ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated balance sheet of Hybrid
Coating Technologies Inc. as of March 31, 2016 and the related unaudited
consolidated statements of operations, and cash flows for the three months ended
March 31, 2016 have been prepared by management in conformity with accounting
principles generally accepted in the United States. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and all such
adjustments are of a normal recurring nature. Operating results for the three
months ended March 31, 2016 are not necessarily indicative of the results that
can be expected for the fiscal year ending December 31, 2016 or any other
subsequent period.
2
Hybrid Coating Technologies Inc.
Consolidated
Balance Sheets
(Unaudited)
|
|
March 31,
|
|
|
December 31,
|
|
ASSETS
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,966
|
|
$
|
23,893
|
|
Total current assets
|
|
1,966
|
|
|
23,893
|
|
Equipment loan receivable
|
|
17,000
|
|
|
12,000
|
|
Intangible assets, net of accumulated
amortization
|
|
2,854,100
|
|
|
1,132,753
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
2,873,066
|
|
$
|
1,168,646
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Bank indebtedness
|
$
|
2,150
|
|
$
|
-
|
|
Accounts payable and accrued liabilities
|
|
993,008
|
|
|
866,103
|
|
Accounts payable and accrued liabilities -
related parties
|
|
393,525
|
|
|
324,865
|
|
Deferred revenue
|
|
26,840
|
|
|
177,442
|
|
Stock payable
|
|
15,000
|
|
|
15,000
|
|
Senior secured convertible debentures
|
|
200,000
|
|
|
200,000
|
|
Convertible notes net of unamortized
discount of $0 and $76,975 respectively
|
|
-
|
|
|
60,424
|
|
Convertible debentures, current portion
|
|
1,344,584
|
|
|
-
|
|
Loans payable
|
|
1,206,500
|
|
|
1,206,500
|
|
Loans payable - shareholders
|
|
2,235,082
|
|
|
2,197,082
|
|
Note payable - related party
|
|
2,631,491
|
|
|
1,300,491
|
|
Derivative liabilities
|
|
13,416
|
|
|
138,957
|
|
Total current
liabilities
|
|
9,061,596
|
|
|
6,486,864
|
|
Convertible debentures, long-term portion
|
|
-
|
|
|
1,344,242
|
|
Total liabilities
|
|
9,061,596
|
|
|
7,831,106
|
|
Commitments and contingencies
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
Series A preferred stock, $0.001 par value, 800,000 shares
authorized, 0 shares issued
|
|
-
|
|
|
-
|
|
Series B preferred stock, $0.001 par value,
4,000,000 shares authorized, 2,700,000 shares and 460,000 shares issued
and outstanding respectively
|
|
2,700
|
|
|
460
|
|
Common stock, $0.001 par value, 1,600,000,000 shares
authorized, 1,563,559,058 shares and 1,188,559,0585 shares issued and
outstanding , respectively
|
|
1,563,559
|
|
|
1,188,559
|
|
Additional paid-in capital
|
|
25,774,784
|
|
|
21,502,881
|
|
Accumulated deficit
|
|
(33,529,573
|
)
|
|
(29,354,360
|
)
|
Total stockholders deficit
|
|
(6,188,530
|
)
|
|
(6,662,460
|
)
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
|
$
|
2,873,066
|
|
$
|
1,168,646
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
Hybrid Coating Technologies Inc.
Consolidated
Statements of Operations
For the Three Months Ended March 31, 2016
and 2015
(Unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
150,602
|
|
$
|
-
|
|
Cost of sales
|
|
85,413
|
|
|
-
|
|
Gross profit
|
|
65,189
|
|
|
-
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
General and administrative
|
|
219,939
|
|
|
491,335
|
|
Amortization of
intangible assets
|
|
280,756
|
|
|
265,547
|
|
Loss on settlement of payables
|
|
746,400
|
|
|
369,260
|
|
Total operating expenses
|
|
1,247,095
|
|
|
1,126,142
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,181,906
|
)
|
|
(1,126,142
|
)
|
|
|
|
|
|
|
|
Loss on extinguishment of
debt
|
|
(2,684,000
|
)
|
|
(355,641
|
)
|
Change in fair value of derivative liability
|
|
(28,597
|
)
|
|
(20,561
|
)
|
Gain (loss) on foreign
currency transactions
|
|
(3,927
|
)
|
|
5,934
|
|
Interest expense
|
|
(276,783
|
)
|
|
(729,078
|
)
|
|
|
|
|
|
|
|
Net loss
|
$
|
(4,175,213
|
)
|
$
|
(2,225,488
|
)
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
$
|
(0.00
|
)
|
$
|
0.46
|
|
|
|
|
|
|
|
|
Weighted average number of common shares -
basic and diluted
|
|
1,393,265,270
|
|
|
48,739,400
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
Hybrid Coating Technologies Inc.
Consolidated
Statements of Cash Flows
For the Three Months Ended March 31, 2016
and 2015
(Unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
$
|
(4,175,213
|
)
|
$
|
(2,225,488
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
Stock-based compensation
|
|
-
|
|
|
109,832
|
|
Amortization of
debt discounts
|
|
76,975
|
|
|
203,445
|
|
Amortization of intangible
assets
|
|
280,756
|
|
|
265,547
|
|
Loss on
settlement of payables
|
|
746,400
|
|
|
369,260
|
|
Loss on extinguishment of debt
|
|
2,684,000
|
|
|
355,641
|
|
Interest expense
related to derivative liability in excess of face value of debt
|
|
-
|
|
|
368,051
|
|
Change in fair value of
derivative liability
|
|
28,597
|
|
|
20,561
|
|
(Gain) loss on
foreign currency transactions
|
|
3,927
|
|
|
(5,934
|
)
|
Interest imputed from notes
payable - related party
|
|
46,000
|
|
|
46,487
|
|
Change in operating
assets and liabilities
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
122,778
|
|
|
68,668
|
|
Accounts
payable and accrued liabilities - related parties
|
|
72,588
|
|
|
235,254
|
|
Deferred revenue
|
|
(150,602
|
)
|
|
-
|
|
Net cash used in operating
activities
|
|
(263,794
|
)
|
|
(188,676
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of loan receivable
for equipment
|
|
(5,000
|
)
|
|
-
|
|
Net cash used in investing activities
|
|
(5,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Bank indebtedness
|
|
2,150
|
|
|
(5,552
|
)
|
Proceeds from convertible notes net of
issuance costs
|
|
-
|
|
|
336,750
|
|
Proceeds from loans payable
|
|
-
|
|
|
25,000
|
|
Proceeds from loans payable - shareholders
|
|
757,911
|
|
|
530,445
|
|
Repayments from loans payable
- shareholders
|
|
(208,138
|
)
|
|
(525,035
|
)
|
Repayments of convertible notes
|
|
(136,056
|
)
|
|
(111,111
|
)
|
Repayments of note payable -
related party
|
|
(169,000
|
)
|
|
(60,000
|
)
|
Net cash provided by financing activities
|
|
246,867
|
|
|
190,497
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
(21,927
|
)
|
|
1,821
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
23,893
|
|
|
-
|
|
CASH, END OF PERIOD
|
$
|
1,966
|
|
$
|
1,821
|
|
5
Hybrid Coating Technologies Inc.
