during the three months ended March 31, 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. From our inception on February 20, 2009 to March 31, 2014 we
spent $1,516,722 in cash on operating activities.
We
did not spend any cash on investing activities during the three months ended March 31, 2014 or 2013. From our inception on February
20, 2009 to March 31, 2014, we spent $349,832 in cash on the purchase of equipment, our only investing activities to date.
We
received $37,274 in cash from financing activities during the three months ended March 31, 2014, all of which was in the form
of advances from related parties. During the three months ended March 31, 2013, we received $25,000 in cash from financing activities,
all of which was in the form of proceeds from the issuance of our common stock. From our inception on February 20, 2009 to March
31, 2014 we received $1,869,036 in cash from financing activities, including the following proceeds: $1,222,442 from the issuance
of our common stock, $601,320 from convertible notes payable and $208,000 from loans payable, as offset by a loan repayment of
$200,000.
During
the three months ended March 31, 2014, our cash increased by $877 as a result of our operating, investing and financing activities,
from $1,605 to $2,482. As of March 31, 2014, we did not have sufficient cash resources to meet our operating expenses for the
next month based on our current burn rate.
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 March 31, 2014, we had a working capital deficit of $1,621,934 and an
accumulated deficit of $6,990,456. 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.
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.