Form 10-K for HYDROGEN FUTURE CORP
21-Jan-2015
Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This annual report on Form 10-K and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements (collectively the "Filings") and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan", or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the section entitled "Risk Factors", relating to the Company's industry, the Company's operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Plan of Operation
Hydrogen Future Corp. is a development stage company specializing in the commercialization of hydrogen fuel cell technologies and contract research and laboratory services. Currently, our contract research and laboratory services division is inactive, and we plan to concentrate on commercializing our hydrogen fuel cell products.
We are currently in the process of developing a working prototype of our HydraStax ? fuel cell product for residential use. We believe that we will require $800,000 of the upcoming fiscal year to meet this objective.
Results of Operations
Our results of operations are summarized below:
Year Ended Year Ended September 30, September 30, 2014 ($) 2013 ($) Revenue -0- -0- Expenses 6,047,884 761,052 Issuance of Common Stock to settle a prior liability 117,000 -0- Other Income (Expenses) (1,638,756 ) (1,660,093) Net Income (Loss) (7,803,640 ) (2,421,145) Gain/(Loss) Per Share-Basic (6.58 ) (4,172.94 ) Gain/(Loss) Per Share-Fully diluted (4.92 ) (3,026.50 )
Year Ended September 30, 2014 Compared to the Year Ended September 30, 2013 During the years ended September 30, 2014 and 2013, we did not earn any revenues. We have not earned any revenues since our inception and there is no assurance that we will be able to earn any revenues in the future. Our expenses for the years ended September 30, 2014 and 2013 can be summarized as follows: For the Year Ended September 30, 2014 ($) 2013 ($) Difference ($) Compensation Expense to Officers 5,255,000 471,549 4,783,451 Consulting Fees 340,000 217,335 122,665 General and administrative expenses-other 452,884 72,168 380,716 Other income (expense) - net (1,638,756 ) (1,660,093) 21,337
Our net loss for the year ended September 30, 2014, was ($7,803,640) compared to net income of ($2,421,145) for the year ended September 30, 2013, an increased loss of $5,382,495. During the years ended September 30, 2014 and September 30, 2013, we did not generate any revenues from operations.
During the year ended September 30, 2014, we incurred operating expenses (and respective net operating losses) of $6,164,884, compared to operating expenses of $761,052 incurred during the year ended September 30, 2013, an increase in expenses of $5,403,382. The operating expenses incurred during the year ended September 30, 2014 and 2013, consisted of of(i) $5,255,000 and $471,549, respectively in Compensation Expense to officers; (ii) $340,000 and $217,335, respectively, in fees paid to professionals; (iii) and (iv) $452,884 and $72,168, respectively, in other general and administrative expenses.
Changes in expenses were due to the following:
a. Compensation expense to Officers- Compensation expense to Officers increased $4,783,451 due to the issuance of 100 million shares of common stock to our Management team on January 27, 2014 and another 720,000 shares which were issued in December 2013 with a value of $45,000. These expenditures were partially offset by similar expenditures made in the prior year
b. Consulting fees- Consulting fees increased $122,665 principally due to the existence of the consulting arrangement for the entire fiscal year as opposed to only a
c. General and Administrative other- General and Administrative other increased $21,337 primarily due to the Hydra acquisition.
Other Income (Expense) incurred during the year ended September 30, 2014, included: (i) interest expense of ($312,873); (ii) derivative expense of ($2,685,435) (iii) change in fair value of the derivative liability of $3,509,298 and (iv) loss on retirement of debt of ($2,149,746). During the year ended September 30, 2013, the ($1,660,093) in Other Income/(Expense) was comprised primarily of charges of ($994,808) due to mark to market accounting associated with the fair market value of the derivative liability interest expense of ($235,661) , derivative expense on new debt instruments of ($227,264) and loss on Retiremetn of Debt of ($202,360),
Therefore, our net loss and net loss per share during the year ended September 30, 2014 was ($7,803,640) or ($6.58) and ($4.92), per basic and diluted share, respectively compared to net loss and net loss per share of ($4,172.94) or ($3,026.50) per share during the year ended September 30, 2013. The weighted average number of shares outstanding for the year ended September 30, 2014 and 2013 was as follows (adjusted for all stock splits):
Year Ended Year Ended September 30, September 30, 2014 2013 Basic Shares 1,186,813 580 Fully diluted shares 1,586,813 800
Liquidity and Capital Resources
As of September 30, 2014, our current assets were $31,744 and our current liabilities were $2,655,267, which resulted in a working capital deficiency of
($2,623,523). As of September 30, 2014, current assets were comprised of: (i)
$31,033 in cash; and (ii) $712 in inventory. As of September 30, 2014, current liabilities were comprised of: (i) $165,991 in accounts payable and accrued liabilities; (ii) $415,719 in accounts payable due to a related party; (iii) $379,092 in accrued interest payable; (iv) $27,173 in notes payable due to a related party; (v) 442,609 in convertible debt (net of $295,013 of discount),
(vi) a derivative liability of 243,175 resulting from convertible notes payable, and (vii) $981,508 in non-convertible debt from the Hydra acquisition
As of September 30, 2014, our total assets of $3,633,452 were comprised of: (i) $31,744 in current assets; (ii) $20,288 in debt issue costs (net of $68,548 of amortization), (iii) Goodwill associated with the Hydra acquisition of $3,353,156; and (iii) $181,259 in property and equipment (net of $469,297 of depreciation),and $47,005 in a Note Receivable. As of September 30, 2014, our total liabilities of $2,655,267 were comprised of current liabilities of the same amount.
