EXHIBIT 99.1
HYDROGEN POWER INC. (A Development Stage Company) FINANCIAL REPORT DECEMBER 31, 2005 |
C O N T E N T S
| | Page |
INDEPENDENT AUDITORS' REPORT | 1 |
| | | |
FINANCIAL STATEMENTS | |
| | BALANCE SHEETS | 2 |
| | STATEMENTS OF OPERATIONS | 3 |
| | STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) | 4 |
| | STATEMENTS OF CASH FLOWS | 5 |
| | NOTES TO FINANCIAL STATEMENTS | 6-11 |
| PETERSON SULLIVAN PLLC | |
| | |
| CERTIFIED PUBLIC ACCOUNTANTS | Tel 206.382.7777 * Fax 206.382.7700 |
| 601 UNION STREET, SUITE 2300 | http://www.pscpa.com |
| SEATTLE, WASHINGTON 98101 | |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hydrogen Power Inc.
Seattle, Washington
We have audited the accompanying balance sheets of Hydrogen Power Inc. (a development stage company) as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and for the period from December 17, 2003 (date of inception) to December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hydrogen Power Inc. (a development stage company) as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, and for the period from December 17, 2003 (date of inception) to December 31, 2005, in conformity with accounting principles generally accepted in the United States.
/S/ PETERSON SULLIVAN PLLC
May 2, 2006
Seattle, Washington
| HYDROGEN POWER INC. (A Development Stage Company) BALANCE SHEETS December 31, 2005 and 2004 |
| | | | | | |
| ASSETS | | 2005 | | 2004 | |
| Current Assets | | | | | | | |
| Cash and cash equivalents | | $ | 708,198 | | $ | 383,426 | |
| Certificates of deposit | | | 2,027,409 | | | | |
| Prepaid expenses | | | 26,551 | | | 1,697 | |
| Total current assets | | | 2,762,158 | | | 385,123 | |
| Sub-license Agreement, net | | | 2,343,323 | | | 2,498,681 | |
| Advances to Shareholder | | | | | | 210,431 | |
| | | $ | 5,105,481 | | $ | 3,094,235 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | |
| Current Liabilities | | | | | | | |
| Accounts payable and accrued expenses | | $ | 56,508 | | $ | 41,671 | |
| Due to officer | | | 79,461 | | | 80,152 | |
| Loans payable | | | | | | 1,000,000 | |
| Note payable, shareholder | | | 3,000,000 | | | | |
| Current portion of amounts due to shareholder | | | 586,673 | | | 838,700 | |
| Accrued interest expense, due to shareholders | | | 146,775 | | | 124,200 | |
| Total current liabilities | | | 3,869,417 | | | 2,084,723 | |
| Due to Shareholder, less current portion | | | 1,219,394 | | | 1,776,500 | |
| Stockholders' Equity (Deficit) | | | | | | | |
| Preferred stock, $0.0001 par value; authorized | | | | | | | |
| 1,000,000 shares; none issued and outstanding | | | | | | | |
| Common stock, $0.0001 par value; authorized 75,000,000 | | | | | | | |
| shares; 28,290,000 and 25,000,000 shares issued and | | | | | | | |
| outstanding at December 31, 2005 and 2004, respectively | | | 339 | | | 10 | |
| Additional paid-in capital | | | 3,689,671 | | | | |
| Deficit accumulated during development stage | | | (3,673,340 | ) | | (766,998 | ) |
| Total stockholders' equity (deficit) | | | 16,670 | | | (766,988 | ) |
| | | $ | 5,105,481 | | $ | 3,094,235 | |
| | | | | | | | |
See Notes to Financial Statements.
