ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated balance sheet of Hybrid
Coating Technologies Inc. as of September 30, 2016 and the related unaudited
consolidated statements of operations, and cash flows for the three and nine
months ended September 30, 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 and nine months ended September 30, 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)
|
|
September 30,
|
|
|
December 31,
|
|
ASSETS
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
30,100
|
|
$
|
23,893
|
|
Total current assets
|
|
30,100
|
|
|
23,893
|
|
Equipment loan receivable
|
|
17,000
|
|
|
12,000
|
|
Intangible assets, net of accumulated
amortization
|
|
2,593,119
|
|
|
1,132,753
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
2,640,219
|
|
$
|
1,168,646
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
1,124,317
|
|
$
|
866,103
|
|
Accounts payable and accrued liabilities - related parties
|
|
679,697
|
|
|
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 $450,705
and $76,975, respectively
|
|
124,601
|
|
|
60,424
|
|
Convertible debentures, current portion
|
|
1,344,566
|
|
|
-
|
|
Loans payable
|
|
1,206,500
|
|
|
1,206,500
|
|
Loans payable - shareholders
|
|
2,553,626
|
|
|
2,197,082
|
|
Note payable - related party
|
|
2,320,491
|
|
|
1,300,491
|
|
Derivative liabilities
|
|
533,733
|
|
|
138,957
|
|
Total current liabilities
|
|
10,129,371
|
|
|
6,486,864
|
|
Convertible debentures, long-term portion
|
|
-
|
|
|
1,344,242
|
|
Total liabilities
|
|
10,129,371
|
|
|
7,831,106
|
|
Commitments and contingencies
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
Series A preferred stock, $0.001 par value,
1,000,000 shares authorized, 0 shares issued
|
|
-
|
|
|
-
|
|
Series B preferred stock, $0.001 par value, 4,000,000
shares authorized, 13,500 shares and 2,300 shares issued and outstanding,
respectively
|
|
14
|
|
|
2
|
|
Common stock, $0.001 par value,
1,600,000,000 shares authorized, 42,884,707 shares and 5,492,795 shares
issued and outstanding , respectively
|
|
42,885
|
|
|
5,943
|
|
Additional paid in capital
|
|
24,864,026
|
|
|
22,685,955
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
(32,396,077
|
)
|
|
(29,354,360
|
)
|
Total stockholders deficit
|
|
(7,489,152
|
)
|
|
(6,662,460
|
)
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
|
$
|
2,640,219
|
|
$
|
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
and Nine
Months
Ended
September
30, 2016 and 2015
(Unaudited)
|
|
Three
Months
|
|
|
Three
Months
|
|
|
Nine Months
|
|
|
Nine
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September
30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
-
|
|
$
|
1,712
|
|
$
|
167,614
|
|
$
|
5,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
11,196
|
|
|
260
|
|
|
100,000
|
|
|
2,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
(11,196
|
)
|
|
1,452
|
|
|
67,614
|
|
|
3,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
347,993
|
|
|
283,099
|
|
|
841,040
|
|
|
1,270,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible asset
|
|
158,440
|
|
|
265,611
|
|
|
541,738
|
|
|
796,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on settlement of
payables
|
|
(390,000
|
)
|
|
297,838
|
|
|
(390,000
|
)
|
|
781,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (income) expenses
|
|
116,433
|
|
|
846,548
|
|
|
992,778
|
|
|
2,849,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(127,629
|
)
|
|
(845,096
|
)
|
|
(925,164
|
)
|
|
(2,845,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on extinguishment of debt
|
|
2,546,397
|
|
|
-
|
|
|
(1,131,503
|
)
|
|
(355,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
117,368
|
|
|
(161,693
|
)
|
|
105,245
|
|
|
315,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on foreign currency transactions
|
|
790
|
|
|
4,994
|
|
|
(3,137
|
)
|
|
9,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(608,469
|
)
|
|
(316,013
|
)
|
|
(1,087,158
|
)
|
|
(1,401,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
2,056,086
|
|
|
(472,712
|
)
|
|
(2,116,553
|
)
|
|
(1,432,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
1,928,457
|
|
$
|
(1,317,808
|
)
|
$
|
(3,041,717
|
)
|
$
|
(4,278,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
$
|
0.22
|
|
$
|
(0.99
|
)
|
$
|
(0.33
|
)
|
$
|
(6.68
|
)
|
Diluted net income (loss) per
common share
|
$
|
0.16
|
|
$
|
(0.99
|
)
|
$
|
(0.33
|
)
|
$
|
(6.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
8,913,614
|
|
|
1,326,724
|
|
|
9,161,531
|
|
|
640,689
|
|
Diluted
|
|
11,779,622
|
|
|
1,326,724
|
|
|
9,161,531
|
|
|
640,689
|
|
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 Nine Months Ended September 30, 2016
and 2015
(Unaudited)
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
$
|
(3,041,717
|
)
|
$
|
(4,278,230
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
Stock-based compensation
|
|
59,000
|
|
|
211,374
|
|
Amortization of
intangible asset
|
|
541,738
|
|
|
796,704
|
|
(Gain) loss on settlement of
payables
|
|
(390,000
|
)
|
|
781,918
|
|
Loss on
extinguishment of debt
|
|
1,131,503
|
|
|
355,641
|
|
Change in fair value of
derivative liability
