As filed with the Securities and Exchange Commission on July 19, 2019October 14, 2020
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
H/CELL ENERGYVISION HYDROGEN CORPORATION
(Name of registrant in its charter)
| Nevada | 2860 | 47-4823945 | ||
(State or other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
3010 LBJ Freeway, Suite 120095 Christopher Columbus Drive, 16th Floor
Dallas, TX 75234Jersey City, NJ 07302
(972) 888-6009(551) 298-3600
(Address and telephone number of principal executive offices and principal place of business)
Andrew Hidalgo, Chief Executive Officer
H/Cell EnergyVision Hydrogen Corporation
3010 LBJ Freeway, Suite 120095 Christopher Columbus Drive, 16th Floor
Dallas, TX 75234Jersey City, NJ 07302
(972) 888-6009(551) 298-3600
(Name, address and telephone number of agent for service)
Copies to:
Marc J. Ross, Esq.
James M. Turner, Esq.
Marc J. Ross, Esq.
Sichenzia Ross Ference LLP
1185 Avenue of the Americas, 37th Floor
New York, New York 10036
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to timeAs soon as practicable after this Registration Statement becomesis declared effective.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, small reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class Of Securities To Be Registered | Amount To Be Registered (1) | Proposed Maximum Offering Price Per Security (2) | Proposed Maximum Aggregate Offering Price | Amount Of Registration Fee | ||||||||||||
| Common stock, $.0001 par value | 700,000 | (3) | $ | 1.00 | $ | 700,000.00 | $ | 84.84 | ||||||||
| Total | 700,000 | $ | 700,000.00 | $ | 84.84 | |||||||||||
| Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1) | Amount of Registration Fee | ||||||
| Common Stock, $0.0001 par value per share (2) | $ | 2,500,000 | $ | 272.75 | ||||
| Total | $ | 2,500,000 | $ | 272.75 | ||||
| (1) | Estimated solely for the purpose of calculating the amount of registration fee pursuant to Rule 457(o) under the Securities Act. |
| (2) | Pursuant to Rule 416 under the Securities Act of 1933, as amended, or the Securities Act, the shares of common stock offered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this Prospectus is not complete and may be changed. The selling stockholdersCompany may not sell these securities under this Prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 19, 2019OCTOBER 14, 2020
PRELIMINARY PROSPECTUS
Up to 700,00012,500,000 Shares of Common Stock
This prospectus covers the offer and saleVision Hydrogen Corporation is offering up to a maximum of up to 700,00012,500,000 shares (“Maximum Shares Offering”) of our common stock $0.0001 par value per sharefor gross proceeds of H/Cell Energy Corporation,$2,500,000 (the “Maximum Offering Amount”) before deduction of commissions and offering expenses. There is no minimum offering amount required as a Nevada corporation, by GHS Investments LLC, or GHS orcondition to closing in this offering, and as a result, the Selling Stockholder.
The shares of common stock being offered by the Selling Stockholderactual public offering amount and proceeds to us, if any, are not presently determinable and may be issued pursuantsubstantially less than the total Maximum Offering Amount. This offering will terminate on December 31, 2020 (which we may extend to January 31, 2021 in our sole discretion), unless the equity financing agreement dated July 9, 2019,offering is fully subscribed before that date or we decide to terminate the Purchase Agreement,offering prior to that we entered into with GHS. Seedate. In either event, the “GHS Transaction” sectionoffering may be closed without further notice to you. Any and all funds for a description ofsecurities purchased in the Purchase Agreement and “Selling Stockholder” for additional information regarding GHS. The prices at which GHS may sell the shares of common stockoffering will be determined by the prevailing market pricetransmitted directly to us for the sharesour immediate use for repayment of common stock or in negotiated transactions.
We are not selling any securities under this prospectusoutstanding debt and will not receive any of the proceeds from the sale of the shares of common stock by the Selling Stockholder. We may receive up to $3,000,000 in aggregate gross proceeds under the Purchase Agreement from any sales we make to GHS pursuant to the Purchase Agreement after the date of this prospectus.
The Selling Stockholder may sell the shares of common stock described in this prospectus in a number of different ways and at varying prices. See “Plan of Distribution”working capital for more information about how the Selling Stockholder may sell the shares of common stock being registered pursuant to this prospectus. The Selling Stockholder is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
We will pay the expenses incurred in registering the shares of common stock, including legal and accounting fees. See “Plan of Distribution”.corporate activities.
Our common stock is currently available for quotationquoted on the OTCQB Market under the symbol “HCCC”.“HCCCD”, and will change to “VIHD” effective November 2, 2020. On July 18, 2019,October 13, 2020, the last reported sale price offor our common stock on the OTCQB Market was $1.00$3.00 per share.
This is a self-underwritten offering. This prospectus is part of a registration statement that permits our officers and directors to sell the shares directly the public with no commission or other remuneration payable to them for any shares that are sold by them. Our officers and directors will sell the shares and intend to offer them to friends, family members, and business acquaintances. In offering the securities on our behalf, our directors and officers will rely on the safe harbor from broker dealer registration set out in Rule 3a4-1 under the Securities Exchange Act of 1934. Our officers, directors, control persons and affiliates may purchase shares in this offering.
In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933 and, as such, are allowed to provide in this Prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Risk Factors” and “Prospectus Summary—Emerging Growth Company Status.”
Investing in our common stock involves a high degree of risk. Before making any investment in our common stock, you should read and carefully consider the risks described in this Prospectus under “Risk Factors”“Risk Factors” beginning on page 54 of this Prospectus.
You should rely only on the information contained in this Prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with different information.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This Prospectus is dated ____, 2019 , 2020
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. Forward-looking statements reflect the current view about future events. When used in this Prospectus, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements, include, but are not limited to, statements contained in this Prospectus relating to our business strategy, our future operating results and liquidity and capital resources outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward–looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, a continued decline in general economic conditions nationally and internationally; decreased demand for our products and services; market acceptance of our products and services; our abilityplans to protect our intellectual property rights; the impact of any infringement actions or other litigation brought against us;develop hydrogen energy production projects; competition from other providers and products; our ability to develop and commercialize new and improved products and services; our ability to raise capital to fund continuing operations; changes in government regulation; our ability to complete customer transactions and capital raising transactions; and other factors (including the risks contained in the section of this Prospectus entitled “Risk Factors”) relating to our industry, our operations and results of operations and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
You should rely only on the information contained in this Prospectus.prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to you. We have not authorized anyone to provide you with any information different fromother than that contained in this Prospectus. The selling stockholders are offeringprospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted.securities. The information contained in this Prospectusprospectus is accurate only as of the date of this Prospectus,prospectus, regardless of the time of delivery of this Prospectusprospectus or of any sale of our common stock. The Prospectus will be updatedsecurities. Our business, financial condition, results of operations and updated prospectuses made available for delivery to the extent required by the federal securities laws.
No person is authorized in connection with this Prospectus to give any information or to make any representations about us, the selling stockholders, the securities or any matter discussed in this Prospectus, other than the information and representations contained in this Prospectus. If any other information or representation is given or made, such information or representationprospects may not be relied upon as having been authorized by us or any selling stockholder.have changed since that date. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful. Neitherunlawful, and we are not making an offer of these securities in any jurisdiction where the deliveryoffer is not permitted.
For investors outside the United States: We have not done anything that would permit this offering or possession or distribution of this Prospectus norprospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of securities in accordance with this Prospectus shall, under any circumstances, imply that there has been no change in our affairs sinceprospectus outside the date of this Prospectus. The Prospectus will be updated and updated prospectuses made available for delivery to the extent required by the federal securities laws.United States.
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This summary highlights information contained throughout this Prospectus and is qualified in its entirety to the more detailed information and financial statements included elsewhere in this Prospectus. This summary does not contain all of the information that should be considered before investing in our common stock. Investors should read the entire Prospectus carefully, including the more detailed information regarding our business, the risks of purchasing our common stock discussed in this Prospectus under “Risk Factors” beginning on page 54 of this Prospectus and our financial statements and the accompanying notes beginning on page F-1 of this Prospectus.Except where the context otherwise requires, the terms, “we,” “us,” “our,” “H/Cell”“Vision Hydrogen” or “the Company,” refer to the business of H/Cell EnergyVision Hydrogen Corporation, a Nevada corporation and its wholly-owned subsidiaries.corporation.
Overview
We were formed in August 2015The 2020 year has been challenging for us. Originally, we set out to expand upon the successful implementation of aprovide hydrogen energy system usedsystems for residential users. The original business plan, established in April 2016, focused on developing the market for residential off grid hydrogen energy systems while simultaneously acquiring companies that possessed technicians who could be trained in the design and deployment of these hydrogen energy systems.
In February 2020, we decided to completely poweradopt another approach in market development, which was to pursue the one market that was establishing momentum, hydrogen production on a residence or commercial propertyplant size scale. Hydrogen production that can be transported for vehicles. In order to achieve our new strategic business model, we decided to sell both our subsidiaries because they were not producing enough profit and were not a strategic fit with cleanour goal of developing the market for hydrogen energy sosystems. Further, the hydrogen energy market for residential users was not developing at all based on cost inefficiencies, and debt levels were beginning to impact us adversely.
Beginning in March 2020, the following steps were undertaken to implement the business transition plan:
| ● | March 2020 - Commenced discussions with investor regarding financing options for our company and strategic acquisitions. | |
| ● | April 21, 2020 - Concluded the disposition of the PVBJ subsidiary | |
| ● | May 2020 - Commenced discussions and diligence for an investment in a hydrogen production project in the Netherlands, known as Volt H2 | |
| ● | May 18, 2020 - Concluded the disposition of The Pride Group subsidiary | |
| ● | July 2020 - Concluded 2nd and 3rd tranches of debt financing with proceeds earmarked for an investment in Volt H2. | |
| ● | August 12, 2020 - Concluded acquisition of an equity interest in Volt H2 | |
| ● | October 6, 2020 – Changed the company name to Vision Hydrogen Corporation and effected a twenty-for-one reverse stock split of our outstanding common stock |
With the initial investment into the hydrogen production market via Volt H2, the first step in transitioning our hydrogen business focus has been completed. We now will continue to operate the business in a manner that it can run independentis aligned with our primary hydrogen business strategy.
Recent Transactions
Sale of PVBJ
On April 21, 2020, we sold PVBJ back to PVBJ pursuant to the terms as follows: (a) Benis Holdings applied the $221,800 earn-out liability as consideration towards the purchase of PVBJ; (b) Paul Benis applied the remaining salary due to him, as prorated from the closing date to the expiration date of his employment agreement (January 31, 2021), to the purchase of PVBJ by Benis Holdings as additional consideration thereof, and as a result, we have no further salary obligation to Paul Benis, who resigned as our executive officer; and (c) as additional consideration for the purchase of PVBJ by Benis Holdings, PVBJ assumed responsibility for the line of credit agreement with Thermo.
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Sale of Pride
On May 18, 2020, we executed the Agreement with Turquino providing for our sale of 100% of Pride’s outstanding stock Pride to Turquino in return for Turquino’s assumption of the utility grid$550,000 of Notes and also provide energythe debt obligations and accrued interest related thereto. In conjunction therewith, Hidalgo and Doyle assigned the notes to Turquino, at which time Turquino became responsible for the utility griddebt obligations under the Notes and we had no further note obligations to Hidalgo or Doyle, and we reduced our debt by approximately $600,000, or 65% of the corporate debt obligations. We obtained a valuation of the fair market value of Pride from an independent third party, which valued Pride at $425,000. The Agreement provided that the parties mutually release one another and discharge and release the other party (and their respective current and former officers, directors, employees, shareholders, note holders, attorneys, assigns, agents, representatives, predecessors and successors in interest), from any and all claims, demands, obligations, or causes of action.
Volt Investment
On August 12, 2020, pursuant to a Seed Capital Subscription Agreement, we made an equity investment into VoltH2 Holdings AG (“VoltH2”), a Swiss corporation developing scalable green hydrogen production projects primarily in Europe. VoltH2 is currently developing a 25MW green hydrogen production site near Vlissingen, Netherlands. The investment was for monetary credits. This system uses renewal energya total purchase price $175,000, and we received a 17.5% equity interest in VoltH2.
Name and Symbol Change and Reverse Stock Split
We filed a certificate of amendment with the Nevada Secretary of State, which as its source for hydrogen production.of effective October 6, 2020, changed our name from H/Cell Energy Corporation to Vision Hydrogen Corporation. In addition, pursuant to that amendment, we effectuated a twenty-for-one reverse stock split of our issued and outstanding common stock. We believe that it is a revolutionary green-energy concept that is safe, renewable, self-sustainingthe name change better represents our vision for the company and cost effective.
Market Potential
communicates our commitment to hydrogen energy. As we are one ofwell, starting October 6, 2020, our stock symbol changed from “HCCC” to “HCCCD” to reflect the first providers of a hydrogen energy system for residential housing, we are creatingreverse stock split, and will change to “VIHD” effective November 2, 2020. All share and per share amounts in this new market withinprospectus reflect the renewable energy sector. As a result, there is no expectation or basis for any projections of the future of this market. Since the market did not exist previously, there can only be growth, not a decline, and we are, through the use of these statistics, showing that there is a significant market opportunity for hydrogen energy in the renewable energy sector. While the statistics show that there is expected to be a significant growth in renewable energy market, we cannot provide any assurances as to how much, if any, of this market, we will be able to capture.reverse stock split.
Technology Overview
There are great benefits to hydrogen energy. The use of hydrogen as a fuel produces no carbon dioxide or other greenhouse gases. Unlike fossil fuels, the sole emission from hydrogen fuel is chemically pure water. Hydrogen can be extracted from water using renewable energy from the sun and unlike batteries, hydrogen energy can be stored indefinitely. There is no drilling, fracking or mining required to produce hydrogen energy. We believe it is safe and efficient, and the cleanest energy source on the planet. In addition
Hydrogen can be produced from a large number of primary energy sources and by various technical processes. Electrolysis is the cleanest option for hydrogen production from renewable resources. Electrolysis is the process of using electricity to offering this self-sustaining clean energy system usingsplit water into hydrogen and fuel cell technology, we offer a number of renewable energy services, such as audits of energy consumption, review of energy/tax credits available, feasibility studies, solar/battery system installation, zoning/permitting analysis, site design/preparation and restoration, system startup, testing, commissioning, maintenance and interconnection applications.
The HC-1 System
We have succeeded in developing a hydrogen energy system designed to create electricity. We call the hydrogen energy system the HC-1. The HC-1 system functions as a self-sustaining renewable energy system. It can be configured as an off grid solution for all your electricity needs or it can be connected to the grid to generate energy credits. Its production of hydrogen is truly eco-friendly, as it is not produced byoxygen. Electrolysis occurs through the use of fossil fuels. It isan electrolyzer, which can range in size from a system comprisedsmall unit suited for low end hydrogen production to large-scale units for central production facilities that could be tied directly to renewable or other non-greenhouse, gas emitting forms of solar, batteries, a hydrogen generator, a fuel cell and a hydrogen storage tank.electricity production.
When thereDevelopments in electrolyzer technology have allowed for a reduction in research and development requirements with a stable network of suppliers for turn-key equipment solutions. The key inputs to hydrogen production are water and electricity supply, as such, proximity to both is sunlight,essential. Electrolyzers, and the solar produce renewable energy that charges a bankvarious ancillary components can be purchased from various suppliers as pre-built packages. They will be assembled at our sites with the assistance of batteries. After the batteries are fully charged, the excess electricity is then combined with water through a hydrogen generator that extracts the hydrogen from the water in a gasified state, which is safely transferred to a tank and stored for later use. If the tank is full, excess electricity is sent from the batteries to the utility grid, which results in energy creditssuppliers, but will not require in-house technical knowledge for the system owner.assembly.
The HC-1 system is connected to the residential or commercial property. The electricity is always provided by the charged batteries. If there is no solar to charge the batteries, the system keeps the batteries fully charged by using hydrogen stored in the tank, which processed through a fuel cell, creates the electricity. As the system is able to produce hydrogen, that keeps the hydrogen tank full, it provides a continuous supply of clean energy and sustainability that is independent from the grid.
Each HC-1 system is custom designed to accommodate the electrical loads for an end user. The system is completely scalable. Typically, one HC-1 standard system configuration can provide 40 kWh per day, which is a sufficient amount of electricity to satisfy the daily demand of a majority of homes in the United States. If the customer is connected to the utility grid, excess energy production is transferred to the utility company, creating energy credits.
Pride Subsidiary
On January 31, 2017, we entered into a share exchange agreement (the “Exchange Agreement”) with The Pride Group (QLD) Pty Ltd., an Australian corporation (“Pride”), Turquino Equity LLC (“Turquino”) and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (together with Turquino, the “Pride Shareholders”).
Pride sells, designs, installs and maintains a variety of technology products in the security systems market, including commercial alarm systems, access control and video surveillance. Pride also provides annual maintenance contracts. Pride has a renewable energy division that designs, installs and maintains a variety of technology services in the clean energy market, including audits of energy consumption, review of energy and tax credits available, feasibility studies, solar/battery energy system design, zoning and permitting analysis, site design/preparation and restoration, system startup, testing and commissioning and maintenance.
PVBJ Subsidiary
On February 1, 2018, we acquired PVBJ, Inc. (“PVBJ”) of Downingtown, Pennsylvania for 444,445 shares of our common stock and $221,800 in cash, to be paid out over time from positive earnings of PVBJ. Established in 2008 and historically profitable, PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. PVBJ is now expanding into renewable energy systems.
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The Offering
| Up to | ||
| Maximum Offering Amount | $2,500,000. There is no minimum offering amount required as a condition to | |
| Common | ||
| Common | ||
| Use of proceeds | We | |
| Subscription Procedures | Investors interested in subscribing for the common stock in this offering must complete and deliver to the Company a completed subscription agreement to the address provided in the subscription agreement. Within one business day of receipt of the subscription agreement, the Company will inform the investor that it has accepted the subscription and within three business days of the Company’s notification of this acceptance, the investor should deliver the purchase price in the amount of $0.20 per share of common stock being purchased by wire transfer in immediately available funds using the wire transfer instructions provided in the subscription agreement. Promptly following the receipt of subscription proceeds from the investor, the Company will deliver to the investor the common stock purchased by such investor. All funds for subscriptions in the offering will be transmitted to the Company’s bank account for immediate use by the Company. As a result, upon execution of the subscription agreement by the subscriber and acceptance by the Company, such subscription is irrevocable. | |
| Symbol on the OTCQB Market | “ | |
| Risk factors | You should carefully consider the information set forth in this Prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page |
Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or “JOBS Act.” For as long as we are an emerging growth company, unlike other public companies, we will not be required to:
| ● | provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002; |
| ● | comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; |
| ● | comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise; |
| ● | provide certain disclosure regarding executive compensation required of larger public companies; or |
| ● | obtain shareholder approval of any golden parachute payments not previously approved. |
We will cease to be an “emerging growth company” upon the earliest of:
| ● | when we have $1.07 billion or more in annual revenues; |
| ● | when we have at least $700 million in market value of our common units held by non-affiliates; |
| ● | when we issue more than $1.0 billion of non-convertible debt over a three-year period; or |
| ● | the last day of the fiscal year following the fifth anniversary of our initial public offering. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1), which will allow us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
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This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this Prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.
Risks Related to Our Company and Our Business
We have a short operating history and have generated minimal revenue to date. This makes it difficult to evaluate our future prospects and increases the risk that we will not be successful.
We were incorporated in August 2015, have been operating for less than four years.five years, and have recently sold off our operating subsidiaries as we look to pivot our business plan. As a result, we have a very limited operating history for you to evaluate in assessing our future prospects. We are subject to all risks inherent in a developing business enterprise. Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the services industry and the competitive and regulatory environment in which we operate. As a new industry, there are few established companies whose business models we can follow. Similarly, there is little information about comparable companies for potential investors to review in making a decision about whether to invest in the Company.
Potential investors should consider, among other factors, our prospects for success in light of the risks and uncertainties generally encountered by companies that, like us, are in their early stages. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold unit holder advisory votes on executive compensation.
Our services have never been provided on a mass market commercial basis, and we do not know whether they will be accepted by the market.
The market for residential or commercial properties to run on hydrogen energy is a relatively new concept and the extent to which its use will be widely adopted is uncertain. To date, we are only aware of four homes, which we installed, that have been successful with this technology, and that is not a large enough market to prove our concept. If our services are not accepted by the market our financial condition will be negatively impacted. The development of a successful market for our proposed operations and our ability to implement our business plan may be affected by a number of factors, many of which are beyond our control. If our proposed operations fail to gain sufficient market acceptance, our business plans, prospects, results of operations and financial condition will be negatively impacted.
If hydrogen energy technology is not suitable for widespread adoption at economically attractive rates of return or if sufficient additional demand for hydrogen energy systems does not develop or takes longer to develop than we anticipate, we may not achieve significant net sales and we may be unable to obtain or sustain profitability.
In comparison to fossil fuel-based electricity generation, the hydrogen energy market is at an early stage of development. If hydrogen technology proves unsuitable for widespread adoption at economically attractive rates of return or if additional demand for hydrogen energy systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient net sales to obtain profitability. In addition, demand for hydrogen energy systems in our targeted markets may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of hydrogen energy technology and demand for hydrogen energy systems, including the following:
| ● | cost-effectiveness of the electricity generated by hydrogen energy systems compared to conventional energy sources, such as natural gas and coal (which fuel sources may be subject to significant price fluctuations from time to time), and other non-solar renewable energy sources, such as solar or wind; | |
| ● | performance, reliability, and availability of energy generated by hydrogen energy systems compared to conventional and other renewable energy sources and products, particularly conventional energy generation capable of providing 24-hour, non-intermittent baseload power; | |
| ● | success of other renewable energy generation technologies, such as solar, hydroelectric, tidal, wind, geothermal, and biomass; | |
| ● | fluctuations in economic and market conditions that affect the price of, and demand for, conventional and non-solar renewable energy sources, such as increases or decreases in the prices of natural gas, coal, oil, and other fossil fuels; | |
| ● | fluctuations in capital expenditures by end-users of renewable energy systems, which tend to decrease when the economy slows and when interest rates increase; and | |
| ● | availability, substance, and magnitude of support programs including government targets, subsidies, incentives, and renewable portfolio standards to accelerate the development of the hydrogen energy industry. |
Our business currently depends on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits and incentives would adversely impact our business.
U.S. federal, state and local government bodies provide incentives to end users, distributors, system integrators and manufacturers of renewable energy systems like ours to promote renewable energy electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments for renewable energy credits associated with renewable energy generation and the exclusion of renewable energy systems from property tax assessments. We rely on these governmental rebates, tax credits and other financial incentives to incentivize customers to buy our HC-1 systems. However, these incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning.
The federal government currently offers an investment tax credit of qualified expenditures under Section 25D of the Internal Revenue Code, or the Federal ITC, for the installation of certain residential renewable energy systems, such as our HC-1 system. The credit will remain at 30% for projects that are placed in service by December 31, 2019, then decline to 26% for systems placed in service by December 21, 2020, and to 22% for systems placed in service by December 31, 2021. The credit is scheduled to expire effective January 1, 2022. This credit was previously scheduled to expire effective January 1, 2017, and there can be no assurances that it will be further extended, or if extended, that the amount of the tax credit will remain at the same levels.
Reductions in, eliminations of, or expirations of, governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing the overall cost of the HC-1 system to our customers, which would effectively reduce the size of our addressable market.
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We relyhave no experience manufacturing hydrogen fuel on net metering and related policies to attract and incentivize customers to purchase our hydrogen energy systems.a commercial basis.
Most statesTo date, we have no experience manufacturing hydrogen fuel on a commercial basis and our experience has been limited to developing systems for residential hydrogen energy purposes. We cannot be sure that we will be able to develop efficient, low-cost, high-volume automated processes that will enable us to meet our development goals. Once operational, we cannot be sure that we will be able to achieve any planned increases in production capacity or that unforeseen problems relating to our manufacturing processes will not occur. Even if we are successful in developing high-volume automated processes and achieving planned increases in production capacity, we cannot be sure that we will do so in time to meet our product commercialization schedule or to satisfy customer demand. If our business does not grow as quickly as anticipated, our planned manufacturing facilities would, in part, represent excess capacity for which we may not recover the U.S.cost, in which case our revenues may be inadequate to support our committed costs and planned growth, and our gross margins and business strategy would be adversely affected. Any of these factors could have a regulatory policy known as net energy metering,material adverse effect on our business, results of operations and financial performance.
We may be unable to successfully identify, execute or net metering, available to customers. Net metering allows our customers to interconnect their hydrogen energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess of the electric load used by the customers. At the end of the billing period, the customer simply pays for the net energy usedeffectively integrate acquisitions, or receives a credit at the retail rate if more energy is produced than consumed. Utilities operating in states without a net metering policy may receive hydrogen electricity that is exported to the grid when there is no simultaneous energy demand by the customer without providing retail compensation to the customer for this generation.effectively disentangle divested businesses.
Our ability to sellgenerate revenue, earnings, and cash flow at anticipated rates depends in large part on our hydrogen energy systemsability to identify, successfully acquire and the electricity they generateintegrate businesses and assets at appropriate prices, and realize expected growth, synergies, and operating efficiencies. We may not be able to complete transactions on favorable terms, on a timely basis or at all. In addition, our results of operations and cash flows may be adversely impacted by the failure of acquired businesses or assets to expand existing limits on the amount of net metering in states that have implemented it,meet expected returns, the failure to adoptintegrate acquired businesses, and the discovery of unanticipated liabilities or other problems in acquired businesses or assets for which we lack adequate contractual protections or insurance. In addition, we may incur asset impairment charges related to acquisitions that do not meet expectations.
We continually assess the strategic fit of our existing businesses and may divest businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. For example, earlier this year, we decided to sell both our subsidiaries because they were not producing enough profit and were not a net metering policy where it currently is not in place,strategic fit with our goal of developing the impositionmarket for hydrogen energy systems. These transactions pose risks and challenges that could negatively impact our business and financial statements. For example, when we decide to sell or otherwise dispose of new charges that onlya business or disproportionately impact customers that utilize net meteringassets, we may be unable to do so on satisfactory terms within our anticipated time frame or reductionsat all. In addition, divestitures or other dispositions may dilute our earnings per share, have other adverse financial and accounting impacts, distract management, and give rise to disputes with buyers. In addition, we have agreed, and may in the amount or value of credit that customers receive through net metering.future agree, to indemnify buyers against known and unknown contingent liabilities. Our ability to sell our HC-1 systems and our customers’ ability to sell the electricity they generate may also be adversely impacted by the unavailability of expedited or simplified interconnection for grid-tied hydrogen energy systems or any limitation on the number of customer interconnections or amount of hydrogen energy that utilities are required to allow in their service territory or some part of the grid. For example, in October 2015, the Hawaii Public Utilities Commission capped the state’s net metering program at existing levels, and in late-December 2015, the Nevada Public Utilities Commission effectively capped the state’s net metering program at existing levels and imposed additional monthly charges on customers who interconnect their renewable energy systems. In addition, utilities in some states, such as Arizona, have proposed imposing additional monthly charges on customers who interconnect renewable energy systems installed on their homes. If such charges are imposed, the cost savings associated with switching to hydrogen energy may be significantly reduced and our ability to attract future customersfinancial results could be impacted.impacted adversely by claims under these indemnities.
Existing electric utility industry regulations,Delays in or not completing our product development goals may adversely affect our revenue and changes to regulations, may present technical, regulatory and economic barriers to the purchase and use of hydrogen energy systems that may reduce demand for our hydrogen energy systems.profitability.
Federal, stateIf we experience delays in meeting our development goals, our products exhibit technical defects, or if we are unable to meet cost or performance goals, including power output, useful life and local government regulationsreliability, the profitable commercialization of our products will be delayed. In this event, potential purchasers of our products may choose alternative technologies and policies concerningany delays could allow potential competitors to gain market advantages. We cannot assure that we will successfully meet our commercialization schedule in the electric utility industry, utility rate structures, interconnection procedures, internal policiesfuture, or at all.
We currently do not have any commercially viable products or services at this time, and regulations promulgated by electric utilities, heavily influencewe do not know when or whether we will successfully complete research and development of a commercially viable product, which is critical to our future. If we are unable to develop commercially viable products, we will not be able to generate sufficient revenue to become profitable. The commercialization of our products requires achievement and verification of their overall reliability, efficiency and safety targets, and we cannot assure you that we will be able to develop, acquire or license the market for electricity generationtechnology necessary to achieve these targets. We must undertake research and development in order to manufacture commercially viable products and services. These regulations and policies often relatein commercial quantities.
We may not be able to electricity pricing and the interconnection of customer-owned electricity generation. In the United States, governments and utilities continuously modify these regulations and policies. These regulations and policies could deter potential customers from purchasing renewable energy, includingsell our HC-1 systems. This could result inproducts on a reduction in potential demand for our hydrogen energy systems. In addition, dependingcommercially viable basis on the region, electricity generated by our HC-1 systems would compete most effectively with higher priced peak-hour electricity fromtimetable we anticipate, or at all.
We cannot guarantee that we will be able to develop commercially viable hydrogen fuel production on a plant-size scale on the electric grid, rather thantimetable we anticipate, or at all. We will need to acquire production facilities, develop and install the lower average price of electricity. Modifications to the utilities’ peak-hour pricing policies or rate design, such as a flat rate, would require us to lower the price of our hydrogen energy systems to compete withproduce and store hydrogen gas, and develop delivery systems on a commercial volume. It also depends upon our ability to reduce the pricecosts of electricity from the electric grid.
Future changes to government or internal utility regulations and policies that favor electric utilities could also reduce our competitiveness, cause a significant reduction in demand for our products and services, since they are currently more expensive than products based on existing technologies, such as internal combustion engines and threaten the economics of our existing energy contracts. For example, in October 2015, the Hawaii Public Utilities Commission capped the state’s net metering program at existing levels and net metering no longer is available to new customers. In late-December 2015, the Nevada Public Utilities Commission also effectively capped the state’s net metering program at existing levels and net metering no longer is available to new customers. In addition, Nevada’s new rules include significant additional monthly charges on customers who interconnect their solar energy systems, significant reduction in the amount of bill credit for energy generated by their solar energy system that is exported to the grid in excess of electric load used by customers, and application of the new rules to existing customers with solar energy systems.
Project development or construction activitiesbatteries. We may not be successfulable to sufficiently reduce the cost of these products without reducing their performance, reliability and proposed projectsdurability, which would adversely affect the willingness of consumers to buy our products. We cannot guarantee that we will be able to internally develop the facilities and systems to sell hydrogen fuel on a commercially viable basis.
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A mass market for our products may not receive required permitsnever develop or construction may not proceed as planned.take longer to develop than we anticipate.
Hydrogen fuel production represents an emerging market, and we do not know whether there will be a sufficient number of end-users that will want to use it in commercial volumes. In such emerging markets, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. The development of a mass market for hydrogen fuel production may be affected by many factors, some of which are beyond our control, including the emergence of newer, more competitive technologies and constructionproducts, the cost of fuels used by our customers, regulatory requirements, consumer perceptions of the safety of our proposed projectsproducts and related fuels, and end-user reluctance to buy a new product.
If a mass market fails to develop, or develops more slowly than we anticipate, we may never achieve profitability. In addition, we cannot guarantee that we will involve various risks. Success in developing a particular project is contingent upon, among other things: (i) negotiationcontinue to develop, manufacture or market our products if sales levels do not support the continuation of satisfactory engineering, procurement and construction agreements; (ii) receipt of required governmental permits and approvals, including the right to interconnect to the electric grid on economically acceptable terms; (iii) payment of interconnection and other deposits (some of which may be non-refundable); and (iv) timely implementation and satisfactory completion of construction.product.
Successful completion of a particular project may be adversely affected by numerous factors, including: (i) delays in obtaining required governmental permits and approvals with acceptable conditions; (ii) unforeseen engineering problems; (iii) construction delays and contractor performance shortfalls; (iv) work stoppages; (v) cost over-runs; (vi) equipment and materials supply; (vii) adverse weather conditions; and (viii) environmental and geological conditions.
The hydrogen energy industry competes with both conventional power industries and other renewable power industries.
The hydrogen energy industry faces intense competition from companies in the energy industry, such as nuclear, natural gas and fossil fuels as well as other renewable energy providers, including solar, biomass and wind. Other energy sources may benefit from innovations that reduce costs, increase safety or otherwise improve their competitiveness. New natural resources may be discovered, or global economic, business or political developments may disproportionately benefit conventional energy sources. Governments may support certain renewable energy sources and not support hydrogen energy. If we cannot compete with the providers of other energy sources, it may materially and adversely affect our business, results of operations and financial condition.
To execute our overall business strategy, we will likely require additional working capital, which may not be available on terms favorable to us or at all. If additional capital is not available or is available at unattractive terms, we may be forced to delay, reduce the scope of or eliminate our operations.
We have an ambitious business plan for strong growth of our business, which will likely require us to raise additional financing to supplement our cash flows from operations to fully execute. We intend to use proceeds from our recent private placement to implement our business strategy. We believe that since we are now a public company, we will have a greater potential ability to issue stock in lieu of cash, including for acquisitions and employee retention.
We expect that we will require additional financing to execute our business strategy. To the extent we raise additional capital through the sale of equity securities, the issuance of those securities could result in dilution to our shareholders. In addition, if we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. If adequate funds are not available, we may be required to reduce our marketing and sales efforts or reduce or curtail our operations.
There can be no assurance that if we were to need additional funds to meet obligations we have incurred, or may incur in the future, that additional financing arrangements would be available in amounts or on terms acceptable to us, if at all. Furthermore, if adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of the implementation of our business strategy.
We face strong competition from other energy companies, including traditional and renewable providers.
Although we offer a unique solution, theThe energy provider business is competitive. Our competitors range in size from small companies to large multinational corporations. Our main competitors vary by region and energy services offered. We compete against other renewable energy providers that offer solar and wind, as well as traditional electricity providers. Almost all of our competitors have greater financial and other resources than we do and may be able to grow more quickly or better respond to changing business and economic conditions. Many of our competitors also have greater access to capital and we may not be able to compete successfully with them.
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The industry in which we operate has relatively low barriers to entry and increased competition could result in margin erosion, which would make profitability even more difficult to sustain.
Other than the technical skills required in our business, the barriers to entry in our business are relatively low. We do not have any intellectual property rights to protect our business methods and business start-up costs do not pose a significant barrier to entry. The success of our business is dependent on our employees, customer relations and the successful performance of our services. If we face increased competition as a result of new entrants in our markets, we could experience reduced operating margins and loss of market share and brand recognition.
Our lack of diversification will increase the risk of an investment in us, and our financial condition and results of operations may deteriorate if we fail to diversify.
Our current business focuses primarily on one area of the renewable energy space, the hydrogen energy sector. Larger companies have the ability to manage their risk by diversification. However, we currently lack diversification, specifically in terms of the nature of our business. As a result, we will likely be impacted more acutely by factors affecting our industry and sector in which we operate, than we would if our business were more diversified, enhancing our risk profile.
If we fail to successfully introduce new products or services, we may lose market position.
New products, product improvements, line extensions or new services will be an important factor in our sales growth. If we fail to identify emerging technological trends, to maintain and improve the competitiveness of our existing products and services or to successfully introduce new products or services on a timely basis, we may lose market position.
The industry in which we operate has relatively low barriers to entry and increased competition could result in margin erosion, which would make profitability even more difficult to sustain.
Other than the technical skills required in our business, the barriers to entry in our business are relatively low. We do not have any intellectual property rights to protect our business methods and business start-up costs do not pose a significant barrier to entry. The success of our business is dependent on our employees, customer relations and the successful performance of our services. If we face increased competition as a result of new entrants in our markets, we could experience reduced operating margins and loss of market share and brand recognition.
Our failure to attract and retain engineering personnel or maintain appropriate staffing levels could adversely affect our business.
Our success depends upon our attracting and retaining skilled engineering personnel. Competition for such skilled personnel in our industry is high and at times can be extremely intense, especially for engineers and project managers, and we cannot be certain that we will be able to hire sufficiently qualified personnel in adequate numbers to meet the demand for our services. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Additionally, we cannot be certain that we will be able to hire the requisite number of experienced and skilled personnel when necessary in order to service the number of contracts we may have at a particular time, particularly if the market for related personnel is competitive. Conversely, if we maintain or increase our staffing levels in anticipation of one or more projects and the projects are delayed, reduced or terminated, we may underutilize the additional personnel, which could reduce our operating margins, reduce our earnings and possibly harm our results of operations. If we are unable to obtain a sufficient number of contracts or effectively complete such contracts due to staffing deficiencies, our revenues may decline and we may experience continued losses.
Acquisitions involve risks that could result in a reduction of our operating results, cash flows and liquidity.
We have made two acquisitions since January 1, 2017 and currently intend to grow our business substantially by making additional strategic acquisitions, although we currently have no agreements to do so. However, we may not be able to identify suitable acquisition opportunities, or may be unable to complete such acquisitions. We may pay for acquisitions with our common stock or with convertible securities, which may dilute your investment in our common stock, or we may decide to pursue acquisitions that investors may not agree with. In connection with our acquisitions, we may also agree to substantial earn-out arrangements. To the extent we defer the payment of the purchase price for any acquisition through a cash earn-out arrangement, it will reduce our cash flows in subsequent periods. In addition, acquisitions may expose us to operational challenges and risks, including:
Completing acquisitions may require significant management time and financial resources because we may need to assimilate widely dispersed operations with distinct corporate cultures. In addition, acquired companies may have liabilities that we failed, or were unable, to discover in the course of performing due diligence investigations. We cannot assure you that the indemnification granted to us by sellers of acquired companies will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with businesses or properties we assume upon consummation of an acquisition. We may learn additional information about our acquired businesses that materially adversely affect us, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business.
Failure to successfully manage the operational challenges and risks associated with, or resulting from, acquisitions could adversely affect our results of operations, cash flows and liquidity. Borrowings or issuances of convertible securities associated with these acquisitions may also result in higher levels of indebtedness.
Liability claims could have a material adverse effect on our operating results.
We face an inherent business risk of exposure to liability claims arising from the alleged failure of our services, including the individual components in our systems. Any material uninsured losses due to liability claims that we experience could subject us to material losses. We could be required to redesign our services if they prove to be defective. We maintain insurance against liability claims, but it is possible that our insurance coverage will not continue to be available on terms acceptable to us or that such coverage will not be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage, or any claim that results in significant expense or adverse publicity against us, could have a material adverse effect on our business, operating results and financial condition.
We are dependent upon key personnel whose loss may adversely impact our business.
We rely heavily on the expertise, experience and continued services of our founders, especially Andrew Hidalgo, our Chief Executive Officer, President and Chairman of the Board, Mike Strizki, our Chief Technology Officer and the developer of the hydrogen house concept and James Strizki, our Executive Vice President of Technical Services. We currently only have employment agreements with Andrew Hidalgo and Matthew Hidalgo, and any of our other executive officers are not restricted from leaving or competing against us. The loss of either of these individuals, or an inability to attract or retain other key individuals, could materially adversely affect us. We seek to compensate and motivate these individuals, as well as other personnel, through competitive cash and equity compensation, but there can be no assurance that these programs will allow us to retain key personnel or hire new key personnel. As a result, if any member of our key personnel were to leave, we could face substantial difficulty in hiring a qualified successor and could experience a loss in productivity while any such successor obtains the necessary training and experience.
Our resources may not be sufficient to manage our expected growth; failure to properly manage our potential growth would be detrimental to our business.
We may fail to adequately manage our anticipated future growth. Any growth in our operations could place a significant strain on our administrative, financial and operational resources, and increase demands on our management and on our operational and administrative systems, controls and other resources. We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems.
If we are unable to manage growth effectively, such as if our sales and marketing efforts exceed our capacity to perform our services and maintain our products or if new employees are unable to achieve performance levels, our business, operating results and financial condition could be materially adversely affected. As with all expanding businesses, the potential exists that growth will occur rapidly. If we are unable to effectively manage this growth, our business and operating results could be negatively impacted. Anticipated growth in future operations may place a significant strain on management systems and resources. In addition, the integration of new personnel will continue to result in some disruption to ongoing operations. The ability to effectively manage growth in a rapidly evolving market requires effective planning and management processes. We will need to continue to improve operational, financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force. Our success depends in part on our maintaining high quality customer service and any failure to do so could adversely affect our business, financial condition or results of operations.
Failure to properly manage projects may result in unanticipated costs or claims.
Our project engagements may involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers, and to effectively manage the project and deploy appropriate resources, in a timely manner. Any defects or errors or failure to meet customers’ expectations could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our customers. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event of litigation.