Stockholders' equity (deficit) increased $3,328,243 from ($2,350,057) as of September 30, 2013 to $978,186 as of September 30, 2014. The change in Stockholder's Equity was due to issuances of common stock of $9,081,963 ($5,255,000 for management compensation, $3,661,993 for retirement of debt and $164,990 for other), issue of Series A Preferred stock for the Hydra acquisition of $2,049,920 partially offset by of our net loss of ($7,803,640)
Cash Flows from Operating Activities
For the year ended September 30, 2014, net cash flows used by operations was ($718,906). Net cash flows used in operating activities for the year ended September 30, 2014, consisted of a net loss of ($7,803,640) adjusted by: (i) $(3,509,298) in net loss due to a change in the fair value of the derivative liability on convertible notes payable; partially offset by (ii) $5,255,000 in share based payments; (iii) $2,685,435 of derivative expense on new convertible notes issued; (iv) $2,149,746 for loss on retirement of debt; (v) $148,603 in amortization of debt issue cost; and (vi) $33,570 in amortization of debt issue cost. Net cash flows used by operating activities was further changed by a decrease of (i) $319,630 due to working capital acquired in the acquisition partially offset by ii) $304,845 in greater accrued interest.
For the year ended September 30, 2013, net cash flows used by operations was ($244,288). Net cash flows used in operating activities for the year ended September 30, 2013, consisted of a net loss of ($2,421,1454) adjusted by: (i) $994,808 in net loss due to a change in the fair value of the derivative liability on convertible notes payable; partially offset by (ii) $471,549 in share based payments; (iii) $227,264 of derivative expense on new convertible notes issued; (iv) $202,360 for loss on retirement of debt; and (v) $197,977 in amortization of debt issue cost. Net cash flows used by operating activities was further changed by $36,789 in increased accrued interest.
Cash Flows from Investing Activities
For the year ended September 30, 2014, net cash flows used in investing activities was ($62,427.)
This was comprised of a long-term note receivable acquired in the acquisition of Hydra of $47,005, partially offset by cash of $402. In addition, the Company spent $15,824 on the purchase of property and equipment.
There was no cash flow from investing activities for the year ended September 30, 2013.
Cash Flows from Financing Activities
We have financed our operations primarily from debt or the issuance of equity instruments.
For the year ended September 30, 2014, net cash flows provided from financing activities was $812,365, consisting of (i) $504,375 in proceeds from convertible promissory notes; (ii) $300,000 in the issuance of convertible notes payable for consulting services, and (iii) $7,990 for sales of common stock.
For the year ended September 30, 2013, net cash flows provided from financing activities was $243,500, consisting of (i) $28,500 in proceeds from convertible promissory notes and (ii) $215,000 in the issuance of convertible notes payable for consulting services,
We anticipate that we will meet our ongoing cash requirements by selling our equity securities or through shareholder loans. Our management has changed our business focus to the acquisition of operating assets and we estimate that our expenses over the next 12 months will be approximately $800,000, as described in the table below. These estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources.
Estimated Estimated Expenses Description Completion Date ($) Legal and accounting fees 12 months 50,000 Consulting Expenses 12 months 300,000 General and administrative expenses 12 months 450,000 Total 800,000
Material Commitments
As of the date of this Annual Report, we do not have any material commitments other than as described below.
Convertible Debt
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Inflation
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Such estimates for the year ended September 30, 2014 and 2013, and assumptions affect, among others, the following:
? estimated carrying value, useful lives and related impairment of property and equipment;
? estimated fair value of derivative liabilities;
? estimated valuation allowance for deferred tax assets, due to continuing losses; and
? estimated fair value of share based payments.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Derivative Liabilities
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model.
In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.
In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Debt Issue Costs and Debt Discount
The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Share-based Payments
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards' grant date, based on estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Earnings per Share
In accordance with accounting guidance now codified as FASB ASC Topic 260, "Earnings per Share, " basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Since the Company reflected a net loss in 2012 and 2011, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
Fair Value of Financial Instruments
ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
? Level 1 inputs: Quoted prices for identical instruments in active markets.
? Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
? Level 3 inputs: Instruments with primarily unobservable value drivers.
Foreign Currency Transactions
The Company's reporting currency is the U.S. Dollar. All transactions initiated in Canadian Dollars are translated to U.S. Dollars in accordance with ASC 830-10-20 "Foreign Currency Translation" as follows:
(i) Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
(ii) Equity at historical rates; and
(iii) Revenue and expense items at the average exchange rate prevailing during the period.
Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders' equity (deficit) as a component of comprehensive income (loss). Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company's functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
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