|
|
(105,245
|
)
|
|
(315,465
|
)
|
(Gain) loss on
foreign currency transactions
|
|
3,137
|
|
|
(9,486
|
)
|
Amortization of debt discounts
|
|
466,791
|
|
|
420,901
|
|
Interest expense
related to derivative liability in excess of face value of debt
|
|
126,770
|
|
|
374,494
|
|
Interest imputed from notes
payable - related party
|
|
138,000
|
|
|
89,421
|
|
Change in operating assets
and liabilities
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
255,077
|
|
|
827,970
|
|
Accounts payable
and accrued liabilities - related parties
|
|
201,012
|
|
|
127,537
|
|
Deferred revenue
|
|
(150,602
|
)
|
|
-
|
|
Net cash used in operating
activities
|
|
(764,536
|
)
|
|
(617,221
|
)
|
|
|
|
|
|
|
|
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
|
|
-
|
|
|
(4,801
|
)
|
Proceeds from convertible
notes, net of issuance costs
|
|
427,500
|
|
|
524,210
|
|
Proceeds from loans payable
|
|
-
|
|
|
229,000
|
|
Proceeds from loans payable -
shareholders
|
|
1,924,433
|
|
|
1,778,106
|
|
Repayments of loans payable - shareholders
|
|
(960,134
|
)
|
|
(1,483,494
|
)
|
Repayments of convertible
notes
|
|
(136,056
|
)
|
|
(189,872
|
)
|
Repayments of note payable - related party
|
|
(480,000
|
)
|
|
(236,000
|
)
|
Proceeds from exercise of
warrants
|
|
-
|
|
|
500
|
|
Net cash provided by financing activities
|
|
775,743
|
|
|
617,649
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
6,207
|
|
|
428
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
23,893
|
|
|
-
|
|
CASH, END OF PERIOD
|
$
|
30,100
|
|
$
|
428
|
|
5
Hybrid Coating Technologies Inc.
Consolidated
Statements of Cash Flows (continued)
For the Nine Months Ended
September 30, 2016 and 2015
(Unaudited)
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Supplemental disclosure of
cash flow information
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest paid
|
$
|
72,222
|
|
$
|
44,993
|
|
Income taxes
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible asset through
issuance of note payable
|
$
|
1,500,000
|
|
$
|
-
|
|
Acquisition of intangible
asset through issuance of preferred stock
|
$
|
502,104
|
|
$
|
420
|
|
Common stock issued for settlement of
accounts payable - related party
|
$
|
-
|
|
$
|
941,384
|
|
Warrants and stock issued for
settlement of liabilities
|
$
|
5,006,395
|
|
$
|
626,410
|
|
Warrants issued for payment of interest
|
$
|
-
|
|
$
|
15,600
|
|
Warrants issued for
convertible debt inducement
|
$
|
15,000
|
|
$
|
-
|
|
Reduction of derivative liabilities on
redemption of debt
|
$
|
354,526
|
|
$
|
-
|
|
Derivative debt discount
|
$
|
854,547
|
|
$
|
851,377
|
|
Cashless exercise of warrants
|
$
|
-
|
|
$
|
410
|
|
Common stock issued for debt
|
$
|
-
|
|
$
|
1,121,155
|
|
Warrants issued for cancellation of shares
|
$
|
151,950
|
|
$
|
1,950
|
|
Cancellation of common shares
|
$
|
-
|
|
$
|
8,113
|
|
Cancellation of warrants
|
$
|
3,860,000
|
|
$
|
-
|
|
Exchange of loans payable -
shareholders to convertible notes
|
$
|
350,200
|
|
$
|
-
|
|
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 on 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 of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 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 and related parties. 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 recurring negative
cash flows from operations, an accumulated deficit of $32,396,077, and has a
working capital deficit of $10,099,271 as of September 30, 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 nine months ended September 30, 2016 and 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.
7
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.
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 September 30, 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)
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance -
derivative liabilities
|
$
|
138,957
|
|
$
|
181,723
|
|
Additions
|
|
854,547
|
|
|
851,377
|
|
Reduction on conversion of
debt
|
|
(354,526
|
)
|
|
(358,672
|
)
|
Total gains
|
|
(105,245
|
)
|
|
(315,465
|
)
|
Ending balance - derivative
liabilities
|
$
|
533,733
|
|
$
|
358,963
|
|
|
|
|
|
|
|
|
Change in unrealized gains
(losses) included in earnings relating to derivatives still held as of
September 30, 2016 and 2015
|
$
|
105,245
|
|
$
|
315,465
|
|
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.
8
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.
For the nine months ended September 30, 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:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible debt
|
|
111,241,669
|
|
|
1,221,371
|
|
Stock warrants
|
|
1,068,926
|
|
|
135,733
|
|
Total common shares issuable
|
|
112,310,595
|
|
|
1,357,104
|
|
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 September 30, 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 11,200 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 156,500 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
$313,000 and shall expire ten years from the date of issuance.
|
|
|
|
|
iii)
|
Issue purchase warrants to purchase 630,000 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.