We are subject to operating and litigation risks that may not be covered by insurance.
Our business operations are subject to all of the operating hazards and risks normally incidental to the implementation of systems involving combustible products, such as liquefied petroleum gases, propane, natural gas and hydrogen gas, and the generation of electricity. Accidents involving our hydrogen energy systems, including leaks, ruptures, fires, explosions, sabotage and mechanical problems, could result in substantial losses due to personal injury and/or loss of life, and severe damage to and destruction of property and equipment arising from explosions and other catastrophic events. If such accidents were to occur, we could face lawsuits from our clients alleging that we were responsible for such accidents. There can be no assurance that our insurance will be adequate to protect us from all material expenses related to future claims or that such levels of insurance will be available in the future at economical prices.
An impairmentThe reduction or elimination of government subsidies and economic incentives for alternative energy technologies, or the failure to renew such subsidies and incentives could reduce demand for our products, lead to a reduction in the carrying value of goodwill or other intangibleour revenues and long-lived assets could negatively affectadversely impact our operating results and equity.liquidity.
AsWe believe that the near-term growth of March 31, 2019, we had $1,373,621alternative energy technologies, including hydrogen energy, is affected by the availability and size of goodwillgovernment and indefinite-lived intangible assets. Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350,Intangibles—Goodwilleconomic incentives. Many of these government incentives expire, phase out over time, may exhaust the allocated funding, or require renewal by the applicable authority. In addition, these incentive programs could be reduced or discontinued for other reasons. The reduction, elimination, or expiration of an investment tax credit or other government subsidies and other(“ASC 350”) requires that we test these assets for impairment annually (or more frequently should indications of impairment arise) by first assessing qualitative factors and then by quantitatively estimatingeconomic incentives, or the fair value of eachfailure to renew such tax credit, governmental subsidies, or economic incentives, may result in the diminished economic competitiveness of our reporting units (calculated using a discounted cash flow method)planned products to our customers and comparing that value to the reporting units’ carrying value, if necessary. If the carrying value exceeds the fair value, there is a potential impairmentcould materially and additional testing must be performed. In performing our annual tests and determining whether indications of impairment exist, we consider numerous factors including actual and projected operating results of each reporting unit, external market factors such as market prices for similar assets and trends within our industry. We performed an annual assessment, at December 31, 2018, of the recoverability of our goodwill and indefinite-lived intangibles, noting no instances of impairment. However, future events may occur that could adversely affect the estimated fair valuegrowth of alternative energy technologies, including our reporting units. Such events may include, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions and the impact of the economic environment onplanned products, as well as our operating results. Failure to achieve sufficient levels of cash flow at our reporting units could also result in impairment charges on goodwill. If the value of the acquired goodwill is impaired, ourfuture operating results and shareholders’ equity could be adversely affected.
We also had $78,524 of definite-lived intangible assets as of March 31, 2019. FASB ASC Topic 360-10-35, (“ASC 360-10-35”) requires companies to review these assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. No such events or circumstances were identified during the year ended December 31, 2018. If similar events occur as enumerated above such that we believe indicators of impairment are present, we would test for recoverability by comparing the carrying value of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount, we would perform the next step, which is to determine the fair value of the asset, which could result in an impairment charge. Any impairment charge recorded could negatively affect our operating results and shareholders’ equity.liquidity.
Management has identified a material weaknessOur business may become subject to increased government regulation.
Our planned products are expected to be subject to certain federal, local, and non-U.S. laws and regulations, including, for example, state and local ordinances relating to building codes, public safety, electrical and gas pipeline connections, hydrogen transportation and siting and related matters. See “Business— Government Regulations; Regulatory Matters” for additional information. In certain jurisdictions, these regulatory requirements may be more stringent than those in the designUnited States. Further, as products are introduced into the market commercially, governments may impose new regulations. We do not know the extent to which any such regulations may impact our ability to manufacture, distribute, install and effectivenessservice our products. Any regulation of our internal controls, which, if not remediated could affectproducts, whether at the accuracyfederal, state, local or foreign level, including any regulations relating to the production, operation, installation, and timelinessservicing of our products may increase our costs and the price of our products, and noncompliance with applicable laws and regulations could subject us to investigations, sanctions, enforcement actions, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, our business, operating results, and financial reporting andcondition could be materially adversely affected. In addition, responding to any action will likely result in misstatementsa significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial statements.condition.
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For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
In connection withApril 2012, the preparation of our annualJumpstart Our Business Startups Act, or the JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on Form 10-K, an evaluation was carried out by management, with the participation of our Chief Executive Officer and Chief Financial Officer,management’s assessment of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) undersystem of internal control over financial reporting pursuant to Section 404(b) of the Securities ExchangeSarbanes Oxley Act of 1934 as of December 31, 2018. Disclosure controls and procedures are designed2002, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to ensure that informationthe auditor’s report in which the auditor would be required to be disclosed in reports filedprovide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.(5) hold unit holder advisory votes on executive compensation.
During the evaluation of our disclosure controls and procedures as of December 31, 2018 conducted as part of our annual audit and preparation of our annual financial statements, management conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective. Management determined that at December 31, 2018, we had material weaknesses which relate to (i) a lack of sufficient written policies and procedures for accounting and financial reporting, and (ii) lack of sufficient personnel in our accounting and financial functions to provide adequate segregation of duties.
This material weakness, which remained unremediated as of March 31, 2019, could result in a misstatement to the accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. If we do not remediate the material weakness or if other material weaknesses are identified in the future, we may be unable to report our financial results accurately or to report them on a timely basis, which could result in the loss of investor confidence and have a material adverse effect on our stock price as well as our ability to access capital and lending markets.
Risks Related to Our Common Stock
Our officers, directors and principal shareholders will own a controlling interest in our voting stock and investors will not have any voice in our management.
As of July 18, 2019,October 13, 2020, our officers, directors and principal shareholders, in the aggregate, beneficially own or control the votes of approximately 92.6%81.81% of our outstanding common stock. As a result, these stockholders, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval, including:
| ● | election of our board of directors; | |
| ● | removal of any of our directors; | |
| ● | amendment of our articles of incorporation or bylaws; and | |
| ● | adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. |
As a result of their ownership and positions, our directors, executive officers and principal shareholders collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors, executive officers or principal shareholders, or the prospect of these sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
We have not paid cash dividends in the past and do not expect to pay cash dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant.
We may raise capital through the sale of our securities in either private placements or a public offering, which offerings would dilute the ownership of investors in this private offering.
If our operations require additional capital in the future, we may sell additional share of our common stock and/or securities convertible into or exchangeable or exercisable for shares of our common stock. Such offerings may be in private placements or a public offering. If we conduct such additional offerings, an investor would experience dilution of his ownership of the Company.
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You may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are authorized to issue an aggregate of 25,000,000100,000,000 shares of common stock and 5,000,000 shares of “blank check” preferred stock. In addition, we have reserved 2,500,000125,000 shares of common stock for issuance under our 2016 stock option incentive plan, of which 1,149,000 million options27,325 have been issued, 200,000 have been exercised and there are 411,250 currently exercisable. The options were issued at various prices.exercised. We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock may create downward pressure on the trading price of the common stock. We will likely need to raise additional capital in the near future to meet our working capital needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including at a price (or exercise or conversion prices) that could be below the price an investor paid for stock.
There has been a limited trading market for our common stock and limited market activity to date.
Currently, our common stock is available for quotation on the OTCQB Market under the symbol “HCCC.”“HCCCD”, which will change to “VIHD” effective November 2, 2020. However, our stock only became eligible for quotation in November 2017 and prior to February 2017, there was no trading activity in our common stock and there has been limited trading activity to date. It is anticipated that there will remain a limited trading market for the common stock on the OTCQB. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using common stock as consideration.
You may have difficulty trading and obtaining quotations for our common stock.
Our common stock is not actively traded, and the bid and asked prices for our common stock on the OTCQB Market may fluctuate widely. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. This severely limits the liquidity of the common stock and would likely reduce the market price of our common stock and hamper our ability to raise additional capital.
Our common stock is not currently traded at high volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
Our common stock is currently traded, but with very low if any, volume, based on quotations on the OTCQB Market, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. During the year ended December 31, 2018,2019, there was an average of approximately 1611,694 shares traded per trading day, with no trading on 214170 of 251252 trading days. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
Shareholders should be aware that, according to Commission Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.
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We have implemented a reverse stock split, which will likely reduce our trading volume and may result in a decrease in our market capitalization.
Effective October 6, 2020, we implemented a one-for-twenty reverse stock split. This reverse stock split was implemented to increase the per share market price of our common stock to make it more attractive to potential investors.
We cannot guarantee that the price increase of our common stock price resulting from the reverse split will:
| ● | be proportionate to the reverse split ratio; | |
| ● | last in the marketplace for any length of time; | |
| ● | maintain the total market capitalization of our common stock outstanding before the reverse split; or | |
| ● | be sufficient to facilitate raising capital. |
The market price of our common stock may, and is likely to continue to be, highly volatile and subject to wide fluctuations.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
| ● | dilution caused by our issuance of additional shares of common stock and other forms of equity securities, which we expect to make in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships or acquisitions of other companies; |
| ● | quarterly variations in our revenues and operating expenses; | |
| ● | changes in the valuation of similarly situated companies, both in our industry and in other industries; | |
| ● | changes in analysts’ estimates affecting our company, our competitors and/or our industry; | |
| ● | changes in the accounting methods used in or otherwise affecting our industry; | |
| ● | additions and departures of key personnel; | |
| ● | announcements of technological innovations or new technologies or services available to the renewable energy industry; | |
| ● | fluctuations in interest rates and the availability of capital in the capital markets; and | |
| ● | significant sales of our common stock. |
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our Common Stock and/or our results of operations and financial condition.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our articles of incorporation give our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any shares of preferred stock or to create a series of preferred stock, we may issue such shares in the future.
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Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market, including upon the expiration of any lockup periods or the statutory holding period under Rule 144, or issued upon the conversion of preferred stock, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or if we discover material weaknesses and deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.
Management has identified a material weakness in the design and effectiveness of our internal controls, which, if not remediated could affect the accuracy and timeliness of our financial reporting and result in misstatements in our financial statements.
In connection with the preparation of our annual report on Form 10-K for the fiscal year ended December 31, 2019, an evaluation was carried out by management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During evaluation of disclosure controls and procedures as of December 31, 2019 conducted as part of our annual audit and preparation of our annual financial statements, management conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective. Management determined that at December 31, 2019, we had a material weakness that relates to the relatively small number of staff who have bookkeeping and accounting functions. In addition, we lacked sufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements. This limited number of staff prevents us from segregating duties within our internal control system.
This material weakness could result in a misstatement to the accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. If we do not remediate the material weakness or if other material weaknesses are identified in the future, we may be unable to report our financial results accurately or to report them on a timely basis, which could result in the loss of investor confidence and have a material adverse effect on our stock price as well as our ability to access capital and lending markets.
Our common stock is subject to the “Penny Stock” rules of the SEC and the trading market in our securities will be limited, which makes transactions in our common stock cumbersome and may reduce the value of an investment in our common stock.
Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Risks Related to This Offering
The sale of our common stock to GHS may cause dilution, andOur management will have broad discretion over the saleuse of the shares of common stock acquired by GHS, ornet proceeds from this offering and we may use the perception that such sales may occur, could cause the price of our common stock to fall.net proceeds in ways with which you disagree.
On July 9, 2019,We currently intend to use the net proceeds from this offering to repay an outstanding loan to an affiliate and for working capital and general corporate purposes. Other than approximately $584,000 to repay the outstanding loan and accrued interest as of October 1, 2020, we entered intohave not allocated specific amounts of the Purchase Agreement with GHS, pursuant to which GHS has committed to purchase up to $3,000,000net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our common stock. Uponmanagement with regard to the executionuse of these net proceeds, and you will not have the Purchase Agreement, we issued30,000 commitment sharesopportunity, as part of your investment decision, to GHSassess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for its commitment to purchase sharesus or our stockholders. The failure of our common stock under the Purchase Agreement. The remaining sharesmanagement to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of our common stock that may be issued under the Purchase Agreement may be sold by us to GHS at our discretion from time to time over a 24-month period commencing after the satisfaction of certain conditions set forth in the Purchase Agreement, including that the SEC has declared effective the registration statement that includes this prospectus. The purchase price for the shares that we may sell to GHS under the Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall.operation.
We generally have the right to control the timing and amount of any future sales of our shares to GHS. Additional sales of our common stock, if any, to GHS will depend upon market conditions and other factors to be determined by us. We may ultimately decide to sell to GHS all, some, or none of the additional shares of our common stock that may be available for us to sell pursuant to the Purchase Agreement. If and when we do sell shares to GHS, after GHS has acquired the shares, GHS may resell all, some or none of those shares at any time or from time to time in its discretion. Therefore, sales to GHS by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock to GHS, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
GHS will payThere is no minimum offering amount that must be raised and as a result we may raise significantly less than the then-prevailing market price for our common stock.Maximum Offering Amount.
We will sell common stockThere is no minimum offering amount that must be raised and as result we may close on significantly less than the Maximum Offering Amount. In the event that we close on less than the Maximum Offering Amount, we may not have sufficient capital to GHS pursuantexecute on our business strategy the way we have intended. Our ability to the Purchase Agreement at 80% of the lowest trading price of the common stock in the 10 consecutive trading days immediately preceding our delivery of a purchase notice to GHS. GHS has a financial incentive to sell our common stock immediately upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If GHS sells the shares, the price of our common stock could decrease. If our stock price decreases, GHSobtain additional financing thereafter may have a further incentivematerially adverse effect on our ability to sellexecute its overall plan and your investment may be lost. All investor funds for subscriptions are being transmitted directly to the Company for the Company’s immediate use.
Additional stock offerings in the future may dilute your percentage ownership of our company.
Given our plans and expectations that we may need additional capital and personnel, we may need to issue additional shares of our common stock that it holdsor securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible notes, stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership of then current stockholders.
You will experience immediate and purchase additionalsubstantial dilution as a result of this offering.
You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of 12,500,000 shares to sell. These sales may have a further impact on our stock price.offered in this offering at an assumed public offering price of $0.20 per share and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $0.03 per share in the case of the Maximum Shares Offering.
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This prospectus relates to shares of our common stockAfter deducting the estimated offering expenses that may be offered and sold from time to timeare payable by GHS. We will receive nous, we estimate that the net proceeds from the sale of shares ofthe common stock by GHS in this offering. We may receive up to $3,000,000 in aggregate gross proceeds under the Purchase Agreement from any sales we make to GHSoffered pursuant to this prospectus will be $2.4 million if the Purchase Agreement after the date of this prospectus. Maximum Offering Amount is sold.
We estimate thatcurrently intend to use the net proceeds from this offering to us from the sale of our common stockrepay an outstanding loan to GHS pursuant to the Purchase Agreement will be up to $2,946,000 over an approximately 24-month period, assuming that we sell the full amount of our common stock that we have the right, but not the obligation, to sell to GHS under the Purchase Agreement,affiliate and after other estimated fees and expenses. See “Plan of Distribution” elsewhere in this prospectus for more information.
We expect to use any proceeds that we receive under the Purchase Agreement for working capital and general corporate purposes. On June 19, 2020, we entered into a promissory note, or the Promissory Note, with Judd Brammah, one of our directors, for a principal amount up to $230,332 bearing interest with interest at 6% per annum. The entire principal and interest upon the Promissory Note are due on June 19, 2021. As of October 1, 2020, we owed an aggregate of $583,825 under the Promissory Note, including $579,953 of principal and $3,872 of accrued interest.
Other than repayment of the Promissory Note, we have not yet determined the amount of net proceeds to be used specifically for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds from this offering.
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On July 9, 2019, we entered into the Purchase Agreement and a registration rights agreement, or the Registration Rights Agreement, with GHS, pursuant to which GHS has agreed to purchase from us up to $3,000,000 in shares, or the Shares, of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement.
Under the Purchase Agreement, we have the right, from time to time at our sole discretion and subject to certain conditions, to direct GHS to purchase Shares on any business day (a “Put”), provided that at least ten trading days has passed since the most recent Put. The purchase price of Shares pursuant to the Purchase Agreement will be 80% of the lowest trading price of our common stock during the 10 trading days prior to the Put (the “Pricing Period”). Such sales of common stock by us, if any, may occur from time to time, at our option, over the 24-month period commencing on the date that the registration statement, which this prospectus is a part of, is declared effective by the SEC and a final prospectus in connection therewith is filed and the other terms and conditions of the Purchase Agreement are satisfied.
The number of Shares that we may direct GHS to purchase per Put is limited by the average daily trading volume of our common stock prior to the Put, as follows:
In all instances, we may not sell Shares to GHS under the Purchase Agreement if it would result in GHS beneficially owning more than 4.99% of our common stock. In addition, no Put can be made in an amount that exceeds $400,000.
Pursuant to the Registration Rights Agreement, we are required to register the Shares on the Registration Statement to be filed with the SEC within 30 days after the date of the Purchase Agreement.
Additionally, on July 9, 2019, we issued 30,000 shares of common stock to GHS for entering into the Purchase Agreement.
Issuances of our common stock in this offering will not affect the rights or privileges of our existing stockholders, except that the economic and voting interests of each of our existing stockholders will be diluted as a result of any such issuance. Although the number of shares of common stock that our existing stockholders own will not decrease, the shares owned by our existing stockholders will represent a smaller percentage of our total outstanding shares after any such issuance to GHS.
MARKET FOR COMMON EQUITYSTOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our common stock has been available for quotation on the OTCQB Markets under the symbol “HCCC”“HCCCD” since November 21, 2017. The price range during the year ended December 31, 2018, was a low of $0.51 per share and a high of $3.25 per share.
On July 18, 2019, the closing sale price ofOctober 6, 2020. Previously, our common stock aswas available for quotation on the OTCQB Markets under the symbol “HCCC”.
The following table shows the reported high and low prices per share for our common stock based on information provided by the OTC Markets was $1.00 per share. Group, Inc. The over-the-counter market quotations set forth for our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| Common Stock Price (1) | ||||||||
| Financial Quarter Ended | High ($) | Low ($) | ||||||
| September 30, 2020 | 6.60 | 2.20 | ||||||
| June 30, 2020 | 10.00 | 3.22 | ||||||
| March 31, 2020 | 16.90 | 3.22 | ||||||
| December 31, 2019 | 15.00 | 5.00 | ||||||
| September 30, 2019 | 32.00 | 8.00 | ||||||
| June 30, 2019 | 20.00 | 13.60 | ||||||
| March 31, 2019 | 23.00 | 11.22 | ||||||
| December 31, 2018 | 25.00 | 10.21 | ||||||
| September 30, 2018 | 39.00 | 20.00 | ||||||
| June 30, 2018 | 65.00 | 46.00 | ||||||
| March 31, 2018 | 62.00 | 50.00 | ||||||
(1) All prices reflect a 1-for-20 reverse split of its issued and outstanding common stock effective October 6, 2020.
Holders
On July 18, 2019,October 13, 2020, there were 5047 holders of record of our common stock. Because certainThe actual number of ourstockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares of common stock are held in street name by brokers and other institutions on behalf of stockholders, we are unable to estimate the totalnominees. This number of holders of record also does not include stockholders representedwhose shares may be held in trust or by these record holders.other entities.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.
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The following table sets forth our capitalization, as of June 30, 2020:
| ● | on an actual basis; and | |
| ● | on a pro forma basis to give effect to the sale of the shares in this offering at the assumed public offering price of $0.20 per share, after deducting estimated offering expenses payable by us. |
You should consider this table in conjunction with our financial statements and the notes to those financial statements included elsewhere in this prospectus.
| June 30, 2020 | ||||||||
| (Pro forma) | ||||||||
| (Actual) | Maximum | |||||||
| Preferred Stock, $.0001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding | $ | - | $ | - | ||||
| Common stock; $0.0001 par value; 25,000,000 shares authorized, 397,576 shares issued and outstanding actual and 12,897,577 maximum shares issued and outstanding pro forma | 39 | 289 | ||||||
| Additional paid-in capital | 3,059,091 | 3,060,096 | ||||||
| Accumulated deficit | (3,308,835 | ) | (3,308,835 | ) | ||||
| Total stockholder’s equity | $ | 248,950 | 248,950 | |||||
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If you invest in our securities, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after giving effect to this offering.
Our net tangible book value as of June 30, 2020 was $(252,023) or approximately $(0.63) per share of common stock, based upon 397,577 shares outstanding as of June 30, 2020.
If the maximum amount is raised, after giving effect to the sale of the shares in this offering at the assumed public offering price of $0.20 per share and after deducting estimated offering expenses payable by us, our pro forma net tangible book value at June 30, 2020 would have been $2,188,977 or approximately $0.17 per share. This represents an immediate increase in pro forma net tangible book value of approximately $0.80 per share to our existing stockholders, and an immediate dilution of $0.03 per share to investors purchasing securities in this offering.
Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.
The following table illustrates the per share dilution to investors purchasing shares in the offering if the maximum number of shares are sold:
| Assumed public offering price per share | $ | 0.20 | ||||||
| Net tangible book value per share as of June 30, 2020 | $ | (0.63 | ) | |||||
| Increase in net tangible book value per share attributable to this offering | $ | 0.80 | ||||||
| Pro forma net tangible book value per share after this offering | $ | 0.17 | ||||||
| Amount of dilution in net tangible book value per share to new investors in this offering | $ | 0.03 |
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DETERMINATION OF OFFERING PRICE
Our common stock is currently traded on OTCQB marketplace under the symbol “HCCCD”, and will change to “VIHD” effective November 2, 2020. On October 13, 2020, the closing price of our common stock was $3.00 per share.
There is a material disparity between the actual offering price of the shares being offered under this prospectus and the market price of the common stock at the date of this prospectus. We believe that the market price of our common stock at the date of this prospectus is not the appropriate offering price for the shares of our common stock because the market price is affected by a number of factors. The public offering price of the shares offered by this prospectus was determined by careful consideration of our management and our Board of Directors. The principal factors considered by us in determining the public offering price included:
| ● | An analysis of the trading history of our common stock on the OTCQB marketplace; | |
| ● | the recognition that the current market price of our common stock on the OTCQB marketplace may not be fully indicative of its true value due to the limited public float of our common stock; | |
| ● | the common stock’s limited historical trading volume; | |
| ● | the limited liquidity of securities trading on the OTCQB, as compared to securities trading on a national securities exchange; | |
| ● | the information set forth or incorporated by reference in this prospectus; | |
| ● | our past and present financial performance and an assessment of our management; | |
| ● | our prospects for future earnings and the present state of our operating business; | |
| ● | the general condition of the securities markets at the time of this offering; and | |
| ● | other factors deemed relevant by us. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the information in this Form S-1 contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. You should read statements that contain these words carefully because they:
| ● | discuss our future expectations; | |
| ● | contain projections of our future results of operations or of our financial condition; and | |
| ● | state other “forward-looking” information. |
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in this Prospectus. See “Risk Factors.”
Business Overview
We were formed in August 2015The 2020 year has been challenging for us. Originally, we set out to expand upon the successful implementation of a hydrogen energy system used to completely power a residence or commercial property with clean energy so that it can run independent of the utility grid and also provide energy to the utility grid for monetary credits. This system uses renewable energy as its source for hydrogen production. It functions as a self-sustaining clean energy system using hydrogen and fuel cell technology. Its production of electricity is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective.
There are great benefits to hydrogen energy. The use of hydrogen as an energy source produces no carbon dioxide or other greenhouse gases. Unlike fossil fuels, the only emission from hydrogen is chemically pure water. Hydrogen can be extracted from water using renewable energy from the sun and unlike batteries, hydrogen can be stored indefinitely. There is no drilling, fracking or mining required to produce hydrogen. We believe it is safe and the most abundant and cleanest energy source on the planet. In addition to offering this self-sustaining clean energy system using hydrogen and fuel cell technology, we offer a number of renewable energy services, such as audits of energy consumption, review of energy/tax credits available, feasibility studies, solar/battery system installation, zoning/permitting analysis, site design/preparation and restoration, system startup, testing, commissioning, maintenance and interconnection applications.
We have succeeded in developing and installing hydrogen energy systems for residential users. The original business plan, established in April 2016, focused on developing the market for residential off grid hydrogen energy systems while simultaneously acquiring companies that are combinedpossessed technicians who could be trained in the design and deployment of these hydrogen energy systems.
In February 2020, we decided to adopt another approach in market development, which was to pursue the one market that was establishing momentum, hydrogen production on a plant size scale. Hydrogen production that can be transported for vehicles. In order to achieve our new strategic business model, we decided to sell both our subsidiaries because they were not producing enough profit and were not a strategic fit with renewable solarour goal of developing the market for hydrogen energy to produce clean electricity. We callsystems. Further, the hydrogen energy system the HC-1. The HC-1 system functions as a self-sustaining renewable energy system. It can be configured as an off grid solutionmarket for residential users was not developing at all your electricity needs or it can be connectedbased on cost inefficiencies, and debt levels were beginning to the grid to generate energy credits. It is a system comprised of solar, batteries, a hydrogen generator, a fuel cell and a hydrogen storage tank.impact us adversely.
When there is sunlight,Beginning in March 2020, the solar produce renewable energy that charges a bank of batteries. Afterfollowing steps were undertaken to implement the batteries are fully charged,business transition plan:
| ● | March 2020 - Commenced discussions with investor regarding financing options for our company and strategic acquisitions. | |
| ● | April 21, 2020 - Concluded the disposition of the PVBJ Inc. (“PVBJ”) subsidiary (See ‘Discontinued Operations’ section below). | |
| ● | May 2020 - Commenced discussions and diligence for an investment in a hydrogen production project in the Netherlands, known as Volt H2 (See ‘Subsequent Events’ section below). | |
| ● | May 18, 2020 - Concluded the disposition of The Pride Group (QLD) Pty Ltd. (“Pride”) subsidiary (See ‘Discontinued Operations’ section below). | |
| ● | July 2020 - Concluded 2nd and 3rd tranches of debt financing with proceeds earmarked for an investment in Volt H2. | |
| ● | August 12, 2020 - Concluded acquisition of an equity interest in Volt H2 (See ‘Subsequent Events’ section below) |
With the excess electricity is then combined with water through a hydrogen generator that extractsinitial investment into the hydrogen fromproduction market via Volt H2, the waterfirst step in transitioning our hydrogen business focus has been completed. We now will continue to operate the business in a gasified state, which is safely transferred to a tank and stored for later use. If the tank is full, excess electricity is sent from the batteries to the utility grid, which results in energy credits for the system owner. The electricity for the end user is always provided by the charged batteries. If there is no solar power to charge the batteries, the system keeps the batteries fully charged by using the hydrogen gas stored in the tank, which processed through a fuel cell, creates the electricity to charge the batteries. As the system is able to produce its own hydrogen gas, which keeps the tank full, it provides a continuous supply of clean energy and sustainabilitymanner that is independent from the grid. Each HC-1 system is custom designed to accommodate the electrical loads for an end user. The system is completely scalable.
If a customer wishes to connect the system to the electrical grid in order to generate renewable energy credits, we obtain interconnection agreements from the local electric utility company. If the customer obtains authorization for interconnection to the utility grid, once the HC-1 system is operational, the HC-1 system owner can eliminate their electric bill and, if in a permissible state, can begin generating energy credits. In certain states, an end user receives one energy credit for each 1,000 kilowatt hours (kWh) produced through renewal energy. The customer sells these credits to a broker, who in turn sells the credits to a utility company so that the utility company can demonstrate their compliancealigned with the regulatory obligations to reduce greenhouse gas emissions. The price per credit can vary depending on supply and demand. Many other states that may not offer an energy credit program, do offer other cash incentives for renewable energy systems.
On January 31, 2017, we acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”). Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy division to focus on the high growth renewable energy market in Asia-Pacific. On February 1, 2018, we acquired PVBJ Inc. (“PVBJ”). Established in 2008, PVBJ is a regionally recognized company that specializes in HVAC and refrigeration for commercial and residential customers. The services offered include design, installation, repair, maintenance and emergency services for environmental systems. PVBJ has a highly trained technical team that is experienced in all aspects of environmental systems. PVBJ covers the U.S. Mid-Atlantic market. PVBJ is also establishing a clean energy division so that it can offerour primary hydrogen energy systems to its existing customer base.business strategy.
Current Operating TrendsDiscontinued Operations
Currently, a numberOn April 21, 2020, we sold PVBJ back to PVBJ pursuant to the terms as follows: (a) Benis Holdings LLC (“Benis Holdings”) applied the $221,800 earn-out liability as consideration towards the purchase of technicians are licensedPVBJ; (b) Paul Benis applied the remaining salary due to install our HC-1 systems in the Mid-Atlantic region of the U.S. and Australia. In addition to recently establishing a clean energy division, Pride is a highly regarded and established company that designs, installs and maintains a variety of technology products in the security systems market. Pride also provides annual maintenance programs which amount to approximately AUD $2 million per annum. Pride currently generates approximately half of its revenue from government contracts and the other halfhim, as prorated from the commercial sector. Pride is a certified and licensed security systems integrator for the Queensland Government and has various government contracts in place for installation, maintenance and project services.
PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. The subsidiary has a team of technicians that can install and service a variety of HVAC and refrigeration products. PVBJ is certified and licensed in multiple states and has developed an extensive customer base. PVBJ is now expanding into clean energy systems and employs technicians that are familiar with installing environmental systems requiring electrical, plumbing and gases, which is similarclosing date to the installation of an HC-1 system.
We intend to aggressively grow our business, both organically and through strategic acquisitions. Our goal is to acquire companies with the licenses and certifications to operate in various states and countries. This will allow us to expand the geographic areas in which we can install our systems. These acquired companies will also provide us with a consistent revenue stream, a customer base for marketing our systems and technicians that can be trained to install our products and services. Initially, we intend to focus on states or countries whose government supports a regulatory standard requiring its utility companies to increase their production of electricity from renewable energy sources. This overall approach is more cost effective than the protracted nature of opening an office, hiring staff and obtaining certifications to operate in a specific geographic area. As of theexpiration date of this prospectus,his employment agreement (January 31, 2021), to the purchase of PVBJ by Benis Holdings as additional consideration thereof, and as a result, we have no written agreementsfurther salary obligation to Paul Benis, who resigned as our executive officer; and (c) as additional consideration for the purchase of PVBJ by Benis Holdings, PVBJ assumed responsibility for the line of credit agreement with Thermo Communications Funding, LLC (“Thermo”).
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On May 18, 2020, we executed a Purchase and Sale Agreement with Turquino Equity LLC (“Turquino”) providing for our sale of 100% of Pride’s outstanding stock Pride to Turquino in return for Turquino’s assumption of the $550,000 of principal amount of promissory notes outstanding to Andrew Hidalgo and Michael Doyle (the “Notes”) and the debt obligations and accrued interest related thereto (the “Agreement”). In conjunction therewith, Hidalgo and Doyle assigned the notes to Turquino, at which time Turquino became responsible for the debt obligations under the Notes and we had no further note obligations to Hidalgo or understandings to acquireDoyle, and we reduced our debt by approximately $600,000, or 65% of the corporate debt obligations. We obtained a valuation of the fair market value of Pride from an independent third party, which valued Pride at $425,000. The Agreement provided that the parties mutually release one another and discharge and release the other party (and their respective current and former officers, directors, employees, shareholders, note holders, attorneys, assigns, agents, representatives, predecessors and successors in interest), from any companies and no assurances can be given that we will identifyall claims, demands, obligations, or successfully acquire any other companies.causes of action.
| June 30, 2020 | ||||
| PVBJ | ||||
| Proceeds on sale (earn-out payable exchange) | $ | 214,074 | ||
| Less: net asset value | (1,383,440 | ) | ||
| Loss on sale of assets | $ | (1,169,366 | ) | |
| Pride | ||||
| Proceeds on sale (debt forgiveness) | $ | 500,321 | ||
| Less net asset value | (120,380 | ) | ||
| Gain on sale of assets | $ | 379,941 | ||
Results of Continuing Operations
For the three months ended March 31,Three Months Ended June 30, 2020 and 2019
Revenue and Cost of Revenue
We had no revenue or cost of revenue for the three months ended MarchJune 30, 2020 and 2019.
General and Administrative Expenses
During the three months ended June 30, 2020, our general and administrative expenses were $71,370 consisting of: $52,400 of legal and accounting fees, $26,530 of gross payroll and payroll taxes, $10,000 of management disbursements, $9,788 of consulting/dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, and $5,175 of miscellaneous expenses offset by a credit of $32,523 as the result of entering into various Settlement and Release Agreements with several other creditors.
During the three months ended June 30, 2019, our general and administrative expenses were $148,916 consisting of : $61,028 of legal and accounting fees, $40,369 of gross payroll and payroll taxes, $19,500 of management disbursements, $8,518 of consulting/dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $5,271 in amortization of intangible assets, $4,674 of directors and officers insurance liability, $2,074 of stock-based compensation and $7,482 of miscellaneous expenses.
We incurred $46,135 of other expenses for the three months ended June 30, 2020, including $4,584 of interest expense – related party and $41,551 of interest expense.
We incurred $72,865 of other expenses for the three months ended June 30, 2019, including $58,060 of interest expense – related party, $10,258 of interest expense and $4,547 change in fair value earn-out.
As a result of the foregoing, we had a net loss from continuing operations of $117,506 for the three months ended June 30, 2020, compared to a net loss of $221,781 for the three months ended June 30, 2019.
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For the Six Months Ended June 30, 2020 and 2019
Revenue and Cost of Revenue
We had no revenue or cost of revenue for the six months ended June 30, 2020 and 2019.
General and Administrative Expenses
During the six months ended June 30, 2020, our general and administrative expenses were $199,757 which consisted of the following: $66,516 of gross payroll and payroll tax, $90,300 of accounting and legal fees related to audit and consulting costs, $30,000 of management disbursements, $17,445 of consulting/dues and subscription fees, which pertained to EDGAR fees, OTC Market annual listing fees, and transfer agent fees, $7,993 of stock-based compensation, $5,421 of amortization of intangible assets, and officers insurance liability of $11,023 and $3,582 of miscellaneous expenses. Offset by a credit of $32,523 as the result of entering into various Settlement and Release Agreements with several other Creditors.
During the six months ended June 30, 2019, our general and administrative expenses were $315,695 was related to the renewable systems integration segment including corporate expenses, consisting of: $80,738 of gross payroll and payroll tax, $68,301 of accounting fees related to audit, consulting and acquisition costs, $39,000 of management disbursements, $34,000 of legal fees, $23,450 for a share donation, $15,783 of consulting/dues and subscription fees, which pertained to EDGAR fees, OTC Market annual listing fees, and transfer agent fees, $10,636 of stock-based compensation, $10,542 of amortization of intangible assets, $8,964 of travel and meals, $8,000 of investment banking fees, directors and officers insurance liability of $7,542 and $8,739 of miscellaneous expenses.
We incurred $90,507 of other expenses for the six months ended June 30, 2020, including $35,719 of interest expense – related party, $49,912 of interest expense and $4,875 change in fair value earn-out.
We incurred $115,189 of other expenses for the six months ended June 30, 2019, including $94,155 of interest expense – related party, $12,091 of interest expense and $8,943 change in fair value earn-out.
As a result of the foregoing, we had net losses from continuing operations of $290,265 and $430,884 for the six months ended June 30, 2020 and 2019, respectively.
For discontinued operations please refer to note 16.
For the Years Ended December 31, 2019 and 2018
Revenue and Cost of Revenue
We had $1,704,273 ofno revenue and $1,196,438 foror cost of revenue during the three months ended March 31, 2019.
We had $1,726,324 of revenue and $1,241,030 for cost of revenue during the three months ended March 31, 2018, of which $31,789 and $31,617, respectively, was related party.
| For the Three Months Ended | ||||||||
| March 31, 2019 | March 31, 2018 | |||||||
| Revenue by Segment | ||||||||
| Renewable Systems Integration | $ | 49,514 | $ | 31,789 | ||||
| Non-renewable Systems Integration | 1,654,759 | 1,694,535 | ||||||
| $ | 1,704,273 | $ | 1,726,324 | |||||
General and Administrative Expenses
During the three months ended March 31, 2019, our general and administrative expenses were $626,552. $167,540 was related to the Renewable Systems Integration segment, which included $37,500 of gross payroll, $26,773 of accounting fees related to audit and consulting fees, $23,450 for share donation, $19,500 of management fees, $12,000 of legal fees, $8,562 of stock based compensation, $8,000 of investment banking fees, $7,265 of dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $6,331 of travel and meals, $5,271 of amortization, $5,059 of miscellaneous expenses, $3,207 for insurance, $2,869 of payroll taxes and $1,753 of auto lease.
During the three months ended March 31, 2018, our general and administrative expenses were $574,684. $161,692 was related to the Renewable Systems Integration segment, which included $37,500 of gross payroll, $35,263 of accounting fees related to audit and consulting fees, $27,000 of legal fees, $19,500 of management fees, $17,148 of stock based compensation, $6,944 of dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $5,202 for insurance, $4,387 of travel, $3,564 of amortization, $3,271 of miscellaneous expenses and $1,913 of payroll taxes.
The Non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended March 31, 2019 of $459,012, including management and administrative salaries of $228,614 along with $87,810 of other various employee expenses, such as vacation, sick time, office expenses, training and meals. In addition, automobile expenses totaled $17,238, which included lease and auto allowance. Facilities lease maintenance and utilities totaled $24,961. In addition, we incurred $46,689 for various insurance, other miscellaneous fees of $17,680, $13,300 of payroll tax, $13,006 for telecommunications and information technology, $5,247 of computer services and $4,467 of 401(k) expense.
The Non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended March 31, 2018 of $412,992, including management and administrative salaries of $157,841 along with $65,978 of other various employee expenses, such as vacation and sick time. In addition, automobile expenses totaled $71,452, which included repairs, fuel and auto allowance. Facilities lease totaled $26,994. We incurred $7,183 of travel and entertainment, business meals, investor relations and promotional expenses. Professional fees of $6,145 consisted of legal and accounting fees incurred for tax and human resources advice. Dues and subscription fees were $1,102, which pertained to miscellaneous business subscriptions and renewals. In addition, we incurred depreciation of $27,574, $25,159 for various insurance, other miscellaneous fees of $19,361, $17,154 for telecommunications, $5,156 of 401(k) expense and $4,066 of tax expense.
We incurred $24,921 of other expenses for the three months ended March 31, 2019, including $36,095 of interest expense – related party, $4,396 change in fair value earn-out and $1,833 of interest expense, offset by $17,403 of gain on fixed asset disposal.
We incurred $21,579 of other expenses for the three months ended March 31, 2018, including $14,215 of interest expense – related party, $3,946 of interest expense and $3,418 of loss on fixed asset disposal.
As a result of the foregoing, we had a net loss of $143,638 for the three months ended March 31, 2019, compared to a net loss of $110,969 for the three months ended March 31, 2018.
For the years ended December 31, 2018 and 2017
Revenue and Cost of Revenue
For the year ended December 31, 2018, we had $7,546,4372019 and $31,789 of revenuesales – related party and $5,532,983$31,617 of cost of revenue, of which $40,548 and $40,376, respectively, wasgoods sold – related party. Revenues increased from 2017 to 2018 due to the acquisition of PVBJ in February of 2018. Forparty for the year ended December 31, 2017, we had $6,352,886 of revenue and $4,329,070 of cost of revenue, of which $85,919 and $87,649, respectively, was related party. Pride revenues for year ended December 31, 2018 were $5,073,533, down from $6,266,967 for year ended December 31, 2017. This was due in large part to two larger contract jobs that Pride completed in 2017 year that were in excess of one million dollars.2018.
| For the Year Ended | ||||||||
December 31, 2018 | December 31, 2017 | |||||||
| Revenue by segment | ||||||||
| Renewable systems integration – related party | $ | 40,548 | $ | 85,919 | ||||
| Non-renewable system integration | 7,505,889 | 6,266,967 | ||||||
| $ | 7,546,437 | $ | 6,352,886 | |||||
General and Administrative Expenses
During the year ended December 31, 2019, our total operating expenses were $528,283, including $150,000 of gross payroll, $98,451 of accounting fees related to audit, consulting and tax costs, $80,500 in management disbursements, $58,000 of legal fees, $25,669 of dues and subscription fees, which pertained to transfer agent, press release, EDGAR fees and OTC Market annual listing fees, $23,089 of stock-based compensation, $21,084 of amortization, $16,138 of directors and officers insurance liability, $10,916 of travel and meals, $10,457 of payroll taxes, $9,313 of investor relations, $8,000 of investment banking fees, $7,846 in automobile expense and $8,820 of miscellaneous expenses.
