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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2016

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 000-53459

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

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

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

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

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

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

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

Yes [X]     No [  ] 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

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

11,087,212 shares of the issuer’s common shares, par value $0.001 per share, were issued and outstanding as of August 17, 2016.

EXPLANATORY NOTE

The sole purpose of this Amendment No. 1 to HYBRID Coating Technologies Inc.’s Form 10-Q for the period ended June 30, 2016, filed with the Securities and Exchange Commission on August 22, 2016 (the “Form 10-Q”), is to is to furnish interactive data files formatted in XBRL (eXtensible Business Reporting Language) as Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T.

No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way the disclosures made in the original Form 10-Q.


TABLE OF CONTENTS

  PART I. FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements 2
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (Unaudited) 3
Consolidated Statements of Operations for the Three and Six Months Ended June 31, 2016 and 2015 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited) 5
  Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
     
  PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 23
Item 1a. Risk factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Mine Safety Disclosures 23
Item 5. Other Information 23
Item 6. Exhibits 24

1


PART I

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited consolidated balance sheet of Hybrid Coating Technologies Inc. as of June 30, 2016 and the related unaudited consolidated statements of operations, and cash flows for the three and six months ended June 30, 2016 have been prepared by management in conformity with accounting principles generally accepted in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2016 or any other subsequent period.

2


Hybrid Coating Technologies Inc.
Consolidated Balance Sheets
(Unaudited)

    June 30,     December 31,  
  2016     2015  
ASSETS              
Current assets:            
Cash and cash equivalents $  36,239   $  23,893  
   Total current assets   36,239     23,893  
             
Equipment loan receivable   17,000     12,000  
Intangible assets, net of accumulated amortization   2,751,559     1,132,753  
             
TOTAL ASSETS $  2,804,798   $  1,168,646  
             
LIABILITIES AND STOCKHOLDERS’ DEFICIT            
             
Current liabilities:            
Bank indebtedness $  4,081   $  -  
Accounts payable and accrued liabilities   1,118,535     866,103  
Accounts payable and accrued liabilities - related parties   483,602     324,865  
Deferred revenue   26,840     177,442  
Stock payable   15,000     15,000  
Senior secured convertible debentures   200,000     200,000  
Convertible notes net of unamortized discount of $145,678 and $76,432 respectively   29,322     60,424  
Convertible debentures, current portion   1,344,566     -  
Loans payable   1,206,500     1,206,500  
Loans payable - shareholders   2,126,473     2,197,082  
Note payable - related party   2,588,491     1,300,491  
Derivative liabilities   148,879     138,957  
   Total current liabilities   9,292,289     6,486,864  
             
Convertible debentures, long-term portion   -     1,344,242  
             
Total liabilities   9,292,289     7,831,106  
             
Commitments and contingencies            
             
STOCKHOLDERS’ DEFICIT            
             
Series A preferred stock, $0.001 par value, 1,000,000 shares authorized, 0 shares issued   -     -  
Series B preferred stock, $0.001 par value, 4,000,000 shares authorized, 13,500 shares 
     and 2,300 shares issued and outstanding respectively
  14     2  
Common stock, $0.001 par value, 1,600,000,000 shares authorized, 7,808,045 shares 
     and 5,942,795 shares issued and outstanding, respectively
  7,808     5,943  
Additional paid-in capital   27,829,221     22,685,955  
Accumulated deficit   (34,324,534 )   (29,354,360 )
             
Total stockholders’ deficit   (6,487,491 )   (6,662,460 )
             
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $  2,804,798   $  1,168,646  

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

3


Hybrid Coating Technologies Inc.
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2016 and 2015
(Unaudited)

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
    June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
Revenues $  17,012   $  4,103   $  167,614   $  4,103  
Cost of sales   3,391     1,850     88,804     1,850  
                         
Gross profit   13,621     2,253     78,810     2,253  
                         
Operating expenses                        
 General and administrative   273,108     496,287     493,047     987,622  
 Amortization of intangible assets   102,542     265,547     383,298     531,093  
 Loss on settlement of payables   -     114,820     746,400     484,080  
                         
Total operating expenses   375,650     876,654     1,622,745     2,002,795  
                         
Loss from operations   (362,029 )   (874,401 )   (1,543,935 )   (2,000,542 )
                         
Loss on extinguishment of debt   (247,500 )   -     (2,931,500 )   (355,641 )
Change in fair value of derivative liability   16,474     497,719     (12,123 )   477,158  
Gain (loss) on foreign currency transactions   -     (1,442 )   (3,927 )   4,492  
Interest expense   (201,906 )   (356,811 )   (478,689 )   (1,085,889 )
                         
Total other income (expense)   (432,932 )   139,466     (3,426,239 )   (959,880 )
                         
Net loss $  (794,961 ) $  (734,935 ) $  (4,970,174 ) $  (2,960,422 )
                         
Basic and diluted net loss per common share $  (0.10 ) $  (2.21 ) $  (0.68 ) $  (10.26 )
                         
Basic and diluted weighted average number of common shares   7,807,724     332,147     7,348,748     288,447  

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

4


Hybrid Coating Technologies Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)

    Six Months Ended     Six Months Ended  
    June 30, 2016     June 30, 2015  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss $  (4,970,174 ) $  (2,960,422 )
Adjustments to reconcile net loss to net cash used in operating activities:            
 Stock-based compensation   -     182,199  
 Amortization of intangible assets   383,298     531,093  
 Loss on settlement of payables   746,400     484,080  
 Loss on extinguishment of debt   2,931,500     355,641  
 Change in fair value of derivative liability   12,123     (477,158 )
 (Gain) loss on foreign currency transactions   3,927     (4,492 )
 Amortization of debt discounts   117,254     354,348  
 Interest expense related to derivative liability in excess of face value of debt   6,980     374,494  
 Interest imputed from notes payable - related party   92,000     92,487  
 Change in operating assets and liabilities            
     Accounts payable and accrued liabilities   248,286     770,038  
     Accounts payable and accrued liabilities - related parties   236,709     (153,332 )
     Deferred revenue   (150,602 )   -  
Net cash used in operating activities   (342,299 )   (451,024 )
             
CASH FLOWS FROM INVESTING ACTIVITIES            
Issuance of loan receivable for equipment   (5,000 )   -  
Net cash used in investing activities   (5,000 )   -  
             
CASH FLOWS FROM FINANCING ACTIVITIES            
Bank indebtedness   4,081     310  
Proceeds from convertible notes net of issuance costs   149,000     474,950  
Proceeds from loans payable   -     229,000  
Proceeds from loans payable - shareholders   991,641     982,006  
Repayments from loans payable - shareholders   (437,021 )   (894,870 )
Repayments of convertible notes   (136,056 )   (189,872 )
Repayments of note payable - related party   (212,000 )   (151,000 )
Proceeds from exercise of warrants   -     500  
Net cash provided by financing activities   359,645     451,024  
             
