Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - HYBRID Coating Technologies Inc.exhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - HYBRID Coating Technologies Inc.exhibit31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE YEAR ENDED December 31, 2013

OR

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____________ to _____________

Commission File Number 000-53459

HYBRID COATING TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

NEVADA 20-3551488
(State of other jurisdiction of incorporation or (IRS Employer Identification Number)
organization)  

950 John Daly Blvd. Suite 260
Daly City, CA 94015
(Address of principal executive offices)

(650) 491-3449
(Registrant's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $ 0.001 par value

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes [   ]      No [X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [   ]      No [X]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [   ]

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 the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]      No [X]

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $3,041,146 based on the closing price of $0.39 for the common stock on June 29, 2013, the last business day of the registrant’s most recently completed second fiscal quarter.

Number of shares outstanding of the registrant's class of common stock, as of April 30, 2014 was 14,356,528.


TABLE OF CONTENTS

  Page
PART I    
  Special Note Regarding Forward Looking Statements 3
Item 1 Description of Business 4
Item 1A. Risk Factors 14
Item 2 Description of Property 18
Item 3. Legal Proceedings 18
Item 4. Mine Safety Disclosures 18
     
PART II    
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities 19
Item 6. Selected Financial Data 20
Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations 20
Item7A Quantitative and Qualitative Disclosures about Market Risks 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Item 9A. Controls And Procedures 27
     
PART III    
Item 10. Directors, Executive Officers and Corporate Governance 28
Item 11 Executive Compensation 33
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35
Item 13 Certain Relationships and Related Transactions, and Director Independence 36
Item 14 Principal Accountant Fees and Services 37
Item 15 Exhibits 38


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, contained in this Annual Report constitute forward-looking statements. In some cases you can identify forward-looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "estimate," "anticipate," "predict," "project," "potential," or the negative of these terms and similar expressions intended to identify forward-looking statements.

     Forward-looking statements are based on assumptions and estimates and are subject to risks and uncertainties. We have identified in this Annual Report some of the factors that may cause actual results to differ materially from those expressed or assumed in any of our forward-looking statements. There may be other factors not so identified. You should not place undue reliance on our forward-looking statements. As you read this prospectus, you should understand that these statements are not guarantees of performance or results. Further, any forward-looking statement speaks only as of the date on which it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect and it is not possible for us to predict all of them. Factors that may cause actual results to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to, those described under the heading "Description of Business and Risk Factors" under Item 1, as well as the following:

     Hybrid Coating Technologies Inc.’s anticipated cash needs and estimates regarding its capital expenditures, as well as its capital requirements and need for additional financing;

     Hybrid Coating Technologies Inc.’s ability to maintain its production capacity, staff complement and manufacturing performance in a cost-effective way;

     Hybrid Coating Technologies Inc.’s ability to identify and retain personnel for the continued manufacturing and sale of the Nanotech Products;

     Hybrid Coating Technologies Inc.’s ability to successfully commercialize its products including the Green Polyurethane™ products and to develop and commercialize new products and services;

     Hybrid Coating Technologies Inc.’s ability to maintain current strategic relationships and develop relationships with new strategic partners;

     Hybrid Coating Technologies Inc.’s ability to maintain its relationship with its current manufacturing partners;

     Hybrid Coating Technologies Inc.’s ability to maintain its rights pursuant to the Licensing Agreement:

     Hybrid Coating Technologies Inc.’s competitive position and its expectations regarding competition from other paint manufacturers and suppliers; and

     Anticipated trends and challenges in Hybrid Coating Technologies Inc.’s business and the markets in which it operates.

-3-


PART I

ITEM 1. DESCRIPTION OF OUR BUSINESS

Our Business

On August 30, 2010, Hybrid Coating Technologies Inc. (the “Company”) consummated an August 16, 2010 Stock Purchase Agreement (the “Stock Purchase Agreement”) with Nanotech Industries International Inc., (“Nanotech”) a Nevada corporation located in Daly City, California. A previous January 31, 2010 agreement with Nanotech Industries Inc. (“NTI”), a related party of Nanotech, was terminated on August 16, 2010 prior to its effectiveness.

Under the terms of the Stock Purchase Agreement, the Company agreed to acquire all of the issued and outstanding shares of capital stock of Nanotech (“Nanotech Shares”) from the holders of the Nanotech Shares (“Nanotech Shareholders”). In consideration for the purchase of the Nanotech Shares from the Nanotech Shareholders (the “ Nanotech Acquisition”), the Company issued an aggregate of 3,381,003 shares (the “Shares”) of the Company’s common stock, $0.001 par value per share (“Common Stock”), to the Nanotech Shareholders. In addition, certain shareholders of the Company agreed to have 1,028,000 of their shares cancelled as part of the transaction. This transaction was closed on August 30, 2010.

Upon completion of all required regulatory filings, the Company appointed the senior management of Nanotech to the board of the Company.

As a result of the Nanotech Acquisition, Nanotech is now a wholly owned subsidiary of the Company. The Company intends to pursue the business of its Nanotech subsidiary and assume and execute Nanotech's business plan as its sole business. (See “Incorporation and Business of Nanotech” below).

The products manufactured and sold by the Company (“Nanotech Products”) comprise both:

(1)

coatings and raw binder ingredients comprised of Green Polyurethane™ Monolithic Floor Coating and Green Polyurethane™ Binder and hereinafter referred to as “Coating Products”.

   
(2)

sealants and adhesives comprised of Green Polyurethane™ and hereinafter referred to as “Sealant Products”.

The Company was granted the right to manufacture and sell the Nanotech Products pursuant to an agreement (“Licensing Agreement”) entered into between the Company and Nanotech Industries Inc. (“NTI”), the holder of the proprietary rights to the license and intellectual property required for the manufacturing of the Nanotech Products. The Nanotech Products will target the coatings, adhesives, sealants and elastomers (“C.A.S.E.”) market in North America, Europe and Russian Territory ( including the Russian Federation, Belorussia, Kazakhstan Republic) with an option to sell in Asia and the rest of the world pursuant to the terms of the Licensing Agreement.

NTI and the Company are related parties by virtue of common ownership and control. NTI is privately-held.

“The Company” and “the Registrant”, as referred to herein, includes Hybrid Coating Technologies Inc. and/or its wholly owned subsidiary, Nanotech.

-4-


Incorporation and Business of Nanotech

The Company was incorporated under the laws of the State of Nevada on July 8, 2010. On July 12, 2010, the Company entered into the Licensing Agreement (“Initial Licensing Agreement”) for the manufacturing and sale of the Coating Products, an alternative, non-isocyanate polyurethane, including coatings and raw binder ingredients comprised of Green Polyurethane™ Monolithic Floor Coating and Green Polyurethane™ Binder. The Nanotech Coating Products will be sold to the coatings andadhesives market in North America, with options to sell to Europe, South America, Asia and the rest of the world.

Initial Licensing Agreement Note 1

The terms of the Initial Licensing Agreement are as follows:

(i)

The Company was granted, effective June 12, 2010, manufacturing and sale rights (“North American Licensing Rights”) for the Coating Products on an exclusive basis for a 36-month period (“Exclusivity Period”) for the territory of North America. In consideration for the North America Licensing Rights, Nanotech paid NTI (“Licensor”) a one-time licensing fee of $500,000 and a royalty of 5% of future gross Coating Products sales.

   
(ii)

Within the Exclusivity Period, the Company shall have the option (“American- European Option”) to acquire perpetual and exclusive licensing rights for all of North America, South America and Europe (“Perpetual American-European Licensing Rights”). Should the Company wish to exercise the American-European Option, the Company shall issue to NTI an aggregate number of shares of common stock of the Company which shall give NTI, immediately upon such issuance of shares, a 52.5% ownership stake in the Company.

   
(iii)

Should the Company exercise the American-European Option, the Company shall then have an additional option to obtain perpetual and exclusive Licensing Rights for all of Asia and the rest of the world (“Asia Option”). Should the Company exercise the Asia Option, the Company shall issue to NTI an aggregate number of shares of common stock of the Company which shall give NTI, immediately upon such issuance of shares, an additional 10% ownership stake in the Company.

Note 1: The Initial Licensing Agreement was originally filed in a Current Report on Form 8-K on August 30, 2010 and the amended version (as described above) was refiled in a Current Report on Form 8-K on October 18, 2011. In the original filing the Licensing Rights included not only the Coating Products but Sealant Products as well. Also, for the “Asia” option the territory was for Asia only and later changed to Asia and the rest of the world.

Subsequent Licensing Agreements and Amendments

(i)

On March 17, 2011, the Company and NTI amended the agreement to now include the territory of the Customs Union of Belorussia, Kazakhstan Republic and Russian Federation (the “Russian Territory”), on an exclusive basis for a period of ten years from the date of the signing of this amendment. In exchange for the right to manufacture and sell in the Russian Territory, the Company shall pay to the Licensor an ongoing royalty of 7.5% of gross Coating Products sales in the Russian Territory, and a one-time royalty fee of $150,000 (paid as of December 31, 2011).

-5-



(ii)

On July 7, 2011, a second amendment was made to the agreement granting the Company an option (the “Option”) for a period of six months from the signing of this amendment to manufacture and sell Coating Products in the territory of the European Continent on an exclusive basis for a period of five years from the date the option is exercised, after which time the European Right shall continue perpetually on a non-exclusive basis. In exchange for this Option, the Company shall pay to the Licensor a one-time royalty fee of $1,250,000 payable within 24 months of the exercise of the Option. On November 29, 2011, the Company exercised the Option, the payment for which is being financed by NTI. The Company recorded the royalty fee of $1,250,000 as a related liability in Note Payable-related party.

   
(iii)

On October 18, 2011, the Company and NTI entered into a second licensing agreement (“Sealant Agreement”) granting the Company an option (“Sealant Option”) to be exercised within six months of the signing of the Sealant Agreement, for the manufacturing and sale of the Sealant Products, for the following :


1.

The Company shall issue to NTI a one-time licensing fee, an aggregate number of shares (“Sealant Shares”) of the Company’s restricted common stock which shall give NTI, immediately upon issuance of such shares, an incremental 15% (fifteen percent) ownership stake in the Company.

   
2.

The Company shall pay to NTI a royalty of 7.5% of gross revenue from the Sale of the Sealant Products for the duration of this Agreement. The royalty shall be paid on a quarterly basis 65 calendar days after the end of each quarter and shall be based on the gross revenue as stated in the Company’s quarterly statements.

(iv)      On December 6, 2011, the Company notified NTI of its intent to exercise the Sealant Option. To date, the Company has not issued the Sealant Shares and the Sealant Option has expired. The Company intends to renegotiate the Sealant Option once the Company has determined it has commercial viability.

(v)       On June 28, 2013 the Company and NTI entered into a third licensing agreement whereby NTI granted the Company an extension of thirty-six months on the Exclusivity Period (as defined in the Licensing Agreement), which has been extended to July 12, 2016.

(vi)      On December 13, 2013 the Company and NTI entered into a fourth licensing agreement agreeing to modify the definition of Licensor Products to include polyurethane foam for the textile industry in addition to environmentally safe coatings.

(vii)     On March 31, 2014 the Company and NTI entered into a fifth licensing agreement agreeing to modify the definition of Licensor Products to include synthetic leather, sealants and adhesives (“Added Applications”).In consideration for the Added Applications, the Company shall pay the Licensor an amount equal to US $2,000,000 , to be paid within 36 (thirty-six) months of the execution of this Fifth Amendment Agreement. Should the Company not pay the Consideration within the deadline, the Company shall lose all rights to the Added Applications, and the Added Applications shall be removed from the Licensor Product definition.

(viii)    On April 9, 2014 the Company and NTI signed a sixth amendment extending the terms of the note from 24 months to 42 months making it payable by May 29, 2015.

-6-


Further information concerning the historical business of Nanotech, the business acquired by the Company in the Acquisition, is set forth below.

Overview

The Company is a development-stage company and has only just begun to implement its business plan. The likelihood of success of the Company must be considered in light of the expenses, complications and delays frequently encountered in connection with the establishment and expansion of new business and the competitive environment in which the Company will operate. The Company's long-term viability, profitability and growth will depend upon successful commercialization of the Nanotech Products and the development and commercialization of new products and services relative to its business plan. As a development stage company, the Company has little or no relevant operating history upon which an evaluation of its performance can be made. Such performance must be considered in light of the risks, expenses and difficulties frequently encountered in establishing new products, services and markets.

Business Model

The Company’s business model is based on a two-tier strategy, which includes direct sales and licensing. The Company’s 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 Coatings, Adhesives, Sealants and Elastomers (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 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; and
  • Protective coatings inside industrial and commercial pipes.

In addition to the above, the Company’s business plan includes plans to:

  • Increase the number of contractors and applicators contacted;
  • Contact paint formulators and offer Green Polyurethane™ Binder for their proprietary formulations; and
  • Establish distribution channels utilizing existing distribution hubs.

-7-


Competitive Strengths

The Company believes that its competitive strengths include the following:

Product Advantage. Green Polyurethane™ is the first ever chemical platform based on modified hybrid polyurethane that is produced using pending patented proprietary methods which completely eliminate the use of toxic isocyanates resulting in a substitute for conventional polyurethane. This results in a product that is hundreds of times less toxic than conventional polyurethane and which has superior chemical and mechanical properties.

2 Times Wear Resistance & Excellent Adhesion

  • Wear resistance is 25-30 (mgs./1000 cycles) or 2 times better than most premium polyurethane coatings

  • Adhesiveness - 10-30% higher (depends on substrate)

High Gloss, Self-Priming - Achieve Any Thickness in One Coat

  • Green Polyurethane’s™ 100% solids, specific curing formulation can be applied with only one layer at any thickness in specific environments (some substrates in poor condition may need a primer) compared to conventional polyurethane brands which normally require 2 or 3 layers

  • Does not require careful drying of substrates (compared to conventional polyurethane coatings)

Increased Resistance to Chemical Degradation & Corrosion

  • Maintains an extended period of corrosion protection, more reliability due to its non-porous coating structure, and better durability than conventional coatings

  • Assures more effective protection against aggressive media

  • Unlike conventional polyurethanes, Green Polyurethane™ is indifferent to moisture and does not require special moisture controlled conditions in the manufacturing process

Safe & Easy curing in Cold, Hot or Sunny Conditions

  • Hardens at ambient temperatures

  • UV and low temperature curing applications available (36-77 ºF) (2-25 ºC)

Increased Hydrolytic Stability

  • Maintains stability against chemical decomposition upon contact with water through an intramolecular hydrogen bond formed during its curing, thereby improving hydrolytic stability well above that of conventional polyurethanes – making it virtually water proof.

Wider Range of Applications

  • There are circumstances where traditional polyurethanes cannot be used due to their decomposition toxicity during a fire event (reversion to isocyanate components).

