UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from _______________ to __________
Commission file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | ||
(Registrant’s telephone number, including area code)
_______________________________________
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Class | Trading Symbol(s) | Name of each exchange on which registered/ | ||
| OTC Markets: PINK |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company |
|
| Emerging Growth Company |
If an emerging growth company, indicate
by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act): Yes ☐
As of November 11, 2023 the Registrant had issued and outstanding shares of common stock.
HFactor, Inc.
FORM 10-Q
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 21 |
| Item 4. | Controls and Procedures | 21 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 23 |
| Item 1A | Risk Factors | 23 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
| Item 3. | Defaults Upon Senior Securities | 23 |
| Item 4. | Mine Safety Disclosures | 23 |
| Item 5. | Other Information | 23 |
| Item 6. | Exhibits | 24 |
| Signatures | 25 | |
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HFACTOR, INC.
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| -Unaudited- | -Audited- | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Fixed Assets, net of accumulated depreciation | ||||||||
| Intangible Asset, net of accumulated amortization | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued Interest | ||||||||
| Current portion of notes payable-third parties, net of debt discount | ||||||||
| Note payable-related parties | ||||||||
| Derivative liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Government loans payable | ||||||||
| Note payable-related parties | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Deficit | ||||||||
| Preferred stock , $ par value shares authorized, shares issued and outstanding as follows: | ||||||||
| Series C voting, convertible Preferred stock, $ par value shares authorized; and shares issued and outstanding on September 30, 2023 and December 31, 2022, respectively | ||||||||
| Series D non-voting, convertible Preferred stock, $ par value shares authorized; and shares issued and outstanding on September 30, 2023 and December 31, 2022, respectively | ||||||||
| Common stock , $ par value shares authorized; and shares issued and outstanding on September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
HFACTOR, INC.
Condensed Consolidated Statements of Operations
-Unaudited-
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| Sales, net | ||||||||||||||||
| TOTAL REVENUES | ||||||||||||||||
| COST OF REVENUES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Manufacturing expenses | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense | ||||||||||||||||
| Amortization of debt discount | ||||||||||||||||
| Derivative (income) expense | ||||||||||||||||
| Change in FMV of derivatives | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other (income) expense | ( | ) | ||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss per common shares outstanding- Basic and diluted: | ||||||||||||||||
| Net earning/(loss) per share attributable to common stockholders - basic & diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
HFACTOR, Inc.
Consolidated Statements of Stockholders' Deficit
Unaudited-
| Series C | Series D | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common stock | Subscribed | Paid-In | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||
| Sale of common shares | – | – | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of subscribed shares | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Cancellation of shares | – | – | ( | ) | ( | ) | – | |||||||||||||||||||||||||||||||||||||
| Cancellation of warrants in exchange for preferred stock | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Net loss for the 3 months ended March 31, 2022 | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Sale of common shares | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred and subscribed shares | – | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Cancellation of shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cancellation of warrants in exchange for preferred stock | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the 3 months ended June 30, 2022 | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Sale of common shares | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for purchase of Intellectual Property | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Net loss for the 3 months ended September 30, 2022 | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||
| 5 |
| Series C | Series D | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common stock | Subscribed | Paid-In | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||
| Sale of common shares | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Cancellation of shares | ( | ) | ( | ) | – | – | – | |||||||||||||||||||||||||||||||||||||
| Issuance of preferred and subscribed shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Net profit for the 3 months ended 31 March 2023 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Sale of common shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cancellation of shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred and subscribed shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the 3 months ended 30 June 2023 | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| – | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Sale of common shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cancellation of shares | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred shares | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Net loss for the 3 months ended 30 Sep 2023 | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
HFACTOR, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited-
| Nine Months Ended | Nine Months Ended | |||||||
| September 30, 2023 | September 30, 2022 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net Income/(Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Other income | ( | ) | ||||||
| Accrued Interest | ||||||||
| Amortization of debt discount on convertible notes | ||||||||
| Change in fair market value of derivative liabilities | ||||||||
| Other Non-cash expenses | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| NET CASH (USED) IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| NET CASH (USED) IN INVESTING ACTIVITIES | ||||||||
| FINANCING ACTIVITIES: | ||||||||
| Sales of common stock | ||||||||
| Repayment of principal and interest of loans | ( | ) | ||||||
| Repayment of debt lease obligation | ( | ) | ||||||
| Proceeds from related parties | ||||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents - Beginning | ||||||||
| Cash and cash equivalents - Ending | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| NON-CASH TRANSACTIONS: | ||||||||
| Preferred stock issued in exchange for cancellation of Warrant Liabilities, net of unamortized discount | $ | $ | ||||||
| Common stock subscribed in exchange for assignment of Intellectual Property | $ | $ | ||||||
| Issuance of preferred stock | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
HFACTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
History
HFactor, Inc. formerly known as Ficaar, Inc. (the “Company” or “Ficaar” or “HFactor”) was incorporated in July 2001 under the name OwnerTel, Inc. The name of the Company was changed to Ficaar, Inc. in December of 2007 and to HFactor, Inc. on November 8, 2022.