We had net income from discontinued operations of $67,650 for the year ended December 31, 2019.
We incurred $233,345 of interest expense – related party and $18,463 change in fair value earn-out in other expenses for the year ended December 31, 2019.
During the year ended December 31, 2018, our general and administrativetotal operating expenses were $2,446,860. $565,700 was related to the Renewable Systems Integration segment, including corporate expenses comprised of $150,000 of gross payroll, $87,560 of accounting fees related to audit, consulting and tax costs, $78,000 in management disbursements, $68,293 of stock-based compensation, $63,050 of legal fees, $30,343 of dues and subscription fees, which pertained to transfer agent, press release, EDGAR fees and OTC Market annual listing fees, $18,063 of directors and officers insurance liability, $16,877 of amortization, $12,545 of investor relations, $12,221 of travel, $10,168 of payroll taxes, and $18,580 of miscellaneous expenses.
The Non-renewable Systems Integration segment incurred general and administrative expenses during the year ended December 31, 2018 of $1,881,160, including management and administrative salaries of $827,406 along with $434,697 of other various employee expenses, such as vacation, sick time, workcover and payroll processing. In addition, facilities lease for the Pride and PVBJ offices totaled $98,593 and auto allowance totaled $61,869. Insurance expense was $178,567, which related to liability and health. Other expenses included $62,646 of professional and legal fees, including fees related to the acquisition of PVBJ, $52,950 of telecommunications, $26,012 of general office expenses, $24,155 in computer services, $23,451 of 401(k) contribution, $9,218 of meals and entertainment, $8,278 of donations and contributions, $6,814 in bank service charges, $4,502 of advertising and $62,002 of miscellaneous expenses.
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During the year ended December 31, 2017, our general and administrative expenses were $1,960,863. $261,118 was related to the Renewable Systems Integration segment, including corporate expenses comprised of $94,643 of accounting fees related to audit, consulting and Pride acquisition costs, $60,689 of legal fees, $51,625 of stock-based compensation, $24,525 of dues and subscription fees, which pertained to transfer agent, EDGAR fees and OTC Market annual listing fees, $10,404 of directors and officers insurance liability, $9,097 of travel, and $10,135 of miscellaneous expenses.
The Non-renewable Systems Integration segment incurred general and administrative expenses during the year ended December 31, 2017 of $1,699,745 including management and administrative salaries of $611,178 along with $376,628 of other various employee expenses, such as vacation and sick time, and management fees of $184,004. In addition, automobile expenses totaled $181,233, which included repairs, fuel and auto allowance. Facilities lease for the Pride offices totaled $91,111. Consulting/dues and subscription fees were $4,000 which pertained to miscellaneous business subscriptions and renewals. Professional fees of $13,827 consisted of legal and accounting fees incurred for tax and human resources advice. Other expenses included $66,255 of insurance, $28,529 of telecommunications, $27,176 of computer expenses and $19,362 of utilities and safety expenses. We also incurred $31,985 of depreciation, $24,311 of bad debt expense, $7,295 of interest expense, $2,041 of travel and entertainment, and $30,810 of other miscellaneous fees.
We incurred $16,257had net income from discontinued operations of income tax provision and other expenses totaling $104,347$59,833 for the year ended December 31, 2018, including2018.
We incurred $79,622 of interest expense – related party $26,584 of interest expense and $15,418 change in fair value earn-out offset by $17,277 of gain on fixed asset disposal.
We incurred $54,056 of income tax provisionin other expenses for the year ended December 31, 2017 and incurred no other expenses.2018.
As a result of the foregoing, we had a net losslosses of $554,010$712,441 and $600,735 for the yearyears ended December 31, 2018, compared to net income of $8,897 for the year ended December 31, 2017.2019 and 2018.
Liquidity and Capital Resources
For the Six Months Ended June 30, 2020 and 2019
As of March 31, 2019,June 30, 2020, we had anegative working capital deficit of $48,401,$252,323, comprised of current$5,010 in cash, $4,079 in prepaid expenses offset by $59,186 of accounts payable, $2,388 in taxes payable and $199,838 in loan payable. We also had other assets of $937,897$300, which consisted of accounts receivables, $328,439 of cash and cash equivalents, $92,269 of current right-of-use asset, $48,052 of costs in excess of billings and $18,772 of prepaid expenses. We had $695,997 of accounts payables, $257,659 of current convertible notes payable – related party net of discount, $195,132 of earn out payable, $92,269 of current lease liability, $72,510 of current finance leases payable, $54,071 of sales and withholding tax payable, $41,881 of billings in excess of cost, $32,259 of income tax payable and $32,052 of current notes payable, which made up our current liabilities at March 31, 2019. Other noncurrent liabilities at March 31, 2019 were $172,715 for line of credit, $167,985 of lease liability, $306,163 of long term finance leases and $65,779 of equipment notes payable along with $61,609 of convertible notes payable – related party net of discount.security deposits.
For the threesix months ended March 31, 2019,June 30, 2020, we used $293,894$230,899 of cash in operating activities, which represented our net loss of $143,638, $260,524 in change in operating ROU asset, $207,425$290,265, $50,462 of changes in accounts payable, $153,792amortization, $7,993 of billings in excess of cost, $30,000 in long term asset change, $17,403 of gain on the disposal of fixed assets $2,481 of prepaid expenses and $2,258 of costs in excess of billings, offset by $260,524 in change in operating ROU liability, $154,680 of changes in accounts receivables, $72,015 of depreciation and amortization, $23,450 of share donation, $8,562 in stock based compensation, and $4,396$129,180 of other assets, $4,875 of change in fair value contingent consideration.
We used $13,689 from investing activities from the purchaseconsideration offset by $300 change in prepaid expenses and $132,844 of fixed assets of $79,912 and $6,415change in security deposits less the disposition of fixed assets for $72,638.
We generated $273,489 from financing activities consisted of the issuance of convertible debt for $147,500, net of related costs, less repayments on notes payable of $8,382, less repayments of $9,985 of repayments on capital leases adding back net proceeds from line of credit of $144,356accounts payable.
For the threesix months ended March 31, 2018,June 30, 2019, we generated $126,372used $247,558 of cash in operating activities, which represented our net loss of $110,969 and $217,910$430,884), $77,777 of changesamortization, $10,636 in stock based compensation, $8,943 of change in fair value, $23,450 for a share donation, $6,000 in prepaid expenses, $86,520 in accounts payable offset by $33,352$30,000 in long term asset.
For the six months ended June 30, 2020 we used $322,101 in cash in investing activities due to the cash disposed of depreciationin the disposition of the two subsidiaries Pride and PVBJ.
There was no cash used or provided by from investing activities for the six months ended June 30, 2019.
For the six months ended June 30, 2020, we generated $210,846 in financing activities relating to $26,008 in proceeds from equity financing, $20,000 in proceeds from PPP notes payable, $179,838 in proceeds from related party debt and $75,000 in proceeds from the issuance of convertible debt offset by $90,000 in debt repayment.
For the six months ended June 30, 2019 we generated $147,500 from the issuance of convertible debt.
For the Years Ended December 31, 2019 and 2018
For the year ended December 31, 2019, we used $469,340 of cash in operating activities, which represented our net loss of $780,091, $120,698 of amortization, $39,654$23,089 of changesstock based compensation and $18,463 of change in fair value consideration, offset by $140,571 of change in accounts receivables, $4,284payable and $7,750 change in prepaid expenses.
For the year ended December 31, 2018, we used $530,565 of prepaid expenses, $28,969cash in operating activities, which represented our net loss of $660,568, $68,293 of stock based compensation, $48,500 of amortization, $15,418 of change in fair value consideration and $474 in costs in excess of billings, offset by $2,482 of change in accounts payable and $34,354 of billings$200 change in excess of cost, $17,148 in stock based compensation, $3,418 loss on sale of assets and $4,066 of income tax.prepaid expenses.
WeThere was no cash used $82,647or provided by from investing activities fromfor the purchase of fixed assets of $68,628 and security deposits of $14,412 less the disposition of assets of $393.year ended December 31, 2019.
WeFor the year ended December 31, 2018, $30,408 of cash was provided by the acquisition of PVBJ Inc.
For the year ended December 31, 2019, we generated $73,849 from$42,622 of cash in financing activities, consistedmade up of $92,500 from the issuance of convertible debt and $40,122 in equity financing, offset by $90,000 for $395,000, netlegal fees in relation to capital raising.
For the year ended December 31, 2018, we generated $1,000 of related costs, less repayments on notes payable of $14,113, adding back proceeds of issuance of notes payable for $61,062 less payments on capital leases of $16,619 and long term debt of $351,481.cash in financing activities, made up $1,000 from a stock option exercise.
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In the future we expect to incur expenses related to compliance for being a public company and travel related to visiting potential customer sites. We expect that our general and administrative expenses will increase as we expand our business development, add infrastructure, and incur additional costs related to being a public company, including incremental audit fees, investor relations programs and increased professional services.
Our future capital requirements will depend on a number of factors, including the progress of our sales and marketing of our services, the timing and outcome of potential acquisitions, the costs involved in operating as a public reporting company, the status of competitive services, the availability of financing and our success in developing markets for our services. When we enter into contacts with customers, they will be required to make payments in tranches, including a payment after a contract is executed but prior to commencement of the project. We believe our existing cash, together with revenue generated by operations, will be sufficient to fund our operating expenses and capital equipment requirements for at least the next 12 months.
Other than a line of credit from Thermo Communications Funding, LLC (“Thermo”Subsequent Events
Effective July 17, 2020, our director lent us $50,000 at 6% per annum payable on the due date, June 19, 2021 (the “$50,000 Note”) and. Effective July 22, 2020, an equity purchase agreement withadditional loan by the Investor discussed below, we presently do not have any available credit, bank financing or other external sources of liquidity. We did not achieve net income from operations for the quarter ended March 31, 2019 or the year ended December 31, 2018 and our operations historically have not been a source of liquidity and we cannot be assured they will be in the near future. We may need to obtain additional capital in order to expand operations and fund our activities. Future financing may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds if required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owedsame director was provided to us or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution orfor a principal amount of $299,900 at 6% per annum payable on the new equity securities may have rights, preferences or privileges senior to thosedue date of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may be required to delay, reduceJune 19, 2021 (the $299,900 Note”). The $50,000 Note and the scope of or eliminate our marketing and business development services.$299,900 Note are related party transactions.
Credit Facility
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo. The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition,12, 2020, pursuant to a limited recourse guaranty, Andrew Hidalgo, our Chief Executive Officer, personally guaranteed the repayment of the Credit Agreement under certain conditions.
Pursuant to the terms of the CreditSeed Capital Subscription Agreement, we are permitted to borrow up to $350,000 under the revolving credit line, undermade an equity investment into VoltH2 Holdings AG (“VoltH2”), a borrowing base equal to the lesser of (i) or 85% of Eligible Accounts (as definedSwiss corporation developing scalable green hydrogen production projects primarily in the Credit Agreement). Borrowings under the Credit Agreement may be usedEurope. VoltH2 is currently developing a 25MW green hydrogen production site near Vlissingen, Netherlands. The investment was for working capital and to refinance certain existing debt of PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to 1.0,total purchase price $175,000 USD representing a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans. As of December 2018, we were17.5% equity interest in compliance with these covenants.
The loan commitment shall expire on August 21, 2020. The interest rate applicable to revolving loans under the Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. We paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and $3,500 will be paid on the first anniversary. We will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears.
We may prepay the Note at any time and terminate the Credit Agreement. In the event that we terminate the Credit Agreement, we will pay Thermo an early termination fee equal to 4% of the pro rata portion, which pro rata portion is determined by multiplying $350,000 by the number of months prior to the second anniversary of the effective date of the Credit Agreement and then dividing that by 24.
The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in our financial condition that could have a material adverse effect on us.
As of July 18, 2019, we had outstanding borrowings of $190,330 under the Credit Agreement, and the interest rate was 10.5%.
Equity Financing AgreementVoltH2.
On July 9, 2019, we entered into the Purchase Agreement and Registration Rights Agreement with GHS, pursuant to which GHS has agreed to purchase from us up to $3,000,000 in Shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement.
Under the Purchase Agreement, we have the right, from time to time at our sole discretion and subject to certain conditions, to issue GHS a Put, provided that at least ten trading days has passed since the most recent Put. The purchase price of Shares pursuant to the Purchase Agreement will be 80% of the lowest trading price of our common stock during the Pricing Period. Such sales of common stock by us, if any, may occur from time to time, at our option, over the 24-month period commencing on the date that the registration statement, which this prospectus is a part of, is declared effective by the SEC and a final prospectus in connection therewith is filed and the other terms and conditions of the Purchase Agreement are satisfied.
The number of Shares that we may direct GHS to purchase per Put is limited by the average daily trading volume of our common stock prior to the Put, as follows:
In all instances, we may not sell Shares to GHS under the Purchase Agreement if it would result in GHS beneficially owning more than 4.99% of our common stock. In addition, no Put can be made in an amount that exceeds $400,000.
Actual sales of shares of common stock to GHS under the Purchase Agreement will depend on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price of our common stock and our determinations as to the appropriate sources of funding for us and our operations. For entering into the Purchase Agreement, we issued to GHS the Commitment Shares. We will not receive any cash proceeds from the issuance of the Commitment Shares.
2019 Convertible Debenture Financing
On February 8, 2019, we entered into a securities purchase agreement (the “2019 Purchase Agreement”) with two of our directors, pursuant to which we sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (the “2019 Debentures”), convertible into shares of our common stock at a conversion price of $0.50 per share.
The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and on the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $0.50 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of our common stock.
2018 Convertible Debenture Financing
On January 2, 2018, we entered into a securities purchase agreement (the “2018 Purchase Agreement”) with two of our directors, pursuant to which we sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (the “2018 Debentures”), convertible into shares of our common stock at a conversion price of $0.75 per share.
The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and on the 2020 Maturity Date. The 2018 Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of our common stock.
On February 8, 2019, we entered into amendments (the “Amendments”) with the holders of the 2018 Debentures. Pursuant to the Amendments, the conversion price of the 2018 Debentures was reduced from $0.75 to $0.50, and the interest rate on the 2018 Debentures was reduced from 12% to 10%.
Critical Accounting Policies
Please refer to Note 2 in the accompanying financial statements for our policies.statements.
Recent Accounting Pronouncements
Please refer to Note 16 in the accompanying unaudited financial statements at March 31, 2019.statements.
Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.
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Overview
We were formed in August 2015The 2020 year has been challenging for us. Originally, we set out to expand upon the successful implementation of aprovide hydrogen energy system usedsystems for residential users. The original business plan, established in April 2016, focused on developing the market for residential off grid hydrogen energy systems while simultaneously acquiring companies that possessed technicians who could be trained in the design and deployment of these hydrogen energy systems.
In February 2020, we decided to completely poweradopt another approach in market development, which was to pursue the one market that was establishing momentum, hydrogen production on a residence or commercial propertyplant-size scale. In order to achieve our new strategic business model, we decided to sell both our subsidiaries because they were not producing enough profit and were not a strategic fit with cleanour goal of developing the market for hydrogen energy sosystems. Further, the hydrogen energy market for residential users was not developing at all based on cost inefficiencies, and debt levels were beginning to impact us adversely.
Beginning in March 2020, the following steps were undertaken to implement the business transition plan:
| ● | March 2020 - Commenced discussions with investor regarding financing options for our company and strategic acquisitions. | |
| ● | April 21, 2020 - Concluded the disposition of the PVBJ subsidiary | |
| ● | May 2020 - Commenced discussions and diligence for an investment in a hydrogen production project in the Netherlands, known as Volt H2 | |
| ● | May 18, 2020 - Concluded the disposition of The Pride Group subsidiary | |
| ● | July 2020 - Concluded 2nd and 3rd tranches of debt financing with proceeds earmarked for an investment in Volt H2. | |
| ● | August 12, 2020 - Concluded acquisition of an equity interest in Volt H2 | |
| ● | October 6, 2020 – Changed the company name to Vision Hydrogen Corporation and effected a twenty-for-one reverse stock split of our outstanding common stock |
With the initial investment into the hydrogen production market via Volt H2, the first step in transitioning our hydrogen business focus has been completed. We now will continue to operate the business in a manner that it can run independentis aligned with our primary hydrogen business strategy.
Recent Transactions
Sale of PVBJ
On April 21, 2020, we sold PVBJ back to PVBJ pursuant to the terms as follows: (a) Benis Holdings applied the $221,800 earn-out liability as consideration towards the purchase of PVBJ; (b) Paul Benis applied the remaining salary due to him, as prorated from the closing date to the expiration date of his employment agreement (January 31, 2021), to the purchase of PVBJ by Benis Holdings as additional consideration thereof, and as a result, we have no further salary obligation to Paul Benis, who resigned as our executive officer; and (c) as additional consideration for the purchase of PVBJ by Benis Holdings, PVBJ assumed responsibility for the line of credit agreement with Thermo.
Sale of Pride
On May 18, 2020, we executed the Agreement with Turquino providing for our sale of 100% of Pride’s outstanding stock Pride to Turquino in return for Turquino’s assumption of the utility grid$550,000 of Notes and also provide energythe debt obligations and accrued interest related thereto. In conjunction therewith, Hidalgo and Doyle assigned the notes to Turquino, at which time Turquino became responsible for the utility griddebt obligations under the Notes and we had no further note obligations to Hidalgo or Doyle, and we reduced our debt by approximately $600,000, or 65% of the corporate debt obligations. We obtained a valuation of the fair market value of Pride from an independent third party, which valued Pride at $425,000. The Agreement provided that the parties mutually release one another and discharge and release the other party (and their respective current and former officers, directors, employees, shareholders, note holders, attorneys, assigns, agents, representatives, predecessors and successors in interest), from any and all claims, demands, obligations, or causes of action.
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Volt Investment
On August 12, 2020, pursuant to a Seed Capital Subscription Agreement, we made an equity investment into VoltH2 Holdings AG (“VoltH2”), a Swiss corporation developing scalable green hydrogen production projects primarily in Europe. VoltH2 is currently developing a 25MW green hydrogen production site near Vlissingen, Netherlands. The investment was for monetary credits. This system uses renewal energya total purchase price $175,000, and we received a 17.5% equity interest in VoltH2.
Name and Symbol Change and Reverse Stock Split
We filed a certificate of amendment with the Nevada Secretary of State, which as its source for hydrogen production.of effective October 6, 2020, changed our name from H/Cell Energy Corporation to Vision Hydrogen Corporation. In addition, pursuant to that amendment, we effectuated a twenty-for-one reverse stock split of our issued and outstanding common stock. We believe that it is a revolutionary green-energy concept that is safe, renewable, self-sustainingthe name change better represents our vision for the company and cost effective.communicates our commitment to hydrogen energy. As well, starting October 6, 2020, our stock symbol changed from “HCCC” to “HCCCD” to reflect the reverse stock split, and will change to “VIHD” effective November 2, 2020. All share and per share amounts in this prospectus reflect the reverse stock split.
Market Potential
As the world’s fossil fuel supply continually diminishes while causing harm to the planet, we believe that climate hydrogen is the most reliable alternative to carbon fossil fuels, as it leaves zero greenhouse gas residues and can be used at any time of the day or night, as well as in any weather conditions, unlike renewable energy from solar and wind.
Hydrogen is fast becoming a significant factor in the planning of future energy production and is anticipated by energy analysts to become more widely competitive as an alternative energy source by as early as 2030 as economies of scale drive-down the cost of fuel cells and electrolysers with the addition of lower costs for wind and solar power. According to the International Energy Agency’s World Energy Outlook 2017, renewable energy will representGrand View Research report on future hydrogen growth, published in February 2020, the largest source of electrical generation through 2040. During that time, the share of renewable energy in global power generationhydrogen market is expected to rise from its current 25% to 40%. This rapid growth in the use of renewable energy is ledreach $154 billion by continued expansion in renewable energy technology, the need to lessen dependency on fossil fuel energy, grid-based vulnerabilities and the battle against global warming.
As we are one of the first providers of a hydrogen energy system for residential housing, we are creating this new market within the renewable energy sector. As a result, there is no expectation or basis for any projections of the future of this market. Since the market did not exist previously, there can only be growth, not a decline, and we are, through the use of these statistics, showing that there is a significant market opportunity for hydrogen energy in the renewable energy sector. While the statistics show that there is expected to be a significant growth in renewable energy market, we cannot provide any assurances as to how much, if any, of this market, we will be able to capture.2027.
Technology Overview
There are great benefits to hydrogen energy. The use of hydrogen as a fuel produces no carbon dioxide or other greenhouse gases. Unlike fossil fuels, the sole emission from hydrogen fuel is chemically pure water. Hydrogen can be extracted from water using renewable energy from the sun and unlike batteries, hydrogen energy can be stored indefinitely. There is no drilling, fracking or mining required to produce hydrogen energy. We believe it is safe and efficient, and the cleanest energy source on the planet. In addition
Hydrogen can be produced from a large number of primary energy sources and by various technical processes. Electrolysis is the cleanest option for hydrogen production from renewable resources. Electrolysis is the process of using electricity to offering this self-sustaining clean energy system usingsplit water into hydrogen and fuel cell technology, we offer a number of renewable energy services, such as audits of energy consumption, review of energy/tax credits available, feasibility studies, solar/battery system installation, zoning/permitting analysis, site design/preparation and restoration, system startup, testing, commissioning, maintenance and interconnection applications.
The HC-1 System
We have succeeded in developing a hydrogen energy system designed to create electricity. We call the hydrogen energy system the HC-1. The HC-1 system functions as a self-sustaining renewable energy system. It can be configured as an off grid solution for all your electricity needs or it can be connected to the grid to generate energy credits. Its production of hydrogen is truly eco-friendly, as it is not produced byoxygen. Electrolysis occurs through the use of fossil fuels. It isan electrolyzer, which can range in size from a system comprisedsmall unit suited for low end hydrogen production to large-scale units for central production facilities that could be tied directly to renewable or other non-greenhouse, gas emitting forms of solar, batteries, a hydrogen generator, a fuel cell and a hydrogen storage tank.electricity production.
When thereDevelopments in electrolyzer technology have allowed for a reduction in research and development requirements with a stable network of suppliers for turn-key equipment solutions. The key inputs to hydrogen production are water and electricity supply, as such, proximity to both is sunlight,essential. Electrolyzers, and the solar produce renewable energy that charges a bank of batteries. After the batteries are fully charged, the excess electricity is then combined with water through a hydrogen generator that extracts the hydrogen from the water in a gasified state, which is safely transferred to a tank and stored for later use. If the tank is full, excess electricity is sent from the batteries to the utility grid, which results in energy credits for the system owner.
The HC-1 system is connected to the residential or commercial property. The electricity is always provided by the charged batteries. If there is no solar to charge the batteries, the system keeps the batteries fully charged by using hydrogen stored in the tank, which processed through a fuel cell, creates the electricity. As the system is able to produce hydrogen, that keeps the hydrogen tank full, it provides a continuous supply of clean energy and sustainability that is independent from the grid.
Each HC-1 system is custom designed to accommodate the electrical loads for an end user. The system is completely scalable. Typically, one HC-1 standard system configurationvarious ancillary components can provide 40 kWh per day, which is a sufficient amount of electricity to satisfy the daily demand of a majority of homes in the United States. If the customer is connected to the utility grid, excess energy production is transferred to the utility company, creating energy credits.
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We are an integrator of technology, so we do not manufacture any of the components of our HC-1 system. All components arebe purchased from various suppliers. We do not have any formal relationships with any suppliers as allpre-built packages. They will be assembled at our sites with the assistance of the components are readily available off-the-shelf from a number of various suppliers. As such, when we need to obtain components, we are able to source such components at that time and atsuppliers, but will not require in-house technical knowledge for the best available price.assembly.
Each project is customized to meet the particular needs of the client. Various factors, including the size of the residence or commercial property, the amount of electricity needed to be generated and the amount of solar availability, all impact the price charged on a project.
All project work is performed to specifications that meet local utility requirements as well as domestic and international building codes. Once the system is operational, we remotely receive data to monitor its performance and energy efficiency to confirm the system is functioning as expected. We will also provide any additional maintenance required at standard labor rates. Each of the components has a manufacturer’s warranty that is at least one year in duration. If components need to be replaced after the one year workmanship warranty, we will secure replacement components, under warranty if possible, and we will install at our standard labor rates.
Growth Strategy
We intend to aggressively grow our business, both organicallythrough investments and throughacquisition of strategic acquisitions. We intendtarget sites. Investment opportunities and target sites will be strategically positioned for power supply, storage, transportation, and fueling infrastructure in geographic regions that have customer and government support for hydrogen markets. Target customers will be industrial users, fleet operators, and various industries looking to continuereplace and/or offset their current carbon-based energy consumption. Delivery and logistics will be unique to acquire companies with licensed contractors in various stateseach site, but may involve pipeline, rail, and regions, which will allow us to expand the territories in which we can build our systems. These acquired companies will also provide us with a consistent revenue stream, a customer base for marketing our HC-1 systems and technicians that can be trained to design and install our systems.truck supplies.
Pride Subsidiary
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On January 31, 2017, we entered into a share exchange agreement (the “Exchange Agreement”) with The Pride Group (QLD) Pty Ltd., an Australian corporation (“Pride”), Turquino Equity LLC (“Turquino”) and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (together with Turquino, the “Pride Shareholders”). Pursuant to the Exchange Agreement, we acquired all of the issued and outstanding capital stock of Pride from the Pride Shareholders in exchange for an aggregate of 3,800,000 shares of our common stock. Andrew Hidalgo and Matthew Hidalgo, our Chief Executive Officer and Chief Financial Officer, respectively, are each a managing partner of Turquino.
Pride sells, designs, installs and maintains a variety of technology products in the security systems market, including commercial alarm systems, access control and video surveillance. Pride also provides annual maintenance contracts. The division generates approximately half of its revenue from government contracts and the other half from the commercial sector. Pride has recurring annual maintenance revenue of close to AUD $2 million. Pride is a certified security systems integrator for the Queensland Government and has various government contracts in place for installation, maintenance and project services. Pride also works with a number of general contractors as a subcontractor for security systems integration.
Pride has a renewable energy division that designs, installs and maintains a variety of technology services in the clean energy market, including audits of energy consumption, review of energy and tax credits available, feasibility studies, solar/battery energy system design, zoning and permitting analysis, site design/preparation and restoration, system startup, testing and commissioning and maintenance. The division has a significant bid list and has begun to generate limited revenue for renewable energy systems focusing on the residential, commercial and government sectors.
PVBJ Subsidiary
On February 1, 2018, we acquired PVBJ of Downingtown, Pennsylvania for 444,445 shares of our common stock and $221,800 in cash, to be paid out over time from positive earnings of PVBJ. Established in 2008 and historically profitable, PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. PVBJ is now expanding into renewable energy systems.
Competition
Given the increasing focus on renewable energy, and hydrogen specifically, to offset the environmental problems caused by fossil fuels, the renewable energy industry is highly competitive, and rapidly evolving. Our major competitors include leading global companies, and other regional and local energy providers.
In the markets where we plan to conduct business, we will compete with many energy producers including electric utilities and large independent power producers. There is also competition from fossil fuel sources such as natural gas and coal, and other renewable energy sources such as solar and wind. The competition depends on the resources available within the specific markets. However, we believe that our system allowstarget approach will allow us to compete favorably with traditional utilities and other renewable energy systems in the regions we service.
Although the cost to produce clean, reliable, renewable energy is becoming more competitive with traditional fossil fuel sources, it generally remains more expensive to produce, and the reliability of its supply is less consistent than traditional fossil fuel. Deregulation and consumer preference are becoming important factors in increasing the development of renewable energy projects.
However, as a company with only a short operating history, substantially all of our competitors have advantages over us in terms of greater operational, financial, technical, management or other resources in particular markets or in general. While hydrogen energy has certain advantages when compared to other power generating technologies, it is one of the newer and less established methods of renewable energy and therefore currently has less market acceptance.
Governmental RegulationGovernment Regulations; Regulatory Matters
Given the industrial nature of our planned operations, water access restrictions, and high level of electricity needs, we expect to operate in an area that is highly regulated by local and possibly national government bodies. We areanticipate that our operations at will be subject to lawsoversight and regulations affecting our operations in a number of areas. These U.S. and foreign laws and regulations affectregulation at the Company’s activities which include, but are not limited to, the areas of zoning, permitting, labor, advertising, consumer protection, real estate, billing, quality of services, intellectual property and ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, and health and safety. In the U.S., our operations are subject to stringent and complex federal, state and local lawslevel in accordance with statutes and regulations governing the occupational healthordinances relating to, among others, building codes, fire codes, public safety, electrical and safetygas pipeline connections and hydrogen siting. The level of our employees and wage regulations. For example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee health and safety. We expend resources to maintain compliance with OSHA requirements and industry best practices.regulation may depend, in part, upon where a system is located.
Regulatory Matters
If a customer wishesOther than these requirements, at this time we do not know what additional requirements, if any, each jurisdiction will impose on our operations. We also do not know the extent to connectwhich any new regulations may impact our systemability to the electrical grid in orderdistribute, install and service our products. The federal, state, local or foreign government entities may seek to generate energy credits, the customer needsimpose regulations or competitors may seek to obtain interconnection agreements from the applicable local primary electricity utility. Prior to an installation of the HC-1 system, on behalf of the customer, we will submit an interconnection application with the local public utility company to become a certified renewable energy generator. Approval of the application is based on a balance of historical consumption and the amount of renewable energy to be produced. In almost all cases, interconnection agreements are standard form agreements that have been pre-approved by the local public utility commission or other regulatory body with jurisdiction over interconnection. As such, no additional regulatory approvals are required once interconnection agreements are signed. In our experience, there has not been any cost involved in obtaining an interconnection agreement, but as the requirements are determined on a local basis, it may be possible that some nominal costs are involved in connection with the process.influence regulations through lobbying efforts.
Government Incentives
We intend to focus on states or countrieson regions whose government supports a regulatory standard requiring its utility companies to increase theirthat promotes hydrogen production of energy from renewable energy sources.and consumption. These governments have established various incentives and financial mechanisms to accelerate and promote the use of hydrogen as renewable energy sources. IfThese incentives may take the customer obtains an interconnection agreement from the applicable local primary electricity utility, once the HC-1 systemform of support for infrastructure and hydrogen transportation versus monetary incentives. For example, in June 2020, as part of its economic COVID-19 stimulus package, Germany announced €9.0 billion of funding earmarked for expansion of hydrogen production. Funding is operational, the HC-1 system end user can eliminate their electric billstill to be determined, but specific areas could include, infrastructure conversions and if in a permissible state, can begin generating energy credits.new pipeline development.
Employees
As of July 18, 2019,October 13, 2020, we had 46 full timetwo full-time employees, of which 28 worked for Pride, 13 for PVBJ, and five for corporate.are our executive officers. We plan to hire employees on an as-needed basis. None of our employees are represented by a labor union, and we believe that our relations with our employees are good.
We maintain our principal office at 3010 LBJ Freeway, Suite 1200, Dallas, TX 75234.95 Christopher Columbus Drive, 16th Floor, Jersey City, NJ 07302. Our telephone number at that office is (972) 888-6009.(551) 298-3600. Our office is in a shared office space provider, for which we entered into a one-yearsix month lease in January 2019October 2020 at a cost of $120$99 per month. Our Pride main office is located at 1/36 Kerryl Street Kunda Park, Queensland Australia at a cost of $2,640 and our PVBJ office located at 141 Robbins Road Suite 100 Downingtown, PA United States at a cost of $1,390 a month.
We believe that our existing facilities are suitable and adequate to meet our current business requirements. We maintain various websites and the information contained on those websites is not deemed to be a part of this prospectus.
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From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
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The names of our executive officers and directors and their age, title, and biography as of July 18, 2019October 13, 2020 are set forth below:
| Name | Age | Position Held with our Company | Date First Elected or Appointed | |||
| Andrew Hidalgo | Chief Executive Officer, President, Chairman of the Board and Director | August 17, 2015 | ||||
| Matthew Hidalgo | Chief Financial Officer, Treasurer and Secretary | August 17, 2015 | ||||
| Director | ||||||
Business Experience
The following is a brief account of the education and business experience of each director and executive officer of our Company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Andrew Hidalgo – Chief Executive Officer, President, Chairman of the Board and Director.
AndyAndrew Hidalgo is responsible for strategic direction, business development and investor relations. AndyMr. Hidalgo has over 25 years of experience in business planning, operations, mergers, acquisitions, financing, corporate governance and SEC compliance. AndyMr. Hidalgo has been a Managing Partner at Turquino Equity LLC (“Turquino”Turquino”) since its formation in August 2013. Turquino is a global investment firm that focuses on private equity investments, mergers and acquisitions. Andy founded WPCS International Incorporated (“WPCS”WPCS”), a NASDAQ-listed, design-build engineering services company, and served as Chairman, CEO and President between November 2001 and July 2013. WPCS raised over $40 million of equity financing and acquired 19 companies on three continents during Andy’s tenure. Andy also has prior experience included operational and business development roles with 3M, Schlumberger and General Electric, where he was also a member of the corporate business development committee. Andy’s significant executive leadership experience was instrumental in his selection as a member of the board of directors.Board.
Matthew Hidalgo – Chief Financial Officer, Treasurer and Secretary.
MattMatthew Hidalgo is responsible for financial management and operations. MattMr. Hidalgo has over 10 years of experience in finance, accounting, operations, restructuring and the integration of acquisitions. MattMr. Hidalgo has been a Managing Partner at Turquino since its formation in August 2013. Between February 2010 and December 2013, he was the controller and operations manager for WPCS International – Trenton, Inc., WPCS’ largest subsidiary, managing over $30 million in annual revenue. Between February 2008 and February 2010, Matt managed accounting functions for several Australian subsidiaries of WPCS. After graduating Pennsylvania State University with a B.S. in Accounting, he began his career as an accountant for PriceWaterhouse CoopersPriceWaterhouseCoopers LLP, where he focused on preparing financial statements and partnership allocations for hedge funds and private equity firms.
Mike StrizkiJudd Brammah – Chief Technology Officer.Director
Mike is responsible for research and development. Developer of the concept, Mike converted his own home to run on solar-hydrogen power in 2006. This included a hydrogen vehicle fueling station. The home serves as the flagship prototype for his accomplishments. Mike founded Renewable Energy Holdings LLC, or REH, a project management firm, in July 2008 and remains its sole managing member. Mike has served as the executive director of the Hydrogen House Project, a non-profit organization focused on the development of an affordable solar hydrogen energy system for residential and commercial properties, since Mike founded it in 2003. Between 1983 and 1999, Mike worked for the New Jersey Department of Transportation, where he developed two fuel cell vehicles for the state. Previously, he has assisted in the development of the Peugeot Fuel Cell Fire Engine and the Duffy Fuel Cell Electric Boat. Mike has obtained several patents for his prior work, which patents do not relate to our operations.
James Strizki – Executive Vice President of Technical Services
James is responsible for outlining the project scope, generating quotes, project management, site permits and system implementation. He manages our technical resources in assuring a high quality and efficient installation that meets the customer’s expectations. After graduating Rutgers University in 2006 with a degree in Civil Engineering, James worked for the New Jersey Department of Transportation between July 2006 and OctoberSince 2011, as a project engineer focused on the structural evaluation of transportation infrastructure. Since October 2011, JamesJudd Brammah has been the vice presidentChief Executive Officer of operations of REH, where his responsibilities encompassed CADD design, solar array layoutsSynergy Medical Technologies, Ltd, a United Kingdom based company that focuses on orthopedic medical devices and vendor management. Jamestechnologies used by healthcare professionals. Mr. Brammah, holds a ProfessionalBachelor of Science Degree with Honors in Engineering License and a Home Inspection License. James’ significantProduct Design from London South Bank University, UK. Judd’s executive leadership experience with our HC-1 system was instrumental in his selection as a member of the board of directors.Board.
Paul V. Benis, Jr. – Executive Vice President
With over 20 years of experience in the design and implementation of environmental systems, Mr. Benis is responsible for the management of designated subsidiaries. He has served as President of PVBJ Inc. since founding it in July 2008, which is an environmental systems integrator. Prior to establishing PVBJ, Mr. Benis held operation and management positions with Mauger & Company and Reedy Industries, where his focus covered project management, service operations and business development. Mr. Benis received his certification in environmental systems from Technical Careers Institute, Windsor, Connecticut.
Michael A. Doyle – Director
For over 25 years, Mr. Doyle was a key executive for Comcast Corporation where he was the President of the largest division of the multi-billion dollar Comcast Cable group representing over 18,000 employees. Mr. Doyle has been recognized by the National Cable Television Association with induction into its prestigious Cable Pioneers organization. He has also served as chairman of the management board for New England Cable News. Mr. Doyle has received the Distinguished Communications Award for Excellence in Journalism from the International Association of Business Communicators. Mr. Doyle received his B.A. from Drew University where he is also a member of their Athletic Hall of Fame.
Charles F. Benton – Director
Mr. Benton has over 30 years of experience in finance, operations and business development with major corporations. Formerly, he directed the distribution services and supply chain for Ascena Retail Group, Inc. which is a leading national specialty retailer of women’s apparel operating over 1,800 retail stores in the United States. Mr. Benton also worked 20 years for Consolidated Rail Corporation (CONRAIL) where he was responsible for finance, operations and business development. Between July 2012 and January 2018, Mr. Benton served as a director of, and chaired the audit committee of, DropCar, Inc. (formerly, WPCS International Incorporated), and served as the chairman of the Board between August 2015 and January 2018. Mr. Benton is a graduate of St. Joseph’s University with a B.S. degree in Accounting.
Family Relationships
Matthew Hidalgo, our Chief Financial Officer, is the son of Andrew Hidalgo, and James Strizki is the son of Mike Strizki.our Chief Executive Officer.
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Board Independence and Committees
We are not required to have any independent members of the Board of Directors.Board. The board of directorsBoard has determined that (i)each of Andrew Hidalgo and Judd Brammah has a relationship with the companyCompany which, in the opinion of the board of directors,Board, would not allow him to be considered as an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market.
As of the date of this annual report,prospectus, we do not have any active Board committees and the Board as a whole carries out the functions of audit, nominating and compensation committees. We expect our Board, of Directors, in the future, to appoint an audit committee, nominating committee and compensation committee, and to adopt charters relative to each such committee. We intend to appoint such persons to committees of the Board of Directors as are expected to be required to meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply with such requirements until we elect to seek a listing on a national securities exchange. In addition, we intend that a majority of our directors will be independent directors, of which at least one director will qualify as an “audit committee financial expert,” within the meaning of Item 407(d)(5) of Regulation S-K, as promulgated by the SEC. We do not currently have an “audit committee financial expert” since we currently do not have an audit committee in place.
The Board does not have a policy on whether the roles of Chief Executive Officer and Chairman of the Board should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee. The Board believes that we and our stockholders benefit when the Board is free to determine the most appropriate leadership structure in light of the experience, skills and availability of directors and the Chief Executive Officer as well as other circumstances. The Board is also responsible for oversight of our risk management practices, while management is responsible for the day-to-day risk management processes.
The Board has not formally established any criteria for Board membership. Candidates for director nominees are reviewed in the context of the current composition of the Board, our operating requirements, and the long-term interests of our stockholders. In conducting this assessment, the Board considers skills, knowledge, diversity, experience, and such other factors as it deems appropriate given the current needs of the Board and us, to maintain a balance of knowledge, experience and capability.
Except as may be provided in our bylaws, we do not currently have specified procedures in place pursuant to which whereby security holders may recommend nominees to the Board. The names of all of our directors are available in this Information Statement. Given the infrequency of stockholder communications to the Board, and given that the majority of Directors.the Common Stock is held by our directors, the Board does not believe a formal process is necessary. The Board will consider, from time to time, whether adoption of a formal process for such stockholder communications has become necessary or appropriate. Director nominations and other communications may be submitted by a stockholder by sending such communications to any member of Board c/o Vision Hydrogen Corporation at 95 Christopher Columbus Drive, 16th Floor, Jersey City, NJ 07302, marked to the attention of an individual director’s name or to the Chairman of the Board.