| HYDROGEN POWER INC. (A Development Stage Company) STATEMENTS OF OPERATIONS For the Years Ended December 31, 2005 and 2004, and for the Period from December 17, 2003 (Date of Inception) to December 31, 2005 |
| | | | | | | | |
| | | 2005 | | 2004 | | Cumulative During Development Stage | |
| Revenues | | $ | - | | $ | - | | $ | - | |
| Expenses | | | | | | | | | | |
| Professional fees | | | 158,009 | | | 93,168 | | | 251,177 | |
| General and administrative | | | 2,011,191 | | | 107,000 | | | 2,118,191 | |
| Amortization of sub-license agreement | | | 155,358 | | | 116,519 | | | 271,877 | |
| Research and development | | | 427,905 | | | 325,995 | | | 753,900 | |
| | | | 2,752,463 | | | 642,682 | | | 3,395,145 | |
| Other income (expense) | | | | | | | | | | |
| Interest income | | | 30,841 | | | | | | 30,841 | |
| Interest expense | | | (184,720 | ) | | (124,316 | ) | | (309,036 | ) |
| | | | (153,879 | ) | | (124,316 | ) | | (278,195 | ) |
| Net loss | | $ | (2,906,342 | ) | $ | (766,998 | ) | $ | (3,673,340 | ) |
See Notes to Financial Statements.
| HYDROGEN POWER INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 2005 and 2004, and for the Period from December 17, 2003 (Date of Inception) to December 31, 2005 |
| | | | | | | | | | |
| | | Common Stock | | Additional Paid-in | | Deficit Accumulated During Development | | Total Stockholders' | |
| | Shares | | Amount | | Capital | | Stage | | Equity (Deficit) | |
| Balances at December 17, 2003 (and December 31, 2003) | | | - | | $ | - | | $ | - | | $ | - | | $ | - | |
| Common stock issued for cash, January 2004 | | | 1,000 | | | 10 | | | | | | | | | 10 | |
| Stock split affected in the form of a dividend | | | 24,999,000 | | | | | | | | | | | | - | |
| Net loss | | | | | | | | | | | | (766,998 | ) | | (766,998 | ) |
| Balances at December 31, 2004 | | | 25,000,000 | | | 10 | | | - | | | (766,998 | ) | | (766,988 | ) |
| Common stock issued for settlement of debt, January 2005 | | | 1,100,000 | | | 110 | | | 549,890 | | | | | | 550,000 | |
| Common stock and warrants issued for settlement of debt, | | | | | | | | | | | | | | | | |
| February 2005 | | | 1,600,000 | | | 160 | | | 999,840 | | | | | | 1,000,000 | |
| Options issued for services, March 2005 | | | | | | | | | 1,550,000 | | | | | | 1,550,000 | |
| Common stock issued for cash, April 2005 | | | 350,000 | | | 35 | | | 349,965 | | | | | | 350,000 | |
| Common stock issued for settlement of debt, May 2005 | | | 190,000 | | | 19 | | | 189,981 | | | | | | 190,000 | |
| Common stock issued for cash, July 2005 | | | 50,000 | | | 5 | | | 49,995 | | | | | | 50,000 | |
| Net loss | | | | | | | | | | | | (2,906,342 | ) | | (2,906,342 | ) |
| Balances at December 31, 2005 | | | 28,290,000 | | $ | 339 | | $ | 3,689,671 | | $ | (3,673,340 | ) | $ | 16,670 | |
See Notes to Financial Statements.
| HYDROGEN POWER INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2005 and 2004, and for the Period from December 17, 2003 (Date of Inception) to December 31, 2005 |
| | | | | | | | |
| | | 2005 | | 2004 | | Cumulative During the Development Stage | |
| Cash Flows from Operating Activities | | | | | | | | | | |
| Net loss | | $ | (2,906,342 | ) | $ | (766,998 | ) | $ | (3,673,340 | ) |
| Amortization expense | | | 155,358 | | | 116,519 | | | 271,877 | |
| Interest accumulated on certificates of deposit | | | (27,409 | ) | | | | | (27,409 | ) |
| Options issued for services | | | 1,550,000 | | | | | | 1,550,000 | |
| Adjustments to reconcile net loss to | | | | | | | | | | |
| net cash used in operating activities | | | | | | | | | | |
| Changes in operating assets and liabilities | | | | | | | | | | |
| Prepaid expenses | | | (24,854 | ) | | (1,697 | ) | | (26,551 | ) |
| Accounts payable and accrued expenses | | | 14,837 | | | 41,671 | | | 56,508 | |
| Due to officer | | | (691 | ) | | 80,152 | | | 79,461 | |
| Accrued interest expense | | | 183,873 | | | 124,200 | | | 308,073 | |
| Net cash used in operating activities | | | (1,055,228 | ) | | (406,153 | ) | | (1,461,381 | ) |
| Cash Flows from Investing Activity | | | | | | | | | | |
| Purchases of certificates of deposit | | | (2,000,000 | ) | | | | | (2,000,000 | ) |
| Cash Flows from Financing Activities | | | | | | | | | | |
| Advances to shareholder | | | | | | (210,431 | ) | | (210,431 | ) |
