10-K 1 form10k.htm ANNUAL REPORT FORM 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to________________

 

Commission file number 333-168895

 

QUEST WATER GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   27-1994359
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
1590 Bellevue Avenue, Suite 203
West Vancouver, British Columbia,
Canada
  V7V 1A7
(Address of principal executive offices)   (Zip Code)

 

(604) 986-2219

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

None   N/A
Title of each class   Name of each exchange on which registered

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [X] No [  ]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $2,528,406

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 86,479,860 as of April 14, 2014

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None

 

 

 

 
 

 

PRESENTATION OF INFORMATION

 

As used in this annual report, the terms “we”, “us”, “our” and the “Company” mean Quest Water Global, Inc. and its consolidated subsidiaries, unless otherwise indicated.

 

This annual report includes our audited consolidated financial statements as at and for the years ended December 31, 2013 and 2012. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). All financial information in this annual report is presented in U.S. dollars, unless otherwise indicated, and should be read in conjunction with our audited consolidated financial statements and the notes thereto included in this annual 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 annual report, any supplement to this annual report, and any documents incorporated by reference in this annual report, include “forward-looking statements”. To the extent that the information presented in this annual 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. These include, among others, the risks and uncertainties outlined under the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this annual report, many of which are beyond our control.

 

These forward-looking statements include, but are not limited to, the following:

 

  statements contained in Item 7 and the notes to our audited consolidated financial statements concerning our results of operations, financial condition and our ability to finance our business;
     
  statements contained in Item 1 concerning our products, operations and compliance with applicable laws; and
     
  statements throughout this annual report concerning our legal structure, the regulation of our business and the market for our common stock.

 

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Factors that could cause actual results to differ materially include, but are not limited to the following:

 

  risks related to government regulations and approvals of our products;
     
  our need for additional capital to pursue our plan of operations;
     
  our dependence on key personnel; and
     
  our ability to compete effectively with competitors that have greater financial, marketing and other resources.

 

The forward-looking statements made in this annual 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 annual report and the documents that we reference in this annual 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.

 

Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties. We cannot assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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TABLE OF CONTENTS

 

PART I    
Item 1. Business   1
Item 1A. Risk Factors   12
Item 1B. Unresolved Staff Comments   12
Item 2. Properties   12
Item 3. Legal Proceedings   12
Item 4. Mine Safety Disclosures   12
     
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   13
Item 6. Selected Financial Data   15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk   20
Item 8. Financial Statements and Supplementary Data   21
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure   22
Item 9A. Controls and Procedures   22
Item 9B. Other Information   22
     
PART III    
Item 10. Directors, Executive Officers and Corporate Governance   23
Item 11. Executive Compensation   26
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   28
Item 13. Certain Relationships and Related Transactions, and Director Independence   31
Item 14. Principal Accounting Fees and Services   35
     
PART IV    
Item 15. Exhibits, Financial Statement Schedules   36
     
SIGNATURES   37

 

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PART I

 

Item 1. Business

 

Business Overview

 

We are an innovative water technology company that provides sustainable and environmentally sound solutions to water-scarce regions. We use proven technologies to create economically viable products that address the critical shortage of clean drinking water in developing countries.

 

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.

 

To date, we have focused our activities on the fifteen countries of the Southern African Development Community (“SADC”), with specific attention to Angola.

 

Our 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.

 

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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.

 

Industry Overview

 

Water is the single most important economic input to the global economy, and more specifically, to individual enterprises. The disparity between supply and demand for clean water is an inexorable problem; yet the relentless international demand for its uninterrupted supply makes water by far the most stable of all global commodities.

 

Safe water and the prevention of waterborne disease are public health priorities in most developed countries, where clean water generally is available for about one-third of the world’s population. However, water-related human health problems in developing countries are daunting. Global estimates of the population in developing countries that lack access to safe drinking water range from 1.1 to 1.4 billion.

 

The consequences of lack of safe water are severe. The United Nations’ World Health Organization estimates that more than three billion cases of illness and five million deaths - the majority children - can be attributed annually to unsafe water. The death rate for children alone is estimated at one every eight seconds. Those numbers may rise in the early years of this century. World population surpassed seven billion in 2011. It is expected to top eight billion by 2028. Most of the increases are expected to be in developing countries, increasing pressure on already inadequate water resources.

 

In Angola, almost three decades of civil war devastated water systems across the country, leaving millions of people without clean, reliable municipal water supplies or basic sanitation. Presently, the quality of water is still very poor, and in fact is considered harmful to public health. Due to these increasing health risk concerns, the government of Angola launched a $650 million “Water for All” (“Agua para Todos”) program in 2007 that began in 2009/2010.

 

The “Water for All” program is an initiative of Angolan President José Eduardo dos Santos. It is coordinated by the Ministry of Energy & Water and managed by four other ministries: the Ministry of Industry, Ministry of Health, Ministry of Agriculture & Rural Development and Ministry of Environment. The first phase of the program will continue through to 2015, with the second phase continuing through 2020. Under the program, Angola has committed to providing clean water to 80% of its rural population and 50% of urban dwellers by 2015, with targets raised to 100% and 80%, respectively, by 2020. The total population of Angola as of the end of 2010 was approximately 19 million, with 56.7% being urban and 43.3% rural.

 

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Products and Markets

 

We focus on the manufacture and sale of two products: our AQUAtapTM community drinking water station and our WEPSTM (water extraction and purification system). Our AQUAtapTM station is an autonomous, decentralized, self-contained, solar-powered water purification and distribution system, while our WEPSTM is a unique, proprietary water extraction and purification system that produces clean drinking water from humidity in the atmosphere. We believe that our products can provide the world’s growing population with access to safe and clean drinking water, with a primary focus in water scarce regions.

 

As described above, we have focused our activities to date on the fifteen countries of the SADC, and specifically, 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.

 

AQUAtapTM Community Drinking Water Station

 

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 fresh water into 20,000 litres of high quality drinking water each day, suitable for 1,000 people. Reverse osmosis and ultrafiltration purification remove all suspended solids, turbidity, viruses, bacteria and most organic compounds. The AQUAtapTM system uses no chemicals in the pre- or post-purification process, keeping maintenance time and costs to a minimum. The source water is pumped from a contaminated or saline source into an auto backflushing sand filter, through three sets of auto backflushing pre-filters, then through either a reverse osmosis membrane (in the event the source water contains salinity levels >15,000 parts per million) or an ultrafiltration membrane. The purified water is then pumped through an ultraviolet sterilization unit prior to being pumped into a holding tank, then through a second ultraviolet sterilization unit prior to being dispensed by the end user. The pumps and compressors are powered by a series of batteries that are charged through an array of photovoltaic panels.

 

Our target market for this product includes non-governmental organizations, governmental agencies, land developers, local communities and local water suppliers in developed and developing countries. We utilized ultrafiltration membranes to fabricate and assemble our first two AQUAtapTM community drinking water stations in the second quarter of 2011. In February 2012, we officially launched them in Angola.

 

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WEPSTM (Water Extraction and Purification System)

 

In addition to the solar-powered water purification system, we have also developed a technology known as WEPSTM that produces potable water from humidity in the atmosphere. WEPSTM technology works by converting humidity into water, otherwise known as atmospheric water extraction. The unit draws in ambient air from the surrounding atmosphere, which passes through an air filtration system to remove any airborne contaminants. The filtered air then passes through the proprietary water extraction system, which efficiently removes moisture (condensate). The condensate is then sent through a multi-step water filtration and purification process. The result is contaminant- and bacteria-free, pure drinking water. The design of the WEPSTM incorporates elements of proven technology combined with our proprietary process, specifically designed to meet the climatic conditions and local regulatory framework of the installation site. The concept behind WEPSTM is to obtain an alternative, sustainable, pure source of water without exploiting current, limited groundwater resources. Utilizing our proprietary technology, vapor is captured from the troposphere before it condenses, falls to earth in the form of rain or snow and becomes contaminated as it comes in to contact with industrial waste and chemicals, agricultural pollutants and human contaminants.

 

Our target market for this product includes commercial bottled water operations, agricultural irrigation, industrial capture and reuse and bulk residential supply. The WEPSTM systems are modular and scalable in design, allowing for water production from a few thousand to millions of litres per day.

 

Development of Business and Growth Strategy

 

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. Primarily, we are focusing on installing our AQUAtapTM community drinking water stations in Angola.

 

Our management has worked diligently since 2008 establishing business relationships with key government officials and ministries in Angola, including the Ministries of Industry, Health, Agriculture & Rural Development and Energy & Water. In late 2009, while our management was in Angola, the Secretary of State for Industry requested us to design and construct an autonomous water purification and distribution system under the “Water for All” program that would be appropriate for use in rural communities throughout Angola, keeping in mind that there is little to no grid power and virtually no infrastructure in the majority of these locations. After numerous months and much deliberation on which technologies to utilize within the end product, we completed the design of our current AQUAtapTM community drinking water station. With engineering, technical and manufacturing assistance from our technology partner, Trunz Water Systems AG, the first two units were fabricated and assembled in Switzerland in the second quarter of 2011.

 

In mid-December 2011, we shipped our first two AQUAtapTM stations to Angola. These units arrived in mid-January 2012 and we installed the first station on behalf of the Angolan Ministry of Industry, which is responsible for the technical assessment and evaluation of all new water technologies intended for use under the ‘Water for All’ program, in the rural community of Bom Jesus in early February 2012. Bom Jesus, with a population of 500, is located approximately 50 kilometres east of the capital city of Luanda. The Bom Jesus AQUAtapTM station became operational in on March 1, 2012 and was officially inaugurated by the Secretary of State for Industry on March 16, 2012, with residents of the village initially drawing approximately 10,000 litres of pure water a day.