The Board reviews the qualities of the Board members as a group, including the diversity of the Board’s career experiences, viewpoints, company affiliations, expertise with respect to the various facets of our business operations and business experiences. The Board has not adopted a formal policy and did not employ any particular benchmarks with respect to these qualities, but was mindful of achieving an appropriate balance of these qualities with respect to the Board as a whole. Moreover, the Board considered each nominee’s overall service to us during the previous term, each nominee’s personal integrity and willingness to apply sound and independent business judgment with respect to our matters, as well as the individual experience of each director noted within their biographies above.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. A copy of the Code of Business Conduct and Ethics is incorporated by reference as an exhibit.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in any of the following events during the past ten years:
| 1. | any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; | |
| 4. | being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| 5. | being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| 6. | being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Executive Officer Compensation
No cash compensation was paid to any executive officer since inception through December 31, 2017. The Board started paying a cash salary to one executive officer in 2018. In addition, equity compensation may be granted to executive officers pursuant to the 2017 Plan, at the discretion of the Board.
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and one other highest paid individual whose total annual salary and bonus exceeded $100,000 for fiscal years 20182019 and 2017.2018.
| Name & Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Other ($) | Total ($) | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Other ($) | Total ($) | |||||||||||||||||||||||||||||||||||||||||
| Andrew Hidalgo | 2018 | - | - | - | - | 78,000 | (1) | 78,000 | 2019 | - | - | - | - | 80,500 | 80,500 | ||||||||||||||||||||||||||||||||||||||||
| Chief Executive Officer | 2017 | - | - | - | - | 184,000 | (1) | 184,000 | 2018 | - | - | - | - | 78,000 | 78,000 | ||||||||||||||||||||||||||||||||||||||||
| Matthew Hidalgo | 2018 | 150,000 | - | - | - | 150,000 | 150,000 | 2019 | 150,000 | - | - | - | - | 150,000 | |||||||||||||||||||||||||||||||||||||||||
| Chief Financial Officer | 2017 | - | - | - | - | 184,000 | (1) | 184,000 | 2018 | 150,000 | - | - | - | - | 150,000 | ||||||||||||||||||||||||||||||||||||||||
| (1) | Represents management fees paid to Turquino Equity LLC, of which Messrs. Hidalgo are managing partners. |
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
None.
Option/SAR Grants in Fiscal Year Ended December 31, 20182019
None.
Equity Compensation Information
The following table summarizes information about our equity compensation plans as of December 31, 2019.
| Plan Category | Number of Shares of Common Stock to be Issued upon Exercise of Outstanding Options (a) | Weighted-Average Exercise Price of Outstanding Options | Number of Options Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by stockholders | 34,925 | (1) | 8.60 | 62,750 | ||||||||
| Equity compensation plans not approved by stockholders | — | — | — | |||||||||
| Total | 34,925 | (1) | 8.60 | 62,750 | ||||||||
| (1) | Subsequent to December 31, 2019, all outstanding options were forfeited or canceled, as there are currently no outstanding options. |
Outstanding Equity Awards at Fiscal Year-End Table
The following table sets forth information for the named executive officers regarding the number of shares subject to both exercisable and unexercisable stock options, as well as the exercise prices and expiration dates thereof, as of December 31, 2018.2019.
| Name | Number of Securities underlying Unexercised Options (#) Exercisable (1) | Number of Securities underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($/Sh) | Option Expiration Date | ||||||||||
| Andrew Hidalgo | - | 200,000 | $ | 0.01 | 3/10/2026 | |||||||||
| Matthew Hidalgo | - | 200,000 | $ | 0.01 | 3/10/2026 | |||||||||
| James Strizki | - | 100,000 | $ | 0.01 | 3/10/2026 | |||||||||
Equity Compensation Information
| Name | Number of Securities underlying Unexercised Options (#) Exercisable (1) | Number of Securities underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($/Sh) | Option Expiration Date | ||||||||||
| Andrew Hidalgo | 5,000 | 5,000 | $ | 0.20 | 3/10/2026 | |||||||||
| Matthew Hidalgo | 5,000 | 5,000 | $ | 0.20 | 3/10/2026 | |||||||||
| James Strizki (former Executive Vice President of Technical Services) | 5,000 | 5,000 | $ | 0.20 | 3/10/2026 | |||||||||
The following table summarizes information about our equity compensation plans as of December 31, 2018.
| Plan Category | Number of Shares of Common Stock to be Issued upon Exercise of Outstanding Options (a) | Weighted-Average Exercise Price of Outstanding Options | Number of Options Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a) | |||||||||
| Equity compensation plans approved by stockholders | 955,000 | 0.29 | 1,545,000 | |||||||||
| Equity compensation plans not approved by stockholders | — | — | — | |||||||||
| Total | 955,000 | 0.29 | 1,545,000 | |||||||||
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
On September 1, 2017, we entered into employment agreements (the “Agreements”) with Andrew Hidalgo to serve as our President and Chief Executive Officer and Matthew Hidalgo to serve as our Chief Financial Officer. The Agreements are effective as of the date that Messrs. Hidalgo and Hidalgo, either directly or indirectly (including through Turquino Equity LLC and any other entity affiliated with Messrs. Hidalgo and Hidalgo) are no longer entitled to receive compensation from The Pride Group (Qld) Pty Ltd., a wholly-owned subsidiary, or any other subsidiary, direct or indirect, of our company. Effective January 2018, Mr. Matthew Hidalgo started to receive salary, while Mr. Andrew Hidalgo continues to receive compensation through Turquino Equity LLC.
The Agreements have a term of five years. Upon each one year anniversary, the Agreements will automatically renew for another five years from the anniversary date. The base salary under the Agreements is $156,000 and $150,000 per annum for Andrew Hidalgo and Matthew Hidalgo, respectively, however Andrew Hidalgo was only paid $78,000 in management disbursements through Turquino Equity. In addition, Messrs. Hidalgo and Hidalgo are entitled to participate in any and all benefit plans, from time to time, in effect for our employees, along with vacation, sick and holiday pay in accordance with our policies established and in effect from time to time.
Director Compensation
There was no compensation paidIn September 2019, 1,250 options were granted to non-employeeeach of our then independent directors, Michael Doyle and Charles Benton, with such options vesting a year from issuance, having an exercise price of $15.00, and exercisable for five years from the year endeddate of issuance. Subsequent to December 31, 2018.2019, all outstanding options were forfeited or canceled, and there are currently no outstanding options.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as disclosed below, during the last two fiscal years, there have been no transactions, or proposed transactions, in which our company was or is to be a participant where the amount involved exceeds the lesser of $120,000 or one percent of the average of our company’s total assets at year-end and in which any director, executive officer or beneficial holder of more than 5% of the outstanding common,Common Stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties.
In June 2016, we entered into a contract with Rezaul Karim, one of our former directors, for the installation of an HC-1 system. The system installation was complete, pending any change orders, as of December 31, 2018 and generated $31,789 and $85,919 of revenue for the yearsyear ended December 31, 2018 and 2017, respectively.2018. We subcontracted the installation of the system to Renewable Energy Holdings LLC (“REH”), a company owned by Mike Strizki, one of our former executive officers. James Strizki, one of our former executive officers, is vice president of operations at REH. Costs incurred for REH were $31,617 and $87,649 for the yearsyear ended December 31, 2018 and 2017, respectively.
In September 2018, we entered into a contract with Steve Mullane, the Executive General Manager of Pride, for a solar installation. The system installation was complete as of December 31, 2018 and generated $8,759 of revenue in 2018 along with costs of $8,759.2018.
On January 31, 2017, we entered into a share exchange agreement (the “Exchange Agreement”) by and among us, Pride, Turquino Equity LLC (“Turquino”) and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (the “Mullane Trust” and together with Turquino, the “Pride Shareholders”). Andrew Hidalgo and Matthew Hidalgo, our Chief Executive Officer and Chief Financial Officer, respectively, are each a managing partner of Turquino. During 2017, Turquino had an arrangement with Pride for a monthly management fee of AUD $20,000. Effective January 2018, Turquino amended its arrangement with Pride to now pay the management fee directly to the Companyus, from which the Company payswe pay Turquino $6,500 USD per month (from which Mr. Andrew Hidalgo continues to receive compensation), and Mr. Matthew Hidalgo started to receive salary directly from us. The obligation to pay Turquino was terminated in connection with the sale of Pride to Turquino in May 2020.
In September 2018, we entered into a contract with Steve Mullane, the Executive General Manager of Pride, for a solar installation. The system installation was complete as of December 31, 2018 and generated $8,759 of revenue in 2018 along with costs of $8,333.
On January 2, 2018, we entered into a securities purchase agreement with two Andrew Hidalgo, our current Chief Executive Officer and Michael Doyle, then a director of our company (collectively referred to herein as the “Holders”) pursuant to which we sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“2018 Debentures”). On February 8, 2019 and January 3, 2020, respectively, we and the Holders of the 2018 Debentures entered into amendments to the 2018 Debentures to the extend the maturity date of the 2018 Debentures. The 2018 Debentures, together with any accrued and unpaid interest, currently become due and payable on February 8, 2021. Interest on the 2018 Debentures previously accrued at a rate of 12% per annum from January 2, 2018 through February 8, 2019, and currently accrues at a rate of 10% per annum. The 2018 Debentures were convertible into our common stock at a conversion price of $10.00 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of our common stock. Pursuant to the Exchange Agreement, we acquired allJanuary 3, 2020 amendment, which was effective as of January 2, 2020, the Holders of the issued and outstanding capital stock2018 Debentures waived any defaults that might have occurred prior to January 3, 2020. The obligation to pay the 2018 Debentures was assumed by Turquino Equity in connection with the sale of Pride fromto Turquino in May 2020.
On February 8, 2019, we entered into a securities purchase agreement with the Pride Shareholders in exchange forHolders, pursuant to which we sold an aggregate principal amount of 3,800,000 shares$150,000 in 10% Convertible Debentures (“2019 Debentures”). The 2019 Debentures, together with any accrued and unpaid interest, is due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and through the 2021 Maturity Date. The 2019 Debentures were convertible into our common stock at a conversion price of $10.00 per share at the discretion of the Holder, with special provisions applying to any holder whose conversion would result in the Holder beneficially owning more than 4.99% of our common stock (the “Acquisition Shares”). The obligation to pay the 2019 Debentures was assumed by Turquino received 3,040,000Equity in connection with the sale of Pride to Turquino in May 2020.
On April 21, 2020, we sold our wholly-owned subsidiary PVBJ back to Benis Holdings, from which we previously bought PVBJ, pursuant to the following terms (a) the outstanding $221,800 earn-out liability was used as consideration towards the purchase of PVBJ; (b) Paul Benis agreed to apply the remaining salary due to him by us, as prorated from the closing date to the expiration date of the Acquisition Shares.employment agreement (January 31, 2021), to the purchase of PVBJ by Benis Holdings as additional consideration thereof and (c) as additional consideration for the purchase of PVBJ by Benis Holdings, PVBJ shall continue to be responsible for the line of credit with Thermo Communications Funding, LLC. Paul Benis, the control person of Benis Holdings, was our Executive Vice President at that time, and he resigned in connection with the sale of PVBJ to Benis Holdings.
On April 1, 2017,May 18, 2020, we executed a Purchase and Sale Agreement with and Turquino (the “Purchase and Sale Agreement”) pursuant to which we sold 100% of Pride’s outstanding stock to Turquino in exchange for Turquino’s assumption of the 2018 Debentures and 2019 Debentures (collectively, the “Debentures”). In conjunction therewith, the Holders of the Debentures assigned the Debentures to Turquino, at which time Turquino became responsible for the debt obligations thereunder. We have no further note obligations to the Holders, and it reduced our debt by approximately $600,000, or 65% of our corporate debt obligations.
On June 19, 2020, we entered into a consulting agreementpromissory note (the “Promissory Note”) with Rezaul KarimJudd Brammah, our majority shareholder and one of our directors, for a periodprincipal amount up to $230,332 bearing interest with interest at 6% per annum. The entire principal and interest upon the Promissory Note are due on June 19, 2021. The proceeds from the note was used to pay our accrued expenses.
We have agreed to pay Judd Brammah, our majority shareholder and one of one year. As such his function will beour directors, a fee of $5,000 per quarter to promoteserve on our products and services. In April 2017 and 2018, Rezaul Karim exercised 100,000 options.board of directors.
We have entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our articles of incorporation and bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of our company, arising out of such person’s services as a director or executive officer of ours, any subsidiary of ours or any other company or enterprise to which the person provided services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of our common stock as of July 18, 2019:October 13, 2020:
| ● | by each person who is known by us to beneficially own more than 5% of our common stock; | |
| ● | by each of our officers and directors; and | |
| ● | by all of our officers and directors as a group. |
Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o H/Cell EnergyVision Hydrogen Corporation, 3010 LBJ Freeway, Suite 1200 Dallas, TX 75234.95 Christopher Columbus Drive, 16th Floor, Jersey City, NJ 07302.
| NAME OF OWNER | TITLE OF CLASS | NUMBER OF SHARES OWNED (1) | PERCENTAGE OF COMMON STOCK (2) | |||||||
| Andrew Hidalgo | Common Stock | 4,190,000 | (3) | 50.48 | % | |||||
| Matthew Hidalgo | Common Stock | 3,640,000 | (4) | 46.96 | % | |||||
| Paul Benis | Common Stock | 444,445 | (5) | 5.81 | % | |||||
| James Strizki | Common Stock | 800,000 | (6) | 10.39 | % | |||||
| Mike Strizki | Common Stock | 750,000 | 9.80 | % | ||||||
| Charles Benton | Common Stock | 57,400 | (6) | * | ||||||
| Michael Doyle | Common Stock | 397,636 | (7) | 4.99 | % | |||||
| Officers and Directors as a Group (7 persons) | Common Stock | 6,742,934 | (8) | 75.87 | % | |||||
| Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust | Common Stock | 760,000 | 9.93 | % | ||||||
| Turquino Equity LLC (9) | Common Stock | 3,540,000 | 46.27 | % | ||||||
| Karim Rezaul | Common Stock | 726,316 | 9.49 | % | ||||||
| Benis Holdings LLC (10) | Common Stock | 444,445 | 5.81 | % | ||||||
| NAME OF OWNER | TITLE OF CLASS | NUMBER OF OWNED (1) | PERCENTAGE OF STOCK (2) | |||||||
| Andrew Hidalgo | Common Stock | 0 | 0 | % | ||||||
| Matthew Hidalgo | Common Stock | 0 | 0 | % | ||||||
| Judd Brammah | Common Stock | 213,928 | 53.81 | % | ||||||
| Officers and Directors as a Group (3 persons) | Common Stock | 213,928 | 53.81 | % | ||||||
| James Strizki | Common Stock | 37,500 | 9.43 | % | ||||||
| Mike Strizki | Common Stock | 37,500 | 9.43 | % | ||||||
| Karim Rezaul (3) | Common Stock | 36,316 | (4) | 9.13 | % | |||||
(1) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of July 18, 2019October 13, 2020 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(2) Percentage based upon 7,651,024397,578 shares of common stock issued and outstanding as of July 18, 2019.October 13, 2020.
(3) Includes (i) 550,000 shares of common stock issuable upon conversion of two outstanding convertible debentures, (ii) 100,000 shares of common stock underlying options which are currently exercisable and (iii) 3,540,000 shares of common stock owned by Turquino Equity LLC. Andrew Hidalgo, as a Managing Partner of Turquino Equity, has voting and dispositive power over the shares held by such entity, andThe mailing address for this shareholder is therefore deemed a beneficial owner of such shares.8 Harmony School Road, Flemington, NJ 08822.
(4) Represents (i) 100,000Includes 26,316 shares of common stock underlying options which are currently exercisable and (ii) 3,540,000 shares of common stock owned by Turquino Equity LLC. Matthew Hidalgo, as a Managing Partner of Turquino Equity, has voting and dispositive power over the sharesCommon Stock held by such entity, and is therefore deemed a beneficial ownerReza Enterprises. Rezaul Karim, as Chief Executive Officer of such shares.
(5) Represents shares of common stock owned by Benis Holdings LLC. Paul Benis, as Managing Member of Benis Holdings LLC, has voting and dispositive power over the shares held by such entity, and is therefore deemed a beneficial owner of such shares.
(6) Includes 50,000 shares of common stock underlying options which are currently exercisable or become exercisable within 60 days.
(7) Includes (i) 50,000 shares of common stock underlying options which are currently exercisable or become exercisable within 60 days and (ii) 336,089 shares of common stock issuable upon conversion of two outstanding convertible debentures. The number of shares that may be beneficially owned under the convertible debentures is subject to a 4.99% beneficial ownership limitation provision in the convertible debentures, and as such, the total number of shares issuable upon conversion of the convertible debentures is greater than the number of shares beneficially owned.
(8) Includes (i) 886,089 shares of common stock issuable upon conversion of outstanding convertible debentures, (ii) 350,000 shares of common stock underlying options which are currently exercisable or become exercisable within 60 days, (iii) 3,540,000 shares of common stock owned by Turquino Equity LLC, and (iv) 444,445 shares of common stock owned by Benis Holdings LLC.
(9) Andrew Hidalgo and Matthew Hidalgo, as Managing Partners of Turquino Equity, have voting and dispositive power over the shares held by such entity, and are therefore deemed beneficial owners of such shares.
(10) Paul Benis, as Managing Member of Benis Holdings LLC,Reza Enterprises, has voting and dispositive power over the shares held by such entity, and is therefore deemed a beneficial owner of such shares.
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Common Stock
We are authorized to issue up to 25,000,000100,000,000 shares of our common stock, par value $0.0001 per share. As of July 18, 2019,October 13, 2020, there were 7,651,024397,578 shares of our common stock issued and outstanding. The outstanding shares of our common stock are validly issued, fully paid and nonassessable.
Holders of our common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of our common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of our common stock voting for the election of directors can elect all of the directors. Holders of our common stock representing a majority of the voting power of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our articles of incorporation.
Holders of our common stock are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over our common stock. Our common stock has no pre-emptive, subscription or conversion rights and there are no redemption provisions applicable to our common stock.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock, par value $.0001 per share, none of which are currently outstanding. The shares of preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors. The board of directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Nevada.
Options,
As of July 18, 2019, there are an aggregate of 955,000 options to purchase shares of our common stock issued and outstanding at a weighted-average exercise price of $0.29 per share.
Convertible Securities
As of July 18, 2019, we have an aggregate of $550,000 principal amount of convertible debentures outstanding, which are convertible into shares of common stock at a conversion price of $0.50 per share.
or Warrants
None.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is vStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598, phone number (212) 828-8436.
Listing
Our shares of common stock are quoted on the OTCQB under the symbol “HCCCD”, which will change to “VIHD” effective November 2, 2020.
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INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Nevada Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct was unlawful.
Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined such officer or director did not meet the standards.
We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the NRS would permit indemnification.
The Company also has director and officer indemnification agreements with each of its executive officers and directors that provide, among other things, for the indemnification to the fullest extent permitted or required by Nevada law, provided that such indemnitee shall not be entitled to indemnification in connection with any “claim” (as such term is defined in the agreement) initiated by the indemnitee against the Company or the Company’s directors or officers unless the Company joins or consents to the initiation of such claim, or the purchase and sale of securities by the indemnitee in violation of Section 16(b) of the Exchange Act.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Our Amended and Restated Articles of Incorporation provides a limitation of liability such that no director or officer shall be personally liable to us or any of our stockholders for damages for breach of fiduciary duty as a director or officer, involving any act or omission of any such director or officer, provided there was no intentional misconduct, fraud or a knowing violation of the law, or payment of dividends in violation of NRS Section 78.300.
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TheWe are offering up to 12,500,000 shares of our common stock in this offering. There is no minimum offering amount required as a condition to closing and we may sell significantly fewer shares of common stock in the offering. The offering will terminate on December 31, 2020 (which we may extend to January 31, 2021 in our sole discretion), unless the offering is fully subscribed before that date or we decide to terminate the offering prior to that date.
In determining the offering price of the common stock, we have considered a number of factors including, but not limited to, the current market price of our common stock, trading prices of our common stock over time, the illiquidity and volatility of our common stock, our current financial condition and the prospects for our future cash flows and earnings, and market and economic conditions at the time of the offering. The offering price for the common stock will remain fixed for the duration of the offering. The offering price for the common stock sold in this offering may be less than the market price for our common stock.
This is a self-underwritten offering. This prospectus is part of a registration statement that permits our officers and directors to sell the shares directly the public with no commission or other remuneration payable to him for any shares that are sold by him.
This offering is intended to be made solely by the delivery of this prospectus and the accompanying subscription agreement to prospective investors. We may terminate this offering prior to the expiration date. Our officers and directors will sell the shares and intend to offer them to friends, family members and business acquaintances. In offering the securities on our behalf, our directors and officers will rely on the safe harbor from broker dealer registration set out in Rule 3a4-1 under the Securities Exchange Act of 1934.
Rule 3a4-1 sets forth those conditions under which a person associated with an Issuer may participate in the offering of the Issuer’s securities and not be deemed to be a broker-dealer. Those conditions are as follows:
a. Our officers and directors are not subject to a statutory disqualification, as that term is defined in Section 3(a)(39) of the Act, at the time of their participation; and
b. Our officers and directors will not be compensated in connection with their participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities; and
c. Our officers and directors are not, nor will they be at the time of their participation in the offering, an associated person of a broker-dealer; and
d. Our officers and directors meet the conditions of paragraph (a)(4)(ii) of Rule 3a4-1 of the Exchange Act of 1934, as amended, in that they (A) primarily perform, or intend primarily to perform at the end of the offering, substantial duties for or on behalf of our Company, other than in connection with transactions in securities; and (B) are not a broker or dealer, or been associated person of a broker or dealer, within the preceding twelve months; and (C) have not participated in selling and offering securities for any Issuer more than once every twelve months other than in reliance on Paragraphs (a)(4)(i) and (a)(4)(iii).
Our officers, directors, control persons and affiliates may purchase shares in this offering.
Investors interested in subscribing for the common stock in this offering must complete and deliver to the Company a completed subscription agreement to the address provided in the subscription agreement. Within one business day of receipt of the subscription agreement, the Company will inform the investor that it has accepted the subscription and within three business days of the Company’s notification of this acceptance, the investor should deliver the purchase price in the amount of $0.20 per share of common stock being purchased by wire transfer to the Company in immediately available funds using the wire transfer instructions provided in the subscription agreement. Promptly following the receipt of subscription proceeds from the investor, the Company will deliver to the investor the common stock purchased by such investor. We have not arranged to place the funds from investors in an escrow, trust or similar account. All funds for subscriptions in the offering will be transmitted to the Company’s bank account for immediate use by the Company. As a result, upon execution of the subscription agreement by the subscriber and acceptance by the Company such subscription is irrevocable.
Our obligations to issue and sell the shares of common stock to the purchasers is subject to the conditions set forth in the subscription agreement, which may be waived by us at our discretion. A purchaser’s obligation to purchase the shares of common stock is subject to the conditions set forth in the subscription agreement as well, which may also be waived.
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We estimate the total offering expenses in this offering that will be payable by us will be approximately $69,000, which include legal, accounting and printing costs and various other fees and expenses.
The foregoing does not purport to be a complete statement of the terms and conditions of the subscription agreement. A copy of the form of subscription agreement with investors is included as an exhibit to the Registration Statement of which this prospectus forms a part.
Offer Restrictions Outside the United States
Other than in the United States, no action has been taken by us that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
European Economic Area — Belgium, Germany, Luxembourg and Netherlands
The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.
An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:
| (a) | to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
| (b) | to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements); |
| (c) | to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining our prior consent for any such offer; or |
| (d) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive. |
France
This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D. 744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation. Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.
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Ireland
The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.
Israel
The securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), or ISA, nor have such securities been registered for sale in Israel. The shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is being offeredsubject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.
Italy
The offering of the securities in the Republic of Italy has not been authorized by the Selling Stockholder, GHS. The common stockItalian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, “CONSOB”) pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold or distributed from time to time byin Italy in a public offer within the Selling Stockholder directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents at market prices prevailing at the timemeaning of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which may be changed. The saleArticle 1.1(t) of the common stock offered by this prospectus could be effected in one or moreLegislative Decree No. 58 of the following methods:24 February 1998 (“Decree No. 58”), other than:
| ● | ||
| ● | in other |
Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:
| ● | made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and |
| ● | in | |
| compliance with all relevant Italian securities, tax and exchange controls and any |
In orderAny subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities laws of certain states, if applicable,for any damages suffered by the shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the state or an exemption from the state’s registration or qualification requirement is available and complied with.investors.
GHSPortugal
This document is an “underwriter”not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Section 2(a)(11)Article 109 of the Portuguese Securities Act.Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
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Sweden
GHSThis document has informed usnot been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it intendsor the information contained in it to use an unaffiliated broker-dealerany other person.
Switzerland
The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to effectuate all sales, if any,the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the commonSwiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock that it may purchase from us pursuantexchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the Purchase Agreement. Such salessecurities may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering material relating to the securities have been or will be made at pricesfiled with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and at terms then prevailing or at prices relatedthe offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA). This document is personal to the then current market price. Each such unaffiliated broker-dealer will be an underwriter withinrecipient only and not for general circulation in Switzerland.
United Kingdom
Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of Section 2(a)(11)section 85 of the Securities Act. GHSFinancial Services and Markets Act 2000, as amended (“FSMA”)) has informed us that each such broker-dealer will receive commissions from GHS that will not exceed customary brokerage commissions.
Brokers, dealers, underwritersbeen published or agents participatingis intended to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the distribution ofUnited Kingdom, and the shares as agentssecurities may receive compensationnot be offered or sold in the formUnited Kingdom by means of commissions, discounts, or concessions from the Selling Stockholder and/or purchasers of the common stock for whom the broker-dealers may act as agent. The compensation paid to a particular broker-dealer may be less than or in excess of customary commissions. Neither we nor GHS can presently estimate the amount of compensation thatthis document, any agent will receive.
We know of no existing arrangements between GHSaccompanying letter or any other stockholder, broker, dealer, underwriter or agent relating todocument, except in circumstances which do not require the sale or distributionpublication of the shares offered by this prospectus. At the time a particular offer of shares is made, a prospectus supplement, if required, willpursuant to section 86(1) FSMA. This document should not be distributed, that will set forth the names of any agents, underwriterspublished or dealers and any compensation from the Selling Stockholder, andreproduced, in whole or in part, nor may its contents be disclosed by recipients to any other required information.person in the United Kingdom.
We will payAny invitation or inducement to engage in investment activity (within the expenses incident to the registration, offering, and salemeaning of the shares to GHS. We have agreed to indemnify GHS and certain other persons against certain liabilitiessection 21 of FSMA) received in connection with the offering of shares of common stock offered hereby, including liabilities arising under the Securities Actissue or if such indemnity is unavailable, to contribute amounts required to be paid in respect of such liabilities. GHS has agreed to indemnify us against liabilities under the Securities Act that may arise from certain written information furnished to us by GHS specifically for use in this prospectus or, if such indemnity is unavailable, to contribute amounts required to be paid in respect of such liabilities.
GHS has represented to us that at no time prior to the Purchase Agreement has GHS or its agents, representatives or affiliates engaged in or effected, in any manner whatsoever, directly or indirectly, any short sale (as such term is defined in Rule 200 of Regulation SHO of the Exchange Act) of our common stock or any hedging transaction, which establishes a net short position with respect to our common stock. GHS agreed that during the term of the Purchase Agreement, it, its agents, representatives or affiliates will not enter into or effect, directly or indirectly, any of the foregoing transactions.
We have advised GHS that it is required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes the selling stockholder, any affiliated purchasers, and any broker-dealer or other person who participates in the distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of the securities offered by this prospectus.has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to us.
This offeringIn the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will terminatebe engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on the date that all shares offered by this prospectus have been sold by GHS.
Our common stock is available for quotation on the OTCQB Market under the symbol “HCCC”.document or any of its contents.
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This prospectus relates to the possible resale by the Selling Stockholder, GHS, of shares of our common stock that may be issued to GHS pursuant to the Purchase Agreement. We are filing the registration statement of which this prospectus forms a part pursuant to the provisions of the Registration Rights Agreement, which we entered into with GHS on July 9, 2019 concurrently with our execution of the Purchase Agreement, in which we agreed to provide certain registration rights with respect to sales by GHS of the shares of our common stock that may be issued to GHS under the Purchase Agreement.
GHS, as the Selling Stockholder, may, from time to time, offer and sell pursuant to this prospectus any or all of the shares that we may issue to GHS under the Purchase Agreement. The Selling Stockholder may sell some, all or none of its shares. We do not know how long the Selling Stockholder will hold the shares before selling them, and we currently have no agreements, arrangements or understandings with the Selling Stockholder regarding the sale of any of the shares.
The following table presents information regarding the Selling Stockholder and the shares that it may offer and sell from time to time under this prospectus. The table is prepared based on information supplied to us by the Selling Stockholder, and reflects its holdings as of July 18, 2019. Neither GHS nor any of its affiliates has held a position or office, or had any other material relationship, with us or any of our predecessors or affiliates. Beneficial ownership is determined in accordance with Section 13(d) of the Exchange Act and Rule 13d-3 thereunder. The percentage of shares beneficially owned prior to the offering is based on 7,651,024 shares of our common stock actually outstanding as of July 18, 2019.
| Selling Stockholder | Shares Beneficially Owned Before this Offering | Percentage of Outstanding Shares Beneficially Owned Before this Offering | Shares to be Sold in this Offering | Percentage of Outstanding Shares Beneficially Owned After this Offering | ||||||||||||
| GHS Investments LLC (1) | 30,000 | (2) | * | (3) | 700,000 | (4) | * | (5) | ||||||||
* Represents less than 1%
Sichenzia Ross Ference LLP, New York, New York will issue an opinion with respect to the validity of the shares of common stock being offered hereby. Sichenzia Ross Ference LLP is the beneficial owner of 10,000500 shares of our common stock.
The financial statements of our company included in this Prospectus and in the registration statement have been audited by Rosenberg Rich Baker Berman, P.A. independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance on such report, given the authority of said firm as an expert in auditing and accounting.
We have filed with the SEC a registration statement on Form S-1, together with any amendments and related exhibits, under the Securities Act with respect to our shares of common stock offered by this Prospectus. The registration statement contains additional information about us and the shares of common stock that we are offering in this Prospectus.
We file annual, quarterly and current reports and other information with the SEC under the Exchange Act. Such reports and other information filed by the Company with the SEC are available free of charge on the SEC’s website. You may also request a copy of those filings, excluding exhibits, from us at no cost. These requests should be addressed to us at: Investor Relations, H/Cell EnergyVision Hydrogen Corporation, 3010 LBJ Freeway, Suite 1200, Dallas, TX 75234.95 Christopher Columbus Drive, 16th Floor, Jersey City, NJ 07302. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC atwww.sec.gov. The contents of these websites are not incorporated into this filing by reference. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
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VISION HYDROGEN CORPORATION
(formerly, H/CELL ENERGY CORPORATIONCORPORATION)
INDEX TO FINANCIAL STATEMENTS
For the Year Ended December 31, 20182019
For the Quarter Ended March 31, 2019June 30, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of H/Cell Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of H/Cell Energy Corporation (the Company) as of December 31, 20182019, and 2017,2018, and the related consolidated statements of operations – other- comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018,2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its consolidated operations and its cash flows for each of the years in the two-year period ended December 31, 2018,2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Rosenberg Rich Baker Berman, P.A.
We have served as the Company’s auditor since 2015.
Somerset, New Jersey
March 25, 2020, except for the changes in presentation and disclosure of the subsequent discontinued operations of PVBJ and The Pride Group, the impact of the reverse stock split and the name change of the Company as noted in Note 22, as to which the date is October 14, 2020.
| December 31, 2018 | December 31, 2017 | December 31, 2019 | December 31, 2018 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 359,134 | $ | 455,700 | $ | 25,059 | $ | 20,128 | ||||||||
| Accounts receivable (net retention) | 1,087,381 | 808,050 | ||||||||||||||
| Prepaid expenses | 16,282 | 14,669 | 4,079 | 11,829 | ||||||||||||
| Costs and earnings in excess of billings | 45,478 | 51,531 | ||||||||||||||
| Current assets held for sale | 1,093,444 | 1,476,318 | ||||||||||||||
| Total current assets | 1,508,275 | 1,329,950 | 1,122,582 | 1,508,275 | ||||||||||||
| Property and equipment, net | 476,436 | 102,573 | ||||||||||||||
| Non-current assets | ||||||||||||||||
| Security deposits and other non-current assets | 32,530 | 8,416 | 600 | 1,200 | ||||||||||||
| Deferred tax asset | 50,000 | 44,257 | ||||||||||||||
| Customer lists, net | 83,645 | - | ||||||||||||||
| Goodwill | 1,373,621 | - | ||||||||||||||
| Deferred offering cost | 130,072 | 0 | ||||||||||||||
| Non-current assets held for sale | 2,215,177 | 2,015,032 | ||||||||||||||
| Total non-current assets | 2,345,849 | 2,016,232 | ||||||||||||||
| Total assets | $ | 3,524,507 | $ | 1,485,196 | $ | 3,468,431 | $ | 3,524,507 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 891,354 | $ | 631,385 | $ | 157,484 | $ | 17,469 | ||||||||
| Management fees payable – related party | - | 31,257 | ||||||||||||||
| Earn-out payable | 190,736 | - | ||||||||||||||
| Billings in excess of costs and earnings | 195,331 | 87,206 | ||||||||||||||
| Sales and withholding tax payable | 59,857 | 61,239 | 2,552 | 1,996 | ||||||||||||
| Current equipment notes payable | 38,991 | - | ||||||||||||||
| Current capital lease payable | 65,265 | - | ||||||||||||||
| Income tax payable | 48,643 | 98,313 | ||||||||||||||
| Current convertible note payable | 80,500 | - | ||||||||||||||
| Current liabilities held for sale | 1,131,193 | 1,279,976 | ||||||||||||||
| Total current liabilities | 1,490,177 | 909,400 | 1,371,729 | 1,299,441 | ||||||||||||
| Noncurrent liabilities | ||||||||||||||||
| Line of credit | 28,359 | - | ||||||||||||||
| Equipment note payable | 121,038 | - | ||||||||||||||
| Capital leases | 232,876 | - | ||||||||||||||
| Convertible note payable – related party, net of discount | 29,122 | - | ||||||||||||||
| Non-current liabilities held for sale | 1,199,984 | 602,131 | ||||||||||||||
| Total noncurrent liabilities | 411,395 | - | 1,199,984 | 602,131 | ||||||||||||
| Total liabilities | 1,901,572 | 909,400 | 2,571,713 | 1,901,572 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Stockholders’ equity | ||||||||||||||||
| Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding | - | - | - | - | ||||||||||||
| Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,586,024 and 7,041,579 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively | 758 | 704 | ||||||||||||||
| Common stock - $0.0001 par value; 25,000,000 shares authorized; 386,276 and 379,301 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 39 | 38 | ||||||||||||||
| Additional paid-in capital | 2,983,476 | 1,335,656 | 2,970,419 | 2,984,196 | ||||||||||||
| Accumulated deficit | (1,285,764 | ) | (731,754 | ) | (2,073,740 | ) | (1,361,299 | ) | ||||||||
| Accumulated other comprehensive loss | (75,535 | ) | (28,810 | ) | ||||||||||||
| Total stockholders’ equity | 1,622,935 | 575,796 | 896,718 | 1,622,935 | ||||||||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 3,524,507 | $ | 1,485,196 | $ | 3,468,431 | $ | 3,524,507 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
CONSOLIDATED STATEMENT OF OPERATIONS – OTHER COMPREHENSIVE INCOME
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| Revenue | ||||||||||||||||
| Construction income | $ | 7,505,889 | $ | 6,266,967 | ||||||||||||
| Related party | 40,548 | 85,919 | ||||||||||||||
| Sales | $ | - | $ | - | ||||||||||||
| Sales – related party | - | 31,789 | ||||||||||||||
| Total revenue | 7,546,437 | 6,352,886 | - | 31,789 | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Direct costs | 5,492,607 | 4,241,421 | ||||||||||||||
| Direct costs – related party | 40,376 | 87,649 | - | 31,617 | ||||||||||||
| Total cost of goods sold | 5,532,983 | 4,329,070 | - | 31,617 | ||||||||||||
| Gross profit | 2,013,454 | 2,023,816 | - | 172 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | 2,368,860 | 1,776,859 | 447,783 | 487,700 | ||||||||||||
| Management fees – related party | 78,000 | 184,004 | 80,500 | 78,000 | ||||||||||||
| Total operating expenses | 2,446,860 | 1,960,863 | 528,283 | 565,700 | ||||||||||||
| Income (loss) from operations | (433,406 | ) | 62,953 | |||||||||||||
| Loss from operations | (528,283 | ) | (565,528 | ) | ||||||||||||
| Other expenses | ||||||||||||||||
| Interest expense | 26,584 | - | - | - | ||||||||||||
| Interest expense – related party | 79,622 | - | 233,345 | 79,622 | ||||||||||||
| Change in fair value earn-out | 15,418 | - | 18,463 | 15,418 | ||||||||||||
| Gain on fixed asset disposal | (17,277 | ) | - | |||||||||||||
| Total other expenses | 104,347 | - | 251,808 | 95,040 | ||||||||||||
| Income tax provision | 16,257 | 54,056 | ||||||||||||||
| Net loss from continuing operations | $ | (780,091 | ) | $ | (660,568 | ) | ||||||||||
| Net income (loss) before income taxes | $ | (554,010 | ) | $ | 8,897 | |||||||||||
| Net income from discontinued operations | 67,650 | 59,833 | ||||||||||||||
| Other comprehensive income (loss), net | ||||||||||||||||
| Net loss | $ | (712,441 | ) | $ | 600,735 | |||||||||||
| Foreign currency translation adjustment | (46,725 | ) | 21,996 | |||||||||||||
| Comprehensive income (loss) | $ | (600,735 | ) | $ | 30,893 | |||||||||||
| Earnings (loss) per share | ||||||||||||||||
| Loss per share (continuing operations) | ||||||||||||||||
| Basic | $ | (1.86 | ) | $ | (1.74 | ) | ||||||||||
| Diluted | $ | (1.86 | ) | $ | (1.74 | ) | ||||||||||
| Earnings per share (discontinued operations) | ||||||||||||||||
| Basic | $ | (0.07 | ) | $ | 0.00 | $ | 0.18 | $ | 0.16 | |||||||
| Diluted | $ | (0.07 | ) | $ | 0.00 | $ | 0.18 | $ | 0.16 | |||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | 7,586,024 | 6,703,223 | 382,233 | 379,301 | ||||||||||||
| Diluted | 7,586,024 | 7,699,743 | 382,233 | 379,301 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 20182019 AND 2017DECEMBER 30, 2018
| Common Stock | Preferred Stock | Accumulated | ||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Beginning, January 1, 2017 | 3,131,579 | $ | 313 | - | $ | - | 1,283,422 | $ | (740,651 | ) | $ | (50,806 | ) | $ | 492,278 | |||||||||||||||||
| Issuance of common stock | 3,800,000 | 380 | - | - | (380 | ) | - | - | - | |||||||||||||||||||||||
| Common stock issued for services | 10,000 | 1 | - | - | 4 ,999 | - | - | 5,000 | ||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 46,625 | - | - | 46,625 | ||||||||||||||||||||||||
| Proceeds from stock option exercise | 100,000 | 10 | - | - | 990 | - | - | 1,000 | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | 8,897 | 21,996 | 30,893 | ||||||||||||||||||||||||
| Ending, December 31, 2017 | 7,041,579 | $ | 704 | - | $ | - | 1,335,656 | $ | (731,754 | ) | $ | (28,810 | ) | $ | 575,796 | |||||||||||||||||
| Issuance of common stock February 2018, PVBJ Acquisition | 444,445 | 44 | - | - | 1,183,537 | - | - | 1,183,581 | ||||||||||||||||||||||||
| Stock option exercise | 100,000 | 10 | - | - | 990 | - | - | 1,000 | ||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 68,293 | - | - | 68,293 | ||||||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 395,000 | - | - | 395,000 | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | (554,010 | ) | (46,725 | ) | (600,735 | ) | |||||||||||||||||||||
| Ending, December 31, 2018 | 7,586,024 | $ | 758 | - | $ | - | 2,983,476 | $ | (1,285,764 | ) | $ | (75,535 | ) | $ | 1,622,935 | |||||||||||||||||
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||
| Number of Shares | Amount | Number of shares | Amount | Additional Paid-In Capital | Accumulated Income (Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||
| Beginning, January 1, 2018 | 352,079 | $ | 35 | - | $ | - | 1,336,325 | $ | (760,564 | ) | $ | 575,796 | ||||||||||||||||
| Issuance of common stock February 2018, PVBJ Acquisition | 22,222 | 2 | - | - | 1,183,579 | - | 1,183,581 | |||||||||||||||||||||
| Stock option exercise | 5,000 | 1 | - | - | 999 | - | 1,000 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 68,293 | - | 68,293 | |||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 395,000 | - | 395,000 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (600,735 | ) | (600,735 | ) | |||||||||||||||||||
| Ending, December 31, 2018 | 379,301 | $ | 38 | - | $ | - | 2,984,196 | $ | (1,361,299 | ) | $ | 1,622,935 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||
| Number of Shares | Amount | Number of shares | Amount | Additional Paid-In Capital | Accumulated Income (Deficit) | Total Stockholders’ Equity | ||||||||||||||||||||||
| Beginning, January 1, 2019 | 379,301 | $ | 38 | - | $ | - | $ | 2,984,196 | $ | (1,361,299 | ) | $ | 1,622,935 | |||||||||||||||
| Stock-based compensation | - | - | - | - | 23,089 | - | 23,089 | |||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 97,500 | - | 97,500 | |||||||||||||||||||||
| Commitment shares | 1,500 | - | - | - | 45,000 | - | 45,000 | |||||||||||||||||||||
| Equity financing (net proceeds) | 5,475 | 1 | - | - | 37,094 | - | 37,095 | |||||||||||||||||||||
| Debt extinguishment | - | - | - | - | (216,460 | ) | - | (216,460 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (712,441 | ) | (712,441 | ) | |||||||||||||||||||
| Ending, December 31, 2019 | 386,276 | $ | 39 | - | $ | - | $ | 2,970,419 | $ | (2,073,740 | ) | $ | 896,718 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | (554,010 | ) | $ | 8,897 | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 194,105 | 32,585 | ||||||
| Stock-based compensation | 68,293 | 51,625 | ||||||
| Change in deferred tax asset | 5,743 | (44,257 | ) | |||||
| Gain on sale of assets | (17,276 | ) | (77 | ) | ||||
| Change in fair value contingent consideration | 15,418 | - | ||||||
| Bad debt expense | 616 | - | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts and retainage receivable | (219,501 | ) | (157,164 | ) | ||||
| Prepaid expenses and other costs | (2,018 | ) | (420 | ) | ||||
| Costs in excess of billings | 1,067 | 40,373 | ||||||
| Accounts payable and accrued expenses | 28,261 | (5,128 | ) | |||||
| Billings in excess of costs | 114,656 | 3,668 | ||||||
| Net cash used in operating activities | (364,646 | ) | (69,898 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of fixed assets | (46,690 | ) | (36,943 | ) | ||||
| Cash acquired in business acquisition | 30,408 | - | ||||||
| Security deposits | (26,922 | ) | - | |||||
| Proceeds from disposition of property and equipment | 67,959 | 11,969 | ||||||
| Net cash provided by (used in) investing activities | 24,755 | (24,974 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of convertible debt | 395,000 | - | ||||||
| Payments of related party interest | (48,000 | ) | - | |||||
| Repayments on capital leases | (51,048 | ) | - | |||||
| Repayments on notes payable | (47,684 | ) | - | |||||
| Net proceeds from line of credit | 27,175 | - | ||||||
| Proceeds related to stock option exercises | 1,000 | 1,000 | ||||||
| Net cash provided by financing activities | 276,443 | 1,000 | ||||||
| Net decrease in cash and cash equivalents | (63,448 | ) | (93,872 | ) | ||||
| Effect of foreign currency translation on cash | (33,118 | ) | 11,705 | |||||
| Cash and cash equivalents, beginning of period | 455,700 | 537,867 | ||||||
| Cash and cash equivalents, end of period | $ | 359,134 | $ | 455,700 | ||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Common stock issued for acquisition of business | $ | 1,177,779 | - | |||||
| Fair value of net assets acquired in business combination | $ | 2,056,344 | - | |||||
| Beneficial conversion feature | $ | 365,878 | - | |||||
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss from continuing operations | $ | (780,091 | ) | $ | (660,568 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization | 1,583 | 48,500 | ||||||
| Stock based compensation | 23,089 | 68,293 | ||||||
| Change in fair value contingent consideration | 18,463 | 15,418 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Prepaid expenses and other costs | 7,750 | (200 | ) | |||||
| Costs in excess of billings | - | 474 | ||||||
| Accounts payable and accrued expenses | 140,571 | (2,482 | ) | |||||
| Net cash (used in) in operating activities – continuing operations | (575,635 | ) | (530,565 | ) | ||||
| Net cash provided by (used in) operating activities – discontinued operations | (163,439 | ) | 165,919 | |||||
| Net cash used in operating activities | (412,196 | ) | (364,646 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash acquired in business acquisitions | - | 30,408 | ||||||
| Net cash provided by (used in) investing activities – continuing operations | - | 30,048 | ||||||
| Net cash (used in) investing activities – discontinued operations | (6,587 | ) | (5,653 | ) | ||||
| Net cash (used in) investing activities | (6,587 | ) | 24,755 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from stock option exercise | - | 1,000 | ||||||
| Legal fees paid associated with financing | (90,000 | ) | - | |||||
| Proceeds from issuance of convertible debt | 92,500 | - | ||||||
| Proceeds from equity financing | 40,122 | - | ||||||
| Net cash provided by (used in) financing activities – continuing operations | 42,622 | 1,000 | ||||||
| Net cash provided by (used in) financing activities – discontinued operations | 289,363 | (275,443 | ) | |||||
| Net cash provided by (used in) provided by financing activities | 331,985 | 276,443 | ||||||
| Net increase (decrease) in cash and cash equivalents | (86,798 | ) | (63,448 | ) | ||||
| Effect of foreign currency translation on cash | (5,284 | ) | (33,118 | ) | ||||
| Cash and cash equivalents - beginning of period | 359,134 | 455,700 | ||||||
| Cash and cash equivalents - end of period | $ | 277,620 | $ | 359,134 | ||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Common stock issued for acquisition of business | $ | - | $ | 1,177,779 | ||||
| Fair value of net assets acquired in business combination | $ | - | $ | 2,056,344 | ||||
| Beneficial conversion feature | $ | 190,000 | $ | 365,878 | ||||
The accompanying notes are an integral part of these consolidated financial statements
| F-6 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20182019 AND 20172018
| 1. | ORGANIZATION AND LINE OF BUSINESS |
H/Cell Energy Corporation (the “Company”) was incorporated in the state of Nevada on August 17, 2015. The Company, based in Dallas, Texas, is a company whose principal operations consist of designing and installing clean energy systems with a focus on hydrogen energy. Effective January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”) (see Note 11). Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy systems division to focus on the high growth renewable energy market in Asia-Pacific. The new clean energy division has generated some revenue and has begun to bid a number of projects. On February 1, 2018, the Company acquired PVBJ Inc. (“PVBJ”) for 444,44522,223 shares of the Company’s common stock with a fair value of $1,177,779 and $221,800 in earn-out liability (see Note 12).liability. Established in 2008, PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. PVBJ is now expanding into clean energy systems.
