HFactor, Inc. - Quarter Report: 2023 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2023

For the transition period from _______________ to __________

Commission file number: 000-1144546

HFactor, Inc.

(Exact name of registrant as specified in its charter)

244 Madison Ave, #1249

New York, NY 10016

(Address of principal executive offices)

(516) 647-5171

(Registrant’s telephone number, including area code)

_______________________________________

(Former name or former address, if changed since last report).

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of Class)

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

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

Indicate by check mark whether the registrant (1) has filed all reports 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 ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐    No ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐    No ☒

As of May 11, 2023, the Registrant had 50,467,414 issued and outstanding shares of common stock.

HFactor, Inc.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION

HFACTOR, INC.

Condensed Consolidated Balance Sheets

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

HFACTOR, INC.

Condensed Consolidated Statements of Operations

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

HFACTOR, Inc.

Consolidated Statements of Stockholders' Deficit

-Unaudited-

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

HFACTOR, INC.

Condensed Consolidated Statements of Cash Flows

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

HFACTOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS

History

HFactor, Inc. formerly known as Ficaar, Inc. (the “Company” or “Ficaar” or “HFactor”) was incorporated in July 2001 under the name OwnerTel, Inc. The name of the Company was changed to Ficaar, Inc. in December 2007 and to HFactor, Inc. on November 8, 2021.

On May 28, 2021, David Cicalese (“Cicalese”), an officer and Board member of Ficaar entered into an agreement with Gail Levy whereby Cicalese agreed to sell 29,900,000 shares, representing a majority interest in Ficaar, to Levy. Acting as the majority shareholder of the Company, Levy then caused Ficaar to enter into an Agreement and Plan of Merger (the “Merger Agreement”) between the Company, FCAA Merger Sub I, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Ficaar, and HyEdge, Inc. (“Target” or “HyEdge”), a Delaware corporation, wherein Merger Sub and Target would merge, with Target surviving the transaction as a wholly owned subsidiary of Ficaar (the “Merger”). The Merger Agreement was executed on August 6, 2021, and the Merger closed on August 9, 2021. The Merger effected a change in control and was accounted for as a "reverse acquisition" whereby Target is the accounting acquirer for financial statement purposes. Accordingly, for all periods subsequent to the Closing Date, the Company’s financial statements reflect the historical financial statements of HyEdge and any operations of the Company subsequent to the Merger.

Immediately following the Merger, the business of HyEdge became the business of the Company.

On September 2, 2021 the Company filed an amendment in its articles of incorporation to change its name to HFactor Inc. The Company was able to secure an OTC Bulletin Board symbol HWTR from Financial Industry Regulatory Authority (FINRA).

Present Operations

The Company as a result of the Merger, changed its business focus from engaging in the cannabis industry to presently being a holding company that operates entirely through its subsidiary, HyEdge, Inc, a Delaware Corporation. The Company engages in the manufacturing, marketing, distribution and selling of HFactor^® hydrogen infused drinking water.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying (a) condensed consolidated balance sheet at December 31, 2022, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of March 31, 2023 and 2022, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10K for the year ended December 31, 2022 (the “2022 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2023. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months ended March 31, 2023, are not necessarily indicative of the results of operations expected for the year ending December 31, 2023.

These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) and are expressed in United States dollars. These consolidated financial statements include the accounts of HFactor Inc. and its wholly owned subsidiaries, HyEdge, Inc., a Delaware corporation, and, the following all of which are inactive, Standard Canna, Inc., a Florida corporation, and its wholly owned subsidiaries, Standard Cultivation Systems Inc., a Colorado corporation; and Standard Property Group Inc., a California corporation; and as well as Precious Holdings, Inc., a Delaware corporation. All inter-company balances and transactions have been eliminated on consolidation.

Going Concern

The financial statements have been prepared on a going concern basis, and do not reflect any adjustments related to the uncertainty surrounding the Company’s working capital deficiency, or accumulated deficit.

As of March 31, 2023, the Company had $36,206 in cash to fund its operations. The Company does not believe its current cash balance will be sufficient to allow the Company to fund its planned operating activities for the next twelve months. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to maintain profitable operations. These principal factors raise substantial doubt concerning the Company’s ability to continue as a going concern. Management has financed the Company’s operations principally through government loans, third-party and related parties’ loans, and also through equity investments into the Company.

It is the Company’s intent to continue to attempt to raise funds in this manner and to raise funds through the sale of equity securities until the Company attains sustainable profitability. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually secure other sources of financing and maintain profitable operations.

Cash

For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. As of March 31, 2023 and December 31, 2022, the Company held a cash balance of $36,206 and $148,055, respectively.