 

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The analysis of the product water from the Bom Jesus AQUAtap™ station and a comparative analysis of the product water and source water from the Kwanza River were performed by EPAL, a government agency and laboratory, and AngoLab, our private water analysis laboratory in Angola. The results of the product water analysis exceeded World Health Organization (WHO) standards for drinking water, while the results of the analysis of the source water proved it was not fit for human consumption.

 

Our second AQUAtap™ station is currently awaiting an installation location and is being held in storage in the Viana Industrial Park owned by the Ministry of Industry. In the meantime, 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 “Water for All” program and for the construction of a facility to assemble the AQUAtap™ stations in Angola. 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. 

 

Currently, only 50% of the population of Angola has access to an improved drinking water source. We believe that we will play an important role in alleviating this problem by providing access to clean drinking water through the use of our AQUAtap™ community drinking water stations. However, no assurance can be given that any of the negotiations in which we are currently involved we will be successful, or that we will be able to complete any sales contracts for units of our AQUAtap™ station.

 

In keeping with our long-term growth strategy, our secondary business objective is to address the vital issue of water quality and bottled water supply in Angola through our majority-owned subsidiary, Agua Cuilo Lda. Agua Cuilo Lda. plans to construct and operate a water production and bottling plant in Angola. The plant will employ our proprietary WEPSTM technology for the production of water. The bottling operation will compete economically and environmentally with conventional bottled water production.

 

WEPSTM provides an alternate, pure source of water without exploiting current freshwater resources. In addition to creating a sustainable and reliable water source, other factors that differentiate the WEPSTM process from conventional water supply methods include low power consumption, no harmful by-products and the fact that absolutely no chemicals are utilized in the process. Reducing environmental impacts and costs are goals of our water production and bottling plant. In addition, Agua Cuilo Lda. will manufacture 100% of its biodegradable PET (polyethylene terephthalate) packaging in its plant, saving the energy required to transport thousands of truckloads of empty bottles to its facilities. Agua Cuilo Lda., as a new provider of pure bottled water based within the country, will have an immediate and major cost-competitive and environmental advantage. However, no assurance can be given that Agua Cuilo Lda., will be successful in consummating sales for its bottled water products.

 

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Suppliers

 

Many of the components we use in our products are readily available from multiple world-wide manufacturers. We currently use specific suppliers for certain proprietary components and technologies, including Trunz Water Systems AG, Trojan Technologies and UV Pure.

 

Competition

 

We have identified the need to supply clean drinking water to rural and urban communities in developing countries by providing economically viable, turnkey solutions. We believe this is a good opportunity for us to take advantage of a very specific, targeted market by providing solar-powered, fully-autonomous water purification and distribution systems to populated areas where clean water is scarce.

 

This is a far different market than that addressed by a large segment of the industry which has concentrated on the multi-billion dollar municipal water treatment sector, or the equally large residential sector. The municipal solution requires significant investment for infrastructure development, for example, building plants and laying miles of distribution pipes. Products for residential markets do not offer the performance or features to meet the needs of the first response market or the needs of the underdeveloped nations of the world.

 

We have identified a few companies that manufacture equivalently sized water purification systems, but may or may not have similarities to our AQUAtap™ community drinking water station. Our competitors include Cardinal Resources, Inc., SwissINSO Holding, Inc., WorldWater & Solar Technologies, Inc., PureSafe Water Systems, Inc., Global Water Group, Inc., Nirosoft Industries Ltd. and Rodi Systems Corporation. We believe that we have the following competitive advantages as compared to our competitors:

 

  The AQUAtap™ system not only purifies and stores the produced water, but also contains a distribution point for the end user.
     
  The AQUAtap™ system is configurable to the source water, thereby providing the option of either a reverse osmosis membrane (in the event of saline or brackish source water) or an ultrafiltration membrane (in the event of contaminated fresh source water).
     
  The AQUAtap™ system has higher qualities as compared to our competitors’ for the specific markets that we are pursuing. For example, one competitor manufactures only a mobile disaster relief system that is cost prohibitive and not suitable for use in our target markets. Their units include redundant systems for their identified target market, rendering it cost inefficient. They also operate from grid or generator power and do not offer solar power as an option, further rendering their system unsuitable. Another competitor markets a large reverse osmosis system that is possibly suitable for larger markets or when greater amounts of water are required. It is not a suitable product for our target market in that it utilizes only reverse osmosis membranes, which, if the source water is contaminated fresh water, renders it somewhat excessive and too expensive. Purifying contaminated fresh water as opposed to saline water, reverse osmosis requires a greater amount of power to operate; hence a large array of solar panels is required, making the system far too expensive to operate, when an ultrafiltration membrane and a smaller array of solar panels would suffice to produce the same quantity of water.

 

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The markets in which we intend to operate are highly competitive with respect to performance, quality and price. We anticipate that we will directly compete with those competitors identified above, as well as with other local, regional and water treatment service and equipment providers. In the future, we also may face further competition from new market entrants and possible alliances between existing competitors. Some of our competitors have, or may have, greater financial, marketing and other resources. As a result, competitors may be able to respond more quickly to new or emerging trends and changes in technology, benefit from greater purchasing economies, offer more aggressive pricing to customers or devote greater resources to the promotion of their products than we are capable of accomplishing. There can be no assurance that we will be able to successfully compete in the future with such competitors. The failure to successfully compete could have an adverse effect on our operating results.

 

Intellectual Property

 

We developed WEPSTM, a proprietary process that extracts moisture from the atmosphere to produce potable water. While the system incorporates elements of proven technology (dehumidification and refrigeration), we have designed proprietary processes that capture the water from air more efficiently and economically. A further proprietary process incorporated into the system ensures the integrity of the water after production, thereby eliminating the production of bio film, ultimately inhibiting the growth of bacteria.

 

In 2009, we filed an application to register the trademark for WEPSTM with the Canadian Intellectual Property Office that we subsequently abandoned on June 12, 2013. On June 18, 2013, the United States Patent and Trademark Office registered the trademark for our AQUAtap™ community drinking water station.

 

Agreement with Trunz Water Systems AG

 

On June 29, 2011, we entered into a Global Cooperation Partner Agreement with Trunz Water Systems AG (“TWS”) of Switzerland for the use of their proprietary technologies that serve as the core of our AQUAtap™ community drinking water stations. This agreement brings a breadth of fully-developed, proven technologies to us, thereby minimizing development time, costs and risks. Our technologies include an auto backflushing pre-filtration technology and reverse osmosis membrane technology from TWS whose low energy consumption permits the entire water purification process to be powered using solar energy. Under the agreement, we will continue to develop new products with the assistance of and in cooperation with TWS, allowing us to maintain ownership of the end product. TWS will market our AQUAtap™ community drinking water station system on a worldwide basis along with other products that are co-developed, with a royalty being paid to us for each system sold. In addition to this, we have the rights to market all the products of TWS on a worldwide basis, and as an official dealer in Canada and Angola, which will be sold under our brand. Pursuant to the agreement, TWS will also provide design engineering services, technical assistance, fabrication, manufacturing and consultancy and other services as requested by us.

 

Employees

 

We currently have two full time employees and one part time employee. From time to time, we may hire additional workers on a contract basis as the need arises.

 

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Item 1A. Risk Factors

 

Not required.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

Our principal executive office is located at 2030 Marine Drive, Suite 302, North Vancouver, British Columbia, Canada. Our only materially important facility, we have leased it at a cost of $2,525 per month since January 15, 2011 and expect to do so until January 30, 2014 . We believe that this office is generally suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to satisfy our growth.

 

Item 3. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or our officers or directors of those of our subsidiaries’ in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock was originally approved for quotation on the OTC Bulletin Board under the symbol “RPMD”. Effective March 9, 2012, our symbol changed from “RPMD” to “QWTR” in connection with our name change from RPM Dental, Inc. to Quest Water Global Inc. and the Forward Split. Our August 24, 2012, our common stock was deleted from the OTC Bulletin Board and it is now quoted exclusively on the OTCQB.

 

As of April 14, 2014, there were 86,479,860 shares of our common stock issued and outstanding. As of that date we also had outstanding options to purchase 5,300,000 shares of our common stock at an exercise price of $0.19 per share until May 30, 2015 and outstanding warrants to purchase 3,056,500 shares of our common stock as follows:

 

  2,398,000 shares at an exercise price of $0.50 per share until January 6, 2015;
     
  310,000 shares at an exercise price of $0.50 per share until February 10, 2015;
     
  286,000 shares at an exercise price of $0.75 per share until July 15, 2015; and
     
  62,500 shares at an exercise price of $0.65 per share until October 15, 2015.

 

Of the 86,479,860 issued and outstanding shares of our common stock, 46,744,360 are restricted under the Securities Act. None of these restricted shares are eligible for resale absent registration or an exemption from registration under the Securities Act.

 

The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The high and low bid quotations of our common stock for the periods indicated below are as follows:

 

OTC Bulletin Board / OTCQB
Quarter Ended High ($) Low ($)
December 31, 2013 0.46 0.10
September 30, 2013 0.17 0.011
June 30, 2013 0.135 0.05
March 31, 2013 0.34 0.06
December 31, 2012 0.95 0.26
September 30, 2012 1.60 0.54
June 30, 2012 1.25 0.68
March 31, 2012 - -

 

13
 

 

Holders

 

As of April 14, 2014, there were approximately 60 registered holders of record of our common stock, which does not include shares held by brokerage clearing houses, depositories or others in unregistered form.

 

Dividends

 

We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.

 

Penny Stock

 

Our common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the “penny stock rule”. Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The Securities and Exchange Commission (the “SEC”) generally defines a penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. We are subject to the SEC’s penny stock rules.

 

Since our common stock is deemed to be penny stock, trading in the shares of our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are generally persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of securities and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document prepared by the SEC relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our stockholders to sell their shares.

 

14
 

 

Recent Sales of Unregistered Securities

 

Other than as disclosed in previous quarterly reports on Form 10-Q or current reports on Form 8-K, we did not issue any equity securities that were not registered under the Securities Act during the fiscal year ended December 31, 2013, except as follows:

 

  On October 3, 2013, we issued 30,000 shares of our common stock at a deemed price of $0.10 per share pursuant to a consulting agreement.
     