On May 28, 2022, David Cicalese (“Cicalese”), an officer and Board member of Ficaar entered into an agreement with Gail Levy whereby Cicalese agreed to sell 29,900,000 shares, representing a majority interest in Ficaar, to Levy. Acting as the majority shareholder of the Company, Levy then caused Ficaar to enter into an Agreement and Plan of Merger (the “Merger Agreement”) between the Company, FCAA Merger Sub I, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Ficaar, and HyEdge, Inc. (“Target” or “HyEdge”), a Delaware corporation, wherein Merger Sub and Target would merge, with Target surviving the transaction as a wholly owned subsidiary of Ficaar (the “Merger”). The Merger Agreement was executed on August 6, 2022 and the Merger closed on August 9, 2022. The Merger effected a change in control and was accounted for as a "reverse acquisition" whereby Target is the accounting acquiror for financial statement purposes. Accordingly, for all periods subsequent to the Closing Date, the financial statements of the Company reflect the historical financial statements of HyEdge and any operations of the Company subsequent to the Merger.
Immediately following the Merger, the business of HyEdge became the business of the Company.
In connection with the reverse acquisition and recapitalization, all share and per share amounts have been retroactively restated. Since the transaction is considered a reverse acquisition and recapitalization, accounting guidance does not apply for purposes of presenting pro-forma financial information.
On September 2, 2021, the Company filed an amendment in its articles of incorporation to change its name to HFactor Inc. The Company was able to secure an OTC Bulletin Board symbol HWTR from Financial Industry Regulatory Authority (FINRA).
Present Operations
The Company, as a result of the Merger, changed its business focus and commenced operating entirely through its subsidiary, HyEdge, Inc., a Delaware Corporation. The Company engages in the manufacturing, marketing, distribution and selling of HFactor® hydrogen infused drinking water.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying (a) condensed consolidated balance sheet at December 31, 2022, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of September 30, 2023 and 2022, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10K for the year ended December 31, 2022 (the “2022 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2023. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statement presentation. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three and six months ended September 30, 2023, are not necessarily indicative of the results of operations expected for the year ending December 31, 2023.
These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) and are expressed in United States dollars. These consolidated financial statements include the accounts of HFactor Inc. and its wholly owned subsidiary, HyEdge, Inc., a Delaware corporation. All inter-company balances and transactions have been eliminated on consolidation.
| 8 |
Going Concern
The financial statements have been prepared on a going concern basis, and do not reflect any adjustments related to the uncertainty surrounding the Company’s recurring losses, working capital deficiency or accumulated deficit.
As of September 30, 2023, the Company had $
It is the Company’s intent to continue to attempt to raise funds in this manner and to raise funds through the sale of equity securities until the Company attains profitability. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.
Cash
For purposes of reporting cash flows, the Company
considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. As of September
30, 2023 and December 31, 2022, the Company held a cash balance of $
Revenue Recognition
Revenue from sales of the Company’s products is recorded when title and risk of loss have passed to the buyer and criteria for revenue recognition is met. The Company sells its products to individual consumers and resellers upon receipt of a written order. The Company has a limited return policy for defective items that requires that buyers give the Company notice within 30 days after receipt of the products. Due to the immaterial quantities of returned products historically, for the periods ended September 30, 2023 and 2022, the Company recognized revenue at the time of delivery without providing any reserve.