| Proceeds from loans payable | | | | | | 1,000,000 | | | 1,000,000 | |
| Due to shareholder | | | (20,000 | ) | | | | | (20,000 | ) |
| Proceeds from note payable to shareholder | | | 3,000,000 | | | | | | 3,000,000 | |
| Issuance of common stock for cash | | | 400,000 | | | 10 | | | 400,010 | |
| Net cash provided by financing activities | | | 3,380,000 | | | 789,579 | | | 4,169,579 | |
| Net change in cash during period | | | 324,772 | | | 383,426 | | | 708,198 | |
| Cash and Cash Equivalents, beginning of period | | | 383,426 | | | - | | | - | |
| Cash and Cash Equivalents, end of period | | $ | 708,198 | | $ | 383,426 | | $ | 708,198 | |
| Supplementary Disclosure of Cash Flow Information | | | | | | | | | | |
| Non-cash transactions | | | | | | | | | | |
| Settlement of amounts due to shareholder by | | | | | | | | | | |
| assumption of shareholder debt | | $ | 740,000 | | $ | - | | $ | 740,000 | |
| Conversion of debt assumed from shareholder into | | | | | | | | | | |
| common stock of the company | | $ | 740,000 | | $ | - | | $ | 740,000 | |
| Conversion of loans payable into common stock of | | | | | | | | | | |
| the company | | $ | 1,000,000 | | $ | - | | $ | 1,000,000 | |
| Application of advances to shareholder to | | | | | | | | | | |
| amounts due to shareholder | | $ | 210,431 | | $ | - | | $ | 210,431 | |
| Purchase of sub-license agreement financed by | | | | | | | | | | |
| amounts due to shareholder | | $ | - | | $ | 2,615,200 | | $ | 2,615,200 | |
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Organization
Hydrogen Power Inc. (the "Company") was incorporated as a Delaware corporation on December 17, 2003. The Company began operations in 2004. Under a sub-license agreement, the Company has access to a patented system called "Hydrogen Now." The Hydrogen Now system creates pure hydrogen from the chemistry of aluminum and water. With this technology, the Company plans to market a portable hydrogen generator for the purpose of replenishing hydrogen fuel cells and vehicle fuel stations at a safe and dependable pressure. As the Company has not yet developed any commercial product and has not generated any revenues to date, it is considered to be a development stage company.
Liquidity
As shown in the financial statements, the Company is in the development stage and has not generated positive cash flows from operations and has incurred significant net losses, resulting in an accumulated deficit of $3,673,340 at December 31, 2005. Additionally, at December 31, 2005, the Company's current liabilities exceed its current assets.
The Company will need additional working capital to be successful in its development of its business purpose and to be able to continue to pay its liabilities as they become due. Therefore, continuation of the Company as a going concern is dependent upon obtaining the additional working capital necessary to accomplish its objective. Management is presently engaged in seeking additional working capital and in March 2006 received a $10 million capital commitment in connection with the acquisition of the Company as described in Note 8 to these financial statements.
The accompanying financial statements do not include any adjustments to the recorded assets or liabilities that might be necessary should the Company fail in any of the above objectives and become unable to operate for the coming year.
Cash and Cash Equivalents
The Company considers all highly liquid securities with a maturity of three months or less to be cash equivalents for purposes of the statements of cash flows. The Company regularly has cash and cash equivalents in excess of federally insured limits. The Company has paid no material amounts for interest since inception.
Certificates of Deposit
The certificates of deposit are held with a bank and have a maturity of one year. The certificates of deposit are carried at cost which approximate market value.
Sub-license Agreement
The sub-license agreement is stated at cost and is being amortized over the estimated useful life through February 2021 using the straight-line method. Accumulated amortization was $271,877 and $116,519 at December 31, 2005 and 2004, respectively. Intangible assets are tested at least annually for potential impairment.