Consolidated
Statements of Cash Flows (continued)
For the Three Months Ended March
31, 2016 and 2015
(Unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information
|
|
-
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
$
|
9,981
|
|
$
|
28,407
|
|
Income taxes
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible asset through issuance of note
payable - related party
|
$
|
1,500,000
|
|
$
|
-
|
|
Acquisition of intangible asset through
issuance of preferred stock
|
$
|
502,104
|
|
$
|
-
|
|
Common stock and warrants issued for settlement of accounts
payable - related party
|
$
|
866,100
|
|
$
|
300,000
|
|
Warrants and stock issued for settlement of
liabilities
|
$
|
3,080,000
|
|
$
|
614,260
|
|
Warrants issued for payment of interest
|
$
|
-
|
|
$
|
15,600
|
|
Reduction of derivative liabilities on
redemption of debt
|
$
|
154,939
|
|
$
|
-
|
|
Cashless exercise of warrants
|
$
|
-
|
|
$
|
296
|
|
Common stock issued for debt
|
$
|
-
|
|
$
|
258,141
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
6
Hybrid Coating Technologies Inc.
Notes to
Consolidated Financial Statements
(Unaudited)
NOTE 1 NATURE OF BUSINESS AND BASIS OF PRESENTATION
Hybrid Coating Technologies Inc. (the Company, HCT) was
incorporated in the State of Nevada on July 8, 2010. The Company manufactures
and sells under license, alternative non-toxic (isocyanate-free) polyurethane,
Green Polyurethane, including coatings and raw binder ingredients (Green
Polyurethane® Monolithic Floor Coating and Green Polyurethane Binder).
The accompanying consolidated financial statements, which
should be read in conjunction with the financial statements and footnotes of
Hybrid Coating Technologies Inc., included in Form 10-K filed on April 14, 2016
and Form 10-K/A filed May 2, 2016 with the Securities and Exchange Commission,
are unaudited, but have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2016 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2016.
Going Concern
The Company remains highly dependent upon funding from
non-operational sources. The Companys consolidated financial statements have
been presented on the basis that it is a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has an accumulated deficit of $33,529,573, and has a
working capital deficit of $9,059,630 as of March 31, 2016. These conditions
raise substantial doubt about the Companys ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
There are no assurances that the Company will be able to either
(1) achieve a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private placement,
public offerings and/or bank financing necessary to support The Companys
working capital requirements. To the extent that funds generated from operations
and any private placements, public offerings and/or bank financing are
insufficient, the Company will have to raise additional working capital. No
assurance can be given that additional financing will be available, or if
available, will be on terms acceptable to the Company. If adequate working
capital is not available the Company may be required to curtail or cease its
operations.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- The financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles in the United States of America and are presented in US
dollars. The Companys fiscal year end is December 31.
Principles of Consolidation
- The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiary, Nanotech. All significant inter-company balances and transactions
have been eliminated in the consolidated financial statements.
Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make certain 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 revenue and expenses during the reported period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company
maintains various cash balances in two financial institutions located in Daly
City, California. These balances are fully insured by the Federal Deposit
Insurance Corporation, which insures up to $250,000. On occasion, balances may
temporarily exceed such coverage. The Company considers all highly liquid debt
instruments, which could include commercial paper and certificates of deposits,
with an original maturity of three months or less to be cash equivalents.
Investments with maturities greater than three months and less than on year are
classified as short term investments.
Concentrations of Credit Risk
Financial instruments which potentially subject the
Company to concentrations of credit risk include cash deposits place with financial
institutions. The Company had sales to one customer that comprised 100% of the Companys
total revenues for the three months ended March 31, 2016. The Company had no sales for the
three months ended March 31, 2015. The Company believes that, in the event its primary
customers are unable or unwilling to continue to purchase the Companys goods, there are a
number of alternative customers at comparable prices.
Intangible Assets
Intangible assets are
comprised of intellectual property which is amortized on a straight-line basis
over the assets respective life, for approximately 5 years. Intellectual
property with a perpetual life in not amortized.
7
Impairment of Long - Lived Assets
Long-lived assets to be held and used are reviewed for impairment on an
annual basis or whenever events or changes in circumstances indicate that the
carrying amount of such asset may not be recoverable. The determination of
recoverability of long-lived assets is based on an estimate of undiscounted
future cash flows resulting from the use of the asset or its disposition.
Measurement of an impairment loss for long-lived assets that management expects
to hold and use is based on the fair value of the asset. Long-lived assets to be
disposed of are reported at the lower of carrying amount or net realizable
value.
Revenue Recognition
Revenue is
recognized when persuasive evidence of an arrangement exists, goods are
delivered, sales price is determinable, and collection is reasonably
assured.
Fair Value
ASC 820 defines fair value,
establishes a framework for measuring fair value and enhances disclosures about
fair value measurements. It defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. ASC 820 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted)
in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable
for the asset or liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities that are not active; and model-driven
valuations whose inputs are observable or whose significant value drivers are
observable. Valuations may be obtained from, or corroborated by, third-party
pricing services.
Level 3: Unobservable inputs to measure fair value of assets
and liabilities for which there is little, if any market activity at the
measurement date, using reasonable inputs and assumptions based upon the best
information at the time, to the extent that inputs are available without undue
cost and effort.
As of March 31, 2016 and 2015, the significant inputs to the
Companys derivative liability calculation were Level 3 inputs.