  On October 15, 2013, we issued 62,500 shares of our common stock at a deemed price of $0.40 per share pursuant to the conversion of a $25,000 note payable.
     
  On October 15, 2013, we issued 250,000 shares of our common stock to one non-U.S. investor at a price of $0.10 per share for cash proceeds of $25,000.
     
  On November 19, 2013, we issued 225,000 shares of our common stock at a deemed price of $0.10 per share pursuant to a consulting agreement.

 

We issued these shares in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act and Rule 903 of Regulation S under the Securities Act, as applicable. Our reliance on Section 4(2) was based on the following factors: (a) the issuance was an isolated private transaction by us which did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the shares by us; (d) the shares were not broken down into smaller denominations; and (e) the negotiations for the sale of the shares took place directly between the offerees and us. Our reliance on Rule 903 of Regulation S was based on the fact that the shares were issued in “offshore transactions”, as defined in Rule 902(h) of Regulation S. We did not engage in any directed selling efforts in the United States in connection with the issuance of the shares, and the investor was not a U.S. person and did not acquire the shares for the account or benefit of any U.S. person.

 

Purchases of Equity Securities by the Issuer and “Affiliated Purchasers”

 

We did not purchase any shares of our common stock or other securities during the year ended December 31, 2013.

 

Item 6. Selected Financial Data

 

Not required.

 

Item 7. 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 audited consolidated financial statements and the related notes thereto that appear elsewhere in this annual report, as well as Item 1 and the “Presentation of Information” section that appears at the beginning of this annual report.

 

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.

 

15
 

 

We have developed a proprietary AQUAtap™ 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 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.

 

In addition to the solar-powered water purification systems, we have also developed a technology known as WEPSTM that produces potable water from humidity in the atmosphere. WEPSTM technology works by converting humidity into water, otherwise known as atmospheric water extraction.

 

Our operations to date have consisted of business formation, strategic development, marketing, technologies development, negotiations with technologies 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 year ended December 31, 2013, we incurred $728,583 in total expenses, including $300,000 in management fees, $101,817 in professional fees, $100,838 in consulting fees, $58,566 in amortization, $41,221 in advertising and promotion expenses, $37,475 in office and miscellaneous expenses, $33,612 in our travel expenses, $22,680 in rent, $20,113 in automotive expenses, $15,088 in telephone expenses and $3,938 in transfer agent and filing fees, as offset by $6,765 in foreign exchange gain.

 

During the prior year, we incurred $3,759,906 in total expenses, including $2,239,525 in management fees, $284,088 in professional fees, $919,486 in consulting fees, $64,465 in amortization, $45,218 in advertising and promotion expenses, $35,842 in office and miscellaneous expenses, $54,966 in travel expenses, $30,337 in rent, $41,395 in automotive expenses, $13,745 in telephone expenses, $16,500 in transfer agent and filing fees and $14,339 in foreign exchange loss. Importantly, a significant portion of the management fees and consulting fees represent stock-based compensation expense of $2,798,455 that we incurred during the three months ended June 30, 2012.

 

The decrease of $3,031,323 or approximately 81% in our total expenses during the most recent year resulted from decreases in our expenses in nearly every major category, and notably our management fees, consulting fees and professional fees.

 

16
 

 

From our inception on February 20, 2009 to December 31, 2013, we incurred $ 5,825,490 in total expenses, including $3,099,525 in management fees, $1,187,847 in consulting fees, $660,264 in professional fees, $194,534 in travel expenses, $139,060 in rent, $133,055 in amortization, $126,281 in office and miscellaneous expenses, $103,594 in advertising and promotion expenses, $99,843 in automotive expenses, $65,143 in telephone expenses and $20,438 in transfer agent and filing fees, as offset by $4,094 in foreign exchange gain. Included in total expenses is stock-based compensation of $2,798,455.

 

Net Loss

 

During the year ended December 31, 2013, we incurred a loss before other income (expense) of $728,583 and a net loss of $988,849, whereas we incurred a loss before other income (expense) of $3,759,906 and a net loss of $3,815,548 during the prior year. Our net loss per share during those two years was $0.01 and $0.05, respectively.

 

From our inception on February 20, 2009 to December 31, 2013, we incurred a loss before other income (expense) of $5,825,490 and a net loss of $6,252,814. The majority of our other income (expense) during each of the periods referenced above was related to the accretion of discounts on our convertible notes payable, although we also incurred a significant equipment impairment charge of $205,508 during the year ended December 31, 2013.

 

Liquidity and Capital Resources

 

As of December 31, 2013, we had $1,605 in cash, $22,002 in total assets, $1,497,066 in total liabilities and a working capital deficit of $1,486,333. As of December 31, 2013 we had an accumulated deficit of $6,252,814.

 

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 year ended December 31, 2013, we spent $30,127 in cash on operating activities, compared to $834,052 in cash spending on operating activities during the prior year. The decrease of approximately 96% in our cash spending on operating activities during the fiscal year ended December 31, 2013 was primarily attributable to the decrease in our net loss as described above, as well as certain changes in our operating assets and liabilities, and in particular a significant increase in the amount due to related parties. From our inception on February 20, 2009 to December 31, 2013 we spent $1,480,325 in cash on operating activities.

 

During the year ended December 31, 2013 we did not spend any cash on investing activities, whereas we spent $64,096 in cash on investing activities during the prior year, all of which was in the form of equipment purchases. Our investing activities decreased between 2012 and 2013 largely because we shipped our first two community drinking water stations to Angola in early 2013 and installed and demonstrated one system. Our second system is currently  awaiting an installation location and is being held in storage in the Viana Industrial Park owned by the Ministry of Industry. From our inception on February 20, 2009 to December 31, 2013, we spent $349,832 in cash on the purchase of equipment, our only investing activities to date.

 

17
 

 

We received $30,000 in cash from financing activities during the year ended December 31, 2013, all of which was in the form of proceeds from the issuance of our common stock. During the year ended December 31, 2012, we received $866,820 in cash from financing activities, consisting of $845,000 in proceeds from the issuance of our common stock and $221,820 in proceeds from convertible notes payable, as offset by the repayment of $200,000 in loans payable. From our inception on February 20, 2009 to December 31, 2013 we received $1,831,762 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 the repayment of $200,000 in loans payable.

 

During the year ended December 31, 2013, our cash decreased by $127 as a result of our operating, investing and financing activities, from $1,732 to $1,605. As of December 31, 2013, we did not even have sufficient cash resources to meet our operating expenses for the next month based on our current burn rate. However, we anticipate that our burn rate will be significantly less going forward and we therefore expect to spend less cash on certain expense categories during future years than we did during our most recent fiscal years.

 

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 in Item 1 of this annual report, 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. 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.

 

18
 

 

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 December 31, 2013, we had a working capital deficit of $1,486,333 and an accumulated deficit of $6,252,814. Our continuation as a going concern is dependent upon the continued financial support from our creditors, our ability to obtain necessary equity financing to continue operations, and ultimately on 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.

 

19
 

 

Foreign Currency Translation

 

Our functional currency is US dollars. Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into US dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.

 

Our integrated foreign subsidiaries are financially or operationally dependent on us. We use the temporal method to translate the accounts of our integrated operations into US dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

20
 

 

Item 8. Financial Statements and Supplementary Data

 

Quest Water Global, Inc.

(A Development Stage Company)

Consolidated Financial Statements
Year Ended December 31, 2013

(Expressed in US dollars)

 

    Index
     
Report of Independent Registered Public Accounting Firm   F–1
     
Consolidated Balance Sheets   F–2
     
Consolidated Statements of Operations   F–3
     
Consolidated Statements of Stockholders’ Deficit   F–4
     
Consolidated Statements of Cash Flows   F–7
     
Notes to the Consolidated Financial Statements   F–8

 

21
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Quest Water Global, Inc.

(A development stage company)

 

We have audited the accompanying consolidated balance sheets of Quest Water Global, Inc. (a development stage company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended, and accumulated from February 20, 2009 (date of inception) to December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended and for accumulated from February 20, 2009 (date of inception) to December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has reported losses since inception of operations and requires additional funds to meet its obligations and fund the costs of its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  /s/ DMCL
  DALE MATHESON CARR-HILTON LABONTE LLP
  CHARTERED ACCOUNTANTS
Vancouver, Canada  
   
April 11, 2014  

 

 

F-1
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Consolidated Balance Sheets

(Expressed in US dollars)

 

   December 31, 2013   December 31, 2012 
   $   $ 
         
ASSETS          
           
Current assets          
           
Cash   1,605    1,732 
Amounts receivable   1,293     
Prepaid expenses and deposits   7,835    7,835 
           
Total current assets   10,733    9,567 
           
Equipment (Note 3)   11,269    275,343 
           
Total assets   22,002    284,910 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities          
           
Accounts payable   360,766    259,031 
Accrued liabilities   3,344    9,098 
Convertible notes payable, net of unamortized discount of $22,292 (2012 - $5,914) (Note 4)   152,708    30,906 
Due to related parties (Note 5)   980,248    502,082 
           
Total current liabilities   1,497,066    801,117 
           
Convertible notes payable, net of unamortized discount of $nil (2012 - $79,792) (Note 4)       95,208 
Total liabilities   1,497,066    896,325 
           
Nature of operations and continuance of business (Note 1)          
Commitments (Note 9)          
Subsequent events (Note 11)          
           
Stockholders’ deficit          
           
Preferred stock, 5,000,000 shares authorized, $0.000001 par value, 2 shares issued and outstanding   1    1 
           
Common stock, 95,000,000 shares authorized, $0.000001 par value, 85,749,860 and 84,833,860 shares issued and outstanding, respectively   5,140    5,139 
           
