Attached files

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EX-32 - EXHIBIT 32.1 - HydroPhi Technologies Group, Inc.exhibit321.htm
EX-31 - EXHIBIT 31.1 - HydroPhi Technologies Group, Inc.exhibit311.htm
EX-21 - EXHIBIT 21 - HydroPhi Technologies Group, Inc.exhibit211.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


x

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended March 31, 2015


o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ____________________ to ____________________


Commission file number: 000-55050


Hydrophi Technologies Group, Inc.

(Name registrant as specified in its charter)


Florida

 

27-2880472

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Oakcliff Road, Suite C6, Doraville, GA

 

30340

(Address of principal executive offices)

 

(Zip Code)


Registrant’s telephone number, including area code: (404) 974-9910


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


Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.0001


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o   No x


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

Yes x  No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o


Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o



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


Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller Reporting Company x


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x


The aggregate market value based on the average bid and asked price on the over-the-counter market of the Registrant’s common stock, (“Common Stock”) held by non-affiliates of the Company was $1,196,773 as of September 30, 2014.


As of June 26, 2015, there were 201,865,149 shares of the issuer’s $0.0001 par value common stock issued and outstanding.




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TABLE OF CONTENTS


Part I

Page No.

 

 

 

Item 1.     Description of Business.

5

Item 1A.   Risk Factors.

12

Item 1B.   Unresolved Staff Comments.

21

Item 2.     Properties.

21

Item 3.     Legal Proceedings.

21

Item 4.     Mine Safety Disclosures.

21

 

 

 

Part II

 

 

 

 

Item 5.     Market for Common Equity and Related Stockholder Matters.

22

Item 6.     Selected Financial Data.

23

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

23

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

30

Item 8.      Financial Statements and Supplementary Data.

30

Item 9.     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

30

Item 9A.  Controls and Procedures.

30

Item 9B.  Other Information.

31

 

 

 

Part III

 

 

 

 

Item 10.  Directors, Executive Officers, and Corporate Governance.

32

Item 11.  Executive Compensation.

34

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

36

Item 13.  Certain Relationships and Related Transactions.

37

Item 14.  Principal Accountant Fees and Services.

38

 

 

 

Part IV

 

 

 

 

Item 15.  Exhibits, Financial Statement Schedules.

39

 

 

 

Signatures

41




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CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING INFORMATION


Certain statements in this report contain or may contain forward-looking statements. These statements, identified by words such as “plan”, “anticipate”, “believe”, “estimate”, “should”, “expect” and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward - looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to secure suitable financing to continue with our existing business or change our business and conclude a merger, acquisition or combination with a business prospect, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this report in its entirety, including but not limited to our financial statements and the notes thereto. We advise you to carefully review Part I., Item 1A. Risk Factors of this report, together with the other reports and documents we file from time to time with the Securities and Exchange Commission (the “SEC”). Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.


OTHER PERTINENT INFORMATION


When used in this report, the terms, “we,” the “Company,” “our,” “us,” and “HPT Group” refers to Hydrophi Technologies Group, Inc., a Florida corporation, and includes our wholly and partially owned subsidiaries.




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PART I


ITEM 1.

BUSINESS.


Incorporation and History of HPT Group


HPT Group was incorporated in Florida on June 18, 2010, under the name “Big Clix Corp.” On October 2, 2013, the corporate name was changed to “HydroPhi Technologies Group, Inc.”  HPT Group has one principal subsidiary, HydroPhi Technologies, Inc., a Delaware corporation (“Hydro Phi”), which was acquired in a reverse merger transaction in September 2013.  Reference to the “Company” includes HPT Group and Hydro Phi.  The Company operated as a non-active, shell company (as the term “shell company” is defined by the SEC) and filed its reports with the SEC as a shell company until the filing of a Current Report on Form 8-K on September 25, 2013.


The common stock of HPT Group traded in the over the counter market, under the symbol “BCLX” until October 2, 2013.  Now it trades under the symbol “HPTG,” and its price and volume are reported by the OTC Markets.  Historically, however, the frequency of trades and the volume of trading has been low, and there can be no assurance that an active or sustained public market for our shares will develop.


The business office is located at 3404 Oakcliff Road, Suite C6, Doraville, GA 30340.  The telephone number is (404) 974-9910.


Our website is located at http: //www.HydroPhi.com. Information contained on our official website or any other personal, viral, social network informational websites or software applications, does not constitute part of this report.


Going Concern


The Company requires additional financing to be able to continue to operate and pursue its business development, marketing and product manufacturing and distribution.  It has no current agreements for additional financing at this time, and if it is offered financing opportunities, they may be on terms that are not acceptable to management. Without sufficient funding and working capital, the Company may have to severely curtail its operations or cease operations altogether.  The Company is seeking ways to control costs, which may hinder the development and implementation of its business plan.  As a result of recurring losses from operations and a net capital deficit, the independent reviewing auditor of the Company has indicated that its report is issued on a going concern basis.


Hydro Phi Overview


Hydro Phi, our wholly owned subsidiary, was founded in 2008 to develop new clean energy technologies. Through Hydro Phi, the Company makes and sells a system using water-based clean energy technologies that is engineered and functionally designed to provide fuel savings and reduced greenhouse gas emissions for the internal combustion engine.  The primary market for the Hydro Phi products initially will be the transportation industry, with a primary focus on the trucking/logistics and buses and a secondary focus on heavy equipment, marine and agriculture segments, where rising fuel costs and emission regulations are driving the development of new technologies to control operating expenses. Transportation logistics are those companies providing long and short haul trucking of goods, usually employing diesel engine trucks, and often additional services such as warehousing, freight forwarding, and multimodal transporting. We believe that our proprietary HydroPlant ™ technology will have additional applications in the future, such as in off-grid power generation, where there is reliance on diesel and similar types of internal combustion engines for the generation of electricity.


HydroPlant ™ is a technology initially developed by the Company to help meet the needs of the aforementioned market segments.  Generally, and in particular in the non-OECD countries, the transportation industry is largely reliant on the diesel engine, many of which are earlier generation designs and long used.  Therefore, they tend to be inefficient in their fuel consumption and relatively more polluting than more modern engines.  Notwithstanding that, we believe even the modern engine used in the transportation industry could benefit from our technology to achieve better fuel consumption rates and reduction in greenhouse gas emissions.




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We believe that Hydro Phi has developed efficient and unique methods to generate hydrogen and oxygen using water as the raw material.  The basis of the HydroPlant ™ system is a Hydrolyzer ™ unit that splits water molecules into ionized hydrogen and oxygen gases and their radicals. The hydrogen and oxygen gases, once introduced into the engine’s combustion chambers, acts as a fuel additive to help enhance engine performance because the gases cause the existing fuel source to burn more completely and, thus, cleanly.  The increased performance use of the primary fuel has the benefit of reducing the operating expense because more energy is derived from the fuel and of reducing carbon emissions thereby helping to reduce greenhouse gases introduced into the atmosphere as well as meeting emission standards where applicable.


The entire HydroPlant™ operation is performed “on-demand” and “on-board” a vehicle or any other application, providing a clean “power-on-demand” alternative.  What we mean by these terms is that the Hydrolyzer ™ unit within the HydroPlant™ is attached to the engine and produces the hydrogen and oxygen gases as they are needed by the engine.  Our unit eliminates the requirement for the vehicle or unit to carry high pressure hydrogen gas or liquid gas storage cylinders to supply the same gases as alternatives might have to do, which in the case of transportation vehicles such storage cylinders can be very dangerous in the event of an accident. Especially beneficial in the transportation market, the need for supporting charging stations and distribution infrastructure also is eliminated because the HydroPlant™ is attached to the engine of the vehicle. We believe that this approach helps make HydroPlant™ a practical, safe and affordable solution. The Company believes that its system, and the related retrofitting and system-engineering, overall improves combustion and engine performance.  This has been verified in our internal laboratory testing and in limited on road testing under various operating conditions by the Company.   Currently, the Company is working with potential customers in Mexico and Poland, which have been conducting  tests of the system in actual use and road conditions, to determine whether or not to proceed with retrofitting a larger portion if their fleets of their class 7 and 8 trucks.  Some of the test results have been reported to the Company as very positive.  No substantial sales have yet resulted.


The production of hydrogen using the HydroPlant™ is intended to be used as an additive within the combustion process of petroleum-based fuels. We believe that the HydroPlant™ provides an efficient method to produce hydrogen and oxygen and to manage the introduction of these gases into the engine fuel system. We also believe that the HydroPlant™ process does not adversely affect the rated horsepower of the engine with which it is used and, actually, provides a net gain in fuel efficiency resulting in the principal benefits of reduced operating expense and the reduction of carbon emissions.


The Environmental Benefit Proposition


Our system is based on the deployment of water as a source of energy.  We believe that our research into the use of the water elements as a fuel additive for the internal combustion engine has shown it can effectively and economically reduce their use of gasoline and diesel fuels. Water is abundantly available and, significantly, is free of any carbon – it is inorganic.  Because it is inorganic, it does not release carbon monoxides or carbon dioxides into the environment when its component element, hydrogen, is burned, unlike carbon-based fossil fuels. And water is plentiful. We believe that we have developed a practical method to economically generate sufficient quantities of hydrogen and oxygen gases from water to enable carbon-free energy creation.


It is commonly acknowledged that there is a growing global demand for energy as economies flourish and more consumer demand is created for digital devices, appliances, lighting, refrigeration and motorized transportation. We believe that to satisfy the growing demand worldwide for power, it is not feasible or timely to continue to build the centralized power plants and distribution infrastructure. We believe that alternative sources of energy must be developed to meet the continuing demand for energy. We believe that HydroPlant™ will contribute in some way to add a new component to the mix of alternative energy sources and to promote increase efficiency in the use of current petroleum and carbon based energy.  We believe that the HydroPlant™ is a sustainable and renewable technology engineered to address certain issues of the internal combustion engine as used in the transportation and portable power.





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Hydro Phi Technology


Hydro Phi technology is water-based to provide a clean energy solution as a fuel additive for use in connection with internal combustion engines, whether stationary (such as generators) or in mobile situations (such as in transportation, marine and agricultural trucks and equipment). Our technology was developed using the combined interdisciplinary knowledge of: electrochemistry (a branch of chemistry that studies chemical reactions which take place in a solution at the interface of an electron conductor); electronics; nano thick-material coatings and fuel combustion dynamics, and combustion engine system engineers. Our system uses small amounts of energy to split water molecules into their component elements, which then produces a mixture of hydrogen gas and oxygen gas that are then introduced into an engine to be used as a fuel additive to provide fuel savings and reduced greenhouse gases.


The HydroPlant™ process essentially involves PEM-based (proton membrane exchange) electrolysis, gas vapor management, and system electronics and integration to deliver a reliable supply of fuel additive to the engine regardless of the rigors of the engine location environment – such as in a truck, bus, boat, or movable electricity generator.  The value of our intellectual property resides in the management of the gas delivery into the engine; the matching of that gas delivery to the needs of the engine, and the near-real time ability to modify the hydrogen and oxygen gases mix to be delivered based upon real-time and accrued statistical and analytical information about the engine requirements at a point in time.  Based on the earlier iterations and the current testing that is being done on the current design, we believe one of the values of the system will be that it can reliably operate in the rugged environment of the on-road and other harsh, unprotected situations, where the vibrations, outside temperature and weather conditions and different engine revolutions per minute cab place tremendous demand on individual components, control electronics and system performance.  While the technology during our early development phase relied on older-style chemical electrolysis, we have since moved to a HydroPlant™ design that no longer requires any harsh chemicals; only pure, distilled water.  This avoids the handling dangers that accompany older-style chemical electrolysis units as well as the potential in those units for contamination from hexavalent chromium.  Our PEM-based approach avoids these hazards altogether.  The other advantage of our PEM design is that the hydrogen and oxygen gases are physically separated upon splitting the water molecule, unlike traditional mixed-gas electrolyzes.  The gases are separately conveyed to the air intake of the engine, and are only combined at that point, rendering the system safe from explosion hazard.  The robust and rugged control system monitors all internal functions and sensors.  Should any parameter falls outside the expected pre-defined range, the unit fails-safe, by failing-OFF, so that the vehicle proceeds with simply a ‘normal’ rather than a reduced fuel consumption profile.


Business Development and Marketing


At this stage of the development of the Company, business development is inextricably linked to marketing and customer development and product production.  The Company has progressed in its business plan to one that is a more comprehensive growth strategy, which encompasses many facets its business, including customer acquisition and retention, developing selective partnerships, selective licensing, selective geographic hubs, continued research and development and technology enhancement, intellectual property protection and distributor development. Implementation of all of the parts of the plan, however, will be limited by the financial resources of the Company, and the Company will follow this plan, to the extent it has funds, first with a focus on customer acquisition and retention, strategic alliances and necessary research and development on the current unit as well as for following generation products, so as to maximize the resources it has to launch the HydroPlant™ technology into the market place.


While there are many applications for the HydroPlant™ technology to all kinds of internal combustion engines, at this stage of our business development, we believe that a focus on the logistics and bus segments of the transportation industry will be the most productive in establishing acceptance of our technology and products.  Then, if and as we are able to establish our brand and gain acceptance within these markets, and depending on our financial resources, we plan to expand into additional market segments, which most likely will be the, lighter truck classifications, marine and agriculture segments and, in the farther future, the stationary power generation equipment segment.


The principal reason we can consider so many different potential uses is that we believe the HydroPlant™ technology can be modified for the different sizes of engines in different use situations.  We believe that because the basic concepts of our technology is within our experience, to address different market segments will primarily require only engineering solutions to scale the system appropriately to the size and type of the engine rather than having to conduct full scale research and development of new technologies. We believe that the fundamental technology of the HydroPlant™ can be readily scaled, because the basic technology and design of internal



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combustion engines does not differ greatly from size to size or use to use. However, until we attempt to address a particular use and market segment, we will not be able to know for certain that the HydroPlant™ technology can be modified, or if it can be so modified, that we will be able to achieve a properly designed system for a particular purpose without significant commitment of research, development and testing activity and funding.


Of the potential future markets, we believe that the stationary internal combustion engine could ultimately in the future be one of the most important markets for us.  This market encompasses the diesel engine electric generator.  These engines are widely used around the world in all manner of situations in both advance and developing economies.  Although these generators are widespread, generally their fuel consumption is relatively inefficient, in part because the design of the internal combustion engine that they use has not advanced as much as other engine designs for other uses, such as in the automotive context.  Therefore, we believe that in the future there is a significant opportunity to promote the HydroPlant™ technology for use in these types of engines. Such promotion would be, not only to the end user, but to the manufacturers of such products. For the latter, we would try to seek OEM (original equipment manufacturer) arrangements. We do not have any current OEM companies with which we have any relations at this time, and there is no assurance that such OEM arrangements will ever be developed in the future.


Our recent marketing efforts have concentrated on Mexico and Poland, which are located in territories that are covered by regional distribution and license arrangements.  To date, we have introduced our system to several potential customers for testing in Cass 6, 7 and 8 vehicles, such as buses and trucks. The testing has been conducted in real-traffic, city and country road conditions.  These potential customers have reported back to us favorable test results.  Additionally, we are also pursuing other fleet owners and logistics companies with similarly rated vehicles who may also want to perform testing or move directly to orders.  To date, we have only sold a limited number of units based on the need of potential customers to perform their testing requirements.  We expect that several of the potential customers will have order time frames that will be extended over a longer term, as their funding is related to public service contracts or are themselves in the public sector.  Several of the other potential customers are private companies, and therefore we would expect the length of time to final purchase orders will be more expeditious, but to date we have not received any orders from these potential customers.  We are not able to predict at this time any order flow, both in quantity of units or timing for the placing of orders.


To date, we have not had significant sales penetration in any of our intended markets. Sales mostly have been limited to testing situations.  As we progress in our marketing strategy, the use of distributors and dealers will be an important aspect of the overall marketing effort and product penetration.  We will try to use distributors and dealers to achieve initial penetration of the Class 7 and 8 logistics vehicles and buses, but also to use them to address the other potential uses for the system, such as in Class 5 and 6 vehicles (medium load trucks and delivery vehicles), marine and agricultural engines and stationary power units. We will attempt to select distributors and dealers with their own or local manufacturing capacities, so as to facilitate delivery of the system to users.


Distribution Arrangements - Customer Concentration


We have entered into a master distribution and marketing agreement with Energia Vehicular Limpia S.A. de C.V, a Mexican transportation logistics company (“Energia”), to launch marketing, sales and installation of our system in Class 7 and 8 trucks in the defined territories. The master distribution and marketing agreement, is for three years, and may be extended for two additional years unless previously terminated by its terms or by the parties upon mutual agreement. The agreement currently provides for a distribution territory of Mexico and Brazil.  In April 2014 the Company and Energia  amended the agreement to add consulting and advisory services to be provided by the Company to the distributor for an 18-month period beginning April 1, 2014.  Energia will buy the systems at a wholesale price and will sell the systems at an agreed upon list price, which may be changed by the Company upon 30 days’ notice, but if the change is greater than 10%, then the new pricing must be mutually agreed upon. Energia has certain minimum purchase requirements of systems in defined periods, running from 150 systems in the first period to 1000 systems in the third period, and the distributor has to provide installation and maintenance support services to their customers. Energia is solely responsible for its marketing expenses, and will also pay an advertising fee of 2% to the Company. Energia is obliged to use its best effort to promote and sell the systems. Actual sales will be by purchase orders, complying with the general terms of the distribution agreement, and only binding on the Company upon their acceptance. Pricing terms are in United States dollars and the contract is made under Delaware law with arbitration in Georgia. The agreement may be terminated for default of a material term, which would include the sales objectives and other performance requirements of the distributor, change in control, bankruptcy and criminal violation of applicable laws of or by the contracting party.  The intellectual property rights of and related to the system will in all instances belong to the Company, and the distributor is restricted from modifying, creating derivative works and copying the system and taking any ownership rights therein.  The Company only gives a



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standard product warranty to the end user for a one year period, which will include the warranty of the system being free of defects in workmanship and parts.


We are also marketing in Europe through an affiliated company, HydroPhi Technologies Europe S.A. (“HTEurope”).  Under a distribution agreement, we have granted to HTEurope the exclusive right to market and distribute the HydroPlant™ system in Europe for five years, subject to an automatic renewal after the first five years if certain conditions are met.  In exchange, HTEurope agreed to pay the Company $10,000 as the initial consideration for the grant of the distribution arrangement.  HTEurope is further obligated to pay the Company an aggregate sum of $490,000 upon the successful testing of our system in a potential fleet customer located in the distribution zone. As of the date of this report, this amount has not become due.  Upon reaching a total sales of $2,500,000 of our system by HTEurope, HTEurope will pay the Company an additional $500,000 as the balance of the license fee for the distribution arrangement. The distribution agreement further requires HTEurope to purchase a minimum of the HydroPlant™ system once it has achieved an initial capital raise.

We currently own approximately 21% of the capital of HTEurope, which amount we anticipated being diluted as HTEurope sells equity to provide funding for its operations.  We have the right to name the Vice President of the Management Board and two supervisory board members of HTEurope. The territory covered by the distribution arrangement is all of Europe; however the current marketing by HTEurope and the Company is focused on Poland and Eastern Europe.

For the fiscal years ended March 31, 2014 and 2015, one customer, Energia Vehicular Limpia S.A., accounted for 97% and 100% of our consolidated revenues, respectively. We have had only a few customers, and they have only purchased systems on a limited basis, largely for testing purposes.  Therefore there is no assurance that the Company will place commercial levels of systems with and generate meaningful sales revenues from any customers or under the distribution agreement.