INCREASE IN CASH   12,346     -  
             
CASH, BEGINNING OF PERIOD   23,893     -  
CASH, ENDING OF PERIOD $  36,239   $  -  

5


Hybrid Coating Technologies Inc.
Consolidated Statements of Cash Flows (continued)
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)

    Six Months Ended     Six Months Ended  
    June 30, 2016     June 30, 2015  
Supplemental disclosure of cash flow information            
Cash paid during the period for:            
Interest $  18,603   $  44,733  
Income taxes $  -   $  -  
             
Non-cash investing and financing transactions:            
             
Acquisition of intangible asset through issuance of note payable $  1,500,000   $  -  
Acquisition of intangible asset through issuance of preferred stock $  502,104   $  -  
Common stock issued for settlement of accounts payable - related party $  1,001,100   $  458,220  
Warrants and stock issued for settlement of liabilities $  3,380,000   $  626,410  
Warrants issued for payment of interest $  -   $  15,600  
Warrants issued for convertible debt inducement $  15,000   $  -  
Reduction of derivative liabilities on redemption of debt $  154,939   $  -  
Derivative debt discount $  152,738   $  820,064  
Cashless exercise of warrants $  -   $  410  
Common stock issued for debt $  -   $  525,394  
Warrants issued for cancellation of shares $  151,950   $  1,950  

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

6


Hybrid Coating Technologies Inc.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

Hybrid Coating Technologies Inc. (the “Company”, “HCT”) was incorporated in the State of Nevada on July 8, 2010. The Company manufactures and sells under license, alternative non-toxic (isocyanate-free) polyurethane, Green Polyurethane™, including coatings and raw binder ingredients (Green Polyurethane® Monolithic Floor Coating and Green Polyurethane™ Binder).

The accompanying consolidated financial statements, which should be read in conjunction with the financial statements and footnotes of Hybrid Coating Technologies Inc., included in Form 10-K filed on April 14, 2016 and Form 10-K/A filed May 2, 2016 with the Securities and Exchange Commission, are unaudited, but have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.

Going Concern

The Company remains highly dependent upon funding from non-operational sources. The Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has an accumulated deficit of $34,324,534, and has a working capital deficit of $9,256,050 as of June 30, 2016. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support The Company’s working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available the Company may be required to curtail or cease its operations.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. The Company’s fiscal year end is December 31.

Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Nanotech. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.

Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.

Cash and Cash EquivalentsThe Company maintains various cash balances in two financial institutions located in Daly City, California. These balances are fully insured by the Federal Deposit Insurance Corporation, which insures up to $250,000. On occasion, balances may temporarily exceed such coverage. The Company considers all highly liquid debt instruments, which could include commercial paper and certificates of deposits, with an original maturity of three months or less to be cash equivalents. Investments with maturities greater than three months and less than on year are classified as short term investments.

Concentrations of Credit RiskFinancial instruments which potentially subject the Company to concentrations of credit risk include cash deposits place with financial institutions. The Company had sales to one customer that comprised 100% of the Company’s total revenues for the six months ended June 30, 2016 and 2015. The Company believes that, in the event its primary customers are unable or unwilling to continue to purchase the Company’s goods, there are a number of alternative customers at comparable prices.

7


Intangible AssetsIntangible assets are comprised of intellectual property which is amortized on a straight-line basis over the assets’ respective life, for approximately 5 years. Intellectual property with a perpetual life in not amortized.

Impairment of Long - Lived AssetsLong-lived assets to be held and used are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. The determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset or its disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or net realizable value.

Revenue RecognitionRevenue is recognized when persuasive evidence of an arrangement exists, goods are delivered, sales price is determinable, and collection is reasonably assured.

Fair ValueASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.

As of June 30, 2016 and 2015, the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:

    Significant Unobservable Inputs  
    (Level 3)
    Six Months Ended June 30,  
    2016     2015  

Beginning balance

$  138,957   $  181,723  

Additions

  152,738     820,064  

Reduction on conversion of debt

  (154,939 )   (163,115 )

Total (gains) and losses

  12,123     (477,158 )

Ending balance

$  148,879   $  361,514  

 

           

Change in unrealized gains (losses) included in earnings relating to
derivatives still held as of June 30, 2016 and 2015

$  (12,123 ) $  477,158  

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

8


Earnings Per ShareBasic net loss per share amounts are computed by dividing the net loss by the weighted average number of common shares outstanding over the reporting period. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation of diluted net loss per share amounts as the effect would be anti-dilutive.

For six months ended June 30, 2016 and 2015, the following convertible debt and warrants to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:

    Six Months Ended  
    June 30,     June 30,  
    2016     2015  
Convertible debt   1,873,810     423,274  
Stock warrants   10,668,926     135,733  
Total common shares issuable   12,542,736     559,007  

Recently Issued Accounting PronouncementsThe Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operations, financial position or cash flow.

Subsequent Events – The Company has evaluated all transactions occurring from June 30, 2016 through the date of issuance of the consolidated financial statements for disclosure consideration.

NOTE 3 – INTANGIBLE ASSETS

On February 12, 2016, the Company signed the eleventh amendment to its Licensing Agreement with Nanotech Industries, Inc. (“NTI”), whereby the parties amended the Licensing Agreement (and subsequent amendments) to extend the exclusivity period, to December 31, 2020 (“2020 Extended Exclusivity Period”). In consideration for the 2020 Extended Exclusivity Period, the Company shall pay the following to NTI:

  i)

Issue 2,240,000 shares of Series B Preferred Stock (“Series B Preferred Shares”) to be issued at the time of execution of the Eleventh Amendment Agreement (“Share Issuance Deadline”).

     
  ii)

Issue purchase warrants to purchase 31,300,000 shares of Series B Preferred Stock (“90-Day Warrants”), to be issued 90 days following the execution of the amendment (“90-Day Deadline“). The 90-Day Warrants shall be exercisable at any time from the date of issuance at a price per share equal to the par value of the Series B Preferred Stock of $313,000 and shall expire ten years from the date of issuance.

     
  iii)

Issue purchase warrants to purchase 126,000,000 shares of Series B Preferred (“12-Month Warrants”), to be issued 12 months following the execution of this Agreement (“12-Month Deadline”). The 12-Month Warrants shall be exercisable at any time from the date of issuance at a price per share equal to the par value of the Series B Preferred Stock and shall expire ten years from the date of issuance.

     
 

(The “90-Day Warrants” and the 12-Month Warrants” collectively referred to as the “Warrants”).

     
  iv)

Pay the Licensor an amount equal to US $1,500,000, to be paid within twelve months of the execution of this Eleventh Amendment Agreement and recorded on the balance sheet as note payable - related party as of March 31, 2016 (“Fee Deadline”).

Should the Company not meet any of: (i) the Share Issuance Deadline; or (ii) the 90-Day Deadline; or (iii) the 12-Month Deadline; or (iv) the Fee Deadline (individually referred to as “Unmet Deadline”) and should such Unmet Deadline not be extended by the Parties, the Company shall continue to have the right to the Manufacturing and Sale for the Territory, on a non-exclusive basis for the duration of the Agreement. The Company valued the Series B Preferred Stock and Warrants at $502,104 along with a note payable of $1,500,000. Both the 90-Day Warrants and 12-Month Warrants have been issued.

9


Intangible assets activity is as follows for the six months ended June 30, 2016 and 2015:

    2016     2015  
             
Net intangible assets, beginning of period $  1,132,753   $  2,136,205  
     Purchases   2,002,104     -  
     Less: current amortization   (383,298 )   (531,093 )
Net intangible assets, end of period $  2,751,559   $  1,605,112  

The balance of intangible assets, net is as follows:

    June 30, 2016     December 31, 2015  
Intangible assets $  6,504,584   $  4,502,480  
Less impairment and transfer   (781,917 )   (781,917 )
Less: accumulated amortization   (2,971,108 )   (2,587,810 )
Intangible assets, net $  2,751,559   $  1,132,753  

During the three months ended June 30, 2016 and 2015, the Company recognized amortization expense of its intangible assets of $102,542 and $265,547, respectively. During the six months ended June 30, 2016 and 2015, the Company recognized amortization expense of its intangible assets of $383,298 and $531,093, respectively.

The following is a summary of the licenses acquired to date from NTI:

License Rights Overview Licensed Region License Issuance
Date and Term
Original Cost Carrying Value at
June 30, 2016
Carrying Value at
December 31, 2015
A Coating Products North America June 12, 2010
10 years , 6 months
$500,000 $0 $0
B Coating Products Russian Territory March 17, 2011
9 years, 9 months
$150,000 $22,281 $24,800
C Coating Products European Continent July 7, 2011
9 years, 5 months
$1,250,000 $103,841 $129,020
D Spray Foam Insulation North America, European
Continent and Russian
Territory
May 6, 2016
4 years, 7 months
$500,000 $53,571 $86,865
E Added Applications including
synthetic leather, sealants
and adhesives
North America, European
Continent and Russian
Territory
March 31, 2017
3 years, 9 months
$2,000,000 $697,669 $833,333
F Polyurethane Foam Packaging North America August 10, 2015
5 years , 4 months
$102,480 $42,340 $58,735
G Extension All Territories and Products Extended through
December 31, 2020
$2,002,104 $1,831,857 $0
TOTAL       $6,504,584 $2,751,559 $1,132,753

NOTE 4 – LOANS PAYABLE

Loans payable include a loan from a non-related party that was issued for $75,000 on November 16, 2010 and was repayable on May 16, 2011 with a 10% premium. The balance at June 30, 2016 and December 31, 2015 was $27,500, and the loan is currently in default. The Company has not received any notices from the loan holder with respect to the defaults.

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

In 2013, the Company entered into various loan agreements totaling $268,500, at interest rates ranging from 15%-16%. These loans are all currently in default. The creditors have not called these loans.

10


There were no new loans advanced in the first six months of 2016. During the first six months of 2015 lenders advanced $229,000 in non-interest bearing demand loans.

During the three months ended June 30, 2016 and 2015, interest expense related to these notes was $43,162 and $40,858, respectively. During the six months ended June 30, 2016 and 2015, interest expense related to these notes was $86,325 and $85,317, respectively, and the interest paid was $13,500 and $21,450, respectively.

NOTE 5 – LOANS PAYABLE – SHAREHOLDERS

During the years ended December 31, 2013, 2012 and 2011, the Company entered into various loan agreements and arrangements for loans with certain shareholders. The loans all have different maturity dates ranging from 2011 to 2015 and interest rates that range from 2% to 18%. The Company was in default on loans totalling $999,026 as of June 30, 2016. The shareholders have not called these loans.

During the year ended December 31, 2015, a shareholder-creditor transferred $100,000 of its outstanding balance owed by the Company to a third party. The Company and the third party agreed to amend the loan agreement to allow the third party to convert the principal balance into shares of the Company’s stock. The third party converted the principal balance of $100,000 into 6,252,324 shares of the Company’s common stock. The shares had a fair value of $258,141 and the Company recorded a loss on debt extinguishment of $158,141.

The Company had an outstanding balance of $2,126,473 and $2,197,082 in loans payable to shareholders as of June 30, 2016 and December 31, 2015, respectively.

During the first six months of 2016, the Company received $991,641 in shareholder advances and repaid $437,021. During the first six months of 2015, the Company received $982,006 in shareholder advances and repaid $894,870. During the six months ended June 30, 2016, the Company issued a total of 1,875,000 shares of common stock and 8,100,000 warrants to a shareholder-creditor for payment of outstanding accounts payable. The fair value of the shares was $866,100 based on the market price on the date of grant which settled accounts payable and accrued liabilities to related parties of $119,700. Accordingly, the Company recognized a loss on settlement in the amount of $746,400. The fair value of the warrants was $3,380,000 based on the Black-Scholes method described in Note 10 which settled accounts payable and accrued liabilities to related parties of $531,000. Accordingly, the Company recognized a loss on settlement in the amount of $2,849,000.

During the three months ended June 30, 2016 and 2015, interest expense related to these loans was $27,219 and $17,287, respectively. During the six months ended June 30, 2016 and 2015, the total interest expense on the loans payable to shareholders was $54,437 and $33,950, respectively, and the total interest paid was $1,872 and $2,810, respectively. The Company had an outstanding balance of $2,126,473 and $2,197,082 as of June 30, 2016 and December 31, 2015, respectively.

NOTE 6 – CONVERTIBLE DEBENTURES

On April 29, 2011, the Company issued convertible debentures for proceeds of $1,201,000 (the “April 29” debenture) and on February 21, 2012, issued an additional $119,500 (the “Feb 21” debenture and together the “Debentures”) with a maturity of 36 months and a coupon rate of 10% per annum payable in cash or capital stock at the Company’s discretion. The debentures are held by third parties and by non-controlling shareholders, and are convertible as follows:

April 29, 2011 convertible debentures

-by dividing the conversion amount by a conversion factor of 1.4 yielding Units of the Company where each Unit (at a price of $1.40 per Unit), is comprised of 1 share of common stock and one half of a warrant to purchase a share of common stock of the Company with an exercise price of $2.00 per share and a maturity at April 29, 2014. Warrants are exercisable at the option of the holder at any time prior to maturity.

February 21, 2012 convertible debentures:

-by dividing the conversion amount by a conversion factor of 1.45 yielding Units of the Company where each Unit (at a price of $1.45 per Unit), is comprised of 1 share of common stock and one half of a warrant to purchase a share of common stock of the Company with an exercise price of $2.10 per share and a maturity at February 21, 2015. Warrants are exercisable at the option of the holder at any time prior to maturity.

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Both debentures carry an anti-dilution provision. The conversion price applicable to the debentures is subject to reset in the event of a Dilutive Issuance (as defined in the debenture agreement) by the Company. A Dilutive Issuance excludes shares or options issued to employees, officers, directors or consultants pursuant to stock option plans approved by the Board of Directors.

The Company recorded a corresponding discount of $46,721 and $558,248 against the carrying value of the convertible debentures during the years ended December 31, 2012 and 2011, respectively. The discounts were amortized using the effective interest method over the term of the debt.

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

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

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

The maturity date for the April 29, 2011 debentures was April 29, 2016. The Company has defaulted on this payment but is in negotiations with all the debenture holders to exchange their debt for new financing of which the terms have not yet been determined. No notice by the debenture holders has been sent to the Company.

During the three months ended June 30, 2016 and 2015, interest expense related to these convertible debentures was $33,284 and $32,922, respectively. Interest expense of $64,844 and $66,722 have been recorded on the convertible debentures for the six months ended June 30, 2016 and June 30, 2015, respectively. No interest payments were made during the six months ended June 30, 2016. The balance of the debentures both at June 30, 2016 and December 31, 2015, was $1,344,566 and $1,344,242, respectively.

NOTE 7 – CONVERTIBLE NOTES

Convertible debt with a variable conversion feature consists of the following as of June 30, 2016 and December 31, 2015:

Noteholder (issuance date)         June 30, 2016     December 31, 2015  
JMJ (3/4/15)       $  -   $  44,099  
Prolific (5/8/15)         -     800  
LG (7/16/15)         -     52,500  
EMA Financial (10/29/15)         -     40,000  
Harbour Gates (5/9/16)         110,000     -  
EMA Financial (5/15/16)         40,000     -  
Forest Capital (6/17/16)         25,000     -  
Total convertible debentures         175,000     137,399  
Less: debt discount         (145,678 )   (76,975 )
Convertible debentures, net       $  29,322   $  60,424  

During the six months ended June 30, 2016, the Company fully repaid the noteholders a total of $136,056 including principal and accrued interest of $48,856. The Company fully amortized the remaining discount of $76,975 with a corresponding charge to interest expense. In addition, the Company issued $175,000 in convertible notes net of issuance costs of $26,000 recorded as a debt discount. The Company determined that the conversion option was a derivative. Accordingly, the Company recorded a derivative liability of $151,937 of which $144,957 was recorded as debt discount, $6,980 as additional interest expense and the Company amortized the $10,476 of debt discount as interest expense and recorded accrued interest of $1,818.

During the six months ended June 30, 2015, the Company repaid a note holder $189,872 including interest of $13,333 and amortized the remaining $60,424 discount to interest expense. In addition, the Company issued $336,750 in convertible notes net of issuance costs of $55,108 recorded as a debt discount. The Company determined that the conversion option was a derivative. Accordingly, the Company recorded a derivative liability of $703,001 of which $336,750 was recorded as debt discount, $366,251 as additional interest expense and the Company amortized the $66,469 of debt discount as interest expense and recorded accrued interest of $886.

During the three months ended June 30, 2016 and 2015, the Company recognized total debt discount amortization of $40,279 and $150,903, respectively. During the six months ended June 30, 2016 and 2015, the Company recognized total debt discount amortization of $117,254 and $354,348, respectively.

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Following is a summary of the debt discount for each of the convertible notes:

Noteholder   December 31,           Debt Discount     Debt     June 30,  
(issuance date)   2015     Additions     Net of Amortization     Conversions     2016  
                               
JMJ (3/4/15) $  43,556   $  -   $  -   $  (43,556 ) $  -  
Prolific (5/8/15)   800     -     -     (800 )   -  
LG (7/16/15)   52,500     -     -     (52,500 )   -  
EMA Financial (10/29/15) 40,000 - - (40,000 ) -
Harbour Gates (5/9/16)   -     110,000     (83,624 )   -     26,376  
EMA Financial (5/15/16) - 40,000 (38,033 ) - 1,967
Forest Capital (6/17/16) - 25,000 (24,021 ) - 979
  $  136,856   $  175,000   $  (145,678 ) $  (136,856 ) $  29,322  

NOTE 8 – SENIOR SECURED CONVERTIBLE DEBENTURES

On August 16, 2010, the Company entered into a securities purchase agreement with a third party for the subscription of senior secured convertible debentures (“SSCD”) for an amount of $400,000. The debentures had a maturity date of August 16, 2012 with a coupon of 10% and convert at the option of the holder into shares of common stock of the Company at a price of $0.75 per share. The notes are secured by all assets of the Company. The subscriber also received 533,336 Series A warrants with a maturity of 1 year and an exercise price of $1.25 and 133,360 Series B warrants with a term of 3 years and an exercise price of $1.50. These warrants have since expired. To date, the shares have not been registered. All prices and warrants issued have been adjusted for the post-acquisition of Nanotech by HCT.

The Company is in default of payment of the debentures which matured on August 16, 2012. No notices have been issued by the debenture holder.

The obligations of the Company under the SSCD will rank senior to all outstanding and future indebtedness of the Company and shall be secured by a first priority, perfected security interest in all the assets of the Company.

The balance outstanding at June 30, 2016 and December 31, 2015 was $200,000.

NOTE 9 – DERIVATIVE LIABILITIES

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

The valuation of the derivative liability attached to the Debentures arrived at through the use of multinomial lattice models based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes. The features in the note that were analyzed and incorporated into the model included the conversion feature with the reset provisions and the call/redemption options. Based on these features, there are six primary events that can occur: payments are made in cash; payments are made with stock; the holder converts upon receiving a change notice; the holder converts the note; the Issuer redeems the note; or the company defaults on the note.

The model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. interest rates, stock price, conversion price, etc.). Projections were then made on these underlying factors which led to a set of potential scenarios. Probabilities were assigned to each of these scenarios over the remaining term of the note based on management projections. This led to a cash flow projection over the life of the note and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed, and it was compared to the discounted cash flow of the note without the embedded features, thus determining a value for the derivative liability. As of June 30, 2016 and December 31, 2015, the Company recorded derivative liabilities for issuance of convertible notes payable initial fair value of $152,738 and $1,014,703, respectively.

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The Company recorded unrealized (losses) and gains of $(12,123) and $477,158 for the six months ended June 30, 2016 and 2015, respectively. The Company recorded unrealized gains of $16,474 and $497,719 for the three months ended June 30, 2016 and 2015, respectively. The fair value of the derivative liability was $148,879 and $138,957 as of June 30, 2016 and December 31, respectively.

      Derivative Values  
                                 
                        Fair Value        
Valuation     December 31,                 Increase        
Date     2015     Additions     Conversions     (Decrease)     June 30, 2016  
April 29, 2011 debenture   $  3,363   $  -   $  -   $  (1,047 ) $  2,316  
Feb 21, 2012 debenture     -     -     -     25     25  
2015 convertible notes     135,594     -     (154,939 )   19,345     -  
2016 convertible notes     -     152,738     -     (6,200 )   146,538  
Total   $  138,957   $  152,738   $  (154,939 ) $  12,123   $  148,879  

      Derivative Values  
                                 
                        Fair Value        
Valuation     December 31,                 Increase     December 31,  
Date     2014     Additions     Conversions     (Decrease)     2015  
April 29, 2011 debenture   $  13,405   $  -   $  -   $  (10,042 ) $  3,363  
Feb 21, 2012 debenture     9,000     -     -     (9,000 )   -  
Oct 10, 2014 note     73,472     -     (109,896 )   36,424     -  
Nov 12, 2014 debenture     2,750     -     -     (2,750 )   -  
Nov 13, 2014 debenture     83,096     -     (41,094 )   (42,002 )   -  
2015 convertible notes     -     1,014,703     (603,883 )   (275,226 )   135,594  
Total   $  181,723   $  1,014,703   $  (754,873 ) $  (302,596 ) $  138,957  

NOTE 10 – STOCKHOLDERS’ DEFICIT

On March 2, 2016, the Board of Directors approved and recommended the approval by the stockholders, to undergo a reverse stock split of each class of shares which includes the shares of common stock (“Common stock”), the Series A preferred Stock and the Series B Preferred Stock by a ratio of 200 to 1 for each class of shares. The par value of each class of shares shall remain unchanged. The Series A Preferred Stock and Series B Preferred Stock voting rights per share shall remain unchanged. The reverse stock split became effective on July 15, 2016.

During the six months ended June 30, 2016, the Company issued a total of 2,625,000 shares (525,000,000 before reverse stock split) of common stock to a shareholder-creditor for payment of outstanding accounts payable. The fair value of the shares was $1,001,100 based on the market price on the date of grant which settled accounts payable and accrued liabilities to related parties of $172,200.

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Accordingly, the Company recognized a loss on settlement in the amount of $828,900. The Company cancelled 9,750 (1,950,000 shares before reverse split) common shares issued in 2014 and 750,000 (150,000,000 shares before reverse stock split) shares issued in 2015 in exchange for 759,750 (151,950,000 shares before reverse stock split) warrants with a 5-year term and an exercise price of $0.001 valued on the original grant date, of which $151,950 was reclassified from common stock to additional paid-in capital in 2016.

As part of its extension of its licenses (see Note 3), the Company issued 11,200 (2,240,000 shares before reverse stock split) Series A Preferred Shares and 786,500 (157,300,000 shares before reverse stock split) Series B Preferred Share warrants with an exercise price of $0.001 and a 10-year maturity with a total fair value of $502,104.

Warrants

During the six months ended June 30 , 2016, the Company issued 8,100,000 (1,620,000,000 warrants before reverse stock split) warrants to a shareholder to repay accounts payable-related party with a fair value of $3,380,000 (recorded as an adjustment to loans payable - shareholder of $531,000 and loss on settlement of debt of $2,849,000); 75,000 warrants issued to a convertible note holder as part of the derivative liability for a fair value of $151,755; 759,750 (151,950,000 warrants before reverse stock split) warrants to shareholder in exchange for the cancellation of 759,750 (151,950,000 warrants before reverse stock split) shares for consideration of $151,950, all with a corresponding increase in additional paid-in capital valued using the Black-Scholes option pricing model according to the following assumptions:

Expected volatility   176.4%-287.9%  
Exercise price $ 0.002  
Stock price $ 0.42-$0.2  
Expected life   5 years  
Risk-free interest rate   1.23%-1.46%  
Dividend yield $  Nil  

A summary of the activity in the Company's warrants during the six months ended June 30, 2016 is presented below:

    Number of     Weighted Average  
    Warrants     Exercise Price  
             
Outstanding and exercisable, at December 31, 2015   1,734,176   $  0.36  
Issued   8,934,750   $  0.01  
Outstanding and exercisable, at June 30, 2016   10,668,926   $  0.07  

The intrinsic value of warrants outstanding at June 30, 2016 was $1,576,050.

Contingent Warrant Issuance

On July 20, 2012, the Company’s board of directors approved the issuance of 1,500 (300,000 warrants before reverse stock split) warrants with an exercise price of $0.001 per share and a five-year life from date of issuance to the Company’s President, Joseph Kristul, contingent upon his successful negotiation of a major sales contract. The major sales contract agreement has not yet been consummated by the Company.

NOTE 11 – RELATED PARTY TRANSACTIONS

NTI License Fees

The Company’s principal assets are licenses for product sales with NTI, an entity under common control. During the six months ended June 30, 2016, the Company extended all its licenses with NTI until December 31, 2020. The consideration given was 11,200 (2,240,000 before reverse stock split) Series B preferred shares and 786,500 (157,300,000 before reverse stock split) Series B preferred share warrants with a total fair value of $502,104 and a note payable of $1,500,000 due by February 12, 2017. During the year ended December 31, 2015, the Company issued 2,100 (420,000 shares before reverse stock split) of Series B Preferred Stock valued at $102,480 as consideration for its licenses with NTI. The notes payable – related party was repaid through cash payments of $439,000 and the issuance of 200 (40,000 shares before reverse stock split) shares of Series B Preferred Stock valued at $150,000. During the year ended December 31, 2014, the Company issued $2,500,000 of notes payable - related party as consideration for its licenses with NTI. The debt was partially repaid through cash payments of $420,800 and issuances of 40,565 (8,113,116 shares before reverse stock split) shares of common stock valued at $872,160.

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During the six months ended June 30, 2016, the Company made principal payments of $212,000 on its note payable to NTI related to the 2014 acquisition of the Added Applications license rights. The note matures on March 31, 2017, does not bear interest, and no payments are required prior to maturity. As of June 30, 2016 and December 31, 2015, the balance of notes payable - related party outstanding with NTI was $2,588,491 and $1,300,491, respectively.

The Company also has an option (expiring December 31, 2020) to issue a controlling stake in the Company amounting to 52.5% to NTI for a perpetual exclusive license to manufacture and sell Nanotech Products for all North America, South America and Europe. If this option is exercised, the Company will have a similar option for the territory of Asia to issue an additional 10% ownership stake in the Company. There is an additional option, also expiring December 31, 2020, for the Company to issue an additional 15% ownership stake in exchange for exclusivity for Spray Foam Insulation products.

Fees and Loans with Shareholder

During the six months ended June 30, 2016 and 2015, the Company was charged $118,082 and $424,837, respectively, by an outside consultant, who is also a shareholder-creditor, for professional fees of $15,000 per month in 2016 and 2015, out-of-pocket expenses of $28,082 in 2016 and $34,000 in 2015, and professional fees of approximately $0 in 2016 and $300,000 in 2015 related to strategic partnership negotiations and other business related services performed on the Company’s behalf.

The Company issued 17,200,000 of the Company’s common shares to the shareholder-creditor with a fair value of $417,361 to settle liabilities for consulting services of $144,400 and a loss on settlement of $272,961 to the consultant during the six months ended June 30, 2015. The Company had an outstanding balance payable included in accounts payable and accrued liabilities - related parties as of June 30, 2016 and December 31, 2015 of $165,456 and $91,019, respectively. Also during the six months ended June 30, 2015, the shareholder-creditor transferred $100,000 of its outstanding balance owed by the Company to a third party. The Company and the third party agreed to amend the loan agreement to allow the third party to convert the principal balance into shares of the Company’s stock. The third party converted the principal balance of $100,000 into 31,261 (6,252,354 shares before reverse stock split) of the Company’s common stock. The shares had a fair value of $258,141 and the Company recorded a loss on debt extinguishment of $158,141.

During the six months ended June 30, 2016, the shareholder-creditor loaned the Company $503,832 through loans payable - shareholders and the Company made a cash repayment of $15,000 and repayments through the issuance 2,625,000 shares (525,000,000 shares before reverse stock split) of common stock and 8,100,000 (1,620,000,000 warrants before reverse stock split) warrants to this consultant of $172,200 and $531,000 respectively. During the six months ended June 30, 2015, this shareholder-creditor loaned the Company $172,751 through loans payable - shareholders and the Company made cash repayments to this consultant of $3,000 .

Shared Administrative Costs

The Company shares office space and certain personnel with NTI. Costs are allocated among the parties based on usage. Rent expense for the six months ended June 30, 2016 and 2015 was $22,500.

NOTE 12 – SUBSEQUENT EVENTS

Subsequent to June 30, 2016, the Company issued the following:

- 2,010,000 shares of the Company’s common stock with a fair value of $162,200 to a shareholder to repay $41,738 of outstanding loans and recognized a loss on settlement of debt of $120,462;

- a convertible note holder redeemed $25,047 of outstanding convertible debt for 768,953 shares of the Company’s common stock; and

- 500,000 shares at a fair value of $59,000 to a consultant for services.

In July 2016, the Company entered into several convertible note agreements with a third parties with a total principal balance of $414,000, annual interest rates ranging from 6% to 8%, conversion rates per share equal to 60% of the lowest trading price of the Company’s common stock for the twenty prior trading days, and mature in July 2017.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The Management’s Discussion and Analysis (“MD&A”) is designed to assist investors in understanding the nature and the importance of the changes and trends, as well as the risks and uncertainties associated with the Company’s operations and financial position. Some sections of this report contain forward-looking statements that, because of their nature, necessarily involve a number of known and unknown risks and uncertainties, including statements regarding our capital needs, business strategy and expectations, and the factors described under “Risk Factors” contained in the Company’s Form 10-K/A Report filed May 2, 2016. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. The Company’s actual and future results could therefore differ materially from those indicated or underlying these forward-looking statements.

Although the Company deems the expectations reflected in these forward-looking statements to be reasonable, the Company cannot provide any guarantee as to the materialization of the expectations reflected in these forward-looking statements.

The following information should be read in conjunction with the unaudited financial statements for the period ended June 30, 2016 and notes thereto. Unless otherwise indicated or the context otherwise requires, the "Company," “HCT,” “we," "us," and "our" refer to Hybrid Coating Technologies Inc.

Compliance with Generally Accepted Accounting Principles

Unless otherwise indicated, the financial information presented below, including tabular amounts, is expressed in US dollars and prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Critical items of the financial statements that require the use of estimates include the determination of the allowance for doubtful accounts, the determination of the allowance for inventory obsolescence, the determination of the useful life of fixed and intangible assets for amortization calculation purposes, the assumptions for fixed asset impairment tests, the determination of the allowance for guarantees, the determination of the allowance for income taxes, the assumptions used for the purposes of calculating the stock-based compensation expense, the determination of the fair value of financial instruments, the determination of the fair value of the assets and liabilities acquired on business acquisitions and the implicit fair value of goodwill.

The financial statements include estimates based on currently available information and management’s judgment as to the outcome of future conditions and circumstances.

Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.

Changes in Accounting Principles

No accounting changes were adopted during the six months ended June 30, 2016.

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Overview

Company Background

HCTs principal office is located in Daly City, California, U.S.A.

As of June 30, 2016, HCT had 3 employees.

HCT offers an alternative to toxic formulations of polyurethane (PU) worldwide through its exclusive distribution rights which provide for a cost-effective alternative non-toxic (isocyanate-free) polyurethane, Green Polyurethane™. Its focus is within the C.A.S.E. segment specifically for large industrial and commercial coatings applications where Green Polyurethane™ has a natural competitive advantage over other PU and epoxy coatings due to its superior chemical resistance and environmentally safe properties with reduced health risks.

The Company’s ultimate goal is to license its proprietary Green Polyurethane™ formulation to national and/or global coatings formulators and then focus on rolling out the commercialization of other Green Polyurethane™ applications such as adhesives and sealants. In order to achieve this, the Company is proving the validity of its products through direct sales and is therefore targeting large distributors and multiple client bases. The Company intends to focus within the C.A.S.E. segment specifically for large industrial and commercial coatings applications where Green Polyurethane™ has a natural competitive advantage over other polyurethane ("PU") and epoxy coatings due to its superior chemical resistance and environmentally safe properties with reduced health risks. Some of the target applications for Green Polyurethane™ products markets include:

 

Industrial and commercial buildings

 

Civil applications for tunnels and bridges

 

Private and public garages

 

Chemical and food processing plants

 

Warehouses

 

Monolithic floorings for civil, industrial and military engineering

 

Marine and Aeronautic applications

 

Industrial equipment for dairy and liquid fertilizer processing plants and delivery systems

 

Military facilities and equipment

 

Protective coatings inside industrial and commercial pipes

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

In addition, the Company plans to:

 

Increase the number of contractors and applicators contacted

 

Contact paint formulators and offer Green Polyurethane® Binder for their proprietary formulations

 

Establish distribution channels utilizing existing distribution hubs

 

Sub-license technology in certain geographic areas.

HCT intends to establish full commercial-scale manufacturing for both of its products at Adhpro Adhesives in Magog, Quebec and Simpson Coatings in California through non-exclusive toll manufacturing agreements.

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

HCT is currently at the commencement of the commercialization phase of its business model. HCT plans on significantly expanding its sales and client base by promoting the NTI Products at trade unions, press and trade shows and by capitalizing on existing distribution hubs to increase its distribution channels and build new strategic relationships. The Company expects to have significant sales by the end of 2016.

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Results of Operations

Comparison of the Six Months Ended June 30, 2016 and 2015

The Company recorded $167,614 in revenues for the six months ended June 30, 2016 and $4,103 for the corresponding prior year’s period as the Company started to commercialize its products.

General and administrative expenses totaled $493,047 for the six months ended June 30, 2016, as compared to $987,622 for the six months ended June 30, 2015, representing a 50% decrease from the prior corresponding period. Included in general administrative expenses for the period ended June 31 are the following:

    Six Months Ended June 30,     %  
    2016     2015     Change  
Professional Fees $  321,682   $  577,161     (44% )
Payroll   22,609     22,902     (1% )
Stock-based compensation (non-cash)   -     176,832     (100% )
Rent, supplies and general office costs   73,221     51,737     42%  
Travel and trade shows   75,535     158,990     (52% )
                   
Total $  493,047   $  987,622     (50% )

Professional fees were $321,682 for the six months ended June 30, 2016, compared to $577,161 for the six months ended June 30, 2015. Professional fees decreased due to approximately $255,000 less in charges from a consultant used for financing, sales and marketing purposes.

Payroll was $22,609 and $22,902 for the six months ended June 30, 2016 and 2015, respectively. There was one employee on the payroll. The other two employees were paid through stock-based compensation and professional fees. $20,500 was paid to an employee for the six months ended June 30, 2016 and charged to professional fees. There was $0 charged to professional fees for the corresponding prior year’s period.

Stock-based compensation was $0 for the six months ended June 30, 2016, compared to $176,832 for the six months ended June 30, 2015. Stock-based compensation decreased from the prior year’s period due to no compensation incurred during the current period.

Rent, supplies and general office costs were $73,221 for the six months ended June 30, 2016, which was a $21,484 increase from $51,737 for the six months ended June 30, 2015, due to higher corporate filing fees and supplies costs.

For the six months ended June 30, 2016, travel and tradeshows expenses were $75,535, decreasing by $83,455 from $158,990 for the corresponding prior year’s quarter. The Company had decreased travel in connection with sales, product development and financing purposes during the six months ended June 30, 2016, due to less activity as compared to the prior period.

The Company expects to significantly increase operating expenses in the future including selling general and administrative expenses as the Company commences its efforts to commercialize its products.

The Company had $383,298 of amortization expense related to its intangible assets for the six months ended June 30, 2016, compared to $531,093 for the six months ended June 30, 2015. The decrease in amortization expense was a result of the five-year extension of the exclusivity period of the Company’s licenses with NTI completed in the first quarter of 2016, therefore decreasing the amount amortized during the current period.

The Company recognized a loss on change in fair value of derivatives of $12,123 during the six months ended June 30, 2016, compared to a gain of $477,158 in the six months ended June 30, 2015. The intrinsic fair value of the Company’s convertible notes increased during the six months ended June 30, 2016. This decrease was due to the exercise price of the embedded conversion feature decreasing as a result of the discount rate applied to the 25-day average trading price of the Company’s stock as measured at June 30, 2016 compared to the exercise price on the dates of issuance of the convertible notes. Accordingly, as of June 30, 2016, the Company recorded an increase in the derivative liabilities and a corresponding loss on change in fair value.

The Company recorded $478,689 in interest expense for the six months ended June 30, 2016, compared to $1,085,889 in interest expense for the six months ended June 30, 2015. The decrease in interest expense was a result of the Company converting and redemption by the debt holders in the latter part of 2015 and first six months of 2016.

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During the six months ended June 30, 2016, the Company recorded a loss on extinguishment of debt in the amount of $2,931,500 compared to $355,641 recorded in the six months ended June 30, 2015. The increase was as a result of warrants issued to pay a loan payable shareholder for the six months ended June 30, 2016. In addition, for the six months ended June 30, 2016, the Company recorded a loss on settlement of payables in the amount of $746,400, compared to $484,080 during the six months ended June 30, 2015. Both losses occurred as a result of shares issued as payment to a shareholder-creditor for accounts payable - related parties.

Comparison of the Three Months Ended June 30, 2016 with the Three Months Ended June 30, 2015

The Company recorded $17,012 in revenues for the three months ended June 30, 2016 and $4,103 for the corresponding prior year’s period as the Company started to commercialize its products.

General and administrative expenses totalled $273,108 for the three months ended June 30, 2016, as compared to $496,287 for the three months ended June 30, 2015, representing a 45% decrease from the prior corresponding period. Included in general administrative expenses for the three months ended June 30 are the following:

    Three Months Ended June 30,     %  
    2016     2015     Change  
                   
Professional Fees $  163,725   $  309,706     (47% )
Payroll   11,066     11,360     (3% )
Stock-based compensation (non-cash)   -     67,000     (100% )
Rent, supplies and general office costs   35,987     27,497     31%  
Travel and trade shows   62,330     80,724     (23% )
                   
Total $  273,108   $  496,287     (45% )

Professional fees were $163,725 for the three months ended June 30, 2016, a 47% decrease compared to $309,706 for the three months ended June 30, 2015 as a result of approximately $146,000 less in charges from a consultant used for financing, sales and marketing purposes.

Payroll was $11,066 and $11,360 for the three months ended June 30, 2016 and 2015, respectively. There was one employee charged to this account in both 2016 to 2015.

Stock-based compensation was $0 for the three months ended June 30, 2016 compared to $67,000 for the three months ended June 30, 2015. Stock-based compensation decreased by 100% due to additional warrants issued to consultants and employees for services in 2015.

Rent, supplies and general office costs were $35,987 for the three months ended June 30, 2016, an increase of 31% from the $27,497 for the corresponding prior year’s period due to higher office and corporate filing expenses in 2016.

For the three months ended June 30, 2016, travel and tradeshows were $62,330 decreasing from $80,724 for the corresponding prior year’s period. There was a strong effort to promote the product and raise financing in 2015.

The Company had $102,542 of amortization expense related to its intangible assets for the three months ended June 30, 2016, compared to $265,547 for the three months ended June 30, 2015. The decrease in amortization expense was a result of the five-year extension of the exclusivity period of the Company’s licenses with NTI completed in the first quarter of 2016, therefore decreasing the amount amortized during the current period.

The Company recognized a gain on change in fair value of derivatives of $16,474 during the three months ended June 30, 2016, compared to a gain of $497,719 in the six months ended June 30, 2015. The intrinsic fair value of the Company’s convertible notes increased during the three months ended June 30, 2016. This decrease was due to the exercise price of the embedded conversion feature decreasing as a result of the discount rate applied to the 25-day average trading price of the Company’s stock as measured at June 30, 2016 compared to the exercise price on the dates of issuance of the convertible notes.

The Company recorded $201,906 in interest expense for the three months ended June 30, 2016, compared to $356,811 in interest expense for the three months ended June 30, 2015. The decrease in interest expense was a result of the Company converting and redemption by the debt holders in the latter part of 2015 and first six months of 2016.

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During the three months ended June 30, 2016, the Company recorded a loss on extinguishment of debt in the amount of $247,500 compared to $0 recorded in the six months ended June 30, 2015. The increase was as a result of warrants issued to pay a loan payable shareholder for the three months ended June 30, 2016. In addition, for the three months ended June 30, 2016, the Company recorded a loss on settlement of payables in the amount of $0, compared to $114,820 during the three months ended June 30, 2015. The 2015 loss occurred as a result of shares issued as payment to a shareholder-creditor for accounts payable - related parties.

Liquidity and Capital Resources

The Company had cash and equivalents of $36,239 as of June 30, 2016. For the six months ended June 30, 2016, the Company received $991,641 proceeds from shareholder loans and repaid $437,021 for shareholder loans. The Company also received $149,000 proceeds and redeemed $136,056 in convertible notes and repaid $212,000 note payable - related party. The Company intends to raise additional capital to fund ongoing operations, but has no assurances of being able to do so. The Company expects it will need approximately $600,000 in additional funding to continue operations for the next 12 months.

The ability of the Company to continue its operations is dependent on the successful execution of management's plans, which include the expectation of raising debt or equity based capital, with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with related parties to sustain the Company’s existence.

Principal Cash Flows for the Six Months Ended June 30, 2016 and 2015

Operating activities for the six months ended June 30, 2016, used cash flows of $342,299 compared to $451,024 for the six months ended June 30, 2015. The Company used less cash during the six months ended June 30, 2016 due to lower cash-based operating expenses incurred than the prior year’s period. The Company’s net loss for the six months ended June 30, 2016 of $4,970,174 was partly offset by $2,931,500 in loss on extinguishment of debt, $746,400 of loss on settlement of payables, $383,298 of amortization of intangible asset and by non-cash interest and amortization of debt discounts of $92,000 and $117,254, respectively.

Investing activities for the six months ended June 30, 2016, used cash flows of $5,000 related to the issuance of a loan receivable for equipment.

Financing activities for the six months ended June 30, 2016, provided cash flows of $359,645 compared to $451,024 for the six months ended June 30, 2015. The decrease in cash provided by financing activities was primarily as a result of higher proceeds from convertible notes in 2015.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Convertible Debt

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, who also acts as our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our President and Chief Executive Officer, who also acts as our principal financial officer, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our President and Chief Executive Officer, concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report for the purpose of gathering, analyzing and disclosing of information that the Company is required to disclose in the reports it files under the Exchange Act within the time periods specified in the SEC’s rules and forms. The Company has undertaken steps to remedy this and improve the effectiveness of its disclosure controls and procedures.

Changes in internal control over financial reporting

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

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

We are a “smaller reporting company” (as defined by Rule 12b-2 of the Exchange Act) and are not required to provide the information required under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

This Item is not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

This Item is not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

This Item is not applicable.

ITEM 5. OTHER INFORMATION

This Item is not applicable.

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ITEM 6. EXHIBITS

Exhibit  
Number Description of Exhibits
   
3.1 Amended Articles of Incorporation. (1)
3.2 Bylaws, as amended. (1)
3.3 Certificate of Amendment to Articles of Incorporation (2)
4.1 Convertible Debenture Agreement dated April 29, 2011 Pursuant to Regulation D (6)
4.2 Convertible Debenture Agreement dated April 29, 2011 Pursuant to Regulation S (6)
10.1 Stock Purchase Agreement, dated August 18, 2010, by and among Nanotech Industries International Inc. and EPOD Solar Inc. (3)
10.2 Licensing Agreement between Nanotech Industries International Inc. and Nanotech Industries Inc. dated July 12, 2010 (4)
10.3 Amendment to the Licensing Agreement previously entered into on the 12th day of July, 2010 (5)
10.4 Securities Purchase Agreement dated April 29, 2011 Pursuant to Regulation D (6)
10.5 Securities Purchase Agreement dated April 29, 2011 Pursuant to Regulation S (6)
10.6 Warrant Agreement dated April 29, 2011 Pursuant to regulation D (6)
10.7 Warrant Agreement dated April 29, 2011 Pursuant to regulation S (6)
10.8 Amendment to articles of incorporation to change the name of the company to “Hybrid Coating Technologies Inc.” (7)
10.9 Approval and adoption of the 2011 Stock Incentive Plan (7)
10.10 Second Amendment to the Licensing Agreement previously entered into on the 12th day of July, 2010 (8)
10.11 Licensing Agreement between Nanotech Industries International Inc. and Nanotech Industries Inc. dated October 18, 2011 (9)
10.12 Convertible Debenture Agreement Dated February 21, 2012 (10)
10.13 Third Amendment of Licensing Agreement entered into the 12th day of July 2010 (11)
10.14 Amendment Agreements to Convertible Debenture Agreements dated April 29,2011 and February 21, 2012 (12)
10.15 Fourth Amendment of Licensing Agreement entered into the 12th day of July 2010 (13)
10.16 Fifth Amendment of Licensing Agreement entered into the 12th day of July 2010 (14)
10.17 Sixth Amendment of Licensing Agreement entered into the 12th day of July 2010 (15)
10.18 Seventh Amendment of Licensing Agreement entered into the 12th day of July 2010 (16)
10.19 Eight Amendment of Licensing Agreement entered into the 12th day of July 2010 (17)
10.20 Ninth Amendment of Licensing Agreement entered into the 12th day of July 2010 (18)
10.21 Form of 10% Convertible Debenture (Pursuant to Regulation D) (19)
10.22 Form of 10% Convertible Debenture (Pursuant to Regulation S) (19)
10.23 Form of Securities Purchase Agreement (Pursuant to Regulation D) (19)
10.24 Form of Securities Purchase Agreement (Pursuant to Regulation S) (19)
10.25 Tenth Amendment of Licensing Agreement entered into the 12th day of July 2010 (20)
10.26 Eleventh Amendment of Licensing Agreement entered into the 12th day of July 2010 (21)
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-153675), filed with the SEC on September 26, 2008
(2) Incorporated by reference to the Current Report on Form 8-K filed with the SEC on July 22, 2009
(3) Incorporated by reference to the Current Report on Form 8-K filed with the SEC on August 30, 2010
(4) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on August 30, 2010

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(5) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on March 14, 2011
(6) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on May 3, 2011
(7) Incorporated as reference to the Schedule 14C filed with the SEC on July 6, 2011
(8) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on July 7, 2011
(9) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on October 18, 2011
(10) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on February 21, 2012
(11) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on June 28, 2013
(12) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on November 20, 2013
(13) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on December 13, 2013
(14) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on March 31, 2014
(15) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on April 9, 2014
(16) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on May 8, 2014
(17) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on August 19, 2014
(18) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on September 10, 2014
(19) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on November 28, 2014
(20) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on August 14, 2015
(21) Incorporated as reference to the Current Report on Form 8-K filed with the SEC on February 12, 2016

SIGNATURES

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

Date: August 23, 2016 Hybrid Coating Technologies Inc.
   
  BY: /s/ Joseph Kristul 
  Name: Joseph Kristul          Title: President and Chief Executive Officer
  (Principal Executive, Financial and Accounting Officer)

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