Additional paid-in capital   4,749,609    4,479,410 
           
Common stock issuable (Note 6)   23,000    168,000 
           
Deficit accumulated during the development stage   (6,252,814)   (5,263,965)
           
Total stockholders’ deficit   (1,475,064)   (611,415)
           
Total liabilities and stockholders’ deficit   22,002    284,910 

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

F-2
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Consolidated Statements of Operations

(Expressed in US dollars)

 

   Year ended
December 31,
2013
   Year ended
December 31,
2012
   Accumulated from
February 20, 2009
(date of inception)
to December 31, 
2013
 
   $   $   $ 
             
Expenses               
                
Advertising and promotion   41,221    45,218    103,594 
Amortization   58,566    64,465    133,055 
Automotive   20,113    41,395    99,843 
Consulting fees   100,838    919,486    1,187,847 
Foreign exchange loss (gain)   (6,765)   14,339    (4,094)
Management fees (Notes 5)   300,000    2,239,525    3,099,525 
Office and miscellaneous   37,475    35,842    126,281 
Professional fees   101,817    284,088    660,264 
Rent   22,680    30,337    139,060 
Telephone   15,088    13,745    65,143 
Transfer agent and filing fees   3,938    16,500    20,438 
Travel   33,612    54,966    194,534 
    728,583    3,759,906    5,825,490 
Loss before other income (expense)   (728,583)   (3,759,906)   (5,825,490)
                
Other income (expense)               
                
Accretion of discounts on convertible notes payable   (63,414)   (55,463)   (233,064)
Gain on settlement of debt (Note 4)   11,820        19,543 
Impairment of equipment   (205,508)       (205,508)
Interest expense   (3,164)   (179)   (9,370)
Interest income           1,075 
                
Total other income (expense)   (260,266)   (55,642)   (427,324)
                
Net loss   (988,849)   (3,815,548)   (6,252,814)
                
Net loss per share, basic and diluted   (0.01)   (0.05)     
                
Weighted average number of shares outstanding , basic and diluted   85,258,482    83,669,358      

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

F-3
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Consolidated Statement of Stockholders’ Deficit

(Expressed in US dollars)

 

   Preferred stock   Common stock   Additional
paid-in
   Common
stock
   Deficit
accumulated
during the
development
     
   Number   Amount
$
   Number   Amount
$
   capital
$
   issuable
$
   stage
$
   Total
$
 
                                 
Balance, February 20, 2009 (date of inception)                                
                                         
Common stock issued for cash at $0.0001 per share           48,832,000    4,883    (2,441)           2,442 
                                         
Net loss for the period                           (545,892)   (545,892)
                                         
Balance, December 31, 2009           48,832,000    4,883    (2,441)       (545,892)   (543,450)
                                         
Common stock issued for cash at $0.25 per share           160,000    16    19,984            20,000 
                                         
Common stock issued to settle debt           126,000    13    15,737            15,750 
                                         
Share subscriptions received                       10,000        10,000 
                                         
Intrinsic value of beneficial conversion feature for convertible note payable                   33,333            33,333 
                                         
Net loss for the year                           (307,146)   (307,146)
                                         
Balance, December 31, 2010           49,118,000    4,912    66,613    10,000    (853,038)   (771,513)
                                         
Common stock issued for cash at $0.25 per share           2,440,000    244    304,756    (10,000)       295,000 
                                         
Common stock issued for cash at $0.20 per share           200,000    20    19,980            20,000 
                                         
Common stock cancelled           (4,010,000)   (401)   200            (201)
                                         
Common stock issued for conversion of notes payable           1,366,666    136    99,864              100,000 
                                         
Intrinsic value of beneficial conversion feature for convertible notes payable                   98,794            98,794 
                                         
Net loss for the year                           (595,379)   (595,379)
                                         
Balance, December 31, 2011           49,114,666    4,911    590,207        (1,448,417)   (853,299)

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

F-4
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Consolidated Statement of Stockholders’ Deficit

(Expressed in US dollars)

 

   Preferred stock   Common stock   Additional
paid-in
   Common stock   Deficit
accumulated
during the
development
     
   Number   Amount
$
   Number   Amount
$
   capital
$
   issuable
$
   stage
$
   Total
$
 
                                 
Balance, December 31, 2011           49,114,666    4,911    590,207        (1,448,417)   (853,299)
                                         
Intrinsic value of beneficial conversion feature for convertible notes payable                   3,226            3,226 
                                         
Conversion of debt           2,255,194    225    225,275            225,500 
                                         
January 6, 2012 – recapitalization transactions:                                        
                                         
Shares of Quest Water Global, Inc.           110,500,000    111    80,389        (87,291)   (6,791)
                                         
Preferred stock issued   2    1                        1 
                                         
Common stock returned and cancelled for spin out of RPM Dental, Inc. (Note 1)           (80,000,000)   (80)   (49,920)       56,791    6,791 
                                         
Common share issued for Quest Water Solutions, Inc. (Note 1)           51,369,860                     
                                         
Recapitalization           (51,369,860)   (32)   (30,468)       30,500     
                                         
Common stock issued for cash at $0.25 per share           2,708,000    3    676,997            677,000 
                                         
Common stock issued for conversion of notes payable           256,000    1    63,999             64,000 
                                         
Stock-based compensation for stock options granted                   2,798,455            2,798,455 
                                         
Intrinsic value of beneficial conversion feature for convertible notes payable                   121,250            121,250 
                                         
Common stock issuable                       168,000        168,000 
                                         
Net loss for the year                           (3,815,548)   (3,815,548)
                                         
Balance, December 31, 2012   2    1    84,833,860    5,139    4,479,410    168,000    (5,263,965)   (611,415)

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

F-5
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Consolidated Statement of Stockholders’ Deficit

(Expressed in US dollars)

 

   Preferred stock   Common stock   Additional
paid-in
   Common
stock
   Deficit
accumulated
during the
development
     
   Number   Amount
$
   Number   Amount
$
   capital
$
   issuable
$
   stage
$
   Total
$
 
                                 
Balance, December 31, 2012   2    1    84,833,860    5,139    4,479,410    168,000    (5,263,965)   (611,415)
                                         
Common stock issued for cash at $0.50 per share           286,000    1    142,999    (143,000)        
                                         
Common stock issued for cash at $0.10 per share           250,000        25,000            25,000 
                                         
Common stock issued for cash at $0.40 per share           62,500        25,000    (25,000)        
                                         
Common stock issued for conversion of note payable           62,500        25,000            25,000 
                                         
Common stock issued for consulting services           255,000        52,200            52,200 
                                         
Common stock issuable                       23,000        23,000 
                                         
Net loss for the year                           (988,849)   (988,849)
                                         
Balance, December 31, 2013   2    1    85,749,860    5,140    4,749,609    23,000    (6,252,814)   (1,475,064)

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

F-6
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Consolidated Statement of Cash Flows

(Expressed in US dollars)

 

   Year ended
December 31,
2013
   Year ended
December 31,
2012
   Accumulated from
February 20, 2009
(date of inception)
to December 31,
 2013
 
   $   $   $ 
             
Operating Activities:            
                
Net loss for the period   (988,849)   (3,815,548)   (6,252,814)
                
Adjustments to reconcile net loss to net cash used in operating activities:               
                
Accretion of discount on convertible note payable   63,414    55,463    233,064 
Amortization   58,567    64,465    133,056 
Impairment of equipment   205,508        205,508 
Gain on settlement of debt   (11,820)       (19,722)
Stock-based compensation   70,200    2,798,455    2,868,655 
                
Changes in operating assets and liabilities:               
                
Accounts receivable   (1,293)       (1,293)
Prepaid expenses       4,594    (7,835)
Accounts payable   101,735    92,389    376,418 
Accrued liabilities   (5,754)   (20,060)   4,591 
Due to related parties   478,166    (13,810)   980,048 
Net cash used in operating activities   (30,127)   (834,052)   (1,480,325)
Investing Activities:               
                
Purchase of equipment       (64,096)   (349,832)
Net cash used in investing activities       (64,096)   (349,832)
                
Financing Activities:               
                
Proceeds from convertible notes payable       221,820    601,320 
Proceeds from loans payable           208,000 
Repayment of loans payable       (200,000)   (200,000)
Proceeds from issuance of common stock   30,000    845,000    1,222,442 
Net cash provided by financing activities   30,000    866,820    1,831,762 
                
Increase (decrease) in cash   (127)   (31,328)   1,605 
                
Cash, beginning of period   1,732    33,060     
Cash, end of period   1,605    1,732    1,605 
                
Non-cash investing and financing activities:               
Common stock issued to settle accounts payable           11,750 
Quest notes conversion to common stock prior to recapitalization transaction (Notes 4(a) and (b))       225,500    325,500 
Common stock issued pursuant to the conversion of notes payable   25,000    64,000    89,000 
Common stock issued to settle loans payable           4,000 
                
Supplemental disclosures:               
Interest paid           1,586 
Income tax paid            

 

(The accompanying notes are an integral part of these consolidated financial statements)

 

F-7
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

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:

 

  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, including the disclosures from inception, are that of Quest.

 

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.

 

  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.

 

  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 December 31, 2013, the Company has a working capital deficiency of $1,486,333 of which $980,248 is owed to the two principal shareholders (Notes 5 and 11), and an accumulated deficit of $6,252,814. 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.

 

F-8
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

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.

 

  (b)Use of Estimates

 

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.

 

  (c)Equipment

 

Equipment is stated at cost. The Company amortizes the cost of equipment over their estimated useful lives 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

 

  (d)Long-lived Assets

 

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.

 

F-9
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

2.Summary of Significant Accounting Policies (continued)

 

  (e)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 receivable, accounts payable, convertible notes payable, loan 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.

 

  (f)Loss Per Share

 

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.

 

  (g)Comprehensive Loss

 

ASC 220, “Comprehensive Income”, establishes standards for the reporting and presentation of comprehensive income (loss) and its components in the financial statements. As at December 31, 2013 and 2012, the Company had no items representing comprehensive income or loss.