Loans Payable
Loans payable were all due to a third-party and were unsecured, non-interest bearing, and due on demand. In 2005, the loans payable were settled in full for 1,600,000 shares of common stock of the Company and warrants to purchase 1,600,000 shares of common stock of the Company. There was no gain or loss recorded on the settlement.
Stock Split
In March 2004, the Board of Directors authorized a 25,000-to-one stock split of the common stock of the Company. In connection with the stock split, the par value of the common stock was changed from $0.01 to $0.0001. No adjustment has been made to the amount of common stock capitalized as a result of the split. All references in these financial statements to the number of common shares outstanding give affect to the split.
Warrants
At December 31, 2005, there are warrants outstanding to purchase 1,600,000 shares of the Company’s common stock at a price that would have been $1.25 per share through February 2006 and is presently $2 per share after February 2006 through February 2007. The warrants were exercisable on issuance and were scheduled to expire in February 2007 (see Note 8). The value attributed to the warrants was insignificant.
Stock-based Compensation
Effective January 1, 2005, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, which requires the Company to recognize compensation expense for options granted to employees and non-employees based on the fair value of the options at the grant date. Prior to that date, the Company was accounting for stock-based compensation using the provisions of APB Opinion No. 25 as permitted under SFAS No. 123.
The issuance of common shares for services would be recorded at the estimated market price of the shares on the date the services are rendered or at the stated value of the services. No shares were issued for services through December 31, 2005.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.
Note 2. Sub-license Agreement
In 2004, the Company entered into a sub-license agreement with a shareholder who was its parent company at the time, Global Hydrofuel Technologies, Inc. ("GHTI"). The sub-license agreement includes substantially all the rights of the original underlying license agreement between GHTI and the University of British Columbia ("UBC"). The sub-license gives the Company exclusive rights to use the Hydrogen Now technology developed by UBC and any improvements and to market, manufacture and distribute products using the technology in the United States, Mexico, and Central and South America. The agreement also gives the Company non-exclusive rights to market and distribute products using the technology and any improvements in Canada and to use any trademarks, service marks, or logos associated with the technology in the United States, Canada, Mexico, and Central and South America.
The sub-license agreement is effective, with certain provisions for early termination, for as long as the underlying license agreement is in effect. The underlying license agreement is effective through the latest expiration date of the patents that are the subject of the licensed technology. At present, the latest patent expiration date is February 2021. GHTI acquired the license with UBC under a royalty arrangement.
The cost of the rights under the sub-license agreement is stated at the present value of the future minimum payments owed to a shareholder under the terms of the agreement amounting to $2,615,200. As described in Note 8 to these financial statements, the Company was acquired in 2006 by an unrelated third party. The acquiring shareholder company advanced the Company $3,000,000 under a promissory note for purposes of meeting the cash payment obligations under the sub-license agreement and has committed to fulfilling any future obligations under the terms of the underlying license agreement with UBC. The Company believes this contractual commitment establishes the fair value of the sub-license agreement as recorded at the effective date of the agreement.
Management believes the best estimate of the useful life of the sub-license agreement is represented by the life of the underlying patents. Accordingly, the cost of the sub-license agreement is being amortized on the straight-line basis over the remaining term of the patents, or approximately 17 years. Amortization expense is expected to be approximately $155,000 for each of the years 2006 through 2010. At December 31, 2005, management has determined that there is no impairment of the sub-license rights that should be recorded against the carrying amount of the asset.
Note 3. Stock-based Compensation
During 2005, 1,550,000 stock purchase options were granted to certain employees (650,000 options) and non-employees (900,000 options; 800,000 of which were granted to directors of the company) during the year ended December 31, 2005 (and since inception), and remained outstanding at that date. The options were granted at an exercise price of $.50 per share, the estimated fair value of the stock at the grant date. Subsequent to the granting of the options, the Company was acquired as described in Note 8 to these financial statements. Given the acquisition and subsequent exchange of the Company's outstanding options for options in the acquiring company's stock, management's best estimate of the fair value of the options was $1.00 per option as of the date of the grants.
As of December 31, 2005, the accompanying financial statements include compensation expense related to employee and non-employee options of $1,550,000. This amount has been recorded in general and administrative expenses for the 12 months and cumulative period ended December 31, 2005.