Seasonality


We do not expect to experience any seasonality trends in our operations.


Manufacturing and Supplies


The Company has limited manufacturing capacity in its facilities in Doraville, Georgia.  To date, a large part of the systems produced have been manufactured at this facility.  The Company also has an outsource relationship with a European based manufacturer which has reviewed the assembly and manufacturing protocols that is CE compliant, ISO certified and trained in the assembly of the HydroPlant™ unit, which we believe could fully assume the manufacturing process of the system with little delay. There is no formal written agreement with this supplier, as our needs to date from this supplier have been fulfilled on a purchase order basis. As sales increase, we anticipate that we will outsource more of our product manufacturing requirements, either on a contract basis or through joint venture partners and licensees that have manufacturing capacity themselves.  Generally, it is intended that manufacturing will be located in those regions where there is logistical practicality or need to meet the demands of a particular distributor or group of distributors, timeliness, shipping economies, and manufacturing costs.


As the Company expands its marketing efforts, it will have a preference for partnering with distributors with local manufacturing ability or connections.  This will help minimize intellectual property erosion in the global markets and will foster better management of the supply chain and associated costs where there is shared ownership and an alignment of interests.  The Company also expects to patent its technology and know-how on a global basis so as to protect and reduce erosion of its intellectual property and technical leadership.


We believe that there are a number of manufacturers globally that are capable of providing and assembling the parts for the Hydro Phi products at a high quality level and efficient rate of production for prices that will work within the projected pricing of our systems.  While we believe there are many manufactures that can meet our requirements, our plan is to only work with only one or two at a time in a particular region.


Certain of the components in the HydroPlant™ unit are generally available stock items, which will be supplied by contract suppliers to our specifications while other components will be provided by generic manufacturers.  We believe there are adequate providers in both categories of suppliers.




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Competition


Our market and technical research shows that currently we believe there is no directly competing company that offers integrated water-based, clean energy products and retrofitting for use with the internal combustion engine. However, there are some companies that have or may be broadly working in this area of hydrogen based technologies.  Some of these companies, and others yet to be identified, may be able to develop alternate technologies that will compete with or supplant our HydroPlant™ product, which may be at a more effective cost to the end user. The general business of energy use improvement attracts many potential entrants, and in the future there may be strong competitors or competitors that will compete with us in the future, in general or in selected markets.  These and other companies may be better financed and be able to develop their markets more quickly and penetrate those market more effectively.


We anticipate that we will compete on the basis of our technology, product evolution through a continuing research and development program, and the benefits that our products will bring to our customers in controlling their energy expenses and meeting environmental emission standards.  We believe that, if properly funded, we have an advance position on many of our potential competitors.  We also believe that we have begun to establish a reputation for our technology within our selected initial markets, which can be enhanced over time as we gain customer acceptance.  As we improve our customer base, we believe we will develop brand awareness and obtain data from our product users that will provide validation for the use of our products.


Our competitive position may be seriously damaged if we cannot maintain and obtain patent protection for important differentiating aspects of our products or otherwise protect our intellectual property rights in our technology. We rely on a combination of contracts, patent and trade secret laws to establish and protect our proprietary rights in our technology. However, we may not be able to prevent misappropriation of our intellectual property, our competitors may be able to independently develop similar technology and the agreements we enter into to protect our proprietary rights may not be enforceable.


Intellectual Property


We have filed a provisional application with the United States Patent and Trademark Office for an apparatus and control unit for the regulation and method of disbursing hydrogen and oxygen, which has been assigned an application number #61659606.  No assurance can be given that we will be awarded the patent.  In the future, we plan on filing additional applications for other aspects of our technology.


In addition to the patent protection that we seek, we also rely on the confidentiality of our operations, proprietary know-how and business secrets. Although we do not have formal agreements with our employees at this time, we plan on implementing a program whereby employees will enter into formal agreements with respect to our intellectual property.  We consider our employees’ work to be proprietary and owned by the Company. Where necessary, we will take steps to protect our intellectual property interests under the laws of the United States and the jurisdictions in which we intend to operate. There can be no assurance that we will be able to enforce our rights if they are improperly taken by our employees or adopted by our competitors outside of sanctioned use and royalty agreements with the Company.


The Company has several trademarks in use at this time. However, as the business develops, we plan to develop more specific trademarks for our products and seek registration of those marks with government authorities for their protection. The current Company trademarks include “HydroPlant” and “The New H in Hybrid.”


Our success and competitive position, in part, will depend on our ability to obtain and enforce intellectual property protection of our technology our patents. There is no guarantee any patent will issue on any patent application that we have filed or may file. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Further, any patent that we may obtain will expire, and it is possible that it may be challenged, invalidated or circumvented. If we do not secure and maintain patent protection for our technology and products, our competitive position could be significantly harmed. A competitor may independently develop or patent technologies that are substantially equivalent or superior to our technology.




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As we expand our product line or develop new uses for our products, these products or uses may be outside the protection provided by our current patent applications and other intellectual property rights. In addition, if we develop new products or enhancements to existing products we cannot assure you that we will be able to obtain patents to protect them. Even if we do receive patents for our existing or new products, these patents may not provide meaningful protection, or may be too costly to enforce protection. In some countries outside of the United States where our products may be sold or licensed, patent protection is not available. Moreover, some countries that do allow registration of patents do not provide meaningful redress for violations of patents. As a result, protecting intellectual property in these countries is difficult and our competitors may successfully sell products in these countries that have functions and features that infringe on our intellectual property.


We may initiate claims or litigation against third parties in the future for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and divert the efforts of our technical and management personnel. As a result, our operating results could suffer and our financial condition could be harmed.


Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. As a result, we may be found to infringe the intellectual property rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely affected. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. An adverse result from intellectual property litigation could force us to do one or more of the following:


·

cease selling, incorporating or using products that incorporate the challenged intellectual property;


·

obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and


·

redesign products that incorporate the disputed technology.


If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. In addition, it is possible that our customers or end users may seek indemnity from us in the event that our products are found or alleged to infringe the intellectual property rights of others. Any such claim for indemnity could result in substantial expenses to us that could harm our operating results.


Research and Development


We believe that innovation will be one of the keys to our competitiveness and will be necessary for future sustained growth. To the extent it is able, given the limited financial resources at our disposal, the Company invests in core technical competencies and equipment to be able to do more product development.


The Company has used a portion of its financial resources for research, technology development and patent protection and expects to continue to spend financial and other resources to develop product enhancements, to strengthen in-house research and development, to enrich current and develop new intellectual property, and to introduce new versions of current products and new products.  In the fiscal years ending March 31, 2015 and 2014, the Company spent $395,462 and $562,344, respectively on research and development.


Employees


At the time of this report, the Company had a total of eight full-time employees, of which two were in senior executive position, four were in engineering, research and development, and two in administration and finance.  None of the employees are covered by any collective bargaining agreement, and we believe it has good employee relations. In the future, the Company expects to expand its management employees for financial compliance, and marketing.  Our future success will depend in part on our ability to continue to attract, retain and motivate highly qualified technical and management personnel.





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ITEM 1A

RISK FACTORS 


Because we are an early growth company, we face many obstacles as a new venture, and therefore we may never be able to fully execute our business plan in respect of the Hydro Phi technologies.


We have been operating since 2008.  To date, we have focused on research and development and developmental marketing efforts, achieving revenues of $278,012 for the fiscal year ended March 31, 2015 and $142,050 for the fiscal year ended March 31, 2014. The increase in revenues was due to our distribution agreements and the addition of a consulting agreement with our distributor. We continue to have limited revenues.  We will not be able to sustain our current operations or implement any substantive business expansion on these limited revenues. If we are not able to increase our revenues, obtain additional working capital as needed from time to time, and achieve market acceptance for our Hydro Phi technology and establish sales, we will have to reduce or curtail our business operations. In such case, investors will lose all or a portion of their investment.


Because our business and marketing plans may be unsuccessful, we may not be able to continue operations as a going concern.


Our ability to continue as a going concern is dependent upon our generating cash flow from sales that are sufficient to fund operations or finding adequate financing to support our operations. To date, we have had limited revenues and relied on equity and equity-based financing and loans from our shareholders and related parties, which we do not expect to provide any further financing.  Our business and marketing plans may not be successful in achieving a sustainable business and revenues. We have no arrangements in place for sufficient financing to be able to fully implement our business plan.  If we are unable to continue as planned currently, we may have to curtail some or all of our business plan and operations.  In such case, investors will lose all or a portion of their investment.


We have had operating losses since inception, and we currently are not profitable; and we may never achieve profitability.


For the fiscal year ended March 31, 2015, we had a net loss of $2,716,477 and an accumulated deficit of $33,413,345.  The loss for fiscal year ended March 31, 2015 was largely attributable to our inability to generate revenues sufficient to sustain operations and having to rely on relatively expensive financing to fund on-going operations.  We have had and we expect to continue to have losses in the near term and have relied and will rely on capital funding to support our operations in the future. To date, such capital funding has been limited in amount.  Because we are at the earliest stages of market acceptance of our products, we do not expect that they will generate revenues sufficient to cover the costs of our operations in the nearer and medium term.  We cannot predict whether or not we will ever become profitable or be able to continue to find capital to support our development and business plan.


We have a substantial amount of debt outstanding which is convertible into a significant number of shares, currently calculated to be much more than our current outstanding number of shares, carrying various conversion and protective provisions for the benefit of the debt holders.


We have obtained recent financing through the sale of debt instruments convertible into common stock, at the option of the note holders, at a conversion rate which is at a substantial discount to the market price of the common stock on the date of conversion.  Additionally this debt was issued at a discount to the principal amount. The debt carries interest at 8% per annum, which is also convertible into common stock at the same discounted rate.  We have granted the debt holders various protective provisions, including a right of first refusal on future financings.  The existence of such a large amount of debt and its various conversion and protective provisions may act to deter different investors from investing in the Company.  The substantial number of shares which may be issued will result in dilution to current investors.  Much of the debt amount is due within the next twelve months, which will require the Company to raise new funds to pay off the debt or renegotiate the current debt terms. There can be no assurance that the Company will be able to raise new funds or renegotiate the current debt, in which case the Company may have to take action to obtain debt relief or protection, curtail operations or cease operations. Investors should carefully consider the amount and the terms of the outstanding debt in relation to their decision to invest in the Company or hold its securities.




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We have a limited operating history, which makes it difficult to forecast whether or not our business will be successful.


Our Hydro Phi subsidiary was incorporated on April 21, 2008, with a primary focus on researching and developing and licensing our technologies. In September 2009, Hydro Phi added a new management team. Throughout 2010, the new management team realigned the Company’s product development strategy and hired new talent. During this period, we relocated our business from Maine to Georgia. We did not have a redesigned, commercially viable product until February 2013, and since then we have continued to make modifications and improvements to our product.  Accordingly, we have only a limited operating history and limited experience in marketing our product, which makes it difficult to forecast our future operating results. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in an early stage of development and product introduction, particularly companies engaged in new and rapidly evolving technology and markets such as that of “clean energy.” There can be no assurance that we will be successful in addressing these risks and keeping pace with developments, and the failure to do so could have a material adverse effect on our business, operating results and financial condition.


Although potential customers have been conducting beta tests, which we believe have been successful in several important respects, there is no assurance that we will generate sufficient sales from these potential or other customers.


Our operating results may be volatile, and therefore our future prospects may be difficult for investors and analysis to assess.


Our operating results are likely to fluctuate significantly in the future due to a variety of factors, many of which may be outside of our control. Due to the emerging nature of the markets in which we plan to sell our products and our limited operating history, we believe it will be difficult to accurately forecast our revenues and operating results. Factors that may slow or harm our business or cause our operating results to fluctuate include the following:


·

The market acceptance of, and demand for, our products;

·

Our inability to attract new customers or maintain existing customer satisfaction at a reasonable cost;

·

The revenue based on our technology;

·

Changes in alternative technologies, industry standards and customer or end user preferences;

·

The length of our sales cycle;

·

Our inability to attract and retain key personnel, including hands-on engineering product developers and logistics and supply chain experts;

·

A gain or loss of significant customers or their confidence in our products;

·

Product design, manufacturing and operational defects and other quality problems;

·

Economic conditions affecting our potential customers;

·

The number, timing and significance of product enhancements and new product introductions by competitors;

·

Our failure to increase sales and or penetrate new markets; and

·

Governmental regulation surrounding clean energy and environmental policies.


Any change in one or more of these factors, as well as others that we cannot yet identify, could cause our annual or quarterly operating results to fluctuate. Any change in one or more of these factors could reduce our gross margins in future periods.


We face significant competition from other technology companies.


The market for clean energy technologies and their applications is highly competitive, and there are a variety of potential technologies for the same purpose as ours, from companies around the world. Many of our current and potential competitors have substantially greater financial, technical, marketing, distribution and other resources than we do. As a result, they may be able to respond more rapidly than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, the market for our type of technology is in its very early stages. We expect competition to intensify as current competitors develop and expand their product offerings and new competitors enter the market. Increased competition could result in pricing pressures, reduced margins or the failure of our products to achieve or maintain market acceptance. In addition, new technologies will likely increase the competitive pressures that we face. The development of competing technologies



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by market participants or the emergence of new industry standards may adversely affect our competitive position. In addition, our customers and strategic partners may become competitors in the future. Certain of our competitors may be able to negotiate alliances with strategic partners on more favorable terms than we are able to negotiate. Many of our competitors may also have well established relationships with our potential customers. As a result of these and other factors, we may not be able to compete effectively with current or future competitors, which could adversely affect our revenues and operating results.


Our future success depends upon customers accepting and supporting new clean energy solutions, and their ability to fund their operations.


To date, because our system is a new product, we have had a limited acceptance of the Hydro Phi technology.  Our product is undergoing extensive testing by several of our current potential users.  Our initial product placement and beta testing have been mostly in the transportation industry, and to date has been on a very limited basis. Many of our potential customers themselves are early stage and growth companies with limited operating histories and limited resources. As a result, they may be required to raise funds through public or private financings, strategic relationships, borrowings or other arrangements to be able to sustain their operations and be in a position to purchase and use the Hydro Phi technology. Therefore, we may have difficulty in establishing a market for the Hydro Phi technology and our products, and to the extent we do achieve market acceptance and sales, we may experience a delay in being paid for our products or may not be paid at all.


Our customer base is limited, and it may be geographically spread around the world; our initial success depends in part on our ability to not only retain existing customers but also implement our technologies in many different regions.


For the fiscal years ended March 31, 2015 and 2014, one customer accounted for 100% and 97% of our consolidated revenues, respectively. We currently have only one customer, and they have only purchased systems on a limited basis. Future customers will be located in a number of disparate geographic regions.  This geographic distribution will make the marketing and product development and sales implementation more difficult, with added costs, with the result that our expenses per customer will be greater than otherwise expected when we have a more robust customer base.  Until we achieve economies of scale in terms of volume and location, we expect that our cost of operations will be greater than if we concentrated on a limited or defined market area.


Various field trials for our products are in progress. Field trials can take more actual time than expected due to various operational and fleet availability issues to gather data and fix operational issues to incrementally keep improving the performance. In addition, field trials typically are on older engines, which require cleaning or conditioning before the full fuel saving benefits can be seen, thus increasing the standard testing cycle time. If one or more of our major customers were to substantially delay, reduce or stop their use of our products, our business, operating results and financial condition would be harmed. We do not have long-term contractual commitments from any of our current customers. As a result, we cannot provide assurance that any of our current customers will be customers in future periods. A customer termination would not only result in lost revenue, but also the loss of customer references that are necessary for securing future customers.


Although we have two marketing and distribution agreements for parts of Latin America and Europe, there is no assurance that these arrangements will generate any sales.


We have concluded two marketing and distribution agreements, one for Mexico and Brazil and one for Europe. To date the focus of these distributors has been in Mexico and Poland and Eastern Europe. Although there are minimum sales objectives stated in the agreements, there have been no notable sales under the agreements to date, and there is no assurance that there will be any sales under the agreements. To date, the sales under these agreements have largely been for beta testing by potential customers. Additionally, because the sales are to be by purchase orders from time to time, there is no assurance of when, if any, orders will be placed. In the event that the sales objectives specified in the agreements are not met, our remedy is to terminate the arrangement.


The brand Hydro Phi and its related trademarks will be an important part of our sales effort.


We believe that establishing and maintaining the Hydro Phi brand name and related trade and service marks will be important to our success and facilitate our sales. The importance of brand recognition may increase as a result of established and new competitors offering technologies and products similar to ours. To the extent we are able, with our limited funding and personnel, we intend to increase our marketing and branding expenditures in an effort to increase awareness of Hydro Phi. If our brand-building strategy is unsuccessful, these expenses may never



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be recovered, we may be unable to increase our future revenues, and our business could be harmed.  Although we have several trademarks these are more general in character: we anticipate that we will develop new ones in the future to achieve greater differentiation and identity.


We are dependent upon the acceptance of our products.


We currently derive all of our revenues from the sale of units based on our HydroPlant™ technology and license fees under our distribution arrangements. We expect revenues from this product family to account for substantially all of our revenues for the foreseeable future. In addition, the market is rapidly evolving and is characterized by an increasing number of market entrants that have introduced and developed competitive products. Our future operating results depend on the development and growth of the market. We have spent, and intend to continue to spend, considerable resources educating potential customers and indirect channel partners about our products. However, we cannot provide assurance that such expenditures will enable our products to achieve or maintain any significant degree of market acceptance.


We may have difficulty managing our growth.


We have begun to expand our operations, and depending on our financial resources, we expect to grow our sales and marketing capabilities, to continue research and development activities and to expand our administrative operations. This expansion is expected to place a significant strain on our management, operational and financial resources. To manage any further growth, we will be required to improve existing, and implement new, operational, customer service and financial systems, procedures and controls and expand, train and manage our growing employee base. We also will be required to expand our finance, administrative and operations staff. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our anticipated growth, that management will be able to hire, train, retain, motivate and manage required personnel or that our management will be able to successfully identify, manage and exploit existing and potential market opportunities. If we are unable to manage growth effectively, our business could be harmed.


We will require additional capital in the future, which may not be available on terms acceptable to us, or at all.


Our future liquidity and capital requirements will depend upon numerous factors, including the success of our product offerings and competing technological and market developments. We will to need to raise funds through public or private financings, strategic relationships or other arrangements. There can be no assurance that such funding, if needed, will be available on terms acceptable to us, or at all. Furthermore, any equity financing will be dilutive to existing stockholders, and debt financing, if available, may involve restrictive covenants that may limit our operating flexibility with respect to certain business matters. Strategic arrangements, if necessary to raise funds, may require us to relinquish our rights or grant licenses to some or substantial parts of our intellectual property. If funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution in net book value per share, and such equity securities may have rights, preferences or privileges senior to those of the holders of our existing capital stock. If adequate funds are not available on acceptable terms, we may be unable to develop or enhance products, take advantage of future opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, operating results and financial condition.


If we do not increase our direct sales capabilities, our business could suffer.


We need to substantially expand our direct sales capabilities if we are to increase market awareness and sales volume of our products. Our products require a sophisticated sales effort targeted at the information technology management of our prospective customers. We have recently expanded our direct sales force and plan to hire additional sales personnel to meet the demand for our products and increase our market presence. However, competition for qualified sales personnel is intense, and we may not be able to hire the kind and number of sales personnel we require. Newly hired sales personnel will require extensive training and typically need several months to achieve productivity. We cannot be certain that personnel hired in the future, will be as productive as necessary to meet our financial goals. If we fail to increase our direct sales capabilities as we have planned or our sales force fails to achieve productivity in a timely fashion, our business, financial condition and operating results would be materially adversely affected.