The following table sets forth a reconciliation of changes in
the fair value of financial assets and liabilities classified as Level 3 in the
fair value hierarchy:
|
|
Significant Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
$
|
138,957
|
|
$
|
181,723
|
|
Additions
|
|
-
|
|
|
704,801
|
|
Reduction on conversion of
debt
|
|
(96,584
|
)
|
|
-
|
|
Total (gains) and losses
|
|
28,597
|
|
|
20,561
|
|
Ending balance
|
$
|
13,416
|
|
$
|
907,085
|
|
|
|
|
|
|
|
|
Change in unrealized losses
included in earnings relating to derivatives still held as of March 31,
2016 and 2015
|
$
|
(28,597
|
)
|
$
|
(20,561
|
)
|
Stock-Based Compensation
For stock and
stock options awarded in return for services rendered, the expense is measured
at the grant-date fair value of the award and recognized as compensation expense
on a straight-line basis over the service period, which is the vesting period.
The Company estimates forfeitures that it expects will occur and records expense
based upon the number of awards expected to vest.
Earnings Per Share
Basic net loss per
share amounts are computed by dividing the net loss by the weighted average
number of common shares outstanding over the reporting period. In periods in
which the Company reports a net loss, dilutive securities are excluded from the
calculation of diluted net loss per share amounts as the effect would be
anti-dilutive.
8
For three months ended March 31, 2016 and 2015, the following
convertible debt and warrants to purchase shares of common stock were excluded
from the computation of diluted net loss per share, as the inclusion of such
shares would be anti-dilutive:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible debt
|
|
370,945,000
|
|
|
37,789,774
|
|
Stock warrants
|
|
1,666,835,164
|
|
|
18,666,592
|
|
Total common shares issuable
|
|
2,037,780,200
|
|
|
56,456,366
|
|
Recently Issued Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flow.
Subsequent Events
The Company has
evaluated all transactions occurring from March 31, 2016 through the date of
issuance of the consolidated financial statements for disclosure consideration.
NOTE 3 INTANGIBLE ASSETS
On February 12, 2016, the Company signed the eleventh amendment
to its Licensing Agreement with Nanotech Industries, Inc. (NTI), whereby the
parties amended the Licensing Agreement (and subsequent amendments) to extend
the exclusivity period, to December 31, 2020 (2020 Extended Exclusivity
Period). In consideration for the 2020 Extended Exclusivity Period, the Company
shall pay the following to NTI:
|
i)
|
Issue 2,240,000 shares of Series B Preferred Stock
(Series B Preferred Shares) to be issued at the time of execution of the
Eleventh Amendment Agreement (Share Issuance Deadline).
|
|
|
|
|
ii)
|
Issue purchase warrants to purchase 31,300,000 shares of
Series B Preferred Stock (90-Day Warrants), to be issued 90 days
following the execution of the amendment (90-Day Deadline). The 90-Day
Warrants shall be exercisable at any time from the date of issuance at a
price per share equal to the par value of the Series B Preferred Stock of
$31,300 and shall expire ten years from the date of issuance.
|
|
|
|
|
iii)
|
Issue purchase warrants to purchase 126,000,000 shares of
Series B Preferred (12-Month Warrants), to be issued 12 months following
the execution of this Agreement (12-Month Deadline). The 12-Month
Warrants shall be exercisable at any time from the date of issuance at a
price per share equal to the par value of the Series B Preferred Stock and
shall expire ten years from the date of issuance.
|
|
|
|
|
|
(The 90-Day Warrants and the 12-Month Warrants
collectively referred to as the Warrants).
|
|
|
|
|
iv)
|
Pay the Licensor an amount equal to US $1,500,000, to be
paid within twelve months of the execution of this Eleventh Amendment
Agreement and recorded on the balance sheet as note payable - related
party as of March 31, 2016 (Fee Deadline).
|
Should the Company not meet any of: (i) the Share Issuance
Deadline; or (ii) the 90-Day Deadline; or (iii) the 12-Month Deadline; or (iv)
the Fee Deadline (individually referred to as Unmet Deadline) and should such
Unmet Deadline not be extended by the Parties, the Company shall continue to
have the right to the Manufacturing and Sale for the Territory, on a
non-exclusive basis for the duration of the Agreement. The Company valued the
Series B Preferred Stock and Warrants at $502,104 along with a note payable of
$1,500,000. Both the 90 Day Warrants and 12-Month Warrants have been issued.
Intangible assets activity is as follows for the three months
ended March 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net intangible asset,
beginning of period
|
$
|
1,132,753
|
|
$
|
2,136,205
|
|
Purchases
|
|
2,002,104
|
|
|
-
|
|
Less:
current amortization
|
|
(280,757
|
)
|
|
(265,547
|
)
|
Net intangible asset, end of period
|
$
|
2,854,100
|
|
$
|
1,870,658
|
|
9
The balance of intangible assets, net is as follows:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Intangible assets
|
$
|
6,504,584
|
|
$
|
4,502,480
|
|
Less impairment
|
|
(631,917
|
)
|
|
(631,917
|
)
|
Less: accumulated
amortization
|
|
(3,018,567
|
)
|
|
(2,737,810
|
)
|
Intangible assets, net
|
$
|
2,854,100
|
|
$
|
1,132,753
|
|
The following is a summary of the licenses acquired to date
from NTI:
|
License Rights
Overview
|
Licensed Region
|
Term (date) of
License
|
Original Cost
|
Carrying Value
at March 31,
2016
|
Carrying Value at
December 31, 2015
|
A
|
Coating Products
|
North America
|
12-Jun-10
10
years , 6 months
|
$500,000
|
$0
|
$0
|
|
|
|
17-Mar-11
|
|
|
|
B
|
Coating Products
|
Russian Territory
|
9 years, 9 months
|
$150,000
|
$22,460
|
$24,800
|
C
|
Coating Products
|
European Continent
|
07-Jul-11
9
years, 5 months
|
$1,250,000
|
$92,893
|
$129,020
|
D
|
Spray Foam Insulation
|
North America, European Continent
and Russian Territory
|
06-May-16
4 years, 7 months
|
$500,000
|
$49,025
|
$86,865
|
E
|
Added Applications including
synthetic leather, sealants and adhesives
|
North America, European Continent
and Russian Territory
|
31-Mar-17
3 years, 9 months
|
$2,000,000
|
$709,750
|
$833,333
|
F
|
Polyurethane Foam Packaging
|
North America
|
10-Aug 15
5 years , 4
months
|
$102,480
|
$45,967
|
$58,735
|
G
|
Extension
|
All Territories and
Products
|
31-Dec -20
5
years
|
$2,002,104
|
$1,934,005
|
$0
|
TOTAL
|
|
|
|
$6,504,584
|
$2,854,100
|
$1,132,753
|
10
NOTE 4 LOANS PAYABLE
Loans payable include a loan from a non-related party that was
issued for $75,000 on November 16, 2010 and was repayable on May 16, 2011 with a
10% premium. The balance at March 31, 2016 and December 31, 2015 was $27,500,
and the loan is currently in default. The Company has not received any notices
from the loan holder with respect to the defaults.