Revenue Recognition

The Company recognizes revenue from product sales when control of the promised goods is transferred to the company’s customers in an amount that reflects the consideration to which management expects to be entitled in exchange for those goods. To achieve this core principle, management applies the following five steps: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as the Company satisfies a performance obligation. The Company sells its products to individual consumers and resellers upon receipt of a written order. The Company has a limited return policy for defective items that requires that buyers give the Company notice within 30 days after receipt of the products. Due to the immaterial quantities of returned products historically, for the periods ended March 31, 2023 and 2022, the Company recognized revenue at the time of delivery without providing any reserve.

Accounts Receivable

Accounts receivable represent amounts due from the Company’s customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management utilizes a specific customer identification methodology. Management also considers historical losses adjusted for current market conditions and the customers’ financial condition and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. As of March 31, 2023 and December 31, 2022, the allowance for doubtful accounts were not material.

Inventories

Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. The stated cost is comprised of finished goods of HFactor® hydrogen infused drinking water, its related raw material and spare parts for machinery. Reserves, if necessary, are recorded to reduce inventory to market value based on assumptions about consumer demand, current inventory levels and product life cycles for the various inventory items. These assumptions are evaluated annually and are based on the Company’s business plan, feedback from customers and the product development team. A reserve will be established if necessary to reduce excess or obsolete inventories to their realizable value. As of March 31, 2023 and December 31, 2022, the inventory reserves were not material.

Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which is generally three to five years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income or expense.

The Company will periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

Intangible Assets

Intangible asset amounts were determined based on the estimated economics of the asset and are amortized over the estimated useful life on a straight-line basis over 10 years for intellectual licensing arrangement (HyEdge IP), which approximates the pattern in which the economic benefits are expected to be received. On July 22, 2022, the Company entered into an Intellectual Property Assignment Agreement with Gail Levy, whereby the Company acquired the intellectual property related to its beverage production operations from HyEdge IP in exchange for 715,000 shares of Company Common stock. The acquired intellectual property was valued at $1.00 per share for total valuation of $715,000 and is being amortized over 10 years on a straight-line basis. We evaluate the recoverability of intangible assets periodically and consider events or circumstances that may warrant revised estimates of useful lives or that may indicate an impairment.

Intangible asset amortization expense for the three months ended March 31, 2023 was $17,875 (March 2022: 0 Nil). The Company’s intangible assets were $655,417 and $673,292 as of March 31, 2023 and December 31, 2022, from its intellectual property licensing arrangement (HyEdge IP).

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs for the periods ended March 31, 2023 and 2022 were $24,541 and $27,565, respectively.

Income Taxes

The Company accounts for income taxes under ASC 740, Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period, which includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. This first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company's evaluation was performed for the tax years ended December 31, 2017 through 2022, The Company does not expect any changes in its unrecognized tax benefits in the current period.

The Company’s policy for recording interest and penalties related to unrecognized tax benefits is to record such expenses as a component of current income tax expense. As of March 31, 2023 and December 31, 2022, the Company has no accrued interest or penalties related to uncertain tax positions.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.

Research and Development Expenses

Costs related to research and development, which primarily consists of consulting for logo and packaging design, are charged to expense as incurred. The Company has not incurred any research and development for the periods ended March 31, 2023, and 2022.

Basic and Diluted Net Earnings Per Share

The Company computes gain/ loss per common share, in accordance with FASB ASC Topic 260, Earnings Per Share, which requires dual presentation of basic and diluted earnings/loss per share. Basic income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding, plus the issuance of common shares, if dilutive, that could result from the exercise of outstanding stock options and warrants. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported. No convertible securities were outstanding as of 31 March 2023.

Stock-Based Compensation

The Company applies the fair value method of ASC 718, Compensation-Stock Compensation, in accounting for its stock-based compensation. These standards state that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, if any. The Company uses the Black-Scholes option pricing model to determine the fair value of its stock, stock option, and warrant issuance. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price, volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends. No stock-based compensation plan was active as at 31 March, 2023.

Fair Value

FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a framework for all fair value measurements and expands disclosures related to fair value measurement and developments. ASC 820 defines fair value as 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. ASC 820 requires that assets and liabilities measured at fair value are classified and disclosed in one of the following three categories:

Level 1 — Quoted market prices for identical assets or liabilities in active markets or observable inputs;

Level 2 — Significant other observable inputs that can be corroborated by observable market data; and

Level 3 — Significant unobservable inputs that cannot be corroborated by observable market data.

The carrying amounts of cash, loan receivable, accounts payable and other liabilities, and accrued interest payable approximate fair value because of the short-term nature of these items.

The fair value of the Company’s debt approximated the carrying value of the Company's debt as of March 31, 2023, and December 31, 2022. Factors that the Company considered when estimating the fair value of its debt included market conditions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt.