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Failure to expand our operations could significantly affect our ability to increase revenue.


We intend to expand our operations both within the United States and enter selected non-United States markets.  We expect to commit time and development resources to customizing our products for selected markets and to developing sales and support channels. There can be no assurance that these efforts will be successful.


In addition to the uncertainty regarding our international presence, there are difficulties and risks inherent in doing business internationally, including, but not limited to:


·

Potential costs of customizing products for international markets;

·

Multiple and conflicting regulations and unexpected changes in regulatory requirements;

·

Exchange controls;

·

Import and export restrictions and tariffs;

·

Difficulties in staffing and managing international operations;

·

Longer payment cycles;

·

Greater difficulty or delay in accounts receivable collection;

·

Potentially adverse tax consequences; and

·

Political and economic instability.


In addition, our ability to expand our business into some countries may require modification of our products, including in particular national language support. To the extent that international sales are denominated in U.S. dollars, an increase/decrease in the value of the United States dollar relative to other currencies could make our products more expensive/less expensive and, therefore, potentially less competitive in certain international markets. To the extent that future international sales are denominated in foreign currency, our operating results will be subject to risks associated with foreign currency fluctuations. As we increase our international sales, our total revenue may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during summer months in Europe and other parts of the world.


The sales cycle for our products is long, and we may devote significant resources to sales that do not occur when anticipated or at all.


Our products are engineered solutions and tend to be complex, which typically involve significant testing periods and investment decisions by prospective customers. Accordingly, the licensing and/or implementation of our technologies require us to engage in a lengthy sales cycle and to provide a significant level of education to prospective customers regarding the use and benefits of our products. The purchase and use of our technology and products typically involves a significant commitment of our customers’ capital and resources; therefore the decision process for a purchase is subject to delays and aspects that are beyond our control. The decision-making process also can be substantially impacted by the sales practices of, and product introductions by, our competitors. We expect to continue to experience lengthy sales cycles, which will require a substantial investment in our marketing and sales, and if the sales cycle lengthens, we would expect increased marketing and sales expense and possibly delayed or lost sales. Any increased cost of marketing and sales and any delay or loss in sales of our products could adversely affect our operating results.


We are dependent on the continued services and on the performance of our senior management and other key personnel.


The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business, operating results and financial condition. Although we anticipate having in the near future employment contracts with our key personnel, these will be at will employment agreements, but they likely will have severance, non-competition and confidentiality provisions and other rights typically associated with written agreements. We also depend on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, sales, marketing and customer service personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to attract and retain necessary technical, managerial, sales, marketing and service personnel could have a material adverse effect on our business, operating results and financial condition.




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Our future success will depend on our ability to enhance our existing products and to develop new products.


To be competitive, we must successfully develop and introduce product enhancements and new products for additional types of engines. Our failure to develop and introduce new products and enhancements successfully to achieve our strategy on a timely basis could have a material adverse effect on our business, operating results and financial condition. The emerging nature of the market for clean energy requires that we continually improve the performance, features and reliability of our products, particularly in response to competitive products and evolving customer needs. We must also introduce enhancements to existing products as rapidly as possible and prior to the introduction of competing products. Any delay or failure to successfully develop market-accepted technologies could negatively affect our business and the growth of our Company.


The strategic relationships that we may be able to develop and on which we may come to rely on may not be successful.


We will seek to develop strategic relationships with supply chain companies and regional providers and others to enhance the efforts of our market penetration, business development, implementation, critical component manufacturing, variable and direct sales force. These relationships are expected to, but may not, succeed. Furthermore, we intend to develop additional strategic relationships in the future with numerous other companies. There can be no assurance that these relationships will develop and mature, or that any of our existing relationships will be successful or that potential competitors will not develop more substantial relationships with attractive partners. Our inability to successfully implement our strategy of building valuable strategic relationships could harm our business.


Our revenues could decrease if our products do not operate as intended.


Our engineered technologies are system-engineered, interdisciplinary products that perform complex functions and are vulnerable to undetected errors in calibration or unforeseen defects that could result in a product’s failure or inefficiency. There can be no assurance that errors and defects will not be found in current or new products or, if discovered, that we will be able to successfully correct them in a timely manner or at all. The occurrence of errors and defects could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, increased product development costs, diversion of development resources and injury to our reputation or damage to our efforts to build brand awareness.


We could be subject to product liability claims relating to our customers’ critical business operations.


Any failure in a customer’s platform or trading application could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Although we maintain general liability insurance, there can be no assurance that such coverage will continue to be available on reasonable terms or will be adequate to indemnify us for all liability that may be imposed on us. Safety perceptions may deter future use of our products.  A fundamental requirement of using water-based involves perceptions of handling hydrogen and oxygen. We cannot be certain that any inadequate practice of instructions or use by our customers’ will not compromise the designed safety envelope. Any instance of such an occurrence may lead to an uncalled for market perception deterring future use of our products. We may be required to incur significant costs to protect against safety perceptions and further improvements.


If the protection of our trademarks and other proprietary rights is inadequate, we could lose our proprietary rights and revenue.


Our success significantly depends on our proprietary technology. We rely on a combination of copyright, trademark and trade secret laws, employee and third-party non-disclosure and invention assignment agreements and other methods to protect our proprietary technology. Additionally, we have filed a U.S. provisional patent application relating to the disbursement of hydrogen and oxygen. Despite these precautions, it may be possible for unauthorized third parties to copy portions of our products or reverse engineer or obtain and use information that we regard as proprietary. Provisions in our license agreements with our customers protecting against unauthorized use, copying, transfer and disclosure of our licensed product may be unenforceable under the laws of specific jurisdictions and foreign countries. There can be no assurance that our efforts to obtain patent protection will be successful, or if successful, that any patent issued to us will be deemed enforceable or valid. For example, previous disclosures or activities unknown at present may be uncovered in the future and adversely impact our patent rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps taken by us to protect our proprietary rights will be



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adequate or that third parties will not infringe or misappropriate our trademarks, copyrights and similar proprietary rights. If we resort to legal proceedings to enforce our IP rights, those proceedings could be expensive and time-consuming and could distract our management from our business operations.


Intellectual property claims against us can be costly and could impair our business.


We cannot predict whether third parties will assert claims of infringement against us, or whether any future assertions or prosecutions will harm our business. If we are forced to defend against any such claims, whether they are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel, or product shipment delays, any of which could adversely impact our business. As a result of such a dispute, we may have to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, if at all. If there is a successful claim of product infringement against us and we are unable to develop non-infringing technology or to license the infringed or similar technology on a timely basis, our business could be impaired.


Our products may require availability of components or known technology from third parties and their non-availability can impede our growth.


We source components and will continue to license/buy certain technology integral to our products from third parties. Our inability to acquire and maintain any third-party product licenses, or integrate the related third-party products into our products, could result in delays in product development until equivalent products can be identified, licensed and integrated. We also expect to require new licenses in the future as our business grows and technology evolves. We cannot provide assurance that these licenses will continue to be available to us on commercially reasonable terms, if at all.


Government regulations may increase our costs of doing business.


The laws governing energy transactions remain largely unsettled. The adoption or modification of laws or regulations relating to the energy could harm our business, operating results and financial condition by increasing our costs and administrative burdens. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel, consumer protection and taxation apply. Laws and regulations directly applicable to clean energy carbon credits and/or commerce over the energy industry are becoming more diverse and prevalent in all global markets. We must comply with regulations in the United States and with any other regulations adopted by other countries where we do business. The growth and development of the market for online carbon credit trade may prompt calls for more stringent consumer protection laws, both in the United States and abroad, as well as new laws governing the taxation of energy commerce. Compliance with any newly adopted laws may prove difficult for us and may harm our business, operating results and financial condition.


We are controlled by a limited number of persons who are both management and significant shareholders.


Our management group beneficially owns an aggregate of 20,114,497 shares of our common stock representing 9.96%, calculated on the basis of Section 13 of the Exchange Act of 1934 without taking into account the common stock that may be used under various outstanding convertible notes and financing warrant and based on 201,865,149 outstanding shares. Of this amount, Mr. Roger M. Slotkin owns 12,063,671 shares, representing 5.98% of our common stock. There are two additional significant shareholders of HPT Group, Mr. John Durham, who currently holds 30,430,650 shares representing 15.07% of our common stock, and Mr. Philip Levin, who was also a former officer of Hydro Phi, who currently holds 16,303,012 shares representing 8.08% of our common stock.  The management persons and Messrs. Durham and Levin together, and Messrs. Durham and Levin together and independently from the management persons, would be able to influence, if not determine, the outcome of any proposals put to the shareholders, and would be able to determine the election of directors because our board is elected by a plurality vote.  Consequently, investors will have to rely on the decisions of our current management and the additional significant shareholders in respect of our operational and business direction.


The Company has paid no cash dividends to date.


The Company has paid no cash dividends on its common stock to date.  Payment of dividends on the common stock is within the discretion of the board of directors and will depend upon the consolidated earnings, its capital requirements and financial condition, and other relevant factors.  The board of directors has indicated that it currently does not intend to declare any dividends on the common stock of HPT Group in the foreseeable future.



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There is not an active market for our common stock.


We are providing no assurances of any kind or nature whatsoever that an active market for our common stock will ever develop. Since the transaction whereby Hydro Phi was acquired there has been limited amounts of trading in our common stock and the price and volume has been volatile.  Investors should understand that there may be no alternative exit strategy for them to recover or liquidate their investments in the common stock of HPT Group. Accordingly, investors must be prepared to bear the entire economic risk of an investment in the common stock for an indefinite period of time. If a market ever develops for our common stock, we anticipate that our then financial condition, product offerings, and product roll out strategy and implementation will greatly impact the value of the stock, which may not reflect our business prospects.


There may be no liquid market for our common stock.


Even if a trading market develops over time, we cannot predict how liquid that market might become. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control.


These factors include:


·

Quarterly variations in our results of operations or those of our competitors;

·

Announcements by us or our competitors of acquisitions, new hardware and/or software products, significant contracts, commercial relationships or capital commitments;

·

Disruption or substantive changes to our operations;

·

Variations in our sales and earnings from period to period;

·

Commencement of, or our involvement in, litigation;

·

Any major change in our board or management;

·

Changes in governmental regulations or in the status of our regulatory approvals; and

·

General market conditions and other factors, including factors unrelated to our own operating performance.


In addition, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of public companies. Such fluctuations may be even more pronounced in the trading market shortly following this offering. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies.  This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.


The potential number of shares of common stock that may be sold by the holders of various convertible notes and a financing warrant may have an adverse effect on the public market of our stock.  Because of the large number of shares that may be issued on conversion of the convertible notes and exercised for the warrant, there may be an adverse effect on the market because of the conversion and/or exercise.  Although there are limits on the holder’s conversion and exercise, investors may not regard these limits when evaluating our common stock available to be sold in the public market.  Therefore, there may be limited demand and excessive price and volume volatility.


We are subject to the reporting requirements of the United States securities laws, which will require expenditure of capital and other resources.


We are a public reporting company subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, including, without limitation, compliance with the Sarbanes-Oxley Act (“Sarbanes”). The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be substantially higher than they would otherwise be if we were privately-held. It will be difficult, costly, and time-consuming for us to develop and implement internal controls and reporting procedures required by Sarbanes, and we will require additional staff and third-party assistance to develop and implement appropriate internal controls and procedures. If we fail to or are unable to comply with Sarbanes, we will not be able to obtain independent accountant certifications that the Sarbanes requires publicly-traded companies to obtain.



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Investor confidence and market price of our shares may be adversely impacted if we are unable to attest to the adequacy of the internal controls over our financial reporting, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.


The SEC, as directed by Section 404 of Sarbanes, adopted rules requiring public companies to include a report of management about their internal control structure and procedures for financial reporting in their annual reports on Form 10-K. The report must discuss the assessment by management of the effectiveness of the internal controls over financial reporting of the Company. We have reported in the Annual Report on Form 10-K, filed for the fiscal year ended March 31, 2015, that management concluded the internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses. The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) ineffective controls over period end financial disclosure and reporting processes. This assessment could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of our shares and our ability to fund the Company. Although we have added a new controller to our staff, we believe these generally stated material weaknesses will continue until we are in a financial position to add the necessary staffing to address the above factors.


Because we are subject to the “Penny Stock” rules, the level of trading activity in our stock may be limited.


Our stock is subject to the regulations applicable to "Penny Stock." The regulations of the SEC promulgated under the Exchange Act that require additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The SEC regulations define penny stocks to be any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Unless an exception is available, those regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a standardized risk disclosure schedule prepared by the SEC, to provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the purchaser’s account, to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock that becomes subject to the penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage market investor interest in and limit the marketability of our common stock.


In addition to the "penny stock" rules promulgated by the Securities and Exchange Commission, the 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, the 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.


Because future sales by our stockholders could cause the stock price to decline, our investors may lose money on their investment in our stock.


No predictions can be made of the effect, if any, that market sales of shares of our common stock or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of our common stock could adversely affect the prevailing market price of the common stock, as well as impair our ability to raise capital through the issuance of additional equity securities.



20





State securities laws may limit secondary trading, which may restrict the states in which you can sell our shares of common stock.


You may not be able to resell the shares of common stock held in HPT Group in a state unless and until the shares of our common stock are qualified for secondary trading under the applicable securities laws of such state, or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in such state. There can be no assurance that we will be successful in registering or qualifying our common stock for secondary trading, or identifying an available exemption for secondary trading in our common stock in every state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, our common stock in any particular state, the shares of common stock could not be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the market for the common stock will be limited which could drive down the market price of our common stock and reduce the liquidity of the shares of our common stock and limit a stockholder's ability to resell shares of our common stock at all or at current market prices, which could increase a stockholder's risk of losing some or all of his investment.


If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our share price and trading volume could decline.


The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade our shares or change their opinion of our business prospects, our share price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.


ITEM 1B

UNRESOLVED STAFF COMMENTS


Not applicable.


ITEM 2

PROPERTIES


The Company leases approximately 19,400 square feet for its executive offices and operational facilities on a commercial lease in Doraville, Georgia.  The Company’s current leases expire March 31, 2016 and the total monthly lease expense is $6,319.  The Company believes that the rates it is paying under its property leases are competitive in the Atlanta real estate market, and it would be able to find comparable lease properties in the event it changed locations.


ITEM 3

LEGAL PROCEEDINGS


From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  As of the filing date of this Form 10-K, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.


In June 2014, the Company reached a tentative agreement to settle a lawsuit filed by Cardinal Logistics Management Corporation (“Cardinal”) against the Company for $25,000. Cardinal alleged that the Company did not make payment for certain installation and delivery services involving Cardinal’s vehicles. The Company disputed the allegation in full and filed an answer with affirmative defenses.  In fiscal year 2015, the Company paid Cardinal $25,000 and fulfilled its obligations under terms of the agreement.


ITEM 4

MINE SAFETY DISCLOSURES


Not Applicable.




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PART II


ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.


Market Information


Our common stock is reported through the OTCPink.  Our trading symbol was “BCLX” until October 2, 2013, and currently it is trading under the symbol “HPTG,” Quotations for our common stock commenced on March 22, 2013. Trading in our common stock has been sporadic and volatile. The following table sets forth, for the periods indicated, the reported high and low closing bid prices for our common stock as reported through the OTC Markets. Bid prices represent inter-dealer quotations without adjustment for markups, markdowns and commissions. The recorded trading in our common stock should not be deemed to constitute an “established trading market.”


Fiscal year ended March 31, 2015

 

High

 

Low

Quarter ended June 30, 2014

 

$0.59

 

$0.07

Quarter ended September 30, 2014

 

$0.17

 

$0.02

Quarter ended December 31, 2014

 

$0.03

 

$0.01

Quarter ended March 31, 2015

 

$0.03

 

$0.00

 

 

 

 

 

Fiscal year ending March 31, 2014

 

High

 

Low

Quarter ended June 30, 2013

 

$0.52

 

$0.03

Quarter ended September 30, 2013

 

$2.00

 

$0.39

Quarter ended December 31, 2013

 

--

 

--

Quarter ended March 31, 2014

 

$0.85

 

$0.35


Holders of Our Common Stock


As of the date of the annual report, we had 76 registered shareholders. We believe that we have additional shareholders that hold their shares of common stock through their brokers in “street name.”


Dividend Policy

 

Since inception we have not paid any dividends on our common stock.  We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock.  Although we intend to retain our earnings, if any, to finance the expansion and growth of our business, our board of directors will have the discretion to declare and pay dividends in the future.


Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors that our board of directors may deem relevant.


There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends.  Florida law, however, prohibits us from declaring dividends where after giving effect to the distribution of the dividend:


1.

We would not be able to pay our debts as they become due in the usual course of business, or;

2.

Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.


Equity Compensation Plans


On April 29, 2014, the Board of Directors adopted the 2014 Non-Qualified Performance Equity Award Plan (“Plan”). The Plan provides for awards of non-qualified stock options, restricted stock and other equity based awards. Award shares that are not used will be available for re-grant. The maximum award is limited to 1,250,000 shares.  The Plan provides for a term of 20 years, but awards may not be granted after the 10th anniversary of the effective date of the Plan.  The Plan does not require and the Company will not obtain shareholder approval of the Plan.  To the extent required, for example for stock options, the exercise price or other award price will be the fair market value of a share of stock on the date of grant.



22





On November 7, 2014, the Board of Directors of the Company authorized an increase the number of shares under the Plan by 5,000,000 shares, for a total of 10,000,000 shares under the Plan.


Awards may be made or granted to employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company.  An award may be made or granted to a person in connection with his hiring or retention, or at any time on or after the date he reaches an agreement (oral or written) with the Company with respect to such hiring or retention, even though it may be prior to the date the person first performs services for the Company or its subsidiaries.


The Plan will be administered by the board or a committee, and the board or committee has the power to set the terms of individual awards, subject to the Plan limitations and purposes. The Plan has provision for early termination of an award, such as in the case of a termination of employment or disability, and events such as a change of control. The Plan is an unfunded plan.


Separately from the Plan, on November 7, 2014, the Board of Directors of the Company authorized the issuance of shares of common stock to officers and directors as follows: (i) 1,000,000 shares of its common stock to Roger Slotkin; (ii) 1,000,000 shares of Common Stock to Mark Robinson; and (iii) 1,000,000 shares of Common Stock to Reid Meyer, in consideration for services they have rendered to the Company.  In addition, the Board of Directors authorized the issuance of two warrants to employees, Scott Smith and Jonathan Goldman, respectively, in consideration for services they have rendered to the Company.  Each warrant will allow the warrant holder to purchase up to 3,000,000 shares of Common Stock. The Board of Directors further authorized an issuance of 1,000,000 shares of Common Stock to the employees of the Company, to be distributed at the discretion of the Chief Executive Officer of the Company.


Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities


We have issued no unregistered securities within the period covered by this report which have not been previously reported on Form 10-Q or Form 8-K.


ITEM 6.

SELECTED FINANCIAL DATA


Not Applicable


ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.