In 2012, the Company entered into various loan agreements
totaling $681,500 at interest rates ranging from 15%-25%. These loans are all
currently in default. The creditors have not called these loans.
In 2013, the Company entered into various loan agreements
totaling $268,500, at interest rates ranging from 15%-16%. These loans are all
currently in default. The creditors have not called these loans.
In 2015, lenders advanced $229,000 in non-interest bearing
demand loans.
There were no new loans advanced in the first three months of
2016. During the first three months of 2015, the Company received new loans of
$25,000.
During the three months ended March 31, 2016 and 2015, interest
expense related to these notes was $43,162 and $40,147, respectively, and the
interest paid was $6,750 and $13,200, respectively.
NOTE 5 LOANS PAYABLE SHAREHOLDERS
During the years ended December 31, 2013, 2012 and 2011, the
Company entered into various loan agreements and arrangements for loans with
certain shareholders. The loans all have different maturity dates ranging from
2011 to 2015 and interest rates that range from 2% to 18%. The Company was in
default on loans totalling $999,026 as of March 31, 2016. The shareholders have
not called these loans.
During the year ended December 31, 2015, a shareholder-creditor
transferred $100,000 of its outstanding balance owed by the Company to a third
party. The Company and the third party agreed to amend the loan agreement to
allow the third party to convert the principal balance into shares of the
Companys stock. The third party converted the principal balance of $100,000
into 6,252,324 shares of the Companys common stock. The shares had a fair value
of $258,141 and the Company recorded a loss on debt extinguishment of $158,141.
The Company had an outstanding balance of $2,235,081 and
$2,197,082 as of March 31, 2016 and December 31, 2015, respectively.
During the first three months of 2016, the Company received
$757,911 in shareholder advances and repaid $208,138. During the first three
months of 2015, the Company received $530,245 in shareholder advances and repaid
$525,035. During the three months ended March 31, 2016, the Company issued a
total of 375,000,000 shares of common stock to a shareholder-creditor for
payment of outstanding accounts payable. The fair value of the shares was
$866,100 based on the market price on the date of grant which settled accounts
payable and accrued liabilities to related parties of $119,700. Accordingly, the
Company recognized a loss on settlement in the amount of $746,400.
As of March 31, 2016 and 2015, the total interest expense on
the loans payable to shareholders was $27,218 and $20,875, respectively, and
there was no interest paid in either year. The Company had an outstanding
balance of $2,235,082 and $2,197,082 as of March 31, 2016 and December 31, 2015,
respectively.
NOTE 6 CONVERTIBLE DEBENTURES
On April 29, 2011, the Company issued convertible debentures
for proceeds of $1,201,000 (the April 29 debenture) and on February 21, 2012,
issued an additional $119,500 (the Feb 21 debenture and together the
Debentures) with a maturity of 36 months and a coupon rate of 10% per annum
payable in cash or capital stock at the Companys discretion. The debentures are
held by third parties and by non-controlling shareholders, and are convertible
as follows:
April 29, 2011 convertible debentures
-by dividing the conversion amount by a conversion factor of
1.4 yielding Units of the Company where each Unit (at a price of $1.40 per
Unit), is comprised of 1 share of common stock and one half of a warrant to
purchase a share of common stock of the Company with an exercise price of $2.00
per share and a maturity at April 29, 2014. Warrants are exercisable at the
option of the holder at any time prior to maturity.
11
February 21, 2012 convertible debentures:
-by dividing the conversion amount by a conversion factor of
1.45 yielding Units of the Company where each Unit (at a price of $1.45 per
Unit), is comprised of 1 share of common stock and one half of a warrant to
purchase a share of common stock of the Company with an exercise price of $2.10
per share and a maturity at February 21, 2015. Warrants are exercisable at the
option of the holder at any time prior to maturity.
Both debentures carry an anti-dilution provision. The
conversion price applicable to the debentures is subject to reset in the event
of a Dilutive Issuance (as defined in the debenture agreement) by the Company. A
Dilutive Issuance excludes shares or options issued to employees, officers,
directors or consultants pursuant to stock option plans approved by the Board of
Directors.
The Company recorded a corresponding discount of $46,721 and
$558,248 against the carrying value of the convertible debentures during the
years ended December 31, 2012 and 2011, respectively. The discounts were
amortized using the effective interest method over the term of the debt.
On November 20, 2013, the Company entered in an amendment
agreement modifying its terms with both the April 29 and February 21 debenture
holders as follows:
1) The maturity date of the Debentures, was extended by a
period of 24 (twenty-four) months, to April 29, 2016 and February 21, 2017,
respectively,
2) Each Unit into which the Debentures are convertible shall be
comprised of 2 stock purchase warrants at an exercise price per share equal to
the conversion price. The warrants shall expire 36 (thirty-six months) from the
date of issuance.
The maturity date for the April 29, 2011 debentures was April
20, 2016. The Company has defaulted on this payment but is in negotiations with
all the debenture holders to exchange their debt for new financing of which the
terms have not yet been determined. No notice by the debenture holders has been
sent to the Company.
Interest expense of $32,560 and $33,180 have been recorded on
the convertible debentures for the quarters ended March 31, 2016 and March 31,
2015, respectively. No interest payments were made during the three months ended
March 31, 2016. The balance of the debentures both at March 31, 2016 and
December 31, 2015, was $1,344,584 and 1,344,242 respectively.