Recent Accounting Pronouncements

We have considered all other recently issued accounting pronouncements during 2023 and 2022 and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

NOTE 3 – FIXED ASSETS, NET

Fixed assets, net consist of the following: 

Depreciation expenses for the periods ended March 31, 2023 and 2022 were $10,615 and $18,899, respectively.

NOTE 4 – NOTES PAYABLE-THIRD PARTIES

Third party convertible notes payable consists of the following: 

(A) Includes a warrant for the right to purchase an additional 250,000 shares of Company Common Stock, subject to adjustments for anti-dilution. Each Warrant is exercisable for a period of five years from the date of issuance at an initial exercise price of $1 per share. The exercise price is also subject to adjustment due to certain events, including stock dividends, stock splits and recapitalizations. In the event the Company files a registration statement with the Securities and Exchange Commission, the Maturity Date shall be the earlier of (i) May 27, 2022; or (ii) the date on which the Company has raised at least $1,250,000 under a registration statement. Interest is payable at the Maturity Date.

(B) Includes a warrant for the right to purchase an additional 300,000 shares of Company Common Stock, subject to adjustments for anti-dilution. Each Warrant is exercisable for a period of five years from the date of issuance at an initial exercise price of $0.55 per share. The exercise price is also subject to adjustment due to certain events, including stock dividends, stock splits and recapitalizations. In the event the Company files a registration statement with the Securities and Exchange Commission, the Maturity Date shall be the earlier of (i) July 22, 2022; or (ii) the date on which the Company has raised at least $1,500,000 under a registration statement. Interest is payable at the Maturity Date.

C) Includes a warrant for the right to purchase an additional 300,000 shares of Company Common Stock, subject to adjustments for anti-dilution. Each Warrant is exercisable for a period of five years from the date of issuance at an initial exercise price of $0.55 per share. The exercise price is also subject to adjustment due to certain events, including stock dividends, stock splits and recapitalizations. In the event the Company files a registration statement with the Securities and Exchange Commission, the Maturity Date shall be the earlier of (i) October 4, 2022; or (ii) the date on which the Company has raised at least $1,500,000 under a registration statement. Interest is payable at the Maturity Date

D) On December 3, 2021, the Company entered into a Stock Purchase Agreement with Boot Capital LLC (“Boot”), lender for the three notes of (A), (B) and (C), whereby Boot agreed to retire all of its outstanding warrants (850,000 in total) in exchange for 200 shares of Series D Preferred stock. The Preferred stock shares were issued on March 29, 2022. Accordingly, the Warrant liability of $335,651 as of December 31, 2021 was written-off during the period ended June 30, 2022.

In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company allocated $0 of the derivative liability as discounts against the convertible notes for the period ended March 31, 2023 and year ended December 31, 2022, respectively. The discounts are being amortized to interest expense over the term of the notes using the straight-line method which approximates the effective interest method. The Company recorded $0 and $142,687 of interest expense pursuant to the amortization of the note discounts during the periods ended March 31, 2023 and 2022, respectively.

NOTE 5 – NOTES PAYABLE - RELATED PARTY

Notes payable to related parties consists of the following: 

NOTE 6 – GOVERNMENT DEBT

Economic Injury Disaster Loan

On June 2, 2020, the Company executed a secured loan with the U.S. Small Business Administration (SBA) under the Economic Injury Disaster Loan program in the amount of $150,000. The loan is secured by all tangible and intangible assets of the Company and payable over 30 years at an interest rate of 3.75 % per annum. Installment payments, including principal and interest, totaling $731.00 monthly, will begin thirty (30) months from the date of the Note, with first payments applied to accumulated accrued interest. As part of the loan, the Company also received an advance of $10,000 from the SBA. While the SBA refers to this program as an advance, it was written into law as a grant. This means that the amount given through this program does not need to be repaid.

Future maturities of government debt are as follows: 

NOTE 7 – DERIVATIVE LIABILITIES

The Company analyzed the notes payable – related parties and convertible notes payable referred to in Notes 4 and 5 based on the provisions of ASC 815-15 and determined that the conversion options of the convertible notes qualify as embedded derivatives and required the recognition of derivative liabilities.

For the derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date and any resulting gain or loss is recognized as a current period charge to the consolidated statements of operations. The Company estimates the fair value of the embedded derivatives using a Monte Carlo simulation valuation model that combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, probability of a change of control and the trading information of our common stock into which the notes are convertible, as appropriate to value the derivative instruments at inception and subsequent valuation dates and the value is reassessed at the end of each reporting period, in accordance with FASB ASC Topic 815-15.