The Company has developed a hydrogen energy system for residential and commercial use designed to create electricity. This system uses renewable energy as its source for hydrogen production. It functions as a self-sustaining clean energy system using hydrogen and fuel cell technology. It can be configured as an off grid solution for all electricity needs or it can be connected to the grid to generate energy credits. Its production of electricity is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All inter-company transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Accounts Receivable
Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. Accounts are written off as uncollectible after collection efforts have failed. In addition, the Company does not generally charge interest on past-due accounts or require collateral. At December 31, 20182019 and December 31 2017,2018, there was no allowance for doubtful accounts required.
| F-7 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20182019 AND 20172018
Property and Equipment, and Depreciation
Property and equipment are stated at cost. Depreciation is generally provided using the straight-linestraight line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-linestraight line basis over the shorter of the remaining term of the lease or the estimated useful life of the improvement.
Repairs and maintenance that do not improve or extend the lives of the property and equipment are charged to expense as incurred.
Goodwill and FiniteFinite-Lived Intangible Assets
Goodwill represents the excess of the aggregate of the following (1) consideration transferred, (2) the fair value of any non-controlling interest in the acquiree, and (3) if the business combination is achieved in stages, the acquisition-date fair value of our previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Identifiable intangible assets consist primarily of customer lists and relationships, non-compete agreements and technology based intangibles and other contractual agreements. The Company amortizes finite lived identifiable intangible assets over 5five years, on a straight-line basis to their estimated residual values and periodically reviews them for impairment. Total goodwill and identifiable intangible assets comprised 41% of ourthe Company’s consolidated total assets at each of December 31, 2019 and 2018. There were no intangible assets or goodwill at December 31, 2017.
The Company uses the acquisition method of accounting for all business combinations and does not amortize goodwill. Goodwill is tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, its goodwill is not impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.
The Company performed its annual impairment test for PVBJ. Based on the results of the qualitative testing, the fair value did not exceed the carrying value. The PVBJ reporting unit exceeded acquisition projections in 2018 and expects to meet future projections.
As of December 31, 2018,2019, the Company had recorded goodwill in the amount of $1,373,621 related to the PVBJ acquisition.acquisition included in the non-current assets for sale on the balance sheet. The performance of the Company’s fiscal 20182019 impairment analysis did not result in an impairment of the Company’s goodwill.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss)loss and other comprehensive income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.
adjustments and has been reclassified to discontinued operations at December 31, 2020 and 2019 to show the effect of the disposition of Pride on May 18, 2020.
Advertising Costs
Advertising costs are charged to expense during the period in which they are incurred. Advertising expense for the years ended December 31, 2019 and 2018 was $9,350 and 2017 was $4,426, respectively, and $3,166, respectively.reclassified to discontinued operations at December 31, 2020 and 2019 to show the effect of the disposition of Pride on May 18, 2020.
| F-8 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20182019 AND 20172018
Foreign Currency Translation
The Company translates its foreign subsidiary’s assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in accumulated other comprehensive income. The Company records gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location’s functional currency in net income (loss) for each period. Items included in the financial statements of each entity in the group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”).
The functional and reporting currency of the Company is the United States Dollar (“U.S. Dollar”). The financial records of Pride located in Australia, is maintained in the local currency, the Australian Dollar (AUD$) which is also its functional currency.
For the year ended December 31, 2019, the Company recorded other comprehensive income from a translation gain of $11,952 in the consolidated financial statements. For the year ended December 31, 2018, the Company recorded other comprehensive loss from a translation loss of $46,725 in the consolidated financial statements. For the year endedThe balance of comprehensive loss and accumulated comprehensive loss has been reclassified to discontinued operations at December 31, 2017,2020 and 2019 to show the Company recorded other comprehensive gain from a translation gaineffect of $21,996 in the consolidated financial statements.disposition of Pride on May 18, 2020.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with Customers”Customers (Topic 606)” (“Topic 606”ASU 2014-09”) using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017.2018. Results for reporting periods beginning January 1, 2018 are presented under Topic 606,ASU 2014-09, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
Under ASC Topic 606ASU 2014-09 requirements, the Company recognizes revenue from the installation or construction of projects and service or short term projects over time using the cost-based input method. The Company accounts for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. The Company considers the start of a project to be when the above criteria have been met and the Company either has written authorization from the customer to proceed or an executed contract. A detailed breakdown of the five step process is as follows:
Identify the contractContract with a customer:Customer
The Company receives almost all of its contracts from only two sources, referrals or government bids. In a referral, a client that the companyCompany has an ongoing business relationship refers the companyCompany to perform services. In a government bid, the Company applies to perform services for public projects. The contracts have a pattern of being stand-alone contracts.
Identify the performance obligationsPerformance Obligations in the contract:Contract
The performance obligation of the companyCompany is to perform a contractually agreed upon task for the customer. If the contract is stated to provide only contractual service, then the service is considered the only performance obligation. If the contractual service includes design and or engineering in addition to the contract, it is considered a single performance obligation.
| F-9 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Determine the transaction price:Transaction Price
The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerationconsiderations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:
| 1. | The customer’s written approval of the scope of the change order; |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| 2. | Current contract language that indicates clear and enforceable entitlement relating to the change order; | |
| 3. | Separate documentation for the change order costs that are identifiable and reasonable; or | |
| 4. | The Company’s favorable experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated |
Once the Company receives a contract, a budget of projected costs areis generated for the contract based on the contract price. The Company has a trend of overestimating costs to the project in order to reduce the frequency of change orders required for a project. If the scope of the contract during the contractual period needs to be modified, the companyCompany typically files a change order. The companyCompany does not continue to perform services until the change modification is agreed upon with documentation by both the companyCompany and the client.customer. There are few times that claims, extras, or back charges are included in the contract.
Allocate the transaction priceTransaction Price to the performance obligationsPerformance Obligations in the contract:Contract
If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the company’sCompany’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one client,customer, the companyCompany has a policy of splitting out the services over multiple contracts.
Recognize revenue when (or as) the entity satisfies a performance obligations:obligation:
The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e. design, engineering, procurement of material, etc.) should not be recognized as the client does not have control of the good/service provided. When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract represent contract assets and are reflected as a current asset in the Company’s balance sheet under the captions “Costs and estimated earnings in excess of billings” and “Unbilled accounts receivable.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in the Company’s balance sheet under the caption “Billings in excess of costs and estimated earnings.”
Disaggregated Revenue:
For the year ended December 31, 2018, revenues from contracts with customers summarized by Segment Geography and Revenue Stream were as follows:
| 2018 | 2017 | |||||||
| United States - Service | $ | 2,440,854 | $ | - | ||||
| Australia - Service | 1,941,078 | 1,877,755 | ||||||
| United States - Contract | 40,548 | 85,919 | ||||||
| Australia - Contract | 3,123,957 | 4,389,212 | ||||||
| Total | $ | 7,546,437 | $ | 6,352,886 | ||||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Cash and Cash Equivalents
Cash and cash equivalents includes cash in bank and money market funds as well as other highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents as of December 31, 20182019 or December 31, 2017. At times during the years ended December 31, 2018 and 2017, balances exceeded the FDIC insurance limit of $250,000.2018.
Stock-Based Compensation
The Company recognizes expense for its stock-based compensation based on the fair value of the awards at the time they are granted. We estimateThe Company estimates the value of stock option awards on the date of grant using the Black-Scholes model. The determination of the fair value of stock-based payment awards on the date of grant is affected by ourthe Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include ourthe Company’s expected stock price volatility over the term of the awards, expected term and risk-free interest rate expected dividends and expected forfeiture rates.expected. The forfeiture rate is estimated using historical option cancellation information, adjusted for anticipated changesCompany recognizes forfeitures in expected exercise and employment termination behavior. Ourthe period in which they occur. The Company’s outstanding awards do not contain market or performance conditions.
| F-10 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Sales and Use Tax
The Company collects sales tax in various jurisdictions. Upon collection from customers, it records the amount as a payable to the related jurisdiction. On a periodic basis, it files a sales tax return with the jurisdictions and remits the amount indicated on the return.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes pursuant to FASB ASC 740,Income Taxes(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the financial statements as appropriate. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense.
The Company recognizes and measures its unrecognized tax benefits in accordance with ASC 740. Under that guidance, management assesses the likelihood that tax positions will be sustained upon examination based on the facts, circumstances and information, including the technical merits of those positions, available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change.
The Company did not identify any material uncertain tax positions. The Company did not recognize any interest or penalties for unrecognized tax benefits.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The federal income tax returns of the Company are subject to examination by the IRS, generally for the three years after they are filed. The Company’s 2018, 2017, 2016 and 2015 income tax returns are still open for examination by the taxing authorities.
Fair Value of Financial Instruments
Except for the Company’s earn-out liability, the carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
The table below presents a reconciliation of the fair value of the Company’s contingent earn-out obligations that use significant unobservable inputs (Level 3).
| Balance at December 31, 2017 | $ | - | ||
| Earn-out liability from acquisition of PVBJ Inc. | 175,318 | |||
| Payments | - | |||
| Adjustments to fair value | 15,418 | |||
| Balance at December 31, 2018 | $ | 190,736 |
The Company values earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
Net Income (Loss) Per Common Share
The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of diluted loss per share excludes dilutive securities for the year ended December 31, 2018 because their inclusion would be anti-dilutive. Dilutive securities for the years ended December 31, 2018 and 2017 were as follows:
| December 31, 2018 | December 31, 2017 | |||||||
| Options to purchase common stock | 955,000 | 1,050,000 | ||||||
| Convertible debt | 800,000 | - | ||||||
| Totals | 1,755,000 | 1,050,000 | ||||||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Company’s former office space during the years ended December 31, 2017 and 2018 consisted of approximately 800 square feet, which was donated to it from one of its executive officers. There was no lease agreement and the Company paid no rent.
Effective February 4, 2016, the Company sold 526,316 shares of common stock to Reza Enterprises, Inc., an entity beneficially owned by Rezaul Karim. In connection with, and as a condition of closing, the Company agreed to appoint Rezaul Karim to its board of directors. Rezaul Karim resigned from the board of directors effective April 1, 2017. On April 1, 2017, the Company entered into a consulting agreement with Rezaul Karim for a period of one year to promote our products and services. In April of 2017 and 2018, Rezaul Karim exercised 100,000 options.
In June 2016, the Company entered into a contract with Rezaul Karim, one of its former directors, for the installation of an HC-1 system. The system installation was complete pending any change orders as of December 31, 2018, and generated $31,789 and $85,919 of revenue for the years ended December 31, 2018 and 2017, respectively. The Company subcontracted the installation of the system to Renewable Energy Holdings LLC (“REH”), a company owned by Mike Strizki, one of the Company’s executive officers. James Strizki, one of the Company’s executive officers, is vice president of operations at REH. Costs incurred for REH were $31,617 and $87,649 for the years ended December 31, 2018 and 2017, respectively.
In September 2018, the Company entered into a contract with Steve Mullane, the Executive General Manager of Pride, for a solar installation. The system installation was complete as of December 31, 2018 and generated $8,759 of revenue in 2018 along with costs of $8,759.
The Company has entered into agreements to indemnify its directors and executive officers, in addition to the indemnification provided for in the Company’s articles of incorporation and bylaws. These agreements, among other things, provide for indemnification of the Company’s directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provided services at the Company’s request. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
At December 31, 2018 and December 31, 2017, the balances due to Turquino Equity LLC (Turquino”), a significant shareholder, amounted to $0 and $31,257, respectively. These balances represent expenses for management services. There was $78,000 of management fees expensed for the year ended December 31, 2018 and $184,004 for the year ended December 31, 2017.
On January 2, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“Debentures”), convertible into shares of the Company’s common stock at a conversion price of $0.75 per share. The Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “Maturity Date”). Interest on the Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and through the Maturity Date. The Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. Subsequent to December 31, 2018, the Debentures were amended to reduce the interest rate to 10% and reduce the conversion price to $0.50 (see Note 20). In connection with this convertible note payable, the Company recorded a $395,000 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“Thermo”). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Cash is maintained at an authorized deposit-taking institution (bank) incorporated in both the United States and Australia and is insured by the U.S. Federal Deposit Insurance Corporation and Australian Securities & Investments Commission up to $250,000 and approximately $186,000 USD in total, respectively. At December 31, 2018 and 2017 the balance was fully covered under the $250,000 threshold in the United States. In Australia the balance exceeded the threshold by $133,578 at December 31, 2018 and $265,273 at December 31, 2017.
Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at December 31, 2018, approximately 20% of the Company’s accounts receivable was due from two unrelated customers, each at 10%. At December 31, 2017, approximately 36% of the Company’s accounts receivable was due from three unrelated customers, 14%, 12% and 10%, respectively.
There were three customers with a concentration of 10% or higher of the Company’s revenue, two at 13% and one at 12% for the year ended December 31, 2018, and three customers, at 24% and two at 12%, for the year ended December 31, 2017.
At December 31, 2018 and December 31, 2017, property and equipment were comprised of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Furniture and fixtures (5 to 7 years) | $ | 11,661 | $ | 6,857 | ||||
| Machinery and equipment (5 to 7 years) | 36,969 | 35,919 | ||||||
| Computer and software (3 to 5 years) | 88,021 | 94,761 | ||||||
| Auto and truck (5 to 7 years) | 785,979 | 250,044 | ||||||
| Leasehold improvements (life of lease) | 34,788 | 40,608 | ||||||
| 957,418 | 428,189 | |||||||
| Less accumulated depreciation | 480,982 | 325,616 | ||||||
| $ | 476,436 | $ | 102,573 | |||||
Depreciation expense for the years ended December 31, 2018 and 2017 was $145,606 and $31,985, respectively.
Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at December 31, 2018 and December 31, 2017:
| December 31, 2018 | December 31, 2017 | |||||||
| Costs incurred on uncompleted contracts | $ | 811,173 | $ | 2,485,787 | ||||
| Estimated earnings | 469,109 | 779,598 | ||||||
| Costs and estimated earnings on uncompleted contracts | 1,280,282 | 3,265,385 | ||||||
| Billings to date | 1,265,475 | 3,553,817 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 14,807 | (288,432 | ) | |||||
| Costs and earnings in excess of billings on completed contracts | (164,660 | ) | (252,757 | ) | ||||
| $ | (149,853 | ) | $ | (35,675 | ) | |||
| Costs in excess of billings | $ | 45,478 | $ | 51,531 | ||||
| Billings in excess of cost | (195,331 | ) | (87,206 | ) | ||||
| $ | (149,853 | ) | $ | (35,675 | ) | |||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Company previously entered into two operating leases for office space in Woombye and Brisbane, Queensland, Australia, both which expired in April 2018. The Company signed a new lease in February of 2018 for new office space in Kunda Park Queensland Australia, starting in May 2018 and expiring in May 2021. The Company also renewed the Brisbane office space for one year starting in May 2018. The Company’s office in Downingtown, Pennsylvania was renewed in January of 2018 for a one-year period. The future minimum payments on the leases for each of the next three years and in the aggregate amount to the following:
| 2019 | 54,050 | |||
| 2020 | 39,639 | |||
| 2021 | 13,213 | |||
| $ | 106,902 |
Rent expense for the year ended December 31, 2018 and 2017 was $98,593 and $90,000, respectively and is included in “General and Administrative” expenses on the related statements of operations.
During the year December 31, 2018, the Company had vehicles leased under two capital leases, with a net book value of $324,495, which expire in June 2020 and December 2025. During the year ended December 31, 2017, the Company had no capital leases. The obligations are payable in monthly installments ranging from approximately $503 to $1,578 with interest rates from 3.0% to 5.57% per annum. The leases are secured by the related equipment.
At December 31, 2018, approximate payments to be made on these capital lease obligations are as follows:
| 2019 | $ | 75,342 | ||
| 2020 | 75,342 | |||
| 2021 | 60,734 | |||
| 2022 | 43,703 | |||
| 2023 | 39,531 | |||
| Thereafter | 29,843 | |||
| Capital lease obligation | 324,495 | |||
| Less: amounts representing interest | 26,354 | |||
| Current maturities of capital lease obligations | 65,265 | |||
| Capital lease obligations, non-current | $ | 232,876 |
Long-term debt consisted of the following:
Equipment Notes Payable
| December 31, 2018 | December 31, 2017 | |||||||
| Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020. | $ | 18,707 | $ | - | ||||
| Note payable with monthly payments of $615.25, including interest at 6.80% per annum through August 2021. | $ | 18,383 | - | |||||
| Note payable with monthly payments of $1,294.50, including interest at 14.72 per annum through March 2023. | $ | 50,072 | $ | - | ||||
| Note payable with monthly payments of $1,063.45, including interest at 5.76% per annum through April 2021 | $ | 18,539 | $ | - | ||||
| Note payable with monthly payments of $946.84 including interest at 6.14% per annum through December 2024. | $ | 54,328 | $ | - | ||||
| Total: | $ | 160,029 | $ | - | ||||
| Total current portion: | $ | (38,991 | ) | $ | - | |||
| Total non-current portion: | $ | 121,038 | $ | - | ||||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Aggregate annual principal payments in the fiscal years subsequent to December 31, 2018, are as follows:
| Year ending December 31: | Amount | |||
| 2019 | $ | 49,318 | ||
| 2020 | 46,567 | |||
| 2021 | 29,614 | |||
| 2022 | 22,307 | |||
| 2023 | 25,653 | |||
| Thereafter | 11,362 | |||
| Notes payable obligation | 184,821 | |||
| Less amounts representing interest | (24,792 | ) | ||
| $ | 160,029 | |||
Convertible Note Payable
On January 2, 2018, the Company entered into an agreement with two related parties, who are directors of the Company and issued a 12.0% interest bearing convertible debenture for $400,000 due on January 2, 2020, with conversion features commencing immediately following the date of the note. Payments of interest only were due monthly beginning January 2018. The Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $395,000 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid. The Company incurred $5,000 of legal fees for preparation of the financing documents, which has been reflected as an additional debt discount.
For the year ended December 31, 2018, the Company incurred interest expense of $106,206, of which $29,122 related to the amortization of the discount.
For the year ended December 31, 2017, the Company incurred no interest expense.
At December 31, 2018, the Company had a contract backlog approximating $583,392, with anticipated direct costs to completion approximating $452,884. At December 31, 2017, the Company had a contract backlog approximating $1,091,816, with anticipated direct costs to completion approximating $808,098.
On January 31, 2017, the Company entered into a share exchange agreement (the “Exchange Agreement”) by and among the Company, Pride, Turquino and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (the “Mullane Trust” and together with Turquino, the “Pride Shareholders”). Andrew Hidalgo and Matthew Hidalgo, the Company’s Chief Executive Officer and Chief Financial Officer, respectively, are each a managing partner of Turquino.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of PVBJ from Benis Holdings for an aggregate amount equal to (i) $221,800 (the “Cash Purchase Price”) which will be paid in the form of an earn-out and (ii) 444,445 shares of the Company’s common stock, par value $.0001 per share having a fair value of $1,177,779 (the “Acquisition Shares”). Pursuant to the Purchase Agreement, the Acquisition Shares were issued at closing, and the earn-out will be paid to Benis Holdings from positive earnings before taxes of PVBJ, with Benis Holdings to receive 50% of annual earnings before taxes of PVBJ until such time as Benis Holdings has received the full Cash Purchase Price.
The tables below present a reconciliation of the Company’s goodwill and intangibles:
Goodwill
| Balance at December 31, 2017 | $ | - | ||
| Goodwill from acquisition of PVBJ Inc. | 1,373,621 | |||
| Adjustments | - | |||
| Balance at December 31, 2018 | $ | 1,373,621 |
Intangibles – customer list
| Balance at December 31, 2017 | $ | - | ||
| Customer list from acquisition of PVBJ Inc. | 102,422 | |||
| Amortization | (18,777 | ) | ||
| Balance at December 31, 2018 | $ | 83,645 |
The Company has elected to early adopt ASU 2017-04 as of January 1, 2018 which is outlined below in Note 18 in performing their 2018 impairment test and as previously stated noted no impairment.
On February 1, 2018, the Company entered into a stock purchase agreement (the “Purchase Agreement”) by and among the Company, PVBJ and Benis Holdings LLC, the sole shareholder of PVBJ (“Benis Holdings”).
Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of PVBJ from Benis Holdings for an aggregate amount equal to (i) $221,800 (the “Cash Purchase Price”) and (ii) 444,445 shares of the Company’s common stock, par value $.0001 per share having a fair value of $1,177,779 (the “Acquisition Shares”). Pursuant to the Purchase Agreement, the Acquisition Shares were issued at closing, and the earn-out will be paid to Benis Holdings from positive earnings before taxes of PVBJ, with Benis Holdings to receive 50% of annual earnings before taxes of PVBJ until such time as Benis Holdings has received the full Cash Purchase Price.
In connection with the acquisition of PVBJ, the Company entered into an employment agreement (the “Employment Agreement”) with Paul V. Benis, Jr. to serve as an Executive Vice President of the Company for a period of three years. Pursuant to the Employment Agreement, Mr. Benis shall receive an annual salary of $150,000 and have oversight of the business operations of PVBJ.
The consideration transferred in the acquisition was as follows:
| Upfront consideration | $ | 1,177,779 | ||
| Liabilities assumed | 878,565 | |||
| Total | $ | 2,056,343 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The acquisition accounting of PVBJ, including the fair values of working capital balances, property and equipment, identifiable intangible assets and goodwill was finalized in the fourth quarter of the year ended December 31, 2018. Management did not need to record any measurement period adjustments during the period.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Cash and cash equivalents | $ | 30,408 | ||
| Accounts receivable | 277,338 | |||
| Property and equipment, net | 272,554 | |||
| Customer list | 102,422 | |||
| Goodwill | 1,373,621 | |||
| Total assets acquired | 2,056,344 | |||
| Accounts payable | (112,590 | ) | ||
| Debt assumed | (590,657 | ) | ||
| Earn-out liability | (175,318 | ) | ||
| Total liabilities assumed | (878,565 | ) | ||
| Total net assets acquired | $ | 1,177,779 |
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
A summary of identifiable intangible assets acquired, useful lives and amortization method is as follows:
| Useful Life in | Amount |
Years | Amortization Method | |||||||
| Customer List | $ | 102,422 | 5 | Straight Line | ||||||
| Total | $ | 102,422 | ||||||||
The results of PVBJ’s operations are included in the consolidated statements of operations beginning February 1, 2018. PVBJ’s net loss for year ended December 31, 2018 totaled $27,682. The net loss of the Company includes acquired intangible asset amortization of $18,777 for the year ended December 31, 2018.
For year ended December 31, 2018, acquisition related costs for the Company totaled $44,500 and are included in general and administration expenses.
Pro forma results for H/Cell Energy Corporation giving effect to the PVBJ Inc. acquisition
The following pro forma financial information presents the combined results of operations of PVBJ and the Company for the years ended December 31, 2018 and 2017. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017.
The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.
Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2017.
Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||
| Revenues | $ | 7,755,567 | $ | 8,533,972 | ||||
| Net loss | (549,235 | ) | (83,468 | ) | ||||
| Net loss per share: | ||||||||
| Basic | (0.07 | ) | (0.01 | ) | ||||
| Diluted | (0.07 | ) | (0.01 | ) | ||||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
A summary of the stock option activity and related information for the Company’s 2016 Incentive Stock Option Plan from December 31, 2017 to December 31, 2018 is as follows:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2015 | - | |||||||||||||||
| Grants | 1,000,000 | $ | 0.01 | 5.00 | $ | 387,450 | ||||||||||
| Exercised | - | |||||||||||||||
| Canceled | - | |||||||||||||||
| Outstanding at December 31, 2016 | 1,000,000 | $ | 0.01 | 3.19 | $ | 387,450 | ||||||||||
| Grants | 150,000 | 1.83 | 4.35 | 165,477 | ||||||||||||
| Exercised | (100,000 | ) | 0.01 | - | (38,745 | ) | ||||||||||
| Canceled | - | |||||||||||||||
| Outstanding at December 31, 2017 | 1,050,000 | $ | 0.27 | 3.35 | 514,182 | |||||||||||
| Exercisable at December 31, 2017 | - | $ | - | - | $ | - | ||||||||||
| Outstanding at December 31, 2017 | 1,050,000 | $ | 0.27 | 3.35 | $ | 514,182 | ||||||||||
| Grants | 30,000 | 0.03 | 4.89 | - | ||||||||||||
| Exercised | (100,000 | ) | 0.01 | - | (38,475 | ) | ||||||||||
| Canceled | (25,000 | ) | 0.03 | - | (14,456 | ) | ||||||||||
| Outstanding at December 31, 2018 | 955,000 | 0.29 | 3.40 | 461,251 | ||||||||||||
| Exercisable at December 31, 2018 | 106,250 | $ | 0.26 | 2.98 | $ | 120,063 | ||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s weighted average grant date stock price of $0.3958 per share, which would have been received by the option holders had those option holders exercised their options as of that date. It also includes options granted at exercise prices of $2.00, $1.50, and $1.00, which were equal to the closing sales price of the Company’s common stock on the dates of grant.
Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to be a more accurate indicator of value.
The Company accounts for the expected life of options based on the contractual life of options for non-employees. For incentive options granted to employees, the Company accounts for the expected life in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The fair value of stock-based payment awards was estimated using the Black-Scholes pricing model.
As of December 31, 2018, there was $56,745 of unrecognized compensation expense. At December 31, 2017, there was $110,366 of unrecognized compensation expense.
The Company’s business is organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements. The following represents selected information for the Company’s reportable segments for the years ended December 31, 2018 and 2017.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| December 31, 2018 | December 31, 2017 | |||||||
| Assets by Segment | ||||||||
| Renewable systems integration | $ | 1,540,423 | $ | 27,589 | ||||
| Non-renewable systems integration | 1,984,084 | 1,457,607 | ||||||
| 3,524,507 | $ | 1,485,196 | ||||||
| For the Years Ended | ||||||||
| December 31, 2018 | December 31, 2017 | |||||||
| Revenue by segment | ||||||||
| Renewable systems integration – related party | $ | 40,548 | $ | 85,919 | ||||
| Non-renewable system integration | 7,505,889 | 6,266,967 | ||||||
| $ | 7,546,437 | $ | 6,352,886 | |||||
| Cost of sales by segment | ||||||||
| Renewable systems integration – related party | $ | 40,376 | $ | 87,649 | ||||
| Non-renewable system integration | 5,492,607 | 4,241,421 | ||||||
| $ | 5,532,983 | $ | 4,329,070 | |||||
| Operating expenses | ||||||||
| Renewable Systems integration | $ | 565,700 | $ | 261,118 | ||||
| Non-renewable system Integration | 1,881,160 | 1,699,745 | ||||||
| $ | 2,446,860 | $ | 1,960,863 | |||||
| Operating (loss) income by segment | ||||||||
| Renewable Systems integration | $ | (565,528 | ) | $ | (262,633 | ) | ||
| Non-renewable system Integration | 132,122 | 325,586 | ||||||
| $ | (433,406 | ) | $ | 62,953 | ||||
Substantially all of the Company’s employees may elect to defer a portion of their annual compensation in the Company-sponsored 401(k) tax-deferred savings plans. The Company makes matching contributions in these plans. The amount charged to expense for these plans was $12,324 for the year ended December 31, 2018. There was no expense for year ended December 31, 2017.
The components of income tax expense (benefit) are as follows (in thousands):
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Current | ||||||||
| U.S. Federal | $ | - | $ | - | ||||
| U.S. State and local | 13 | - | ||||||
| Australia | 9 | 98 | ||||||
| Total current | 22 | 98 | ||||||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred | ||||||||
| U.S. Federal | $ | - | $ | - | ||||
| U.S. State and local | - | - | ||||||
| Australia | (6 | ) | (44 | ) | ||||
| Total deferred | (6 | ) | (44 | ) | ||||
| Total income tax expense | 16 | 54 | ||||||
At December 31, 2018 and 2017, the Company had deferred tax assets of $430,000 and $235,000, respectively, against which a valuation allowance of $380,000 and $191,000, respectively, had been recorded. The change in the valuation allowance for the year ended December 31, 2018 was an increase of $189,000. The increase in the valuation allowance for the year ended December 31, 2018 was mainly attributable to increases in U.S. net operating losses and share-based compensation, which resulted in an increase in the Company’s deferred tax assets. The Company established valuation allowances equal to the full amount of its U.S. deferred tax assets because of the uncertainty of the realization of these deferred tax assets in future periods. The Company periodically assesses the likelihood that it will be able to recover the deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income.
Significant components of our deferred tax assets at December 31, 2018 and 2017 were as follows ($ in thousands):
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards – U.S. | 224 | 68 | ||||||
| Charitable contribution carryforward | 3 | - | ||||||
| Share-based compensation | 153 | 123 | ||||||
| Accrued liabilities | 50 | 44 | ||||||
| Gross deferred tax assets | 430 | 235 | ||||||
| Valuation allowance | (380 | ) | (191 | ) | ||||
| Net deferred tax assets | 50 | 44 | ||||||
A reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2018 and 2017 is as follows:
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| U.S. federal statutory tax rate | 21.0 | % | 34.0 | % | ||||
| State income taxes, net of federal benefit | (7.1 | ) | (67.2 | ) | ||||
| U.S. vs. foreign tax rate differential | - | (20.7 | ) | |||||
| Impact of tax law change | - | 140.5 | ||||||
| Deferred tax adjustments | - | (205.7 | ) | |||||
| Deemed repatriation | - | 34.7 | ||||||
| Other | (9.5 | ) | (8.1 | ) | ||||
| Change in valuation allowance | (7.4 | ) | 178.4 | |||||
| Effective tax rate | (3.0 | )% | 85.9 | % | ||||
The Company had approximately $749,000 and $235,000 of gross net operating loss (“NOL”) carryforwards (U.S. federal and state) as of December 31, 2018 and 2017, respectively, which begin to expire after 2036 through 2038. Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. Among other things, the Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, eliminates the alternative minimum tax for corporations, and creates a one-time deemed repatriation of profits earned outside of the U.S. The reduction of the corporate tax rate resulted in a write-down of the Company’s gross deferred tax assets of approximately $88,000, and a corresponding write-down of the valuation allowance. The one-time deemed repatriation of profits by the Company’s Australian subsidiary in 2017 resulted in a decrease in its NOL of approximately $64,000.
In May 2014, the FASB issued accounting standard update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved the proposal to defer the effective date of ASU 2014-09 standard by one year. Early adoption was permitted after December 15, 2016, and the standard became effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU No. 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU No. 2016-10), narrow-scope improvements and practical expedients (ASU No. 2016-12) and technical corrections and improvements to ASU 2014-09 (ASU No. 2016-20) in its new revenue standard. The Company has performed a review of the requirements of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. The Company reviewed customer contracts, applied the five-step model of the new standard to its contracts, and compared the results to its current accounting practices. The Company has included disclosures required by the new standard and the adoption has not had a material impact on the financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”) and issued subsequent amendments to the initial guidance. This ASU requires an entity to recognize a right-of-use asset (“ROU”) and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. Similar modifications have been made to lessor accounting in-line with revenue recognition guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective for the Company on January 1, 2019, with early adoption permitted. Entities are required to adopt ASC 842 using a modified retrospective transition method. Full retrospective transition is prohibited. The guidance permits an entity to apply the standard’s transition provisions at either the beginning of the earliest comparative period presented in the financial statements or the beginning of the period of adoption (i.e., on the effective date). We expect to adopt the new standard on its effective date. While the Company continues to assess all of the effects of adoption, it currently believes the most significant effects relate to: the recognition of new ROU assets and lease liabilities on its balance sheet for real estate and equipment operating leases; and providing significant new disclosures about its leasing activities. The Company does not expect a significant change in its leasing activities between now and adoption. The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits it to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On adoption, the Company currently expects to recognize additional operating lease liabilities with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments for existing operating leases on its consolidated balance sheets. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for all of its leases, which will mean all consideration that is fixed, or in-substance fixed, relating to the non-lease components will be captured as part of its lease components for balance sheet purposes.
In August 2016, FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years beginning after December 15, 2017. The Company adopted ASU 2016-15 effective January 1, 2018 and it did not have a material impact on its financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 as part of the goodwill impairment test. The amount of the impairment charge to be recognized would now be the amount by which the carrying value exceeds the reporting unit’s fair value. The loss to be recognized cannot exceed the amount of goodwill allocated to that reporting unit. The amendments in ASU 2017-04 are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has elected to early adopt ASU 2017-04 as of January 1, 2018. The Company has applied the guidance related to ASU 2017-04 during its annual impairment test in the fourth quarter of 2018. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the entity initially adopts the amendments in this update. The Company has elected to early adopt this standard in performing their 2018 impairment test.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within each annual reporting period. The Company adopted ASU 2017-09 effective January 1, 2018 and it did not have a material impact on its financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard will become effective for the Company beginning January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
In August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new standard will become effective for the Company January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The following table sets forth the information needed to compute basic and diluted earnings (loss) per share:
| Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||
| Net income (loss) | $ | (554,010 | ) | $ | 8,897 | |||
| Weighted average common shares outstanding | 7,586,024 | 6,703,223 | ||||||
| Dilutive securities Convertible debt | 601,704 | - | ||||||
| Options | 951,034 | 996,520 | ||||||
| Diluted weighted average common shares outstanding | 7,586,024 | 7,699,743 | ||||||
| Basic net income (loss) per share | $ | (0.07 | ) | 0.00 | ||||
| Diluted net income (loss) per share | $ | (0.07 | ) | 0.00 | ||||
For the year ended December 31, 2018 certain potential shares of common stock have been excluded from the calculation of diluted income per share because of a net loss, and therefore, the effect on diluted income per share would have been anti-dilutive.