NOTE 7 CONVERTIBLE NOTES
Convertible debt with a variable conversion feature consists of
the following as of March 31, 2016 and December 31, 2015:
Noteholder (issue date)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
JMJ (3/4/15)
|
$
|
-
|
|
$
|
44,099
|
|
Prolific (5/8/15)
|
|
-
|
|
|
800
|
|
LG (7/16/15)
|
|
-
|
|
|
52,500
|
|
EMA Financial (10/29/15)
|
|
-
|
|
|
40,000
|
|
|
|
-
|
|
|
137,399
|
|
Less: debt discount
|
|
-
|
|
|
(76,975
|
)
|
Convertible debentures, net
|
$
|
-
|
|
$
|
60,424
|
|
During the three months ended March 31, 2016, the Company fully
repaid the noteholders a total of $137,399 including principal and accrued
interest of $48,856. The Company fully amortized the remaining discount of
$76,975 with a corresponding charge to interest expense. During the three months
ended March 31, 2015, the Company repaid a note holder $124,444 including
interest of $13,333 and amortized the remaining $60,424 discount to interest
expense. In addition, the Company issued $336,750 in convertible notes net of
issuance costs of $55,108 recorded as a debt discount. The Company determined
that the conversion option was a derivative, accordingly, the Company recorded a
derivative liability of $703,001 of which $336,750 was recorded as debt
discount, $366,251 as additional interest expense and the Company amortized the
$66,469 of debt discount as interest expense and recorded accrued interest of
$886.
12
Following is a summary of the debt discount for each of the
convertible notes:
|
|
December 31,
|
|
|
Debt
|
|
|
Debt
|
|
|
Discount
|
|
|
March 31,
|
|
Noteholder (issue date)
|
|
2015
|
|
|
Discount
|
|
|
Conversion
|
|
|
Amortization
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMJ (3/4/15)
|
$
|
43,556
|
|
$
|
7,310
|
|
$
|
(43,556
|
)
|
$
|
(7,310
|
)
|
$
|
-
|
|
Prolific (5/8/15)
|
|
800
|
|
|
8,811
|
|
|
(800
|
)
|
|
(8,811
|
)
|
|
-
|
|
LG (7/16/15)
|
|
52,500
|
|
|
27,739
|
|
|
(52,500
|
)
|
|
(27,739
|
)
|
|
-
|
|
EMA Financial (10/29/15)
|
|
40,000
|
|
|
33,115
|
|
|
(40,000
|
)
|
|
(33,115
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,856
|
|
$
|
76,975
|
|
$
|
(136,856
|
)
|
$
|
(76,975
|
)
|
$
|
-
|
|
NOTE 8 SENIOR SECURED CONVERTIBLE DEBENTURES
On August 16, 2010, the Company entered into a securities
purchase agreement with a third party for the subscription of senior secured
convertible debentures (SSCD) for an amount of $400,000. The debentures had a
maturity date of August 16, 2012 with a coupon of 10% and convert at the option
of the holder into shares of common stock of the Company at a price of $0.75 per
share. The notes are secured by all assets of the Company. The subscriber also
received 533,336 Series A warrants with a maturity of 1 year and an exercise
price of $1.25 and 133,360 Series B warrants with a term of 3 years and an
exercise price of $1.50. These warrants have since expired. To date, the shares
have not been registered. All prices and warrants issued have been adjusted for
the post-acquisition of Nanotech by HCT.
The Company is in default of payment of the debentures which
matured on August 16, 2012. No notices have been issued by the debenture
holder.
The obligations of the Company under the SSCD will rank senior
to all outstanding and future indebtedness of the Company and shall be secured
by a first priority, perfected security interest in all the assets of the
Company.
The balance outstanding at March 31, 2016 and December 31, 2015
was $ 200,000.
NOTE 9 DERIVATIVE LIABILITIES
The embedded conversion features in the convertible debentures
and attached warrants are accounted for as derivative liabilities. The warrants
contain full ratchet reset features (subject to adjustment for dilutive share
issuances) and should be valued as derivative liabilities.
The valuation of the derivative liability attached to the
Debentures arrived at through the use of multinomial lattice models based on a
probability weighted discounted cash flow model. These models are based on
future projections of the various potential outcomes. The features in the note
that were analyzed and incorporated into the model included the conversion
feature with the reset provisions and the call/redemption options. Based on
these features, there are six primary events that can occur: payments are made
in cash; payments are made with stock; the holder converts upon receiving a
change notice; the holder converts the note; the Issuer redeems the note; or the
company defaults on the note.
The model analyzed the underlying economic factors that
influenced which of these events would occur, when they were likely to occur,
and the specific terms that would be in effect at the time (i.e. interest rates,
stock price, conversion price, etc.). Projections were then made on these
underlying factors which led to a set of potential scenarios. Probabilities were
assigned to each of these scenarios over the remaining term of the note based on
management projections. This led to a cash flow projection over the life of the
note and a probability associated with that cash flow. A discounted weighted
average cash flow over the various scenarios was completed, and it was compared
to the discounted cash flow of the note without the embedded features, thus
determining a value for the derivative liability. For the year ended December
31, 2015, the Company recorded derivative liabilities for issuance of
convertible notes payable initial fair value of $1,014,703.
13
The Company recorded unrealized gains of $28,597 and $20,461
for the three months years ended March 31, 2016 and 2015, respectively. The fair
value of the derivative liability was $13,416 and $138,957 as of March 31, 2016
and December 31, respectively.
|
|
|
Derivative Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Valuation
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
Date
|
|
|
2015
|
|
|
Additions
|
|
|
Conversions
|
|
|
(Decrease)
|
|
|
March 31, 2016
|
|
April 29, 2011 debenture
|
|
$
|
3,363
|
|
$
|
-
|
|
$
|
-
|
|
$
|
9,003
|
|
$
|
12,366
|
|
Feb 21, 2012 debenture
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,050
|
|
|
1,050
|
|
2015 convertible notes
|
|
|
135,594
|
|
|
-
|
|
|
(154,138
|
)
|
|
18,544
|
|
|
-
|
|
Total
|
|
$
|
138,957
|
|
$
|
-
|
|
$
|
(154,138
|
)
|
$
|
28,597
|
|
$
|
13,416
|
|
|
|
|
Derivative Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Valuation
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Increase
|
|
|
December 31,
|
|
Date
|
|
|
2014
|
|
|
Additions
|
|
|
Conversions
|
|
|
(Decrease)
|
|
|
2015
|
|
April 29, 2011 debenture
|
|
$
|
13,405
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(10,042
|
)
|
$
|
3,363
|
|
Feb 21, 2012 debenture
|
|
|
9,000
|
|
|
-
|
|
|
-
|
|
|
(9,000
|
)
|
|
-
|
|
Oct 10, 2014 note
|
|
|
73,472
|
|
|
-
|
|
|
(109,896
|
)
|
|
36,424
|
|
|
-
|
|
Nov 12, 2014 debenture
|
|
|
2,750
|
|
|
-
|
|
|
-
|
|
|
(2,750
|
)
|
|
-
|
|
Nov 13, 2014 debenture
|
|
|
83,096
|
|
|
-
|
|
|
(41,094
|
)
|
|
(42,002
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 convertible notes
|
|
|
-
|
|
|
1,014,703
|
|
|
(603,883
|
)
|
|
(275,226
|
)
|
|
135,594
|
|
Total
|
|
$
|
181,723
|
|
$
|
1,014,703
|
|
$
|
(754,873
|
)
|
$
|
(302,596
|
)
|
$
|
138,957
|
|
NOTE 10 STOCKHOLDERS DEFICIT
On March 2, 2016, the Board of Directors approved and
recommended the approval by the stockholders, to undergo a reverse stock split
of each class of shares which includes the shares of common stock (Common
stock), the Series A preferred Stock and the Series B Preferred Stock by a
ratio of 200 to 1 for each class of shares. The par value of each class of
shares shall remain unchanged. The Series A Preferred Stock and Series B
Preferred Stock voting rights per share shall remain unchanged. The Company
expects the reverse stock split to become effective in June 2016.