Tested Product and Technology. The Green Polyurethane™ technology has been tested, is proven, is commercial ready and currently in use. The Green Polyurethane™ technology has undergone rigorous testing by the Polymer Institute, GmbH, a well-recognized analytical firm for qualifying materials for use in the flooring industry and Assured Testing Services of Pennsylvania.

-8-


Testing by the Polymer Institute and Assured Testing Services confirmed Green Polyurethane’s™ claims in regard to its structural and chemical properties and its suitability for use in the flooring industry. In addition, floor coating samples were rigorously tested and were found to perform successfully in accordance with The American Society for Testing and Materials.

Cost Savings. The Company can offer substantial savings to clients in the flooring installation industry due to the unique combination of multiple properties in one coating of Green Polyurethane™ paint. Typically, concrete floors are painted using a primer, base and topcoat, resulting in the need for three different types of coatings for one application, which can be time consuming and costly. By using the Green Polyurethane™ formulation the number of layers can be reduced to only one or two, as Green Polyurethane™ does not require a primer, has excellent stand-alone adhesion and, in most cases, would not require a top coat due to its excellent mechanical properties. In addition, its zero isocyanate, approximate zero volatile organic compound (VOC) safety features, allows it to be applied without the interruption of business due to public exposure, creating an additional 30-60% savings on application costs for customers.

Management Team. The Company’s management team possesses a diverse set of industry skills and operating experience and a record of success in the scientific R&D, nanotechnology, management, marketing, sales and finance industries.

Growth Strategy

The Company’s business growth model includes a two-pronged strategy of direct sales and licensing. The Company’s ultimate goal is to license its’ proprietary formulation to national or global coatings formulators. In order to achieve this it is proving the validity of its products through direct sales.

The Company has developed marketing tools, brochures, one-sheets, and a user-friendly website to market its products directly to contractors and applicators of high end coatings and paint. The Company has also participated in high visibility trade shows to highlight the unique qualities of Green Polyurethane™ including the European Coatings Show (March 2011) and World of Concrete (February 2011 and 2012). From these trade shows, internet and direct marketing campaigns, the Company has attracted hundreds of prospective clients. Flooring applications done for some of these clients in Montreal, San Jose, Bergen County, New Jersey and New York have allowed the Company to prove that its product can live up to the high standards and safety features advertised.

The Company’s marketing and direct coating sales/application efforts have attracted over 50 established regional and global coatings distributors and formulators who are either testing samples of Green Polyurethane™, applying for final pilot samples of the material prior to ordering commercial quantities or negotiating licensing contracts.

The $3.5 billion European Union (EU) polyurethane coatings market (JCT CoatingsTech | November 1, 2007 | Challener, Cynthia) is of particular interest to the Company because of the high demand and the overhaul of the EU’s chemical regulatory system. REACH (Registration, Evaluation & Authorization and Restriction of Chemicals) regulations were drafted in 1998 and finally adopted and put into force in June 2007. A major shift in this system will be placing a greater burden of proof on the industry that chemicals are safe. Substances of very high concern must be authorized under REACH and their use may be subject to restrictions. Isocyanates used in making polyurethane are highly toxic and require expensive worker safety and handling procedures. A general movement towards greener products combined with the REACH regulations has accelerated projected growth in the EU market for less toxic alternatives.

In addition to the above, 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; and
  • Sub-license technology in certain geographic areas

-9-


The Company intends to work with GBK Gmbh Global Regulatory Compliance , a global regulatory compliance consultancy firm, first in the EU marketplace and then in other markets to educate targeted government agencies responsible for setting standards for hazardous chemicals used in coatings.

Educating Regulatory Authorities. The Company intends to educate regulatory agencies of the existence of an alternative to hazardous isocyanate-based polyurethane. The US Environmental Protection Agency (EPA) has shown strong interest in Green Polyurethane™ and has supported the efforts to manufacture and distribute Green Polyurethane™ products in the US and have suggested linking the Green Polyurethane™ technology to the EPA’s new website for spray polyurethane foam.

Maintain and Increase Cost and Operational Advantages. The Company’s strategy is to avoid large capital investments in manufacturing and instead rent facilities and equipment from its strategic partners. Management estimates that the Company can outsource the manufacture of up to 20,000 tons per year.

Subsidiaries

Nanotech Industries International, Inc. (“Nanotech”) is a wholly owned subsidiary of Hybrid Coating Technologies Inc. (collectively “the Company”) and is the source of the Company’s operations.

Legislation and Government Incentives

Current global trends toward more environmentally sound products and new legislative restrictions on the use of hazardous materials and their chemical by-products pose formidable obstacles to polyurethane manufacturers. The EU has already begun to take action against isocyanates by passing recent legislation that banned the addition of any new manufacturing capacities of isocyanates. Governmental health agencies and workers unions throughout Europe are beginning to actively speak out against the dangers of isocyanates in the workplace in order to protect and lobby for worker’s safety. On September 2007 the president of FATIPEC (Federation of the Paints, Varnishes, Lacquers and Printing Inks Industries Technologists' Associations of Continental Europe) along with the Oil & Color Chemists' Association reported that new EU safety regulations have been put into place which includes a tenfold lowering of the concentration limits of isocyanates in all paints.

In addition, the EPA has recently developed a new Action Plan causing any company that produces products with free isocyanates to report any health related incidents related to the isocyanate exposure of its workers and any consumers using its products.

These measures are similar to recent EU actions, which preceded the banning of any Do-It-Yourself (DIY) consumer products with free isocyanates. These new regulations will afford the Company the opportunity to gain new ground.

Manufacturing

Overview

The Company 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.

The Company’s strategy is to avoid large capital investments in manufacturing and to outsource the manufacturing of the Company products to third-party manufacturers. At current capacity, the Company can manufacture 20,000 tons per year.

-10-


Third Party Manufacturing Partners

Adhpro Adhesives Inc.

Adhpro is an industrial premium quality adhesives manufacturer based out of Magog, Quebec Canada. Adhpro’s products are manufactured from the highest quality raw material to meet customer’s exact needs. Established since 1990, Adhpro is a young company that is expanding its skills from coast to coast.

Simpson Coatings Group Inc.

Simpson Coatings Group Inc. is a manufacturer of a wide variety of paints and lacquers for over fifty years based out of San Francisco, California. Simpson Coatings is a leader and respected principal in nearly every major coating paint category and a broadening list of specification products selling to firms of every description. The company is also a member of the National Paint and Coatings Association, Inc. and through this membership is kept current with all the latest specifications and their amendments.

Due to its long history, qualifications and production capacity Simpson Coatings is positioned as the primary source of production for the United States and its president is a Board member of Nanotech Industries, Inc. (NTI).

Research and Development

The Company does not foresee spending any capital on research and development. The Company has a renewable Licensing Agreement with NTI to sell the Nanotech Products. Any and all research and development for the Nanotech Products is conducted by NTI.

Intellectual Property Protection

Several formulations of Green Polyurethane™ technology are patent and know-how protected through control of the manufacturing process. The underlying patents of Green Polyurethane™ (often referred to as HNIPU or NIPU) have been filed with the U.S Registrar of Patents and are held by NTI and cover the composition of and method for producing Green Polyurethane™.

Name of Patent


Filed in
USA
(No. &
Date)
Liquid oligomer composition containing hydroxylamine adducts and method of manufacturing thereof
12/315,580
04/12/2008
Nanostructured Hybrid Oligomer Composition
12/381,626
03/13/2009
Epoxy-Amine Composition Modified with Hydroxyalkyl Urethane

Method of producing hybrid polyhydroxyurethane network on the base of carbonated- epoxydated unsaturated fatty acid triglycerides
12/383,589
03/26/2009
09/20/2010

In addition, with respect to proprietary knowledge that is not patentable and processes for which patents are difficult to enforce, the Company relies on trade secret protection and confidentiality agreements to safeguard its interests. Many elements of the manufacturing process used by the Company may involve proprietary knowledge, technology or data that is not covered by patents or patent applications, including technical processes, equipment designs, algorithms and procedures.

-11-


Facilities and Employees

Hybrid Coating Technologies Inc.’s principal office is located in Daly City, California, U.S.A.

As of December 31, 2013, Hybrid Coating Technologies Inc. had 3 employees.

Competition

To date, the Company is unaware of any other non isocyanate polyurethane product and as such does not have any direct competition. However, it still must compete against major companies manufacturing and supplying toxic PU based paints and coatings. Large members of this market are BASF, Sherwin Williams, PPG, Benjamin Moore, AKZO Nobel, Rust-Oleum and Sika AG. The Company’s products, however, offer these competitors a cost-effective and attractive green alternative to their existing coating formulations and this is why almost all of the top 10 formulators in the world have sought out the Company to learn about Green Polyurethane™.

Environmental Matters

The Company is not aware of any pending or threatened environmental investigation, proceeding or action by foreign, federal, state or local agencies, or third parties involving its current operations.

Description of the Industry

According to the Center for the Polyurethanes, the industry is generally broken up into the following segments:

  • C.A.S.E. (Binders, Coatings, Adhesives, Sealants and Elastomers)

  • Thermoplastics (highly elastic, flexible and abrasion resistant polyurethane)

  • Rigid Foam (used as packaging material, building insulation, etc.)

  • Flexible Foam (in bedding, furniture, car interiors, and running shoes)

The total available market for the Company within the polyurethane and coatings industries is currently estimated at $136 billion and comprised of three segments as follows:

Polyurethane – According to plastemart.com, a well-known online authority in the coatings market, “As per Research and Markets, the global market for polyurethanes was estimated at 13,650.00 kilo tons in 2010 and is expected to reach 17,946.20 kilo tons by 2016, growing at a CAGR of 4.7% from 2011 to 2016. In terms of revenue, the market was estimated to be worth US$33 billion in 2010 and is expected to reach US$55 billion by 2016, growing at a CAGR of 6.8% from 2011 to 2016.”

   

Global Paints & Coatings – According to Datamonitor’s 2010 paints & coatings Global Industry Guide, “the global paints & coatings market grew by 8.6% in 2010 to reach a value of $103 billion with a volume of 35MM Tons. In 2015, the global paints & coatings market is forecast to have a value of $142 billion, an increase of 37.3% since 2010.” This market comprises three segments: Decorative, Industrial and Automotive, Specialty and Other. HCT’s focus is on “Specialty and Other,” which comprises 23% of the market.

   

Nano Coatings - The market for nanocoatings was $2.1 billion in 2009 and projected to reach $3.3 billion in 2010 and $17.9 billion in 2015 with a five-year CAGR of 39.5% (BCC research, Jan. 2010).

-12-


Total Serviceable Market (TSM)

The total serviceable market is currently estimated at $32 billion as follows:

Polyurethane – Out of the total $33BB global paints & coatings market, 25% or $8.25 billion accounts for binders, coatings & adhesives, available for the Company to service.

   

Global Paints & Coatings – Out of the total $103 billion polyurethane market 23% or $23.7 billion accounts for “specialty and other”, available for the Company to service.

   

NanoCoatings - Out of the total $3 billion nanocoatings market, the Company anticipates servicing 5% or $150 million.

The only polyurethane markets for which it would not be economical to use Green Polyurethane™ are certain foams, which are produced at very low costs for furniture. However, Green Polyurethane™ can still be used for other polyurethane based foam products on a competitive basis. Green Polyurethane™ could also replace up to 20% of the high-end epoxy flooring/coating market.

2013 Progress and 2014 Outlook

On July 17, 2013, the Company entered into an agreement with a major coatings manufacturer ("Licensee"), who will sell its products through more than two thousand big box retail locations across the United States, for the development and licensing of an isocyanate free polyurethane coating. Under the terms of the agreement, the Company would make certain minor modifications to its existing polyurethane formulation to address certain specific requirements of the Licensee.

Once the modifications to the Company’s formulation are successfully completed and accepted, the Company will become a supplier and sell its Coating Products to the Licensee in the territory of the United States. As part of the confidentiality clause in the agreement, the Company is not at liberty to divulge the identity of the Licensee at this time.

In addition, the Company has expanded its technology with a new UV curing formulation which is the only non-isocyanate UV curing polyurethane formulation in the world. The new formulation allows the Company’s floor coating products to fully cure within an hour instead of 7 days, which is currently the normal industry standard.

On June 25, 2013 the Occupational Safety and Health Administration (OSHA), a division of the US Department of Labor, initiated a National Emphasis Program to protect workers from the serious health effects from occupational exposure to isocyanates. According to the OSHA workers exposed to isocyanates can suffer debilitating health problems for months or even years after exposure which could result in death.

The EPA mentioned the Company's technology as an alternative to toxic polyurethane coatings in its previously issued Action Plan. On page 4 of its Action Plan, the scientists Figovsky and Shapovalov who are the founders of Green PolyurethaneTM and who are presently continuing to develop enhanced and new formulations for the Company, are mentioned as an alternative to toxic polyurethane.

The Company is presently in discussions with several large industry players and expects to enter into commercialization agreements with some potential partners during 2014 and is targeting to generate revenues and profit for its fiscal year of 2014.

-13-


ITEM 1A. RISK FACTORS

Risks Related to Our Business, Products and the Green Polyurethane Industry

Risks Related to Hybrid Coating Technologies Inc.’s Business Operations

We have a limited operating history.

The Company was incorporated on July 8, 2010 and has limited or no operating history. As such historical operating results may not provide a meaningful basis for evaluating the business, financial performance and prospects. You should consider the Company’s business, operations and prospects in light of the risks, expenses and challenges faced as an early-stage company.

Our business, and therefore our results of operations and financial condition, may be adversely affected by the current disruption in the global credit markets and instability of financial systems.

The recent disruption in the global credit markets, the re-pricing of credit risk and the deterioration of the financial and real estate markets generally, particularly in the U.S. and Europe, have all contributed to a reduction in consumer spending and a decline in the overall U.S. and world economy. Although the recent disruptions were initially in the housing, financial and insurance sectors, this deterioration has further expanded to the general economy and various sectors. Tight credit, increased unemployment and reduced consumer confidence have had negative effects on demand in the consumer market and consequently for our product and service offerings. In addition, some economists are predicting that the U.S. economy, and possibly the global economy, has entered into a prolonged recession or even a depression as a result of the foregoing factors. Such a prolonged downturn in the U.S. or global economy could have a material adverse effect on our business in a number of ways, including lower product demand and lower sales, which could have a material adverse effect on our liquidity, results of operations and financial condition.

The intellectual property used by the Company has limited protection.

The process of seeking patent, industrial design and trademark protection can be time consuming and expensive and there can be no assurance that patents, industrial design registrations or trademark registrations will issue from future applications or that the existing intellectual property rights used by the Company or any new patents, industrial design registrations or trademark registrations that may be issued will be sufficient in scope or strength to provide meaningful protection or any commercial advantage. There can be no assurance that any pending or future patent, industrial design or trademark applications will be granted in respect of the technology used by The Company or that any existing, pending or future patents, industrial design registrations or trademark registrations will not be challenged, invalidated, ignored, circumvented or otherwise rendered unenforceable.