9
Intangible assets activity is as follows for the nine months
ended September 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net intangible assets, beginning of period
|
$
|
1,132,753
|
|
$
|
2,136,205
|
|
Purchases
|
|
2,002,104
|
|
|
420
|
|
Less: current
amortization
|
|
(541,738
|
)
|
|
(796,704
|
)
|
Net intangible assets, end of period
|
$
|
2,593,119
|
|
$
|
1,339,921
|
|
The balance of intangible assets, net is as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Intangible assets
|
$
|
6,504,584
|
|
$
|
4,502,480
|
|
Less impairment and transfer
|
|
(781,917
|
)
|
|
(781,917
|
)
|
Less: accumulated amortization
|
|
(3,129,548
|
)
|
|
(2,587,810
|
)
|
Intangible assets, net
|
$
|
2,593,119
|
|
$
|
1,132,753
|
|
During the three months ended September 30, 2016 and 2015, the
Company recognized amortization expense of its intangible assets of $158,440 and
$265,611, respectively. During the nine months ended September 30, 2016 and
2015, the Company recognized amortization expense of its intangible assets of
$541,738 and $796,704, respectively.
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 September
30,
2016
|
Carrying Value
at
December
31, 2015
|
A
|
Coating Products
|
North America
|
12-Jun-10
10 years, 6 months
|
$500,000
|
$0
|
$0
|
B
|
Coating Products
|
Russian Territory
|
17-Mar-11
9 years, 9 months
|
$150,000
|
$21,041
|
$24,800
|
C
|
Coating Products
|
European Continent
|
07-Jul-11
9 years, 5 months
|
$1,250,000
|
$97,390
|
$129,020
|
D
|
Spray Foam Insulation
|
North America, European
Continent and
Russian Territory
|
06-May-16
4 years, 7 months
|
$500,000
|
$49,227
|
$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
|
$656,002
|
$833,333
|
F
|
Polyurethane Foam Packaging
|
North America
|
10-Aug 15
5 years, 4 months
|
$102,480
|
$39,404
|
$58,735
|
G
|
Extension
|
All Territories and Products
|
31-Dec -20
5 years
|
$2,002,104
|
$1,730,055
|
$0
|
TOTAL
|
|
|
|
$6,504,584
|
$2,593,119
|
$1,132,753
|
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 loan is currently in default, and 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.
Other than loans from related parties, there were no new loans
advanced in the first nine months of 2016. During the first nine months of 2015 lenders advanced $229,000 in non-interest bearing
demand loans.
10
During the three months ended September 30, 2016 and 2015,
interest expense related to these notes was $43,153 and $36,908, respectively.
During the nine months ended September 30, 2016 and 2015, interest expense
related to these notes was $129,478 and $122,245, respectively, and the interest
paid was $20,250 and $19,150, 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 $982,675 as of September 30, 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 $2,553,626 and
$2,197,082 in loans payable to shareholders as of September 30, 2016 and
December 31, 2015, respectively.
During the first nine months of 2016, the Company received
$1,924,433 in shareholder advances and repaid $960,134. During the first nine
months of 2015, the Company received $1,778,106 in shareholder advances and
repaid $1,483,494. During the nine months ended September 30, 2016, the Company
issued a total of 12,805,000 shares of common stock and 8,100,000 warrants to a
shareholder-creditor for payment of outstanding loans payable. The fair value of
the shares was $1,402,296 based on the market price on the date of grant which
settled loans of $270,893. Accordingly, the Company recognized a loss on
settlement in the amount of $1,131,503. The fair value of the warrants was
$3,380,000 based on the Black-Scholes method described in Note 10 which settled
accounts payable and accrued liabilities to related parties of $531,000.
Accordingly, the Company recognized a loss on settlement in the amount of
$2,849,000. In August 2016, the Company and shareholder-creditor agreed to
cancel the 8,100,000 warrants issued previously, reinstate the loan of $531,000
and reverse the loss on settlement of $2,849,000. An additional 1,500,000
warrants were cancelled, accounts payable and accrued liabilities related
parties of $90,000 were reinstated and a loss on settlement of payables of
$380,000 was reversed.
During the three months ended September 30, 2016 and 2015,
interest expense related to these loans was $27,218 and $16,975, respectively.
During the nine months ended September 30, 2016 and 2015, the total interest
expense on the loans payable to shareholders was $81,655 and $50,925,
respectively, and the total interest paid was $3,121 and $4,371, respectively.
The Company had an outstanding balance of $2,553,626 and $2,197,082 as of
September 30, 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.
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.
11
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; and
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
29, 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.
During the three months ended September 30, 2016 and 2015,
interest expense related to these convertible debentures was $33,284. Interest
expense of $99,128 and $98,766 have been recorded on the convertible debentures
for the nine months ended September 30, 2016 and 2015, respectively. No interest
payments were made during the nine months ended September 30, 2016. The balance
of the debentures at September 30, 2016 and December 31, 2015, was $1,344,566
and $1,344,242, respectively.