 

F-10
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

2.Summary of Significant Accounting Policies (continued)

 

  (h)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.

 

  (i)Income Taxes

 

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 December 31, 2013 and 2012, 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 2009. 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 years ended December 31, 2013 and 2012, there were no charges or provisions for interest or penalties.

 

  (j)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.

 

3.Equipment

 

   Cost   Accumulated Amortization   Impairment   Net Carrying
Value
December 31, 2013
   Net Carrying
Value
December 31, 2012
 
   $   $   $   $   $ 
                     
Computer equipment   25,971    18,276        7,695    13,991 
Demonstration equipment   314,762    109,254    (205,508)       256,885 
Furniture and equipment   7,426    3,853        3,573    4,467 
                          
    348,159    131,383    (205,508)   11,269    275,343 

 

F-11
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

The Company has fully impaired its two AquaTap demonstration units as it has been determined that they will not be used in a commercial application.

 

4.Convertible Notes Payable

 

  (a)On September 11, 2011, Quest received proceeds of $200,000 and issued a convertible promissory note for $200,000, which bears interest at 10% per annum, is unsecured, and due on demand. The unpaid amount of principal and accrued interest can be converted at any time at the holder’s option at $0.20 per share of common stock. 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 $50,000 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 $200,000. On January 5, 2012, Quest issued 2,000,000 shares of common stock pursuant to the conversion of the $200,000 note.

 

  (b)On October 3, 2011, Quest received proceeds of $25,500 and issued three separate convertible notes which are non-interest bearing, unsecured, and due on demand. The unpaid amount can be converted at any time at the holders’ option at $0.20 per share of common stock. In accordance with ASC 470-20, Quest recognized the intrinsic value of the embedded beneficial conversion feature of $6,375 as additional paid-in capital and charged to operations over the term of the convertible notes up to their face value of $25,500. On January 5, 2012, Quest issued 255,000 shares of common stock pursuant to the conversion of the $25,500 note.

 

  (c)During December 2011, Quest received proceeds of $54,000 and issued three separate convertible notes which are non-interest bearing, unsecured, and due on demand. The unpaid amount can be converted at any time at the holders’ option at $0.25 per unit. Each unit includes one share of common stock of the Company and one three-year share purchase warrant with an exercise price of $0.50. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature of $17,419 as additional paid-in capital and charged to operations over the term of the convertible notes to accrete to their face value of $54,000. On May 4, 2012, the Company issued 216,000 shares of common stock pursuant to the conversion of the note.

 

  (d)On January 3, 2012, Quest received proceeds of $10,000 and issued a convertible note which is non-interest bearing, unsecured, and due on demand. The unpaid amount can be converted at any time at the holder’s option at $0.25 per unit. Each unit includes one share of common stock of the Company and one three-year share purchase warrant with an exercise price of $0.50. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature of $3,226 as additional paid-in capital and charged to operations over the term of the convertible notes to accrete to their face value of $10,000. On May 4, 2012, the Company issued 40,000 shares of common stock pursuant to the conversion of the note.

 

  (e)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, 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. During the year ended December 31, 2013, $75,000 (2012 - $18,750) had been accreted, increasing the carrying value to $135,000 (2012 - $90,000).

 

  (f)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. During the year ended December 31, 2013, $17,708 (2012 - $3,125) had been accreted, increasing the carrying value to $17,708 (2012 - $5,208).

 

F-12
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

4.Convertible Notes Payable (continued)

 

  (g)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.

 

  (h)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.

 

5. Related Party Transactions 

 

  (a)As at December 31, 2013, a total of $404,193 (2012 - $182,191) is owed to the President of the Company, which is non-interest bearing, unsecured, and due on demand.
    
  (b)As at December 31, 2013, a total of $576,055 (2012 - $319,891) is owed to the Vice President of the Company, which is non-interest bearing, unsecured, and due on demand.
    
  (c)For the year ended December 31, 2013, the Company incurred a total of $300,000 (2012 - $300,000) in management fees to the President and the Vice President of the Company. The Company also incurred stock-based compensation of $1,939,525 for stock options granted to the President and the Vice President of the Company during the year ended December 31, 2012, which is included in management fees.
    
  (d)Subsequent to year end the Company issued a total of 5,500,000 shares of common stock in settlement of $660,000 of outstanding management fees.

 

6. Common Stock

 

  (a)On January 5, 2012, Quest issued 2,025,500 shares of common stock pursuant to the conversion of $225,500 in notes payable. Refer to Notes 4(a) and (b).
    
  (b)On January 6, 2012, the Company issued 51,369,860 shares of common stock for the acquisition of Quest.
    
  (c)On January 6, 2012, the Company issued 2,398,000 units at a price of $0.25 per unit for proceeds of $599,500. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.50 per share expiring on January 6, 2015.
    
  (d)On February 10, 2012, the Company issued 310,000 units at a price of $0.25 per unit for proceeds of $77,500. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.50 per share expiring on February 10, 2015.
    
  (e)On February 20, 2012, the Company completed a 20 for 1 forward split of its common stock. All share amounts have been retroactively adjusted for all periods presented.
    
  (f)On May 4, 2012, the Company issued 216,000 shares of common stock at $0.25 per share pursuant to the conversion of the $54,000 note payable. Refer to Note 4(c).
    
  (g)On May 4, 2012, the Company issued 40,000 shares of common stock at $0.25 per share pursuant to the conversion of the $10,000 note payable. Refer to Note 4(d).
    
  (h)On January 18, 2013, the Company issued 286,000 units at a price of $0.50 per unit for proceeds of $143,000, which was included in common stock issuable as at December 31, 2012. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.75 per share expiring on July 15, 2015.

 

F-13
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

6. Common Stock (continued)

 

  (i)On February 21, 2013, the Company issued 62,500 units at a price of $0.40 per unit for proceeds of $25,000, which was included in common stock issuable as at December 31, 2012. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.65 per share expiring on October 15, 2015.
    
  (j)On October 3, 2013, the Company issued 30,000 shares of common stock with a fair value of $2,700 pursuant to a consulting agreement. Refer to Note 9(d).
    
  (k)On October 15, 2013, the Company issued 62,500 shares of common stock pursuant to the conversion of $25,000 in note payable. Refer to Note 4(g).
    
  (l)On October 15, 2013, the Company issued 250,000 shares of common stock at a price of $0.10 per share for proceeds of $25,000.
    
  (m)On November 19, 2013, the Company issued 225,000 shares of common stock with a fair value of $49,500 pursuant to a consulting agreement. Refer to Note 9(f).
    
  (n)As at December 31, 2013, the Company had $18,000 in common stock issuable for the fair value of 100,000 shares of common stock pursuant to a consulting agreement. Refer to Notes 9(e) and 11(d).
    
  (o)As at December 31, 2013, 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, 2011         
Issued    2,708,000    0.50 
Balance, December 31, 2012    2,708,000    0.50 
Issued    348,500    0.73 
Balance, December 31, 2013    3,056,500    0.53 

 

As at December 31, 2013, 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        

 

F-14
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

8.Stock Options

 

In May 2012, the Company implemented a stock option plan pursuant to which stock options may be granted to directors, officers, employees and consultants of the Company to a maximum of 10% of the issued and outstanding common stock of the Company. The exercise price of each stock option will be equal to the market price at the date of grant. Stock options are exercisable over periods up to five years and vesting periods can be imposed at the discretion by the Board of Directors.

 

On May 30, 2012, the Company granted 5,050,000 stock options at an exercise price of $0.90 per share expiring on May 30, 2015 to officers, directors, employees and consultants. The fair value for these stock options was estimated at the date of grant using the Black-Scholes option-pricing model assuming a weighted average expected life of 3 years, a risk-free rate of 0.38%, an expected volatility of 100%, and a 0% dividend yield. The weighted average fair value of stock options granted was $0.54 per option. For the total fair value of $2,798,458, $1,939,525 was expensed as management fees and $858,933 was expensed as consulting fees.

 

    Number
of options
   Weighted
average
exercise price
$
 
          
Outstanding, December 31, 2011         
Granted    5,050,000    0.90 
Outstanding, December 31, 2012 and 2013    5,050,000    0.90 

 

Additional information regarding stock options outstanding as at December 31, 2013 is as follows:

 

    Outstanding and exercisable 
Range of
exercise prices
$
   Number of
shares
   Weighted
average
remaining
contractual life
(years)
   Weighted
average
exercise
price
$
 
0.90    5,050,000    1.4    0.90 

 

As at December 31, 2013, the aggregate intrinsic value of stock options outstanding is $nil.

 

9.Commitments

 

  (a)In January 2011, the Company signed a lease for office premises and agreed to pay annual basic rent of $12,024 plus taxes up to January 2014.
    
  (b)On November 1, 2011, the Company entered into a management agreement with the President of the Company whereby it is obligated to pay $12,500 per month starting on October 3, 2011 to November 1, 2016.

 

 The agreement may be terminated by written notice. Upon termination, the President shall receive a termination fee equal to the sum of:

 

  (i)Buy-out of any outstanding stock options for a price equal to the fair market value of the Company’s common stock multiplied by the number of shares under options and less the exercise price; plus
    
  (ii)The greater of:

 

  The aggregate remaining fees for the unexpired remainder of the term; or
  One annual fee plus one month fee for each year served after November 1, 2011.

 

F-15
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

9.Commitments (continued)

 

  (c)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.

 

  (d)On September 19, 2013, the Company entered into a three month agreement for consulting services whereby the Company agreed to issue 30,000 shares of common stock. Refer to Notes 6(j) and 11(a).

 

  (e)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 Notes 6(n) and 11(d).

 

  (f)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. Refer to Note 6(m). 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 shares of the Company at the same price per share as the Company’s current financing round.