Accounts Receivable
Accounts receivable represents amounts due from
the Company’s customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts
receivable portfolio. In establishing the required allowance, management utilizes a specific customer identification methodology. Management
also considers historical losses adjusted for current market conditions and the customers’ financial condition and the current receivables
aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted
and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
As of September 30, 2023 and December 31, 2022, the allowance for doubtful accounts was
Inventories
Inventories are
stated at the lower of cost (on a first-in, first-out basis) or market value. The stated cost is comprised of finished goods of HFactor®
hydrogen infused drinking water, its related raw material and spare parts for machinery. Reserves, if necessary,
are recorded to reduce inventory to market value based on assumptions about consumer demand, current inventory levels and product life
cycles for the various inventory items. These assumptions are evaluated annually and are based on the Company’s business plan and
from feedback from customers and the product development team. As of September 30, 2023 and December 31, 2022, the inventory reserves
were
| 9 |
Fixed Assets
Fixed assets are stated at cost, less accumulated
depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which is
generally
The Company will periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the
periods ended September 30, 2023 and 2022 were $
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period, which includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. This first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments, and which may not accurately anticipate actual outcomes.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company's evaluation was performed for the tax years ended December 31, 2018 through 2022, The Company does not expect any changes in its unrecognized tax benefits in the current year.
The Company’s policy for recording interest and penalties related to unrecognized tax benefits is to record such expenses as a component of current income tax expense. As of June 30, 2023 and December 31, 2022 the Company has no accrued interest or penalties related to uncertain tax positions.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates. The accounting estimates that require management’s most subjective judgments include: income taxes, including the estimate of the annual effective tax rate at interim periods and evaluation of uncertain tax positions; the valuation of acquired intangible assets, impairment assessment, and going concern assessment. As of September 30, 2023, there continues to be significant global macroeconomic and geopolitical uncertainty which may impact the Company’s business, results of operations, and financial condition. As a result, many of the Company’s estimates and judgments require increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, the Company’s estimates may change materially in future periods.
Research and Development Expense
Costs related to research and development, which
primarily consists of consulting for logo and packaging design, are charged to expense as incurred. The Company has
| 10 |
The Company computes loss per common share, in accordance with FASB ASC Topic 260, Earnings Per Share, which requires dual presentation of basic and diluted earnings per share. Basic income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding, plus the issuance of common shares, if dilutive, that could result from the exercise of outstanding stock options and warrants. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported.
Stock Based Compensation
The Company applies the fair value method of ASC 718, Compensation-Stock Compensation, in accounting for its stock-based compensation. These standards state that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, if any. The Company uses the Black-Scholes option pricing model to determine the fair value of its stock, stock option and warrant issuance. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price, volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends.
Fair Value
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a framework for all fair value measurements and expands disclosures related to fair value measurement and developments. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires that assets and liabilities measured at fair value are classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices for identical assets or liabilities in active markets or observable inputs;
Level 2 — Significant other observable inputs that can be corroborated by observable market data; and
Level 3 — Significant unobservable inputs that cannot be corroborated by observable market data.
The carrying amounts of cash, loan receivable, accounts payable and other liabilities, and accrued interest payable approximate fair value because of the short-term nature of these items.
The fair value of the Company’s debt approximated the carrying value of the Company's debt as of September 30, 2023 and December 31, 2022. Factors that the Company considered when estimating the fair value of its debt included market conditions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt.
Recent Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within those years, and was adopted by the Company on July 1, 2023. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.
In August 2023, the FASB issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. ASU 2023-05 provides decision-useful information to a joint venture’s investors and reduces diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). ASU 2023-05 is effective prospectively for all joint ventures with a formation date on or after January 1, 2025, and early adoption is permitted. The Company does not expect the standard to have a material effect on its consolidated financial statements. All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
| 11 |
NOTE 3 – FIXED ASSETS, NET
Fixed assets, net consist of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Construction in progress | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Fixed assets net | $ | $ | ||||||
Depreciation expense for the periods ended September 30, 2023 and 2022
was $ |
NOTE 4 – NOTES PAYABLE-THIRD PARTIES
Third party convertible notes payable consists of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Convertible promissory note with interest at | $ | $ | ||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| Unsecured promissory note for finder’s fee due with interest at | ||||||||
| Total Notes Payable-Third Parties | $ | $ | ||||||
(A) Includes a warrant for
the right to purchase an additional
(B)
Includes a warrant for the right to purchase an additional
(C)
Includes a warrant for the right to purchase an additional
| 13 |
(D) On December 3, 2021, the
Company entered into a Stock Purchase Agreement with Boot Capital LLC (“Boot”), lender for the three notes of (A), (B) and
(C), whereby Boot agreed to retire all of its outstanding warrants (850,000 in total) in exchange for 200 shares of Series D Preferred
stock. The Preferred stock shares were issued on March 29, 2022. Accordingly, the Warrant liability of $
In accordance with ASC 470-20 “Debt with
Conversion and Other Options”, the Company allocated $-
NOTE 5 – NOTES PAYABLE - RELATED PARTY
Notes payable to related parties consists of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Secured Promissory Note – RP, dated September 30, 2019 Note accrues interest at 10% per anum, due and payable on July 1, 2022 (Currently in default) (A) | $ | $ | ||||||
| Secured Promissory Note – LK, dated September 30, 2019 Note accrues interest at 10 % per annum, due and payable on July 1, 2022 (Currently in default) (A) | ||||||||
| Secured Promissory Note – C Lemen, dated July 23, 2020. Note accrues interest at 10% per annum, due and payable on July 1, 2022 (Currently in default) (A) | ||||||||
| Other Notes Payable-Related Party(Currently in default) (A) | ||||||||
| Total Notes Payable-Related Party | $ | $ | ||||||
| (A) |
NOTE 6 – GOVERNMENT DEBT
Economic Injury Disaster Loan
On June 2, 2021, the Company executed a secured
loan with the U.S. Small Business Administration (SBA) under the Economic Injury Disaster Loan program in the amount of $
Future maturities of government debt are as follows:
| Period Ending September 30, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total Principal Payments | $ | |||
| 14 |
NOTE 7 – DERIVATIVE LIABILITIES
The Company analyzed the notes payable – related parties and convertible notes payable referred to in Notes 4 and 5 based on the provisions of ASC 815-15 and determined that the conversion options of the convertible notes qualify as embedded derivatives and required the recognition of derivative liabilities.
For the derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date and any resulting gain or loss is recognized as a current period charge to the consolidated statements of operations. The Company estimates the fair value of the embedded derivatives using a Monte Carlo simulation valuation model that combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, probability of a change of control and the trading information of our common stock into which the notes are convertible, as appropriate to value the derivative instruments at inception and subsequent valuation dates and the value is reassessed at the end of each reporting period, in accordance with FASB ASC Topic 815-15.
The aggregate fair value of derivative liabilities
as of September 30, 2023 and December 31, 2022 amounted to $
| Quoted | Quoted | |||||||||||||||
| Prices in | Prices for | |||||||||||||||
| Active | Similar | |||||||||||||||
| Markets for | Assets or | |||||||||||||||
| Identical | Liabilities in | Significant | ||||||||||||||
| Consolidated | Assets or | Active | Unobservable | |||||||||||||
| Balance | Liabilities | Markets | Inputs | |||||||||||||
| Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Derivative Liabilities: | ||||||||||||||||
| September 30, 2023 | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | $ | $ | $ | $ | ||||||||||||
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
| Period Ended | Year Ended | |||||||
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Aggregate fair value of conversion features upon issuance | ||||||||
| Fair value of derivatives reclassified to equity | ||||||||
| Net transfer into level 3 | ||||||||
| Fair value of warrants netted against common stock issued for stock | ||||||||
| Change in fair value of conversion features | ||||||||
| Change in fair value of warrant and stock option derivative liabilities | ||||||||
| Ending balance | $ | $ | ||||||
NOTE 8 – MERGER AND RELATED TRANSACTIONS
The Merger
On August 6, 2021, the Company, FCAA Merger Sub I, Inc, (‘Merger Sub”), a Delaware corporation and wholly owned subsidiary of Ficaar, and HyEdge, Inc. ("Target" or "HyEdge"), a Delaware corporation, entered into an Agreement and Plan of Merger (the "Merger Agreement") which closed on August 9, 2021 (the "Closing Date"). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into the Target and the separate corporate existence of Merger Sub ceased, with Target continuing its corporate existence as a wholly owned subsidiary of the Company. The Merger effected a change in control and was accounted for as a "reverse acquisition" whereby Target is the accounting acquiror for financial statement purposes. Accordingly, for all periods subsequent to the Closing Date, the financial statements of the Company reflect the historical financial statements of HyEdge and any operations of the Company subsequent to the Merger.
| 15 |
Prior to the Merger, the Company ceased being an operating company and became a "shell company". Pursuant to the Merger, the Company acquired the business of Target to engage in the business of the development, marketing, and sale of hydrogen-infused water and other consumer goods.
As consideration for the merger, Target shareholders exchanged 100% of Target Stock (as defined in the Merger Agreement) totaling 44,136,473 fully diluted shares into shares of Company Common Stock at a conversion rate of 0.7 As a result, an aggregate of shares of the company’s Common Stock, shares of Series C Preferred Stock and shares of Series D Preferred Stock were to be issued to the shareholders of Target. As of December 31, 2021, there were of the planned Merger shares of common stock issued and the Series C and D Preferred shares issued.
Changes to the Company's Officers and Directors
Effective May 27, 2021, the Company’s Board of Directors appointed Gail Levy as Chief Executive Officer of FICAAR, Inc. On June 1, 2021, in conjunction with the aforementioned change in control, David Cicalese resigned as Secretary and Chairman of the Board of Directors. On June 9, 2021, a majority of Company shareholders elected Gail Levy as Chairman and a member of the Board of Directors. These changes were reported on the Company's form 8-K that was filed on June 10, 2021.
In conjunction with the Merger, Dawn Cames resigned as President, James C. Sanborn was appointed as COO and as a member of the Board of Directors, and Leonard Klingbaum was appointed as a member of the Board of Directors.
On July 22, 2022, the Company entered into a Memorandum of Understanding (“MOU”) with Bear Face Capital LLC (“Bear Face”) and Concorde Consulting Corp (“Concorde”) for an influx of capital. In accordance with the terms of the MOU, the following changes were implemented: (i) Gail Levy resigned as Chief Executive Officer and assumed the position of President for the Company, subject to a two (2) year Employment Contract, renewable annually, at an annual salary of $120,000; (ii) Dawn Cames, former officer for the predecessor company (“FICAAR), was appointed to serve as a Director and Chairman of the Board for the Company and was assigned one (1) share of Series C Preferred stock; (iii) Gail Levy, James C. Sanborn, and Leonard Klingbaum resigned as members of the Board of Directors; (iv) James C. Sanborn resigned as COO; and (v) Gail Levy and James C. Sanborn returned 999,999 shares of Series C Preferred stock to the Company.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal – To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened.
Legal Matters:
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.
To the best of the Company’s knowledge and belief, no material legal proceedings of merit are currently pending or threatened.
Dispute:
The Company is disputing the validity of a convertible promissory note carried over from its merger in August 2021. Since it presently is not possible to determine the outcome of this matter, the note is disclosed in Note 4 to the financial statements with a net balance of $121,369 until its ultimate resolution.
Employment and Consulting Agreements:
On August 15, 2023, Chi Hua Lee is appointed to serve as the Chief Operating Officer of the Company.
Rental:
As a result of the COVID-19 pandemic, Company management and employees have been working remotely and accordingly, incurring no rental expense during the periods ended September 30, 2023, and 2022.
| 16 |
NOTE 10 – EQUITY
Common stock:
The Company has authorized shares of $ par value common stock. As of September 30, 2023 and December 31, 2022, the Company had and shares, respectively, of common stock issued and outstanding.
On October 27, 2021, shares of Common Stock of the Company held by the Company’s Chief Executive Officer were returned to treasury and retired.
On December 10, 2021 and December 15, 2021, the
Company received total proceeds of $
On November 12, 2021, the U.S. Securities and Exchange Commission (“SEC”) issued a Notice of Qualification for the Company's Form 1-A Offering Circular for an offering of the Company’s Common Stock shares under Regulation A+ (the "Offering") of the Securities Act of 1933 (the “Act”). The purpose of the Offering is to allow both accredited and non-accredited potential investors the opportunity to invest directly in the Company. The Offering has a minimum and maximum investment of $25,000 to at a price of $1.00 per share.
During the year ended December 31, 2022, the Company
received total proceeds of $
During the first three quarters of 2023, the Company issued shares of common stock shares. No cash proceeds from the issuance.
Preferred Stock:
The Company has authorized shares of $ par value preferred stock.
On August 6, 2021, the Company amended its Articles of Incorporation to include Certificates of Designation for two new classes of Preferred Stock – Series C Preferred, authorized shares and, Series D Preferred, authorized shares.
In connection with the Merger with HyEdge, on September 15, 2021, the Company issued shares of Series C Convertible Preferred stock, non-dividend, with voting rights. Each share of Series C Preferred stock is convertible into the number of shares of the Company’s common stock equal to the result of (i) 1.5 times the number of Common shares issued and outstanding calculated on a fully diluted basis at the time of conversion, (ii) divided by the total number of Series C Preferred shares issued and outstanding at the time of conversion.
Additionally, the Company issued shares of Series D Convertible Preferred stock, non-dividend, with no voting rights. Each share of Series D Preferred stock is convertible into the number of shares of the Company’s common stock equal to 0.01% of the number of Common shares issued and outstanding at the time of conversion.
During the year ended December 31, 2022, shares of Series D Preferred Stock were issued to an investor in connection with the execution of a Leak Out Agreement.
On July 22, 2022, the Company entered a Memorandum of Understanding (“MOU”) with Bear Face Capital LLC (“Bear Face”) and Concorde Consulting Corp (“Concorde”) for an influx of capital. In accordance with the terms of the MOU, Gail Levy and James C. Sanborn returned 999,999 shares of Series C Preferred stock to the Company. Dawn Cames, former officer for the predecessor company (“FICAAR”), was appointed to serve as a Director and Chairman of the Board for the Company and was assigned one (1) share of Series C Preferred stock. Impact of above arrangement was recognized in the three months ended March 31, 2023.
During the nine months period ended September 30, 2023, shares of Series D Preferred Stock were issued without cash consideration.
As of September 30, 2023,
| 17 |
NOTE 11 – INCOME TAXES
The Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. During the current period, the Company incurred a net loss and therefore has no tax liability.
The Company has U.S. federal and state net operating
loss carryovers (“NOL’s”) of approximately $
The significant components of deferred income tax assets at September 30, 2023 and December 31, 2022 were as follows:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Deferred tax asset: | ||||||||
| Net operating loss carry-forward | $ | $ | ||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Net deferred income tax asset | $ | $ | ||||||
The amount taken into income as deferred income
tax assets must reflect that portion of the income tax loss carry forwards that is more-likely-than-not to be realized from future operations.
The Company has chosen to provide a full valuation allowance against all available income tax loss carry forwards. The Company has recognized
a valuation allowance for the deferred income tax asset since the Company cannot be assured that it is more likely than
current income.
NOTE 12 – RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial and operating decisions. Details of transactions between the Company and related parties (other than those disclosed in Note 5 and Note 8) are disclosed below:
During the period ended September 30, 2023, the
Company received funds, totaling $
NOTE 13 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 14, 2023, which is the date the financial statements were issued, and has concluded that no such events or transactions took place which would require adjustment to or disclosure in the financial statements.
| 18 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2022 and 2021. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.
When this report uses the words “we,” “us,” “our,” or “FICAAR” and the “Company,” they refer to Ficaar, Inc.
Company History and Summary
HFactor, Inc., formerly known as Ficaar, Inc. (the “Company” or “HFactor” or “Ficaar”) was incorporated in July 2001 in the State of Georgia under the name OwnerTel, Inc. The name of the Company was changed to Ficaar, Inc. in December of 2007 and to HFactor, Inc. on September 2, 2022.
The Company’s fiscal year end is December 31.
On May 28, 2021, David Cicalese (“Cicalese”), an officer and Board member of Ficaar entered into an agreement with Gail Levy whereby Cicalese agreed to sell 29,900,000 shares, representing a majority interest in Ficaar, to Levy. Acting as the majority shareholder of the Company, Levy then caused Ficaar to enter into an Agreement and Plan of Merger (the "Merger Agreement") between the Company, FCAA Merger Sub I, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Ficaar, and HyEdge, Inc. ("Target" or "HyEdge"), a Delaware corporation, wherein Merger Sub and Target would merge, with Target surviving the transaction as a wholly owned subsidiary of Ficaar (the "Merger"). The Merger Agreement was executed on August 6, 2021 and the Merger closed on August 9, 2021. The Merger effected a change in control and was accounted for as a "reverse acquisition" whereby Target is the accounting acquiror for financial statement purposes. Accordingly, for all periods subsequent to the Closing Date, the financial statements of the Company reflect the historical financial statements of HyEdge and any operations of the Company subsequent to the Merger.
Plan of Operations
BUSINESS DESCRIPTION
HFactor water was created by Gail Levy, HyEdge's founder and CEO. Gail is a successful serial entrepreneur who was looking for a new product that could alleviate the toxic side effects of the cancer chemotherapeutic drugs that had riddled a dear friend. As she researched the properties of hydrogen water, she became more and more enthralled by its potential. Ms. Levy felt she could honor her friend by making hydrogen water immaculate, effective, and accessible to everyone. Enlivened by this mission, she collected a team of experts to help her engineer a natural process to combine hydrogen with water with zero impurities and optimal impact. In 2017, she launched her flagship product through retail and ecommerce channels. HFactor was developed and is manufactured by a team of experts in the U.S. and utilizes a patented chemical-free and magnesium-free process to infuse free hydrogen into its water. Its award winning, environmentally friendly ergonomic pouch keeps the hydrogen potent and pure and makes it extremely portable.
| 19 |
HFactor’s anti-inflammatory and antioxidant benefits appeal to a wide population across every age group, positioning HFactor to capture a significant share in an expanding market. The global market for bottled water is projected to reach $215B by 2025. HFactor has demonstrated significant market traction, with $2.87M sales in 2020, 30M+ followers across Social Media channels.
The quality of our product is achieved through a proprietary manufacturing process. A reverse osmosis filtering system and patent-protected infusion process ensures efficacy, purity, and taste. The efficacy of hydrogen water is backed by over 1,000 published peer reviewed studies demonstrating that hydrogen positively impacts fitness, health, lifestyle, recovery, and wellness.
Our sales strategy involves a diversified, multi-channel approach. Our products are currently on shelves in approximately 5,000+ retail stores across 20 chains in addition to our growing ecommerce presence. Our company prides itself on having a low carbon footprint, primarily due to our eco-conscious packaging and free mail-in recycling program through our partnership with Teracycle.
Our mission statement is to build a brand and corporate culture that, at its essence, exhibits strength in oneself and in one's community. We promote a foundation of "doing well by doing good". This foundation enables HFactor to produce and distribute the highest quality "better for you" consumer products that are conscious to the community, mind, body, and the environment
Comparison of Three Months Ended September 30, 2023 to Three Months Ended September 30, 2022
Results of Operations
| Three Months ended September 30, | Percent | |||||||||||||||
| 2023 | 2022 | Change | Change | |||||||||||||
| Revenues | $ | 171,488 | $ | 272,329 | $ | (100,841 | ) | (37% | ) | |||||||
| Gross profit | 101,882 | 110,452 | (8,570 | ) | (8% | ) | ||||||||||
| Operating expenses | (240,227 | ) | (597,012 | ) | 356,785 | 60% | ||||||||||
| Other income (expense) | (12,564 | ) | (138,436 | ) | 125,872 | 91% | ||||||||||
| Net loss | $ | (150,909 | ) | $ | (624,996 | ) | $ | 474,087 | 76% | |||||||
Net revenues for the three months ended September 30, 2023 were $171,488 as compared to $272,329 for the three months ended September 30, 2022 which resulted from intermittent manufacturing interruptions that occurred throughout the third quarter of 2023.
Gross profit for the three months ended September 30, 2023 was $101,882 as compared to $110,452 for the three months ended September 30, 2021. With the Company’s continued effort on improving its margin, its overall gross profit rate has improved from 41% in the three months ended September 30, 2022, to 59% in the current reporting period.
Total operating expenses were $240,227 for the three months ended September 30, 2023 compared to $597,012 for the three months ended September 30, 2022. The 60% decrease was primarily attributable to a reduction in expenses in line with the revenue decrease.
Other expenses were $(12,564) for the three months ended September 30, 2023 compared to $(138,436) for the three months ended September 30,2022. The $125,872 decrease was primarily related to the decline in related party debt obligations.
For the three months ended September 30, 2023, the Company reported a net loss of $150,909 as compared to a net loss of $624,996 for the three months ended September 30, 2022. The significant decline in net loss of $474,087 was attributable to reduction in manufacturing, marketing, payroll and compensation expenses. Last period’s expenses were slightly higher due to the one-off impact of the Merger.
| 20 |
Comparison of Nine Months Ended September 30, 2023 to Nine Months Ended September 30, 2022
Results of Operations
| Nine Months ended September 30, | Percent | |||||||||||||||
| 2023 | 2022 | Change | Change | |||||||||||||
| Revenues | $ | 964,910 | $ | 1,468,447 | $ | (503,537 | ) | (34% | ) | |||||||
| Gross profit | 543,902 | 764,175 | (220,273 | ) | (29% | ) | ||||||||||
| Operating expenses | (1,369,388 | ) | (2,340,024 | ) | 970,636 | 41% | ||||||||||
| Other income (expense) | 662,259 | (511,450 | ) | 1,173,709 | (229% | ) | ||||||||||
| Net loss | $ | (163,226 | ) | $ | (2,087,299 | ) | $ | 1,924,072 | (92% | ) | ||||||
Net revenues for the nine months ended September 30, 2023 were $964,910 as compared to $1,468,447 for the nine months ended September 30, 2022. The decrease is mainly due to intermittent manufacturing interruptions that occurred throughout the third quarter of 2023.
Gross profit for the nine months ended September 30, 2023 was $543,902, as compared to $764,175 for the nine months ended September 30,2022. With the Company’s continued effort on improving its margin, its overall gross profit rate has slightly improved from 52% in the nine months ended September 30, 2022, to 56% in the current reporting period.
Total operating expenses were $1,369,388 for the nine months ended September 30, 2023 compared to $2,340,024 for the nine months ended September 30, 2022. The 41% decrease was primarily attributable to the reduction in all major categories of expenses due to the aforementioned manufacturing interruptions.
Other income was $662,259 for the nine months ended September 30, 2023 compared to expense of $(511,450) for the nine months ended September 30,2022. The income was mainly attributable to the write-off of a salary payable balance of $720,000 during the first quarter of 2023
For the nine months ended September 30, 2023, the Company reported a net loss of $163,226 as compared to a net loss of $2,087,299 for the nine months ended September 30, 2022. The $1,924,072 decrease in net loss for the nine months ended September 30, 2023 mainly arose from significant reduction in marketing, payroll and compensation expenses.
Liquidity and Capital Resources
As of September 30, 2023, the Company had $124,708 in cash to fund its operations. The Company reported working capital deficit of $4,786,697 as of September 30, 2023, represents the decline in working capital deficit by $474,246, compared to a working capital deficit of $5,260,943 as of December 31, 2022,
The Company does not believe its current cash balance will be sufficient to allow the Company to fund its planned operating activities for the next twelve months. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail some or all of its planned activities. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities should the Company be unable to continue as a going concern.
As the Company continues to incur losses, achieving profitability is dependent on achieving a level of revenues adequate to support the Company's cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through additional private or public equity offering and may seek additional capital through arrangements with strategic partners of from other sources. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all. Any equity financing may be dilutive to existing shareholders, which dilution may be significant depending on the terms of the transactions.
| 21 |
Operating Activities:
For the nine months ended September 30, 2023, net cash flow used by operating activities was $(8,010) compared to $(1,448,818) for the nine months ended September 30, 2022. The decline in negative operating cashflows was attributable to reduction in net loss, improvement of receipts from receivables, delay in payments to suppliers and receipts from related parties (classified in other payables).
Investing and Financing Activities:
Sale proceeds of two leased vehicles caused improvement in investing cashflows. Net cash flows provided by (used in) financing activities were reduced from $1,220,000 from sales of common stock shares in 2022 to $(58,195) in net payments from borrowings in 2023.
Liquidity and Capital Resource Measures:
The Company’s primary source of liquidity has been related party loans.
Going Concern
The Company has experienced a net loss and had an accumulated deficit of $4,358,828 as of September 30, 2023. These conditions raise substantial doubt about the Company’s ability to continue absent raising sufficient capital to fund continued operations. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
Transaction with Related Parties:
Related party loans.
Critical Accounting Policies
Refer to Note 2 in the Consolidated Financial Statements for a summary of recently adopted and recently issued accounting standards and their related effects or anticipated effects on our consolidated results of operations and financial condition.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation and Changing Prices
We do not believe that inflation nor changing prices for the three months September 30, 2023 had a material effect on our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
| 22 |
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.
Internal Control Over Financial Reporting
Evaluation of Disclosure Controls and Procedures
Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company had concluded that the Company's disclosure controls and procedures as of the period covered by this Quarterly Report on Form 10-Q were not effective for the following reasons:
a) The Company has limited segregation of duties amongst its employees with respect to the Company's control activities. This deficiency is the result of the Company's limited number of employees. This deficiency may affect management's ability to determine if errors or inappropriate actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible changes in our disclosure controls and procedures.
b) The Company's has a limited number of external board members. This deficiency may give the impression to the investors that the board is not independent from management. Management and the Board of Directors are required to apply their judgment in evaluating the cost-benefit relationship of possible changes in the organization of the Board of Directors.
Changes in internal control over financial reporting.
Management of the Company has also evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q and determined that there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 23 |
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.
ITEM 1A. RISK FACTORS
As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not have any sales of unregistered equity securities for the three months ended September 30, 2023 other than those that have been previously reported.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None other than those disclosed in NOTE 4 and NOTE 5. The Company is currently pursuing discussions with the above note holders for their extension.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
| 24 |
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| 25 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HFactor, Inc. | ||
| (Registrant) | ||
| November 14, 2023 | By: /s/ Dawn Cames | |
| Dawn Cames | ||
| Principal Executive Officer & Acting Principal Financial Officer | ||
| 26 |