NOTE 7 CONVERTIBLE NOTES
Convertible debt with a variable conversion feature consists of
the following as of September 30, 2016 and December 31, 2015:
Noteholder (issuance date)
|
|
|
September 30, 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
|
|
Harbour Gates (5/9/16)
|
|
|
110,000
|
|
|
-
|
|
EMA Financial (5/15/16)
|
|
|
40,000
|
|
|
-
|
|
Forest Capital ( 6/17/16)
|
|
|
25,000
|
|
|
-
|
|
LG (7/11/16)
|
|
|
29,000
|
|
|
-
|
|
Adar Bays (7/14/16)
|
|
|
35,000
|
|
|
-
|
|
Crown Bridge (7/28/16)
|
|
|
35,000
|
|
|
-
|
|
Forest Capital ( 8/25/16)
|
|
|
55,000
|
|
|
-
|
|
Forest Capital ( 8/26/16)
|
|
|
41,062
|
|
|
-
|
|
Crown Bridge (8/29/16)
|
|
|
2,466
|
|
|
-
|
|
Eagle Equities (8/30/16)
|
|
|
15,500
|
|
|
-
|
|
Eagle Equities (9/6/16)
|
|
|
60,000
|
|
|
-
|
|
Lucas Hoppel (9/13/16)
|
|
|
18,278
|
|
|
-
|
|
Micro Cap Equity (9/13/16)
|
|
|
13,800
|
|
|
-
|
|
Lucas Hoppel (9/13/16)
|
|
|
38,500
|
|
|
-
|
|
Crown Bridge (9/29/16)
|
|
|
56,700
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
575,306
|
|
|
137,399
|
|
Less: debt discount
|
|
|
(450,705
|
)
|
|
(76,975
|
)
|
Convertible debentures, net
|
|
$
|
124,601
|
|
$
|
60,424
|
|
During the nine months ended September 30, 2016, the Company
fully repaid the noteholders a total of $136,056 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. In addition, the Company issued $427,500 in
convertible notes, net of issuance costs of $57,000, recorded as a debt
discount. The Company determined that the conversion option was a derivative.
Accordingly, the Company recorded a derivative liability of $420,980 of which
$390,957 was recorded as debt discount, $99,323 as additional interest expense
and the Company amortized $105,206 of debt discount as interest expense and
recorded accrued interest of $6,284.
12
The Company issued an additional $350,200 in convertible notes
which was a an assumption of promissory notes and loans owing to
shareholder-creditors and thereby a reduction in loans payable shareholders for
the same amount. Accordingly the Company recorded a derivative liability of
$380,107 of which $346,160 was recorded as debt discount, $33,947 as additional
interest expense and the Company amortized $12,531 of debt discount as interest
expense and recorded accrued interest of $1,355. The Company issued to
creditors, 24,416,448 shares for converted notes of $202,305, fees of $3,000 and
interest of $1,965. This resulted in a corresponding reduction in the debt
discount of $194,475 that was expensed as interest expense.
During the nine months ended September 30, 2015, the Company
repaid a noteholder $189,872 including interest of $13,333 and amortized the
remaining $60,424 discount to interest expense. In addition, the Company issued
$389,250 in convertible notes, net of issuance costs of $57,608, recorded as a
debt discount. The Company determined that the conversion option was a
derivative. Accordingly, the Company recorded a derivative liability of $751,776
of which $388,025 was recorded as debt discount, $366,251 as additional interest
expense and the Company amortized $77,116 of debt discount as interest expense
and recorded accrued interest of $1,761.
The Company issued an additional $32,000 in convertible notes
which was an assumption of promissory notes owing to shareholder-creditors and
thereby a reduction in loans payable shareholders for the same amount and a loss
on settlement of debt of $36,103. Accordingly the Company recorded a derivative
liability of $36,103 of which $32,000 was recorded as debt discount, $4,103 as
additional interest expense and the Company amortized the full $32,000 of debt
discount as interest expense as the lender converted all $32,000 of debt in
exchange for 134,102 shares of the Companys common stock.