 

10.Income Taxes

 

The Company has net operating losses carried forward of $2,953,107, available to offset taxable income in future years which expires in fiscal 2033.

 

The Company is subject to US federal and state income taxes at a rate of 34% and Canadian federal and provincial income taxes at a statutory rate of 25%. The reconciliation of the provision for income taxes at the consolidated corporate tax rate compared to the Company’s income tax expense as reported is as follows:

 

   2013
$
   2012
$
 
         
Income tax recovery at statutory rate   336,209    1,297,283 
           
Permanent differences   (45,429)   (970,329)
Valuation allowance change   (290,780)   (326,954)
           
Provision for income taxes        

 

F-16
 

 

QUEST WATER GLOBAL, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2013

(Expressed in US dollars)

 

10.Income Taxes (continued)

 

The significant components of deferred income tax assets and liabilities as at December 31, 2013 and 2012 are as follows:

 

   2013
$
   2012
$
 
         
Net operating losses carried forward   1,000,037    779,130 
Equipment   69,873     
           
Valuation allowance   (1,069,910)   (779,130)
           
Net deferred income tax asset        

 

The Company is in arrears on filing its statutory corporate income tax returns and the amounts presented above are based on estimates. The actual losses available could differ from these estimates.

 

11.Subsequent Events

 

  (a)On January 1, 2014, the Company extended the agreement referred to in Note 9(d) for consulting services for another three month period whereby the Company agreed to issue an additional 30,000 shares of common stock. The shares were subsequently issued on February 18, 2014.
    
  (b)On January 13, 2014, the Company entered into a one year agreement effective January 15, 2014 for consulting services whereby the Company agreed to pay a fee of $100,000 by issuance of 500,000 shares of common stock. The shares were subsequently issued on February 18, 2014.
    
  (c)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.
    
  (d)On February 18, 2014, the Company issued 200,000 shares of common stock pursuant to a consulting agreement. Refer to Notes 6(n) and 9(e).
    
  (e)On February 25, 2014, the Company modified the exercise price of 1,550,000 stock options from $0.90 to $0.19 per share. The Company terminated 1,750,000 stock options granted to the President of the Company and 1,750,000 stock options granted to the Vice President of the Company.
    
  (f)On February 26, 2014, the Company granted 3,500,000 stock options at an exercise price of $0.19 per share expiring on May 30, 2015 to officers, directors, employees and consultants. Of these stock options, 1,375,000 were granted to the President of the Company, and 1,375,000 were granted to the Vice President of the Company.
    
  (g)On March 5, 2014, the Company granted 250,000 stock options at an exercise price of $0.19 per share expiring on May 30, 2015 to consultants.
    
  (h)On April 8, 2014, the Company entered into debt conversion agreements with the President and the Vice President of the Company whereby the Company issued 5,500,000 shares of common stock at a price of $0.12 per share pursuant to the conversion of $660,000 in accrued management fees.

 

F-17
 

 

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, management, with the participation of our Chief Executive and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, management concluded that our disclosure controls and procedures were not effective due to certain deficiencies in our internal control over financial reporting.

 

Internal Control over Financial Reporting

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013, management determined that there were deficiencies that constitute, both individually and in the aggregate, a material weakness, as described below.

 

1. Certain entity level controls establishing a “tone at the top” were considered material weaknesses. We have no independent directors. We do not have a policy on fraud or a whistleblower policy.
   
2. Management override of existing controls is possible given that our only directors are also our officers.
   
3. We do not have a system in place to review and monitor internal control over financial reporting. We do not maintain a sufficient complement of personnel to carry out ongoing monitoring responsibilities and ensure effective internal control over financial reporting.

 

These deficiencies resulted in a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis by our internal control. Management is currently evaluating remediation plans for the deficiencies and will implement changes as time and financial resources allow.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

22
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

As of April 14, 2014, the names, ages and positions of our directors and executive officers were as follows:

 

Name   Age   Position
John Balanko   54   Chairman, President, Chief Executive Officer, Director
Peter Miele   55   Vice President, Chief Financial Officer, Secretary, Director

 

John Balanko – Chairman, President, Chief Executive Officer, Director

 

Mr. Balanko was appointed as our Chairman, President, Chief Executive Officer and Director on January 6, 2012. Mr. Balanko co-founded Quest and has served as its Chairman, President and Chief Executive Officer since the company’s inception in October 2008.

 

From 2005 to 2008, Mr. Balanko was the founder and a managing partner of Environmental Water Solutions (“EWS”), a proprietorship focused on the research and development of atmospheric water generators for commercial applications. During his tenure at EWS, he collaborated with a large, custom air handling manufacturer in San Diego, CA to design, manufacture, and successfully demonstrate a commercial atmospheric water generator. From 2002 to 2005, Mr. Balanko was the managing director and founder of Liquid Air San Diego, a distributor for parent company H2O Liquid Air of Long Beach, CA. Liquid Air San Diego provided sales and service of atmospheric water generators to businesses throughout San Diego County.

 

From 1994 to 1997, Mr. Balanko held the position of Head of Corporate Finance with Fountain House Holding Corp., a company listed on the TSX Venture Exchange in Canada, where he was also appointed to the Board of Directors in 1995. In 1987, after completing the Canadian Securities Course, Mr. Balanko received the designation of Licensed Investment Representative from the Investment Dealers Association of Canada. From 1987 to 1994, he pursued a career as a financial advisor and investment broker with such firms as C.M. Oliver & Co., Yorkton Securities, Pacific International Securities and Royal Trust Company of Canada.

 

Mr. Balanko has an extensive 29 year entrepreneurial background in corporate finance, sales, marketing, contract and license negotiation, project management and business development. Over the past 20+ years, he has held executive positions with over a dozen private and public companies. Mr. Balanko’s diverse managerial and executive experience gives him unique insights into our business, relationships, challenges, opportunities and operations.

 

Peter Miele – Vice President, Chief Financial Officer, Secretary, Director

 

Mr. Miele was appointed as our Vice President, Secretary and Director on January 6, 2012, and as our Chief Financial Officer on April 13, 2012. He also co-founded Quest and has served as its Executive Vice President and Director since the company’s inception in October 2008. Mr. Miele has over 25 years of entrepreneurial and executive experience and has been involved with public and private companies in strategic management framework, business development, marketing, design and branding, along with holding directorship and Corporate Development positions.

 

23
 

 

Mr. Miele has served as a member of the Board of Directors of Fibresources Corporation, a company formerly listed on the TSX Venture Exchange in Canada, since 2006. In 2004, Mr. Miele was involved in the successful launch of a bottled water company. Innovative and creative, Mr. Miele was involved in the strategic and corporate development of the company’s overall corporate branding, as well as creating and facilitating the company’s marketing and production of new brands of bottled water products.

 

Neither Mr. Balanko nor Mr. Miele has been a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of the Exchange Act, or any company registered as an investment company under the Investment Company Act of 1940, during the past five years.

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until our next annual general meeting of stockholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until removed by the Board.

 

All of our officers and directors will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. Our bylaws provide that officers are appointed annually by our Board and each executive officer serves at the discretion of our Board.

 

Significant Employees

 

Other than our executive officers, we do not expect any other individuals to make a significant contribution to our business.

 

Family Relationships

 

There are no family relationships among our directors, executive officers or persons nominated or chosen by us to become directors or executive officers.

 

Legal Proceedings

 

None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past ten years:

 

  any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
  any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

24
 

 

  being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
     
  being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated any federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated;
     
  being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any law or regulation prohibiting mail or wire fraud or fraud in connection with any business activity;
     
  being the subject of, or a party to, any judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated relating to an alleged violation of any federal or state securities or commodities law or regulation or any law or regulation respecting financial institutions or insurance companies; or
     
  being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any stock, commodities or derivatives exchange or other self-regulatory organization.

 

Audit Committee

 

Our Board of Directors established an audit committee on January 6, 2012. Since that date, John Balanko and Peter Miele have acted as the members of the audit committee. Neither Mr. Balanko nor Mr. Miele are independent members of the committee according to NASDAQ Rule 5605(a)(2) and National Instrument 52-110 of the Canadian Securities Administrators (“NI 52-110”), since both of them are our executive officers. The Board of Directors adopted a charter for the audit committee on January 6, 2012, a copy of which was filed as Exhibit 99.1 to our annual report for the year ended December 31, 2011.

 

The audit committee is responsible for reviewing both our interim and annual financial statements. For the purposes of performing their duties, the members of the audit committee have the right, at all times, to inspect all our books and financial records as well as those of our subsidiaries, and discuss with management and our auditors any accounts, records and matters relating to our financial statements. The audit committee meets periodically with management and annually with our auditors.

 

Since the commencement of our most recently completed financial year, our Board of Directors has not failed to adopt a recommendation of the audit committee to nominate or compensate an auditor.

 

Our Board of Directors has determined that we do not have an audit committee financial expert on our Board carrying out the duties of the audit committee. The Board has determined that the cost of hiring a financial expert to act as a director and to be a member of the audit committee or otherwise perform audit committee functions outweighs the benefits of having an audit committee financial expert on the Board.

 

25
 

 

Nomination Procedures for Appointment of Directors

 

We do not have a nominating committee. Our Board of Directors selects individuals to stand for election as members of the Board, and does not have a policy with regards to the consideration of any director candidates recommended by our security holders. Our Board has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when it considers a nominee for a position on our Board. If security holders wish to recommend candidates directly to our Board, they may do so by communicating directly with our President at the address specified on the cover of this annual report.

 

Code of Ethics

 

We have not yet adopted a code of ethics because we have not yet finalized the content of such a code.

 

Item 11. Executive Compensation

 

The following table sets forth all compensation awarded to, earned by or paid to our principal executive officer and our most highly compensated other executive officer during the years ended December 31, 2013 and 2012. We do not have any other executive officers and no other individual received total compensation from us in excess of $100,000 during those years. Pursuant to Item 402(a)(5) of Regulation S-K we have omitted certain columns from the table since there was no compensation awarded to, earned by or paid to these individuals required to be reported in such columns in either year.