Note 4. Due to Shareholder
The amount due to a shareholder, relates to amounts owed under the sub-license agreement with GHTI. Payments under the terms of the agreement are non-interest bearing. The obligation was originally stated at its net present value of $2,615,200 using an effective interest rate of 6%. Minimum payments required under the sub-license agreement are as follows for the years ending December 31:
| | | Total | | Amount Representing Interest | | Net Amount Due | |
| 2006 | | $ | 696,235 | | $ | 109,562 | | $ | 586,673 | |
| 2007 | | | 666,667 | | | 75,210 | | | 591,457 | |
| 2008 | | | 666,667 | | | 38,730 | | | 627,937 | |
| | | $ | 2,029,569 | | $ | 223,502 | | $ | 1,806,067 | |
For the 12 months ended December 31, 2005, the Company recognized $122,973 of interest expense with respect to this obligation. For the period from December 17, 2003 (date of inception) to December 31, 2005, the Company recognized $315,361 of interest expense with respect to this obligation.
Note 5. Note Payable, Shareholder
In 2005, the Company obtained a loan from one of its shareholders, Equitex, Inc. ("Equitex"). The maximum borrowing of $3,000,000 was received during 2005. Advances under the note bear interest equal to the prime rate (7.25% at December 31, 2005). Subsequent to year end, the note was forgiven and became a contribution to capital in connection with the acquisition (see Note 8).
Note 6. Related Party Transactions
In January 2005, the Company entered into a debt assignment and conversion agreement whereby the loan payable to a former director of GHTI in the amount of $550,000 was assigned to the Company in exchange for a reduction of the amount owed to the parent company. The debt was then converted into 1,100,000 shares of common stock of the Company in full satisfaction of the debt assumed. This former director of GHTI is also the father of an officer of the Company. No gain or loss was recognized in this conversion.
In May 2005, the Company entered into a debt assignment and conversion agreement whereby a loan payable to a third party of GHTI in the amount of $11,000 was assigned to the Company in exchange for a reduction of the amount owed to the parent company. The debt was then converted into 11,000 shares of common stock of the Company in full satisfaction of the debt assumed. No gain or loss was recognized in this conversion.
In May 2005, the Company entered into a debt assignment and conversion agreement whereby the loan payable to third parties of GHTI, of which one party is a director of the Company, in the amount of $179,000 was assigned to the Company in exchange for a reduction of the amount owed to the parent company. The debt was then converted into 179,000 shares of common stock of the Company in full satisfaction of the debt assumed. No gain or loss was recognized in this conversion.
In 2005, the Company paid $37,500 to a shareholder of the Company (who is also the brother of an officer of the Company) for fees related to his attracting equity investors to the Company.
Note 7. Income Taxes
The Company is liable for taxes in the United States. As of December 31, 2005, the Company did not have any income for income tax purposes and therefore, no tax liability or expense has been recorded in these financial statements. The difference between the tax at the statutory federal tax rate and the tax provision of zero recorded by the Company is primarily due to the Company's full valuation allowance against its deferred tax assets.
At December 31, 2005, the Company has accumulated tax losses of approximately $2,020,000 available to reduce future taxable income. The tax losses expire in 2024 and 2025.
The Company has deferred tax assets and has established a valuation allowance for those assets for the years ended December 31, 2005 and 2004, as follows:
| | | 2005 | | 2004 | |
| Stock option compensation expense | | $ | 527,000 | | $ | - | |
| Accrued salaries | | | 25,500 | | | | |
| Net operating loss carryforward | | | 685,000 | | | 265,000 | |
Total deferred tax assets | | | 1,237,500 | | | 265,000 | |
| Less: Valuation allowance | | | (1,237,500 | ) | | (265,000 | ) |
Net deferred taxes | | $ | - | | $ | - | |
The valuation allowance increased by $972,500 and $265,000 for 2005 and 2004, respectively.
Note 8. Subsequent Event
In September 2005, an agreement in principle was reached with Equitex (an independent third party company) to acquire 100% ownership of the Company from its stockholders. The purchase transaction closed in March 2006. In connection with the purchase, Equitex agreed to make a $10 million capital contribution to the Company, $5 million of which was received upon closing in March 2006 and the remaining amount to be received at a later date. Additionally, the Company's outstanding options and warrants were exchanged for options and warrants to purchase shares of Equitex stock.
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