During the three months ended March 31, 2016, the Company
issued a total of 375,000,000 shares of common stock to a shareholder-creditor
for payment of outstanding accounts payable. The fair value of the shares was
$866,100 based on the market price on the date of grant which settled accounts
payable and accrued liabilities to related parties of $119,700. Accordingly, the
Company recognized a loss on settlement in the amount of $746,400.
14
As part of its extension of its licenses (see Note 3), the
Company issued 2,240,000 Series A Preferred Shares and 157,300,000 Series B
Preferred Share warrants with an exercise price of $0.001 and a 10-year maturity
with a total fair value of $502,104.
Warrants
During the three months ended March 31, 2016, the Company
issued 1,320,000,000 warrants to a shareholder to repay accounts payable-related
party with a fair value of $3,080,000 (recorded as an adjustment to loans
payable - shareholder of $396,000 and loss on settlement of debt of $2,684,000)
with a corresponding increase in additional paid-in capital valued using the
Black-Scholes method according to the following assumptions:
Expected volatility
|
286%-288%
|
Exercise price
|
$0.00001
|
Stock price
|
$0.0021-$0.00025
|
Expected life
|
5 years
|
Risk-free interest rate
|
1.23%-1.46%
|
Dividend yield
|
$ Nil
|
A summary of the activity in the Company's warrants during the
three months ended March 31, 2016 is presented below:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable,
at December 31, 2015
|
|
346,855,164
|
|
$
|
0.002
|
|
Issued
|
|
1,320,000,000
|
|
$
|
0.00001
|
|
Outstanding and exercisable,
at March 31, 2016
|
|
1,666,855,164
|
|
$
|
0.00042
|
|
The intrinsic value of warrants outstanding at March 31, 2016
was $1,770,374.
Contingent Warrant Issuance
On July 20, 2012, the Companys board of directors approved the
issuance of 300,000 stock purchase warrants exercise price of $0.001 per share
and a five-year life from date of issuance to the Companys President, Joseph
Kristul, contingent upon his successful negotiation of a major sales contract.
The major sales contract agreement has not yet been consummated by the Company.
NOTE 11 RELATED PARTY TRANSACTIONS
NTI License Fees
The Companys principal assets are licenses for product sales
with NTI, an entity under common control. During the three months ended March
31, 2016, the Company extended all its licenses with NTI until December 31,
2020. The consideration given was 2,240,000 Series B preferred shares and
157,300,000 Series B preferred share warrants with a total fair value of
$502,104 and a note payable of $1,500,000 due by February 12, 2017. During the
year ended December 31, 2015, the Company issued 420,000 shares of Series B
Preferred Stock valued at $102,480 as consideration for its licenses with NTI.
The notes payable related party was repaid through cash payments of $439,000
and the issuance of 40,000shares of Series B Preferred Stock valued at $150,000.
During the year ended December 31, 2014, the Company issued $2,500,000 of notes
payable related party as consideration for its licenses with NTI. The debt was
partially repaid through cash payments of $420,800 and issuances of 8,113,116
shares of common stock valued at $872,160.
During the three months ended March 31, 2016, the Company made
principal payments of $169,000 on its note payable to NTI related to the 2014
acquisition of the Added Applications license rights. The note matures on March
31, 2017, does not bear interest, and no payments are required prior to
maturity. As of March 31, 2016 and December 31, 2015, the balance of notes
payable related party outstanding with NTI was $2,631,491 and $1,300,491,
respectively.
The Company also has an option (expiring December 31, 2020) to
issue a controlling stake in the Company amounting to 52.5% to NTI for a
perpetual exclusive license to manufacture and sell Nanotech Products for all
North America, South America and Europe. If this option is exercised, the
Company will have a similar option for the territory of Asia to issue an
additional 10% ownership stake in the Company. There is an additional option,
also expiring December 31, 2020, for the Company to issue an additional 15%
ownership stake in exchange for exclusivity for Spray Foam Insulation
products.
15
Fees and Loans with Shareholder
During the three months ended March 31, 2016 and 2015, the
Company was charged $53,292 and $225,837, respectively, by an outside
consultant, who is also a shareholder-creditor, for professional fees of $15,000
per month in 2016 and 2015, out-of-pocket expenses of $8,292 in 2016 and $20,000
in 2015, and professional fees of approximately $0 in 2016 and $150,000 in 2015
related to strategic partnership negotiations and other business related
services performed on the Companys behalf.
The Company issued 5,100,000 of the Companys common shares
with a fair value of $300,000 to settle liabilities of $102,500 and a loss on
settlement of $197,500 to the consultant during the three months ended March 31,
2015. The Company had an outstanding balance payable included in accounts
payable and accrued liabilities - related parties as of March 31, 2016 and
December 31, 2015 of $100,726 and $91,019, respectively. Also during the three
months ended March 31, 2015, the shareholder-creditor transferred $100,000 of
its outstanding balance owed by the Company to a third party. The Company and
the third party agreed to amend the loan agreement to allow the third party to
convert the principal balance into shares of the Companys stock. The third
party converted the principal balance of $100,000 into 6,252,354 shares of the
Companys common stock. The shares had a fair value of $258,141 and the Company
recorded a loss on debt extinguishment of $158,141.