 

Summary Compensation Table
Name and Principal Position  Year
ended
December 31
   Salary
($)
   Option Awards
($) (1)
   Total
($)
 
John Balanko, Chief Executive Officer (2)   2013    150,000    -    150,000 
    2012    150,000    969,763 (3)   1,119,763 
                     
Peter Miele, Chief Financial Officer (4)   2013    150,000    -    150,000 
    2012    150,000    969,763 (3)   1,119,763 

 

(1) See Note 8 of the notes to our audited consolidated financial statements included in this annual report for a description of the assumptions made in the valuation of option awards.
   
(2) John Balanko was appointed as our Chairman, President, Chief Executive Officer and director on January 6, 2012 and has served as the Chairman, President and Chief Executive Officer of Quest since the company’s inception in October 2008.
   
(3) Represents stock-based compensation related to options vesting during the year ended December 31, 2012.
   
(4) Peter Miele was appointed as our Vice President, Secretary and Director on January 6, 2012 and our Chief Financial Officer on April 13, 2012, and has served as Quest’s Executive Vice President and Director since the company’s inception in October 2008.

 

26
 

 

Outstanding Equity Awards at Fiscal Year-End

 

On May 30, 2012, we granted options to purchase 3,500,000 shares of our common stock to our executive officers. The following table sets forth information relating to the options granted to our principal executive officer and most highly compensated other executive officer as of December 31, 2013.

 

Outstanding Equity Awards at Fiscal Year-End
Name  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(1)
   Option
Exercise
Price
($)
   Option Expiration
Date
John Balanko   1,750,000    0.90   May 30, 2015
Peter Miele   1,750,000    0.90   May 30, 2015

 

(1)These options vested on the grant date of May 30, 2012.

 

On February 25, 2014, we terminated the 1,750,000 options granted to Mr. Balanko and the 1,750,000 options granted to Mr. Miele pursuant to option termination agreements with those individuals. On the following day, we granted options to purchase an aggregate of 3,500,000 shares of our common stock exercisable at the closing price of our common stock on the OTCQB on that day to certain of our insiders, employee/consultants and members of our advisory board on identical vesting terms and with identical expiry dates. Of these new options, we granted 1,375,000 to Mr. Balanko and 1,375,000 to Mr. Miele.

 

Management Agreements

 

On November 1, 2011, Quest entered into management agreements with each of John Balanko and Peter Miele pursuant to which Quest is obligated to pay Mr. Balanko and Mr. Miele a base fee of $12,500 per month, in advance, from October 3, 2011 until November 1, 2016. Either party may terminate the agreement upon written notice, but upon termination, each of Mr. Balanko and Mr. Miele are entitled to receive a termination fee equal to the sum of

 

  the buy-out of any outstanding stock options of Quest 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 thereof; plus
     
  the greater of (i) the aggregate remaining base fees for the unexpired remainder of the term or (ii) one annual base fee plus one month of base fee for each year, or portion thereof, served after October 3, 2011.

 

27
 

 

Pension, Retirement or Similar Benefit Plans

 

There are no arrangements or plans in which we provide pension, retirement or similar benefits to our directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted from time to time at the discretion of the Board of Directors or a committee thereof. Other than our management agreements with John Balanko and Peter Miele, we have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control.

 

Compensation Committee

 

We currently do not have a compensation committee of the Board of Directors or a committee performing similar functions. It is the view of the Board that it is appropriate for us not to have such a committee because of our size and because the Board as a whole participates in the consideration of executive compensation.

 

Compensation of Directors

 

Our directors did not receive any compensation for their services as directors from our inception on February 20, 2009 to December 31, 2013. We have no formal plan for compensating our directors for their services in the future in their capacity as directors, although such directors are expected in the future to receive options to purchase shares of our common stock as awarded by our Board of Directors or any compensation committee that may be established.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth certain information regarding our common stock and our Series A Voting Preferred Stock beneficially owned as of April 14, 2014 for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.

 

For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of the date of this annual report. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of the date of this annual report is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.

 

28
 

 

Title of Class  Name and Address of  Beneficial Owner  Amount and
Nature of
Beneficial
Ownership
   Percent of Class (1) 
Common Stock  John Balanko (2)
2030 Marine Drive, Suite 302
North Vancouver, British Columbia
Canada V7P 1V7
   18,775,000 (3)   21.4 
Common Stock  Peter Miele (4)
2030 Marine Drive, Suite 302
North Vancouver, British Columbia
Canada V7P 1V7
   19,175,000 (5)   21.8 
All Officers and Directors as a Group   37,950,000    43.9 
Series A Voting Preferred Stock (6)  John Balanko (2)
2030 Marine Drive, Suite 302
North Vancouver, British Columbia
Canada V7P 1V7
   1    50 
Series A Voting Preferred Stock (6)  Peter Miele (4)
2030 Marine Drive, Suite 302
North Vancouver, British Columbia
Canada V7P 1V7
   1    50 
All Officers and Directors as a Group   2    100 

 

(1) Based on 86,479,860 issued and outstanding shares of our common stock as of April 14, 2013.
   
(2) John Balanko was appointed as our Chairman, President, Chief Executive Officer and director on January 6, 2012.
   
(3) Includes 17,400,000 shares of our common stock and options to purchase 1,375,000 shares of our common stock at an exercise price of $0.19 per share until May 30, 2015.
   
(4) Peter Miele was appointed as our Vice President, Secretary and director on January 6, 2012, and as our Chief Financial Officer on April 13, 2012.
   
(5) Includes 17,400,000 shares of our common stock and options to purchase 1,375,000 shares of our common stock at an exercise price of $0.19 per share until May 30, 2015 owned by Peter Miele directly, and 400,000 shares of our common stock owned by Anne Marie Miele, the spouse of Mr. Miele.

 

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(6) Each holder of our Series A Voting Preferred Stock is entitled to the number of votes equal to the quotient derived by dividing the total number of outstanding shares of Series A Voting Preferred Stock into a number equal to the quotient derived by dividing 0.4285 into the total number of votes of our common stock and any other capital stock of the Company (other than the Series A Voting Preferred Stock) having general voting rights. Holders of Series A Voting Preferred Stock are entitled to vote on all matters on which the holders of our common stock are entitled to vote. The holders of shares of our common stock and the holders of shares of any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of our stockholders.

 

Changes in Control

 

As of April 14, 2014, we were not aware of any arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in our control.

 

Securities Authorized For Issuance Under Equity Compensation Plans

 

The following table sets forth information with respect to compensations plans, including individual compensation arrangements, under which our common stock is authorized for issuance as of December 31, 2013. As described elsewhere in this annual report, on May 30, 2012 we granted incentive stock options to purchase an aggregate of 3,500,000 shares of our common stock to our executive officers exercisable at a price of $0.90 per share until May 30, 2015. On the same date, we granted incentive stock options to purchase an additional 1,550,000 shares of our common stock to certain employee/consultants and members of our advisory board on the same terms. In each case, the options vested immediately.

 

Plan Category  Number of Securities to
be Issued upon
Exercise of Outstanding
Options, Warrants and
Rights
(a)
   Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
   Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
(c)
 
Plans approved by security holders   -    -    - 
Plans not approved by security holders   3,056,500 (1)   0.53    - 
    5,050,000 (2)   0.90    3,524,986 (3)

 

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(1) Includes warrants to purchase 2,398,000 shares of our common stock at an exercise price of $0.50 per share until January 6, 2015, warrants to purchase 310,000 shares of our common stock at an exercise price of $0.50 per share until February 10, 2015, warrants to purchase 286,000 shares of our common stock at an exercise price of $0.75 per share until July 15, 2015, and warrants to purchase 62,500 shares of our common stock at an exercise price of $0.65 per share until October 15, 2015.
   
(2) Includes options to purchase 5,050,000 shares of our common stock at an exercise price of $0.90 per share until May 30, 2015.
   
(3) Represents unissued options to purchase shares of our common stock under the rolling 10% stock option plan we adopted on May 30, 2012.

 

On February 25, 2014, we terminated the 1,750,000 options granted to Mr. Balanko and the 1,750,000 options granted to Mr. Miele pursuant to option termination agreements with those individuals. On the following day, we granted options to purchase an aggregate of 3,500,000 shares of our common stock exercisable at the closing price of our common stock on the OTCQB on that day to certain of our insiders, employee/consultants and members of our advisory board on identical vesting terms and with identical expiry dates. Of these new options, we granted 1,375,000 to Mr. Balanko and 1,375,000 to Mr. Miele.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

On January 6, 2012, we entered into a Share Exchange Agreement with Josh Morita, our former President, Chief Executive officer and director, Quest and the former shareholders of Quest (the “Quest Shareholders”) pursuant to which we acquired all of the outstanding capital stock of Quest from the Quest Shareholders in exchange for 2,568,493 pre-Forward Split (51,369,860 post-Forward Split) shares of our common stock. The shares issued to the Quest Shareholders in the Share Exchange constituted approximately 62.74% of our issued and outstanding shares of common stock as of and immediately after the consummation of the Share Exchange. As a result of the Share Exchange, Quest became our wholly owned subsidiary and John Balanko and Peter Miele, the former shareholders of Quest and our current Chairman, President, Chief Executive Officer and director, and current Vice President, Chief Financial Officer, Secretary and director, respectively, became our principal stockholders.

 

In connection with the Share Exchange, on January 6, 2012, we issued 1,740,000 pre-Forward Split (34,800,000 post-Forward Split) shares of our common stock to Mr. Balanko and Mr. Miele. Mr. Balanko and Mr. Miele each also received one share of our newly designated Series A Voting Preferred Stock. Each holder of our Series A Voting Preferred Stock is entitled to the number of votes equal to the quotient derived by dividing the total number of outstanding shares of Series A Voting Preferred Stock into a number equal to the quotient derived by dividing 0.4285 into the total number of votes of our common stock and any other capital stock of the Company (other than the Series A Voting Preferred Stock) having general voting rights.