Following is a summary of the debt discount for each of the
convertible notes:
|
|
|
|
|
|
|
|
|
Debt Discount
|
|
|
|
|
|
|
|
Noteholder (issuance
|
|
|
December 31,
|
|
|
|
|
|
Net
of
|
|
|
Debt
|
|
|
September 30,
|
|
date)
|
|
|
2015
|
|
|
Additions
|
|
|
Amortizations
|
|
|
Conversion
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMJ (3/4/15)
|
|
$
|
43,566
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(43,566
|
)
|
$
|
-
|
|
Prolific (5/8/15)
|
|
|
800
|
|
|
-
|
|
|
-
|
|
|
(800
|
)
|
|
-
|
|
LG (7/16/15)
|
|
|
52,500
|
|
|
-
|
|
|
-
|
|
|
(52,500
|
)
|
|
-
|
|
EMA Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10/29/15)
|
|
|
40,000
|
|
|
-
|
|
|
-
|
|
|
(40,000
|
)
|
|
-
|
|
Oleg Poltaratskly (10/22/15)
|
|
|
-
|
|
|
20,000
|
|
|
-
|
|
|
(20,000
|
)
|
|
-
|
|
Harbour Gates (5/9/16)
|
|
|
-
|
|
|
110,000
|
|
|
(47,806
|
)
|
|
-
|
|
|
62,194
|
|
EMA Financial (5/15/16)
|
|
|
-
|
|
|
40,000
|
|
|
(24,918
|
)
|
|
-
|
|
|
15,082
|
|
Forest Capital ( 6/17/16)
|
|
|
-
|
|
|
25,000
|
|
|
(17,808
|
)
|
|
-
|
|
|
7,192
|
|
LG (7/11/16)
|
|
|
-
|
|
|
29,000
|
|
|
(22,564
|
)
|
|
-
|
|
|
6,436
|
|
LG (7/11/16)
|
|
|
-
|
|
|
25,000
|
|
|
-
|
|
|
(25,000
|
)
|
|
-
|
|
Adar Bays (7/14/16)
|
|
|
-
|
|
|
35,000
|
|
|
(27,521
|
)
|
|
-
|
|
|
7,479
|
|
Crown Bridge (7/28/16)
|
|
|
-
|
|
|
35,000
|
|
|
(28,863
|
)
|
|
-
|
|
|
6,137
|
|
Forest Capital ( 8/25/16)
|
|
|
-
|
|
|
55,000
|
|
|
(49,575
|
)
|
|
-
|
|
|
5,425
|
|
Forest Capital ( 8/26/16)
|
|
|
-
|
|
|
75,000
|
|
|
(34,177
|
)
|
|
(33,938
|
)
|
|
6,885
|
|
Crown Bridge (8/29/16)
|
|
|
-
|
|
|
35,000
|
|
|
(2,401
|
)
|
|
(32,534
|
)
|
|
65
|
|
Eagle Equities (8/30/16)
|
|
|
-
|
|
|
60,000
|
|
|
(14,330
|
)
|
|
(44,500
|
)
|
|
1,170
|
|
Eagle Equities (9/8/16)
|
|
|
-
|
|
|
60,000
|
|
|
(56,384
|
)
|
|
-
|
|
|
3,616
|
|
Lucas Hoppel (9/13/16)
|
|
|
-
|
|
|
53,500
|
|
|
(17,871
|
)
|
|
(35,222
|
)
|
|
407
|
|
Micro Cap Equity (9/13/16)
|
|
|
-
|
|
|
25,000
|
|
|
(13,266
|
)
|
|
(11,200
|
)
|
|
512
|
|
Lucas Hoppel (9/14/16)
|
|
|
-
|
|
|
38,500
|
|
|
(36,812
|
)
|
|
-
|
|
|
1,688
|
|
Crown Bridge (9/29/16)
|
|
|
-
|
|
|
56,700
|
|
|
(56,387
|
)
|
|
-
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,866
|
|
$
|
777,700
|
|
$
|
(450,705
|
)
|
$
|
(339,260
|
)
|
$
|
124,601
|
|
13
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 September 30, 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. As of September 30, 2016 and
December 31, 2015, the Company recorded derivative liabilities for issuance of
convertible notes payable initial fair value of $854,547 and $1,014,703,
respectively.
The Company recorded unrealized gains of $105,245 and $315,465
for the nine months ended September 30, 2016 and 2015, respectively. The Company
recorded an unrealized gain of $117,368 and an unrealized loss of $161,963 for
the three months ended September 30, 2016 and 2015, respectively. The fair value
of the derivative liability was $533,733 and $138,957 as of September 30, 2016
and December 31, 2015, respectively.
|
|
|
Derivative Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Valuation
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Increase
|
|
|
September 30,
|
|
Date
|
|
|
2015
|
|
|
Additions
|
|
|
Conversions
|
|
|
(Decrease)
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2011 debenture
|
|
$
|
3,363
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,979
|
|
$
|
5,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb 21, 2012 debenture
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
148
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 convertible notes
|
|
|
135,594
|
|
|
-
|
|
|
(154,939
|
)
|
|
19,345
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 convertible notes
|
|
|
-
|
|
|
854,547
|
|
|
(199,587
|
)
|
|
(126,717
|
)
|
|
528,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
138,957
|
|
$
|
854,547
|
|
$
|
(354,526
|
)
|
$
|
(105,245
|
)
|
$
|
533,733
|
|
14
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, 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 reverse stock split became effective on July
15, 2016. All share amounts and per share amounts have been retrospectively
restated to reflect the reverse stock split.
During the nine months ended September 30, 2016, the Company
issued a total of 12,805,000 shares of common stock to a shareholder-creditor
for payment of outstanding loans. The fair value of the shares was $1,402,396
based on the market price on the date of grant which settled loans payable
shareholders of $270,893. Accordingly, the Company recognized a loss on
settlement in the amount of $1,131,503.
The Company issued 24,396,448 shares to lenders for conversion
of $202,394 of debt and payment of $3,000 in fees and $215 in interest.
The Company issued 500,000 shares to a consultant for fair
value of $59,000 recorded as stock-based compensation.
The Company cancelled 9,750 common shares issued in 2014 and
750 shares issued in 2015 in exchange for 759,750 warrants with a 5-year term
and an exercise price of $0.001 valued on the original grant date, of which
$151,950 was reclassified from common stock to additional paid-in capital in
2016. The Company issued 214 shares to shareholders for fractional shares as a
result of the conversion.