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“Thermo”). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions. Pursuant to the terms of the Credit Agreement, the Company is permitted to borrow up to $350,000 under the revolving credit line, under a borrowing base equal to the lesser of (i) or 85% of Eligible Accounts (as defined in the Credit Agreement). Borrowings under the Credit Agreement may be used for working capital and to refinance certain existing debt of PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to 1.0, a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans to H/Cell. The loan commitment shall expire on August 21, 2020. As of December 31, 2018, the Company was in compliance with these covenants. The interest rate applicable to revolving loans under the Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. The Company paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and $3,500 will be paid on the first anniversary. The Company will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears. The Company may prepay the Note at any time and terminate the Credit Agreement. In the event that the Company terminates the Credit Agreement, the Company will pay Thermo an early termination fee equal to 4% of the pro rata portion, which pro rata portion is determined by multiplying $350,000 by the number of months prior to the second anniversary of the effective date of the Credit Agreement and then dividing that by 24. The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in the Company’s financial condition that could have a material adverse effect on the Company. As of December 31, 2018, funds totaling $38,296 were available for borrowing under the Thermo Credit Agreement.
In accordance with FASB ASC 855, Subsequent Events, the Company has evaluated subsequent events through March _ 2019, the date on which these financial statements were available to be issued.
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On January 21, 2019, an aggregate of 15,000 non-statutory options were granted to one employee with such options vesting 25% on each of the first through fourth anniversary of issuance, expiring five years from the date of issuance and having an exercise price of $1.15, which is equal to the closing sales price of the Company’s common stock on the date of grant.
On February 8, 2019, the Company entered into a securities purchase agreement with two of its directors that are accredited investors, pursuant to which it sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (the “2019 Debentures”), convertible into shares of the Company’s common stock at a conversion price of $0.50 per share. The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures will accrue at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and on the 2021 Maturity Date. The 2019 Debentures will be convertible into common stock at a conversion price of $0.50 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock.
On February 8, 2019, the Company and the holders of the Debentures issued in January 2018 entered into amendments (the “Amendments”) to the Debentures. Pursuant to the Amendments, the conversion price of the Debentures was reduced from $0.75 to $0.50, and the interest rate on the Debentures was reduced from 12% to 10%.
Equity Purchase Agreement
On March 12, 2019, the Company entered into an equity purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an accredited investor (the “Investor”), pursuant to which the Investor has agreed to purchase from the Company up to $450,000 in shares (the “Shares”) of its common stock, subject to certain limitations and conditions set forth in the Purchase Agreement.
Under the Purchase Agreement, the Investor has the right, at any time, to purchase Shares by delivering the Company a purchase notice, specifying the number of Shares to be purchased. The purchase price for the Shares under the Purchase Agreement will be 60% of the lowest closing price of the Company’s common stock in the five consecutive trading days preceding the Investor’s receipt of the Shares subject to such equity purchase.
In addition, the Investor has an obligation, to the extent it has not already made voluntary purchases, to purchase up to (i) $200,000 of the $450,000 in Shares within 15 Trading Days (as defined in the Purchase Agreement) after the effective date of the Registration Statement (as defined below) and (ii) $450,000 in Shares within 70 Trading Days after the effective date of the Registration Statement.
The Company has the right to reject any purchase notice from the Investor by delivering written notice of such rejection within one trading day after receipt. If the Company rejects any purchase notice, the Investor has no further obligations to purchase Shares under the Purchase Agreement. The Company may terminate the Purchase Agreement at any time by written notice to the Investor in the event of a material breach of the Purchase Agreement by the Investor. In addition, the Purchase Agreement will automatically terminate on the earliest of: (i) the date that the Investor has purchased $450,000 of Shares; (ii) 70 Trading Days after the effective date of the Registration Statement; or (iii) the date the Registration Statement is no longer effective.
The obligation of the Investor to purchase the Shares is subject to several conditions, including, among other thing, (i) that the Company has an effective registration statement with the SEC registering the Shares for resale, and (ii) that the purchase of the Shares shall not cause the Investor to own more than 9.99% of the outstanding shares of common stock. In connection with the Purchase Agreement, the Company agreed to pay $15,000 of fees to the Investor, of which $10,000 was paid on execution of the Purchase Agreement, and the remaining $5,000 will be paid on the first sale of Shares.
Pursuant to the Registration Rights Agreement, the Company is required to register the Shares on a registration statement (the “Registration Statement”) to be filed with the SEC within 15 calendar days after it files the Annual Report on Form 10-K that these financial statements are part of.
Additionally, on March 12, 2019, the Company agreed to donate 35,000 shares of common stock to the manager of the Investor.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2019 | December 31, 2018 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 328,439 | $ | 359,134 | ||||
| Accounts receivable | 937,897 | 1,087,381 | ||||||
| Prepaid expenses | 18,772 | 16,282 | ||||||
| Current right-of-use (ROU) asset | 92,269 | - | ||||||
| Costs and earnings in excess of billings | 48,052 | 45,478 | ||||||
| Total current assets | 1,425,429 | 1,508,275 | ||||||
| Property and equipment, net | 494,491 | 476,436 | ||||||
| Security deposits and other non-current assets | 38,992 | 32,530 | ||||||
| Deferred tax asset | 50,000 | 50,000 | ||||||
| Customer lists, net | 78,524 | 83,645 | ||||||
| ROU asset | 167,985 | - | ||||||
| Other long term asset | 30,000 | - | ||||||
| Goodwill | 1,373,621 | 1,373,621 | ||||||
| Total assets | $ | 3,659,042 | $ | 3,524,507 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 695,997 | $ | 891,354 | ||||
| Earn-out payable | 195,132 | 190,736 | ||||||
| Billings in excess of costs and earnings | 41,881 | 195,331 | ||||||
| Sales and withholding tax payable | 54,071 | 59,857 | ||||||
| Current equipment notes payable | 32,052 | 38,991 | ||||||
| Current operating lease liability | 92,269 | - | ||||||
| Current finance lease payable | 72,510 | 65,265 | ||||||
| Current convertible notes payable – related party, net of discounts | 257,659 | - | ||||||
| Income tax payable | 32,259 | 48,643 | ||||||
| Total current liabilities | 1,473,830 | 1,490,177 | ||||||
| Noncurrent liabilities | ||||||||
| Line of credit | 172,715 | 28,359 | ||||||
| Lease operating liability | 167,985 | - | ||||||
| Finance leases | 306,163 | 232,876 | ||||||
| Equipment notes payable | 65,779 | 121,038 | ||||||
| Convertible notes payable – related party, net of discounts | 61,609 | 29,122 | ||||||
| Total noncurrent liabilities | 774,251 | 411,395 | ||||||
| Total liabilities | 2,248,081 | 1,901,572 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding | - | - | ||||||
| Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,621,024 and 7,586,024 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | 762 | 758 | ||||||
| Additional paid-in capital | 2,896,524 | 2,983,476 | ||||||
| Accumulated deficit | (1,429,402 | ) | (1,285,764 | ) | ||||
| Accumulated other comprehensive loss | (56,923 | ) | (75,535 | ) | ||||
| Total stockholders’ equity | 1,410,961 | 1,622,935 | ||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 3,659,042 | $ | 3,524,507 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
| For the Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | ||||||||
| Construction income | $ | 1,704,273 | $ | 1,694,535 | ||||
| Related party | - | 31,789 | ||||||
| Total revenue | 1,704,273 | 1,726,324 | ||||||
| Cost of goods sold | ||||||||
| Direct costs | 1,196,438 | 1,209,413 | ||||||
| Direct costs – related party | - | 31,617 | ||||||
| Total cost of goods sold | 1,196,438 | 1,241,030 | ||||||
| Gross profit | 507,835 | 485,294 | ||||||
| Operating expenses | ||||||||
| General and administrative expenses | 607,052 | 555,184 | ||||||
| Management fees – related party | 19,500 | 19,500 | ||||||
| Total operating expenses | 626,552 | 574,684 | ||||||
| Loss from operations | (118,717 | ) | (89,390 | ) | ||||
| Other expenses | ||||||||
| Interest expense | 1,833 | 3,946 | ||||||
| Interest expense – related party | 36,095 | 14,215 | ||||||
| Change in fair value earn-out | 4,396 | - | ||||||
| (Gain) loss on fixed asset disposal | (17,403 | ) | 3,418 | |||||
| Total other expenses | 24,921 | 21,579 | ||||||
| Income tax provision | - | - | ||||||
| Net loss | $ | (143,638 | ) | $ | (110,969 | ) | ||
| Other comprehensive income (loss), net | ||||||||
| Foreign currency translation adjustment | 18,612 | (10,259 | ) | |||||
| Comprehensive loss | $ | (125,026 | ) | $ | (121,228 | ) | ||
| Loss per share | ||||||||
| Basic | $ | (0.02 | ) | $ | (0.02 | ) | ||
| Diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic | 7,593,413 | 7,486,024 | ||||||
| Diluted | 7,593,413 | 7,486,024 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019
| Common Stock | Preferred Stock | Accumulated | Total | |||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Other Comprehensive Gain (Loss) | Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||
| Beginning, January 1, 2019 | 7,586,024 | $ | 758 | - | - | $ | 2,983,476 | $ | (1,285,764 | ) | $ | (75,535 | ) | $ | 1,622,935 | |||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 8,562 | - | - | 8,562 | ||||||||||||||||||||||||
| Share donation | 35,000 | 4 | - | - | 23,446 | - | - | 23,450 | ||||||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 97,500 | - | - | 97,500 | ||||||||||||||||||||||||
| Debt extinguishment | - | - | - | - | (216,460 | ) | - | - | (216,460 | ) | ||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | (143,638 | ) | - | (143,638 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | 18,612 | 18,612 | ||||||||||||||||||||||||
| Ending, March 31, 2019 | 7,621,024 | $ | 762 | - | $ | - | $ | 2,896,524 | $ | (1,429,402 | ) | $ | (56,923 | ) | $ | 1,410,961 | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| For the Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (143,638 | ) | $ | (110,969 | ) | ||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 72,015 | 33,352 | ||||||
| Stock based compensation | 8,562 | 17,148 | ||||||
| (Gain) loss on sale of assets | (17,403 | ) | 3,418 | |||||
| Change in fair value contingent consideration | 4,396 | - | ||||||
| Change in operating assets and liabilities: | ||||||||
| Change in operating ROU asset | 260,524 | - | ||||||
| Share donation | 23,450 | - | ||||||
| Change in operating ROU liability | (260,524 | ) | - | |||||
| Accounts and retainage receivable | 154,680 | (39,654 | ) | |||||
| Other long term asset | (30,000 | ) | - | |||||
| Prepaid expenses and other costs | (2,481 | ) | (4,284 | ) | ||||
| Costs in excess of billings | (2,258 | ) | (28,969 | ) | ||||
| Income tax payable | - | 4,066 | ||||||
| Accounts payable and accrued expenses | (207,426 | ) | 217,910 | |||||
| Billings in excess of costs | (153,792 | ) | 34,354 | |||||
| Net cash (used in) provided by operating activities | (293,894 | ) | 126,372 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of fixed assets | (79,912 | ) | (68,628 | ) | ||||
| Proceeds from disposition of property and equipment | 72,638 | 393 | ||||||
| Security deposits | (6,415 | ) | (14,412 | ) | ||||
| Net cash (used in) investing activities | (13,689 | ) | (82,647 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of convertible debt | 147,500 | 395,000 | ||||||
| Proceeds from issuance of notes payable | - | 61,062 | ||||||
| Net proceeds from line of credit | 144,356 | - | ||||||
| Repayments on long term debt | - | (351,481 | ) | |||||
| Repayments on capital leases | (9,985 | ) | (16,619 | ) | ||||
| Repayments on notes payable | (8,382 | ) | (14,113 | ) | ||||
| Net cash provided by financing activities | 273,489 | 73,849 | ||||||
| Net increase (decrease) in cash and cash equivalents | (34,094 | ) | 117,574 | |||||
| Effect of foreign currency translation on cash | 3,399 | 18,704 | ||||||
| Cash and cash equivalents -beginning | 359,134 | 455,700 | ||||||
| Cash and cash equivalents - ending | $ | 328,439 | $ | 591,978 | ||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Common stock issued for acquisition of business | $ | $ | 1,177,779 | |||||
| Fair value of net assets acquired in business combination | $ | $ | 2,056,344 | |||||
| Beneficial conversion feature | $ | 190,000 | $ | 2,214 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
H/Cell Energy Corporation (the “Company”) was incorporated in the state of Nevada on August 17, 2015. The Company, based in Dallas, Texas, is a company whose principal operations consist of designing and installing clean energy systems with a focus on hydrogen energy. Effective January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”). Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy systems division to focus on the high growth renewable energy market in Asia-Pacific. The new clean energy division has generated some revenue and has begun to bid a number of projects. On February 1, 2018, the Company acquired PVBJ Inc. (“PVBJ”) for 444,445 shares of the Company’s common stock with a fair value of $1,177,779 and $221,800 in earn-out liability (see Note 11). Established in 2008, PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. PVBJ is now expanding into clean energy systems.
The Company has developed a hydrogen energy system for residential and commercial use designed to create electricity. This system uses renewable energy as its source for hydrogen production. It functions as a self-sustaining clean energy system using hydrogen and fuel cell technology. It can be configured as an off grid solution for all electricity needs or it can be connected to the grid to generate energy credits. Its production of electricity is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective.
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or any other interim period or for any other future year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018, included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC. The balance sheet as of December 31, 2018 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
Accounts Receivable
Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. Accounts are written off as uncollectible after collection efforts have failed. In addition, the Company does not generally charge interest on past-due accounts or require collateral. At March 31, 2019 and December 31 2018, there was no allowance for doubtful accounts required.
Goodwill and Finite-Lived Intangible Assets
Goodwill represents the excess of the aggregate of the following (1) consideration transferred, (2) the fair value of any non-controlling interest in the acquiree, and (3) if the business combination is achieved in stages, the acquisition-date fair value of our previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Identifiable intangible assets consist primarily of customer lists and relationships, non-compete agreements and technology based intangibles and other contractual agreements. The Company amortizes finite lived identifiable intangible assets over five years, on a straight-line basis to their estimated residual values and periodically reviews them for impairment. Total goodwill and identifiable intangible assets comprised 37% and 41% of the Company’s consolidated total assets at March 31, 2019 and December 31, 2018, respectively.
The Company uses the acquisition method of accounting for all business combinations and does not amortize goodwill. Goodwill is tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, its goodwill is not impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.
The Company performed its annual impairment test for PVBJ in December of 2018. Based on the results of the qualitative testing, there was no impairment. The PVBJ reporting unit exceeded acquisition projections in 2018 and expects to meet future projections.
As of March 31, 2019, the Company had recorded goodwill in the amount of $1,373,621 related to the PVBJ acquisition. The performance of the Company’s fiscal 2018 impairment analysis did not result in an impairment of the Company’s goodwill.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.
Foreign Currency Translation
The Company translates its foreign subsidiary’s assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in accumulated other comprehensive income. The Company records gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location’s functional currency in net income (loss) for each period. Items included in the financial statements of each entity in the group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”).
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
The functional and reporting currency of the Company is the United States Dollar (“U.S. Dollar”). The financial records of Pride located in Australia, is maintained in the local currency, the Australian Dollar (AUD$) which is also its functional currency.
For the three months ended March 31, 2019, the Company recorded other comprehensive income of $18,612 in the condensed consolidated financial statements. For the three months ended March 31, 2018, the Company recorded other comprehensive loss from a translation loss of $10,259 in the condensed consolidated financial statements.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
Under ASU 2014-09 requirements, the Company recognizes revenue from the installation or construction of projects and service or short term projects over time using the cost-based input method. The Company accounts for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. The Company considers the start of a project to be when the above criteria have been met and the Company either has written authorization from the customer to proceed or an executed contract. A detailed breakdown of the five step process is as follows:
Identify the Contract with a Customer
The Company receives almost all of its contracts from only two sources, referrals or government bids. In a referral, a client that the Company has an ongoing business relationship refers the Company to perform services. In a government bid, the Company applies to perform services for public projects. The contracts have a pattern of being stand-alone contracts.
Identify the Performance Obligations in the Contract
The performance obligation of the Company is to perform a contractually agreed upon task for the customer. If the contract is stated to provide only contractual service, then the service is considered the only performance obligation. If the contractual service includes design and or engineering in addition to the contract, it is considered a single performance obligation.
Determine the Transaction Price
The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
Once the Company receives a contract, a budget of projected costs is generated for the contract based on the contract price. If the scope of the contract during the contractual period needs to be modified, the Company typically files a change order. The Company does not continue to perform services until the change modification is agreed upon with documentation by both the Company and the customer. There are few times that claims, extras, or back charges are included in the contract.
Allocate the Transaction Price to the Performance Obligations in the Contract
If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the Company’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one customer, the Company has a policy of splitting out the services over multiple contracts.
Recognize Revenue When (or As) the Entity Satisfies a Performance Obligations
The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e. design, engineering, procurement of material, etc.) should not be recognized as the client does not have control of the good/service provided. When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current asset in the Company’s balance sheet under the captions “Costs and estimated earnings in excess of billings” and “Unbilled accounts receivable.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in the Company’s balance sheet under the caption “Billings in excess of costs and estimated earnings.”
Disaggregated Revenue
For the three months ended March 31, 2019 and 2018, revenues from contracts with customers summarized by Segment Geography and Revenue Stream were as follows:
| Three Months Ended | ||||||||
| March 31, 2019 | March 31, 2018 | |||||||
| United States – Service | $ | 514,955 | $ | 375,451 | ||||
| Australia – Service | 567,121 | 514,183 | ||||||
| United States – Contract | 160,000 | 0 | ||||||
| Australia – Contract | 462,197 | 836,690 | ||||||
| Total | $ | 1,704,273 | $ | 1,726,324 | ||||
Cash and Cash Equivalents
Cash and cash equivalents includes cash in bank and money market funds as well as other highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents as of March 31, 2019 or December 31, 2018.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
Stock-Based Compensation
The Company recognizes expense for its stock-based compensation based on the fair value of the awards at the time they are granted. We estimate the value of stock option awards on the date of grant using the Black-Scholes model. The determination of the fair value of stock-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates. The forfeiture rate is estimated using historical option cancellation information, adjusted for anticipated changes in expected exercise and employment termination behavior. Our outstanding awards do not contain market or performance conditions.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes pursuant to Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 740,Income Taxes(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the financial statements as appropriate. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense.
The Company recognizes and measures its unrecognized tax benefits in accordance with ASC 740. Under that guidance, management assesses the likelihood that tax positions will be sustained upon examination based on the facts, circumstances and information, including the technical merits of those positions, available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change.
The Company did not identify any material uncertain tax positions. The Company did not recognize any interest or penalties for unrecognized tax benefits.
The federal income tax returns of the Company are subject to examination by the IRS, generally for the three years after they are filed. The Company’s 2018, 2017 and 2016 income tax returns are still open for examination by the taxing authorities.
Fair Value of Financial Instruments
Except for the Company’s earn-out liability, the carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
| ● | Level 1—quoted prices in active markets for identical assets and liabilities; |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
| ● | Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and | |
| ● | Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
| F-11 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The table below presents a reconciliation of the fair value of the Company’s contingent earn-out obligations that use significant unobservable inputs (Level 3).
| Balance at December 31, 2018 | $ | 190,736 | ||||||
| Fair value earn-out liability from acquisition of PVBJ Inc. | $ | 175,318 | ||||||
| Adjustments to fair value | 15,418 | |||||||
| Balance sheet as of December 31, 2018 | 190,736 | |||||||
| Payments | - | - | ||||||
| Adjustments to fair value | 4,396 | 18,463 | ||||||
| Balance at March 31, 2019 | $ | 195,132 | ||||||
| Balance as of December 31, 2019 | $ | 209,199 | ||||||
The Company values earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
The earn-out obligation is classified on the balance sheet under current liabilities held for sale on the balance sheet as of December 31, 2019.
Net Income (Loss)Loss Per Common Share
The Company computes basic net income (loss)loss per share by dividing net income (loss)loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of diluted loss per share excludes dilutive securities, for the three months ended March 31, 2019 and 2018 because their inclusion would be anti-dilutive. Dilutive securities for the three months ended March 31, 2019 and 2018 wereperiods presented are as follows:
| March 31, 2019 | March 31, 2018 | |||||||
| Options to purchase common stock | 968,500 | 1,050,000 | ||||||
| Convertible debt | 1,100,000 | 800,000 | ||||||
| Totals | 2,068,500 | 1,850,000 | ||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Options to purchase common stock | 34,925 | 47,750 | ||||||
| Convertible debt | 55,000 | 40,000 | ||||||
| Totals | 89,925 | 87,750 | ||||||
| 3. | RELATED PARTY TRANSACTIONS |
The Company’s former office space during the year ended December 31, 2018 consisted of approximately 800 square feet, which was donated to it from one of its executive officers. There was no lease agreement and the Company paid no rent.
In AprilSeptember 2018, Rezaul Karimthe Company entered into a former director exercised 100,000 options.contract with Steve Mullane, the Executive General Manager of Pride, for a solar installation. The system installation was complete as of December 31, 2018. Costs incurred were $8,333 along with revenue of $8,759 for year ended December 31, 2018.
In August 2019, the Company entered into a contract with a Pride employee for a solar installation. The system installation was complete as of December 31, 2019. Costs incurred were $5,169 along with revenue of $6,416 for year ended December 31, 2019.
| F-12 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
In June 2016, the Company entered into a contract with Rezaul Karim, one of its former directors, for the installation of an HC-1 system. The system installation was complete as of MarchDecember 31, 2018. The system installation generated $31,789$8,499 and $40,288 of revenue duringfor the three monthsyear ended MarchDecember 31, 2018. The Company subcontracted the installation of the system to Renewable Energy Holdings LLC (“REH”), a company owned by Mike Strizki, one of the Company’s executive officers. James Strizki, one of the Company’s executive officers, is vice president of operations at REH. There was $31,617$9,019 and $40,636 of costs for the three monthsyear ended MarchDecember 31, 2018.2018, respectively.
The Company has entered into agreements to indemnify its directors and executive officers, in addition to the indemnification provided for in the Company’s articles of incorporation and bylaws. These agreements, among other things, provide for indemnification of the Company’s directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provided services at the Company’s request. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
There was $19,500$80,500 and $78,000 of management fees expensed for the three monthsyears ended MarchDecember 31, 2019 and 2018, respectively, to Turquino Equity LLC (Turquino”), a significant shareholder.shareholder wholly-owned by the Chief Executive Officer and Chief Financial Officer.
On January 2, 2018, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“2018 Debentures”).On February 8, 2019, the Company and the holders of the 2018 Debentures entered into amendments (the “Amendments”) to the 2018 Debentures.The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum from January 2, 2018 through the date of the Amendments, and 10% per annum subsequent to the date of the Amendments, payable monthly in cash, beginning on February 1, 2018 and through the 2020 Maturity Date. The 2018 Debentures are convertible into common stock at a conversion price of $0.50$10.00 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $395,000 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“Thermo”). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions. As of December 31, 2019, the Company was in compliance with these covenants and the facility was increased to $400,000 in March of 2020.
On February 8, 2019, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (“2019 Debentures”). The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and through the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $0.50$10.00 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $97,500 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
| F-13 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
| 4. | SIGNIFICANT CONCENTRATIONS OF CREDIT RISK |
Cash is maintained at an authorized deposit-taking institution (bank) incorporated in both the United States and Australia and is insured by the U.S. Federal Deposit Insurance Corporation and Australian Securities & Investments Commission up to $250,000 and approximately $186,000 USD in total, respectively. At MarchDecember 31, 2019 and December 31, 2018, the balance was fully covered under the $250,000 threshold in the United States. In Australia, the balance exceeded the threshold by $34,553 at MarchDecember 31, 2019 by $10,563 and exceeded the threshold by $133,578 at December 31, 2018.2018 and is classified under current assets held for sale.
Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at MarchDecember 31, 2019, approximately 10%one of the Company’s accounts receivable was due from one customer and, at approximately 13%. At December 31, 2018, approximately 20% of the Company’s accounts receivable was due from two unrelated customers, each at 10%.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED) This is classified under current assets held for sale on the balance sheet.
| 5. | MAJOR CUSTOMERS |
During the three months ended March 31, 2019, there was no customers with a concentration of 10% or higher of the Company’s revenue. During the three months ended March 31, 2018, thereThere was one customer with a concentration of 10% or higher of the Company’s revenue, at 30%.14% for the year ended December 31, 2019, and three customers with a concentration of 10% or higher of the Company’s revenue, two at 13% and one at 12% for the year ended December 31, 2018. This is classified under discontinued operations on the balance sheet.
| 6. | PROPERTY AND EQUIPMENT |
At December 31, 2019 and December 31, 2018, property and equipment classified under non-current assets held for sale were comprised of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Furniture and fixtures (5 to 7 years) | $ | 11,649 | $ | 11,661 | ||||
| Machinery and equipment (5 to 7 years) | 44,578 | 36,969 | ||||||
| Computer and software (3 to 5 years) | 48,219 | 88,021 | ||||||
| Auto and truck (5 to 7 years) | 756,138 | 785,979 | ||||||
| Leasehold improvements (life of lease) | 34,707 | 34,788 | ||||||
| 895,291 | 957,418 | |||||||
| Less accumulated depreciation | 417,053 | 480,982 | ||||||
| $ | 478,238 | $ | 476,436 | |||||
Depreciation expense for the years ended December 31, 2019 and 2018 was $164,392 and $145,606, respectively and is included in discontinued operations on the income statement.
| 7. | UNCOMPLETED CONTRACTS |
Costs, estimated earnings and billings on uncompleted contracts classified under non-current assets held for sale are summarized as follows at MarchDecember 31, 2019 and December 31, 2018:
| March 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||
| Costs incurred on uncompleted contracts | $ | 931,173 | $ | 811,173 | $ | 465,686 | $ | 811,173 | ||||||||
| Estimated earnings | 329,198 | 469,109 | 454,132 | 469,109 | ||||||||||||
| Costs and estimated earnings earned on uncompleted contracts | 1,260,371 | 1,280,282 | ||||||||||||||
| Costs and estimated earnings on uncompleted contracts | 919,818 | 1,280,282 | ||||||||||||||
| Billings to date | 1,259,446 | 1,265,475 | 750,769 | 1,265,475 | ||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 925 | 14,807 | 169,049 | 14,807 | ||||||||||||
| Costs and earnings in excess of billings on completed contracts | 5,246 | (164,660 | ) | (190,102 | ) | (164,660 | ) | |||||||||
| $ | 6,171 | $ | (149,853 | ) | $ | (21,053 | ) | $ | (149,853 | ) | ||||||
| Costs in excess of billings | $ | 48,052 | $ | 45,478 | ||||||||||||
| Billings in excess of cost | (41,881 | ) | (195,331 | ) | ||||||||||||
| Costs in excess of billings (contract asset) | $ | 26,045 | $ | 45,478 | ||||||||||||
| Billings in excess of cost (contract liability) | (47,098 | ) | (195,331 | ) | ||||||||||||
| $ | 6,171 | $ | (149,853 | ) | $ | (21,053 | ) | $ | (149,853 | ) | ||||||
| F-14 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
| LEASES |
Operating Leases are classified under current and non-current liabilities held for sale on the balance sheet.
For leases with a term of 12 months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, and wethe Company has elected to recognize lease expense for such leases on a straight-line basis over the lease term.
The Company previously entered into two leases for office space in Woombye and Brisbane, Queensland, Australia, both which expired in April 2018. The Company signed new leases in January 2019 for a Dallas, Texas shared office space, which endsended in December 2019 and is now month-to-month, and February 2018 for new office space in Kunda Park, Queensland Australia, which started in May 2018 and expires in MayApril 2023. The Company also renewed the Brisbane office space for one year, starting in May 2018. The Company’s office in Downingtown, Pennsylvania is month to month.
On March 25, 2019, the Company signed a lease for new office space in Brisbane, which has a fixed 3% increase annually expiring in March 2025 whichand includes a renewal period of three years whichthat management is reasonably certain will be exercised. The Company analyzed this lease and determined that this agreement meets the definition of a lease under ASC 842,ASU 2016-02 as it provides management with the exclusive right to direct the use of and obtain substantially all of the economic benefits from the identified leased asset, which is the office space. Management also analyzed the terms of this arrangement and concluded it should be classified as an operating lease, as none of the criteria were met for finance lease classification. As there was only one identified asset, no allocation of the lease payments was deemed necessary. Management did not incur any initial direct costs associated with this lease. As of the commencement date, which was March 25, 2019, a right toof use asset and lease liability of $130,736 was recorded on the condensed consolidated balance sheet based on the present value of payments in the lease agreement. Per review of the lease agreement, there was no variable terms identified and there is no implicit rate stated. Therefore, the Company determined the present value of the future minimum lease payments based on the incremental borrowing rate of the company.Company. The incremental borrowing rate was determined to be 10%, as this is the rate which represents the incremental borrowing rate for the Company, on a collateralized basis, in a similar economic environment with similar payment terms.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,On July 1, 2019, AND 2018 (UNAUDITED)the Company signed a lease for the previously month-to-month office space in Downingtown, PA. Per review of the lease, the term is less than 12 months, therefore, the Company has elected to treat this lease as an operating lease and recognize lease expense on a straight-line basis.
The future minimum payments on the office spaceoperating leases for each of the next sevenfive years and in the aggregate amount to the following:
| 2019 | $ | 61,500 | ||||||
| 2020 | 82,855 | $ | 65,112 | |||||
| 2021 | 84,021 | 66,285 | ||||||
| 2022 | 85,221 | 67,313 | ||||||
| 2023 | 57,125 | 40,157 | ||||||
| 2024 | 43,732 | 30,741 | ||||||
| 2025 | 11,013 | |||||||
| $ | 425,467 | |||||||
| Thereafter | 7,742 | |||||||
| Total lease payments | 277,350 | |||||||
| Less: present value discount | (52,382 | ) | ||||||
| Total operating lease liabilities | $ | 224,968 | ||||||
The weighted-average remaining term of the Company’s operating leases was 4.5 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 9.69% as of December 31, 2019.
Rent expense for each of the three monthsyears ended MarchDecember 31, 2019 and 2018 amounted to approximately $23,000was $94,210 and $98,593, respectively, and is included in “General and Administrative” expenses on the related statements of operations.
| F-15 |
ROU
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Right of use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROUright of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROUright of use asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
In determining the discount rate to use in calculating the present value of lease payments, the Company estimates the rate of interest it would pay on a collateralized loan with the same payment terms as the lease by utilizing bond yields traded in the secondary market to determine the estimated cost of funds for the particular tenor.
Finance Leases
Under the new leasing standard, ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”), leases that are more than one year in duration are capitalized and recorded on the balance sheet. Some of the Company’s leases, specifically for automobiles and office space, offer an option to extend the term of such leases.
During the three months MarchAt December 31, 2019, the Company leased equipment under twohad 13 finance leases with aan aggregate net book value of $468,490, which expire in October 2023 and February 2025. During the three months ended March 31, 2018, the Company leased equipment under four capital leases, with a net book value of $165,609.$383,547. The obligations are payable in monthly installments ranging from approximately $503 to $1,578 with interest rates from 3.0% to 5.57% per annum. The leases are secured by the related equipment.
At March 31, 2019, the Company had 13 finance leases approximate Approximate payments to be made on these finance lease obligations are as follows:
| 2019 | $ | 64,040 | ||
| 2020 | 85,387 | |||
| 2021 | 77,816 | |||
| 2022 | 66,445 | |||
| 2023 | 62,936 | |||
| Thereafter | 59,851 |
| Finance lease obligation | 416,475 | |||
| Less: amounts representing interest | 37,802 | |||
| Current maturities of capital lease obligations | 72,510 | |||
| Finance lease obligations, non-current | $ | 306,163 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
| 2020 | $ | 91,959 | ||
| 2021 | 84,332 | |||
| 2022 | 78,381 | |||
| 2023 | 80,920 | |||
| 2024 | 67,832 | |||
| Thereafter | 11,495 | |||
| Finance lease obligation | 414,919 | |||
| Less: amounts representing interest | 31,372 | |||
| Less: current maturities of finance lease obligations | 75,743 | |||
| Finance lease obligations, non-current | $ | 307,804 |
| DEBT |
Debt is classified under current and non-current liabilities held for sale on the balance sheet.
Long-term debt consisted of the following:
Equipment Notes Payable
| December 31, 2019 | December 31, 2018 | |||||||
| Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020. | $ | - | $ | 18,707 | ||||
| Note payable with monthly payments of $615, including interest at 6.80% per annum through August 2021. | - | 18,383 | ||||||
| Note payable with monthly payments of $1,294, including interest at 14.72% per annum through March 2023. | 40,733 | 50,072 | ||||||
| Note payable with monthly payments of $1,063, including interest at 5.76% per annum through April 2021. | 10,276 | 18,539 | ||||||
| Note payable with monthly payments of $983, including interest at 4.90% per annum through August 2024. | 48,566 | - | ||||||
| Note payable with monthly payments of $947 including interest at 6.14% per annum through December 2024. | $ | - | $ | 54,328 | ||||
| Total: | $ | 99,575 | $ | 160,029 | ||||
| Less current portion: | (27,435 | ) | (38,991 | ) | ||||
| Total non-current portion: | $ | 72,140 | $ | 121,038 | ||||
| March 31, 2019 | December 31, 2018 | |||||||
| Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020. | $ | 16,228 | $ | 18,707 | ||||
| Note payable with monthly payments of $615.25, including interest at 6.80% per annum through August 2021. | $ | 16,903 | $ | 18,383 | ||||
| Note payable with monthly payments of $1,294.50, including interest at 14.72% per annum through March 2023. | $ | 48,103 | $ | 50,072 | ||||
| Note payable with monthly payments of $1,063.45, including interest at 5.76% per annum through April 2021. | $ | 16,597 | $ | 18,539 | ||||
| Note payable with monthly payments of $946.84 including interest at 6.14% per annum through December 2024. | $ | - | $ | 54,328 | ||||
| Total: | $ | 97,831 | $ | 160,029 | ||||
| Total current portion: | $ | (32,052 | ) | $ | (38,991 | ) | ||
| Total non-current portion: | $ | 65,779 | $ | 121,038 | ||||
| F-16 |
At MarchH/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
As of December 31, 2019, approximate principal payments to be made on these debt obligations are as follows:
| Year ending December 31: | Amount | Amount | ||||||
| 2019 (remaining) | $ | 32,052 | ||||||
| 2020 | 28,478 | $ | 27,435 | |||||
| 2021 | 15,117 | 21,131 | ||||||
| 2022 | 12,759 | 19,895 | ||||||
| 2023 | 9,425 | 24,161 | ||||||
| 2024 | 6,953 | |||||||
| Thereafter | - | - | ||||||
| $ | 97,831 | |||||||
| Notes payable obligation | 99,575 | |||||||
2018 Convertible Note Payable
On January 2, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“(the “2018 Debentures”), convertible into shares of the Company’s common stock at a conversion price of $0.75 per share.. The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “Maturity“2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and through the 2020 Maturity Date. The 2018 Debentures are convertible into common stock at a conversion price of $0.75$15.00 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock.
In connection with this convertible note payable, the Company recorded a $395,000 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
On February 8, 2019, the 2018 Debentures were amended to reduce the interest rate to 10% and reduce the conversion price to $0.50$10.00 (the “Revised Debentures”), providing the issuance of an additional 266,667 shares upon conversion. In conjunction with these amendments, the convertible note was re-evaluated in accordance with ASC 470-50 -Debt Modifications and Extinguishments(“ASC 470”), and it was determined that the change in terms resulted in a substantial modification to the beneficial conversion feature.modification. As a result, the carrying value of the Revised Debentures at the time of the transaction, along with the related beneficial conversion feature, were derecognized and the Revised Debentures were recorded at present value, resulting in a loss on debt extinguishment of $216,460 and a change of $53,000 from$269,793. Of this amount, $53,333 represented the oldhistorical beneficial conversion feature toand has been treated as a debt discount and is being amortized over the new.life of the Revised Debentures using the effective interest method. As the holders of the Revised Debentures are related parties to the Company,ASC 470provides for treatment as a capital contribution wherebyof $216,460, which represents the related extinguishment loss and will instead be recorded within the Company’s Additional Paid in Capital balance.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
In connection with the Revised Debentures, the Company incurred $2,500 of legal fees and recorded a $160,000 beneficial conversion feature, both of which are recorded as a discount on debt and amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
The principal balance was $415,000 at December 31, 2019 and unamortized discount was $6,106 and $137,125, respectively, as of December 31, 2019 and December 31, 2018.
2019 Convertible Note Payable
On February 8, 2019, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (the “2019 Debentures”). The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and through the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $10.00 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock.
| F-17 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
In connection with this convertible note payable, the Company recorded a $97,500 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
The principal balance was $150,000 and unamortized discount was $85,124 as of December 31, 2019.
Interest Expense
For the three monthsyear ended MarchDecember 31, 2019, the Company incurred interest expense of $36,095, of which $21,301$156,394 related to the amortization of the 2018 Debentures debt discount and $1,626$31,434 for the 2019 Debentures debt discount. For the three monthsyear ended MarchDecember 31, 2018, the Company incurred interest expense of $14,215, of which $2,214$29,122 related to the amortization of the discount for the 2018 Debentures.discount.
2019 Convertible Note Financing
As of March 31,On October 17, 2019, the Company hadentered into a contract backlog approximating $436,239,securities purchase agreement with anticipated direct costsFirstFire Global Opportunities Fund LLC (“FirstFire”), an unrelated third party, pursuant to complete approximating $329,198. At December 31, 2018, the Company hadwhich, it sold a contract backlog approximating $583,392,$110,000 convertible note (the “2019 Note”) to FirstFire for gross proceeds of $100,000, with anticipated direct costs to completion approximating $452,884.
an original discount issuance of $10,000. The tables below present a reconciliationtransaction closed on October 23, 2019 upon receipt of the Company’s goodwillfunds from FirstFire. The Company incurred $5,000 of legal fees for the transaction. Both the legal fees and intangibles:original issue discount are amortized over the life of the agreement.
Goodwill
| Balance at December 31, 2018 | $ | 1,373,621 | ||
| Adjustments | - | |||
| Balance at March 31, 2019 | $ | 1,373,621 |
Intangibles – customer list
| Balance at December 31, 2018 | $ | 83,645 | ||
| Amortization | 5,121 | |||
| Balance at March 31, 2019 | $ | 78,524 |
The customer list2019 Note will continue to be amortizedmature on October 17, 2020 and will bear interest at $5,121 a quarter until December 31, 2022. The remaining $1,707the rate of 8% per annum, which interest will be amortizedpayable on the maturity date or any redemption date and may be paid, in January 2023.
A summarycertain conditions, through the issuance of common shares, at the Company’s discretion. The Company makes a monthly principal payment to FirstFire of $6,000 on the 17th day of each month, which started November 17, 2019. The Company also has the right, at any time, to repay all or a part of the stock option activity and related information for2019 Note, on at least one prior business days’ notice, in an amount equal to 115% of the 2016 Incentive Stock Option Plan from December 31, 2018 to March 31, 2019 is as follows:
| Shares | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2018 | 955,000 | 0.29 | 3.40 | 461,251 | ||||||||||||
| Grants | 15,000 | 1.15 | 4.81 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Canceled | (1,500 | ) | 0.05 | - | (629 | ) | ||||||||||
| Outstanding at March 31, 2019 | 968,500 | $ | 0.28 | 3.49 | $ | 460,622 | ||||||||||
| Exercisable at March 31, 2019 | 531,250 | $ | 0.28 | 3.49 | $ | 258,090 | ||||||||||
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)principal being repaid, plus any accrued but unpaid interest on the principal amount being repaid.
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s weighted average grant date stock price of $0.3958 per share, which would have been received by the option holders had those option holders exercised their options as of that date. It also includes options granted at exercise prices of $2.00, $1.50, $1.00 and $1.15, which were equal to the closing sales price of2019 Note will be convertible into the Company’s common stock onat a conversion price of $10.00 per share (the “Fixed Conversion Price”) at the datesdiscretion of grant.
Option valuation models require the inputholder. At no time will FirstFire be entitled to convert any portion of highly subjective assumptions. The fair valuethe 2019 Note to the extent that after such conversion, FirstFire (together with its affiliates) would beneficially own more than 4.99% of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historicaloutstanding common stock prices. Management determined this assumption to be a more accurate indicatoras of value.such date. The 2019 Note contains standard anti-dilution protection.
The Company accounts2019 Note includes customary event of default provisions, and provides for a default interest rate of 15%. Upon the expected lifeoccurrence of options based on the contractual lifean event of options for non-employees. For incentive options granted to employees,default, FirstFire may require the Company accounts for the expected life in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected termto redeem all or any portion of the options. The fair value2019 Note (including all accrued and unpaid interest), in cash, at a price equal to the product of stock-based payment awards was estimated using(A) the Black-Scholes pricing model.amount to be redeemed multiplied by (B) 125%. In addition, upon an event of default, the conversion price would be the lower of (i) the Fixed Conversion Price or (ii) 75% of the lowest closing price of our common stock during the 10 trading days prior to the conversion date.
As of MarchThe principal balance was $92,500 and unamortized discount was $12,000 at December 31, 2019, there was $48,076 of unrecognized compensation expense. As of March 31, 2018, there was $93,218 of unrecognized compensation expense.
Our business is organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. The following represents selected information for the Company’s reportable segments for the three months ended March 31, 2019 and 2018.
| March 31, 2019 | December 31, 2018 | |||||||
| Assets by Segment | ||||||||
| Renewable systems integration | $ | 1,640,549 | $ | 1,540,423 | ||||
| Non-renewable systems integration | 2,018,493 | 1,984,084 | ||||||
| $ | 3,659,042 | $ | 3,524,507 | |||||
| For the Three Months Ended | ||||||||
| March 31, 2019 | March 31, 2018 | |||||||
| Revenue by segment | ||||||||
| Renewable systems integration | $ | 49,514 | $ | 31,789 | ||||
| Non-renewable system integration | 1,654,759 | 1,694,535 | ||||||
| $ | 1,704,273 | $ | 1,726,324 | |||||
| Cost of sales by segment | ||||||||
| Renewable systems integration | $ | 37,785 | $ | 31,617 | ||||
| Non-renewable system integration | 1,158,653 | 1,209,413 | ||||||
| $ | 1,196,438 | $ | 1,241,030 | |||||
| Operating expenses | ||||||||
| Renewable Systems integration | $ | 167,540 | $ | 161,692 | ||||
| Non-renewable system Integration | 459,012 | 412,992 | ||||||
| $ | 626,552 | $ | 574,684 | |||||
| Operating (loss) income by segment | ||||||||
| Renewable Systems integration | $ | (155,811 | ) | $ | (161,520 | ) | ||
| Non-renewable system Integration | 37,094 | 72,130 | ||||||
| $ | (118,717 | ) | $ | (89,390 | ) | |||
2019.
| F-18 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCHDECEMBER 31, 2019 AND 2018 (UNAUDITED)
For the three months ended March 31, 2019 and 2018, the Company did not record any income tax expense or benefit. No tax benefit has been recorded in relation to the pre-tax loss for the three months ended March 31, 2019 and 2018, due to a full valuation allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the losses.
| NOTE PAYABLE |
Note payable is classified under current and non-current liabilities held for sale on the balance sheet.
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“Thermo”). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions. Pursuant to the terms of the Credit Agreement, the Company is permitted to borrow up to $350,000 under the revolving credit line, under a borrowing base equal to the lesser of (i) or 85% of Eligible Accounts (as defined in the Credit Agreement). Borrowings under the Credit Agreement may be used for working capital and to refinance certain existing debt of PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to 1.0, a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans to H/Cell. The loan commitment shall expire on August 21, 2020. As of MarchDecember 31, 2019, the Company was in compliance with these covenants. The facility was increased to $400,000 in August of 2019. The interest rate applicable to revolving loans under the Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. The Company paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and $3,500 will bewas paid on the first anniversary. The Company will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears. The Company may prepay the Note at any time and terminate the Credit Agreement. In the event that the Company terminates the Credit Agreement, the Company will pay Thermo an early termination fee equal to 4% of the pro rata portion, which pro rata portion is determined by multiplying $350,000$400,000 by the number of months prior to the second anniversary of the effective date of the Credit Agreement and then dividing that by 24. The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in the Company’s financial condition that could have a material adverse effect on the Company. As of MarchDecember 31, 2019, funds totaling $120,848$70,254 were available for borrowing under the Credit Agreement.
For the years ended December 31, 2019 and 2018, the Company incurred interest expense of $20,882 and $8,847, respectively, related to interest for the Thermo credit line.
| 11. | CONTRACT BACKLOG |
Contract backlog is classified under current and non-current liabilities held for sale on the balance sheet.
At December 31, 2019, the Company had a contract backlog approximating $551,850, with anticipated direct costs to completion approximating $454,132. At December 31, 2018, the Company had a contract backlog approximating $583,392, with anticipated direct costs to completion approximating $452,884.
| 12. | GOODWILL AND OTHER INTANGIBLES |
The tables below present a reconciliation of the Company’s goodwill and intangibles:
Goodwill
| Balance at December 31, 2018 | $ | 1,373,621 | ||
| Adjustments | - | |||
| Balance at December 31, 2019 | $ | 1,373,621 |
Intangibles – Customer List
| Balance at December 31, 2018 | $ | 83,645 | ||
| Amortization | (20,484 | ) | ||
| Balance at December 31, 2019 | $ | 63,161 |
| F-19 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The customer list original useful life of the asset was five years and $102,422. The balance at December 31, 2019 was $63,161 and will be amortized at $5,121 every quarter until December 31, 2022. The remaining $1,707 will be amortized in January 2023.
The Company has elected to early adopt ASU 2017-04 as of January 1, 2018, which is outlined below in Note 19 in performing their 2019 impairment test, and as previously stated, noted no impairment.
| 13. | BUSINESS ACQUISITION |
On February 1, 2018, the Company entered into a stock purchase agreement (the “Purchase Agreement”) by and among the Company, PVBJ and Benis Holdings LLC, the sole shareholder of PVBJ (“Benis Holdings”).
Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of PVBJ from Benis Holdings for an aggregate amount equal to (i) $221,800 (the “Cash Purchase Price”) which will be paid in the form of an earn-out and (ii) 22,223 shares of the Company’s common stock, par value $.0001 per share having a fair value of $1,177,779 (the “Acquisition Shares”). Pursuant to the Purchase Agreement, the Acquisition Shares were issued at closing, and the earn-out will be paid to Benis Holdings from positive earnings before taxes of PVBJ, with Benis Holdings to receive 50% of annual earnings before taxes of PVBJ until such time as Benis Holdings has received the full Cash Purchase Price.
In connection with the acquisition of PVBJ, the Company entered into an employment agreement (the “Employment Agreement”) with Paul V. Benis, Jr. to serve as an Executive Vice President of the Company for a period of three years. Pursuant to the Employment Agreement, Mr. Benis shall receive an annual salary of $150,000 and have oversight of the business operations of PVBJ.
The consideration transferred in the acquisition was as follows:
| Upfront consideration | $ | 1,177,779 | ||
| Liabilities assumed | 878,565 | |||
| Total | $ | 2,056,343 |
The acquisition accounting of PVBJ, including the fair values of working capital balances, property and equipment, identifiable intangible assets and goodwill was finalized in the fourth quarter of the year ended December 31, 2018. Management did not need to record any measurement period adjustments during the period.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Cash and cash equivalents | $ | 30,408 | ||
| Accounts receivable | 277,338 | |||
| Property and equipment, net | 272,554 | |||
| Customer list | 102,422 | |||
| Goodwill | 1,373,621 | |||
| Total assets acquired | 2,056,344 | |||
| Accounts payable | (112,590 | ) | ||
| Debt assumed | (590,657 | ) | ||
| Earn-out liability | (175,318 | ) | ||
| Total liabilities assumed | (878,565 | ) | ||
| Total net assets acquired | $ | 1,177,779 |
| F-20 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
A summary of identifiable intangible assets acquired, useful lives and amortization method is as follows:
Useful Life in
| Amount | Years | Amortization Method | ||||||||
| Customer List | $ | 102,422 | 5 | Straight Line | ||||||
| Total | $ | 102,422 | ||||||||
The results of PVBJ’s operations are included in the consolidated statements of operations beginning February 1, 2018. PVBJ’s net loss for year ended December 31, 2018 totaled $27,682. The net loss of the Company includes acquired intangible asset amortization of $18,777 for the year ended December 31, 2018.
For year ended December 31, 2018, acquisition related costs for the Company totaled $44,500 and are included in general and administration expenses.
Pro forma results for H/Cell Energy Corporation giving effect to the PVBJ Inc. acquisition
The following pro forma financial information presents the combined results of operations of PVBJ and the Company for the year ended December 31, 2018. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2018.
The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.
Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2018.
Year Ended December 31, 2018 | ||||
| Revenues | $ | 7,755,567 | ||
| Net loss | (549,235 | ) | ||
| Net loss per share: | ||||
| Basic | (0.07 | ) | ||
| Diluted | (0.07 | ) | ||
| 14. | STOCK OPTIONS AWARDS AND GRANTS |
A summary of the stock option activity and related information for the 2016 Incentive Stock Option Plan from December 31, 2018 to December 31, 2019 is as follows:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2018 | 47,750 | 5.80 | 2.40 | 488,000 | ||||||||||||
| Grants | 3,250 | 19.00 | 2.63 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Canceled | (16,075 | ) | 1.00 | - | - | |||||||||||
| Outstanding at December 31, 2019 | 34,925 | $ | 6.20 | 4.15 | - | |||||||||||
| Exercisable at December 31, 2019 | 18,419 | $ | 0.20 | 2.40 | $ | 176,375 | ||||||||||
| F-21 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s weighted average grant date stock price of $7.916 per share, which would have been received by the option holders had those option holders exercised their options as of that date.
Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to be a more accurate indicator of value.
The Company accounts for the expected life of options based on the contractual life of options for non-employees. For incentive options granted to employees, the Company accounts for the expected life in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The fair value of stock-based payment awards was estimated using the Black-Scholes pricing model.
As of December 31, 2019, there was $32,642 of unrecognized compensation expense. As of December 31, 2018, there was $56,745 of unrecognized compensation expense.
| 15. | SEGMENT INFORMATION |
Segment information is included on the balance sheet as part of assets held for sale and under discontinued operations on the income statement.
The Company’s business is organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements. The following represents selected information for the Company’s reportable segments for the years ended December 31, 2019 and 2018.
| December 31, 2019 | December 31, 2018 | |||||||
| Assets by Segment | ||||||||
| Renewable systems integration | $ | 1,642,592 | $ | 1,540,423 | ||||
| Non-renewable systems integration | 1,825,839 | 1,984,084 | ||||||
| $ | 3,468,431 | 3,524,507 | ||||||
| For the Years Ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Revenue by segment | ||||||||
| Renewable systems integration | $ | 203,394 | $ | 40,548 | ||||
| Non-renewable system integration | 6,613,930 | 7,505,889 | ||||||
| $ | 6,817,324 | $ | 7,546,437 | |||||
| Cost of sales by segment | ||||||||
| Renewable systems integration | $ | 144,695 | $ | 40,376 | ||||
| Non-renewable system integration | 4,710,183 | 5,492,607 | ||||||
| $ | 4,854,878 | $ | 5,532,983 | |||||
| Operating expenses | ||||||||
| Renewable Systems integration | $ | 447,783 | $ | 565,700 | ||||
| Non-renewable system Integration | 1,968,002 | 1,881,160 | ||||||
| $ | 2,415,785 | $ | 2,446,860 | |||||
| Operating (loss) income by segment | ||||||||
| Renewable Systems integration | $ | (389,084 | ) | $ | (565,528 | ) | ||
| Non-renewable system Integration | (64,255 | ) | 132,122 | |||||
| $ | (453,339 | ) | $ | (433,406 | ) | |||
| F-22 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Please refer to footnote 3 for related party transactions.
| 16. | 401(k) PLANS |
Substantially all of the Company’s employees may elect to defer a portion of their annual compensation in the Company-sponsored 401(k) tax-deferred savings plans. The Company makes matching contributions in these plans. The amount charged to expense for these plans was $56,310 for the year ended December 31, 2019 and $12,324 for the year ended December 31, 2018 and is included in discontinued operations on the income statement.
| 17. | EQUITY PURCHASE AGREEMENT |
Triton Funds
On March 12, 2019, the Company entered into an equity purchase agreement (the “Equity Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an accredited investor (the “Investor”), pursuant to which the Investor has agreed to purchase from the Company up to $450,000 in shares (the “Shares”) of the Company’s common stock, subject to certain limitations and conditions set forth in the Equity Purchase Agreement.
Under the Equity Purchase Agreement, the Investor has the right, at any time, to purchase Shares by delivering the Company a purchase notice, specifying the number of Shares to be purchased. The purchase price for the Shares under the Equity Purchase Agreement will be 60% of the lowest closing price of the Company’s common stock in the five consecutive trading days preceding the Investor’s receipt of the Shares subject to such equity purchase.
In addition, the Investor has an obligation, to the extent it has not already made voluntary purchases, to purchase up to (i) $200,000 in Shares within 15 Trading Days (as defined in the Equity Purchase Agreement) after the effective date of the Registration Statement (as defined below) and (ii) $450,000 in Shares within 70 Trading Days after the effective date of the Registration Statement.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
The Company has the right to reject any purchase notice from the Investor by delivering written notice of such rejection within one trading day after receipt. If the Company rejects any purchase notice, the Investor has no further obligations to purchase Shares under the Equity Purchase Agreement. The Company may terminate the Equity Purchase Agreement at any time by written notice to the Investor in the event of a material breach of the Equity Purchase Agreement by the Investor. In addition, the Equity Purchase Agreement will automatically terminate on the earliest of: (i) the date that the Investor has purchased $450,000 of Shares; (ii) 70 Trading Days after the effective date of the Registration Statement; or (iii) the date the Registration Statement is no longer effective.
The obligation of the Investor to purchase the Shares is subject to several conditions, including, among other thing, (i) that the Company has an effective registration statement with the SEC registering the Shares for resale, and (ii) that the purchase of the Shares shall not cause the Investor to own more than 9.99% of the outstanding shares of common stock. In connection with the Equity Purchase Agreement, the Company agreed to pay $15,000 of fees to the Investor, of which $10,000 was paid on execution of the Equity Purchase Agreement, and the remaining $5,000 will be paid on the first sale of Shares.
Pursuant to the Registration Rights Agreement, the Company is required to register the Shares on a registration statement (the “Registration Statement”) to be filed with the SEC within 15 calendar days after the Company filed its annual report for the fiscal year ended December 31, 2018. The Company timely filed the Registration Statement with the SEC.
No sales have been made pursuant to the Equity Purchase Agreement as of the date of this quarterly report.
Additionally, on March 12, 2019, the Company agreed to donate 35,0001,750 shares of common stock to the manager of the Investor. The Company recorded value of these shares at the market price and is included in general and administrative expenses.
On June 24, 2019, the Company provided written notice to the Investor that the Company elected to terminate the Equity Agreement, effective immediately. No Shares were sold pursuant to the Equity Purchase Agreement. On August 30, 2019, the 1,750 donation shares were returned to the Company and canceled.
GHS Investments
On July 9, 2019, the Company entered into an equity financing agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with GHS Investments LLC (“GHS”), pursuant to which GHS has agreed to purchase from the Company up to $3,000,000 in shares (the “Shares”) of the Company’s common stock, subject to certain limitations and conditions set forth in the Purchase Agreement. Additionally, the Company issued 1,500 shares to GHS as a commitment fee including in the balance sheet under deferred offering cost along with $90,000 in legal fees.
Under the Purchase Agreement, the Company has the right, from time to time at its sole discretion and subject to certain conditions, to direct GHS to purchase shares of common stock on any business day (a “Put”), provided that at least ten trading days has passed since the most recent Put. The purchase price of shares of common stock pursuant to the Purchase Agreement will be 80% of the lowest trading price of the common stock during the 10 trading days prior to the Put (the “Pricing Period”). Such sales of common stock by the Company, if any, may occur from time to time, at the Company’s option, over the 24-month period commencing on July 31, 2019.
The number of Shares that the Company may direct GHS to purchase per Put is limited by the average daily trading volume of the common stock prior to the Put, as follows:
| i. | If between zero (0) to seven hundred fifty (750) Shares are traded on average per day during the Pricing Period, the relevant Put shall be capped to seven hundred fifty (750) Shares; | |
| ii. | If between seven hundred fifty-one (751) Shares to one thousand five hundred (1,500) Shares are traded on average per day, the relevant Put shall be capped to one thousand five hundred (1,500) Shares; | |
| iii. | If between one thousand five hundred and one (1,501) Shares to three thousand (3,000) Shares are traded on average per day, the relevant Put shall be capped to three thousand (3,000) Shares; | |
| iv. | If between three thousand and one (3,001) Shares to seven thousand five hundred (7,500) Shares are traded on average per day, the relevant Put shall be capped to seven thousand five hundred (7,500) Shares; and | |
| v. | If the average daily traded volume for the Pricing Period is equal to or greater than seven thousand five hundred and one (7,501) Shares, then the relevant Put shall be limited to an amount which equals two times (2x) the average daily volume for the Shares during the Pricing Period. |
| F-23 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
In all instances, the Company may not sell shares of its common stock to GHS under the Purchase Agreement if it would result in GHS beneficially owning more than 4.99% of the Company’s common stock. In addition, no Put can be made in an amount that exceeds $400,000. The Company has sold an aggregate of 5,475 shares for proceeds of $37,094 during the year ended December 31, 2019.
| INCOME TAX |
The components of income tax expense (benefit) are as follows and included on the balance sheet in assets for sale and liabilities for sale
| Year Ended December 31, | ||||||||
| Current | 2019 | 2018 | ||||||
| U.S. Federal | $ | - | $ | - | ||||
| U.S. State and local | 8,000 | 13,000 | ||||||
| Australia | 1,000 | 9,000 | ||||||
| Total current | 9,000 | 22,000 | ||||||
| Year Ended December 31, | ||||||||
| Deferred | 2019 | 2018 | ||||||
| U.S. Federal | $ | - | $ | - | ||||
| U.S. State and local | - | - | ||||||
| Australia | 4,000 | (6,000 | ) | |||||
| Total deferred | 4,000 | (6,000 | ) | |||||
| Total income tax expense | 13,000 | 16,000 | ||||||
At December 31, 2019 and 2018, the Company had deferred tax assets of $582,000 and $430,000, respectively, against which a valuation allowance of $536,000 and $380,000, respectively, had been recorded. The change in the valuation allowance for the year ended December 31, 2019 was an increase of $156,000. The increase in the valuation allowance for the year ended December 31, 2019 was mainly attributable to increases in U.S. net operating losses and share-based compensation, which resulted in an increase in the Company’s deferred tax assets. The Company periodically assesses the likelihood that it will be able to recover the deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income.
Significant components of our deferred tax assets at December 31, 2019 and 2018 were as follows:
| December 31, | ||||||||
| Deferred tax assets: | 2019 | 2018 | ||||||
| Net operating loss carryforwards – U.S. | 371,000 | 224,000 | ||||||
| Charitable contribution carryforward | 6,000 | 3,000 | ||||||
| Share-based compensation | 159,000 | 153,000 | ||||||
| Accrued liabilities | 46,000 | 50,000 | ||||||
| Gross deferred tax assets | 582,000 | 430,000 | ||||||
| Valuation allowance | (536,000 | ) | (380,000 | ) | ||||
| Net deferred tax assets | 46,000 | 50,000 | ||||||
| F-24 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
A reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2019 and 2018 is as follows:
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| U.S. federal statutory tax rate | 21.0 | % | 21.0 | % | ||||
| State income taxes, net of federal benefit | (7.1 | ) | (7.1 | ) | ||||
| Other | (11.1 | ) | (9.1 | ) | ||||
| Change in valuation allowance | (4.6 | ) | (7.4 | ) | ||||
| Effective tax rate | (1.8 | )% | (3.0 | )% | ||||
The Company had approximately $1,236,000 and $749,000 of gross net operating loss (“NOL”) carryforwards (U.S. federal and state) as of December 31, 2019 and 2018, respectively, which begin to expire after 2036 through 2039. Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited.
| 19. | RECENT ACCOUNTING PRONOUNCEMENTS |
In February 2016, the FASB issued ASU 2016-02 and issued subsequent amendments to the initial guidance thereafter. This ASU requires an entity to recognize an ROUa right of use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification of the underlying lease as either finance or operating. Similar modifications have been made to lessor accounting in-line with revenue recognition guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for the Company on January 1, 2019. Entities are required to adopt ASU 2016-02 using a modified retrospective transition method. Full retrospective transition is prohibited. The guidance permits an entity to apply the standard’s transition provisions at either the beginning of the earliest comparative period presented in the financial statements or the beginning of the period of adoption (i.e., on the effective date). The Company adopted the new standard on its effective date.
The new standard provides several optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROUright of use assets or lease liabilities, and this includes not recognizing ROUright of use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient not to separate lease and non-lease components for all of its leases in existence at December 31, 2018,2019, which means all consideration that is fixed, or in-substance fixed, relating to the non-lease components will be captured as part of the Company’s lease components for balance sheet purposes. For the three monthsyear ended MarchDecember 31, 2019, the Company recognized additional lease liabilities of $261,047$383,547 with corresponding ROUright of use assets of the same amount based on the present value of the remaining minimum rental payments for existing leases on its Condensed Consolidated Balance Sheets. See Note 8, “Leases,” above, for additional lease disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and issued subsequent amendments to the initial guidance, collectively, Topic 326. ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 will be effective for the Company on January 1, 2020. Based on financial instruments currently held by the Company, the adoption of ASU 2016-13 will primarily impact its trade receivables, specifically its allowance for doubtful accounts. Due to the historical, current and expected credit quality of its customers, the Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial results, due to the minimal amount of historical write-offs of accounts receivable. The Company currently expects its valuation of credit losses on a forward looking basis to be materially consistent. The Company also expects the adoption of ASU 2016-13 to increase the disclosures associated with its allowance for doubtful accounts on its trade receivables.
| F-25 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCHDECEMBER 31, 2019 AND 2018 (UNAUDITED)
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 as part of the goodwill impairment test. The amount of the impairment charge to be recognized would now be the amount by which the carrying value exceeds the reporting unit’s fair value. The loss to be recognized cannot exceed the amount of goodwill allocated to that reporting unit. The amendments in ASU 2017-04 are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has elected to early adopt ASU 2017-04 as of January 1, 2018. The Company has applied the guidance related to ASU 2017-04 during its annual impairment test in the fourth quarter of 2018.2018 and 2019. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the entity initially adopts the amendments in this update. The Company elected to early adopt this standard in performing their 20182019 impairment test.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard will become effective for the Company beginning January 1, 2019, with early adoption permitted. The Company adopted the standard effective January, 2019 and it did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 amends ASC 350-40 and aligns the accounting for costs incurred to implement a cloud computing arrangement that is currently evaluatinga service contract with the impactguidance on capitalizing costs associated with developing or obtaining internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company will adopt ASU 2018-15 effective January 1, 2020. The Company does not believe that the adoption of this standardASU 2018-15 will have a material impact on its consolidated financial statements and disclosures.statements.
In August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new standard will become effective for the Company January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. ASU 2109-12 eliminates certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes, enacted change in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company is currently in the process of evaluating the effect that ASU 2019-12 will have on its consolidated financial results.
| LOSS PER SHARE |
The following table sets forth the information needed to compute basic and diluted loss per share:
Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||
| Net loss | $ | (712,441 | ) | $ | (600,735 | ) | ||
| Weighted average common shares outstanding | 382,233 | 379,301 | ||||||
| Basic net loss per share | $ | (1.86 | ) | $ | (1.86 | ) | ||
| Diluted net loss per share | $ | (1.58 | ) | $ | (1.58 | ) | ||
| F-26 |
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
For the year ended December 31, 2019 certain potential shares of common stock have been excluded from the calculation of diluted income per share because of a net loss, and therefore, the effect on diluted income per share would have been anti-dilutive.
| 21. | GOING CONCERN |
At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs and comparing those needs to the current cash and cash equivalent balances. The Company is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should we be unable to continue as a going concern.
As reflected in the year-end financial statements, the Company has a net loss of $724,393, net cash used in operations of $412,196, and working capital deficit of $249,147 for the year ended December 31, 2019. In August 2020 the line of credit balance is due, in October 2020 the Company has a convertible note due, and in January 2021 the Company has a convertible note payable – related party due. In addition, the Company is a start- up in the renewable energy space and has generated limited revenues to date. Consolidated cash on hand as of March 24, 2020 was $144,638.
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. As of the date of this filing, our offices remain open in both the U.S. and Australia as our operations service governmental offices and hospitals. We have adjusted certain aspects of our operations to protect our employees and customers while still meeting customers’ needs for our vital services. We will continue to monitor the situation closely and it is possible that we will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenues, profitability and financial position is uncertain at this time.
Management has evaluated the significance of these conditions and under these circumstances expects that its current cash resources, operating cash flows and ability to get financing would be sufficient to sustain operations for a period greater than one year from the annual report issuance date. The Company still has access to, and the ability for, financing via issuing convertible notes as the Company has done subsequently in January 2020. The Company has also extended some previous notes terms maturities with related parties and may continue to do so. Our line of credit creditor and convertible note due in 2020 have both expressed a willingness to refinance and/or extend the terms. Due to COVID-19 there has been various tax breaks and loan possibilities that the Company will take advantage of. In addition the operating budgets of each subsidiary project to produce enough cash flow to continue to cover expenses and between January 1, 2020 and March 24, 2020, the Company has sold an aggregate of 3,938 shares of Common Stock to GHS under the Purchase Agreement for working capital and for the aggregate net proceeds of $19,827, therefore, the identified conditions noted above have been alleviated.
| 22. | SUBSEQUENT EVENTS |
On January 3, 2020, the Company entered into an amendment agreement (the “Amendment”) with two of its directors (the “Holders”), to convertible notes issued by the Company to the Holders in January 2018 (the “2018 Notes”). Pursuant to the Amendment, which was effective as of January 2, 2020, the maturity date of the 2018 Notes was amended from January 2, 2020 to February 8, 2021 and the Holders waived any defaults that might have occurred prior to the date of the Amendment.
Sale of PVBJ
On April 21, 2020, the Company’s Board of Directors authorized its resale of PVBJ pursuant to the following terms (a) the outstanding $221,800 earn-out liability was used as consideration towards the purchase of PVBJ; (b) Paul Benis agreed to apply the remaining salary due to him, as prorated from the Closing Date to the expiration date of the Employment Agreement (January 31, 2021), to the purchase of PVBJ by Benis Holdings LLC as additional consideration thereof and (c) as additional consideration for the purchase of PVBJ by Benis Holdings LLC, PVBJ shall continue to be responsible for the line of credit (see below).
Sale of Pride
On May 18, 2020, the Company executed a Purchase and Sale Agreement between with Turquino providing for our sale of 100% of Pride’s outstanding stock Pride to Turquino in return for Turquino’s assumption of the Hidalgo Notes and the Doyle Notes and the debt obligations and accrued interest related thereto (the “Agreement”). In conjunction therewith, Hidalgo and Doyle assigned the Notes to Turquino, at which time Turquino became responsible for the debt obligations upon the Notes. The Company has evaluated events from Marchno further note obligations to Hidalgo or Doyle, and it reduced its debt by approximately $600,000 or 65% of the corporate debt obligations.
The gain/loss on discontinued operations consists of the following:
| Proceeds on sale (earn-out payable exchange) | $ | 214,074 | ||
| Less: net asset value | (1,383,440 | ) | ||
| Loss on disposal of PVBJ | $ | (1,169,366 | ) | |
| Pride | ||||
| Proceeds on sale (debt forgiveness) | $ | 500,321 | ||
| Less net asset value | (120,380 | ) | ||
| Gain on disposal of Pride | $ | 379,941 |
The results of discontinued operations are as follows:
| Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||
| PVBJ | ||||||||
| Revenue | ||||||||
| Sales | $ | 2,873,796 | $ | 2,440,854 | ||||
| Total revenue | 2,873,796 | 2,440,854 | ||||||
| Cost of goods sold | ||||||||
| Direct costs | 2,152,120 | 1,824,818 | ||||||
| Total cost of goods sold | 2,152,120 | 1,824,818 | ||||||
| Selling, general and administrative | 665,507 | 477,978 | ||||||
| Net income for period | $ | 56,169 | $ | 138,058 | ||||
| Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||
| Pride | ||||||||
| Revenue | ||||||||
| Sales | $ | 3,943,528 | 5,065,035 | |||||
| Total revenue | 3,943,528 | 5,065,035 | ||||||
| Cost of goods sold | ||||||||
| Direct costs | 2,702,758 | 3,676,288 | ||||||
| Total cost of goods sold | 2,702,758 | 3,676,288 | ||||||
| Selling, general and administrative | 1,229,289 | 1,466,972 | ||||||
| Net income (loss) for period | $ | 11,481 | $ | (78,225 | ) | |||
| Results from discontinued operations | $ | 67,650 | $ | 59,833 | ||||
The discontinued operations of the balance sheet as of December 31, 2019 are as follows:
| Pride | PVBJ | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 196,705 | $ | 55,856 | ||||
| Accounts receivable | 449,530 | 354,129 | ||||||
| Prepaid expenses | 2,108 | 9,071 | ||||||
| Costs and earnings in excess of billings | 26,045 | - | ||||||
| Total current assets | 674,388 | 419,056 | ||||||
| Property and equipment, net | 90,847 | 387,391 | ||||||
| Security deposits and other non-current assets | 31,633 | - | ||||||
| Deferred tax asset | 46,000 | - | ||||||
| Customer lists, net | - | 63,161 | ||||||
| Right of use asset | 222,524 | - | ||||||
| Goodwill | - | 1,373,621 | ||||||
| Total assets | $ | 1,065,392 | $ | 2,243,229 | ||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 450,545 | $ | 94,104 | ||||
| Billings in excess of costs and earnings | 47,098 | - | ||||||
| Sales and withholding tax payable | 37,199 | - | ||||||
| Current operating lease liability | 87,897 | - | ||||||
| Current equipment notes payable | 17,782 | 9,653 | ||||||
| Current line of credit | - | 269,746 | ||||||
| Current finance lease payable | - | 75,743 | ||||||
| Income tax payable | 41,426 | - | ||||||
| Total current liabilities | 681,947 | 449,246 | ||||||
| Noncurrent liabilities | ||||||||
| Earn-out payable | - | 209,199 | ||||||
| Lease operating liability | 137,071 | - | ||||||
| Finance leases | - | 307,804 | ||||||
| Equipment notes payable | 33,227 | 38,913 | ||||||
| Convertible notes payable – related party, net of discounts | 473,770 | - | ||||||
| Total noncurrent liabilities | 644,068 | 555,916 | ||||||
| Total liabilities | 1,326,015 | 1,005,162 | ||||||
| F-29 |
| December 31, 2019 | ||||
| Pride current assets | $ | 674,388 | ||
| PVBJ current assets | 419,056 | |||
| Current assets of discontinued operations | $ | 1,093,444 | ||
| Pride non-current assets | $ | 391,004 | ||
| PVBJ non-current assets | 1,824,173 | |||
| Non-current assets of discontinued operations | $ | 2,215,177 | ||
| December 31, 2019 | ||||
| Pride current liabilities | $ | 681,947 | ||
| PVBJ current liabilities | 449,246 | |||
| Current liabilities of discontinued operations | $ | 1,131,193 | ||
| Pride non-current liabilities | $ | 644,068 | ||
| PVBJ non-current liabilities | 555,916 | |||
| Non-current liabilities of discontinued operations | $ | 1,199,984 | ||
The discontinued operations of the balance sheet as of December 31, 2018 are as follows:
| Pride | PVBJ | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 314,694 | $ | 19,287 | ||||
| Accounts receivable | 697,216 | 395,190 | ||||||
| Prepaid expenses | 4,453 | - | ||||||
| Costs and earnings in excess of billings | 45,478 | - | ||||||
| Total current assets | 1,061,841 | 414,477 | ||||||
| Property and equipment, net | 135,712 | 358,338 | ||||||
| Security deposits and other non-current assets | 31,330 | - | ||||||
| Deferred tax asset | 32,386 | - | ||||||
| Customer lists, net | - | 83,645 | ||||||
| Goodwill | - | 1,373,621 | ||||||
| Total assets | $ | 1,261,169 | $ | 2,230,081 | ||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 699,558 | $ | 214,135 | ||||
| Billings in excess of costs and earnings | 45,331 | 150,000 | ||||||
| Sales and withholding tax payable | 66,696 | - | ||||||
| Current equipment notes payable | 17,346 | 21,645 | ||||||
| Current finance lease payable | - | 65,265 | ||||||
| Total current liabilities | 828,931 | 451,045 | ||||||
| Noncurrent liabilities | ||||||||
| Earn-out payable | - | 190,736 | ||||||
| Line of credit | - | 28,359 | ||||||
| Finance leases | - | 280,382 | ||||||
| Equipment notes payable | 51,264 | 51,390 | ||||||
| Convertible notes payable – related party, net of discounts | - | |||||||
| Total noncurrent liabilities | 51,264 | 550,867 | ||||||
| Total liabilities | 880,195 | 1,001,912 | ||||||
| December 31, 2018 | ||||
| Pride current assets | $ | 1,061,841 | ||
| PVBJ current assets | 414,477 | |||
| Current assets of discontinued operations | $ | 1,476,318 | ||
| Pride non-current assets | $ | 199,428 | ||
| PVBJ non-current assets | 1,815,604 | |||
| Non-current assets of discontinued operations | $ | 2,015,032 | ||
| December 31, 2018 | ||||
| Pride current liabilities | $ | 828,931 | ||
| PVBJ current liabilities | 451,045 | |||
| Current liabilities of discontinued operations | $ | 1,279,976 | ||
| Pride non-current liabilities | $ | 51,264 | ||
| PVBJ non-current liabilities | 550,867 | |||
| Non-current liabilities of discontinued operations | $ | 602,131 | ||
H/CELL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On January 15, 2020, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with FirstFire Global Opportunities Fund LLC (the “Investor”), an unrelated third party, pursuant to which, the Company sold a $85,250 principal amount convertible note (the “Note”) to the Investor for gross proceeds of $77,500, with an original discount issuance of $7,750 (the “Offering”). The transaction closed on January 16, 2020 upon receipt of the funds from the Investor.
The Note will mature on January 15, 2021 and will bear interest at the rate of 8% per annum, which interest will be payable on the maturity date or any redemption date and may be paid, in certain conditions, through the issuance of common shares, at the discretion of the Company. The Company shall make a monthly principal payment to the Investor of $4,500 on the 15th day of each month, starting February 15, 2020. The Company also has the right, at any time, to repay all or a part of the Note, on at least one prior business days’ notice, in an amount equal to 115% of the principal being repaid, plus any accrued but unpaid interest on the principal amount being repaid.
The Note will be convertible into the Company’s common shares, par value $0.0001 per share (“Common Stock”) at a conversion price of $10.00 per share (the “Fixed Conversion Price”) at the discretion of the holder. At no time will the Investor be entitled to convert any portion of Convertible Note to the extent that after such conversion, the Investor (together with its affiliates) would beneficially own more than 4.99% of our outstanding Common Stock as of such date. The Note contains standard anti-dilution protection.
The Note includes customary event of default provisions and provides for a default interest rate of 15%. Upon the occurrence of an event of default, the Investor may require the Company to redeem all or any portion of the Note (including all accrued and unpaid interest), in cash, at a price equal to the product of (A) the amount to be redeemed multiplied by (B) 125%. In addition, upon an event of default, the conversion price would be the lower of (i) the Fixed Conversion Price or (ii) 75% of the lowest closing price of the Common Stock during the 10 trading days prior to the conversion date.
Between January 1, 2020 and March 24, 2020, the Company has sold an aggregate of 3,938 shares of Common Stock to GHS under the Purchase Agreement for working capital and for the aggregate net proceeds of $19,827.
On February 27, 2020, the Company extended the lease in Kunda Park, Queensland Australia, which started in May 2018 and now expires in April 2027.
On March 10, 2020, the Company signed an amendment to the Thermo Credit lending facility which confirms the line was increased to $400,000.
On September 29, 2020, the Company filed an amendment to and restatement of its Articles of Incorporation with the Secretary of State of the State of Nevada (the “Amendment”). Pursuant to the Amendment, the Company (i) changed its name from H/Cell Energy Corporation to Vision Hydrogen Corporation, (ii) effectuated a one-for-twenty (1:20) reverse split of the issued and outstanding shares of common stock of the Company without changing the par value of the stock, and (iii) increased its authorized shares of common stock from 25,000,000 to 100,000,000.
Effective as of the opening of market trading on October 6, 2020, the Company’s common stock will trade under the symbol HCCCD for 20 business days to designate the Reverse Split, after which, the ticker symbol will change to VIHD.
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 5,010 | $ | 25,059 | ||||
| Prepaid expenses | 4,079 | 4,079 | ||||||
| Current assets held for sale | - | 1,093,444 | ||||||
| Total current assets | 9,089 | 1,122,582 | ||||||
| Security deposits and other non-current assets | 300 | 600 | ||||||
| Deferred offering cost | - | 130,072 | ||||||
| Non-current assets held for sale | - | 2,215,177 | ||||||
| Total non-current assets | 300 | 2,345,849 | ||||||
| Total assets | $ | 9,389 | $ | 3,468,431 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 59,186 | $ | 157,484 | ||||
| Sales and withholding tax payable | 2,388 | 2,552 | ||||||
| Current convertible note payable | - | 80,500 | ||||||
| Loan payable | 20,000 | - | ||||||
| Loan payable – related party | 179,838 | |||||||
| Current liabilities held for sale | - | 1,131,193 | ||||||
| Total current liabilities | 261,412 | 1,371,729 | ||||||
| Noncurrent liabilities | ||||||||
| Non-current liabilities held for sale | - | 1,199,984 | ||||||
| Total noncurrent liabilities | - | 1,199,984 | ||||||
| Total liabilities | 261,412 | 2,571,713 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding | - | - | ||||||
| Common stock - $0.0001 par value; 25,000,000 shares authorized; 397,576 and 386,276 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | 40 | 39 | ||||||
| Additional paid-in capital | 3,059,845 | 2,970,419 | ||||||
| Accumulated deficit | (3,308,835 | ) | (2,073,740 | ) | ||||
| Total stockholders’ equity | (248,950 | ) | 896,718 | |||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 9,389 | $ | 3,468,431 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-32 |
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS – OTHER COMPREHENSIVE INCOME
(UNAUDITED)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue | ||||||||||||||||
| Sales | $ | - | $ | - | $ | - | $ | - | ||||||||
| Total revenue | - | - | - | - | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Direct costs | - | - | - | - | ||||||||||||
| Total cost of goods sold | - | - | - | - | ||||||||||||
| Gross profit | - | - | - | - | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | 61,370 | 129,416 | 169,757 | 276,695 | ||||||||||||
| Management fees – related party | 10,000 | 19,500 | 30,000 | 39,000 | ||||||||||||
| Total operating expenses | 71,370 | 148,916 | 199,757 | 315,695 | ||||||||||||
| Loss from operations | (71,370 | ) | (148,916 | ) | (199,757 | ) | (315,695 | ) | ||||||||
| Other expenses | ||||||||||||||||
| Interest expense | 41,551 | 10,258 | 49,913 | 12,091 | ||||||||||||
| Interest expense – related party | 4,584 | 58,060 | 35,719 | 94,155 | ||||||||||||
| Change in fair value earn-out | - | 4,547 | 4,875 | 8,943 | ||||||||||||
| Total other expenses | 46,135 | 72,865 | 90,507 | 115,189 | ||||||||||||
| Net loss from continuing operations | $ | (117,505 | ) | $ | (221,781 | ) | $ | (290,264 | ) | $ | (430,884 | ) | ||||
| Net income (loss) from discontinued operations (including loss on disposal of 789,425) | (845,803 | ) | 112,319 | (944,831 | ) | 196,396 | ||||||||||
| Net loss | $ | (963,308 | ) | $ | (109,462 | ) | $ | (1,235,095 | ) | $ | (234,488 | ) | ||||
| Loss per share (continuing operations) | ||||||||||||||||
| Basic | $ | (0.20 | ) | $ | (0.60 | ) | $ | (0.80 | ) | $ | (1.20 | ) | ||||
| Diluted | $ | (0.20 | ) | $ | (0.60 | ) | $ | (0.80 | ) | $ | (1.20 | ) | ||||
| Earnings (loss) per share (discontinued operations) | ||||||||||||||||
| Basic | $ | (2.40 | ) | $ | 0.20 | $ | (3.20 | ) | $ | 0.60 | ||||||
| Diluted | $ | (2.40 | ) | $ | 0.20 | $ | (3.20 | ) | $ | 0.60 | ||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | 394,105 | 381,051 | 390,126 | 380,365 | ||||||||||||
| Diluted | 394,105 | 381,051 | 390,126 | 380,365 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-33 |
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
(UNAUDITED)
| Common Stock | Preferred Stock | Additional | Accumulated | Total | ||||||||||||||||||||||||
| Number of Shares | Amount | Number of shares | Amount | Paid-In Capital | Income (Deficit) | Stockholders’ Equity | ||||||||||||||||||||||
| Beginning, January 1, 2019 | 379,302 | $ | 38 | - | $ | - | $ | 2,984,196 | $ | (1,361,299 | ) | $ | 1,622,935 | |||||||||||||||
| Stock-based compensation | - | - | - | - | 8,562 | - | 8,562 | |||||||||||||||||||||
| Share donation | 1,750 | - | - | - | 23,446 | - | 23,446 | |||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 97,500 | - | 97,500 | |||||||||||||||||||||
| Debt extinguishment | - | - | - | - | (216,460 | ) | - | (216,460 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (125,026 | ) | (125,026 | ) | |||||||||||||||||||
| Ending, March 31, 2019 | 381,052 | $ | 38 | - | $ | - | $ | 2,897,244 | $ | (1,486,325 | ) | $ | 1,410,957 | |||||||||||||||
| Stock-based compensation | - | - | - | - | 2,074 | - | 2,074 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (109,462 | ) | (109,462 | ) | |||||||||||||||||||
| Ending, June 30, 2019 | 381,052 | $ | 38 | - | $ | - | $ | 2,899,318 | $ | (1,595,787 | ) | $ | 1,303,569 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-34 |
HCELL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
(UNAUDITED)
| Common Stock | Preferred Stock | Additional | Accumulated | Total | ||||||||||||||||||||||||
| Number of Shares | Amount | Number of shares | Amount | Paid-In Capital | Income (Deficit) | Stockholders’ Equity | ||||||||||||||||||||||
| Beginning, January 1, 2020 | 386,276 | $ | 39 | - | - | $ | 2,970,419 | $ | (2,073,740 | ) | $ | 896,718 | ||||||||||||||||
| Stock-based compensation | - | - | - | - | 7,993 | - | 7,993 | |||||||||||||||||||||
| Equity financing | 3,150 | - | - | - | 19,833 | - | 19,833 | |||||||||||||||||||||
| Debt extinguishment | - | - | - | - | 39,954 | - | 39,954 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (271,787 | ) | (271,787 | ) | |||||||||||||||||||
| Ending, March 31, 2020 | 389,426 | $ | 39 | - | $ | - | $ | 3,038,199 | $ | (2,345,527 | ) | $ | 692,711 | |||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||
| Equity financing | 3,150 | - | - | - | 6,186 | - | 6,186 | |||||||||||||||||||||
| Share conversion | 5,000 | 1 | - | - | 15,460 | - | 15,461 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (963,308 | ) | (963,308 | ) | |||||||||||||||||||
| Ending, June 30, 2020 | 397,576 | $ | 40 | - | $ | - | $ | 3,059,845 | $ | (3,308,835 | ) | $ | (248,950 | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss from continuing operations | $ | (290,265 | ) | $ | (430,884 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 50,462 | 77,777 | ||||||
| Stock-based compensation | 7,993 | 10,636 | ||||||
| Other assets | 129,180 | - | ||||||
| Change in fair value contingent consideration | 4,875 | 8,943 | ||||||
| Stock issued for services related to equity raise | - | 23,450 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Other long-term asset | - | (30,000 | ) | |||||
| Prepaid expenses and other costs | (300 | ) | 6,000 | |||||
| Accounts payable and accrued expenses | (132,844 | ) | 86,520 | |||||
| Net cash (used in) in operating activities – continuing operations | (230,899 | ) | (247,558 | ) | ||||
| Net cash provided by (used in) operating activities – discontinued operations | 128,054 | (90,035 | ) | |||||
Net cash used in operating activities | (102,845 | ) | (337,593 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash disposed of in disposition of subsidiaries | (322,101 | ) | - | |||||
| Net cash provided by (used in) investing activities – continuing operations | (322,101 | ) | - | |||||
| Net cash (used in) investing activities – discontinued operations | (21,031 | ) | (5,022 | ) | ||||
| Net cash (used in) investing activities | (343,132 | ) | (5,022 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from PPP notes payable | 20,000 | - | ||||||
| Proceeds from related party debt | 179,838 | - | ||||||
| Proceeds from issuance of convertible debt | 75,000 | 147,500 | ||||||
| Repayment of debt | (90,000 | ) | - | |||||
| Proceeds from equity financing | 26,008 | - | ||||||
| Net cash provided by (used in) financing activities – continuing operations | 210,846 | 147,500 | ||||||
| Net cash provided by (used in) financing activities – discontinued operations | (22,243 | ) | 150,282 | |||||
| Net cash provided by (used in) provided by financing activities | (188,603 | ) | 297,782 | |||||
| Net increase (decrease) in cash and cash equivalents | (257,374 | ) | (44,833 | ) | ||||
| Effect of foreign currency translation on cash | (15,236 | ) | (771 | ) | ||||
| Cash and cash equivalents - beginning of period | 277,620 | 359,134 | ||||||
| Cash and cash equivalents - end of period | $ | 5,010 | $ | 313,530 | ||||
Supplemental disclosure of non-cash investing and financing activities
| Beneficial conversion feature | $ | - | $ | 190,000 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-36 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| 1. | ORGANIZATION AND LINE OF BUSINESS |
H/Cell Energy Corporation (the “Company”) was incorporated in the state of Nevada on August 17, 2015 and is based in Dallas, Texas. The Company’s principal operations consist of designing and installing clean energy systems with a focus on hydrogen energy. Effective January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”), a provider of security systems integration for customers in the government and commercial sector, and has launched a new clean energy systems division to focus on the Asia-Pacific high growth renewable energy market. On February 1, 2018, the Company acquired PVBJ Inc. (“PVBJ”) Established in 2008, PVBJ is engaged in the business of the design, installation, maintenance, and emergency service of environmental systems both in residential and commercial markets.
The Company has developed a hydrogen energy system for residential and commercial use designed to create electricity (the “System”), which uses renewable energy as its source for hydrogen production. The System functions as a self-sustaining clean energy system using hydrogen and fuel cell technology and can be configured as an off-grid solution for all electricity needs or connected to the grid to generate energy credits. The System’s production of electricity is eco-friendly since it is not produced by the use of fossil fuels and is based upon a green-energy concept that is safe, renewable, self-sustaining, and cost effective.
During the three and six months ended June 2020, the Company took significant steps to transition its hydrogen energy business to focus on hydrogen production on a scaled production plant model. During the period, the Company disposed of its interests in both PVBJ and Pride (See Note 16 ‘Discontinued Operations’) in order to facilitate this transition. As part of the disposition the Company agreed to provide certain post-closing support to both PVBJ and Pride through Q3 2020. On August 12, 2020, pursuant to a Seed Capital Subscription Agreement, we made an equity investment into VoltH2 Holdings AG (“VoltH2”), a Swiss corporation developing scalable green hydrogen production projects primarily in Europe. VoltH2 is currently developing a 25MW green hydrogen production site near Vlissingen, Netherlands. The investment was for a total purchase price $175,000 USD representing a 17.5% equity interest in VoltH2.
Effective June 26, 2020, Charles Benton and Michael Doyle resigned as our Directors. The resignations are not due to any disagreements with the Company its management, or operations.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or any other interim period or for any other future year. These unaudited condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC. As of June 30, 2020 the company no longer consolidates Pride or PVBJ as they have been dissolved and the financials presented are just of H/Cell. Results from pride and PVBJ have been recast in the current period and comparative periods in discontinued operations. The balance sheet as of December 31, 2019 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, were issued. and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation specifically as it relates to the reclassification of assets, liabilities, operating results, cash flows and the accumulated comprehensive loss as a result of the Company’s disposition of interests in our PVBJ and Pride subsidiaries.
Accounts Receivable
Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. Accounts are written off as uncollectible after collection efforts have failed. In addition, the Company does not generally charge interest on past-due accounts or require collateral. At June 30, 2020 and December 31, 2019, there was no allowance for doubtful accounts required.
Goodwill and Finite-Lived Intangible Assets
Goodwill represents the excess of the aggregate of the following (1) consideration transferred, (2) the fair value of any non-controlling interest in the acquiree, and (3) if the business combination is achieved in stages, the acquisition-date fair value of our previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Identifiable intangible assets consist primarily of customer lists and relationships, non-compete agreements and technology-based intangibles and other contractual agreements. The Company amortizes finite lived identifiable intangible assets over five years, on a straight-line basis to their estimated residual values and periodically reviews them for impairment. Total goodwill and identifiable intangible assets comprised 0% of the Company’s consolidated total assets at June 30, 2020 and 41% at December 31, 2019.
The Company uses the acquisition method of accounting for all business combinations and does not amortize goodwill. Goodwill is tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, its goodwill is not impaired, and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.
As of June 30, 2020, the Company had no goodwill and has included the write-off of goodwill in the calculation of the loss on disposal of PVBJ. (see Discontinued Operations Note 16).
| F-38 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive loss. The Company’s other comprehensive loss is comprised of foreign currency translation adjustments. The balance of accumulated other comprehensive loss is zero at June 30, 2020 due to the disposition of Pride on May 18, 2020.
Currency Translation
The Company translates its foreign subsidiary’s assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in accumulated other comprehensive income. The Company records gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location’s functional currency in net income (loss) for each period. Items included in the financial statements of each entity in the group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”).
The functional and reporting currency of the Company is the United States Dollar (“U.S. Dollar”). The financial records of Australia based Pride is maintained in the local currency, the Australian Dollar (AUD$), which is also its functional currency.
For the three and six months ended June 30, 2020, the Company recorded other comprehensive loss of $6,769 and $19,869 respectively due to foreign currency translation in the condensed consolidated financial statements. For the three and six months ended June 30, 2019, the Company recorded other comprehensive loss of $4,239 and income of $14,373 respectively from foreign currency translation. The balance of comprehensive loss and accumulated comprehensive loss has been reclassified to discontinued operations at June 30, 2020 due to the disposition of Pride on May 18, 2020.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standard Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
Under ASU 2014-09 requirements, the Company recognizes revenue from the installation or construction of projects and service or short-term projects over time using the cost-based input method. The Company accounts for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. The Company considers the start of a project to be when the above criteria have been met and the Company either has written authorization from the customer to proceed or an executed contract. A detailed breakdown of the five-step process is as follows:
Identify the Contract with a Customer
The Company used to receive almost all of its contracts from only two sources, referrals, or government bids. In a referral, a client that the Company has an ongoing business relationship with refers the Company to perform services. In a government bid, the Company applies to perform services for public projects. The contracts have a pattern of being stand-alone contracts.
Identify the Performance Obligations in the Contract
The performance obligation of the Company is to perform a contractually agreed upon task for the customer. If the contract is stated to provide only contractual services, then the services are considered the only performance obligation. If the contractual services include design and or engineering in addition to the contract, it is considered a single performance obligation.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
Determine the Transaction Price
The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:
| 1. | The customer’s written approval of the scope of the change order; |
| 2. | Current contract language that indicates clear and enforceable entitlement relating to the change order; |
| 3. | Separate documentation for the change order costs that are identifiable and reasonable; and |
| 4. | The Company’s favorable experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated |
Once the Company receives a contract, it generates a budget of projected costs for the contract based on the contract price. If the scope of the contract during the contractual period needs to be modified, the Company typically files a change order. The Company does not continue to perform services until the change modification is agreed upon with documentation by both the Company and the customer. There are few times that claims, extras, or back charges are included in the contract.
Allocate the Transaction Price to the Performance Obligations in the Contract
If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the Company’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one customer, the Company has a policy of splitting out the services over multiple contracts.
Recognize Revenue When (or As) the Entity Satisfies a Performance Obligations
The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e. design, engineering, procurement of material, etc.) should not be recognized as the client does not have control of the good/service provided. When the estimate on a contract indicates a loss or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current asset in the Company’s balance sheet under the captions “Costs and estimated earnings in excess of billings” and “Unbilled accounts receivable.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in the Company’s balance sheet under the caption “Billings in excess of costs and estimated earnings.”
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank and money market funds as well as other highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents as of June 30, 2020 or December 31, 2019.
| F-40 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
Stock-Based Compensation
The Company recognizes expense for its stock-based compensation based on the fair value of the awards at the time they are granted. We estimate the value of stock option awards on the date of grant using the Black-Scholes model. The determination of the fair value of stock-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates. The impact of forfeitures is recorded in the period in which they occur. Our outstanding awards do not contain market or performance conditions.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
| ● | Level 1—quoted prices in active markets for identical assets and liabilities; | |
| ● | Level 2—observable market-based inputs or unobservable inputs that are corroborated by market data; and | |
| ● | Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
There were no fair value measurements as of June 30, 2020.
Net Income (Loss) Per Common Share
The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “if converted” method as applicable. The computation of diluted loss per share excludes dilutive securities because their inclusion would be anti-dilutive. Dilutive securities for the periods presented are as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2018 | |||||||||||||
| Options to purchase common stock | 0 | 21,250 | 0 | 21,250 | ||||||||||||
| Convertible debt | 0 | 55,000 | 0 | 55,000 | ||||||||||||
| Totals | 0 | 76,250 | 0 | 76,250 | ||||||||||||
Please refer to Note 10 for a discussion of the decrease for the three and six months ended June 30, 2020 compared to December 31, 2019.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| 3. | RELATED PARTY TRANSACTIONS |
The Company has entered into agreements to indemnify its directors and executive officers, in addition to the indemnification provided for in the Company’s articles of incorporation and bylaws. These agreements, among other things, provide for indemnification of the Company’s directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provided services at the Company’s request. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
There was $10,000 and $19,500 of management fees expensed for the three months ended June 30, 2020 and 2019 to Turquino Equity LLC (Turquino”), a significant shareholder, and $30,000 and $39,000 for each of the six months ended June 30, 2020 and 2019.
On January 2, 2018 and February 8, 2019, the Company and Andrew Hidalgo (“Hidalgo”), completed a Convertible Debenture Agreement whereby Hidalgo, the Company’s Chief Executive Officer, lent us an aggregate of $275,000 (the “Hidalgo Notes”). On January 2, 2018 and February 8, 2019, the Company and Michael Doyle (“Doyle”), the Company’s Director, completed a Convertible Debenture Agreement whereby Doyle lent the Company an aggregate of $275,000 (the “Doyle Notes”).
May 18, 2020 Purchase and Sale Agreement
On May 18, 2020, the Company’s Board of Directors authorized the Company, in accordance to Nevada Statute 78.565, to complete and execute the May 18, 2020 Purchase and Sale Agreement between the Company and Turquino providing for the Company’s sale of 100% of Pride’s outstanding stock Pride to Turquino in return for Turquino’s assumption of the Hidalgo Notes and the Doyle Notes and the debt obligations and accrued interest related thereto (the “Agreement”). In conjunction therewith, Hidalgo and Doyle assigned the Notes to Turquino, at which time Turquino became responsible for the debt obligations upon the Notes. The Company has no further note obligations to Hidalgo or Doyle, and it reduced its debt by approximately $600,000 or 65% of the corporate debt obligations. Pursuant to Nevada Statute Section 78.565, approval of the Agreement only requires the approval of the board of directors and does not require shareholder approval. The Company obtained a valuation of the fair market value of Pride from an independent third party which valued Pride at $425,000 USD. The Agreement provides that the Parties mutually release one another and discharge and release the other party (and their respective current and former officers, directors, employees, shareholders, note holders, attorneys, assigns, agents, representatives, predecessors and successors in interest), from any and all claims, demands, obligations, or causes of action. Hidalgo, our Chief Executive Officer, and a managing member of Turquino, are related parties in connection with the Exchange Agreement, the Notes, and the Agreement.
On June 19, 2020, the Company entered into a Promissory Note with a director of the Company (the “Lender”), for a principal amount up to $230,332 bearing interest with interest at 6% per annum. The entire principal and interest upon the Promissory Note are due on June 19, 2021. The proceeds from the note was used to pay accrued expenses of the Company.
| 4. | SIGNIFICANT CONCENTRATIONS OF CREDIT RISK |
Cash is maintained at an authorized deposit-taking institution (bank) incorporated in both the United States and Australia and is insured by the U.S. Federal Deposit Insurance Corporation and Australian Securities & Investments Commission up to $250,000 and approximately $186,000 USD in total, respectively. As of June 30, 2020 and December 31, 2019, the balance was fully covered under the $250,000 threshold in the United States. In Australia, the balance was $10,563 over at December 31, 2019.
Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions but does not generally require collateral. There were no accounts receivable as of June 30, 2020. As of December 31, 2019, one of the Company’s accounts receivable was due from one customer at approximately 13%.
| 5. | MAJOR CUSTOMERS |
Due to the sale of Pride and PVBJ the Company had no major customers for the three or six months ended June 30, 2020. There were two unrelated customers with a concentration of 10% or higher 16%, and 15%, for the three months ended June 30, 2019, and three unrelated customers for the six months ended June 30, 2019 at 21%, and two at 11%.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| 6. | UNCOMPLETED CONTRACTS |
Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows at June 30, 2020 and December 31, 2019:
| June 30, 2020 | December 31, 2019 | |||||||
| Costs incurred on uncompleted contracts | $ | - | $ | 465,686 | ||||
| Estimated earnings | - | 454,132 | ||||||
| Costs and estimated earnings earned on uncompleted contracts | - | 919,818 | ||||||
| Billings to date | - | 750,769 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | - | 169,049 | ||||||
| Costs and earnings in excess of billings on completed contracts | - | (190,102 | ) | |||||
| $ | - | $ | (21,053 | ) | ||||
| Costs in excess of billings | $ | - | $ | 26,045 | ||||
| Billings in excess of cost | - | (47,098 | ) | |||||
| $ | - | $ | (21,053 | ) | ||||
| 7. | LEASES |
Operating Leases
As of June 30, 2020, the Company had no operating leases. As of December 31, 2019 the Company had $87,897 in current operating lease liability and $137,071 in non-current operating lease liability which have been re-classed to discontinued operations on the condensed consolidated balance sheet.
Finance Leases
As of June 30, 2020, the Company had no finance leases. As of December 31, 2019 the Company had $75,743 in current finance leases and $307,804 in non-current finance leases which have been re-classed to discontinued operations on the balance sheet.
| 8. | CONTRACT BACKLOG |
As of June 30, 2020, the Company had no contract backlog. As of December 31, 2019, the Company had a contract backlog approximating $551,850, with anticipated direct costs to completion approximating $454,132.
| 9. | GOODWILL AND OTHER INTANGIBLES |
The Company has no goodwill or other intangibles as of June 30, 2020. As of December 31, 2019, the Company had $1,373,621 in goodwill and $83,645 in other intangibles which has been re-classed to discontinued operations on the balance sheet.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| 10. | STOCK OPTIONS AWARDS AND GRANTS |
A summary of the stock option activity and related information for the 2016 Incentive Stock Option Plan from December 31, 2019 to June 30, 2020 is as follows:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2019 | 34,925 | $ | 6.20 | 2.40 | $ | 216,535 | ||||||||||
| Grants | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Canceled | (34,925 | ) | (6.20 | ) | (2.40 | ) | - | |||||||||
| Outstanding at June 30, 2020 | - | $ | 0.00 | - | - | |||||||||||
| Exercisable at June 30, 2020 | - | $ | 0.00 | - | - | |||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s weighted average grant date stock price of $7.916 per share, which would have been received by the option holders had those option holders exercised their options as of that date.
Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to be a more accurate indicator of value.
The Company accounts for the expected life of options based on the contractual life of options for non-employees. For incentive options granted to employees, the Company accounts for the expected life in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The fair value of stock-based payment awards was estimated using the Black-Scholes pricing model.
As of June 30, 2020, there was no unrecognized compensation expense as all option holders had their options forfeited through the sale of Pride and PVBJ. As of December 31, 2019, there was $32,642 of unrecognized compensation expense.
| 11. | SEGMENT INFORMATION |
The Company’s business was organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. Due to the sale of both Pride and PVBJ (See Note 16) the Company operates in only one reportable segment. Please refer to Note 16 for further detail and Management’s Discussion and Analysis for further detail.
| 12. | INCOME TAX |
For the three and six months ended June 30, 2020 and 2019, the Company did not record any income tax expense or benefit. No tax benefit has been recorded in relation to the pre-tax income for the three months ended June 30, 2018 and loss for the six months ended June 30, 2018, due to a full valuation allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the losses.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three and months ended June 30, 2020.The Company did not have a deferred tax asset as of June 30, 2020.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| 13. | NOTE PAYABLE |
QRIDA Loan
On May 6, 2020, the Company entered into a loan for $160,410 with the Queensland Rural and Industry Development Authority. The interest rate was 2.50% with a term of ten years. Through the disposition of Pride the Company no longer has this loan as a liability on its balance sheet.
2019 Convertible Note Financing
On October 17, 2019, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund LLC (“FirstFire”), an unrelated third party, pursuant to which it issued a $110,000 convertible note (the “2019 Note”) to FirstFire for gross proceeds of $100,000, with an original discount issuance of $10,000. The transaction closed on October 23, 2019 upon receipt of the funds from FirstFire. The Company incurred $5,000 of legal fees for the transaction. Both the legal fees and original issue discount are amortized over the life of the agreement.
On May 18, 2020 FirstFire converted $15,450 of the balance due for 5,000 shares.
2020 Convertible Note Financing
On January 15, 2020, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with FirstFire, , pursuant to which the Company issued a $85,250 principal amount convertible note for gross proceeds of $77,500, with an original discount issuance of $7,750. The transaction closed on January 16, 2020. The Company incurred $2,500 of legal fees for this transaction.
On June 18, 2020, the Company and FirstFire entered into a settlement agreement whereby both the 2019 and 2020 notes were cancelled and all remaining amounts due under the above notes were settled for $90,000 The Company has no further obligations with respect to any of the notes under terms of the First Fire Note settlement. The Notes were cancelled, and all remaining contractual obligations there under were extinguished under terms of a Settlement and Release Agreement which resulted in a gain on the income statement of $81,203 for the three and six months ended June 30, 2020.
Paycheck Protection Program Loan
On May 5, 2020, the Company entered into a term note with Comerica Bank, with a principal amount of $20,000 thousand pursuant to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan is evidenced by a promissory note. The PPP Term Note bears interest at a fixed annual rate of 1.00%, with the first six months of interest deferred. Beginning in November 2020, the Company will make 18 equal monthly payments of principal and interest with the final payment due in April 2022. The PPP Term Note may be accelerated upon the occurrence of an event of default.
The PPP Term Note is unsecured and guaranteed by the United States Small Business Administration. The Company may apply to Comerica Bank for forgiveness of the PPP Term Note, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the eight-week period beginning upon receipt of PPP Term Note funds, calculated in accordance with the terms of the CARES Act. At this time, the Company is not in a position to quantify the portion of the PPP Term Note that will be forgiven.
| F-45 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
Director Related Party Note
On June 19, 2020, the Company entered into a Promissory Note with a director of the Company (the “Lender”), for the principal amount up to $230,332 bearing interest with interest at 6% per annum. The entire principal and interest upon the Promissory Note are due on June 19, 2021. As of June 30, 2020 $179,838, is due on this note due to advanced funds being received on the note to settle certain liabilities and the note being fully funded subsequent to quarter end. The note incurred interest expense of $416 for the three months ended June 30, 2020.
| 14. | EQUITY PURCHASE AGREEMENT |
On March 12, 2019, the Company entered into an equity purchase agreement (the “Equity Purchase Agreement”) and a registration rights agreement with an accredited investor (the “Investor”), pursuant to which the Investor has agreed to purchase from the Company up to $450,000 in shares (the “Shares”) of the Company’s common stock, subject to certain limitations and conditions set forth in the Equity Purchase Agreement. Additionally, on March 12, 2019, the Company agreed to donate 1,750 shares of common stock to the manager of the Investor. The Company recorded value of these shares at the market price and is included in general and administrative expenses.
On June 24, 2019, the Company provided written notice to the Investor that the Company elected to terminate the Equity Agreement, effective immediately. No Shares were sold pursuant to the Equity Purchase Agreement. On August 30, 2019, the 1,750 donation shares were returned to the Company and canceled.
On July 9, 2019, we entered into an equity financing agreement with GHS Investments LLC (the “GHS Financing Agreement); in connection therewith, we filed a Form S-1 Registration Statement (the “S-1”) registering up to 700,000 Common Stock Shares, which S-1 was declared effective on July 19, 2019. On May 19, 2020, we filed a Post-Effective Amendment No. 1 on Form S-1 amending the S-1 to deregister all securities registered pursuant to said S-1, which as of the date of such Amendment, 22,513 Common Stock Shares were unissued (the “Post Effective S-1”). The Post Effective S-1 was declared effective on May 21, 2020, at which time the Offering described in the S-1 was terminated, as well as the contractual obligations under the GHS Financing Agreement.
| 15. | RECENT ACCOUNTING PRONOUNCEMENTS |
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard became effective for the Company beginning January 1, 2019, with early adoption permitted. The Company has adopted this standard and has no impact on its consolidated financial statements and disclosures.
In August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new standard became effective for the Company January 1, 2020, with early adoption permitted. The Company has adopted this standard and has no impact on its consolidated financial statements and disclosures.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2021 and interim periods within those annual periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| 16. | DISCONTINUED OPERATIONS |
Sale of PVBJ
On April 21, 2020, the Company’s Board of Directors authorized its resale of PVBJ pursuant to the following terms (a) the outstanding $221,800 earn-out liability was used as consideration towards the purchase of PVBJ; (b) Paul Benis agreed to apply the remaining salary due to him, as prorated from the Closing Date to the expiration date of the Employment Agreement (January 31, 2021), to the purchase of PVBJ by Benis Holdings LLC as additional consideration thereof and (c) as additional consideration for the purchase of PVBJ by Benis Holdings LLC, PVBJ shall continue to be responsible for the line of credit (see below).
Sale of Pride
On May 18, 2020, the Company executed a Purchase and Sale Agreement between with Turquino providing for our sale of 100% of Pride’s outstanding stock Pride to Turquino in return for Turquino’s assumption of the Hidalgo Notes and the Doyle Notes and the debt obligations and accrued interest related thereto (the “Agreement”). In conjunction therewith, Hidalgo and Doyle assigned the Notes to Turquino, at which time Turquino became responsible for the debt obligations upon the Notes. The Company has no further note obligations to Hidalgo or Doyle, and it reduced its debt by approximately $600,000 or 65% of the corporate debt obligations.
The gain/loss on discontinued operations consists of the following:
| June 30, 2020 | ||||
| PVBJ | ||||
| Proceeds on sale (earn-out payable exchange) | $ | 214,074 | ||
| Less: net asset value | (1,383,440 | ) | ||
| Loss on disposal of PVBJ | $ | (1,169,366 | ) | |
| Pride | ||||
| Proceeds on sale (debt forgiveness) | $ | 500,321 | ||
| Less net asset value | (120,380 | ) | ||
| Gain on disposal of Pride | $ | 379,941 | ||
The results of discontinued operations are as follows:
| Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | |||||||||||||
| PVBJ | ||||||||||||||||
| Revenue | ||||||||||||||||
| Sales | $ | 85,028 | $ | 747,071 | $ | 722,786 | $ | 1,422,025 | ||||||||
| Total revenue | 85,028 | 747,071 | 722,786 | 1,422,025 | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Direct costs | 48,655 | 534,154 | 560,328 | 1,059,884 | ||||||||||||
| Total cost of goods sold | $ | 48,655 | $ | 534,154 | $ | 560,328 | $ | 1,059,884 | ||||||||
| Selling, general and administrative | 61,812 | 125,408 | 230,807 | 298,011 | ||||||||||||
| Net income (loss) for period | $ | (25,439 | ) | $ | 79,031 | $ | (68,349 | ) | $ | 64,130 | ||||||
| F-47 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | |||||||||||||
| Pride | ||||||||||||||||
| Revenue | ||||||||||||||||
| Sales | $ | 440,270 | $ | 1,180,850 | $ | 1,474,460 | $ | 2,210,169 | ||||||||
| Total revenue | 440,270 | 1,180,850 | 1,474,460 | 2,210,169 | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Direct costs | 323,514 | 775,170 | 1,121,121 | 1,445,878 | ||||||||||||
| Total cost of goods sold | $ | 323,514 | $ | 775,170 | $ | 1,121,121 | $ | 1,445,878 | ||||||||
| Selling, general and administrative | 147,695 | 372,392 | 440,396 | 632,085 | ||||||||||||
| Net income (loss) for period | $ | (30,939 | ) | $ | 33,288 | $ | (87,057 | ) | $ | 132,206 | ||||||
Gain (loss) from discontinued operations:
| Results from discontinued operations | $ | (56,378 | ) | $ | 112,319 | $ | (155,406 | ) | $ | 196,396 | ||||||
| Loss on disposal of assets | (789,425 | ) | - | (789,425 | ) | - | ||||||||||
| Loss from discontinued operations | $ | (845,803 | ) | $ | 112,319 | $ | (944,831 | ) | $ | 196,396 |
The discontinued operations of the balance sheet as of December 31, 2019 are as follows:
| Pride | PVBJ | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 196,705 | $ | 55,856 | ||||
| Accounts receivable | 449,530 | 354,129 | ||||||
| Prepaid expenses | 2,108 | 9,071 | ||||||
| Costs and earnings in excess of billings | 26,045 | - | ||||||
| Total current assets | 674,388 | 419,056 | ||||||
| Property and equipment, net | 90,847 | 387,391 | ||||||
| Security deposits and other non-current assets | 31,633 | - | ||||||
| Deferred tax asset | 46,000 | - | ||||||
| Customer lists, net | - | 63,161 | ||||||
| Right of use asset | 222,524 | - | ||||||
| Goodwill | - | 1,373,621 | ||||||
| Total assets | $ | 1,065,393 | $ | 2,243,229 | ||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 450,545 | $ | 94,104 | ||||
| Billings in excess of costs and earnings | 47,098 | - | ||||||
| Sales and withholding tax payable | 37,199 | - | ||||||
| Current operating lease liability | 87,897 | - | ||||||
| Current equipment notes payable | 17,782 | 9,653 | ||||||
| Current line of credit | - | 269,746 | ||||||
| Current finance lease payable | - | 75,743 | ||||||
| Income tax payable | 41,426 | - | ||||||
| Total current liabilities | 681,947 | 449,246 | ||||||
| Noncurrent liabilities | ||||||||
| Earn-out payable | - | 209,199 | ||||||
| Lease operating liability | 137,071 | - | ||||||
| Finance leases | - | 307,804 | ||||||
| Equipment notes payable | 33,227 | 38,913 | ||||||
| Convertible notes payable – related party, net of discounts | 473,770 | - | ||||||
| Total noncurrent liabilities | 644,068 | 555,916 | ||||||
| Total liabilities | 1,326,015 | 1,005,162 | ||||||
| F-48 |
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
| December 31, 2019 | ||||
| Pride current assets | $ | 674,388 | ||
| PVBJ current assets | 419,056 | |||
| Current assets of discontinued operations | $ | 1,093,444 | ||
| Pride non-current assets | $ | 391,004 | ||
| PVBJ non-current assets | 1,824,173 | |||
| Non-current assets of discontinued operations | $ | 2,215,177 | ||
| December 31, 2019 | ||||
| Pride current liabilities | $ | 681,947 | ||
| PVBJ current liabilities | 449,246 | |||
| Current liabilities of discontinued operations | $ | 1,131,193 | ||
| Pride non-current liabilities | $ | 644,068 | ||
| PVBJ non-current liabilities | 555,916 | |||
| Non-current liabilities of discontinued operations | $ | 1,199,984 | ||
| 17. | GOING CONCERN |
At each reporting period, the Company evaluates whether there are conditions or events that need disclosure.raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs and comparing those needs to the current cash and cash equivalent balances. The Company is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should the Company be unable to continue as a going concern.
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19), a global pandemic and recommended containment and mitigation measures worldwide. As of the date of this filing, the Company has sold its office in the U.S.; Australia remains fully operational as the Company’s operations service governmental offices and hospitals. The Company has adjusted certain aspects of the Company’s operations to protect its employees and customers while still meeting customers’ needs for vital services. The Company will continue to monitor the situation closely and it is possible that it will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on the Company’s revenues, profitability and financial position is uncertain at this time.
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020 AND 2019 (UNAUDITED)
As reflected in the quarterly financial statements, the Company has a net loss of $1,235,095 and net operating cash used of $230,899 for the six months ended June 30, 2020. In addition, the Company is a start up in the renewable energy space and has generated limited revenues to date.
Due to the sale of PVBJ and Pride the Company has alleviated liabilities on its balance sheet such as the line of credit due in August 2020, earn out payable, and other notes and finance leases payables relating to vehicles. Management has evaluated the significance of these conditions and under these circumstances expects that its current cash resources, operating cash flows and ability to secure financing (See Note 18 - Subsequent Events) would be sufficient to sustain operations for a period greater than one year from the quarterly report issuance date.
| 18. | SUBSEQUENT EVENTS |
Effective July 17, 2020, a director of the Corporation lent the Company $50,000 at 6% per annum payable on the due date, June 19, 2021 (the “$50,000 Note”). Effective July 22, 2020, an additional loan by the same director was provided to the Corporation for a principal amount of $299,900 at 6% per annum payable on the due date of June 19, 2021 (the $299,900 Note”). The $50,000 Note and the $299,900 Note are related party transactions.
On August 12, 2020, pursuant to a Seed Capital Subscription Agreement, we made an equity investment into VoltH2 Holdings AG (“VoltH2”), a Swiss corporation developing scalable green hydrogen production projects primarily in Europe. VoltH2 is currently developing a 25MW green hydrogen production site near Vlissingen, Netherlands. The investment was for a total purchase price $175,000 USD representing a 17.5% equity interest in VoltH2.
On September 29, 2020, the Company filed an amendment to and restatement of its Articles of Incorporation with the Secretary of State of the State of Nevada (the “Amendment”). Pursuant to the Amendment, the Company (i) changed its name from H/Cell Energy Corporation to Vision Hydrogen Corporation, (ii) effectuated a one-for-twenty (1:20) reverse split of the issued and outstanding shares of common stock of the Company without changing the par value of the stock, and (iii) increased its authorized shares of common stock from 25,000,000 to 100,000,000.
Effective as of the opening of market trading on October 6, 2020, the Company’s common stock will trade under the symbol HCCCD for 20 business days to designate the Reverse Split, after which, the ticker symbol will change to VIHD.
H/Cell Energy Corporation
PROSPECTUS
Up to 700,00012,500,000 shares of
Common Stock, par value $0.001 per share
__________________ , 20192020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be incurred in connection with the issuance and distribution of the securities registered under this Registration Statement. All amounts are estimates except the SEC registration fee.
| Item | Amount to be paid | Amount to be paid | ||||||
| SEC registration fees | $ | 84.84 | $ | 272.75 | ||||
| Legal fees and expenses | 50,000.00 | 50,000.00 | ||||||
| Accounting fees and expenses | 3,000.00 | 15,000.00 | ||||||
| Transfer agent fees and expenses | 1,000.00 | 1,000.00 | ||||||
| Printing and related expenses | 2,000.00 | |||||||
| Miscellaneous expenses | 15.16 | 727.25 | ||||||
| Total | $ | 54,100.00 | $ | 69,000.00 | ||||
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our bylaws provide to the fullest extent permitted by Nevada law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director’s or officer’s fiduciary duty. The effect of this provision of our bylaws is to eliminate our right and our shareholders (through shareholders’ derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our bylaws are necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the registrant has sold the following securities which were not registered under the Securities Act of 1933, as amended.
On January 31, 2017, we issued an aggregate of 3,800,000 shares of our common stock to two accredited investors in exchange for all of the issued and outstanding shares of The Pride Group (QLD) Pty Ltd.
In January 2017, we issued 10,000 shares of our common stock to our legal counsel for services rendered.
In April 2017, we issued 100,000 shares of our common stock upon the exercise of stock options.
On February 1, 2018, we issued 444,44522,223 shares of our common stock to one accredited investor in exchange for all of the issued and outstanding shares of PVBJ, Inc.
In April 2018, we issued 100,0005,000 shares of our common stock upon the exercise of stock options.
On March 12, 2019, we donated 35,0001,750 shares of common stock to the manager of Triton Funds, LLC, in connection with a purchase agreement.
On July 9, 2019, we issued 30,0001,500 shares of common stock to GHS Investments LLC for entering into an equity financing agreement.
During the three months ended September 30, 2019, we sold an aggregate of 3,900 shares of common stock to GHS Investments LLC pursuant to our equity financing agreement, in exchange for proceeds of $26,746.
During the three months ended December 31, 2019, we sold an aggregate of 1,575 shares of common stock to GHS Investments LLC pursuant to our equity financing agreement, in exchange for proceeds of $10,510.
During the three months ended March 31, 2020, we sold an aggregate of 3,150 shares of common stock to GHS Investments LLC pursuant to our equity financing agreement, in exchange for proceeds of $19,827.
In May 2020, we issued 5,000 shares of our common stock upon conversion of $15,450 of a convertible note.
During the three months ended June 30, 2020, we sold an aggregate of 3,150 shares of common stock to GHS Investments LLC pursuant to our equity financing agreement, in exchange for proceeds of $19,827.
Unless otherwise noted, all of the transactions described in Item 15 were exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act in that such sales did not involve a public offering, under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or pursuant to a written contract relating to compensation, as provided by Rule 701, or under Rule 506 of Regulation D promulgated under the Securities Act.
| II-1 |
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are included as part of this Form S-1. References to “the Company” in this Exhibit List mean H/Cell EnergyVision Hydrogen Corporation, a Nevada corporation.
| II-2 |
| II-3 |
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement, and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
provided, however, that paragraphs (a)(i), (a)(ii) and (a)(iii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Exchange Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i)Eachpurchaser, each prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the Registration Statement as of the date the filed prospectus was deemed part of and included in the Registration Statement; and;
(ii)Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933430A, shall be deemed to be part of and included in the Registration Statementregistration statement as of the earlier of the date such form of prospectusit is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the Registration Statement relating to the securities in the Registration Statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the Registration Statementregistration statement or made in a document incorporated or deemed incorporated by reference into the Registration Statementregistration statement or prospectus that is part of the Registration Statementregistration statement will, as to a purchaser with a time of contract of sale prior to such effective date,first use, supersede or modify any statement that was made in the Registration Statementregistration statement or prospectus that was part of the Registration Statementregistration statement or made in any such document immediately prior to such effective date.date of first use.
(5)That, For the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
| II-4 |
(b) Insofar as indemnification for purposesliabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred and paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that it will:
(1) for determining any liability under the Securities Act, of 1933,treat the information omitted from the form of prospectus filed as part of this Registration Statementregistration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant toregistrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act of 1933 shall be deemed to beas part of this Registration Statementregistration statement as of the time the Commission declared it was declared effective.
(6)That,(2) for the purpose of determining any liability under the Securities Act, of 1933,treat each post-effective amendment that contains a form of prospectus shall be deemed to beas a new registration statement relating tofor the securities offered therein,in the registration statement, and thethat offering of suchthe securities at that time shall be deemed to beas the initial bona fide offering thereof.
(7)To deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information.
(8)That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.those securities.
| II-5 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,Jersey City, State of Texas,New Jersey, on July 19, 2019.October 14, 2020.
| Date: | By: | |
| Andrew Hidalgo | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Date: | By: | /s/ MATTHEW HIDALGO |
| Matthew Hidalgo | ||
| Chief Financial Officer (Principal Accounting Officer) | ||
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of H/Cell EnergyVision Hydrogen Corporation, a Nevada corporation, do hereby constitute and appoint Andrew Hidalgo and Matthew Hidalgo and each of them his or her true and lawful attorney-in-fact and agent with full power and authority to do any and all acts and things and to execute any and all instruments which said attorney and agent, determine may be necessary or advisable or required to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Registration Statement. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Registration Statement, and to any and all instruments or documents filed as part of or in conjunction with this Registration Statement or amendments or supplements thereof, including post-effective amendments, to this Registration Statement or any registration statement relating to this offering to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and each of the undersigned hereby ratifies and confirms that said attorney and agent, shall do or cause to be done by virtue thereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney. In accordance with the requirements of the Securities Act of 1933, as amended, this registration statement was signed by the following persons in the capacities and on the dates stated:
| Signature | Title | Date | ||
| /s/ ANDREW HIDALGO | Chief Executive Officer (Principal Executive | |||
| Andrew Hidalgo | Officer) and Director | |||
| /s/ MATTHEW HIDALGO | Chief Financial Officer (Principal Financial | |||
| Matthew Hidalgo | Officer and Principal Accounting Officer) | |||
| /s/ | Director | |||
| II-6 |