Overview


Hydro Phi developed a number of iterations of its system, direction and technologies since its inception.  Through this, however, there has been a clear belief that there exists a need for a way to improve the use of fuel in the internal combustion engine, with a resulting reduction in costs of operations and discharge of carbon greenhouse gases, used by logistic vehicles (all classes of heavy load trucks), marine, heavy equipment, agriculture and fixed based operating units such as electric generators and pumps. In the “history” of hydrogen based technologies to achieve improvements in fuel efficiency we believe there has also been an evolutionary move away from “chemical” based systems to those that operate solely on water and electricity eliminating any of the hazardous components and by-products that were the residual effects of said systems. The development of our own product has followed this course, where initially chemical electrolyzers were used to break water into its component elements, but now we are using proton exchange membranes, just eliminating aqueous based electrolytes.  We believe that



23




systems based on proton exchange membranes are easier to design and maintain. Based on its current technology, we believe that Hydro Phi has been successful in developing a working system and has begun to market and gain marketing traction in the logistic vehicle marketplace.


Throughout the history of the Company, the financial condition was predicated upon capital raises to support the changes in direction, technology and potential marketplace.   Revenues occurred from time to time but were not sustainable because of technical deployment, manufacturing or design issues and the changes they required to reach a working technology and viable product.  Under the new initiatives commenced in 2012, all formalized selling and marketing efforts at that time were ceased, a thorough failure analysis of the preceding technologies along with failures throughout the industry became the baseline of what was needed to accomplish the Company goal to design, manufacture and deploy a hydrogen gas on demand as a fuel catalyst device in the industry, that would withstand the rigorous working environment of the heavy truck and bus in regular traffic conditions. Commencing in June 2013, Hydro Phi re-entered the marketing and sales aspects of its business.


The Hydro Phi sales and marketing executives are in the process of addressing the identified market place for our system and approaching prospective clients to introduce the HydroPlant™ to fleet managers and owners and users of various diesel and other internal combustion engine applications, including in those territories encompassing the United States, South and Central America and Europe.


Results of Operations for the Fiscal Year Ended March 31, 2015, Compared to the Fiscal Year Ended March 31, 2014


The following table sets forth, for the periods indicated, data derived from our statements of operations:



 

For the year ended

March 31,

 

 

 

 

2015

 

2014

 

Change

 

 

 

 

 

 

 

 

Revenues

$

278,012 

 

$

142,050 

 

$

135,962 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative

 

1,761,297 

 

 

5,607,478 

 

 

(3,846,181)

Research and development

 

395,462 

 

 

562,344 

 

 

(166,882)

Depreciation and amortization

 

68,377 

 

 

69,224 

 

 

(847)

Impairment of intangible assets

 

 

 

350,000 

 

 

(350,000)

Total operating expense

 

2,225,136 

 

 

6,589,046 

 

 

(4,363,910)

 

 

 

 

 

 

 

 

 

Operating loss

 

(1,947,124)

 

 

(6,446,996)

 

 

4,499,872 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

(2,331,680)

 

 

(377,366)

 

 

(1,954,314)

Loss on settlement of litigation

 

 

 

(25,000)

 

 

25,000 

Change in fair value of derivative liability

 

1,440,508 

 

 

 

 

1,440,508 

Gain (loss) on settlement of debt and accrued compensation

 

121,819 

 

 

(7,662,388)

 

 

7,784,207 

 

 

 

 

 

 

 

 

 

Total other expense

 

(769,353)

 

 

(8,064,754)

 

 

7,295,401 

 

 

 

 

 

 

 

 

 

Net loss

$

(2,716,477)

 

$

(14,511,750)

 

$

11,795,273 


Revenues


Revenues increased by $135,962 to $278,012 for the year ended March 31, 2015 compared to $142,050 for the year ended March 31, 2014.  The increase was primary due to the license and consulting revenue recognized during the entire fiscal year related to the exclusive right to sell the Company’s products in Mexico and Brazil granted to Energia Vehicular Limpia S.A de C.V compared to only license revenue for half of fiscal year 2014.  The increase in revenue from license and consulting fees was partially offset by the decrease of product sales.




24




General and Administrative Expenses


General and administrative expenses decreased by $3,846,181 to $1,761,297 for the year ended March 31, 2015 compared to $5,607,478 for the year ended March 31, 2014.  The decrease was primarily because the Company only recorded $178,436 in stock-based compensation in 2015 compared to $5,012,917 recorded in 2014 for the issuance of shares and options to employees and the issuance of warrants to a consultant during fiscal year 2014.


Research and Development Expense


Research and development expense decreased by $166,882 to $395,462 for the year ended March 31, 2015 compared to $562,344 for the year ended March 31, 2014. The decrease was mainly due to reduced development spending due to the Company’s financial constraints.


Impairment of intangible assets


On July 5, 2011, the Company entered into a memorandum of understanding (“MOU”) with Advanced Combustion Technology, Inc. (“ACT”) where the Company paid $350,000 in exchanged for a license agreement related to certain proprietary technology and services.  The Company believes ACT did not deliver the units or equipment to the Company or perform the services as set forth in the MOU. The Company is presently evaluating with its counsel whether to file a claim for breach of contract and seek recovery of the payment in Federal District Court, to pursue collection remedies in the California District Court, or to seek a commercial resolution. Due to the uncertainty of the recoverability of the payment, the Company impaired $350,000 of its intangible previously recorded in fiscal year 2014.


Other expense


Other expense was $769,353 for the year ended March 31, 2015 compared to $8,064,754 for the year ended March 31, 2014.  The $7,295,401 decrease in other expense was primarily due to the 2014 loss of $7,764,755 resulting from the settlement of accrued liabilities and notes payables. Gains in 2015 from the changes in fair value of convertible note related derivatives also decreased 2015 other expense as compared to 2014.  These decreases were partially offset by an increase in interest expense from derivative treatment of convertible notes and conversions.


Net Loss


Net loss decreased by $11,795,273 to $2,716,477 for the year ended March 31, 2015 compared to $14,511,750 for the year ended March 31, 2014.  The 2015 decrease was mainly due to the year over year $4,834,481 reduction in stock-based compensation and the year over year $7,764,755 reduction from the settlement of accrued liabilities and notes payables during the fiscal year ended March 31, 2014, as discussed above.


Liquidity and Capital Resources


Working Capital


We had a working capital deficit of $3,789,302 and an accumulated deficit of $33,413,345, as of March 31, 2015.


The following table sets forth selected cash flow information for the years ended March 31, 2015 and 2014:


 

2015

 

2014

 

 

 

 

 

 

Net Cash Used in Operating Activities

$

(1,851,034)

 

$

(663,246)

Net Cash Provided by Investing Activities

 

 

 

Net Cash Provided by Financing Activities

 

1,818,000 

 

 

759,575 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(33,034)

 

 

96,329 

Cash and Cash Equivalents – Beginning of Year

 

96,446 

 

 

117 

 

 

 

 

 

 

Cash and Cash Equivalents – End of Year

$

63,412 

 

$

96,446 




25





Cash Flows from Operating Activities


Cash flows used in operating activities increased to $1,851,034 for the year ended March 31, 2015 compared to $663,246 for the year ended March 31, 2014. The change was primarily due to the increase in payments made for employee compensation and consultant fees.


Cash Flows from Investing Activities


We had no cash flows from investing activities for the years ended March 31, 2014 and 2015.


Cash Flows from Financing Activities


Cash flows from financing activities increased to $1,818,000 for the year ended March 31, 2015 compared to $759,575 for the year ended March 31, 2014. Cash received from the issuance of convertible notes increased to $1,865,000 as compared to $65,000 of convertible notes and $694,575 in notes and related party notes issued in 2014.  Payments on debt of $47,000 were made in 2015.


Capital Resources


General


Prior to the reverse merger transaction in September 2013 between Hydro Phi and Big Clix Corp, Hydro Phi, the current operating subsidiary of HPT Group, financed itself primarily from the sale of equity securities and loans from shareholders and related parties. All of the preferred stock and common stock of Hydro Phi that was issued in financing and other circumstances, including the conversion of certain debt and payment obligations into Hydro Phi equity or equity based warrants, were converted or assumed in the merger transaction into shares of HPT Group.   In the fiscal year ended March 31, 2014, Hydro Phi raised an aggregate of $759,575 in capital through notes.  During the fiscal year ended March 31, 2015, Hydro Phi raised an aggregate of $1,865,000 in capital through notes.  At March 31, 2015, Hydro Phi had notes payable of $65,000 to unrelated parties, and notes payable to related parties of $1,119,396. Of its total liabilities at March 31, 2015, Hydro Phi had accounts payable and accrued liabilities to related parties of $71,945 and accrued compensation of $226,752.


At March 31, 2015, we had $3,918,818 in total current liabilities.  These obligations will impact our available working capital for our operations, and will adversely impact our liquidity. Therefore, we will have to continue to negotiate with our creditors to balance our ability to pay our outstanding obligations and to fund our business.  We anticipate, but can give no assurance that we will be able to negotiate extending due dates on outstanding payables and other obligations, and if we are able to negotiate extensions whether or not this will raise the cost of our obligations for such things as the payment of interest or interest at higher rates.  Additionally, the outstanding obligations may have to be secured, which will act as a priority that would prevent us from getting other forms of financing, unless those with a priority are willing to subordinate their security interest. Such obligations may also impact our general ability to raise additional equity as well as debt funds, as investors and lenders may find our debt obligations to be limitation on our ability to operate and meet our obligations when they come due.  As mentioned elsewhere, our limited revenues are not currently sufficient to pay our obligations.  As such we also risk the fact that our creditors may seek action for repayment with the result that we may have to seek bankruptcy protection.


April 25, 2014 Financing


The Company entered into a Securities Purchase Agreement, dated April 25, 2014, which was amended July 29, 2014, with 31 Group, LLC (the “April Purchase Agreement”). Under the April Purchase Agreement the Company first sold 31 Group, LLC a convertible note with an initial principal amount of $924,000 (the “Initial Convertible Note”), for a purchase price of $600,000. Because the Company met its obligations under the registration rights agreement associated with this financing, the principal amount of the Initial Convertible Note was reduced to $624,000 in July 2014.  The Company then sold under the April Purchase Agreement two additional notes for an aggregate principal amount of $728,000 for a total purchase price of $700,000 (the “Additional Convertible Notes”). The Initial Convertible Note matures on April 28, 2016, accrues interest at an annual rate of 8.0%.  The Additional Convertible Notes, in principal amounts of $104,000 and $624,000, mature July 29, 2016 and August 6, 2016, respectively, and accrue interest at an annual rate of 8.0%. All these convertible notes are convertible at any time after issuance, in whole or in part, at the investor’s option, into shares of Common Stock, at a conversion price equal to



26




the lesser of (i) the product of (x) the arithmetic average of the lowest three volume weighted average prices of the Common Stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.35 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Company has the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under these convertible notes (the “Remaining Amount”) at a price equal to 135% of the Remaining Amount.  The Company is also required to reserve 150% of the number of shares of Common Stock of the Remaining Amount.  As of March 31, 2015, because of conversions, the principal of the Convertible Notes was $880,000 and interest due was $71,686.  The Company issued 61,112,346 shares upon conversion of principal and interest under the Convertible Notes.


December 4, 2014 Financing


On December 4, 2014, the Company entered into a securities purchase agreement with 31 Group, LLC (“31 Group”), under which 31 Group purchased from the Company two convertible notes in the principal amounts of $385,000 (the “First December Note”) and $275,000 (the “Second December Note,” collectively, the First December Note and the Second December Note are referred to as the “December Notes”), for the cash purchase amounts of $350,000 and $250,000, respectively, or a total proceeds to the Company of $600,000.  The First December Note was issued on December 4, 2014 and matures on May 17, 2016. The Second December Note was issued on February 5, 2015 and matures on July 30, 2016.  Each of the December Notes bears interest at 8% per annum, and 31 Group can convert the December Notes, in whole or in part, into shares of the Company’s common stock commencing six months after issuance. The Company is required to reserve a portion of its common stock based on a multiple of the number shares issuable upon full conversion of the December Notes, subject to a minimum.  The reserved amount of shares will be adjusted every month, pursuant to the conversion formula set forth in the notes.  The 31 Group also has participation rights in certain subsequent placements of equity and equity-related securities of the Company prior to the second anniversary of the purchase agreement, which is December 4, 2016.


The purchase agreement contains customary representations, warranties and covenants by, among and for the benefit of the parties.  The December Notes include customary event of default provisions and cross-default provisions in connection with any other agreements and/or instruments between the Company and 31 Group.  Upon the occurrence of an event of default, the December Notes will become immediately due and the Company is required to pay a penalty.  The December Notes include limitations on its prepayment and protective provisions for 31 Group to receive benefits in the events of fundamental transactions and changes of control transactions.


31 Group, as the holder of the December Notes, will not be entitled to vote, to consent, to receive dividends, or to exercise any rights whatsoever as our shareholders.  If, however, the Company declares a dividend or make a distribution of its assets, 31 Group will be entitled to that distribution to the same extent that 31 Group would have participated therein if it had held the number of shares of Common Stock then acquirable upon complete exercise of the December Notes.


At no time will 31 Group be entitled to convert any portion of the Notes, to the extent that after such exercise/conversion, 31 Group (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of Common Stock as of such date.


In addition, the purchase agreement provides a royalty payment (the “Royalty Payment”) to 31 Group of 3% of the cash revenue from the sales of the Company’s HydroPlant™ units, after the Company receives $500,000 from the sales of HydroPlant™ units, and the Royalty Payment will continue to be due for a period of twenty-four months beginning the date that 31 Group receives its first Royalty Payment. The Royalty Payment does not apply to other revenues of the Company such as from servicing, advertising, consulting, royalties, territorial allocation fees, late payment charges or other fees and revenues or earnings of the Company.


April 15, 2015 and May 27, 2015 Financings


On April 15, 2015, the Company entered into securities purchase agreements as of April 9, 2015, with two separate accredited investors, under which they each purchased separately from the Company a convertible note of the Company in the principal amount of $100,833 (the “April 2015 Notes”), for the cash purchase amount of $91,667, for total proceeds to the Company of $183,334.  The April 2015 Notes will mature on October 9, 2016, and they bears interest at 8% per annum.



27





On May 27, 2015, the Company sold to the holders of the April 2015 Notes additional convertible notes, pursuant to separate securities purchase agreements dated May 27, 2015, each in the principal amount of $55,000 (the “May 2015 Notes”), for the cash purchase price of $50,000, for total proceeds of $100,000.  Each May 2015 Note matures on May 27, 2016, and they bear interest at 8% per annum.


Each investor, separately, can convert their respective April 2015 Notes and May 2015 Notes, in whole or in part, from time to time, into shares of the Company’s common stock commencing six months after issuance. The Company is required to reserve a portion of its common stock based on a multiple of the number shares issuable upon full conversion of the notes, subject to a minimum number of shares, which will be adjusted every month, pursuant to the conversion formula set forth in the notes. Each investor separately has participation rights in certain subsequent placements of equity and equity-related securities of the Company, which continue until May 27, 2016, based on the later of the May 2015 Notes.


Each purchase agreement contains customary representations, warranties and covenants by, among and for the benefit of the parties.  The April 2015 Notes and May 2015 Notes include customary event of default provisions and cross-default provisions in connection with any other agreements and/or instruments between the Company and the investors and other note holders.  Upon the occurrence of an event of default, the April 2015 and May 2015 Notes will become immediately due, and the Company will be required to pay a penalty interest amount.  The April 2015 and May 2015 Notes include limitations on principal and interest prepayment and include investor protective provisions, including the right to receive benefits in the event of fundamental transactions and change of control transactions.


Each investor in the April 2015 Notes and May 2015 Notes will not be entitled to vote, to consent, to receive dividends, or to exercise any rights whatsoever as our shareholders.  If, however, the Company declares a dividend or makes a distribution of its assets, the investors will be entitled to that distribution to the same extend that the investors would have participated therein if they had held the number of shares of Common Stock then acquirable upon complete conversion of their notes.


At no time will the investors be entitled to convert any portion of their April 2015 Notes and May 2015 Notes if after such exercise/conversion, the investor (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of Common Stock as of such date.


June 17, 2015 Financing


As of June 17, 2015, the Company entered into two securities purchase agreements with accredited investors to sell convertible notes of the Company, each in the principle amount of $35,000, for the cash purchase amount of $32,500.  The notes mature on June 17, 2016, and bear interest at 8% per annum.


Each investor can convert its note, in whole or in part, from time to time, into shares of the Company’s common stock commencing six months after issuance. The Company is required to reserve a portion of its common stock based on a multiple of the number shares issuable upon full conversion of the note, subject to a minimum.  The reserved amount will be adjusted every month, pursuant to the conversion formula set forth in the note. The reserved amount may only be implemented when the Company has increased its authorized number of shares of Common Stock, which increase will require the approval of the shareholders of the Company.  Notwithstanding the need to increase the authorized number of shares under the terms of the purchase agreements, the investors have reserved for their prior notes a large number of shares, which may be used for the conversion of this note, with their agreement.


Each investor has participation rights in certain subsequent placements of equity and equity-related securities of the Company prior to the first anniversary of the purchase agreement.


Each purchase agreement contains customary representations, warranties and covenants by, among and for the benefit of the parties.  Each note includes customary event of default provisions and cross-default provisions in connection with any other agreements and/or instruments between the Company and the investors.  Upon the occurrence of an event of default, the notes will become immediately due and the Company will be required to pay a penalty interest amount.  The notes include limitations on principal and interest prepayment and include investor protective provisions, including the right to receive benefits in the event of fundamental transactions and change of control transactions.



28





Each investor, as a note holder, will not be entitled to vote, to consent, to receive dividends, or to exercise any rights whatsoever as our shareholders.  If, however, the Company declares a dividend or makes a distribution of its assets, the investors will be entitled to the distribution to the same extend that the investors would have participated therein if the investor had held the number of shares of Common Stock then acquirable upon complete conversion of their note.


Each investor is not entitled to convert any portion of their note, to the extent that after such exercise/conversion, the investor (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of Common Stock as of such date.


Financing Requirements


As explained above, we have experienced negative cash flows in our business and expect this to continue into the future.  This will hinder our operations as we will experience constraints on our funds to hire additional persons to engage in marketing, manufacturing and distribution of our products. To cover the costs of our operations, we will need external financing.


We will require additional funds to implement our full business plan, continue our operations and pay expenses associated with us being a public reporting company. Our future is dependent upon our ability to obtain financing. We currently do not have any arrangements for additional capital.  Our operating history and our limited revenues are likely to restrict our ability to find adequate funding. To the extent that we may be able to raise new capital, we believe that the funding will be either from the sale of additional equity or debt instruments that include a substantial equity component. If we are able to reach regular production of our system, we may be able to factor our accounts receivable, but such funding will be dependent on a steady sales record and flow of accounts that may be pledged and or sold, for which we can give no assurance of occurring.  To the extent that we raise funds based in whole or in part on equity, it is likely that there will be substantial dilution in the current equity ownership of our shares. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.


There are no assurances that we will be able to obtain further funds required for our continued operations. We will pursue various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.


Going Concern


In the opinion of our management, funds currently available will not satisfy our working capital requirements for the next twelve months. The Company, on a consolidated basis, will need a substantial amount of capital to fund its operations, to repay its outstanding debt and to comply with its SEC reporting obligations. During the next twelve months, we expect that to be able to sustain our current operations, with no significant increase in operations, we will need approximately $1,500,000 to meet our expenses. We will need additional funding to repay our outstanding obligations due during that period. We have no contracts or arrangements for any funding at this time.  Recently, we have been able only to obtain small amounts of funding through the sale of discounted, convertible notes to repeat investors, which convert on a discount to market as determined by the note holder.  These investors have pre-emptive rights, which may limit the ability of the Company to raise funds from new investors. Additionally, the current number of shares of common stock that may be issued if the outstanding convertible notes are converted may deter new investors. There can be no assurance that we will be able to raise any funding or will be able to meet its accrued obligations.  If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.   As a result of the fact that the financial resources are inadequate for our business operations and current obligations at this time and the Company has continuing losses, a capital deficit, and substantial outstanding debt, there is a substantial doubt as to its ability to continue as a going concern, and potentially to meet our obligations as they become due from time to time.



29





Off-Balance Sheet Arrangements


The Company, on a consolidated basis, does not have any off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.  We do not engage in trading activities involving non-exchange traded contracts.


Effects of Inflation


We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.


ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK


Not applicable.


ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The response to this item is submitted as a separate section of this report beginning on page F-1.



ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

On November 1, 2013, we notified ZBS Group LLP, formerly ZS Consulting Group LLP, (“ZBS”), the independent registered public accounting firm to the Company, that the Company had dismissed the firm because the Company desired to continue to use the services of the accounting firm that had worked previously with Hydro Phi, our wholly owned subsidiary as a result of the reverse merger then completed.  The decision to dismiss ZBS was approved by the board of directors of HPT Group.


During the Company’s period of engagement of ZBS from February 5, 2011, through November 1, 2013, there were no disagreements between the Company and ZBS on any matter of accounting principles or practices, financial statement disclosure, or procedure, which disagreements, if not resolved to the satisfaction of ZBS would have caused it to make a reference to the subject matter of the disagreements in connection with their review on our financial statements for such periods.  There were no reportable events (as described under Item 304(a)(1)(v) of Regulation S-K) during the Company’s engagement of ZBS from February 5, 2011 through November 1, 2013.


The Company provided ZBS with a copy of the disclosure in its Current Report on Form 8-K, filed on November 4, 2013, and requested that ZBS furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees or disagrees with the statements by the Company in the Current Report on Form 8-K. A copy of that letter was attached as Exhibit 16.1 thereto.


On November 1, 2013, we engaged GBH CPAs, PC (“GBH”), 6002 Rogerdale Road, Houston, TX 77072, as its new independent registered public accounting firm. The engagement of GBH was approved by our board of directors on November 1, 2013.  GBH was engaged as the independent registered public accounting firm of Hydro Phi before the merger, while Hydro Phi was a private company.


ITEM 9A

CONTROLS AND PROCEDURES


Evaluation of disclosure controls and procedures.


We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management as appropriate, to allow timely decisions regarding required disclosure.




30





Pursuant to Rule 131-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including the Chief Executive Officer, the sole officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on management’s evaluation as of the end of the period covered by this Annual Report, our principal executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act were ineffective as of the end of the period covered by this annual report.


Management’s Annual Report on Internal Control over Financial Reporting.


Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies face additional limitations.  Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties.  Smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.


Our management, with the participation of the Chief Executive Officer, the sole officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of March 31, 2015.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework.  Based on that evaluation, our management concluded that, as of March 31, 2015, our internal controls over financial reporting were not effective because: (1) the Company lacks a functioning audit committee and there is a lack of independent directors on the board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) the Company has inadequate segregation of duties consistent with control objectives; and (3) the Company has ineffective controls over its period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of March 31, 2015.


This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permanently exempt smaller reporting companies from such requirement.


Changes in internal controls


There have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that has occurred that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.


ITEM 9B

OTHER INFORMATION.


Not Applicable.




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PART III


ITEM 10

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE


Set forth below is information regarding the current directors and executive officers of HPT Group and its operating subsidiary, Hydro Phi. Directors are elected each year by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or resignation or removal.  Executive officers are appointed by our board of directors. Each executive officer holds his office until he resigns or is removed by the board of directors or his successor is appointed and qualified.


Name

 

Age

 

Title

 

 

 

 

 

HPT Group

 

 

 

 

Roger M. Slotkin

 

63

 

Director (Chairman of the Board) and Chief Executive Officer of HPT Group

Reid Meyer

 

53

 

Director

Mark Robinson

 

59

 

Director

 

 

 

 

 

Hydro Phi

 

 

 

 

Reid Meyer

 

53

 

Chief Operating Officer of Hydro Phi

Jonathan Goldman

 

55

 

Chief Technology Officer of Hydro Phi


Director and Officer of HPT Group


Roger Slotkin


Mr. Roger M. Slotkin has been a director and acts as the Chairman of the Board of Directors and has been the Chief Executive Officer of HPT Group since consummation of the merger with Hydro Phi.  He will continue as a director and the Chief Executive Officer of Hydro Phi, a position he has held through his consulting firm RS Management, Ltd, since June 2012.  In 1983, Mr. Slotkin founded and serves as the Chief Executive Officer of RS Management, Ltd., a company that provides senior executive management services to companies operating in a wide variety of industries. RS Management, Ltd. specializes in corporate restructuring, turn-around and bankruptcy avoidance.  Mr. Slotkin was also the Chief Executive Officer of OneWorld Energy, Inc., a privately owned, diversified energy developer specializing in wind, solar and wind services, from May 2009 to December 2011, and the Chairman and Chief Executive Officer of Odyne Corporation, a developer and manufacturer of advanced plug-in hybrid powertrains, from July 2003 to September 2007.


Mr. Slotkin was selected as the director of HPT Group because of his extensive experience in managing companies through significant business transitional phases, his past experience with the Company since June 2012, his many years of experience within the alternative energy space, and his general executive skills.  Additionally, because he is a significant shareholder of the Company, his interests in the success of the Company are allied with his personal interests.


Reid Meyer


Mr. Reid Meyer was appointed a director on April 29, 2014.  Mr. Meyer has been the Chief Operating Officer of our subsidiary, Hydro Phi Technologies, Inc. (“Hydro Phi”) since July 2012, and before that he was the Vice President of Global Services and Supply Chain of Hydro Phi from January 2011 to July 2012.  Mr. Meyer has extensive experience in international operations, global manufacturing and supply-chain management experience. Mr. Meyer sold a portfolio of patents and processes to JM Clipper (formerly Johns Manville) in 1996, where Mr. Meyer later served as a member of the senior management team. In 2005, he went to work with Graftech International, Inc. where he worked in Business Development for the fuel cell technology company until 2006. In November 2006 he became Vice President of Leader Global Technologies, Inc, a manufacturer for chemical, power generation, and automotive markets globally, until January 2011.  Mr. Meyer was appointed a director because of his prior operational experience with the Company and his expertise in manufacturing and management, and technological background.





32




Mark Robinson


Mr. Mark Robinson was appointed as a director on April 29, 2014. He founded The Energy Grid (Mark Robinson d/b/a The Energy Grid) on February 6, 2002 in New Hampshire, which provides strategic marketing consulting in areas such as market development, web development, and search engine optimization. He also founded in 2001 HandicappedPets, Inc, which manufactures, markets, and distributes products for disabled animals and has been its president to date. From May 1, 2003 to Dec 1, 2007, he served as Vice President of Sales and Marketing of Nextek Power Systems, Inc. of Hauppauge, NY, a renewable energy technology company. Prior to that, he consulted at Beacon Power, LLC, a manufacturer of flywheels, a battery alternative. From May 1, 2000 to Oct 1, 2002, he served as Director of Customer Service and Information Systems at Advanced Energy Industries, Inc. He founded and was president of both Computer Empowerment Seminars and Computer and Network Services, Inc., in Peterborough, NH.  Mr. Robinson was appointed a director because of his extensive background in renewable energy companies and marketing expertise.


Executive Officers of Subsidiary


Reid Meyer


Mr. Reid Meyer also is a director of Hydro Phi Group.  See above biographical information.


Jonathan Goldman


Mr. Jonathan Goldman has been the Chief Technology Officer of Hydro Phi since April 2012, and before that was the Vice President of Engineering & Research Grants of Hydro Phi from January 2010 to April 2012. From October 2008 to January 2010, Mr. Goldman was a consultant to the Georgia research Alliance and its venture fund.  From October 2007 to October 2008 Mr. Goldman worked with Suniva, Inc. of Norcross, Georgia where he was the Director of Business Development, and from April 2002 to October 2007 he served as Associate Director of Venture Lab at the Georgia Institute of Technology in Atlanta, Georgia.


Family Relationships


There are no family relationships among our current officers and directors.


Board Composition and Committees


The board of directors is currently composed of three members.  HPT Group anticipates expanding the board of directors in the near future.


We do not have a member of the board of directors that qualifies as "independent" as the term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Securities Exchange Act of 1934, as amended, and as defined by Rule 4200(a)(14) of the FINRA Rules.  We are not required to have any independent directors at this time.


We are not required to have and we do not have an Audit Committee. The board of directors of HPT Group performs some of the same functions of an Audit Committee, such as recommending a firm of independent certified public accountants to audit the financial statements; reviewing the auditors' independence, the financial statements and their audit report; and reviewing management's administration of the system of internal accounting controls. The board of directors of HPT Group does not currently have a written audit committee charter or similar document.


We have no audit committee financial expert. Mr. Slotkin has financial statement preparation and interpretation ability obtained over the years from past business experience and education. We believe the cost related to retaining a financial expert at this time is not justified. Further, because of the nature of our current limited operations, we believe the services of a financial expert are not warranted, given the background of Mr. Slotkin.


HPT Group currently does not have nominating or compensation committees and does not have written nominating or compensation committee charters. Our board of directors believes that it is not necessary to have such committees at this time because the functions of such committees can be adequately performed by the board of directors. Our Chief Executive Officer who is also a director participated in employment compensation decisions.





33




Code of Ethics


HPT Group formally adopted a written code of business conduct that governs its employees, officers and directors on June 21, 2010, which was filed with the SEC on July 29, 2010, as an exhibit to a registration statement on Form S-1 of the Company.


Conflict of Interest


We have not adopted any policies or procedures for the review, approval, or ratification of any transaction between the Company and any executive officer, director, nominee to become a director, 10% shareholder, or family member of such persons, required to be reported under paragraph (a) of Item 404 of Regulation S-K promulgated by the SEC.


ITEM 11

COMPENSATION


Compensation of our Named Executive Officers


We have identified Messrs. Roger M. Slotkin, Reid Meyer and Jonathan Goldman as our named executive officers for the fiscal years ending March 31, 2015 and 2014, as indicated below.

 

Summary Compensation Table


The following table sets forth certain summary information with respect to the total compensation paid to the named executive officers during our fiscal years ended March 31, 2014 and 2015:


Name and Principal Position

 

Fiscal

Year

 

Salary

 

Stock Award

 

Warrant/Option Award

 

Total

Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Roger M. Slotkin, CEO and Director (HPT Group and Hydro Phi)(1)

 

2015

 

$

250,000

 

$

20,900

 

$

-

 

$

270,900

 

 

2014

 

$

246,712

 

$

-

 

$

-

 

$

246,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reid Meyer COO (Hydro Phi)

 

2015

 

$

150,000

 

$

20,900

 

$

46,844

 

$

217,744

 

 

2014

 

$

56,250

 

$

-

 

$

-

 

$

56,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jonathan Goldman, CTO (Hydro Phi)

 

2015

 

$

126,600

 

$

-

 

$

4,753

 

$

131,353

 

 

2014

 

$

123,300

 

$

-

 

$

228,200

 

$

351,500

_____________


(1)

Mr. Slotkin was engaged as the Chief Executive Officer of Hydro Phi through his consulting firm (RS Management Ltd.) under an executive management contract for the period June 2012 to July 2013.  Commencing with the consummation of the merger transaction he will be employed directly by HPT Group, and serves as the Chief Executive Officer and a director of both HPT Group and Hydro Phi, under an employment agreement with the Hydro Phi.


Employment Agreements


Hydro Phi, entered into a two-year employment agreement with Mr. Slotkin on July 13, 2013.  The agreement provides that he will act as the Chief Executive Officer of HPT Group and Hydro Phi.  Mr. Slotkin will be paid a salary of $250,000 per annum and regular benefits, and is entitled to a car allowance.  He also may be awarded merit based performance increases.  Mr. Slotkin is eligible additional bonus compensation and for stock options to be determined and awarded in the discretion of the board of directors.  The agreement provides for various termination events and restrictive covenants on competitive employment and for non-solicitation of employees, customers and vendors.


On June 24, 2015 the Company’s board of directors approved by written consent, a one year extension of Mr. Slotkins’ employment agreement.


We intend to enter into employment agreements with the other senior executives of both the HPT Group and Hydro Phi.  These agreements likely will provide employment at will with various severance, non-competition and confidentiality provisions and other rights typically associated with written employment agreements.



34




2014 Non-Qualified Performance Equity Award Plan


On April 29, 2014, our Board of Directors adopted the 2014 Non-Qualified Performance Equity Award Plan (“Plan”). The Plan provides for awards of non-qualified stock options, restricted stock and other equity based awards, with a maximum limit of 5,000,000 shares of common stock allocated to the Plan. Award shares that are not used will be available for re-grant. The maximum award is limited to 1,250,000 shares.  The Plan provides for a term of 20 years, but awards may not be granted after the 10th anniversary of the effective date of the Plan.  The plan does not require and the Company will not obtain shareholder approval of the plan.  To the extent required, for example for stock options, the exercise price or other award price will be the fair market value of a share of stock on the date of grant.


On November 7, 2014, the Board of Directors of the Company authorized to increase the number of shares under the Plan by 5,000,000 shares, for a current authorized amount of 10,000,000 shares.


Awards may be made or granted to employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company.  An award may be made or granted to a person in connection with his hiring or retention, or at any time on or after the date he reaches an agreement (oral or written) with the Company with respect to such hiring or retention, even though it may be prior to the date the person first performs services for the Company or its subsidiaries.


The Plan will be administered by the board or a committee, and the board or committee has the power to set the terms of individual awards, subject to the Plan limitations and purposes. The Plan has provision for early termination of an award, such as in the case of a termination of employment or disability, and events such as a change of control. The Plan is an unfunded plan.


Other Equity Awards


On November 7, 2014, the Board of Directors of the Company authorized the issuance of shares of common stock to officers and directors as follows: (i) 1,000,000 shares of its common stock to Roger Slotkin; (ii) 1,000,000 shares of Common Stock to Mark Robinson; and (iii) 1,000,000 shares of Common Stock to Reid Meyer, in consideration for services they have rendered to the Company.  In addition, the Board of Directors authorized the issuance of two warrants to employees, Scott Smith and Jonathan Goldman, respectively, in consideration for services they have rendered to the Company.  Each warrant will allow the warrant holder to purchase up to 3,000,000 shares of Common Stock. The Board of Directors further authorized an issuance of 1,000,000 shares of Common Stock to the employees of the Company, to be distributed at the discretion of the Chief Executive Officer of the Company.


Employee Benefit Plans


We do not have any annuity, retirement, pension or deferred compensation plans or other arrangements for our executive officers or any employees. We anticipate that in the future we will adopt such plans, but there are no current plans or arrangements for the adoption of any such plans.


Director Compensation


We plan to compensate our directors with cash fees and equity awards. We do not plan at this time to provide additional compensation for committee participation.  On April 29, 2014, we adopted our 2014 Non-Qualified Performance Equity Award Plan (“Plan”).  The Plan provides for awards of non-qualified stock options, restricted stock and other equity based awards.  On April 29, 2014, we granted options to our directors pursuant to the Plan.  Messrs Meyer and Robinson were each awarded options to purchase up to 1,000,000 shares of the Company’s common stock at exercise price of $0.12. The options will vest on each of the first and second anniversaries of his appointment as a director, so long as he is in service to the board, and the option expires on the fifth anniversary of his appointment and may be exercised only when he is serving as a director or an employee of the Company or subsidiary.




35





ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


Beneficial Ownership


The following table sets forth information regarding beneficial ownership of our common stock as of the date of this amended Current Report (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by our current officer and director, and certain officers of Hydro Phi; and (iii) by all of our and Hydro Phi’s officers and directors as a HPT Group. The address of each of the persons set forth below is 3404 Oakcliff Road, Suite C6, Doraville, GA 30340, unless otherwise indicated.


The table below reflects an aggregate of 201,865,149 shares issued and outstanding as the date of this Annual Report.  




Name of Beneficial Owner

 

Director or Officer

 

Amount and Nature of

Beneficial Ownership (1)

 

Percentage (2)

Roger M. Slotkin

 

Director (Chairman of the Board) and CEO of HPT Group

 

12,063,671

 

5.98%

 

 

 

 

 

 

 

Reid Meyer(3)

 

Director of HPT Group and Chief Operating Officer of Hydro Phi

 

  2,525,413

 

1.25%

 

 

 

 

 

 

 

Mark Robinson (4)

 

Director of HPT Group

 

  1,500,000

 

0.74%

 

 

 

 

 

 

 

Jonathan Goldman (5)

 

Chief Technology Officer of Hydro Phi

 

  4,025,413

 

1.99%

 

 

 

 

 

 

 

All officers and directors of HPT Group and Hydro Phi (four persons)(3)(4)(5)

 

 

 

20,114,497

 

9.96%

 

 

 

 

 

 

 

5% and Greater Holders

 

 

 

 

 

 

 

 

 

 

 

 

 

John Durham

 

 

 

30,430,650

 

15.07%

 

 

 

 

 

 

 

Philip Levin

 

 

 

16,303,012

 

  8.08%

 

 

 

 

 

 

 

31 Group, LLC(6)

 

 

 

201,742,082(7)

 

 

 

 

 

 

 

 

 

John Durham (convertible notes)

 

 

 

68,046,215

 

 

 

 

 

 

 

 

 

Philip Levin (convertible notes)

 

 

 

37,496,205

 

 

 

 

 

 

 

 

 

Carnegie LLC (convertible notes)

 

 

 

124,395,020

 

 

____________


(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.


(2) Based on 201,865,149 shares of our common stock issued and outstanding.


(3) Does not include the 500,000 shares of our common stock subject to options granted in April 2014 that are not yet vested and do not vest within 60 days. Includes 500,000 shares of our common stock subject to options granted in April 2014 that vested on April 29, 2015.


(4) Does not include the 500,000 shares of our common stock subject to options granted in April 2014 that are not yet vested and do not vest within 60 days. Includes 500,000 shares of our common stock subject to options granted in April 2014 that vested on April 29, 2015.




36




(5) Includes 753,929 shares subject to a currently exercisable warrant expiring in July 2016 and 3,000,000 shares subject to a currently exercisable option expiring in November 2019.


(6) The business address of 31 Group LLC (“31 Group”) is c/o Magna Group, 5 Hanover Square, New York, New York 10004. Mr. Joshua Sason is a member and the controlling person of 31 Group, with sole voting control and investment discretion over securities held by 31 Group, and may be deemed to share beneficial ownership of any securities beneficially owned by 31 Group.  Mr. Sason disclaims beneficial ownership of these securities.


(7) Consists of 199,095,023 shares of common stock issuable upon conversion of Convertible Notes and 2,647,059 shares of common stock issuable upon exercise of the Warrant by 31 Group. Both the conversion of the Convertible Note and the exercise of the Warrant are subject to a 4.99% blocker, which limit may be increased to 9.99% at the election of 31 Group. The above shares and percentage do not apply the foregoing described blocker provision, and assumes that all the shares indicated have been issued to 31 Group. All the of shares issuable on conversion of the Convertible Notes as indicated may not be issued because the conversion rate is variable.


ITEM 13

Certain Relationships and Related Transactions


Mr. Slotkin was engaged by Hydro Phi through his consulting firm, RS Management, Ltd., from June 2012 to July 13, 2013, to act in the capacity of CEO and director of Hydro Phi.  The compensation paid to RS Management, Ltd is reflected in the above table of compensation to management.  In addition to the above compensation, under the terms of the consulting agreement and as additionally determined by the board of directors of Hydro Phi as additional compensation, Mr. Slotkin was awarded shares of common stock of Hydro Phi, which were converted into 11,063,674 shares of HPT Group. Mr. Slotkin was also reimbursed his business expenses under the terms of the consulting agreement. As of July 13, 2013, Mr. Slotkin became an employee of Hydro Phi, for services to be rendered to HPT Group and Hydro Phi, under the terms of a written agreement between HPT Group and himself which is described above.


From time to time, Hydro Phi received advances from its officers and stockholders for its operations.


Hydro Phi, prior to the merger transaction on September 25, 2013, had written employment agreements with its several of its key employees and officers, other than as Mr. Slotkin with whom it had a written consulting agreement. These employment agreements were not continued after the merger transaction, and each of the persons who were employed thereunder have continued as an at will employee without a written agreement. The HPT Group financial statements, which include the operations of Hydro Phi, account for accrued compensation due to employees and officers who participated in active management roles and worked without pay or limited pay prior to the merger transaction.  The accrued compensation as of March 31, 2015 and 2014 was $226,752 and $281,752, respectively. In the merger transaction, a portion of the accrued compensation was converted into warrants to acquire equity, and on a pro forma basis taking the merger transaction into account, the accrued compensation at March 30, 2013 was reduced by $1,767,649; the warrants represent the right to purchase 3,313,336 shares of common stock of the HPT Group, were issued to Messrs. Goldman, Smith and Sharma and others.  There is no set date for payment of the unpaid accrued expense which was not converted. Payment of the accrued compensation is conditional upon the success of the HPT Group and the approval of the board of directors of the HPT Group.


As of March 31, 2014, Hydro Phi had accrued interest from a note payable to Carnegie Technologies, LLC, a related party, in the amount $811,267.  The principal amount due under this promissory note was loaned to Hydro Phi in a series of advances during the fiscal years ended March 31, 2010 and 2009. The note accrued interest at 6% from the funding dates. The note matures on the earlier of: 1) a change of control transaction as defined in the note; 2) the written consent of the board of directors of Hydro Phi. Hydro Phi agreed in the note not to make any payment with respect to principal and interest until the entire outstanding principal and accrued interest due under certain 7.5% notes and certain 15% notes was paid or discharged in full. The holder of this note agreed to convert $3,143,870 of the outstanding principal and interest due under the note to common stock on the same terms and conditions offered to all the other note holders, which amount was converted on September 25, 2013, concurrently with the merger transaction. In November 2014, the outstanding accrued interest of $811,267 was exchanged for convertible debt that is convertible at $0.01 per share.


As of March 31, 2014, there were convertible notes payable to related parties, John Durham and Philip Levin, in the amount of $450,251. Accrued interest related to the notes was $125,129 at March 31, 2014. On February 28, 2013, Hydro Phi issued convertible notes to Carnegie, then a principal owner of Hydro Phi, and other associated parties, Messrs. Durham and Levin, for a principal amount of up to $3,000,000, which was subsequently increased as a result of the extension of additional loans. The principal amount due under the convertible notes was advanced to Hydro Phi, from time to time beginning in September 14, 2009. The notes accrued interest at a rate of 10% per annum, or the interest rate paid to any unrelated third party lender or investor, whichever is higher. For the



37




year ended March 31, 2013, and part of the year ended March 31, 2014, the effective interest rate was 10% as agreed by the note holders, notwithstanding that the maximum interest rate applicable could have been 15% under the terms of the notes because of other borrowings by Hydro Phi.  The notes were due on demand, secured by all assets of Hydro Phi and convertible to common shares before December 31, 2014, at the conversion rate of $0.03 to $0.05. The holders of these notes agreed to convert $3,143,870 of the outstanding principal and interest due under the notes to common stock on the same terms and conditions offered to all the other note holders, which amount was converted on September 25, 2013, concurrently with the merger transaction.


During the fiscal year ended March 31, 2014, $450,251 in convertible notes was exchanged for non-convertible notes earning interest at 8% per annum with a maturity date of August 31, 2014. During the fiscal year ended March 31, 2015, $445,813 of the outstanding principal and related accrued interest was exchanged for part of two convertible notes.


On September 4, 2013, Hydro Phi issued $65,000 in promissory notes to two related parties, Messrs. John Durham and Philip Levin each of whom was shareholders of Hydro Phi. The notes bear interest at 8% per annum and mature on August 31, 2014.  During fiscal year 2015 Messrs. John Durham and Philip Levin agreed to extend the maturity of aforementioned noted to August 31, 2015. In November 2014, the $65,000 outstanding principal and related accrued interest was exchanged for part of two convertible notes.


We entered into a marketing agreement for Europe through an affiliated company, HydroPhi Technologies Europe S.A. (“HTEurope”).  We own approximately 21% of the capital of HTEurope, and we have the right to name the Vice President of the Management Board and two supervisory board members of HTEurope. The territory covered by the distribution arrangement is all of Europe, however, the current focus of marketing is Poland and Eastern Europe.   Under a distribution agreement, we have granted to HTEurope the exclusive right to market and distribute the HydroPlant™ system in Europe for five years, subject to automatic renewal after the first five years if certain conditions are met.  In exchange, HTEurope agreed to pay the Company $10,000 as the initial consideration for the grant of the distribution arrangement.  HTEurope is further obligated to pay the Company an aggregate sum of $490,000 upon the successful testing of our system in a potential fleet customer located in the distribution zone. As of the date of this report, this amount has not become due.  Upon reaching a total sales of $2,500,000 of our system by HTEurope, HTEurope will pay the Company an additional $500,000 as the balance of the license fee for the distribution arrangement. The distribution agreement further requires HTEurope to purchase a minimum of the HydroPlant™ system once it has achieved an initial capital raise.


For the year ended March 31, 2015 and 2014, the Company incurred $11,881 and $0 for an equipment lease from a company controlled by one of our shareholders.


ITEM 14

Principal Accountant Fees and Services


The following table sets forth fees billed to us by our auditors during the fiscal years ended March 31, 2015 and 2014 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered.


 

March 31,

2015

 

March 31,

2014

 

 

 

 

 

 

(i) Audit Fees

 

 

 

 

 

GBH CPAs, PC

$

42,500

 

$

75,500

(ii) Audit Related Fees

 

-

 

 

-

(iii) Tax Fees

 

 

 

 

 

GBH CPAs, PC

 

5,000

 

 

-

(iv) All Other Fees

 

 

 

 

 

GBH CPAs, PC

 

6,500

 

 

-

Total

$

54,000

 

$

75,500


Pre-Approval Policies and Procedures. Prior to engaging its accountants to perform a particular service, our board of directors obtains an estimate for the service to be performed. All of the services described above were approved by the board of directors in accordance with its procedures.



38





PART IV


ITEM 15.

EXHIBITS


Exhibit

Number

 

Description

3.1*

 

Articles of Incorporation (Incorporated by reference to the registration statement on Form S-1 filed on July 29, 2010).

3.2*

 

Certificate of Amendment to Articles of Incorporation (incorporated by reference to the Current Report on Form 8-K filed on October 7, 2013 – change of name).

3.3*

 

Certificate of Amendment to Articles of Incorporation (incorporated by reference from Exhibit 3.1 to Current Report dated January 9, 2015 – increase in capitalization)

3.4*

 

By-Laws Articles of Incorporation (Incorporated by reference to the registration statement on Form S-1 filed on July 29, 2010).

10.1*

 

Agreement and Plan of Merger, dated July 15, 2013, among the Registrant, HPT Acquisition Corp., and Hydro Phi Technologies, Inc. (incorporated by reference to the Current Report on Form 8-K filed on September 25, 2013).

10.2*

 

Form of Amendment to the Agreement and Plan of Merger (incorporated by reference to the Current Report on Form 8-K filed on September 25, 2013).

10.3*

 

Form of Management Consulting Agreement between Crescendo Communications, LLC and Hydro Phi Technologies, Inc. (incorporated by reference to the Current Report on Form 8-K filed on September 25, 2013).

10.4*

 

Form of Warrant Agreement, issued by Registrant July 24, 2013, in connection with the Management Consulting Agreement with Crescendo Communications, LLC (incorporated by reference to the Current Report on Form 8-K filed on September 25, 2013).

10.5*

 

Form of Warrant Agreement issued by Hydro Phi and assumed by the Registrant – Assumption Agreement (incorporated by reference to the Current Report on Form 8-K filed on September 25, 2013).

10.6*

 

Form of Employment Agreement between Registrant (subsidiary) and Roger Slotkin (incorporated by reference to the Current Report on Form 8-K/A filed on December 17, 2013)

10.7*

 

Form of Distribution Agreement with Energia Vehicular Limpia S.A. de C.V. dated August 22, 2013 (incorporated by reference to the Current Report on Form 8-K/A filed on December 17, 2013).

10.8*

 

Securities Purchase Agreement between the Registrant and 31 Group, LLC (incorporated by reference to the Current Report on Form 8-K filed on April 29, 2014).

10.9*

 

Form of Convertible Note issued by the Registrant to 31 Group, LLC on April 28, 2014 (incorporated by reference to the Current Report on Form 8-K filed on April 29, 2014).

10.10*

 

Form of Warrant Agreement issued by Registrant to 31 Group, LLC, dated as of April 28, 2014 (incorporated by reference to the Current Report on Form 8-K filed on April 29, 2014).

10.11*

 

Form of Registration Rights Agreement between the Registrant and 31 Group, LLC, dated as of April 28, 2014 (incorporated by reference to the Current Report on Form 8-K filed on April 29, 2014).

10.12*

 

Form of 2014 Non-Qualified Equity Performance Award Plan (incorporated by reference to the Current Report on Form 8-K filed on May 1, 2014).

10.13*

 

Convertible Note, for 31 Group, LLC, issued on December 4, 2014, in principal amount of $385,000 (incorporated by reference from Exhibit 4.1 to Current Report dated December 4, 2014)

10.14*

 

Convertible Note, for 31 Group, LLC, issued on February 5, 2015, in principal amount of $275,000 (incorporated by reference from Exhibit 4.1 to Current Report dated December 4, 2014)

10.14*

 

Securities Purchase Agreement, dated as of December 4, 2014, by and between HydroPhi Technologies Group, Inc. and 31 Group, LLC, relating to principal notes in amounts of $385,000 and $275,000 (incorporated by reference from Exhibit 10.1 to Current Report dated December 4, 2014)

10.15*

 

Loan Conversion Agreement with Philip Levin dated November 12, 2014 (incorporated by reference from Exhibit 10.1 to Current Report dated November 12, 2014)

10.16*

 

Loan Conversion Agreement with John Durham dated November 12, 2014 (incorporated by reference from Exhibit 10.2 to Current Report dated November 12, 2014)

10.17*

 

Form of Convertible Notes, dated April 9, 2015, in aggregate principle amount of $201,666.30 (incorporated by reference from Exhibit 4.1 to Current Report dated April 15, 2015)

10.18*

 

Form of Securities Purchase Agreement, dated as of April 9, 2015, by and between HydroPhi Technologies Group, Inc., and two accredited investors, relating to principal notes in aggregate principal amount of $201,666.30 (incorporated by reference from Exhibit 10.1 to Current Report dated April 15, 2015)

10.19*

 

Form of Convertible Notes, dated May 27, 2015, in aggregate principle amount of $110,000 (incorporated by reference from Exhibit 4.1 to Current Report dated May 27, 2015)




39





10.20*

 

Form of Securities Purchase Agreement, dated as of May 27, 2015, by and between HydroPhi Technologies Group, Inc., and two accredited investors, relating to principal notes in aggregate principal amount of $110,000 (incorporated by reference from Exhibit 10.1 to Current Report dated May 27, 2015)

10.21*

 

Form of Convertible Notes, dated as of June 17, 2015, in aggregate principle amount of $70,000 (incorporated by reference from Exhibit 4.1 to Current Report dated June 18, 2015)

10.22*

 

Form of Securities Purchase Agreement, dated as of June 17, 2015, by and between HydroPhi Technologies Group, Inc., and two accredited investors, relating to principal notes in aggregate principal amount of $70,000 (incorporated by reference from Exhibit 10.1 to Current Report dated June 18, 2015)

21

 

List of Subsidiaries

31.1

 

Certification of the Chief Executive Officer and the Principal Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer and the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-101.INS

 

Instance Document

EX-101.SCH

 

Taxonomy Extension Schema

EX-101.CAL

 

Taxonomy Extension Calculation Linkbase

EX-101.DEF

 

Taxonomy Extension Definition Linkbase

EX-101.LAB

 

Taxonomy Extension Label Linkbase

EX-101.PRE

 

Taxonomy Extension Presentation Linkbase



*  Previously filed.





40






SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



HYDROPHI TECHNOLOGIES GROUP, INC.

 

 

 

 

By:

/s/ Roger M. Slotkin

Name:

Roger M. Slotkin

Title:

President, Chief Executive Officer and Director


Date: June 26, 2014



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


Signatures

 

Title(s)

 

Date

 

 

 

 

 

/s/ Roger M. Slotkin

 

President, Chief Executive Officer, and Director

 

June 26, 2015

Roger M. Slotkin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Reid Meyer

 

Director

 

June 26, 2015

Reid Meyer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Mark Robinson

 

Director

 

June 26, 2015

Mark Robinson

 

 

 

 








41





INDEX OF FINANCIAL STATEMENTS AND SCHEDULES






TABLE OF CONTENTS


Audited Financial Statements of

HydroPhi Technologies Group, Inc.

As of and for the Years Ended March 31, 2015 and 2014


 

Page Number

 

 

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets

F-2

Consolidated Statements of Operations

F-3

Consolidated Statements of Changes in Stockholders’ Deficit

F-4

Consolidated Statements of Cash Flows

F-5

Notes to Consolidated Financial Statements

F-6









42









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of

HydroPhi Technologies Group, Inc.

Doraville, Florida



We have audited the accompanying consolidated balance sheets of HydroPhi Technologies Group, Inc. as of March 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years then ended. HydroPhi Technologies Group, Inc.’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.


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


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HydroPhi Technologies Group, Inc. as of March 31, 2015 and 2014 and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.


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



/s/ GBH CPAs, PC

GBH CPAs, PC

www.gbhcpas.com

Houston, Texas

June 26, 2015




F-1







HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Balance Sheets

As of March 31, 2015 and 2014


 

2015

 

2014

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

63,412 

 

$

96,446 

Accounts receivable

 

 

 

1,050 

Inventory

 

42,000 

 

 

Prepaid expenses and other current assets

 

24,104 

 

 

7,055 

Total Current Assets

 

129,516 

 

 

104,551 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation

 

2,058 

 

 

5,435 

Intangible assets, net of accumulated amortization

 

358,500 

 

 

423,500 

Deferred financing costs

 

1,718 

 

 

 

 

 

 

 

 

Total Assets

$

491,792 

 

$

533,486 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

1,640,592 

 

$

1,576,290 

Accounts payable and accrued liabilities – related parties

 

71,945 

 

 

942,847 

Accrued compensation

 

226,752 

 

 

281,752 

Advance from customer

 

60,800 

 

 

60,800 

Deferred revenues

 

692,333 

 

 

969,000 

Notes payable

 

65,000 

 

 

46,603 

Notes payable – related party

 

4,438 

 

 

515,251 

Short-term convertible debts – related party

 

1,114,958 

 

 

Short-term portion of other long-term debt

 

42,000 

 

 

Total Current Liabilities

 

3,918,818 

 

 

4,392,543 

 

 

 

 

 

 

Long-term convertible debts

 

560,264 

 

 

Derivative liabilities

 

1,803,965 

 

 

Other long-term debt

 

14,000 

 

 

Total Liabilities

 

6,297,047 

 

 

4,392,543 

 

 

 

 

 

 

Commitment and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

Preferred stock, $0.0001 par value, 25,000,000 shares authorized; 0 shares issued and outstanding

 

 

 

Common stock, $0.0001 par value, 600,000,000 shares authorized; 167,377,472 and 102,665,126 shares issued and outstanding, respectively

 

16,738 

 

 

10,267 

Additional paid-in capital

 

27,591,352 

 

 

26,827,544 

Accumulated deficit

 

(33,413,345)

 

 

(30,696,868)

Total Stockholders’ Deficit

 

(5,805,255)

 

 

(3,859,057)

 

 

 

 

 

 

Total Liabilities and Stockholders’ Deficit

$

491,792 

 

$

533,486 


See accompanying notes to these consolidated financial statements.




F-2







HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Operations

For the years ended March 31, 2015 and 2014


 

2015

 

2014

 

 

 

 

 

Revenues

$

278,012 

 

$

142,050 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

General and administrative

 

1,761,297 

 

 

5,607,478 

Research and development

 

395,462 

 

 

562,344 

Depreciation and amortization

 

68,377 

 

 

69,224 

Impairment of intangible asset

 

 

 

350,000 

Total operating expense

 

2,225,136 

 

 

6,589,046 

 

 

 

 

 

 

Operating loss

 

(1,947,124)

 

 

(6,446,996)

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

Interest expense

 

(2,331,680)

 

 

(377,366)

Loss on settlement of litigation

 

 

 

(25,000)

Change in fair value of derivative liabilities

 

1,440,508 

 

 

Gain (loss) on settlement of debt and accrued compensation

 

121,819 

 

 

(7,662,388)

 

 

 

 

 

 

Total other expense, net

 

(769,353)

 

 

(8,064,754)

 

 

 

 

 

 

Net loss

$

(2,716,477)

 

$

(14,511,750)

 

 

 

 

 

 

Net loss per common share – basic and diluted

$

(0.02)

 

$

(0.24)

 

 

 

 

 

 

Weighted average common shares outstanding – basic and diluted

 

119,532,410 

 

 

59,932,079 


See accompanying notes to these consolidated financial statements.




F-3







HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Changes in Stockholders’ Deficit

For the years ended March 31, 2015 and 2014


 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders'

 

 

Shares

 

Par

 

Capital

 

Deficit

 

Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances – March 31, 2013

 

8,547,190

 

$

855

 

$

2,701,495 

 

$

(16,185,118)

 

$

(13,482,768)

Shares issued for services

 

11,055,336

 

 

1,106

 

 

4,863,243 

 

 

 

 

4,864,349 

Notes payable discount

 

-

 

 

-

 

 

44,155 

 

 

 

 

44,155 

Shares issued for accounts payable settlement

 

1,330,430

 

 

133

 

 

838,038 

 

 

 

 

838,171 

Shares issued for notes payable and convertible notes payable conversion

 

55,870,710

 

 

5,587

 

 

17,231,756 

 

 

 

 

17,237,343 

Warrants issued for services

 

-

 

 

-

 

 

148,568 

 

 

 

 

148,568 

Warrants issued to settle accrued compensation

 

-

 

 

-

 

 

1,002,875 

 

 

 

 

1,002,875 

Adjustment for reverse merger

 

25,861,460

 

 

2,586

 

 

(2,586)

 

 

 

 

Net loss

 

-

 

 

-

 

 

 

 

(14,511,750)

 

 

(14,511,750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances – March 31, 2014

 

102,665,126

 

 

10,267

 

 

26,827,544 

 

 

(30,696,868)

 

 

(3,859,057)

Reclassification of fair value on derivative warrants from equity to liability

 

-

 

 

-

 

 

(60,527)

 

 

 

 

(60,527)

Shares issued to employees and directors for services

 

3,600,000

 

 

360

 

 

74,880 

 

 

 

 

75,240 

Options issued to employees for services

 

-

 

 

-

 

 

93,688 

 

 

 

 

93,688 

Shares issued for conversion of debts

 

61,112,346

 

 

6,111

 

 

655,767 

 

 

 

 

661,878 

Net loss

 

-

 

 

-

 

 

 

 

(2,716,477)

 

 

(2,716,477)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances – March 31, 2015

 

167,377,472

 

$

16,738

 

$

27,591,352 

 

$

(33,413,345)

 

$

(5,805,255)


See accompanying notes to these consolidated financial statements.




F-4







HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Cash Flows

For the years ended March 31, 2015 and 2014


 

2015

 

2014

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

Net loss

$

(2,716,477)

 

$

(14,511,750)

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

 

 

 

 

 

Stock-based compensation

 

178,436 

 

 

5,012,917 

Depreciation and amortization

 

68,377 

 

 

69,224 

Impairment of intangible asset

 

 

 

350,000 

Amortization of deferred financing costs

 

20,107 

 

 

Amortization of debt discount

 

1,612,007 

 

 

25,758 

Non-cash interest expense related to conversion feature of notes payable

 

565,203 

 

 

Change in fair value of derivative liability

 

(1,440,508)

 

 

Loss on settlement of litigation

 

 

 

25,000 

Gain (loss) on settlement of debt and accrued compensation

 

(121,819)

 

 

7,662,388 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,050 

 

 

(1,050)

Inventory

 

(42,000)

 

 

Prepaid expenses and other current assets

 

(3,874)

 

 

(486)

Accounts payable and accrued liabilities

 

289,453 

 

 

386,903 

Accounts payable and accrued liabilities – related parties

 

70,678 

 

 

149,664 

Accrued compensation

 

(55,000)

 

 

(800,814)

Deferred revenues

 

(276,667)

 

 

969,000 

Net Cash Used in Operating Activities

 

(1,851,034)

 

 

(663,246)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Net proceeds from convertible notes payable

 

1,865,000 

 

 

Proceeds from notes payable

 

 

 

65,000 

Proceeds from notes payable – related party

 

 

 

694,575 

Payments on debt

 

(47,000)

 

 

Net Cash Provided by Financing Activities

 

1,818,000 

 

 

759,575 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(33,034)

 

 

96,329 

Cash and Cash Equivalents – Beginning of Year

 

96,446 

 

 

117 

 

 

 

 

 

 

Cash and Cash Equivalents – End of Year

$

63,412 

 

$

96,446 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flows Information:

 

 

 

 

 

Cash paid for income tax

$

 

$

Cash paid for interest

$

 

$

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

Shares issued for accounts payable settlement and notes and convertible notes payable conversion

$

661,878 

 

$

18,075,514 

Warrants issued to settle accrued compensation

$

 

$

1,002,875 

Notes payable discount

$

2,715,018 

 

$

44,155 

Note issued to settle accounts payable

$

103,000 

 

$

Fair Value of tainted warrants reclassified from equity to liability

$

60,527 

 

$

Conversion of accrued interest-related parties to notes payable-related parties

$

75,716 

 

$

Conversion of accrued interest-related parties to convertible debt-related parties

$

865,864 

 

$

Fair value of warrants issued with convertible notes classified as derivative liability

$

83,762 

 

$

Debt discount-derivative liability on note conversion feature

$

2,715,018 

 

$


See accompanying notes to these consolidated financial statements.




F-5







HYDROPHI TECHNOLOGIES GROUP, INC.

Notes to Consolidated Financial Statements



1.  ORGANIZATION AND BUSINESS


Hydrophi Technologies Group, Inc., formerly known as Big Clix Corp., Inc., (the “Company” or “Hydrophi”) was incorporated under the laws of State of Florida on June 18, 2010.


Reverse Acquisition


On September 25, 2013, the Company consummated an amended Agreement and Plan of Merger (the “Merger Agreement”) with Hydro Phi Technologies, Inc., a Delaware corporation (“Hydro Phi”), and HPT Acquisition Corp., a Delaware corporation (“HPT”), which was a wholly-owned subsidiary of the Company and established solely to implement the merger.  Pursuant to the Merger Agreement, HPT merged with and into Hydro Phi, with Hydro Phi being the surviving company, in an exchange of all the equity securities of the Hydro Phi for common stock of the Company.  As a result of the transaction, the former shareholders of Hydro Phi became the controlling shareholders of the Company. The transaction was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein Hydro Phi is considered the acquirer for accounting and financial reporting purposes. The capital, share price, and earnings per share amount in these consolidated financial statements for the period prior to the reverse merger were restated to reflect the recapitalization. As a result of the merger, Hydro Phi became a wholly-owned subsidiary of the Company.


The unaudited pro forma results of operations for the year ended March 31, 2014, as though this acquisition had taken place at the beginning of the fiscal 2014, is as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the entire period presented.


Revenues

$

142,050 

Net loss

 

(14,499,863)

Loss per common share – basic and diluted

 

(0.14)

Weighted average common shares outstanding – basic and diluted

 

100,181,462 


Hydro Phi was incorporated on April 21, 2008 under the laws of the State of Wyoming. In August 2010, with the relocation of its Research and Development Office from Maine to Georgia, the Company reincorporated under the laws of the State of Delaware and is currently a Delaware corporation.


Hydro Phi is a fuel efficiency company that has created a water-based technology to improve the fuel efficiency of internal combustion engines. Hydro Phi has been engaged in the research and development of its “green energy” solutions primarily for the transportation industry since its inception.  In 2010, Hydro Phi concluded phase one of its research and development phase and started to generate revenues. Hydro Phi’s priority market segments are: logistics, trucking, heavy equipment, marine and agriculture, where rising fuel costs and upcoming emission regulations necessitate the development of new, ground-breaking technologies.  In the future, the continual improvement process at Hydro Phi will focus on miniaturization, data collection, application-specific designs and further efficiency enhancements.


The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  The Company has a net working capital deficit at its most recent fiscal year end, has suffered recurring losses from operations, and has an accumulated deficit of approximately $33 million through March 31, 2015.  Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's research, development, marketing and manufacturing efforts.  While pursuing this business strategy, the Company is expected to continue operating at a loss with negative operating cash flows.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.  As a result of the aforementioned factors and the related uncertainties, there can be no assurance of the Company's ability to survive.



2.  SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation


The financial statements of the Company have been prepared using the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).



F-6







The consolidated financial statements include the Company’s accounts and those of the Company’s wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.


Reclassifications


Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation.  These reclassifications have no effect on previously reported net income.


Use of Estimates


The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.


Concentration of Credit Risks


The Company has no significant off-balance sheet risks related to foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company currently maintains its cash equivalent balance with one major national financial institution.   The Company, by policy, routinely assesses the financial strength of our customers and financial institutions.  The Company does not currently have any outstanding accounts receivables.


Cash and Cash Equivalents


The Company considers highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less to be cash equivalents.


Accounts Receivable and Allowance for Doubtful Accounts


Accounts receivable are stated at the amount the Company expects to collect. Accounts receivable represents receivables, net of allowances for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on its historical experience and other currently available information. When a specific account is deemed uncollectible, the account is written off against the allowance. As of March 31, 2015 and 2014, the allowance for doubtful accounts was $0. For the years ended March 31, 2015 and 2014, the Company recorded bad debt expenses of $0.


Inventory


The Company utilizes a perpetual inventory system and inventory is accounted for using the first-in-first-out (FIFO) method. The Company had raw materials of $42,000 in its inventory as of March 31, 2015.


Investments


Investment in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting. The Company has determined that its 20.05% investments in Hydro Phi Technologies Europe (“HTEurope”) should be accounted for using the equity method.  The equity method requires that the Company accounts for the investment in HTEurope at historical price, and adjust the balance for the Company’s ownership of the net income or loss of HTEurope. The Company discontinues applying the equity method if an investment has been reduced to zero and the Company is not required to advance additional fund to an investee.


Property and Equipment


Property and equipment are recorded at cost.  Expenditures for major additions and improvements are capitalized while minor replacements and maintenance and repairs, which do not improve or extend the life of such assets, are charged to operations as incurred.  Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in the statement of operations.  Depreciation is calculated using the straight-line method which depreciates the assets over the estimated useful lives of the depreciable assets ranging from five to seven years.



F-7







Intangible Assets


Intangible assets include patent applications.  Intangible assets with definite useful lives are recorded on the basis of cost and are amortized on a straight-line basis over their estimated useful lives.  The Company uses a useful life of 10 years for patents.  The Company evaluates the remaining useful life of intangible assets annually to determine whether events and circumstances warrant a revision to the remaining amortization period. If the estimate of the intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over that revised remaining useful life.  At March 31, 2015 and 2014, no revision to the remaining amortization period of the intangible assets was made.


Impairment of Long-lived Assets


The Company reviews the carrying value of the long-lived assets periodically to determine if facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Among the factors the Company considers in making the evaluation are changes in market position and profitability. If facts and circumstances exist which may indicate impairment, the Company will prepare a projection of the undiscounted cash flows of the asset group and determine if the long-lived assets are recoverable based on these undiscounted cash flows. If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair value.


Deferred Financing Costs


The Company recorded deferred financing costs on the balance sheet as an asset and utilized the effective interest rate amortization method to expense deferred financing costs over the life of the related notes. As of March 31, 2015, the Company had remaining unamortized deferred financing costs of $1,718 recorded on its books.


Derivatives


All derivatives are recorded at fair value on the balance sheet. Fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.


Fair Value of Financial Instruments


Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:


Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.


Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.


Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.


Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current financial assets and current financial liabilities approximates their carrying value because of the short-term maturity of these financial instruments.


The following tables set forth assets and liabilities measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as of March 31, 2015 and 2014. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.




F-8







 

Level 1

 

Level 2

 

Level 3

 

Total

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2015

$

-

 

$

-

 

$

1,803,965

 

$

1,803,965

At March 31, 2014

 

-

 

 

-

 

 

-

 

 

-


Income Taxes


An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards (“NOLs”). If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.


Revenue Recognition


Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.


Research and Development


Research and development costs are expensed as incurred. For the years ended March 31, 2015 and 2014, the Company recorded research and development expense of $395,462 and $562,344, respectively.


Share-Based Compensation


The Company estimates the fair value of each stock option award at the grant date by using the Black-Scholes option pricing model or modified binomial valuation model and common shares based on the last applicable market price of the Company’s common stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period.


Earnings (Loss) Per Common Share


Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common stockholders for the period by the weighted average shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period.  The calculation of diluted earnings (loss) per common share assumes the dilutive effect of stock options, warrants and any other potentially dilutive securities outstanding.  During a loss period, the potentially dilutive securities have an anti-dilutive effect and are not included in the calculation of dilutive net loss per common share.  For the year ended March 31, 2014, potentially issuable shares includes warrants to purchase 4,013,336 shares of the Company’s common stock have been excluded from the calculation.  For the year ended March 31, 2015, potentially issuable shares, including warrants to purchase 12,660,395 shares of the Company’s common stock and notes payable convertible to 372,022,796 shares of the Company’s common stock, have been excluded from the calculation.


Subsequent Events


The Company’s management reviewed all material events through the issuance date of this report for disclosure purpose.



F-9







Recent Accounting Pronouncements


In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial statements.


In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, Presentation of Financial Statements- Going Concern. The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently evaluating the effects of ASU 2014-15 on the consolidated financial statements.


In April 2015, the FASB issued an Accounting Standards Update that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company is currently evaluating the effects of ASU 2015-03 on the consolidated financial statements.



3.  PROPERTY AND EQUIPMENT


Property and equipment consisted of the following:


 

Useful

Life

 

March 31,

2015

 

March 31,

2014

Machinery and equipment

7

 

$

8,387 

 

$

8,387 

Computer equipment

5

 

 

5,840 

 

 

5,840 

Computer software

5

 

 

12,820 

 

 

12,820 

Office furniture and equipment

5

 

 

850 

 

 

850 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

27,897 

 

 

27,897 

Less:  accumulated depreciation

 

 

 

(25,839)

 

 

(22,462)

 

 

 

 

 

 

 

 

Total property and equipment, net

 

 

$

2,058 

 

$

5,435 


Depreciation expense for the years ended March 31, 2015 and 2014 was $3,377 and $4,224, respectively.




F-10







4.  INTANGIBLE ASSETS


Intangible assets consisted of the following:


 

March 31,

2015

 

March 31,

2014

Hydrogen On Demand Intellectual Property

$

650,000 

 

$

650,000 

ACT Intellectual Property

 

 

 

Other

 

1,000 

 

 

1,000 

 

 

 

 

 

 

Subtotal

 

651,000 

 

 

651,000 

Less: accumulated amortization

 

(292,500)

 

 

(227,500)

 

 

 

 

 

 

Total intangible assets, net

$

358,500

 

$

423,500 


In January 2009 and April 2011, the Company entered into agreements and obtained Hydrogen On Demand Technology. This intellectual property was valued at $650,000, based on the par value of the shares of common stock issued of $20,000 and $630,000 cash paid by the Company. The Company amortizes the cost over the estimated useful life of 10 years.


For the years ended March 31, 2015 and 2014, amortization expense recorded by the Company on the intangible assets was $65,000.


On July 5, 2011, the Company entered into a memorandum of understanding (“MOU”) with Advanced Combustion Technology, Inc. (“ACT”) where the Company paid $350,000 in exchange for a license agreement related to certain proprietary technology and services. The Company has assessed the value of this license in light of the fact that the Company believes ACT did not deliver the units or equipment or perform the services as set forth in the MOU. Therefore, the intangible as previously recorded at $350,000 was fully impaired as of March 31, 2014.



5.  INVESTMENT IN HYDROPHI EUROPE


The Company is marketing in Europe through an affiliated company, HydroPhi Technologies Europe S.A. (“HTEurope”).  Under a distribution agreement, the Company granted to HTEurope the exclusive right to market and distribute the HydroPlant™ system in Europe for five years, subject to an automatic renewal after the first five years if certain conditions are met.  In exchange, HTEurope agreed to pay the Company $10,000 as the initial consideration for the grant of the distribution arrangement.  HTEurope is further obligated to pay the Company an aggregate sum of $490,000 upon the successful testing of the Company’s system in a potential fleet customer located in the distribution zone. The territory covered by the distribution arrangement is all of Europe; however, the current marketing by HTEurope and the Company is focused on Poland and Eastern Europe. As of the date of this report, this amount has not become due.  Upon reaching a total sales of $2,500,000 of the Company’s system by HTEurope, HTEurope will pay the Company an additional $500,000 as the balance of the license fee for the distribution arrangement. The distribution agreement further requires HTEurope to purchase a minimum of the HydroPlant™ system once it has achieved an initial capital raise.


The Company currently owns approximately 21% of the capital of HTEurope, which amount the Company anticipated being diluted as HTEurope sells equity to provide funding for its operations.  The Company has the right to name the Vice President of the Management Board and two supervisory board members of HTEurope. The Company’s CEO is currently on the board of HTEurpoe. Currently, the Company carries this ownership position as an equity method investment on its books at $0 as no cash investment was made by the Company, HTEurope has an operating loss for the year ended December 31, 2014, and the Company is not obligated to advance funds to HTEurope.



6.  ACCRUED COMPENSATION


In order to attract competent and talented employees and officers, the Company has entered into formal employment agreements with its key employees and officers.  The Company has provided for accrued compensation with employees and officers who have participated in active management roles and worked without pay or limited pay.



F-11







In July 2013, the Company issued warrants to purchase 3,313,336 shares of the Company’s common stock to settle $1,767,649 accrued compensation to current and former employees. See Note 17.


The accrued compensation as of March 31, 2015 and 2014 was $226,752 and $281,752, respectively.  There is no set date for payment of this accrued expense. Payment of the accrued compensation is conditional upon the success of the Company and the approval of the Board of Directors of the Company.  During the year ended March 31, 2015 three payments against accrued compensation totaling $55,000 were made to an employee of the Company.



7.  DEFERRED REVENUES


On August 22, 2013, the Company entered into a regional distribution and service provider agreement with Energia Vehicular Limpia S.A. de C.V. (“Energia”). Pursuant to the agreement, Energia shall have the exclusive rights to market the Company’s products in Mexico for three years, with a potential extension for two additional years. In consideration of the exclusive distribution rights, Energia paid $500,000 as a license fee to the Company. On January 16, 2014, the Company and Energia further amended the regional distribution and service provider agreement to include the exclusive rights to market the Company’s products in Brazil for a license fee of $160,000 during the same period of the original agreement.   On April 9, 2014, the Company and Energia further amended the regional distribution agreement and service provider agreement to add consulting/advisory services to be provided by the Company to Energia for an 18-month period beginning April 1, 2014.  Energia paid in advance $217,000 for these services.  During the year ended March 31, 2014, the Company also received from Energia, a deposit in the amount of $180,000 for Hydroplant units to be shipped in the future.


License fee is recognized ratably over the term of the agreement. For the years ended March 31, 2015 and 2014, $132,000 and $88,000, respectively, in revenue related to the license fees was recorded.


Consulting/advisory fee is recognized ratably over the term of the agreement. For the year ended March 31, 2015 and 2014, $144,667 and $0 in revenue related to the consulting/advisory fees was recorded.


As of March 31, 2015 and 2014, the remaining deferred revenues were $692,333 and $969,000, respectively.



8.  NOTES PAYABLE


At March 31, 2015 and 2014, notes payable consisted of the following:


 

2015

 

2014

 

 

 

 

 

 

Notes payables to shareholders, unsecured, payable on August 31, 2015, and accrues interest at 8% annually.

$

65,000

 

$

46,603

 

 

 

 

 

 

Total notes payable

$

65,000

 

$

46,603


On September 25, 2013, the Company issued 17,819,004 shares to settle certain notes issued to shareholders and a $320,000 note payable issued to acquire an intangible asset.  The 17,819,004 shares were recorded at their fair value of $11,225,973 and the Company recorded a $7,764,755 loss on settlement of $3,461,218 debt.


On September 4, 2013, the Company issued $65,000 promissory notes with warrants to purchase 260,000 shares of the Company’s common stock to third parties. The principal and interest amount are due on August 31, 2015. The notes accrue interest at 8% and are unsecured. In connection with the issuance of the notes, the Company recorded initial debt discount of $44,155 related to the warrants based on the relative fair value of these warrants. As of March 31, 2015, the entire debt discount was fully amortized by the Company.



F-12







9.  NOTES PAYABLE – RELATED PARTY


On September 24, 2010, the Company issued a $2,867,500 promissory note to a related party. The principal amount due under this promissory note has been loaned to the Company in a series of advances during fiscal years ended March 31, 2010 and 2009. The note accrues interest at 6% from the funding date. The note matures on the earlier of: 1) a change of control transaction as defined in the note; 2) the written consent of the Board of Directors of the Company. The Company agrees not to make any payment with respect to this note until the entire outstanding principal and accrued interest due under certain notes issued to shareholders have been paid in full.


On September 25, 2013, $2,867,500 note payable to related party was converted into 14,993,464 shares of the Company’s common stock. Accrued and unpaid interest of $811,267 continues to remain on the books, payable at the discretion of the Company’s board of directors.


On February 28, 2013, the Company issued convertible notes to a principal owner of the Company and other associated or related parties for principal amount up to $3,000,000. The principal amount due under these convertible notes has been advanced to the Company since September 14, 2009. The notes accrue interest at a rate of 10% per annum, or the interest rate paid to any unrelated third party lender or investor, whichever is higher. For the year ended March 31, 2014, the effective interest rate was 10% as agreed by the note holders, notwithstanding that the maximum interest rate applicable was 15%.  The applicable interest rate is to apply for the entire loan period at the discretion of the lender. The notes are due on demand, secured by all assets of the Company and convertible to the Company’s common shares before December 31, 2014 at the conversion rate of from $0.05 to $0.03.


The Company has evaluated the conversion feature of the notes under ASC470 and concluded that they do not contain financial derivatives.  The conversion rate on the notes at the date of issuance exceeded the fair value of the common stock; therefore, no beneficial conversion feature was recorded.


In fiscal year 2014, the Company received proceeds of $629,575 from related party convertible notes.


During fiscal year 2014, $450,251 in convertible notes was exchanged for non-convertible notes earning interest at 8% per annum with a maturity date of August 31, 2015. The notes were not secured. In November 2014, $445,813 of these non-convertible notes was exchanged for part of two convertible notes.


On September 4, 2013, the Company issued $65,000 promissory notes to its related parties. The principal and interest amount are due on August 31, 2015. The notes accrue interest at 8% and are unsecured. In November 2014, these notes along with the accrued interest were exchanged for part of two convertible notes.


In fiscal year 2015, the Company issued a $75,716 note to a related party for unpaid accrued interest. The note bears interest at 8% and is due on August 31, 2015. This note was subsequently exchanged for part of a convertible note.


As of March 31, 2015 and 2014, the Company had notes payable to related party in the amount of $4,438 and $515,251 outstanding, respectively.



10.  CONVERTIBLE NOTES PAYABLE – RELATED PARTY


In 2015, the Company and related parties executed loan conversion agreements. Pursuant to the agreements, the related parties exchange certain non-convertible notes and related accrued interest for convertible notes with total principal of $1,452,393. The convertible notes are convertible to the Company’s common stock at a conversion rate of $0.0065217 per share.  Of this amount, $811,268 has a maturity date at the discretion of the Company’s board of directors and $641,125 has a maturity date of August 31, 2015.


The Company analyzed the loan conversion agreement executed on November 12, 2014 for derivative accounting consideration under FASB ASC 470 and determined that the embedded conversion feature, with issuance date fair values of $2,017,595 qualified for accounting treatment as a financial derivative. As a result, these notes were fully discounted and the fair value of the conversion feature in excess of the principal amount of the notes of $565,203 was expensed immediately as additional interest expense. The remaining discount will be amortized by the Company through interest expense over the life of these related party convertible notes. As of March 31, 2015, unamortized debt discount related to the convertible notes to related parties was $337,435 and the principal balance on these convertible notes was $1,452,393.




F-13






11.  CONVERTIBLE NOTES PAYABLE – 31 GROUP, LLC


Pursuant to a Securities Purchase Agreement, dated April 25, 2014, as amended on July 29, 2014, by and between the Company and 31 Group, LLC (the “Purchase Agreement”), the Company sold convertible notes with a principal amount of $1,352,000, for a total purchase price of $1,270,000, to 31 Group, LLC. The first note in principal amount of $624,000 was issued on April 28, 2014. The second note in principal amount of $104,000 was issued on July 29, 2014. The third note in principal amount of $624,000 was issued on August 5, 2014. The Company incurred $30,000 financing costs on these notes. The notes mature 24 months after issuance and accrue interest at an annual rate of 8%.


The notes are convertible at any time after issuance, in whole or in part, at the investor’s option, into shares of common stock, at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three volume weighted average prices of the common stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.35 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Company has the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the convertible notes at a price equal to 135% of the remaining outstanding amount. The Company is also required to reserve 150% of the number of shares of common stock that may be issued in conversion of the remaining outstanding amount.


Pursuant to a Securities Purchase Agreement, dated December 4, 2014, by and between the Company and 31 Group, LLC, the 31 Group is committed to purchase from the Company two convertible notes of the Company in the principal amounts of $385,000 and $275,000 for the cash purchase amounts of $350,000 and $250,000, respectively. The $385,000 note was issued on December 4, 2014 and will mature on May 17, 2016. The $275,000 note was issued on February 5, 2015 and will mature on July 30, 2016. The notes are convertible 179 days after issuance, in whole or in part, at 31 Group ’s option, into shares of the Company’s common stock, at a conversion price equal to $0.15 per share. If after 179 days from the execution date of the notes, the price of the Company’s common stock is less than $0.15, the Company will have an additional 30 days to repay the 31 Group LLC. If the notes are not repaid, 31 Group LLC may convert the notes at a conversion rate of the product of (x) the arithmetic average of the lowest three volume weighted average prices of the common stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 80%. The Company has the right at any time to redeem some or all, of the total outstanding amount then remaining under the convertible notes at a price equal to: (i) 100% of the outstanding principal and accrued interest if within 60 days of issuance (ii) 115% of the outstanding principal and accrued interest if between 61 and 149 days of issuance (iii) 120% of the outstanding principal and accrued interest if 150 days or more after issuance. The Company is also required to reserve 150% of the number of shares of common stock that may be issued in conversion of the remaining outstanding amount. As part of the note agreement the Company also agreed to give the note holder a 3% royalty payment on the net cash revenue from the sales of the Company’s HydroPlant units. The royalty is only payable when the Company has received $500,000 cash revenue and is for a period of twenty-four months starting from the date 31 Group receives an initial royalty payment.


The Company analyzed these convertible notes for derivative accounting consideration under FASB ASC 470 and determined that the embedded conversion feature, with grant date fair values of $1,262,626 qualified for accounting treatment as a financial derivative. The discount is amortized by the Company through interest expense over the life of the note. The warrants, with a grant date fair value of $83,762, issued with the convertible notes were also determined to be a financial derivative. Together with the original issuance discount of $112,000, the Company recognized a discount of $1,458,388 as result of the embedded conversion feature and warrants issued being financial derivatives.


A summary of value changes to the convertible notes issued during 2015 is as follows:


Principal amount

$

2,012,000 

Less: original issuance discount

 

(112,000)

Less: discount related to fair value of the derivative warrants

 

(83,762)

Less: discount related to fair value of the embedded conversion feature

 

(1,262,626)

Less: conversions of note to equity

 

(472,000)

Add: amortization of discount

 

478,652 

Carrying value at March 31, 2015

$

560,264 


During the year ended March 31, 2015, the Company recorded $478,652 amortization of the debt discount.



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12.  DERIVATIVE LIABILITIES


The Company has determined that the variable conversion price for its convertible notes with 31 Group, LLC causes the embedded conversion feature to be a financial derivative. The Company may not have enough authorized common shares to settle its obligation if the note holder elects to convert the note to common shares when the trading price is lower than a certain threshold.


Because the Company may not have enough authorized common shares to settle its obligation for its convertible notes and equity instruments, such as warrants and convertible notes payable-related parties, the Company concluded that the warrants issued with the 31 Group, LLC convertible notes and all of the existing warrants, options and related party convertible notes should be treated as financial derivatives. The Company reclassified the fair value of the tainted warrants from equity to liability on the same date it obtained the first convertible note from the 31 Group, LLC.


Changes of derivative liabilities during the year ended March 31, 2015 were as follows:


Balance, March 31, 2014

$

Initial valuation of derivatives

 

3,373,491 

Tainted warrants reclassified to liabilities from equity classification

 

60,527 

Transfer from liabilities classification to equity classification

 

(189,545)

Change in fair value

 

(1,440,508)

Balance, March 31, 2015

$

1,803,965 


Fair values of the Company’s financial derivatives are measured at fair value at each reporting period. The fair values of the financial derivative were calculated using a modified binomial valuation model with the following assumptions at their initial valuation dates and March 31, 2015:


 

Initial Valuation

Dates

 

March 31,

2015

Market value of common stock on measurement date (1)

$0.03~$0.17

 

$0.01

Adjusted conversion price (2)

$0.019~$0.108

 

$0.008

Risk free interest rate (3)

0.10%~0.58%

 

0.56%

Life of the note in years

1.75~2 years

 

0~1.35 years

Expected volatility (4)

72%~143%

 

270%

Expected dividend yield (5)

-

 

 -


(1)  

The market value of common stock is based on closing market price as of initial valuation dates and March 31, 2015.

(2)  

The adjusted conversion price is calculated based on conversion terms described in the note agreement.

(3)  

The risk-free interest rate was determined by management using the 2 year Treasury Bill as of the respective offering or measurement date.

(4)  

The volatility factor was estimated by management using the historical volatilities of the Company’s stock.

(5)  

Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.



13.  OTHER LONG-TERM DEBT


On July 7, 2014, the Company issued a $103,000 note to a service provider to settle $219,673 accrued expenses previously recorded. A gain on settlement of debt of $116,673 was recorded in the consolidated statements of operations. The note bears no interest. Principal of $4,000 was due on the date of the note; $15,000 was due on the date of receipt by the Company of the proceeds of the note issued to 31 Group, LLC on July 29, 2014; $3,500 each due on the first day of each calendar month commencing August 1, 2014 and any remaining unpaid balance is due on July 1, 2016. As of March 31, 2015, $56,000 was still outstanding.



14.  RELATED PARTY TRANSACTIONS


From time to time, the Company receives advances from its officers and stockholders for its operations. As of March 31, 2015 and 2014, the Company owed $24,217 and $3,425, respectively, to its related parties for advances and lease of equipment.




F-15






For the years ended March 31, 2015 and 2014, the Company incurred $11,881 and $0 for an equipment lease from a company controlled by one of our shareholders.


As of March 31, 2015 and 2014, outstanding balances of the notes payable and convertible notes payable to the related parties were $4,438 and $515,251, respectively. Accrued interest related to these notes was $47,728 and $939,422 at March 31, 2015 and 2014, respectively.


Historically, the Company’s research, development, marketing and capital raising program relied on the continued support of related parties, their families and friends.  Absent a significant capital raise from outside of the current shareholders, if these related parties, families and friends ceased providing these services on the current terms offered, the Company’s ability to continue in existence could be in jeopardy.



15.  COMMITMENTS AND CONTINGENCIES


Operating Lease


The Company leases its executive and research & development offices in Doraville, Georgia.  This lease was amended on March 31, 2015 and was extended through March 31, 2016 at a monthly rental of $6,319.


Legal Issues


The Company, from time to time, may be a party to claims and legal proceedings generally incidental to its business.  In the opinion of the management, after consultation with the Company’s legal counsel, there were no legal matters that are likely to have a material adverse effect on the Company’s financial position as of March 31, 2015 and 2014 and the results of operations or cash flows for the years ended March 31, 2015 and 2014.


In June 2014, the Company reached a tentative agreement to settle a lawsuit filed by Cardinal Logistics Management Corporation (“Cardinal”) against the Company for $25,000. Cardinal alleged that the Company did not make payment for certain installation and delivery services involving Cardinal’s vehicles. The Company disputed the allegation in full and filed an answer with affirmative defenses. As a result of the tentative settlement, for the year ended March 31, 2014, the Company recorded a loss on settlement of litigation for $25,000 which was fully paid in fiscal year 2015.



16.  INCOME TAXES


The Company had federal NOL carry forwards of approximately $13 million as of March 31, 2015. The NOL is available to offset future taxable income and begins to expire in 2028. Under Section 382 of the Internal Revenue Code, the NOL may be limited as a result of a change in control. The Company periodically assesses the likelihood that it will be able to recover its 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 and ongoing prudent and feasible profits. As of March 31, 2015 and 2014, the Company established valuation allowances equal to the full amount of the net deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.


For the years ended March 31, 2015 and 2014, no amounts have been recognized for uncertain tax positions and no amounts have been recognized related to interest or penalties related to uncertain tax positions. The Company has determined that it is not reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months.



17.  EQUITY TRANSACTIONS


Equity Compensation Plans


On April 29, 2014, the Company adopted the 2014 Non-Qualified Performance Equity Award Plan (the “Plan”). The Plan provides for awards of non-qualified stock options, restricted stock and other equity based awards. Award shares that are not used will be available for re-grant. The maximum award is limited to 1,250,000 shares.  The Plan provides for a term of 20 years, but awards may not be granted after the 10th anniversary of the effective date of the Plan.  To the extent required, for example for stock options, the exercise price or other award price will be the fair market value of a share of stock on the date of grant.



F-16







On November 7, 2014, the Board of Directors of the Company authorized to increase the number of shares under the Plan by 5,000,000 shares to 10,000,000 shares.


Common Stock


In fiscal year 2014, the Company issued 11,055,336 shares of common stock for services. These shares were recorded as share-based compensation at their fair value of $4,864,349.


In fiscal year 2014, the Company issued 1,330,430 shares to settle $175,764 liabilities previously accrued. These shares were recorded at their fair value of $838,171 and the Company recorded a loss on settlement of liabilities of $662,407.


On September 25, 2013, the Company issued 17,819,004 shares to settle the certain notes issued to shareholders and a $320,000 note payable issued to acquire intangible asset and issued 38,051,706 shares for the conversion of notes payable and convertible notes payable to related parties. The 17,819,004 shares were recorded at their fair value of $11,225,973 and the Company recognized a $7,764,755 loss on settlement of debt. The 38,051,706 shares were recorded at $6,011,370, which represents the balance of the notes payable and the convertible notes payable to related parties that were converted.


In fiscal year 2014, 25,861,460 shares of the Company’s common stock were adjusted for the reverse merger transaction.


In fiscal year 2015, the Company issued 3,600,000 shares of common stock for services. These shares were recorded as share-based compensation at their fair value of $75,240.


In fiscal year 2015, the Company issued 61,112,346 shares of common stock to 31 Group for the conversion of the convertible notes and accrued interest of $472,333 and $189,545 reclassification of derivative liabilities on note conversion feature.


Options


In fiscal year 2015, the Company granted its board members 2,000,000 non-qualified options to purchase the Company’s common stock with an exercise price of $0.12, a term of 5 years and a 2-year vesting period. The options had a fair value of $204,412 at the grant date that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 1.74% (2) expected life of 5 years, (3) expected volatility of 129.78%, and (4) zero expected dividends. The fair value is being expensed over the 2-year vesting period.


The Company did not grant any options during fiscal year 2014.


A summary of activities in options and the related information is as follows:


 

Number of

Units

 

Weighted

Average

Exercise

Price

 

Weighted

Average

Remaining

Contractual

Term (in years)

 

Aggregate

Intrinsic

Value

Outstanding, March 31, 2014

-

 

 

-

 

-

 

 

-

Granted

2,000,000

 

 

0.12

 

4.08

 

 

-

Exercised

-

 

 

-

 

-

 

 

-

Outstanding, March31, 2015

2,000,000

 

 

0.12

 

4.08

 

 

-

Exercisable March 31, 2015

-

 

 

 

 

 

 

 

 


Fair value of all options issued and outstanding are being amortized over their respective vesting periods. The unrecognized compensation expense at March 31, 2015 was $110,723. During the year ended March 31, 2015, the Company recorded option expense of $93,688.


Warrants


In July 2013, the Company issued warrants to purchase 440,000 shares of the Company’s common stock for consulting services. These warrants are exercisable at $0.10 per share and expire on July 13, 2015. The Company calculated the fair value of these warrants using the Black-Scholes Model and recorded share-based compensation of at $148,568.





F-17






In July 2013, the Company also issued warrants to purchase 3,313,336 shares of the Company’s common stock to settle $1,767,649 accrued compensation to current and former employees. These warrants are valued using the Black-Scholes Model at $1,002,875, exercisable at $0.60 per share and have a life of 3 years. The Company recorded a $764,774 gain on settlement of debt related to the issuance.


In September 2013, the Company issued warrants to purchase 260,000 shares of the Company’s common stock in connection with the notes issued to third parties. These warrants are valued using the Black-Scholes Model at $137,684, exercisable at $0.10 per share and expire on July 13, 2015. The $44,155 related fair value of the warrants issued was recorded as debt discount.


The fair value of the above warrants was calculated using the Black-Scholes Model with the following assumptions: (1) discount rate of 0.64%~0.89%; (2) expected life of 2~3 years; (3) expected volatility of 156.74%~164.56% and (4) zero expected dividends.


In 2015, the Company granted warrants to purchase 2,647,059 shares of the Company’s common stock to 31 Group, LLC in connection with the issuance of the convertible notes under the Securities Purchase Agreement dated April 25, 2014. These warrants have an exercise price of $0.17 per share and a term of 2 years. Initial fair values of the warrants issued to 31 Group, LLC in the amount of $83,762 were calculated using a modified binomial valuation model and recorded by the Company in derivative liabilities.


In 2015, the Company also granted 6,000,000 warrants to former employees with an exercise price of $0.10, a term of 5 years with immediate vesting.  The warrants have a fair value of $9,508 using a modified binomial valuation model.


A summary of activities in warrants and the related information is as follows:


 

Number of

Units

 

Weighted

Average

Exercise

Price

 

Weighted

Average

Remaining

Contractual

Term (in years)

 

Aggregate

Intrinsic

Value

Outstanding, March 31, 2013

-

 

 

 

 

-

 

 

-

Granted

4,013,336

 

 

0.55

 

2.19

 

 

-

Exercised

-

 

 

-

 

-

 

 

-

Outstanding and exercisable, March 31, 2014

4,013,336

 

$

0.55

 

2.19

 

 

139,920

Granted

8,647,059

 

 

0.12

 

3.55

 

 

-

Exercised

-

 

 

-

 

-

 

 

-

Outstanding, March31, 2015

12,660,395

 

 

0.26

 

2.80

 

 

-

Exercisable, March 31, 2015

12,660,395

 

 

 

 

 

 

 

 


Because the Company may not have enough authorized common shares to settle its obligation for its warrants, the Company concluded that the warrants issued with the 31 Group, LLC convertible notes and all of the existing warrants should be treated as financial derivatives. The Company reclassified the fair value of $60,527 for the tainted warrants from equity to liability on the same date it obtained the first convertible note from the 31 Group, LLC.



18.  CONCENTRATION


100% and 97% of the Company’s revenues were related to one customer for each of the years ended March 31, 2015 and 2014, respectively.  The loss of the customer or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.



19.  SUBSEQUENT EVENTS


From April 1, 2015 through the date of this report, the Company issued 34,487,677 common shares upon conversions of outstanding notes issued to 31 Group, LLC for discharge of principal of $130,000.


On April 15, 2015, the Company entered into securities purchase agreements, dated April 9, 2015, with two separate accredited investors.  Pursuant to the purchase agreements, the investors purchased separately from the Company a convertible note of the Company in the principal amount of $100,833, for the cash purchase amount of $91,667.  Each note will mature on October 9, 2016, and bears interest at 8% per annum.



F-18







On May 27, 2015, the Company entered into securities purchase agreements with two separate accredited investors.  Pursuant to the purchase agreements, the investors purchased separately from the Company a convertible note of the Company in the principal amount of $55,000, for the cash purchase amount of $50,000.  Each note will mature on May 27, 2016, and bears interest at 8% per annum.


As of June 17, 2015, the Company entered into securities purchase agreements with two separate accredited investors.  Pursuant to the purchase agreements, the investors purchased separately from the Company a convertible note of the Company in the principal amount of $35,000, for the cash purchase amount of $32,500.  Each note will mature on June 17, 2016, and bears interest at 8% per annum.











F-19