During the three months ended March 31, 2016, the consultant
described above loaned the Company $503,832 through loans payable - shareholders
and the Company made repayments through the issuance 375,000,000 shares of
common stock and 1,320,000,000 warrants to this consultant of $119,700 and
$396,000 respectively. During the three months ended March 31, 2015, this
consultant loaned the Company $94,000 through loans payable shareholders and
the Company made cash repayments to this consultant of $3,000 and the consultant
transferred debt to a third party of $100,000 that the Company paid through the
issuance of 5,100,000 shares.
Shared Administrative Costs
The Company shares office space and certain personnel with NTI.
Costs are allocated among the parties based on usage. Rent expense for the three
months ended March 31, 2016 and 2015 was $11,250.
NOTE 12 SUBSEQUENT EVENTS
Subsequent to March 31, 2016, the Company issued 301,950,000
warrants to a shareholder to repay loans with a fair value of $301,755 (recorded
as an adjustment to loans payable shareholders of $232,755 and loss on
settlement of debt of $69,000) with a corresponding increase in additional
paid-in capital valued using the Black-Scholes method according to the following
assumptions:
Expected volatility
|
279% - 280%
|
Exercise price
|
$0.00001
|
Stock price
|
$0.001
|
Expected life
|
5 years
|
Risk-free interest rate
|
1.24% - 133%
|
Dividend yield
|
$ Nil
|
The Company and a shareholder-creditor agreed to cancel
1,950,000 shares of common stock In exchange for the stock cancellation, the
shareholder-creditor agreed to receive 1,950,000 warrants respectively, with a
5-year term and an exercise price of $0.001 per share.
16
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statements
The Managements Discussion and Analysis (MD&A) is
designed to assist investors in understanding the nature and the importance of
the changes and trends, as well as the risks and uncertainties associated with
the Companys operations and financial position. Some sections of this report
contain forward-looking statements that, because of their nature, necessarily
involve a number of known and unknown risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations, and
the factors described under Risk Factors contained in the Companys Form
10-K/A Report filed May 2, 2016. Any statements contained herein that are not
statements of historical facts may be deemed to be forward-looking statements.
In some cases, forward-looking statements can be identified by terminology such
as may, will, should, expect, plan, intend, anticipate, believe,
estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. The Companys actual and future results could
therefore differ materially from those indicated or underlying these
forward-looking statements.
Although the Company deems the expectations reflected in these
forward-looking statements to be reasonable, the Company cannot provide any
guarantee as to the materialization of the expectations reflected in these
forward-looking statements.
The following information should be read in conjunction with
the unaudited financial statements for the period ended March 31, 2016 and notes
thereto. Unless otherwise indicated or the context otherwise requires, the
"Company," HCT, we," "us," and "our" refer to Hybrid Coating Technologies
Inc.
Compliance with Generally Accepted Accounting Principles
Unless otherwise indicated, the financial information presented
below, including tabular amounts, is expressed in US dollars and prepared in
accordance with accounting principles generally accepted in the United States
(GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires that management make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. Critical items of the
financial statements that require the use of estimates include the determination
of the allowance for doubtful accounts, the determination of the allowance for
inventory obsolescence, the determination of the useful life of fixed and
intangible assets for amortization calculation purposes, the assumptions for
fixed asset impairment tests, the determination of the allowance for guarantees,
the determination of the allowance for income taxes, the assumptions used for
the purposes of calculating the stock-based compensation expense, the
determination of the fair value of financial instruments, the determination of
the fair value of the assets and liabilities acquired on business acquisitions
and the implicit fair value of goodwill.
The financial statements include estimates based on currently
available information and managements judgment as to the outcome of future
conditions and circumstances.
Changes in the status of certain facts or circumstances could
result in material changes to the estimates used in the preparation of the
financial statements and actual results could differ from the estimates and
assumptions.
Changes in Accounting Principles
No accounting changes were adopted during the three months
ended March 31, 2016.
17
Overview
Company Background
HCTs principal office is located in Daly City, California,
U.S.A.
As of March 31, 2016, HCT had 3 employees.
HCT offers an alternative to toxic formulations of polyurethane
(PU) worldwide through its exclusive distribution rights which provide for a
cost-effective alternative non-toxic (isocyanate-free) polyurethane, Green
Polyurethane. Its focus is within the C.A.S.E. segment specifically for large
industrial and commercial coatings applications where Green Polyurethane has a
natural competitive advantage over other PU and epoxy coatings due to its
superior chemical resistance and environmentally safe properties with reduced
health risks.
The Companys ultimate goal is to license its proprietary Green
Polyurethane formulation to national and/or global coatings formulators and
then focus on rolling out the commercialization of other Green Polyurethane
applications such as adhesives and sealants. In order to achieve this, the
Company is proving the validity of its products through direct sales and is
therefore targeting large distributors and multiple client bases. The Company
intends to focus within the C.A.S.E. segment specifically for large industrial
and commercial coatings applications where Green Polyurethane has a natural
competitive advantage over other polyurethane ("PU") and epoxy coatings due to
its superior chemical resistance and environmentally safe properties with
reduced health risks. Some of the target applications for Green Polyurethane
products markets include:
|
|
Industrial and commercial buildings
|
|
|
Civil applications for tunnels and bridges
|
|
|
Private and public garages
|
|
|
Chemical and food processing plants
|
|
|
Warehouses
|
|
|
Monolithic floorings for civil, industrial and
military engineering
|
|
|
Marine and Aeronautic applications
|
|
|
Industrial equipment for dairy and liquid
fertilizer processing plants and delivery systems
|
|
|
Military facilities and equipment
|
|
|
Protective coatings inside industrial and
commercial pipes
|
The Companys business growth model includes a two-pronged
strategy of direct sales and licensing. HCTs ultimate goal is to license our
proprietary formulation to national or global coatings formulators. In order to
achieve this it is proving the validity of its products through direct
sales.
In addition, the Company plans to:
|
|
Increase the number of contractors and
applicators contacted
|
|
|
Contact paint formulators and offer Green
Polyurethane® Binder for their proprietary formulations
|
|
|
Establish distribution channels utilizing
existing distribution hubs
|
|
|
Sub-license technology in certain geographic
areas.
|
HCT intends to establish full commercial-scale manufacturing
for both of its products at Adhpro Adhesives in Magog, Quebec and Simpson
Coatings in California through non-exclusive toll manufacturing agreements.
HCTs strategy is to avoid large capital investments in
manufacturing and to outsource the manufacturing of the EPOD Products to
third-party manufacturers. At current capacity, the Company can outsource the
manufacture of up to 20,000 tons per year.