As part of its extension of its licenses (see Note 3), the
Company issued 11,200 Series B Preferred Shares and 786,500 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 nine months ended September 30, 2016, the Company
issued and then later cancelled 8,100,000 warrants to a shareholder to repay
loans payable to shareholders with a fair value of $3,380,000 (original recorded
as an adjustment to loans payable - shareholder of $531,000 and loss on
settlement of debt of $2,849,000 but then reversed); cancelled an additional
1,500,000 warrants to the same shareholder-creditor originally issued in
December 2015 reinstating the accounts payable - related party of $90,000 and
reversing the loss on settlement of $390,000, 75,000 warrants issued to a
convertible note holder as part of the derivative liability for a fair value of
$151,755; 759,750 (151,950,000 warrants before reverse stock split) warrants to
shareholder in exchange for the cancellation of 759,750 (151,950,000 warrants
before reverse stock split) shares for consideration of $151,950, all with a
corresponding increase in additional paid-in capital valued using the
Black-Scholes option pricing model according to the following assumptions:
Expected volatility
|
176.4%-287.9%
|
Exercise price
|
$0.002
|
Stock price
|
$0.42-$0.2
|
Expected life
|
5 years
|
Risk-free interest rate
|
1.23%-1.46%
|
Dividend yield
|
0%
|
A summary of the activity in the Company's warrants during the
nine months ended September 30, 2016 is presented below:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable,
at December 31, 2015
|
|
1,734,176
|
|
$
|
0.36
|
|
Issued
|
|
8,934,750
|
|
$
|
0.00
|
|
Cancellation of warrants
|
|
(9,600,000
|
)
|
$
|
0.00
|
|
Outstanding and exercisable, at September 30,
2016
|
|
1,068,926
|
|
$
|
0.00
|
|
The intrinsic value of warrants outstanding at September 30,
2016 was $8,453.
15
Contingent Warrant Issuance
On July 20, 2012, the Companys board of directors approved the
issuance of 1,500 (300,000 warrants before reverse stock split) warrants with an
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 nine months ended September
30, 2016, the Company extended all its licenses with NTI until December 31,
2020. The consideration given was 11,200 Series B preferred shares and 786,500
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 2,100 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 200
shares 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 40,565 shares of common stock
valued at $872,160.
During the nine months ended September 30, 2016, the Company
made principal payments of $480,000 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 September 30, 2016 and December 31, 2015, the balance of notes
payable - related party outstanding with NTI was $2,320,491 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.
Fees and Loans with Shareholder
During the nine months ended September 30, 2016 and 2015, the
Company was charged $198,149 and $515,609, 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 approximately $63,000 in
2016 and $77,000 in 2015, and professional fees of approximately $0 in 2016 and
$303,000 in 2015 related to strategic partnership negotiations and other
business related services performed on the Companys behalf.
The Company issued 660,750 common shares with a fair value of
$941,384 to settle liabilities of $383,663 and a loss on settlement of $557,721
to the consultant during the nine months ended September 30, 2015. The Company
had an outstanding balance payable included in accounts payable and accrued
liabilities - related parties as of September 30, 2016 and December 31, 2015 of
$335,583 and $91,019, respectively. Also during the nine months ended September
30, 2015, the shareholder-creditor transferred $182,000 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 $182,000 into 253,969 shares of the Companys common
stock. The shares had a fair value of $360,578 and the Company recorded a loss
on debt extinguishment of $158,141 and loss on settlement of payables of
$102,437.
During the nine months ended September 30, 2016, the consultant
described above loaned the Company $959,963 through loans payable - shareholders
and the Company made a cash repayment of $15,000 and non-cash repayments through
the issuance 12,805,000 shares of common stock with a fair value of $270,893.
During the nine months ended September 30, 2015, this consultant loaned the
Company $407,153 through loans payable - shareholders and the Company made cash
repayments to this consultant of $3,000.
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 nine
months ended September 30, 2016 and 2015 was $33,750.
16
NOTE 12 SUBSEQUENT EVENTS
Subsequent to year-end, the Company issued a total of
41,200,000 shares of common stock to a shareholder-creditor for payment of
outstanding loans. The fair value of the shares was $114,190 based on the market
price on the date of grant which settled loans payable shareholders of $27,995.
Accordingly, the Company recognized a loss on settlement in the amount of
$86,195. The Company issued 100,251,704 shares to lenders for conversion of
$184,349 of debt and payment of $2,500 in fees and $86 in interest.
The Company issued a convertible note at 5% interest with a
1-year maturity for proceeds of $52,500 including an original issue discount of
$2,500.
The Company issued an additional $118,000 in convertible notes
which was an assumption of promissory notes and loans owed by
shareholder-creditors and thereby a reduction in loans payable shareholders for
the same amount. The convertible notes have a 1-year maturity and interest rate
of 10%, with a conversion price being either the lower of $0.0008 and 60 % of
the lowest traded price during the 25 trading days preceding the conversion date
or 60 % of the lowest traded price during the 20 trading days preceding the
conversion date
On November 9, 2016, the Company, and Nanotech Industries
Inc. entered into a Twelfth Amendment to the Licensing Agreement previously
entered into by and between the Parties on July 12, 2010 whereby:
1.
|
Pursuant to the terms of the Licensing Agreement, the
right of exclusivity for SFI Exclusivity shall be renewed for a period of
24 months from the date of execution of this Twelfth Amendment Agreement
(Renewal Period).
|
|
|
2.
|
In consideration for the renewal of the SFI Exclusivity
for the Renewal Period, NTI shall issue to the Licensor 600,000 Series B
Preferred Shares and 3,000,000 warrants to purchase 3,000,000 Series B
Preferred Shares with an exercise price of $0.00001 and expiring 10 years
from the date of issuance (Consideration), to be paid at the time of
execution of this Twelfth Amendment Agreement (Deadline). Should NTI not
pay the Consideration within the Deadline, the SFI Exclusivity shall not
be renewed.
|
Nanotech Industries Inc. exercised 286,500 warrants and
purchased 286,500 Series B preferred shares.