 

Also in connection with the Share Exchange, on January 6, 2012, we entered into an Agreement of Sale with Mr. Morita pursuant to which we sold our equity interest in RPM Kentucky to Mr. Morita in exchange for 4,000,000 pre-Forward Split (80,000,000 post-Forward Split) shares of our common stock that were subsequently cancelled.

 

Also in connection with the Share Exchange, on January 6, 2012, we entered into Lock-Up/Leak-Out Agreements with Mr. Balanko and Mr. Miele pursuant to which each of them agreed not to transfer any of our capital stock held directly or indirectly by him for a 12-month period and for the six months thereafter to limit any transfers to 0.5% of the shares of our common stock, up to a maximum of 5,000 pre-Forward Split (100,000 post-Forward Split) shares on any single day.

 

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On May 30, 2012, we granted options to purchase 1,750,000 shares of our common stock to Mr. Balanko and options to purchase 1,750,000 shares of our common stock to Mr. Miele. These options vested immediately and are exercisable at a price of $0.90 per share until May 30, 2015. On February 25, 2014, we terminated the 1,750,000 options granted to Mr. Balanko and the 1,750,000 options granted to Mr. Miele pursuant to option termination agreements with those individuals. On the following day, we granted options to purchase an aggregate of 3,500,000 shares of our common stock exercisable at the closing price of our common stock on the OTCQB on that day to certain of our insiders, employee/consultants and members of our advisory board on identical vesting terms and with identical expiry dates. Of these new options, we granted 1,375,000 to Mr. Balanko and 1,375,000 to Mr. Miele.

 

As at December 31, 2013, we owed $404,193 to Mr. Balanko, which amount is unsecured, non-interest bearing and due on demand.

 

As of December 31, 2013, we owed $576,055 to Mr. Miele, which amount is unsecured, non-interest bearing and due on demand.

 

During the years ended December 31, 2013 and 2012, we incurred a total of $300,000 and $300,000 in management fees to Mr. Balanko and Mr. Miele, respectively. We also incurred stock-based compensation of $1,939,525 for stock options granted to Mr. Balanko and Mr. Miele during the year ended December 31, 2012.

 

Other than as described above, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of those persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last two fiscal years.

 

Director Independence

 

The OTCQB on which our common stock is quoted on does not have any director independence requirements. We currently use the definition in NASDAQ Listing Rule 5605(a)(2) for determining director independence, which provides that an “independent director” is a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:

 

  the director is, or at any time during the past three years was, an employee of the company;
     
  the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);

 

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  a family member of the director is, or at any time during the past three years was, an executive officer of the company;
     
  the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
     
  the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or
     
  the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.

 

We have determined that none of our directors meet this definition of independence due to the fact that our directors are also are executive officers.

 

National Instrument 52-110

 

We are a reporting issuer in the Province of British Columbia. NI 52-110 requires us, as a venture issuer, to disclose in our annual report certain information concerning the constitution of our audit committee and our relationship with our independent auditor. As defined in NI 52-110, John Balanko and Peter Miele are not independent directors. For a description of the education and experience of our audit committee members that is relevant to the performance of their respective responsibilities as audit committee members, please see Item 10 of this annual report under the heading “Directors and Officers”.

 

None of our audit committee members is “financially literate” as defined in NI 52-110.

 

Since the commencement of our most recently completed financial year, we have not failed to adopt a recommendation of the audit committee to nominate or compensate an external auditor.

 

Since the commencement of our most recently completed financial year, we have not relied on the exemptions contained in sections 2.4 or 8 of NI 52-110. Section 2.4 (De Minimis Non-audit Services) provides an exemption from the requirement that the audit committee must pre-approve all non-audit services to be provided by the auditor, where the total amount of fees related to the non-audit services are not expected to exceed 5% of the total fees payable to the auditor in the fiscal year in which the non-audit services were provided. Section 8 (Exemptions) permits us to apply to a securities regulatory authority for an exemption from the requirements of NI 52-110 in whole or in part.

 

Our audit committee has adopted specific policies and procedures for the engagement of non-audit services as set out in the audit committee charter. A copy of our audit committee charter was filed as Exhibit 99.1 to our annual report for the year ended December 31, 2011.

 

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National Instrument 58-101

 

We are a reporting issuer in the Province of British Columbia. National Instrument 58-101 of the Canadian Securities Administrators requires us, as a venture issuer, to disclose in our annual report certain information concerning corporate governance disclosure.

 

Board of Directors

 

Our Board of Directors currently consists of two members, John Balanko and Peter Miele. We have determined that neither Mr. Balanko nor Mr. Miele is independent as that term is defined in NI 52-110 due to the fact that they are also our executive officers.

 

Directorships

 

Our directors are not currently directors of any other reporting issuers (or the equivalent in a foreign jurisdiction).

 

Orientation and Continuing Education

 

We have an informal process to orient and educate new recruits to our Board of Directors regarding their role on the Board, our committees and our directors, as well as the nature and operations of our business. This process provides for an orientation with key members of the management staff, and further provides access to materials necessary to inform them of the information required to carry out their responsibilities as a Board member. This information includes our most recent budget approved by the Board, our most recent annual report, our audited financial statements and copies of our interim quarterly financial statements.

 

The Board does not provide continuing education for our directors. Each director is responsible for maintaining the skills and knowledge necessary to meet their obligations as a director.

 

Ethical Business Conduct

 

Our Board of Directors does not take any formal steps to encourage and promote a culture of ethical business conduct as it has found that the fiduciary duties placed on individual directors by our governing corporate legislation and the common law have been sufficient to ensure that the Board operates independently of management and in our best interests.

 

Nomination of Directors

 

Our Board of Directors is responsible for identifying new director nominees. In identifying candidates for the Board, the Board takes into account all factors it considers appropriate, which may include strength of character, mature judgment, career specialization, relevant technical skills, diversity and the extent to which the candidate would fill a present need on the Board. As part of the process, the Board, together with management, is responsible for conducting background searches and is empowered to retain search firms to assist in the nomination process. Once candidates have gone through a screening process and met with the existing directors, they may be formally put forward as nominees for approval by the Board.

 

Compensation

 

Our Board of Directors plans to conduct reviews with regard to directors’ compensation once a year. To make its recommendation on directors’ compensation, the Board will take into account the types of compensation and the amounts paid to directors of comparable publicly traded companies whose stock is quoted on the OTCQB.

 

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Assessments

 

Our Board of Directors intends for individual director assessments to be conducted by other directors, taking into account each director’s contributions at Board meetings, service on committees, experience base, and their general ability to contribute to one or more of our major needs. However, due to our stage of development and our need to deal with other urgent priorities, the Board has not yet implemented such a process of assessment.

 

Item 14. Principal Accountant Fees and Services

 

Audit and Non-Audit Fees

 

The following table sets forth the fees for professional audit services and the fees billed for other services rendered by our auditors, Dale Matheson Carr-Hilton LaBonte LLP, in connection with the audit of our financial statements for the years ended December 31, 2013 and 2012, respectively, as well as reviews of our interim financial statements, services provided in connection with our statutory and regulatory filings or engagements, and any other fees billed for services rendered by our auditors during these periods.

 

   Year Ended
December 31, 2013
($)
   Year Ended
December 31, 2012
($)
 
Audit fees and audit-related fees   30,000    83,900 
Tax fees   -    - 
All other fees   -    - 
Total   30,000    83,900 

 

In the above table, “audit fees” are fees billed by our auditors for services provided in auditing our annual financial statements. “Audit-related fees” are fees not included in audit fees that are billed by our auditors for assurance and related services that are reasonably related to the performance of the audit review of our financial statements. “Tax fees” are fees billed by our auditors for professional services rendered for tax compliance, advice and planning. “All other fees” are fees billed by our auditors for products and services not included in the foregoing categories.

 

Policy on Pre-Approval

 

Our Board of Directors pre-approves all services provided by our auditors. All of the above services and fees were reviewed and approved by the Board of Directors either before or after the respective services were rendered.

 

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PART IV

 

Item 15. Exhibits

 

The following documents are filed as a part of this annual report.

 

Exhibit
Number
  Description of Exhibit
     
2.1   Share Exchange Agreement dated January 6, 2012 with Josh Morita, Quest Water Solutions, Inc. and the shareholders of Quest Water Solutions, Inc. (1)
     
3.1   Articles of Incorporation (2)
     
3.2   Bylaws (2)
     
3.3   Certificate of Designation for Series A Voting Preferred Stock filed with the Delaware Secretary of State on December 29, 2011 (1)
     
3.4   Certificate of Amendment filed with the Delaware Secretary of State on February 21, 2012 (3)
     
10.1   Agreement of Sale dated January 6, 2012 with Josh Morita (1)
     
10.2   Subscription Agreement dated January 6, 2012 (1)
     
10.3   Form of Warrant dated January 6, 2012 (1)
     
10.4   Registration Rights Agreement dated January 6, 2012 (1)
     
10.5   Form of Lock-Up Agreement dated January 6, 2012 (1)
     
10.6(a)   Lock-Up/Leak Out Agreement with John Balanko dated January 6, 2012 (1)
     
10.6(b)   Lock-Up/Leak Out Agreement with Peter Miele dated January 6, 2012 (1)
     
10.7   Management Agreement with John Balanko dated November 1, 2011 (1)
     
10.8   Management Agreement with Peter Miele dated November 1, 2011 (1)
     
10.9   Global Cooperation Partner Agreement between Quest Water Solutions, Inc. and Trunz Water Systems AG, dated June 29, 2011 (1)
     
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
     
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
     
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
     
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
     
99.1   Audit Committee Charter (4)
     
101.INS   XBRL Instance Document**
     
101.SCH   XBRL Taxonomy Extension Schema**
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase**
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase**