UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| [X] | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period endedOctober 31, 2014 | |
| [ ] | Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period to __________ | |
| Commission File Number: 000-53985 |
Well Power, Inc.
(Exact name of Registrant as specified in its charter)
| Nevada | 61-1728870 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
11111 Katy Freeway - Suite # 910 Houston, Texas 77079 |
| (Address of principal executive offices) |
| (713) 973-5738 |
| (Registrant’s telephone number) |
| _______________________________________________________________ |
| (Former name, former address and former fiscal year, if changed since last report) |
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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No
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 (§ 229.405 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
[ ] Large accelerated filer [ ] Non-accelerated filer | [ ] Accelerated filer [X] Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 111,861,934 common shares as of December 8, 2014.
| 1 |
| TABLE OF CONTENTS |
Page | |
| PART I – FINANCIAL INFORMATION | ||
| Item 1: | Financial Statements | |
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4: | Controls and Procedures | |
| PART II – OTHER INFORMATION | ||
| Item 1: | Legal Proceedings | |
| Item 1A: | Risk Factors | |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3: | Defaults Upon Senior Securities | |
| Item 4: | Mine Safety Disclosures | |
| Item 5: | Other Information | |
| Item 6: | Exhibits | |
| 2 |
PART I - FINANCIAL INFORMATION
Our financial statements included in this Form 10-Q are as follows:
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended October 31, 2014 are not necessarily indicative of the results that can be expected for the full year.
| 3 |
Balance Sheets
(unaudited)
| October 31, | April 30, | |||||||
| 2014 | 2014 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 72,140 | $ | 39,832 | ||||
| Prepaid expenses | 14,131 | — | ||||||
| Total Current Assets | 86,271 | 39,832 | ||||||
| Deferred financing costs, net of amortization of $7,946 and $0, respectively | 36,976 | — | ||||||
| Intangible Assets, net | 617,500 | 400,000 | ||||||
| Total Assets | $ | 740,747 | $ | 439,832 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 424,503 | $ | 323,136 | ||||
| Short-term loan payable | 35,000 | 35,000 | ||||||
| Due to related parties | 173,850 | 102,759 | ||||||
| Stock payable | 530,235 | 280,235 | ||||||
| Convertible debentures, net of discount of $248,149 and $0, respectively | 60,406 | — | ||||||
| Derivative liabilities | 366,582 | — | ||||||
| Total Liabilities | 1,590,576 | 741,130 | ||||||
| Contingencies and Commitments | ||||||||
| Stockholders’ Deficit | ||||||||
| Common stock, 4,500,000,000 shares authorized, $0.001 par value; 111,861,934 and 107,500,000 shares issued and outstanding, respectively | 111,862 | 107,500 | ||||||
| Additional paid-in capital | 2,098,707 | 1,801,802 | ||||||
| Accumulated deficit | (3,060,398 | ) | (2,210,600 | ) | ||||
| Total Stockholders’ Deficit | (849,829 | ) | (301,298 | ) | ||||
| Total Liabilities And Stockholders’ Deficit | $ | 740,747 | $ | 439,832 |
The accompanying notes are an integral part of these unaudited financial statements.
| F-1 |
Statements of Operations
(unaudited)
| For the | For the | For the | For the | |||||||||||||
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
| October 31, 2014 | October 31, 2013 | October 31, 2014 | October 31, 2013 | |||||||||||||
| Operating Expenses | ||||||||||||||||
| General and administrative | $ | 350,456 | $ | 2,000 | $ | 394,878 | $ | 4,000 | ||||||||
| Professional and consulting | 138,114 | — | 302,338 | — | ||||||||||||
| Total Operating Expenses | (488,570 | ) | (2,000 | ) | (697,216 | ) | (4,000 | ) | ||||||||
| Other Expense | ||||||||||||||||
| Interest expense | (119,095 | ) | — | (120,065 | ) | — | ||||||||||
| Change in fair value of derivatives | (32,517 | ) | — | (32,517 | ) | — | ||||||||||
| Net Loss | $ | (640,182 | ) | $ | (2,000 | ) | $ | (849,798 | ) | $ | (4,000 | ) | ||||
| Net Loss Per Common Share – Basic And Diluted | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
| Weighted Average Common Shares Outstanding – Basic And Diluted | 107,500,000 | 107,500,000 | 108,984,000 | 107,500,000 | ||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
| F-2 |
Statements of Cash Flows
(unaudited)
| For the | For the | |||||||
| Six Months Ended | Six Months Ended | |||||||
| October 31, 2014 | October 31, 2013 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | (849,798 | ) | $ | (4,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of discount and intangible assets | 91,245 | — | ||||||
| Interest expense on excess fair value of derivatives | 55,726 | |||||||
| Amortization of deferred financing costs | 7,946 | — | ||||||
| Stock-based compensation | 276,855 | |||||||
| Change in fair value of derivatives | 32,517 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | (14,131 | ) | — | |||||
| Accounts payable and accrued liabilities | (148,633 | ) | — | |||||
| Net Cash Used in Operating Activities | (548,273 | ) | (4,000 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Net advances from related parties | 71,091 | 4,000 | ||||||
| Proceeds from issuance of stock to be issued | 250,000 | — | ||||||
| Net proceeds from issuance of convertible debt | 259,490 | — | ||||||
| Net Cash Provided by Financing Activities | 580,581 | 4,000 | ||||||
| Net Increase In Cash | 32,308 | — | ||||||
| Cash - Beginning of Period | 39,832 | — | ||||||
| Cash - End of Period | $ | 72,140 | $ | — | ||||
| Supplementary Cash Flows Information: | ||||||||
| Interest paid | $ | — | $ | — | ||||
| Income taxes paid | $ | — | $ | — | ||||
| Noncash Investing and Financing Activities | ||||||||
| Debt discount on convertible debentures | $ | 24,412 | $ | — | ||||
| Stock issued in connection with deferred financing cost | $ | 278,339 | $ | — | ||||
| Accounts payable incurred for purchase of license | $ | 250,000 | $ | — | ||||
The accompanying notes are an integral part of these unaudited financial statements.
| F-3 |
Notes to the Financial Statements
(unaudited)
1. Nature of Business and Continuance of Operations
Well Power, Inc. (the “Company”) was incorporated in Nevada on March 27, 2007. On December 10, 2013, the Company effected a merger with its wholly-owned subsidiary, Well Power, Inc. As part of the merger, the Company authorized a name change from Vortec Electronics, Inc. to Well Power, Inc. On January 22, 2014, the Company entered into an Exclusive License and Distribution Agreement to distribute mobile and scalable Wellhead Micro-Refinery Units (MRU’s). Upon entering into the agreement, the Company is a business whose planned principal operations are the sales and distribution of MRU’s in the state of Texas. As at October 31, 2014, the Company has had no operating revenues to date.
The Company has incurred losses since inception, has negative working capital, and has not yet received revenues from sales of products or services. These factors create substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock and/or obtaining debt financing and attaining future profitable operations. Management’s plans include selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.
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 April 30.
Interim Financial Statements
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained elsewhere in this prospectus. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year end April 30, 2014 have been omitted.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles 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. The Company regularly evaluates estimates and assumptions related to intangible assets and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.
Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities, short term loan payable, convertible debt and an amount due to an officer. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.
| F-4 |
Intangible Assets
Intangible assets include all costs incurred to acquire a licensing and distribution agreement. Intangible assets are recorded at cost and amortized on a straight-line basis over their estimated useful life of 5 years. Management conducts an annual assessment of the residual balances, useful lives and depreciation methods used. Changes arising from the assessment are applied by the Company prospectively.
Deferred Financing Costs
The Company capitalizes direct costs incurred to obtain financings and amortize these costs over the terms of the related debt instrument using the interest method. Upon the extinguishment of the related debt, any unamortized deferred financing costs are immediately expensed.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Foreign Currency Translation
The Company’s planned operations will be in the United States, which results in exposure to market risks from changes in foreign currency exchange rates. The financial risk is the risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk. The Company's functional currency for all operations worldwide is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the year. Revenues and expenses are translated at average rates for the year. Gains and losses from translation of foreign currency financial statements into U.S. dollars are included in current results of operations.
Financial Derivatives
All derivatives are recorded at fair value on the balance sheet. Fair values for securities traded in the open market and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
Fair Value Measurement
The Company values its derivative instruments under FASB ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The Company uses Level 3 to value its derivative instruments.
| F-5 |
The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on September 30, 2014.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liability | $ | — | $ | — | $ | 366,582 | $ | 366,582 |
Revenue Recognition
The Company recognizes revenue when products are fully delivered or services have been provided and collection is reasonably assured.
Stock-Based Compensation
The expense for equity awards vested during the reporting period is based upon the grant date fair value of the award. The expense is recognized over the applicable vesting period of the stock award using the straight-line method.
Subsequent Events
The Company has evaluated all transactions through the date the financial statements were issued for subsequent event disclosure consideration.
Earnings (Loss) Per Common Share
Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. At October 31, 2014, the Company has no potentially dilutive securities outstanding.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3. Intangible Assets
On January 22, 2014, the Company entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with ME Resources Corp (“MEC”), a Canadian publicly listed company. The President of the Company is related to a director of MEC. Under the License Agreement, MEC appointed the Company as its exclusive distributor of Wellhead Micro-Refinery Units (“MRUs”) for the initial state of Texas. The License Agreement is for 5 years from the date of execution, but can be extended for two successive periods of an additional 5 years each.
Pursuant to the License Agreement, the Company agreed to pay consideration of $400,000, payable in two instalments. $100,000 is to be paid within 30 days (paid) and the balance of $300,000 is to be paid within 90 days ($375,000 paid as of October 31, 2014). At October 31, 2014, the Company recorded the costs of acquiring the license as an intangible asset, and the remaining balance of $25,000 has not been paid and is included in accounts payable and accrued liabilities.
On August 31, 2014, the Company entered into an Exclusive License for Additional Territories (the “Additional License”) with MEC. Under the Additional License, MEC appointed the Company as its exclusive distributor for the additional state of Montana. The Additional License is considered an amendment to the License Agreement and will be considered under the same terms as the License Agreement.
Pursuant to the Additional License, the Company agreed to pay consideration of $250,000 payable within 60 days. As of October 31, 2014, the Company recorded the cost of acquiring the additional license as an intangible asset, and the remaining balance of $250,000 has not been paid and is included in accounts payable and accrued liabilities.
During the three months ended October 31, 2014, the Company recorded amortization of $32,500 on the acquired licenses.
| F-6 |
4. Short-Term Loan
On December 18, 2013, the Company entered into a loan agreement in which the note holder agreed to provide a loan to the Company in the principal amount of up to $35,000. The loan is unsecured, bears interest at 11% per annum and is payable on September 30, 2014. During the period ended October 31, 2014, the maturity date was extended to March 31, 2015. As at October 31, 2014, the note holder has provided the full $35,000 to the Company, and interest of $3,246 has been accrued.
5. Due To Related Parties
a) The amount due to related parties of $173,850 and $102,759 at October 31, 2014 and April 30, 2014, respectively, consists of amounts owed to officers and shareholders of the Company for amounts advanced to pay for professional services provided by the Company’s outside service providers and for consulting services rendered for periods ending on and prior to October 31, 2014. The amount is unsecured, non-interest bearing and due on demand.
b) On January 22, 2014, the Company entered into a License Agreement with ME Resources Corp and on August 31, 2014 the Company entered into an Additional License with ME Resources Corp (Note 3). The President of the Company is related to a director of MEC.
6. Common Stock
The Company’s authorized capital consisted of 4,500,000,000 shares of common stock with a par value of $0.001 per share.
There were 111,861,934 shares of common stock issued and outstanding as of October 31, 2014.
On March 10, 2014, the Company sold 431,034 units at $0.58 per unit for gross proceeds of $250,000. Each unit consisted of one common share and one share purchase warrant. Each share purchase warrant is exercisable into one additional common share at an exercise price of $0.90 per share for a period of 2 years from the date of issuance. The relative fair value of the shares and warrants is $159,475 and $90,525, respectively. As of October 31, 2014, the Company is obligated to issue 431,034 common shares with a fair value of $250,000, which has been recorded as stock payable.
On June 5, 2014, the Company sold 5,000,000 units at $0.05 per unit for gross proceeds of $250,000. Each unit consisted of one common share and one share purchase warrant. Each share purchase warrant is exercisable into one additional common share at an exercise price of $0.90 per share for a period of 2 years from the date of issuance. The relative fair value of the shares and warrants is $184,608 and $65,392, respectively. As of October 31, 2014, the Company is obligated to issue 5,000,000 common shares with a fair value of $250,000, which has been recorded as stock payable.
On August 26, 2014, pursuant to the equity purchase agreement described in Note 8(d), the Company issued 3,955,070 common shares with a fair value of $279,855 which has been recorded in general and administrative expense.
On August 6, 2014, the Company and issued 187,720 common shares with a fair value of $11,263, for financing costs relating to the issuance of the convertible note described in Note 9(b).
On August 21, 2014, the Company issued 135,810 common shares with a fair value of $8,149, for financing costs relating to the issuance of the convertible note described in Note 9(c).
On September 24, 2014, the Company issued 83,333 common shares with a fair value of $5,000, for financing costs relating to the issuance of the convertible note described in Note 9(d).
As at October 31, 2014, pursuant to the consulting agreement described in Note 8(a), the Company is obligated to issue 93,719 common shares with a fair value of $30,235, which has been recorded as stock payable.
| F-7 |
7. Stock Options
On March 14, 2014, the Company entered into two consulting agreements (refer to Note 8) whereby the Company granted 4,000,000 options to purchase shares of common stock exercisable for a period of two years at a price of $0.70 per share.
The following table summarizes information about the stock options.
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||||
| Outstanding and exercisable, October 31, 2014 | 4,000,000 | $ | 0.70 | 1.37 | $ | — | ||||||||||||
8. Commitments And Contingencies
The Company neither owns nor leases any real or personal property. An officer has provided office services without charge. There is no obligation for the officer to continue this arrangement. Such costs are immaterial to the financial statements and accordingly are not reflected herein. The officers and directors are involved in other business activities and most likely will become involved in other business activities in the future.
a) On January 10, 2014, the Company entered into a consulting agreement with a consultant who provided consulting services in consideration for $6,000 per month for a 4 month term. The consulting fee is payable as follows:
i. $3,000 per month settled in shares at the end of the term of the contract. The number of shares issuable is equal to $3,000 divided by the average of the 3 lowest trading prices in the last 10 days of each month.
ii. $3,000 per month payable in cash at the end of each month.
As of October 31, 2014, no shares had been issued. The Company is obligated to issue 93,719 common shares.
b) On March 14, 2014, the Company entered into a consulting agreement with the President of the Company for consulting services to be provided over a one-year term in consideration for $1,000 per month for the first month, and $3,000 per month for the following eleven months. The Company will also pay an initial signing bonus of $10,000. In addition, the President of the Company was granted 2,000,000 options to purchase shares of common stock exercisable for a period of two years at a price of $0.70 per share. During the six months ended October 31, 2014, the Company recognized $18,000 in consulting fees under the agreement and $88,000 for additional consulting fees incurred during the period.
c) On March 14, 2014, the Company entered into a consulting agreement with the CEO of the Company for consulting services to be provided over a one-year term in consideration for $3,000 per month. The Company will also pay an initial signing bonus of $10,000. In addition, the CEO of the Company was granted 2,000,000 options to purchase shares of common stock exercisable for a period of two years at a price of $0.70 per share. During the six months ended October 31, 2014, the Company recognized $18,000 in consulting fees.
d) On August 26, 2014, the Company entered into an Equity Purchase Agreement and Registration Rights Agreement with Premier Venture Partners, LLC (“Premier”) whereby Premier is obligated, providing the Company has met certain conditions including the filing of a Form S-1 Registration Statement for the shares to be acquired, to purchase up to $10,000,000 of the Company’s common stock at the rates set forth in the Equity Purchase Agreement. On August 26, 2014, the Company issued 3,955,070 common shares with a fair value of $279,855 to Premier.
| F-8 |
9. Convertible Debts
a) On July 25, 2014, the Company entered into a $10,000 8% Convertible Promissory Note with a non-related third party. Under the terms of the Convertible Promissory Note, all principal and interest matures on July 25, 2015. The third party shall have the right to convert any unpaid sums into common stock of the Company at the rate of the lesser of $0.09 per share or 50% of the lowest trade reported in the 10 days prior to date of conversion, subject to adjustment as described in the note. On September 16, 2014, the non-related third party paid $10,000 legal fees on behalf of the Company as proceeds from the $10,000 convertible note. As at October 31, 2014, the Company has recorded interest of $99.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15Derivatives and Hedging. The initial fair value of the conversion feature of $14,581 resulted in a discount to the note payable of $10,000 and the reaming $4,581 was recognized as interest expense. During the six months ended October 31, 2014, the Company recorded accretion of $5,538 increasing the carrying value of the note to $5,538.
b) On August 6, 2014, the Company entered into a $275,000 10% Convertible Promissory Note with a non-related third party. Under the terms of the Convertible Promissory Note, the Company will receive principal in one or more installments with a Maturity Date for the Note of August 6, 2015. The third party shall have the right to convert any unpaid sums into common stock of the Company at the rate of the lesser of $0.08 per share or 55% of the lowest trade reported in the 15 days prior to date of conversion, subject to adjustment as described in the note. As at October 31, 2014, the Company has received $100,000 of principal, net of a discount of $10,000, and has recorded interest of $2,367.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15Derivatives and Hedging. The initial fair value of the conversion feature of $127,334 resulted in an additional discount to the note payable of $100,000 and the reaming $27,334 was recognized as interest expense. During the six months ended October 31, 2014, the Company recorded accretion of $17,000 increasing the carrying value of the note to $17,000.
The Company incurred financing costs of $18,263 which consisted of $7,000 cash and 187,720 common shares with a fair value of $11,263 (Note 6). As at October 31, 2014, the Company had unamortized debt issuance costs of $15,441 which are being amortized over the life of the note payable.
c) On August 21, 2014, the Company entered into a $133,000 5% Convertible Debenture with a non-related third party. Under the terms of the Convertible Debenture, all principal and interest is due on February 27, 2015. The convertible debenture is convertible at any time at the third party’s option into shares of the Company’s common stock at a variable conversion price of 55% of the lowest traded price during the 15 days prior to the notice of conversion, subject to adjustment as described in the convertible debenture. As at October 31, 2014, the Company has received $120,000 of principal, net of a discount of $13,000, and has recorded interest of $1,187.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15Derivatives and Hedging. The initial fair value of the conversion feature of $118,339 resulted in an additional discount to the note payable of $118,339. During the six months ended October 31, 2014, the Company recorded accretion of $25,300 increasing the carrying value of the note to $25,300.
The Company incurred financing costs of $18,159 which consisted of $10,010 cash and 135,810 common shares with a fair value of $8,149 (Note 6). As at October 31, 2014, the Company had unamortized debt issuance costs of $14,705 which are being amortized over the life of the note payable.
d) On September 24, 2014, the Company entered into a $350,000 Convertible Note with a non-related third party. Under the terms of the Convertible Note, the Company received $55,555 principal upon closing of the Note and the Company will receive the remaining principal in one or more installments with a Maturity Date for the Note of September 25, 2016. The convertible debenture bears a one-time interest charge of 12% provided that the principle sum is not repaid within 90 days from its effective date. The third party shall have the right to convert any unpaid sums into common stock of the Company at the rate of the lesser of $0.10 per share or 60% of the lowest trade reported in the 25 days prior to date of conversion, subject to adjustment as described in the note. As at October 31, 2014, the Company has received $50,000 of principal, net of a discount of $5,555, and has recorded interest of $0.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15Derivatives and Hedging. The initial fair value of the conversion feature of $73,811 resulted in an additional discount to the note payable of $50,000 and the reaming $23,811 was recognized as interest expense. During the six months ended October 31, 2014, the Company recorded accretion of $10,907 increasing the carrying value of the note to $10,907.
| F-9 |
The Company incurred financing costs of $8,500 which consisted of $3,500 cash and 83,333 common shares with a fair value of $5,000 (Note 6). As at October 31, 2014, the Company had unamortized debt issuance costs of $6,831 which are being amortized over the life of the note payable.
| Principal value of convertible debentures | $ | 308,555 | ||
| Less: repayment of principal | — | |||
| Less: discount related to fair value of the embedded conversion feature | (278,339 | ) | ||
| Less: discount related to original issue discount | (28,555 | ) | ||
| Add: amortization of discount | 58,745 | |||
| Carrying value at October 31, 2014 | $ | 60,406 |
10. Derivative Liabilities
The embedded conversion options of the Company’s convertible debentures described in Note 9 contain conversion features that qualify for embedded derivative classification. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative liabilities.
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
| For the six months ended October 31, 2014 | ||||
| Balance at the beginning of period | $ | — | ||
| Fair value of new derivative liabilities (embedded conversion option) | 334,065 | |||
| Change in fair value of derivative | 32,517 | |||
| Balance at end of period | $ | 366,582 | ||
The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:
| Expected Volatility | Risk-Free Interest Rate | Expected Dividend Yield | Expected Life (in years) | |||||||
| At Issuance | 157% - 182% | 0.05% - 0.56% | 0 | % | 0.50 - 2.00 | |||||
| At October 31, 2014 | 136% - 190% | 0.01% - 0.50% | 0 | % | 0.33 - 1.90 | |||||
11. Subsequent Events
On November 18, 2014, the Company entered into two $78,750 8% Convertible Notes with a non-related third party. Under the terms of the Convertible Notes, all principal and interest is due on November 18, 2015. The convertible debentures are convertible at any time after 180 days of the date of closing into shares of the Company’s common stock at a variable conversion price of 60% of the lowest traded price during the 20 days prior to the notice of conversion, subject to adjustment as described in the convertible debenture.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Company Overview
We have acquired an exclusive license from ME Resource Corp. (“MEC”), a Canadian publicly listed company that is creating mobile and scalable Wellhead Micro-Refinery Units (MRUs) deployable close to the wellhead to process raw natural gas into liquid fuels and clean power. As a result of the license with MEC, we are now in the business of distributing MRUs in the State of Texas and from there into other geographical areas.
The product is still under development, which is ongoing, and the first MRU is expected to occur within a year. Discussions are ongoing to raise capital to begin construction of a commercial unit. There is no assurance that we will be able to raise the capital needed to develop the first MRU. Our expectation is that we will obtain financing, chose a site for the MRU, and begin construction of the unit in the third quarter . As such, we will not be able to realize any revenue from the sale of MRUs until the development has completed and a commercialized product is ready for launch.
Our plan is to assist the development of the MRUs and distribute them in our licensed territory. We hope to provide oil and gas producers and operators in the State of Texas a solution to process otherwise wasted natural gas, including stranded, shut-in, flared and vented gas and produce valued end-products including engineered fuel (diesel, diluents, synthetic crude) and electrical power. The MRU is a novel method and apparatus, for producing chemicals, heat, energy and water from a methane-containing gas. The innovative method and apparatus makes use of heterogeneous catalysis in a single-vessel, beginning with the partial oxidation of methane to produce synthesis gas followed by a Fischer-Tropsch reaction to produce chemicals and other end products with no excess hydrogen.
Under our license agreement, we agreed to pay MEC $400,000 for our exclusive license, which money will go toward the unit cost of an MRU at $800,000 or, alternatively, a revenue sharing arrangement where MEC leases the MRU at 50% unit cost and shares in 50% of the net revenue generated. In either event, this money will be applied to the technical and engineering development of the first demonstration MRU in the territory and may be used to develop catalyst for specific engineered fuels.
The payment to MEC was due in two installments: i) $100,000 within thirty (30) days of January 29, 2014; and ii) balance of $300,000 within ninety (90) days of January 29, 2014. We have made total cash payments of $375,000. The remaining balance of $25,000 has not been paid as of the date of this report.
On August 31, 2014, we entered into an Exclusive License for Additional Territories (the “Additional License”) with MEC. Under the Additional License, MEC appointed us as its exclusive distributor for the additional state of Montana. The Additional License is considered an amendment to the License Agreement and will be considered under the same terms as the license agreement.
Under the Additional License, we agreed to pay MEC a non-refundable license payment of $250,000, which is due 60 days after invoice . The license fee will be used towards the engineering and deployment of a full-scale pilot project in the territory, and after the successful demonstration of the pilot project we will have earned its exclusive right to distribute the MRU in the State of Montana.
The agreement calls for a prototype MRU that is expected to be skid mounted (transportable) and have the ability to process a maximum of 100 MCF/day of natural gas into stable liquid hydrocarbons (synthetic fuels) and process gas for power. The prototype MRU will be developed into a full-scale pilot project and will be used for research and development purposes. The total price of the prototype MRU will be $1,200,000 with a 30% deposit due upon acceptance of the purchase order and issuance of invoice by MEC. With this agreement in place we have reserved the opportunity to work with incumbent Oil and Gas landowners and operators showcasing the prototype.
The prototype MRU will differ from the commercial MRUs that will be deployed in the Territory. The prototype MRU will be used for ongoing Research and Development and thus increased engineering costs will be incurred. The plan is to set up a prototype unit in the Montana territory due to the number of inquiries we have been receiving. As such, we will need to raise money for the costs associated with the prototype MRU and we will share the cost with MEC and the operator.
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Results of Operations for the Three and Six Months Ended October 31, 2014 and 2013
We generated no revenue for the three and six months ended October 31, 2014 and 2013. We do not anticipate earnings revenues until we are able to distribute the MRUs under our license with MEC.
Our operating expenses during the three months ended October 31, 2014 were $488,570, compared with $2,000 for the same period ended October 31, 2013. Our operating expenses during the three months ended October 31, 2014 consisted mainly of professional and consulting fees of $138,114 and general and administrative fees of $350,456.
Our operating expenses during the six months ended October 31, 2014 were $697,216, compared with $4,000 for the same period ended October 31, 2013. Our operating expenses during the six months ended October 31, 2014 consisted mainly of professional and consulting fees of $302,338 and general and administrative fees of $394,878.
We anticipate our operating expenses will increase as we undertake our plan of operations. The increase will be attributable to the continued development of the MRUs, consulting fees to our management, general and administrative expenses and the professional fees associated with our reporting obligations under the Securities Exchange Act of 1934.
We incurred other expenses of $151,612 for the three months ended October 31, 2014 mostly from interest expense, compared with $0 in other expenses for the three months ended October 31, 2013.
We incurred other expenses of $152,582 for the six months ended October 31, 2014 mostly from interest expense, compared with $0 in other expenses for the six months ended October 31, 2013.
We recorded a net loss of $640,182 for the three months ended October 31, 2014, compared with a net loss of $2,000 for the three months ended October 31, 2013.
We recorded a net loss of $849,798 for the six months ended October 31, 2014, compared with a net loss of $4,000 for the six months ended October 31, 2013.
Liquidity and Capital Resources
As of October 31, 2014, we had total current assets of $86,271. We had $1,590,576 in current liabilities as of October 31, 2014. Thus, we had a working capital deficit of $1,504,305 as of October 31, 2014.
Operating activities used $548,273 in cash for the six months ended October 31, 2014. Our net loss of $817,298 and a $148,633 decrease in accounts payable and accrued liabilities mainly accounted for our negative operating cash flow.
Financing activities during the six months ended October 31, 2014 generated $580,581 in cash, represented by $250,000 in proceeds from the sale of our stock, $259,490 in net proceeds from the issuance of convertible debt and $71,091 in net advances from related parties.
We have entered into a number of loan agreements in an effort to provide needed financing. From July 25, 2014 to the present, those loans and their terms are detailed in our footnotes to our financial statements included herein, and our Current Reports on Form 8-K that we filed with the SEC on August 27, 2014 and November 24, 2014, which are incorporated herein by reference.
Despite the financing received, we have insufficient cash to operate our business at the current level for the next twelve months and insufficient cash to achieve our business goals. The success of our business plan beyond the next 12 months is contingent upon us obtaining additional financing. We intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.
Off Balance Sheet Arrangements
As of October 31, 2014, there were no off balance sheet arrangements.
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Going Concern
We have incurred losses since inception, have negative working capital, and have not yet received revenues from sales of products or services. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.
Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management’s plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of October 31, 2014. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2014, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that, as of October 31, 2014, our disclosure controls and procedures were not effective: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending April 30, 2015: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended October 31, 2014 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
A smaller reporting company is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 6, 2014, we entered into a $275,000 10% Convertible Promissory Note with a non-related third party. On August 6, 2014, we issued 187,720 common shares with a fair value of $11,263, for financing costs relating to the issuance of the Note.
On August 21, 2014, we entered into a $133,000 5% Convertible Debenture with a non-related third party. On August 21, 2014, we issued 135,810 common shares with a fair value of $8,149, for financing costs relating to the issuance of Note.
On August 26, 2014, we entered into an Equity Purchase Agreement and Registration Rights Agreement with Premier Venture Partners, LLC (“Premier”) whereby Premier is obligated, providing we have met certain conditions including the filing of a Form S-1 Registration Statement for the shares to be acquired, to purchase up to $10,000,000 of our common stock at the rates set forth in the Equity Purchase Agreement. On September 5, 2014, we issued 3,955,070 common shares with a fair value of $279,855 to Premier.
On September 24, 2014, we entered into a $350,000 Convertible Note with a non-related third party. On September 24, 2014, we issued 83,333 common shares with a fair value of $5,000, for financing costs relating to the issuance of Note.
As at October 31, 2014, pursuant to a consulting agreement, we are obligated to issue 93,719 common shares with a fair value of $30,235, which has been recorded as stock payable.
These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
None
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SIGNATURES
In accordance with the requirements 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.
| Well Power, Inc. | |
| Date: | December 22, 2014 |
| /s/ Cristian Neagoe | |
By: Cristian Neagoe Cristian Neagoe Title:Chief Executive Officer and Director |
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