17
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 September 30, 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 nine months ended
September 30, 2016.
18
Overview
Company Background
HCTs principal office is located in Daly City, California,
U.S.A.
As of September 30, 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 third quarter of 2017.
19
Results of Operations
Comparison of the Nine Months Ended September 30, 2016 and
2015
The Company recorded $167,614 in revenues for the nine months
ended September 30, 2016, and $5,815 for the corresponding prior years period
as the Company started to commercialize its products.
General and administrative expenses totaled $841,040 for the
nine months ended September 30, 2016, as compared to $1,270,721 for the nine
months ended September 30, 2015, representing a 34% decrease from the prior
corresponding period. Included in general administrative expenses for the nine
months ended September 30 are the following:
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
$
|
518,048
|
|
$
|
678,441
|
|
|
(24%
|
)
|
Payroll
|
|
33,675
|
|
|
50,030
|
|
|
(33%
|
)
|
Stock-based compensation
(non-cash)
|
|
59,000
|
|
|
211,374
|
|
|
(72%
|
)
|
Rent, supplies and general office costs
|
|
109,750
|
|
|
117,295
|
|
|
(6%
|
)
|
Travel and tradeshows
|
|
120,567
|
|
|
213,581
|
|
|
(44%
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
841,040
|
|
$
|
1,270,721
|
|
|
(34%
|
)
|
Professional fees were $518,048 for the nine months ended
September 30, 2016, compared to $678,441 for the nine months ended September 30,
2015, a decrease of approximately $160,000. Professional fees decreased due to
approximately $297,000 less in charges from a consultant used for financing,
sales and marketing purposes. This was offset by an increase of $137,000 in
legal fees, accounting fees and fees paid to other consultants for sales and
financing purposes.
Payroll was $33,675 and $50,030 for the nine months ended
September 30, 2016 and 2015, respectively. There was one employee on the
payroll. The other two employees were paid through stock-based compensation and
professional fees. $20,500 was paid to an employee for the nine months ended
September 30, 2016 and charged to professional fees. There was $0 charged to
professional fees for the corresponding prior years period.
Stock-based compensation was $59,000 for the nine months ended
September 30, 2016, compared to $211,374 for the nine months ended September 30,
2015. Stock-based compensation decreased from the prior years period due to
fewer consultants being compensated in this manner in 2016.
Rent, supplies and general office costs were $109,750 for the
nine months ended September 30, 2016, which was a $7,545 decrease from $117,295
for the nine months ended September 30, 2015 due to lower office costs.
For the nine months ended September 30, 2016, travel and
tradeshows expenses were $120,567, decreasing by $93,014 from $213,581 for the
corresponding prior years quarter. The Company had decreased travel in
connection with sales, product development and financing purposes during the
nine months ended September 30, 2016, due to less activity as compared to the
prior period.
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 $541,738 of amortization expense related to its
intangible assets for the nine months ended September 30, 2016, compared to
$796,704 for the nine months ended September 30, 2015. The decrease in
amortization expense was a result of the five-year extension of the exclusivity
period of the Companys licenses with NTI completed in the first quarter of
2016, therefore decreasing the amount amortized during the current period.
The Company recognized a gain on change in fair value of
derivatives of $105,245 during the nine months ended September 30, 2016,
compared to a gain of $315,465 in the nine months ended September 30, 2015. The
intrinsic fair value of the Companys convertible notes decreased during the
nine months ended September 30, 2016. This decrease 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 September 30, 2016 compared to the exercise price on the dates of
issuance of the convertible notes. Accordingly, as of September 30, 2016, the
Company recorded a decrease in the derivative liabilities and a corresponding
gain on change in fair value.
20
The Company recorded $1,087,158 in interest expense for the
nine months ended September 30, 2016, compared to $1,401,902 in interest expense
for the nine months ended September 30, 2015. The decrease in interest expense
was a result of the Company converting and redemption by the debt holders in the
latter part of 2015 and first nine months of 2016.
During the nine months ended September 30, 2016, the Company
recorded a loss on extinguishment of debt in the amount of $1,131,503 compared
to $355,641 recorded in the nine months ended September 30, 2015. The increase
was as a result of shares issued to pay a loan payable shareholder for the nine
months ended September 30, 2016. In addition, for the nine months ended
September 30, 2016, the Company recorded a gain on settlement of payables in the
amount of $390,000, compared to a loss of $781,918 during the nine months ended
September 30, 2015. The gain was a reversal of the loss recorded for warrants
issued to pay accounts payable related parties in 2015 because the warrants
were cancelled in 2016 and the debt was reinstated. The loss in 2015 occurred as
a result of shares issued as payment to a shareholder-creditor for accounts
payable - related parties.