HCT is currently at the commencement of the commercialization
phase of its business model. HCT plans on significantly expanding its sales and
client base by promoting the NTI Products at trade unions, press and trade shows
and by capitalizing on existing distribution hubs to increase its distribution
channels and build new strategic relationships. The Company expects to have
significant sales by the end of 2016.
18
Results of Operations
Comparison of the Three Months Ended March 31, 2016 and
2015
The Company recorded $156,602 in revenues for the three months
ended March 31, 2016 and $0 for the corresponding prior years period as the
Company started to commercialize its products.
General and administrative expenses totaled $219,939 for the
three months ended March 31, 2016, as compared to $491,335 for the three months
ended March 31, 2015, representing a 59% decrease from the prior corresponding
period. Included in general administrative expenses for the period ended March
31 are the following:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Professional Fees
|
$
|
157,960
|
|
$
|
267,455
|
|
|
(41%
|
)
|
|
Payroll
|
|
11,542
|
|
|
11,542
|
|
|
0%
|
)
|
|
Stock-based compensation
(non-cash)
|
|
-
|
|
|
109,832
|
|
|
(100%
|
)
|
|
Rent, supplies and general office costs
|
|
37,232
|
|
|
24,240
|
|
|
54%
|
|
|
Travel and trade shows
|
|
13,205
|
|
|
78,266
|
|
|
(83%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
219,939
|
|
$
|
491,335
|
|
|
(55%
|
)
|
Professional fees were $157,960 for the three months ended
March 31 2016, compared to $267,455 for the three months ended March 31, 2014.
Professional fees decreased due to $150,000 less in charges from a consultant
used for financing, sales and marketing purposes.
Payroll was $11,542 for the three months ended March 31, 2016
and 2015. There was one employee on the payroll. The other two employees were
paid through stock-based compensation and professional fees. $12,000 was paid to
an employee for the three months ended March 31, 2016 and charged to
professional fees. There was $0 charged to professional fees for the
corresponding prior years period. There was no stock-based compensation paid
during the three months ended March 31, 2016.
Stock-based compensation was $0 for the quarter ended March 31,
2016, compared to $109,832 for the quarter ended March 31, 2015. Stock based
compensation decreased from the prior years period due to no compensation
incurred during the current period.
Rent, supplies and general office costs were $37,232 for the
three months ended March 31, 2016, which was a $12,992 increase from $24,240 for
the three months ended March 31, 2015, due to higher corporate filing fees and
supplies costs.
For the three months ended March 31, 2016, travel and
tradeshows expenses were $13,205, decreasing by $65,061 from $78,266 for the
corresponding prior years quarter. The Company had increased travel in
connection with sales, product development and financing purposes during the
three months ended March 31, 2015.
The Company expects to significantly increase operating
expenses in the future including selling general and administrative expenses as
the Company commences its efforts to commercialize its products.
The Company had $280,756 of amortization expense related to its
intangible assets for the three months ended March 31, 2016, compared to
$265,547 for the three months ended March 31, 2015. The increase in amortization
expense was a result of the Company additional value associated with extending
the exclusivity period of the licenses with NTI, therefore increasing the
quarterly amortized amount.
The Company recognized a loss on change in fair value of
derivatives of $28,597 during the three months ended March 31, 2016, compared to
a loss of $20,561 in the three months ended March 31, 2015. The intrinsic fair
value of the Companys convertible notes increased during the three months ended
March 31, 2016. This increase was due to the exercise price of the embedded
conversion feature decreasing as a result of the discount rate applied to the
25-day average trading price of the Companys stock as measured at March 31,
2016 compared to the exercise price on the dates of issuance of the convertible
notes. Accordingly, as of March 31, 2016 the Company recorded an increase in the
derivative liabilities and a corresponding loss on change in fair value.
19
The Company recorded $276,783 in interest expense for the three
months ended March 31, 2016, compared to $729,078 in interest expense for the
three months ended March 31, 2015. The decrease in interest expense was a result
of the Company converting and/or redeeming the debt holders in the latter part
of 2015 and first three months of 2016.
During the three months ended March 31, 2016, the Company
recorded loss on extinguishment of debt in the amount of $2,684,000 compared to
$355,641 recorded in the three months ended March 31, 2015. The increase was due
to the loss as a result of warrants issued to pay a loan payable shareholder for
the three months ended March 31, 2016. In addition, for the three months ended
March 31, 2016, the Company recorded a loss on settlement of payables in the
amount of $746,400, compared to $369,260 during the three months ended March 31,
2015. Both losses occurred as a result of shares issued as payment to a
shareholder-creditor for accounts payable - related parties.
Liquidity and Capital Resources
The Company had cash and equivalents of $1,966 as of March 31,
2016. For the three months ended March 31, 2016, the Company received $757,911
proceeds from shareholder loans and repaid $208,138 for shareholder loans. The
Company also redeemed $136,056 and repaid $169,000 note payable - related party.
The Company intends to raise additional capital to fund ongoing operations, but
has no assurances of being able to do so. The Company expects it will need
approximately $600,000 in additional funding to continue operations for the next
12 months.
The ability of the Company to continue its operations is
dependent on the successful execution of management's plans, which include the
expectation of raising debt or equity based capital, with some additional
funding from other traditional financing sources, including term notes, until
such time that funds provided by operations are sufficient to fund working
capital requirements. The Company may need to incur additional liabilities with
related parties to sustain the Companys existence.
Principal Cash Flows for the Three Months Ended March 31,
2016 and 2015
Operating activities for the three months ended March 31, 2016,
used cash flows of $263,794 compared to $188,676 for the three months ended
March 31, 2015. The Companys net loss for the three months ended March 31, 2016
of $4,175,213 was partly offset by $2,684,000 in loss on extinguishment of debt,
$746,400 of loss on settlement of payables, $280,757 of amortization of
intangible asset and by non-cash interest and amortization of debt discounts of
$46,000 and $76,975, respectively.
Investing activities for the three months ended March 31, 2016,
used cash flows of $5,000 related to the issuance of a loan receivable for
equipment.
Financing activities for the three months ended March 31, 2016,
provided cash flows of $246,867 compared to $190,497 for the three months ended
March 31, 2015. The increase in cash provided by financing activities was
primarily as a result of proceeds from shareholder loans during the period.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements, including
arrangements that would affect our liquidity, capital resources, market risk
support and credit risk support or other benefits.