The Company’s future success depends on its ability to increase its client base and distribution channels

We will initially sell the Nanotech Products primarily to end-users within North America. If we are unable to successfully increase our client base and expand our distribution channels, our revenues and future prospects may be materially harmed. As we seek to grow our sales by entering new markets, our ability to increase market share and sales will depend substantially on our ability to expand our distribution channels by identifying, developing and maintaining relationships with manufacturers and distributors. We may be unable to enter into relationships with resellers in the markets we target or on terms and conditions favorable to us, which could prevent us from entering these markets at all or in accordance with our current plans. Our ability to enter into and maintain relationships with resellers will be influenced by factors beyond our control, including the relationships between these resellers and our competitors and market acceptance of our products.

-14-


Our dependence on third party manufacturers for the manufacturing of all the Nanotech Products could prevent us from delivering our products to our customers within required timeframes, which could result in order cancellations and loss of market share.

We obtain all of the Nanotech Products using third party manufacturers and assemblers and using materials and components procured from a limited number of third-party suppliers. If we fail to develop or maintain our relationships with these or other suppliers, we may be unable to manufacture our products or our products may be available only at a higher cost or after a long delay, which could prevent us from delivering our products to our customers within required time frames which may, in turn, result in order cancellations and loss of market share. The failure of a supplier to supply materials and components in a timely manner, or to supply materials and components that meet our quality, quantity and cost requirements could impair our ability to manufacture our products or increase their component costs, particularly if we are unable to obtain substitute sources of these materials and components on a timely basis or on terms acceptable to us.

Highly Competitive Industry

Many of the companies with which the Company will compete have significantly greater financial and other resources than the Company. Additionally, other companies which at present are not in competition with the Company may also enter into this industry, thereby directly competing with the Company.

Uncertain Acceptance and Maintenance Of Company Brand

The Company believes that the establishment and maintenance of a brand identified with the Company’s services is critical to attracting and expanding its customer base. While the Company is confident that its services and brand name(s) will provide an excellent foundation for developing brand awareness, no assurance can be given that such branding efforts will be successful. Promotion of brand awareness among users will depend, among other things, on the Company’s success in its marketing efforts and the usability of its services, none of which can be assured.

Significant Growth Places a Strain on Resources

If the Company is unable to manage growth effectively, business could be adversely affected. The Company expects to experience significant growth, both internally and through possible acquisitions and partnerships. This anticipated future growth may place a significant strain on its resources. As part of this growth, the Company will need to expand on its operational and financial systems, procedures and controls.

The Company may require additional capital in the future and no assurance can be given that such capital will be available at all or available on acceptable terms.

The Company does not currently generate sufficient revenue from operations to cover operating expenses and is not profitable. If the Company is not able to significantly increase operating revenue and achieve profitability, it may require additional equity or other means of debt financing to maintain business operations, fund expansions or complete strategic acquisitions. There can be no assurances that The Company will be able to obtain additional financial resources on favorable commercial terms or at all. Failure to obtain such financial resources could affect plans for sustainability and growth, or result in the Company being unable to satisfy obligations as they become due, either of which could have a material adverse effect on the Company’s business and financial condition.

-15-


The Company has no history of significant profit and no assured foreseeable earnings.

The Company has no history of significant profit. The Company expects to continue to incur losses in the very near future, and there can be no assurance that it will ever be profitable as it expects operating expenses to increase as its client base and distribution channels are expanded. The Company’s ability to reach and sustain profitability depends on a number of factors including, but not limited to, the availability of financing and the continued availability of third party manufacturers.

The Company’s business depends substantially on the continuing efforts of its executive officers, and its business may be severely disrupted if the Company loses their services. In addition, if the Company is unable to attract, train and retain technical personnel, the Company’s business may be materially and adversely affected.

The Company’s future success depends substantially on the continued services of its executive officers. If one or more of the Company’s executive officers are unable or unwilling to continue being employed by us, the Company may not be able to replace them readily, if at all. Therefore, the Company’s business may be severely disrupted, and it may incur additional expenses to recruit and retain new officers.

Recruiting and retaining capable personnel is vital to the Company’s success. If the Company is unable to retain and attract qualified employees, the Company’s business may be materially and adversely affected.

Our ability to increase market share and sales depends on our ability to successfully expand our distribution channels.

We will sell the Company Products to companies within North America. If we are unable to successfully expand our distribution channels and client base significantly, our revenues and future prospects will be materially harmed. As we seek to grow our sales by entering existing and new markets in some of which we have little experience selling coatings, adhesive and sealant products, our ability to increase market share and sales will depend substantially on our ability to expand our distribution channels by identifying, developing and maintaining relationships with resellers both within and outside of North America. We may be unable to enter into relationships with resellers in the markets we target or on terms and conditions favorable to us, which could prevent us from entering these markets or entering these markets in accordance with our plans.

The Company is delinquent in its payroll tax remittances.

The Company is delinquent on its state and federal payroll tax remittances. The State of California has issued a Notice of State Tax Lien against the property and rights owned by the Company covering interest and penalties for non-payment of payroll remittances.

Risks Related to the Common Stock

The Company may conduct further offerings in the future, in which case your shareholdings will be diluted.

Since inception, both the Registrant and the Company have relied on equity sales of Common Stock and issuances of convertible debt and warrants convertible or exercisable into shares of Common Stock to fund operations. The Registrant may conduct further equity and/or convertible debt offerings in the future to finance current projects or to finance subsequent projects that it decides to undertake. If Common Stock is issued in return for additional funds, or upon conversion or exercise of outstanding convertible debentures or warrants, the price per share could be lower than that paid by existing common stockholders. The Registrant anticipates continuing to rely on equity sales of Common Stock and issuances of convertible debt and/or warrants convertible or exercisable into shares of Common Stock in order to fund its business operations. If the Registrant issues additional shares of Common Stock, your percentage interest in the Registrant will be lower. This condition, often referred to as “dilution”, could result in a reduction in the per share value of your shares of Common Stock.

-16-


The Company may exercise its American-European Option and additionally it’s Asia Option in the Licensing Agreement which will result in your shareholdings being significantly diluted.

On December 6, 2011, the Company notified NTI of its intent to exercise the Sealant Option. To date, the Company has not issued the Sealant Shares and the Sealant Option has expired. The Company intends to renegotiate the Sealant Option with NTI in the future.

Should the Company exercise the American-European Option or also exercise the Asia Option, (as defined in the Licensing Agreement), this will result in a significant issuance of Common Stock in return for Perpetual Licensing Rights (as defined in the Licensing Agreement). This share issuance will also result in a change of control and NTI will own 52.5% of the Company’s outstanding Common Stock in return for the exercise of the American-European Option (and an additional 10% of the Company’s outstanding Common Stock in the event the Company also exercises the Asia Option). On December 6, the Company exercised its Sealant option which entitles NTI to 15% of the outstanding shares in the Company when effective. As a result, NTI will have substantial influence over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of the assets. The interests of NTI could conflict with or differ from your interests as a holder of common shares. For example, the concentration of ownership held by NTI could delay, defer or prevent a change of control of the Company or impede a merger, takeover or other business combination which you may view favorably.

The Registrant does not anticipate paying dividends in the future.

The Registrant’s current policy is to retain earnings to finance the development of new lines of products and to otherwise reinvest in our business. Therefore, the Registrant does not anticipate paying cash dividends in the foreseeable future. The Registrant’s dividend policy will be reviewed from time to time by the Board of Directors in the context of its earnings, financial condition and other relevant factors. Until the Registrant pays dividends, which it may never do, its shareholders will not be able to receive a return on shares of Common Stock unless they sell them.

-17-


ITEM 2. DESCRIPTION OF PROPERTY

We do not own any real property or any rights to acquire any real property. Our head office is located at 950 John Daly Blvd. Suite 260, Daly City, CA 94015 . The lease is on a month to month basis, at $3,750 per month.

ITEM 3. LEGAL PROCEEDINGS

There are no pending legal proceedings to which the Company is a party or to which any of our property is subject and to the best of our knowledge, no such actions against us are contemplated or threatened.

ITEM 4. MINE SAFETY DISCLOSURES

No applicable.

-18-


PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock is quoted on the OTC Bulletin Board. Our shares were first traded on the OTC Bulletin Board on July 10, 2009, under the name “Allora Minerals, Inc.”, (OTCBB: ALRL). On August 12, 2009, the change of the Registrant’s name to Epod Solar Inc. was approved by the NASD, and we were issued the new trading symbol “EPDS”. On July 27, 2011, the Company changed its name to Hybrid Coating Technologies Inc., and on September 7, 2011, that change was approved by the Nevada Secretary of State and the Company was issued a new trading symbol “HCTI.ob”. The following table indicates the high and low bid prices of our common stock obtained during the periods indicated:

  For the year ended For the year ended
  December 31, 2013 December 31, 2012
  High Low High Low
First Quarter $0.48 $0.20 $1.55 $0.26
Second Quarter $0.51 $0.22 $1.50 $0.18
Third Quarter $0.56 $0.20 $1.01 $0.20
Fourth Quarter $0.80 $0.17 $0.83 $0.25

The range of high and low price quotes of our common stock as set out in the table above is as quoted on the OTC Bulletin Board. The market quotations provided reflect inter-dealer prices, without retail markup, mark-down or commission and may not represent actual transactions.

The number of holders of record of our shares of our common stock as of December 31, 2013 was 162.

Penny Stock Rules

The United States Securities and Exchange Commission (“SEC”) has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system; provided, that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and in such form as the SEC shall require by rule or regulation.

The broker-dealer also must, prior to effecting any transaction in a penny stock, provide the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock that is not otherwise exempt from those rules, the broker-dealer must: (a) make a special written determination that the penny stock is a suitable investment for the purchaser; and (b) receive from the purchaser his or her written acknowledgement of receipt of the determination and a written agreement to the transaction.

-19-


These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock and therefore stockholders may have difficulty selling those securities.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future.

Sale of Unregistered Securities

On August 30, 2010, the Company closed on the acquisition from Nanotech, a corporation formed pursuant to the laws of Nevada of all of the issued and outstanding shares of capital stock of Nanotech held by the holders of the Nanotech Shares. The purchase price for the Nanotech Acquisition consisted of 3,381,003 shares of common stock, $0.001 par value per share of the Registrant, issued to Nanotech Shareholders. In addition, certain shareholders of the Company agreed to have 1,028,000 of their shares cancelled as part of the transaction.

ITEM 6. SELECTED FINANCIAL DATA

N/A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

This Management's 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 Company's operations and financial position. Some sections of this MD&A 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. 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 Company's actual and future results could therefore differ materially from those indicated or underlying these forward-looking statements. In evaluating these statements, you should consider various factors, including the risks discussed below, and, from time to time, in other reports filed by the Company with the SEC. See “Risk Factors” and “Special Note Regarding 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.

Basis of Presentation

This MD&A on the Company's operating results and cash flows for the fiscal year ended December 31, 2012 as well as its financial position at December 31, 2012, should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report.

-20-


Company Overview

Headquartered in Daly City, California, Hybrid Coating Technologies Inc.’s (formerly Epod Solar Inc.) (“HCT”) core business is that of its wholly-owned subsidiary, Nanotech Industries International Inc. (‘Nanotech”). This business is the manufacturing and sale of alternative non-toxic (isocyanate-free) polyurethane, Green Polyurethane™. The products manufactured and sold by Nanotech (“Nanotech Products”) include coatings and raw binder ingredients (Green Polyurethane® Monolithic Floor Coating and Green Polyurethane™ Binder). Nanotech was granted the right to manufacture and sell the Nanotech Products pursuant to an agreement (“Licensing Agreement”) entered into between Nanortech and NTI (Nanotech Industries Inc.) the holder of the proprietary rights to the license and intellectual property required for the manufacturing of the Nanotech Products. The Nanotech Products will target the coatings, adhesives, sealants and elastomers (“C.A.S.E.”) market in North America, with options to sell in Europe, South America and Asia, pursuant to the terms of the Licensing Agreement. (see Note 4 to consolidated financial statements and Item 1 –Description of Business) .

Off-Balance Sheet Arrangements

N/A

Going Concern

The Company’s 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 incurred net losses of $16,788,776 since inception. This condition raises substantial doubt about the Company’s 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 Company's 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 its operations.

Recent 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 flows.

-21-


Operating Results for the Fiscal Year Ended December 31, 2013 and 2012

Results of Operations

We have had no significant operating revenues for the period from our inception on July 8, 2010 through December 31, 2013, save for samples sales of $108,793. Our activities to date have been financed from the proceeds of share subscriptions, proceeds from convertible debentures issued and from loans from related and other parties and trade payables. During the year ended December 31, 2013, revenues from our operations were $37,281 compared to $66,642 for the year ended December 31, 2012.

For the period from inception on July 8, 2010 through our fiscal year ended December 31, 2013, we incurred total net loss of $16,788,776 including non-cash charges of $6,155,010 from stock-based compensation, warrant modification expense of $241,697,intangible asset amortization of $673,143, amortization of debt discounts of $1,012,309, interest expenses of $1,636,242, loss on extinguishment of debt of $1,385,303 loss on impairment of intangible assets of $631,917, loss on impairment of samples and supplies of $10,136, and a gain in the fair value of the derivative liability of $173,882. Also incurred were other general and administrative expenses of $3,266,018, cost of sales of $69,350 and other interest expense of $2,012,330.

General and administrative expenses totaled $2,921,059 for the year ended December 31, 2013, as compared to $1,608,055 for the year ended December 31, 2012, representing an 82% increase from the prior corresponding period. Included in general administrative expenses for the year ended December 31 are the following:

    Year Ended December 31        
    2013     2012     % change  
Professional Fees $  873,143   $  452,559     93%  
Payroll   170,088     414,939     (59% )
Stock-based comp. (non-cash)   1,609,709     390,580     312%  
Rent and general office costs   97,678     113,790     (14% )
Lab fees and supplies   25,179     87,809     (71% )
Travel and trade shows   145,262     148,378     (2% )
                   
Total $  2,921,059   $  1,608,055     82%  

General and Admistration expenses analysis

Professional fees were $873,143 for the year ended December 31, 2013 compared to $452,559 for the year ended December 31, 2012.Professional fees increased due to greater use of consultants for financing, sales and marketing purposes. Payroll was $170,088 for the year ended December 31, 2013 compared to $414,939 for the year ended December 31, 2012.  Payroll decreased due to a reduction in employees from five to two , specifically senior management who were remunerated through stock based compensation. Stock based compensation was $1,609,709 for the year ended December 31, 2013 compared to $390,580 for the year ended December 31, 2012.Stock based compensation increased due to payments to management and other consultants for services through the issuance of shares. Lab fees and supplies was $25,179 for the year ended December 31, 2013 compared to $87,809 for the year ended December 31, 2012. Lab fees and supplies decreased because of more extensive lab use and testing in 2012 and more material use for sample sales in 2013

-22-


Amortization and depreciation was $182,023 for the year ended December 31, 2013 compared to $218,580 in the year ended December 31, 2012. Certain patents and licenses of the Company have been fully amortized which resulted in lower amortization in the year ended December 31, 2013 compared to December 31, 2012.

During the year ended December 31, 2013, we recorded a loss of $264,366 on the change in fair value of derivative liabilities related to our convertible notes payable, compared to a gain of $360,461 during the year ended December 31, 2012. The change in derivative liability has no impact on our cash flows for operations and was primarily a result of the increase in our stock price during the year ended December 31, 2013.

During the year ended December 31, 2013, we recorded $921,096 in interest expense compared to $799,374 during the year ended December 31, 2012. Interest expense increased in the year ended December 31, 2013 due to the Company extending the maturity dates of several of its notes payable. In order to obtain these extensions the Company issued additional shares of its common stock which resulted in the recording of additional interest expense.

During the year ended December 31, 2013, we recorded a loss on the extinguishment of debt in the amount of $1,282,836 compared to $22,750 during the year ended December 31, 2012. The loss was a result from amending the convertible debentures as well as other loans.

-During the year ended December 31, 2013, we recorded a loss on warrant modifications of $241,697 compared to $0 in December 31, 2012. The Company extended the expiration date and reduced the exercise price of certain Series A warrants that had been issued to third parties. The modification of the terms resulted in a change in the fair value of the warrants which was recorded as a loss on modification and an increase in additional paid-in capital.

Liquidity and Capital resources

We had no cash and cash equivalents at December 31, 2013 and 2012. The Company had a working capital deficit of $4,296,231 as of December 31, 2013. We do not have enough cash on hand to commence operations. We believe that we will need approximately $1,500,000 to fund our operations over 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 Company’s existence.

From our inception, we raised $25,000 through an exercise of warrants at $0.40 per share for 62,500 shares. We issued 100,000 shares for fair value services rendered with respect to media relations of $135,000 in the fourth quarter of 2010. We issued Senior Secured Convertible Debentures for $400,000 on August 16, 2010. We raised an additional $75,000 and $72,600 from short-term loans in the 4th quarter of 2010.

In April 2011, the Company raised $1,201,000 in convertible debentures, with an individual face value of $5,000, a maturity of 36 months and a coupon rate of 10% per annum payable in cash or capital stock at the Company’s discretion. Each debenture shall be convertible (using a conversion factor of 1.4) into 3,571 Units of the Company where each Unit (at a price of $1.40 per Unit) , comprises of 1 share of common stock at and one half a stock purchase warrant of the Company with an exercise price of $2.00 per full unit and a maturity of 36 months. Warrants are exercisable at the option of the holder at any time prior to maturity. The Debentures shall carry an anti-dilution provision if the total outstanding shares exceed 9,250,000 shares.

On February 21, 2012, the Company raised an additional $119,500 in similar conditions as the ones above except for a conversion price of $1.45 per unit and a warrant exercise price of $2.10.

23-


In 2011, the Company received $894,000 in short term loans from shareholders and repaid $315,200.

In 2012, the Company received approximately $1,566,000 (approximately $765,000 from related parties) in short term loans and repaid approximately $449,000.

In 2013, the Company received approximately $969,000 (approximately $708,000 from related parties) in short term loans and repaid approximately $467,000.

Principal Cash Flows for the Fiscal Year Ended December 31, 2013

Operating activities used cash flows of $502,095. Net change in operating assets and liabilities generated cash flows of $1,175,660 This increase in use of cash relates primarily to the net loss incurred during 2013 after adjusting for non-cash expenses.

Financing activities provided cash flows of $502,095, primarily as a result of receipt of funds such as $708,846 in shareholder loans and $260,000 in loan payable-related party. In addition, the Company repaid $106,430 of the note payable - related party, and repaid $360,696 on loans payable – shareholders.

-24-


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Convertible Debt

The fair market value of our 10% senior secured convertible debentures is subject to interest rate risk, market price risk and other factors due to the convertible feature of the debentures. The fair market value of the debentures will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair market value of the debentures will generally increase as the market price of our common stock increases and decrease as the market price falls. The interest and market value changes affect the fair market value of the debentures but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligations.

-25-


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Hybrid Coating Technology Inc.
(A Development Stage Company)

Consolidated Financial Statements
December 31, 2013

-26-


Hybrid Coating Technology Inc.
(A Development Stage Company)

Consolidated Financial Statements

Contents

Report of Independent Registered Public Accounting Firms F-1
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Operations F-3
   
Consolidated Statement of Stockholder's Deficit F-4
   
Consolidated Statements of Cash Flows F-7
   
Notes to Consolidated Financial Statements F-11


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of
Hybrid Coating Technologies Inc.
(A Development Stage Company)
Daly City, CA

We have audited the accompanying consolidated balance sheets of Hybrid Coating Technologies, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended and the period from July 8, 2010 (inception) to December 31, 2013. Hybrid Coating Technologies Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements for the period from July 8, 2010 (inception) through December 31, 2011 were audited by other auditors whose report expressed an unqualified opinion on those financial statements. The consolidated financial statements for the period from July 8, 2010 (inception) through December 31, 2011 include total revenues of $4,870 and a net loss of $8,728,044. Our opinion on the consolidated financial statements for the period from July 8, 2010 (inception) through December 31, 2013, insofar as it relates to amounts from July 8, 2010 (inception) through December 31, 2011, is based solely on the report of other auditors.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hybrid Coating Technologies Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the period described above in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Hybrid Coating Technologies Inc. will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, Hybrid Coating Technologies Inc. has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ GBH CPAs, PC

GBH CPAs, PC
www.gbhcpas. com
Houston, Texas
April 30, 2014

F-1


Hybrid Coating Technology Inc.
(A Development Stage Company)
Consolidated Balance Sheets
As of December 31, 2013 and 2012

 

  December 31     December 31  

ASSETS

  2013     2012  

 

           

Intangible asset, net of accumulated amortization

$  444,940   $  626,963  

 

           

TOTAL ASSETS

$  444,940   $  626,963  

LIABILITIES AND STOCKHOLDERS’ DEFICIT

           

Current liabilities

           

Bank indebtedness

$  7,706   $  22,104  

Accounts payable and accrued liabilities

  564,289     435,245  

Accounts payable and accrued liabilities-related parties

  491,178     554,633  

Deferred revenue

  20,000     -  

Stock payable

  15,000     15,000  

Senior secured convertible debentures

  200,000     200,000  

Loans payable, net of unamortized discount of $5,455 and $14,638, respectively

  972,045     694,362  

Loans payable -shareholders net of unamortized discounts and premiums of $21,980 and $25,194, respectively

  1,343,562     1,062,521  

Note payable – related party

  682,451     800,481  

    Total current liabilities

  4,296,231     3,784,346  

Convertible debentures, net of unamortized discount of $ 0 and $325,136, respectively

  1,396,858     995,364  

Derivative liability

  816,488     166,721  

Total liabilities

  6,509,577     4,946,431  

Commitments and contingencies

           

STOCKHOLDERS’ DEFICIT

           

Common stock, $0.001 par value, 75,000,000 shares authorized, 11,167,513 shares and 6,503,568 shares issued and outstanding , respectively

  11,168     6,504  

Additional paid in capital

  10,712,971     6,651,428  

 

           

Deficit accumulated during development stage

  (16,788,776 )   (10,977,400 )

Total stockholders’ deficit

  (6,064,637 )   (4,319,468 )

 

           

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$  444,940   $  626,963  

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

F-2


Hybrid Coating Technology Inc.
(A Development Stage Company)
Consolidated Statements of Operations
For the Years Ended December 31, 2013 and 2012
and the Period from July 8, 2010 (Inception) through December 31, 2013

 

  Year ended     Year ended     July 8, 2010 (inception)  

 

  December 31, 2013     December 31, 2012     through December 31, 2013  

 

                 

Revenues

$  37,281   $  66,642   $  108,793  

 

                 

Cost of sales

  37,650     27,700     69,350  

 

                 

Gross-profit

  (369 )   38,942     39,443  

 

                 

Operating expenses

                 

 

                 

 General and administrative

  2,921,059     1,608,055     10,423,539  

 

                 

 Impairment of intangible asset

  -     -     631,917  

 

                 

 Amortization of intangible asset

  182,023     218,580     673,143  

 

                 

Total operating expenses

  3,103,082     1,826,635     11,728,599  

 

                 

Loss from operations

  (3,103,451 )   (1,787,693 )   (11,689,156 )

 

                 

Warrant modification expense

  (241,697 )   -     (241,697 )

 

                 

Loss on extinguishment of debt

  (1,282,836 )   (22,750 )   (1,385,303 )

 

                 

Change in fair value of derivative liability

  (264,366 )   360,461     173,882  

 

                 

Gain on foreign currency transaction

  2,070     -     2,070  

 

                 

Interest expense

  (921,096 )   (799,374 )   (3,648,572 )

 

                 

Net loss

$  (5,811,376 ) $  (2,249,356 ) $  (16,788,776 )

 

                 

Basic and diluted net loss per common share

$  (0.70 ) $  (0.36 )      

 

                 

Basic and diluted weighted average number of common shares

  8,257,277     6,316,699        

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

F-3


Hybrid Coating Technology Inc.
(A Development Stage Company)
Statement of Stockholder’s Deficit
For the Period July 8, 2010 (Inception) through December 31, 2013

 

                    Deficit        

 

                    Accumulated        

 

  Number of                 During the        

 

  Shares           Additional     Development        

 

  Issued     Amount     paid-in capital     Stage     Total  

 

                             

Balance , July 8, 2010

  -   $  -   $  -   $  -   $  -  

 

                             

Issuance of Founders' shares for services rendered

  3,381,003     3,381     334,719           338,100  

 

                             

Fair value of warrants granted on July 8 - re-valued on August 30

  -     -     2,047,471     -     2,047,471  

 

                             

Fair value of warrants granted on July 14 - re-valued on August 30

  -     -     849,063     -     849,063  

 

                             

Exchange of shares for 33,810,035 shares of Nanotech Industries Int'l Inc.

  1,821,000     1,821     (1,821 )   -     -  

 

                             

Issuance of shares for services rendered

  100,000     100     134,900     -     135,000  

 

                             

Beneficial conversion feature on Senior Secured Convertible

                             

 

                             

Debenture

  -     -     126,607     -     126,607  

 

                             

Valuation of warrants issued

  -     -     273,393     -     273,393  

 

                             

Exercise of warrants for cash on July 30, 2010 - 62,500 shares at $0.40 per share

  -     -     25,000     -     25,000  

 

                             

Net loss

  -     -     -     (4,062,486 )   (4,062,486 )

 

                             

Balance, December 31, 2010

  5,302,003   $  5,302   $  3,789,332   $  (4,062,486 ) $  (267,852 )

(Continued on next page)

F-4



Issuance of shares as payment for consulting fees on February 9, 2011

  30,000     30     50,970     -     51,000  

 

                             

Valuation of warrants issued with Loans payable shareholders

  -     -     48,710     -     48,710  

 

                             

Re-measurement of warrants July 14, 2010 and Series A warrants

  -     -     1,179,887     -     1,179,887  

 

                             

Issuance of shares as payment for consulting fees on May 16, 2011

  112,928     113     175,925     -     176,038  

 

                             

Fair value of 25,000 warrants issued with loans payable shareholders - May 24, 2011

  -     -     15,450     -     15,450  

 

                             

Issuance of shares as payment for consulting fees on June 2, 2011

  58,000     58     89,842     -     89,900  

 

                             

Issuance of shares for services rendered on June 15, 2011

  20,000     20     30,980     -     31,000  

 

                             

Fair value of 25,000 warrants issued with loans payable shareholders - July 15, 2011

  -     -     27,915     -     27,915  

 

                             

Issuance of shares for services rendered on September 6, 2011

  40,000     40     59,560     -     59,600  

 

                             

Replacement of outstanding pre-merger shares on September 7, 2011

  30,500     31     (31 )   -     -  

 

                             

Issuance of shares for services rendered on September 7, 2011

  10,000     10     14,390     -     14,400  

 

                             

Issuance of shares for services rendered on September 9, 2011

  2,000     2     2,878     -     2,880  

 

                             

To record shares to be issued with loans payable shareholders

  -     -     36,000     -     36,000  

 

                             

Issuance of shares for services rendered on October 31, 2011

  27,302     27     42,291     -     42,318  

 

                             

Issuance of shares for services rendered on November 9, 2011

  184,000     184     285,016     -     285,200  

 

                             

Net loss

  -     -     -     (4,665,558 )   (4,665,558 )

 

                             

Balance, December 31, 2011

  5,816,733   $  5,817   $  5,849,115   $  (8,728,044 ) $  (2,873,112 )

(Continued on next page)

F-5



Issuance of shares for services rendered on January 31, 2012

  18,000     18     26,982     -     27,000  

 

                             

Fair value of 30,000 warrants issued for services rendered - February 16, 2012

  -     -     29,136     -     29,136  

 

                             

Fair value of 230,000 warrants issued for services rendered - February 23, 2012

  -     -     239,269     -     239,269  

 

                             

Issuance of shares for services rendered - March 5, 2012

  51,000     51     66,249     -     66,300  

 

                             

Issuance of shares with loans payable to shareholders - March 5, 2012

  10,000     10     12,990           13,000  

 

                             

Issuance of shares for interest and premium on loan - March 5, 2012

  90,000     90     92,910     -     93,000  

 

                             

Issuance of shares for cashless exercise of 220,000 warrants on loan - March 23, 2012

  205,135     205     (205 )   -     -  

 

                             

Issuance of shares for interest on convertible debentures - May 21, 2012

  240,200     240     119,860     -     120,100  

 

                             

Issuance of shares for services rendered - May 21, 2012

  50,000     50     16,450     -     16,500  

 

                             

Issuance of shares for services rendered - August 15, 2012

  22,500     23     12,352     -     12,375  

 

                             

Imputed interest on note payable – related party

  -     -     169,452     -     169,452  

 

                             

Fair value of warrants issued with loans payable - shareholders

  -     -     16,868     -     16,868  

 

                             

Net loss

  -     -     -     (2,249,356 )   (2,249,356 )

 

                             

Balance, December 31, 2012

  6,503,568   $  6,504   $  6,651,428   $  (10,977,400 ) $  (4,319,468 )

Continued on next page)

F-6



Issuance of shares for services rendered

  349,303     349     138,136     -     138,485  

 

                             

Issuance of shares for interest payments on Convertible Debentures

  420,567     421     140,456     -     140,877  

 

                             

Issuance of warrants for services

  -       -     1,385,379     -     1,385,379  

 

                             

Imputed interest on note payable-related party

  -     -     133,464     -     133,464  

 

                             

Issuance of warrants to landlord for payment of accounts payable and prepaid rent

  -     -     202,095     -     202,095  

 

                             

Exercise of warrants

  375,000     375     -     -     375  

 

                             

Issuance of shares for cash-less exercise of warrants

  688,060     688     (688 )   -     -  

 

                             

Issuance of shares to SSCD holders for payment of interest

  100,000     100     37,900     -     38,000  

 

                             

Issuance of shares for interest payment on loans payable - shareholders

  43,863     44     13,040     -     13,084  

 

                             

Issuance of warrants for interest payment on loans payable - shareholders

  -     -     68,131     -     68,131  

 

                             

Issuance of shares for payment on accounts payable and accrued liabilities-related parties

  2,287,000     2,287     891,325     -     893,612  

 

                             

Issuance of warrants for payment on loans payable - shareholders

  -     -     623,665     -     623,665  

 

                             

Fair value of 110,000 warrants issued with loans payable

  -     -     23,705     -     23,705  

 

                             

Fair value of 100,000 warrants issued with loans payable shareholders

  -     -     31,588     -     31,588  

 

                             

Modification of Series A warrants

  -     -     241,697     -     241,697  

 

                             

Issuance of shares for amended Convertible Debentures

  400,152     400     131,650     -     132,050  

 

                             

Net loss

  -     -           (5,811,376 )   (5,811,376 )

 

                             

Balance, December 31, 2013

  11,167,513   $  11,168   $  10,712,971   $  (16,788,776 ) $  (6,064,637 )

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

F-7


Hybrid Coating Technology Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012 and the Period from July 8, 2010 (Inception) through December 31, 2013

 

  Year ended     Year ended     July 8, 2010 (inception)  

 

  December 31,2013     December 31,2012     through December 31,2013  

CASH FLOWS FROM OPERATING ACTIVITIES

                 

Net loss

$  (5,811,376 ) $  (2,249,356 ) $  (16,788,776 )

Adjustments to reconcile net loss to net cash used in operating activities:

           

 Stock-based compensation

  1,643,459     390,580     6,155,010  

 Warrant modification expense

  241,697     -     241,697  

 Impairment of samples and supplies

  -     10,136     10,136  

 Interest paid through issuance of shares

  90,043     213,100     303,143  

 Amortization of intangible asset

  182,023     218,580     673,143  

 Loss on extinguishment of debt

  1,282,836     22,750     1,385,303  

 Impairment of intangible assets

  -     -     631,917  

 Interest expense from revaluation of SSCD warrants

  -     -     1,180,886  

 Change in fair value of derivative liability

  264,366     (360,461 )   (173,882 )

 Interest expense on beneficial conversion feature related to SSCD warrants

  -     -     126,607  

 Interest imputed from notes payable -related party

  133,464     169,452     302,916  

 Incentive and interest paid on prepayment of debt

  -     -     25,833  

 Amortization of debt discounts

  297,803     260,505     1,012,309  

 Gain on foreign currency transaction

  (2,070 )   -     (2,070 )

Change in operating assets and liabilities

                 

 Samples and supplies

  -     27,700     (10,136 )

 Accounts payable and accrued liabilities

  362,330     142,031     811,742  

 Accounts payable and accrued liabilities related parties

  799,945     381,938     1,354,578  

 Bank indebtedness

  (6,615 )   (17,909 )   15,489  

 Deferred revenue

  20,000     -     20,000  

Net cash used in operating activities

  (502,095 )   (790,954 )   (2,724,155 )

CONTINUED ON NEXT PAGE)

F-8


Hybrid Coating Technology Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012 and the Period from July 8, 2010 (Inception) through December 31, 2013

 

  Year ended     Year ended     July 8, 2010  (inception)  

 

  December 31,2013     December 31,2012     through December 31,2013  

CASH FLOWS FROM INVESTING ACTIVITIES

                 

 

                 

Proceeds from sale of intangible asset

  -     -     150,000  

Net cash provided by investing activities

  -     -     150,000  

 

                 

CASH FLOWS FROM FINANCING ACTIVITIES

                 

 

                 

Proceeds from issuance of Convertible Debentures

  -     119,500     970,500  

Proceeds from Senior Secured Convertible Debentures

  -     -     400,000  

Proceeds from exercise of warrants

  375     -     25,375  

Proceeds from loans payable-shareholders

  708,846     765,296     2,440,742  

Repayments from loans payable-shareholders

  (360,696 )   (448,992 )   (1,124,888 )

Proceeds from loans payable

  260,000     681,500     1,018,375  

Repayments of note payable - related party

  (106,430 )   (326,350 )   (1,155,949 )

Net cash provided by financing activities

  502,095     790,954     2,574,155  

 

                 

INCREASE (DECREASE) IN CASH

  -     -     -  

 

                 

CASH, BEGINNING OF PERIOD

  -     -     -  

CASH, ENDING OF PERIOD

$  -   $  -   $  -  

(CONTINUED ON NEXT PAGE)

F-9


Hybrid Coating Technology Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012 and the Period from July 8, 2010 (Inception) through December 31, 2013

 

  Year ended     Year ended     July 8, 2010  (inception)  

 

  December 31,2013     December 31,2012     through December 31,2013  

Supplemental disclosure of cash flow information

                 

Cash paid during the period for:

                 

Interest paid

$  122,140   $  83,440   $  133,980  

Income taxes

$  -   $  -   $  -  

 

                 

Non cash financing transactions:

                 

Reclassification of Bank indebtedness to payables

$  8,500   $  -   $  8,500  

Acquisition of intangible asset through issuance of note payable

$  -   $  -   $  1,900,000  

Discount arising from warrants attached to issuance of Convertible Debentures

$  -   $  -   $  273,393  

Discount arising from loans payable -shareholders

$  31,588   $  16,868   $  140,531  

Reclassification of accrued interest to Convertible Debentures

$  76,358   $  -   $  76,358  

Discount arising from loans payable

$  23,705   $  -   $  23,705  

Transfer of loans and SSCD to Convertible Debentures

$  -   $  -   $  310,000  

Reclassification of accrued interest to SSCD

$  -   $  -   $  14,167  

Fair value of derivative convertible debenture

$  -   $  46,721   $  604,969  

Reclassification of note payable to accounts payable

$  11,600   $  -   $  11,600  

Shares issued for premium on shareholder loans

$  -   $  28,000   $  64,000  

Common stock issued and payable for interest accrual

$  170,049   $  -   $  170,049  

Common stock issued for settlement of accounts payable -related party

$  780,900   $  -   $  780,900  

Cashless exercise of warrants

$  688   $  205   $  893  

Warrants issued in payment of shareholder loan

$  125,022   $  -   $  125,022  

Warrants issued for settlement of rent liability and prepaid rent

$  116,250   $  -   $  116,250  

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

F-10


Hybrid Coating Technology Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012

NOTE 1 – NATURE OF BUSINESS AND GOING CONCERN

Nature of Business Overview
Hybrid Coating Technologies Inc. (the “Company”, “HCT”), was incorporated in the State of Nevada on July 8, 2010.

On July 27, 2011, the Company, by majority vote of shareholders, amended its articles of incorporation to change its name to Hybrid Coating Technologies Inc. from EPOD Solar Inc. (EPOD). Further, the name change was approved by the Nevada Secretary of State on September 7, 2011, and the Company’s OTC Bulletin Board trading symbol has been changed to HCTI.

On August 30, 2010, the Company acquired from Nanotech Industries International Inc. ("Nanotech"), a corporation formed pursuant to the laws of Nevada on July 8, 2010, all of the issued and outstanding shares of capital stock of Nanotech ("Nanotech Shares") held by the holders of the Nanotech Shares ("Nanotech Shareholders") (the "Acquisition"). The purchase price for the Acquisition consisted of 3,381,003 shares of common stock, $0.001 par value per share (the " EPOD Common Stock") of the Registrant, issued to Nanotech Shareholders. Nanotech is the surviving and continuing entity and the historical financials following the reverse merger transaction were those of Nanotech. As a result of such acquisition, our operations are now focused on the manufacturing and sale of Green Polyurethane™, including Green Polyurethane™ Monolithic Floor Coating and Green Polyurethane™ Binder, an alternative non-toxic (isocyanate-free) polyurethane.

Going Concern
The Company remains highly dependent upon funding from non-operational sources. The Company’s 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 incurred net losses of approximately $16,789,000 since inception, and has a working capital deficit of approximately $4,296,000 as of December 31, 2013. These conditions raise substantial doubt about the Company’s 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 Company's 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 Company’s 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.

Development StageThe Company complies with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 915 “Development Stage Entities” in its characterization of the Company as a development stage enterprise.

Use of EstimatesThe 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.

F-11


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

Cash and Cash EquivalentsThe Company maintains various cash balances in one financial institution 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.

Inventories - Inventories are valued at the lower of cost or market. The cost is determined by using the average cost method.

Intangible Assets - Intangible assets are comprised of intellectual property which is amortized on a straight-line basis over the assets’ respective lives, 36 months, 60 months and 120 months. Intellectual property with a perpetual life is 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 RecognitionRevenue is recognized when persuasive evidence of an arrangement exists, goods are delivered, sales price is determinable, and collection is reasonably assured.

Income TaxesIncome taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes. Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets are also provided for certain tax loss carryforwards and tax credit carryforwards. A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As long as the Company is categorized as a development stage company, the net amount of any potential deferred tax assets will be off-set by such valuation allowance. Deferred income taxes are measured using the enacted tax rates that are assumed will be in effect when the asset and liability basis differences reverse and/or when the tax loss carryforwards and tax credit carryforwards are utilized.

A tax benefit from an uncertain position is recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of December 31, 2013 and 2012, the Company had not recorded any tax benefits from uncertain tax positions.

Fair ValueASC 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 December 31, 2013 and 2012, the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.

F-12


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

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)  
    Year Ended December 31,  
    2013     2012  
Beginning balance $  166,721   $  480,461  
Total (gains) losses   264,366     (360,461 )
Settlements   (99,412 )   -  
Additions   484,813     46,721  
Ending balance $  816,488     166,721  
             
Change in unrealized gains(losses) included in earnings relating to derivatives still held as of December 31, 2013 and 2012 $  264,366     360,461  

Stock-Based CompensationFor stock and stock options awarded in return for services rendered, the expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis over the service period, which is the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon the number of awards expected to vest.

Earnings (Loss) 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 years ended December 31, 2013 and 2012, 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:

    Year Ended December 31,  
    2013     2012  
Convertible debt   2,002,769     1,206,936  
Stock warrants   7,701,928     3,385,735  
    9,704,697     4,592,671  

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 between the year ended December 31, 2013, and through the date of issuance of the consolidated financial statements for disclosure consideration.

NOTE 3– INTANGIBLE ASSETS

On July 12, 2010, the Company entered into a licensing agreement (the “Licensing Agreement”) with Nanotech Industries, Inc., (“NTI” or “Licensor”, a privately-held entity deemed a related party by virtue of common ownership and control), for the rights to manufacture and distribute environmentally safe coatings (“Coating Products”) using NTI’s technology. As per the Licensing Agreement, the Company has a three-year exclusivity for all of North America and has the option to obtain rights for the rest of the world on an exclusive perpetual basis, in exchange for the issuance of stock to equal 62.5% of the Company’s total shares. If this option is exercised, NTI would obtain voting control of the Company. On June 28, 2013, a third amendment was made to the Licensing Agreement extending this exclusivity period by 36 months to July 12, 2016.

As part of this Licensing Agreement, the Company agreed to pay NTI a one-time licensing fee of $500,000 and a 5% royalty on gross Coating Product sales within North America. The $500,000 cost basis of capitalized license rights

F-13


NOTE 3 – INTANGIBLE ASSETS (cont’d)

(“North American Rights”) is being amortized over a three-year life. On November 22, 2011, the Company sold the Canadian portion of its North American Rights for $150,000 to a related party; Hybrid Coatings Canada Inc., a company whose CEO is a shareholder of, and consultant to, the Company. The proceeds of the sale were recorded as a reduction of the carrying value of the asset, with no gain or loss.

At December 31, 2012 and 2011, management determined, through independent valuation, that the fair value of the North American Rights exceeded the carrying value and no impairment adjustment was deemed necessary. The amount of amortization of the North American Rights for the years ended December 31, 2013 and 2012 was $36,463 and $73,080, respectively.

On March 17, 2011, the Company and NTI amended the Licensing Agreement to now include the territory of the Customs union of Belorussia, Kazakhstan Republic and Russian Federation (the “Russian Territory”), on an exclusive basis for a period of ten years from the date of the signing of this amendment. In exchange for the right to manufacture and sell Coating Products in the Russian Territory (“Russian Rights”), the Company shall pay to the Licensor an ongoing royalty of 7.5%, and a one-time royalty fee of $150,000 (paid during 2011). These capitalized license rights will be amortized over a ten-year period. The amount of amortization for the years ended December 31, 2013 and 2012 was $4,800 for both years, respectively. At December 31, 2011, the fair value, through independent valuation of the Russian Rights was determined to be $44,000. As this was determined to be a permanent impairment in value, the carrying value of the Russian Rights was reduced by $94,750 and the associated loss was recorded. At December 31, 2012 and December 31, 2013 management determined, through independent valuation, that the fair value of the Russian Rights exceeded the carrying value and no further impairment adjustment was deemed necessary.

On July 7, 2011, a second amendment was made to the Licensing Agreement granting the Company an option (the “Option”) for a period of six months from the signing of this amendment to manufacture and sell Coating Products in the territory of the European Continent (“European Rights”) on an exclusive basis for a period of five years from the date the option is exercised, after which time the European Rights shall continue perpetually on a non-exclusive basis. Upon exercise of this Option, the Company shall pay to the Licensor a one-time royalty fee of $1,250,000 payable within 24 months of the exercise of the Option. On November 29, 2011, the Company exercised the Option, the financing for which was provided by NTI and is recorded in notes payable – related party. The Company has repaid $567,549 to Nanotech related to the option as of December 31, 2012. The license rights shall be amortized over a five year period.

At December 31, 2011, management determined, through independent valuation, the fair value of the European Rights was $692,000, requiring an impairment charge of $537,167. At December 31, 2012 and December 31, 2013 , management determined, through independent valuation, that the fair value of the European Rights exceeded the carrying value and no further impairment adjustment was deemed necessary. The Company recorded $140,760 and $140,700 of amortization expense for the years ended December 31, 2013 and 2012, respectively.

On October 18, 2011, the Company and NTI entered into a second Licensing Agreement (“Second Licensing Agreement”) granting the Company an option (“Sealant Option”) to be exercised within six months of the signing of the Second Licensing Agreement, for the manufacturing and sale of environmentally safe adhesives and sealants (“Sealant Products”), for the following:

  1.

The Company shall issue to NTI a one-time licensing fee (“Sealant Shares”), an aggregate number of shares of the Company’s restricted common stock which shall give NTI, immediately upon such issuance of shares, an incremental 15% (fifteen percent) ownership stake in the Company.

     
  2.

The Company shall pay to NTI a royalty of 7.5% (seven and one half percent) of gross revenue from the sale of the Sealant Products for the duration of the agreement.

On December 6, 2011, the Company notified NTI of its intent to exercise the Sealant Option. To date, the Company has not issued the Sealant Shares and the Sealant Option has expired. The Company intends to renegotiate the Sealant Option once the Company has determined it has commercial viability.

On June 28, 2013, the Company and NTI entered into a third amendment to the Licensing Agreement whereby NTI granted the Company an extension of thirty-six months on the exclusivity period to July 12, 2016.

On December 13, 2013, the Company entered into a fourth amendment to the Licensing Agreement, whereby the license to sell and manufacture the Licensor’s products has been expanded to include polyurethane foam for the textile industry.

F-14


NOTE 3 – INTANGIBLE ASSETS (cont’d)

On March 31, 2014, the Company and NTI entered into a fifth amendment to the Licensing Agreement, whereby the license to sell and manufacture Licensor’s products has been expanded to include synthetic leather, sealants and adhesives (“Added Applications”).In consideration for the Added Applications, the Company shall pay the Licensor an amount equal to US $2,000,000 (two million USD) (“Consideration”), to be paid within 36 (thirty-six) months of the execution of this Fifth Amendment Agreement (“Deadline”). Should the Company not pay the Consideration within the Deadline, the Company shall lose all rights to the Added Applications.

On April 9, 2014, the Company signed a sixth amendment to the Licensing Agreement with NTI extending the terms of the note from 24 months to 42 months making it payable by May 29, 2015.

A summary of the licenses acquired to date from NTI is as follows:

        Carrying Value
License Rights   Date of Original at December 31,
Overview      Licensed Region License/Term    cost 2013
A     Coating Products
North America
June 12, 2010
6 years
$500,000
nil
B     Coating Products
Russian Territory
March 17, 2011
10 years
$150,000
$34,400
C     Coating Products
European Continent
July 7, 2011
5 years
$1,250,000
$410,540

The balance of intangible assets is as follows as of December 31, 2013 and 2012:

    2013     2012  
Intangible assets $  1,118,083   $  1,118,083  
Less: accumulated amortization   (673,143 )   (491,120 )
Intangible assets, net $  444,940   $  626,963  

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. This $7,500 premium has been amortized and on April 29, 2011, the lender converted $55,000 of this debt to convertible debentures. The balance at December 31, 2013 and 2012 was $27,500, and the loan is currently in default. The Company has not received any notices from the loan holder with respect to the defaults.

In 2012 the Company entered into various loan agreements totaling $681,500 at interest rates ranging from 15%-25%. These loans are all currently in default. The creditors have not called these loans.

During the year ended December 31, 2013, the Company issued a $100,000 loan with a three-month maturity, maturing on August 23, 2013, bearing interest at 16% per annum, payable monthly, with an additional $5,000 premium payable at maturity, a $110,000 loan with a one-year maturity, maturing on March 25, 2014, bearing interest at 16% per annum, payable monthly with an additional 110,000 warrants attached to the loan, a loan for $8,500 maturing in July 2013 bearing interest of 15% per annum and a $50,000 loan, maturing in April 2014, bearing interest at 15% per annum.

The fair value of these 110,000 warrants issued in conjunction with the $110,000 loan mentioned above amounted to $30,217 using the assumptions discussed in the table below. This resulted in a relative fair value of $23,705 which was recorded as a debt discount and a corresponding increase in paid-in capital. The discount is amortized over the life of the associated loan payable. The assumptions used in determining the fair value were:

Expected volatility 120%
Exercise price $1.00
Stock price $0.38
Expected life 5 years
Risk-free interest rate 0.8%
Dividend yield $ Nil

F-15


NOTE 4–LOANS PAYABLE(cont’d)

During the year ended December 31, 2012, the Company issued 50,000 warrants related to a loan payable. The fair value of the 50,000 warrants issued in conjunction with the debt issued in 2012 amounted to $19,005 using the assumptions discussed in the table below. This resulted in a relative fair value of $16,868 which was recorded as a debt discount. The discount is amortized over the life of the associated loan payable.

Expected volatility 166.04%
Exercise price $0.50
Stock price $0.50
Expected life 2 years
Risk-free interest rate 0.25%
Dividend yield $ Nil

The Company recorded $32,888 and $2,230 of interest expense related to amortization of the debt discounts during the years ended December 31, 2013 and 2012. During the year ended December 31, 2013 and 2012 total interest expense related to loans payable was $152,307 and $47,527 respectively, the total interest paid was $75,173 and $31,086 respectively and accrued interest was $115,448 and $17,345, respectively. Cash payments on interest due from loans payable of $20,969 paid in the year ended December 31, 2012, were reclassed from bank overdraft to accrued interest during the year ended December 31, 2013. At December 31, 2013 and 2012 the unamortized debt discount was $5,455 and $14,638, respectively.

NOTE 5 – LOANS PAYABLE –SHAREHOLDERS

During the years ended December 31, 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 2013 and interest rates that range from 2% to 18%. The Company was in default on loans totalling $1,046,313 as of December 31, 2013. The shareholders have not called these loans.

During the year ended December 31, 2013, the Company received $708,846 in shareholder advances and repaid $360,696. The Company had an outstanding balance of $1,343,562 and $1,062,521, with related discounts of $21,980 and $25,194 for the years ended December 31, 2013 and 2012, respectively .

In addition the Company repaid an additional $125,022 through the issuance of 933,000 warrants. The fair value of the warrants was $307,144. The Company recorded a loss on settlement of debt in the amount of $182,122 and an increase in paid-in capital of $ 307,144. The fair-value of these 933,000 warrants was determined using the assumptions in the table below:

Expected volatility 128.26%
Exercise price $0.001
Stock price $0.33
Expected life 5 years
Risk-free interest rate 1.01%
Dividend yield $ Nil

On January 1, 2013, the Company entered into a new loan agreement with a shareholder with a maturity of December 31, 2013. The new loan agreement for $130,000 cancelled the previous loan agreement for $100,000 that had expired. The Company recorded a loss on extinguishment of debt of $10,169 and a debt discount of $19,831 which has been fully amortized to interest expense at December 31, 2013. In addition 25,000 warrants were issued.

F-16


NOTE 5 – LOANS PAYABLE SHAREHOLDERS (cont’d)

The fair value of these 25,000 warrants issued in conjunction with this debt amounted to $9,840 using the assumptions discussed in the table below. This resulted in a relative fair value of $9,148 which was recorded as an additional debt discount and a corresponding increase in paid –up capital. The discount has been fully amortized and charged to interest expense. The assumptions used in determining the fair value were:

Expected volatility 399.77%
Exercise price $0.01
Stock price $0.40
Expected life 2 years
Risk-free interest rate 0.27%
Dividend yield $ Nil

On January 21, 2013, the Company entered into a loan agreement for $78,400 CDN with a shareholder. At December 31, 2013, the value was $73,296 US. The loan matured on July 20, 2013 (but was extended through an amendment on that date to January 20, 2014) and bears interest at 2% per month, payable monthly, unpaid amounts bear interest at 2.5% per month. The loan is secured by the Company’s current and future assets for approximately $94,000. In exchange for that above mentioned amendment extension 43,863 shares of common stock were issued for $13,084 charged to interest expense. The loan is in default and no notice has been given to the Company.

On October 4, 2013, the Company revised its loan agreement with one of its shareholders amending the maturity date from April 30, 2011 to June 30, 2014. In exchange the Company agreed to pay a renewal fee of $10,000, which was added to the principal, and accrue interest at 10% per annum retroactively, from June 30, 2012 through October 4, 2013, which resulted in $12,667 in additional interest which was added to the principal and issue 75,000 warrants to purchase the Company’s common stock.

The fair value of these 75,000 warrants issued in conjunction with this debt was $22,440 using the assumptions discussed in the table below.

Expected volatility 111.56%
Exercise price $0.001
Stock price $0.30
Expected life 5 years
Risk-free interest rate 1.41%
Dividend yield $ Nil

The Company also issued 142,000 warrants to shareholders whose loans were in default. The fair value of these 142,000 warrants issued in conjunction with this debt was $68,131 using the assumptions discussed in the table below.

Expected volatility 111.56%-359.19%
Exercise price $0.001-$1.48
Stock price $0.40-$0.64
Expected life 2-5 years
Risk-free interest rate 0.33%-1.41%
Dividend yield $ Nil

The Company recorded $66,061 of interest expense related to the amortization of the debt discount on loans payable to shareholders during the year ended December 31, 2013. The corresponding debt discount during the year ended December 31, 2012 was $76,649. During the years ended December 31, 2013 and 2012 total interest expense was $78,630 and $73,854 respectively, and the total interest paid was $30,364 and $52,354 respectively. At December 31, 2013 the unamortized debt discount was $15.420 compared to $31,533 as of December 31, 2012.

F-17


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 “February 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 Company’s 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.

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 are amortized using the effective interest method over the term of the debt.

On November 20, 2013, the Company entered in an amendment agreement modifying its terms with both the April 29 and February 21 debenture holders as follows:

1) The maturity date of the Debentures, was extended by a period of 24 (twenty-four) months, to April 29, 2016 and February 21, 2017, respectively,

2) Each Unit into which the Debentures are convertible shall be comprised of 2 stock purchase warrants at an exercise price per share equal to the conversion price. The warrants shall expire 36 (thirty-six months) from the date of issuance.

As consideration for the amendments, the Company issued a total of 400,152 shares to the debenture holders at a price of $0.33 per share.

The amendment resulted in an extinguishment of both the April 29 and February 21 Debentures as the present value of the new convertible debentures exceeded the present value of the old debentures by greater than 10%.

The Company measured the fair value of the embedded derivatives in the April 29 Debentures, which was $76,322 on the date of the amendments and recorded a gain of $61,238 for the change in fair value of the derivative liabilities.

The Company recorded a loss on extinguishment of debt on the April 29 debenture of $530,541 and the new debt was recorded at its fair value of $1,268,453 with a corresponding derivative liability of $357,790. See table below for calculation of loss on extinguishment of April 29th Debentures.

F-18


NOTE 6 – CONVERTIBLE DEBENTURES (cont’d)

Face amount of April 29 debenture on date of extinguishment $  1,201,000  
Debt discount   (104,099 )
Accrued interest   67,453  
Fair value of embedded derivative liability   76,322  
Total debt extinguished   1,240,676  
       
Fair value of new debt   1,268,453  
Fair value of embedded derivative liability   382,663  
Fair value of shares issued   120,101  
Total fair value of consideration given   1,771,217  
Loss on extinguishment of debt $  530,541  

The Company measured the fair value of the embedded derivatives in the February 21 debentures, which was $23,090 on the date of the amendments and recorded a gain of $6,071 for the change in fair value of the derivative liabilities.

The Company recorded a loss on extinguishment of debt on the February 21 debenture of $113,195 and the new debt was recorded at its fair value of $128,405 with a corresponding derivative liability of $102,150. See table below for calculation of loss on extinguishment of February 21 debentures.

Face amount of February 21 debenture on date of extinguishment $  119,500  
Debt discount   (22,186 )
Accrued interest   8,905  
Fair value of embedded derivative liability   23,090  
Total debt extinguished   129,309  
       
Fair value of new debt   128,405  
Fair value of embedded derivative liability   102,150  
Fair value of shares issued   11,949  
Total fair value of consideration given   242,504  
Loss on extinguishment of debt $  113,195  

NOTE 7 – 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 have a maturity date of August 16, 2012 with a coupon of 10% and convert 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 per share and 133,360 Series B warrants with a maturity of 3 years and an exercise price of $1.50 per share. The debentures and Series A warrants carry registration rights whereby upon the consummation of the reverse merger with Nanotech, the shares underlying the debentures and Series A warrants will be registered as soon as is practicable. All prices and warrants issued have been adjusted for the post-acquisition of Nanotech by HCT.

There was a debt discount as a result of the relative fair value of the Series A and B warrants attached to the SSCD. Amortization of the debt discount was $nil and $ $21,566 for years ended December 31, 2013 and 2012, respectively. The discount was amortized using the effective interest method over the two year term of the debt. There was no unamortized discount as of December 31, 2013 and 2012. Interest of $20,000 was accrued during the year ended December 31, 2013 ($2012-$20,075), for an outstanding balance of $28,159 (2012-$46,159) that has been accrued. During the year $38,000 has been repaid through the issuance of $100,000 shares.

F-19


NOTE 7 – SENIOR SECURED CONVERTIBLE DEBENTURES (cont’d)

During the year ended December 31, 2011, $200,000 of the debt was repaid along with $14,167 of accrued interest and $25,833 as an incentive payment for pre-payment. This $240,000 was repaid through the issuance of a Convertible Debenture due April 29, 2014. A loss on extinguishment of debt of $79,717 was recorded. The balance due at December 31, 2013 and 2012, remained at $200,000. 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.

NOTE 8 – DERIVATIVE LIABILITIES

The embedded conversion features in the convertible debentures and attached warrants are accounted for as a derivative liability. The warrants contain full ratchet reset features (subject to adjustment for dilutive share issuances) and should be valued as a derivative liability.

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 of $558,248 as of April 29, 2011 and of $46,721 at February 21, 2012, which was recorded to additional paid-in capital for each issuance. The Company recorded an unrealized gain (loss) of ($264,366) and $360,461 to reflect the value of the derivative liability as $816,488 and $166,721 as of December 31, 2013 and 2012, respectively.

As described in Note 6, on November 20, 2013 the company entered in an amendment agreement modifying its terms with both the April 29 and February 21 debenture holder.

The following table summarizes the derivative values, pre amendment, post amendment and at December 31, 2013.

      Derivative Values  
      Pre-Amendment     Amended Note        
  Valuation Date:
November 20,
2013


November 20,
2013


December 31,
2013

                     
  April 29 debenture   76,322     382,663     741,433  
                     
  Feb 21 debenture   23,090     102,150     75,055  
                     
  Total   99,412     484,813     816,488  

NOTE 9 – STOCKHOLDERS’ DEFICIT

Common Stock

The Company is authorized to issue 75,000,000 shares of its common stock.

2012

During 2012, the Company issued 141,500 shares to employees and consultants for services with a fair value of $122,175. The shares were valued using the stock price on the date of grant.

F-20


NOTE 9 – STOCKHOLDERS’ DEFICIT (cont’d)

During 2012, the Company issued 240,200 shares to the Convertible Debenture holders as payment for one year’s interest totaling $120,100. The shares were valued using the stock price on the date of grant.

During 2012, the Company issued 100,000 shares to a shareholder as interest compensation for loans. 20,000 of the shares were issued for 2011 premiums previously valued and recorded in additional paid-in capital, 70,000 shares were issued as interest compensation and were valued at $93,000 and were charged to interest expense and the remaining 10,000 shares valued at $13,000 were recorded as debt discount for new loan premiums.

During 2012, the Company issued 260,000 warrants to purchase common stock of the Company to consultants for services and 50,000 warrants in conjunction with the issuance of shareholder loans. The warrants were valued using the Black-Scholes option pricing model using the following assumptions:

Expected volatility 104.75% - 166.04%
Exercise price $0.10 - $0.50
Stock price $0.50 - $1.12
Expected life 2 - 3 years
Risk-free interest rate 0.24% - 0.43%
Dividend yield $ Nil

The value of the warrants (see above) issued to consultants was determined to be $268,405 and was recognized as an increase in additional paid–in capital and expensed as consulting fees. The fair value of the warrants issued for the shareholder loan was $19,005 and the relative fair value of the warrants was $16,868. The relative fair value was recorded as a debt discount against the carrying value of the loan and an increase in additional paid-in capital.

On February 22, 2012, the Company entered an agreement with a shareholder whereby a loan premium of 10,000 shares would be issued to the shareholder. Although the shares had not been issued the Company has recorded a reduction of the loan and an increase in stock payable of $15,000. The fair value of the stock was determined using the stock price on the date of grant.

On March 23, 2012, a warrant holder exercised 220,000 warrants through a cashless option for 205,135 shares. The Company recorded an increase in par value for the shares and a corresponding reduction in additional paid in capital of $205.

2013

During the year ended December 31, 2013, the Company issued 349,303 shares to shareholder creditors and consultants as payment for services with a fair value of $138,485 based on the market price on the date of grant, 420,567 shares to convertible debenture holders as payment of interest for the year of $140,877 based on the market price on the date of grant, 400,152 shares to convertible debenture holders in exchange for amended terms for fair value of $132,050 based on the market price on the date of grant, 100,000 to the Senior Secured Debenture Holder for payment of interest of $38,000 based on the market price on the date of grant, 43,863 shares to a shareholder- creditor for accrued interest of $13,084 based on the market price on the date of grant, and 2,287,000 shares to a shareholder-creditor and a related party for payment, based on the market price on the date of grant, against accounts payable and accrued liabilities related parties of $629,900 and recognized a loss on settlement in the amount of $263,712.

In addition, during the year ended December 31, 2013, warrant holders exercised 689,875 warrants for 688,060 shares on a cashless basis with a reduction in additional paid in capital of $688. Also, 375,000 warrants were exercised for 375,000 shares and $375 was paid.

During the year ended December 31 2013, the Company issued 4,630,000 warrants to shareholders and consultants for consulting services at a fair value of $1,877,035 (recorded as stock-based compensation), and 457,875 warrants to a related party landlord as payment for rent with a fair value of $202,095 (recorded as an adjustment to accounts payable of $116,250 and stock based compensation of $85,845), 933,000 warrants to shareholder to pay a shareholder loan with a fair value of $307,144 (recorded as an adjustment to loans payable-shareholders of $125,022 and loss on extinguishment of debt of $182,122), 755,000 warrants to a shareholder to repay accounts payable-related party with a fair value of $316,521(recorded as an adjustment to accounts payable-related party of $151,000 and loss on extinguishment of debt of $165,521),110,000 warrants in connection with a loan from a third party with a relative fair value of $23,705 (recorded as debt discount), 142,000 warrants to shareholder loan holders for interest of 68,131, 75,000 warrants in connection with a loan from a shareholder with a fair value of $22,440 (recorded as debt discount), and 25,000 warrants in connection with a loan from a shareholder with a relative fair value of $9,148 (recorded as debt discount), all with a corresponding increase in additional paid-in capital using the Black-Scholes method according to the following assumptions:

F-21


NOTE 9 – STOCKHOLDERS’ DEFICIT (cont’d)

Expected volatility 111.56%-399.77%
Exercise price $0.001 - $1.48
Stock price $0.27-$0.64
Expected life 1 -5 years
Risk-free interest rate 0.13%-1.54%
Dividend yield $ Nil

On June 28, 2013, the Company extended the expiration date of common stock purchase warrants described below to February 28, 2018. This extension of the expiration date will apply to the following warrants: (i) the 533,336 Series A warrants issued to a third party pursuant to a securities purchase agreement entered into on August 16, 2010; (ii) the 687,500 stock purchase issued to a consultant on July 14, 2010; and (iii) the 50,000 stock purchase warrants issued pursuant to a loan agreement on November 29, 2012. The Company also agreed to reduce the exercise price of the 533,336 Series A warrants from $1.25 per share to $0.39 per share.

The modification of the maturity and exercise price of the above warrants resulted in a fair value of $241,697 which was recorded as a loss on modification with a corresponding increase in additional paid-in capital using the Black-Scholes method according to the following assumptions:

Expected volatility 128.26% - 152.79%
Exercise price $0.39-$0.50
Stock price $0.39
Expected life 0.67 - 4.67 years
Risk-free interest rate 0.15% - 0.41%
Dividend yield $ Nil

F-22



Warrants

A summary of the activity in the Company's warrants during the years ended December 31, 2013 and 2012 is presented below:

          Weighted Average  
    Number of Warrants     Exercise Price  
             
Outstanding at December 31, 2011   2,158,928   $ 0.28  
Issued February 16, 2012   30,000   $ 0.10  
Issued February 23, 2012   230,000   $ 0.10  
Issued November 29, 2012   50,000   $ 0.50  
Exercised March 23, 2011   (220,000 ) $ 0.10  
Outstanding and exercisable, at December 31, 2012   2,248,928   $ 0.29  
Issued January 1, 2013   25,000   $ 0.01  
Issued March 1, 2013   457,875   $ 0.001  
Issued March 14, 2013   420,000   $ 0.001  
Issued March 25, 2013   110,000   $ 1.00  
Issued April 5, 2013   480,000   $ 0.001  
Issued May 30, 2013   1,683,000   $ 0.001  
Issued July 1 ,2013   200,000   $ 0.20  
Issued July 10 ,2013   230,000   $ 0.65  
Issued August 15,2013   400,000   $ 0.001  
Issued October 1,2013   80,000   $ 1.48  
Issued October 4,2013   75,000   $ 0.001  
Issued November 25,2013   700,000   $ 0.001  
Issued November 28,2013   380,000   $ 0.001  
Issued December 2,2013   375,000   $ 0.001  
Issued December 3,2013   100,000   $ 0.001  
Issued December 9,2013   1,200,000   $ 0.001  
Issued December 9,2013   12,000   $ 0.001  
Issued December 18,2013   150,000   $ 0.001  
Issued December 31,2013   50,000   $ 1,48  
Exercised   (1,064,875 ) $ 0.001  
Expired   (115,000 ) $ 1.50  
Outstanding and exercisable, at December 31, 2013   8,196,928   $ 0.12  

In addition to the regular warrants detailed in the table above, there are issued and outstanding 533,336 Series A warrants with an exercise price of $0.39 per share and a maturity date of February 28, 2018. The 133,336 Series B warrants with an exercise price of $1.50 per share and a maturity date of August 16, 2013 are now expired.

The intrinsic value of warrants outstanding at December 31, 2013 was $4,480,098.

Contingent Warrant Issuance

On July 20, 2012, the Company’s board of directors approved the issuance of 300,000 stock purchase warrants, with an exercise price of $0.001 per share and a five-year life, from date of issuance, to the Company’s President, Joseph Kristul, contingent on his successful negotiation of a major sales contract. The major sales contract agreement has not yet been reached by the Company.

F-23


NOTE 10 – RELATED PARTY TRANSACTIONS

Fees charged by Shareholder

During the years ended December 31, 2013 and 2012, the Company was charged $723,000 and $317,000 by an outside consultant, who is also a shareholder, for professional fees, expenses and commissions. The amounts are included in accounts payable and accrued liabilities related parties. The Company paid $780,900 (through the issuance of shares) and $44,000 to the consultant during the years ended December 31, 2013 and 2012, respectively. The Company has an outstanding balance as of December 31, 2013 and 2012 of $427,842 and $485,468, respectively.

Principal Debt Payments

During the year ended December 31, 2013, the Company made principal payments of $118,030 on its note payable to NTI related to the 2011 acquisition of the license rights for Coatings in Europe. The note matures on May 29, 2015, does not bear interest, and no payments are required prior to maturity. The balance of the note was $682,451 and $800,481at December 31, 2013 and 2012, respectively.

Shared Administrative Costs

The Company shares office space and certain personnel with NTI. Costs are allocated among the parties based on usage. During 2013 and 2012, the allocation of such shared costs between the Company and NTI was 80% and 20%, respectively. Rent expense for the years ended December 31, 2013 and 2012 was $45,000 and $45,000, respectively.

NOTE 11 – INCOME TAXES

Deferred income taxes reflect the net effect of:

(a) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income taxes reporting purposes, and

(b) net operating loss carryforwards.

No net provision for refundable U.S. Federal income tax has been made in the accompanying statement of operations because no recoverable taxes were paid previously. Similarly, no deferred tax asset attributable to the net operating loss carryforward has been recognized, as it is not deemed more likely than not to be realized.

The effective tax rate of the Company is reconciled to statutory tax rates as follows for the years ended December 31, 2013 and 2012:

    2013     2012  
             
US federal statutory tax rate   34%     34%  
             
Change in US valuation allowance   (34% )   (34% )
             
Effective tax rate   -     -  

Deferred tax assets consist of the following as of December 31:

    2013     2012  
             
Net operating loss carryforward $  5,809,000   $  3,672,000  
             
Valuation allowance   (5,809,000 )   (3,672,000 )
             
Deferred tax asset $  -   $  -  

The Company has non-capital losses carried forward of approximately $12,939,000 which expire beginning in 2031. They may be utilized to offset future taxable income. Future tax benefits, which may arise as a result of these losses and resource expenditures, have not been recognized in these financial statements.

F-24


NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company has an option expiring July 12, 2016 to issue a controlling stake in the Company amounting to 52.5% to a related party 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 and additional 10% ownership stake in the Company.

The Company is delinquent on its state and federal payroll tax remittances. The State of California has issued a Notice of State Tax Lien against the property and rights owned by the Company covering interest and penalties for non-payment of payroll remittances.

NOTE 13 – SUBSEQUENT EVENTS

Subsequent to December 31, 2013, the Company issued the following shares:

  • 540,000 shares of common stock valued on the dates of issuances in the amount of $270,000 for consulting services.
  • 2,330,000 shares of common stock valued on the dates of issuances in the amount of $1,206,000. $233,000 as payment for accounts payable and accrued liabilities to a related party and the remaining $973,000 were recorded as loss on settlement of debt.
  • 154,315 shares of common stock valued on the dates of issuances in the amount of $ 93,000. $51,000 applied against payroll liabilities and the remaining $42,000 recognized as a loss on settlement of debt ,
  • 14,700 shares of common stock valued on the dates of issuances in the amount of $7,000. $2,900 to pay interest expenses and the remaining $4,300 recognized as a loss on settlement of debt ,
  • 150,000 shares of common stock on a cashless exercise of 150,000 warrants.

F-25


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

Reference is made to the disclosures below under Item 9A(T) Controls and Procedures.

Item 9A(T). Controls and Procedures.

(a) 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 Exchange Act) which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, who also acts as our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our President and Chief Executive Officer, who also acts as our principal financial officer, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our President and Chief Executive Officer, concluded that our disclosure controls and procedures were not effective and are not designed at a reasonable level to provide assurance that information we are required to disclose in reports that we file or submit under the Exchange Act as of the end of the period covered by this annual report for the purpose of gathering, analyzing and disclosing of information within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, as appropriate to allow timely decisions regarding required disclosure. The Company has undertaken steps to remedy this and improve the effectiveness of its disclosure controls and procedures.

(b) Management’s Report on Internal Controls

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP) and includes those policies and procedures that:

  • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

  • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and
    directors of the issuer; and

  • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.

Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.

Under the supervision and with the participation of our management, including our President and Chief Executive Officer, who also acts as our principal financial officer, an evaluation was performed on the effectiveness of the design and operation of our internal controls and procedures over financial reporting as of December 31, 2013, covered by this annual report, based on the criteria framework established in Internal Control – Integrated Framework issued be the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our President and Chief Executive Officer, concluded that our internal controls and procedures were not effective as of the December 31, 2013, covered by this annual report.

- 27 -


As of December 31, 2013, we identified material weaknesses in certain controls related to the financial statement close and reporting process that were not functioning effectively to properly accrue certain expenses and classify some expenses in the financial statements. We also did not adequately segregate, or mitigate the risks associated with, incompatible functions among personnel ro reduce the risk that a potential material misstatement of the financial statements would occur without being detected or prevented. Management concluded that these control deficiencies constituted a material weakness at December 31, 2013. We are currently in the development stage, and although we have hired qualified resources to carry out our day-to-day accounting and financial reporting obligations, we have not yet reached the point at which we have adequate resources to address all accounting procedures, especially the process to close our financial records at each reporting period in a timely manner. These control weaknesses were, in part, due to lack of adequate funding during the period in which the financial statements were being prepared.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by our independent registered public accounting firm because smaller reporting companies are exempt from this requirement.

(c) Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The address of all Directors and Executive Officers listed above is c/o Hybrid Coating Technologies Inc., 950 John Daly Blvd. Suite 260, Daly City, CA 94015.

Directors and Executive Officers.

The current directors and executive officers of the Registrant are as follows:

Name Age Position(s)
Joseph Kristul 65 Director, President, Treasurer and Chief Executive Officer
Darin Nellis 44 Secretary , Director of Sales & Marketing
Alex Trossman 64 Director

All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. There is no family relationship between any of our directors or executive officers. As of April 16, 2013, there was no known litigation pending or active against any of our directors or executive officers. None of our directors or executive officers has served as a general partner or executive officer of any company that has filed, or has had filed against it, any petition for bankruptcy, either at the time such filing was made or during the preceding two years.

Set forth below is certain biographical information for our current directors and executive officers and certain persons whom we have identified as key personnel, including a summary description of the principal occupation and business experience of each of our directors and executive officers for at least the last five years.

-28-


Directors and Executive Officers

Joseph Kristul, President, CEO, Treasurer and Director

Mr. Kristul is one of the founders and principal financial backers of Nanotech Industries. He has years of experience in international financing with an emphasis on marketing and sales. He is the former Chairman, CEO and co-founder of Transnational Financial Network. At Transnational Mr. Kristul was responsible for overall company management directly overseeing secondary marketing, finance, corporate marketing, investor relations and strategic corporate planning. In 1995 Mr. Kristul created Transnational’s wholesale division, where he developed the company's base of loan brokers and implemented systems and controls to manage the quality of loan products delivered to brokers. In 1999 he took the company public and by 2005 had over 400 employees and $800 million in mortgage loan originations. Mr. Kristul graduated with a Master of Science in Applied Mathematics and Mechanics from the Odessa Physics and Technology University, in Odessa, Russia.

Darin Nellis, Secretary Director of Sales & Marketing

Mr. Nellis, MBA, has twenty years of experience working in business management and community relations for private, public and non-profit organizations in Africa and the US. His expertise includes strategic planning, marketing, cross-cultural education, youth mentorship and nonviolent conflict resolution. Private sector positions include Director of Corporate Planning and consultant in the area of finance, strategic planning and marketing for several environmental high tech firms including the Eurasian power quality equipment distribution company, Power Quality Holdings and the nanotechnology commercialization company, Nanotech Industries. Non-profit and public positions have included Community Development Officer at The United Way of Greater LA, Loyola Marymount Peace Corps Fellow, and Community Development Agent for the U.S. Peace Corps in Mauritania West Africa and Volunteer & Outreach Coordinator for the American Oceans Campaign. Mr. Nellis received his BA from UCLA in International Relations and his MBA in International Business from Loyola Marymount University.

Alex Trossman, Director, VP of Israeli & European Operations

Mr. Trossman is directly responsible for the daily running of Nanotech’s operations in Israel including managing the production process, client orders & communication, product documentation and customs issues. Mr. Trossman has nearly 30 years of experience in management and mechanical engineering in Israel working in such positions as Assistant Chief Engineer for Automotive Industries, Ltd.; Chief of the Engineering Department of Rotem-Amfert-Negev, Ltd., a large fertilizer producer; Technical Manager of Galam, Ltd., a Starch, Glucose & Fructose producer; General Manager of Eurotech Israel, Ltd. and as a founding partner and general manager of the Polymate Research Center.

-29-


Significant Employees

Elena Shenkar, Director of Operations

Ms. Shenkar: has seventeen years of experience as a business owner and upper level executive in the hospitality and finance industries. Her expertise includes negotiations and management of contractual relationships with bankers, private equity investors, landlords, trademark and transactions attorneys, architects, interior designers, operations managers, entitlement consultants, neighborhood community leaders, publicists, marketing and promotions firms, major publications, graphic and brand designers, corporate America executives and high profile charity organizations. She was one of the founding partners of O Sushi Café in Brea, California and helped structure, develop and finance several key concepts in the hospitality industry including the construction, operations and ownership of Blowfish Sushi in the highly publicized, billion-dollar, Santana Row Development. She has raised close to five million dollars for various business ventures and has a wealth of experience with investor relations. She attended the University of Southern California where she received a bachelor of science in Business Finance. She also attended Whittier Law School and has passed the California Bar Exam. Ms. Shenkar was born in Odessa, Ukraine and immigrated to the United States in 1978. She is fluent in English and Russian.

Executive Employment Agreements

The Company currently has no employment agreements in place with any of its named executive officers.

Long-Term Incentive Plans

The Company currently has no long-term incentive plans.

Compensation of Directors

The Company has not compensated our directors for service on the board of directors.

Stock Option Plans

On June 15, 2011, the Company’s Board of Directors established the 2011 Stock Incentive Plan expiring on June 15, 2016 (the “2011 Plan”).

The Company’s Board of Directors has determined that it would be in the best interests of the Company to adopt and approve a new long-term stock incentive plan which will facilitate the continued use of long-term equity-based incentives and rewards for the foreseeable future. The Company expects equity-based incentives to comprise an important part of the compensation packages needed to attract qualified executives, key employees, directors and consultants to the Company and in providing long-term incentives and rewards to those individuals responsible for the Company’s success. Accordingly, the Company’s Board of Directors approved the 2011 Plan. Pursuant to Section 78.320(2) of the Nevada Revised Statutes and the Company’s Bylaws, the written consent of stockholders holding at least a majority of the voting power may adopt a corporate action by written consent in lieu of holding a special meeting of stockholders.

-30-


The 2011 Plan is expected to ensure that the Company will have a sufficient number of long-term equity-based incentives and rewards to issue to its future employees as well as to help ensure, to the extent possible, the tax deductibility by the Company of awards under the 2011 Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986 (the “Code”). The Code, among other things, provides certain tax advantages to persons granted stock options under a qualifying “incentive stock option plan.” The adoption of the 2011 Plan will allow option holders to take advantage of the favorable tax attributes associated with such options that may be granted under the 2011 Plan.

The material terms of the 2011 Plan are summarized below. The summary is qualified in its entirety by reference to the specific provisions of the 2011 Plan, the full text of which is set forth as Exhibit C to this Information Statement.

Purpose

The purpose of the 2011 Plan is to enhance the long-term stockholder value of the Company by offering opportunities to its directors, officers, employees and eligible consultants and any entity that directly or indirectly is in control of or is controlled by the Company (a “Related Company”) to acquire and maintain stock ownership in the Company in order to give these persons the opportunity to participate in the Company’s growth and success, and to encourage them to remain in the Company or a Related Company.

2011 Plan

Under the Plan, the Company may grant certain employees both incentive and non-qualified options to purchase shares of common stock. The Plan is authorized to grant options covering up to seven hundred thousand (700,000) shares.

Involvement in Certain Legal Proceedings

There are no legal proceedings that have occurred during the past five years concerning our directors or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one's participation in the securities or banking industries, or a finding of securities or commodities law violations.

Code of Ethics

Due to the limited scope of our current operations, the Company has not yet adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar function. Following completion of the Acquisition described in Item 1, we may adopt a Code of Ethics.

-31-


Committees

Since our Board of Directors has not established an audit or compensation committee comprised of independent directors, the functions that would have been performed by such committees are performed by our Board of Directors as a whole, nor has the Board established a corporate governance committee or nominating committee.

We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies, as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board of Directors will participate in the consideration of director nominees.

The Board is of the opinion that such committees and procedures are currently not necessary, as the Company is an early exploration stage company, has only one director and, to date, such director has been performing the functions of such committees. When we are able to expand our Board of Directors to include one or more independent directors, our Board of Directors plans to form an audit committee and a corporate governance committee.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires or directors and officers, and the persons who beneficially own more than ten percent (10%) of our common stock, to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable Section 16(a) filing requirements during the fiscal year ended December 31, 2013.

-32-


ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The table below sets forth all compensation awarded to, paid to or earned by the Registrant’s President, Chief Executive Officer and Chief Financial Officer for the fiscal year of the Company indicated.

The table below sets forth all compensation awarded to, paid to or earned by the Company’s President, Chief Executive Officer and Chief Financial Officer for the fiscal year of the Registrant indicated.


Name and
Principal
Position




Year




Salary

($)



Bonus

($)


Stock
Awards

($)


Option
Awards

($)
Nonequity
Incentive
Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings

($)

All
Other
Compensation
($)



Total

($)
                   
Joseph Kristul
Director, President, Chief
Executive Officer and
Chief Financial Officer
2013


$0


0


0


$244,368


0


0


0


0


Compensation of Executive Officers

Mr. Kristul received $480,000 warrants for a fair value of $244,368 in 2013 included in stock based compensation.

Employment Agreements

The Company has not entered into any employment agreements with our executive officers or other employees to date.

Grants of Plan-Based Awards

No plan-based awards were granted to any of our named executive officers during the fiscal year ended December 31, 2013.

-33-


Outstanding Equity Awards at Fiscal Year End

No unexercised options or warrants were held by any of our named executive officers at December 31, 2013. No equity awards were made during the fiscal year ended December 31, 2013.

Option Exercises and Stock Vested

No options to purchase our capital stock were exercised by any of our named executive officers, nor was any restricted stock held by such executive officers vested during the fiscal year ended December 31, 2013.

Pension Benefits

No named executive officers received or held pension benefits during the fiscal year ended December 31, 2013.

Nonqualified Deferred Compensation

No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal year ended December 31, 2013.

Potential Payments upon Termination or Change in Control

Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.

-34-


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below provides information about the beneficial ownership of the Common Stock as of December 31, 2013, by each of the current directors and executive officers, by all directors and executive officers as a group and by each person known to the Registrant who is the beneficial owner of more than 5% of any class of the Registrant’s securities. Unless otherwise noted, the persons listed below have sole voting and investment power with respect to the shares reported.

     Beneficial
Ownership
 
             
Name of Beneficial Owner
  Total Shares
(2)
    Percent of
Class (4)
 
             
Joseph Kristul (1) Director, President, Treasurer and Chief Executive Officer   500,000 (3)   4.48%  
Darin Nellis (1), Secretary   189,473     1.70%  
Alex Trossman (1), Director   62,500     0.56%  
Eugene Shenkar   412,000     3.69%  
All Directors and Executive Officers as a Group (3 Persons)   751,973     6.73%  

(1)

Executive officer and/or director of the Company.

(2)

Represents the total number of shares of Common Stock owned as of December 31, 2013.

(3)

Represents 400,000 shares of common stock issued to Mr. Kristul and 100,000 shares issued to his wife, Maria Kristul.

(4)

The percentages listed in the percent of class column are based upon 11,167,513 issued and outstanding shares of Common Stock.

-35-


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Transactions with Related Persons

None of the following parties has had, since the beginning of the Company’s fiscal year, any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect the Registrant:

  • Any directors or executive officers;
  • Any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to the outstanding shares of Common Stock;
  • Any promoters; and
  • Any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons.

Director Independence

Because the Common Stock is traded on the OTC Bulletin Board, the Company is not subject to the independence requirements of any securities exchange or the NASD regarding members of the Company’s Board of Directors. The Company intends, in the future, to use the definition of “independence” of a national securities exchange or of an inter-dealer quotation system which requires that a majority of the Board of Directors be independent. The Company has not determined whether any of its directors are independent.

-36-


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

GBH CPAs PC (“GBH”) served as our independent registered public accounting firm for our fiscal year ended December 31, 2013 and 2012. Our previous auditor, LBB & Associates Ltd., LLP served as our independent registered public accounting firm for our fiscal year ended December 31, 2011 and up to the third quarter ended September 30, 2012 resigning on March 12, 2013. The following table shows the fees that were billed for the audit and other services provided by the firm for the fiscal year indicated.

    Fiscal Year Ended     Fiscal Year Ended  
    Dec. 31, 2013     Dec. 31, 2012  
             
Audit Fees $  76,500   $  73,383  
Audit-Related Fees   -     -  
Tax Fees   -     -  
All Other Fees   -     -  
Total $  76,500   $  73,383  

Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

Audit-Related Fees — This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.

Tax Fees — This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

All Other Fees — This category consists of fees for other miscellaneous items.

Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board of Directors, or, in the period between meetings, by a designated member of Board of Directors. Any such approval by the designated member is disclosed to the entire Board of Directors at the next meeting. The audit and tax fees paid to the auditors with respect to our fiscal year ended December 31, 2013 were pre-approved by the Board of Directors.

-37-


ITEM 15. EXHIBITS

Exhibit Number   Description of Exhibits
     
3.1  

Amended Articles of Incorporation. (1)

3.2  

Bylaws, as amended. (1)

3.3  

Certificate of Amendment to Articles of Incorporation (2)

4.1  

Convertible Debenture Agreement dated April 29,2011 Pursuant to Regulation D (6)

4.2  

Convertible Debenture Agreement dated April 29,2011 Pursuant to Regulation S (6)

10.1

Stock Purchase Agreement, dated August 18, 2010, by and among Nanotech Industries International Inc. and EPOD Solar Inc. (3)

10.2

Licensing Agreement between Nanotech Industries International Inc. and Nanotech Industries Inc. dated July 12, 2010 (4)

10.3  

Amendment to the Licensing Agreement previously entered into on the 12th day of July, 2010 (5)

10.4  

Securities Purchase Agreement dated April 29,2011 Pursuant to Regulation D (6)

10.5  

Securities Purchase Agreement dated April 29,2011 Pursuant to Regulation S (6)

10.6  

Warrant Agreement dated April 29,2011 Pursuant to regulation D (6)

10.7  

Warrant Agreement dated April 29,2011 Pursuant to regulation S (6)

10.8

Amendment to articles of incorporation to change the name of the company to “Hybrid Coating Technologies Inc.” (7)

10.9  

Approval and adoption of the 2011 Stock Incentive Plan (7)

10.10  

Second Amendment to the Licensing Agreement previously entered into on the 12th day of July, 2010 (8)

10.11

Licensing Agreement between Nanotech Industries International Inc. and Nanotech Industries Inc. dated October 18, 2011 (9)

10.12  

Convertible Debenture Agreement Dated February 21, 2012 (10)

10.13  

Third Amendment of Licensing Agreement entered into the 12th day of July 2010 (11)

10.14  

Amendment Agreements to Convertible Debenture Agreements dated April 29,2011 and February 21,2012(12)

10.15  

Fourth Amendment of Licensing Agreement entered into the 12th day of July 2010 (13)

10.16  

Fifth Amendment of Licensing Agreement entered into the 12th day of July 2010 (14)

10.17  

Sixth Amendment of Licensing Agreement entered into the 12th day of July 2010 (15)

31.1  

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-153675), filed with the SEC on September 26, 2008.
(2) Incorporated by reference to the Current Report on Form 8-K filed with the SEC on July 22, 2009.
(3 Incorporated by reference to the Current Report on Form 8-K filed with the SEC on August 30, 2010.
(4) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on August 30,2010
(5) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on March 14,2011
(6) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on May 3,2011
(7) Incorporated as reference to the Schedule 14C filed with the SEC on July 6,2011
(8) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on July 7,2011
(9) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on October 18,2011
(10) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on February 21,2012
(11) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on June 28,2013
(12) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on November 20,2013
(13) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on December 13,2013
(14) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on March 31,2014
(15) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on April 9,2014

-38-


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 2, 2014 HYBRID COATING TECHNOLOGIES INC
  (Registrant)

  By: /s/ Joseph Kristul
    Name: Joseph Kristul
    Title: President and Chief Executive Officer
    (Principal Executive, Financial and Accounting
    Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date
     
/s/ Joseph Kristul   May 2, 2014
Joseph Kristul President and Chief Executive  
  Officer,  
  (Principal executive officer  
  principal financial and  
  accounting officer)  
     
     
     
/s/ Alex Trossman   May 2, 2014
Alex Trossman Director  

-39