Comparison of the Three Months Ended September 30, 2016 with
the Three Months Ended September 30, 2015
The Company recorded $0 in revenues for the three months ended
September 30, 2016 and $1,712 for the corresponding prior years period. The
Company is not at the commercial stage yet where it has regular repeating orders
from customers.
General and administrative expenses totalled $347,993 for the
three months ended September 30, 2016, as compared to $283,099 for the three
months ended September 30, 2015, representing a 23% increase from the prior
corresponding period. Included in general administrative expenses for the three
months ended September 30 are the following:
|
|
Three Months Ended September 30
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
$
|
196,366
|
|
$
|
101,280
|
|
|
94%
|
|
Payroll
|
|
11,066
|
|
|
27,128
|
|
|
(59%
|
)
|
Stock-based compensation (non-cash)
|
|
59,000
|
|
|
34,542
|
|
|
71%
|
|
Rent, supplies and general office costs
|
|
36,529
|
|
|
65,558
|
|
|
(44%
|
)
|
Travel and tradeshows
|
|
45,032
|
|
|
54,591
|
|
|
(18%
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
347,993
|
|
$
|
283,099
|
|
|
23%
|
|
Professional fees were $196,366 for the three months ended
September 30, 2016, a 94% increase compared to $101,280 for the three months
ended September 30, 2015 as a result of approximately $95,000 more in charges
from a professionals used for financing, sales and marketing purposes.
Payroll was $11,066 and $27,128 for the three months ended
September 30, 2016 and 2015, respectively. There was one employee charged to
this account in both 2016 to 2015. The decrease from 2015 was a result of
expenses charged to this account and later reversed in 2015.
Stock-based compensation was $59,000 for the three months ended
September 30, 2016 compared to $34,542 for the three months ended September 30,
2015 an increase of approximately 25,000 due to a higher compensation
arrangement in 2016.
Rent, supplies and general office costs were $36,529 for the
three months ended September 30, 2016, a decrease of 44% from the $65,558 for
the corresponding prior years period due to higher office and corporate filing
expenses in 2015.
For the three months ended September 30, 2016, travel and
tradeshows were $45,032 decreasing from $54,591 for the corresponding prior
years period. There was a strong effort to promote the product and raise
financing in 2015.
The Company had $158,440 of amortization expense related to its
intangible assets for the three months ended September 30, 2016, compared to
$265,611 for the three months ended September 30, 2015. The decrease in
amortization expense was a result of the five-year extension of the exclusivity
period of the Companys licenses with NTI completed in the first quarter of
2016, therefore decreasing the amount amortized during the current period.
The Company recognized a gain on change in fair value of
derivatives of $117,368 during the three months ended September 30, 2016,
compared to a loss of $161,693 in the three months ended September 30, 2015. The
intrinsic fair value of the Companys convertible notes decreased during the
three months ended September 30, 2016. This decrease 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 September 30, 2016 compared to the
exercise price on the dates of issuance of the convertible notes. Accordingly,
as of September 30, 2016, the Company recorded a decrease in the derivative
liabilities and a corresponding gain on change in fair value. The opposite
occurred in the prior years period which resulted in the loss.
21
The Company recorded $608,469 in interest expense for the three
months ended September 30, 2016, compared to $316,013 in interest expense for
the three months ended September 30, 2015. The decrease in interest expense was
a result of the Company converting and redemption by the debt holders in the
latter part of 2015 and first nine months of 2016.
During the three months ended September 30, 2016, the Company
recorded a gain on extinguishment of debt in the amount of $2,546,397 compared
to $0 recorded in the three months ended September 30, 2015. In addition, for
the three months ended September 30, 2016, the Company recorded a gain on
settlement of payables in the amount of $390,000, compared to a loss of
$297,838 during the three months ended September 30, 2015. The gain was a
reversal of the loss recorded for warrants issued to pay accounts payable -
related parties and loans payable shareholders in 2015 because the warrants were
cancelled in 2016 and the debt was reinstated. The loss on settlement of
payables in 2015 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 $30,100 as of September
30, 2016. For the nine months ended September 30, 2016, the Company received
$1,924,433 proceeds from shareholder loans and repaid $960,134 for shareholder
loans. The Company also received $427,500 proceeds and redeemed $136,056 in
convertible notes and repaid $480,000 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 Nine Months Ended September 30,
2016 and 2015
Operating activities for the nine months ended September 30,
2016, used cash flows of $764,536 compared to $617,221 for the nine months ended
September 30, 2015. The Companys net loss for the nine months ended September
30, 2016 of $3,041,717 was partly offset by $1,131,503 in loss on extinguishment
of debt, $541,738 of amortization of intangible asset and by non-cash interest
and amortization of debt discounts of $138,000 and $466,791, respectively.
Investing activities for the nine months ended September 30,
2016, used cash flows of $5,000 related to the issuance of a loan receivable for
equipment.
Financing activities for the nine months ended September 30,
2016 provided cash flows of $775,743 compared to $617,649 for the nine months
ended September 30, 2015. The increase in cash provided by financing activities
was primarily as a result of higher proceeds from loans payable - shareholders
in 2016.
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.
22