The aggregate fair value of derivative liabilities as of March 31, 2023 and December 31, 2022 amounted to $801,449. The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the assets that are measured at fair value on a recurring basis. 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis: 

NOTE 8 – MERGER AND RELATED TRANSACTIONS

The Merger

On August 6, 2021, the Company, FCAA Merger Sub I, Inc, (‘Merger Sub”), a Delaware corporation and wholly owned subsidiary of Ficaar, and HyEdge, Inc. (“Target” or “HyEdge”), a Delaware corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) which closed on August 9, 2021 (the "Closing Date"). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into the Target and the separate corporate existence of Merger Sub ceased, with Target continuing its corporate existence as a wholly owned subsidiary of the Company. The Merger effected a change in control and was accounted for as a "reverse acquisition" whereby Target is the accounting acquiror for financial statement purposes. Accordingly, for all periods subsequent to the Closing Date, the financial statements of the Company reflect the historical financial statements of HyEdge and any operations of the Company subsequent to the Merger.

Prior to the Merger, the Company ceased being an operating company and became a “shell company”. Pursuant to the Merger, the Company acquired the business of Target to engage in the business of the development, marketing, and sale of hydrogen-infused water and other consumer goods.

As consideration for the merger, Target shareholders exchanged 100% of Target Stock (as defined in the Merger Agreement) totaling 44,136,473 fully diluted shares into shares of Company Common Stock at a conversion rate of 0.7 As a result, an aggregate of 30,895,530 shares of the company’s Common Stock, 1,000,000 shares of Series C Preferred Stock and 3,054 shares of Series D Preferred Stock were to be issued to the shareholders of Target. As of December 31, 2021, there were 30,197,888 of the planned Merger shares of common stock issued and the Series C and D Preferred shares issued.

Changes to the Company's Officers and Directors

Effective May 27, 2021, the Company’s Board of Directors appointed Gail Levy as Chief Executive Officer of FICAAR, Inc. On June 1, 2021, in conjunction with the aforementioned change in control, David Cicalese resigned as Secretary and Chairman of the Board of Directors. On June 9, 2021, a majority of Company shareholders elected Gail Levy as Chairman and a member of the Board of Directors. These changes were reported on the Company's form 8-K that was filed on June 10, 2021.

In conjunction with the Merger, Dawn Cames resigned as President, James C. Sanborn was appointed as COO and as a member of the Board of Directors, and Leonard Klingbaum was appointed as a member of the Board of Directors.

On July 22, 2022, the Company entered into a Memorandum of Understanding (“MOU”) with Bear Face Capital LLC (“Bear Face”) and Concorde Consulting Corp (“Concorde”) for an influx of capital. In accordance with the terms of the MOU, the following changes were implemented: (i) Gail Levy resigned as Chief Executive Officer and assumed the position of President for the Company, subject to a two (2) year Employment Contract, renewable annually, at an annual salary of $120,000; (ii) Dawn Cames, former officer for the predecessor company (“FICAAR”), was appointed to serve as a Director and Chairman of the Board for the Company and was assigned one (1) share of Series C Preferred stock; (iii) Gail Levy, James C. Sanborn, and Leonard Klingbaum resigned as members of the Board of Directors; (iv) James C. Sanborn resigned as COO; and (v) Gail Levy and James C. Sanborn returned 999,999 shares of Series C Preferred stock to the Company.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Legal – To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened.

Legal Matters:

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

To the best of the Company’s knowledge and belief, no material legal proceedings of merit are currently pending or threatened.

Dispute:

The Company is disputing the validity of a convertible promissory note carried over from its merger in August 2021. Since it presently is not possible to determine the outcome of this matter, the note is disclosed in Note 4 to the financial statements with a net balance of $121,369 until its ultimate resolution.

Employment and Consulting Agreements:

Gail Levy resigned as Chief Executive Officer and assumed the position of President for the Company, subject to a two (2) year Employment Contract, renewable annually, at an annual salary of $120,000.

Rental:

Company management and employees have been working remotely and accordingly, incurring no material rental expense during the period ended 31 March 2023 and 31 March 2022. However, minimal rental expense, for storage of office supplies, was charged in the period ended 31 March, 2023.

NOTE 10 – EQUITY

Common stock:

The Company has authorized 200,000,000 shares of $.001 par value common stock. As of March 31, 2023 and December 31, 2022, the Company had 50,467,414 and 49,766,164 shares, respectively, of common stock issued and outstanding.

On October 27, 2021, 26,910,000 shares of Common Stock of the Company held by the Company’s Chief Executive Officer were returned to treasury and retired.

On December 10, 2021 and December 15, 2021, the Company received total proceeds of $650,000 for the sale of 650,000 common stock shares at $1.00 per share. The December 15, 2021 sale of 400,000 shares were issued on January 3, 2022 and accordingly, recorded as common stock subscribed in the accompanying financial statements.

On November 12, 2021, the U.S. Securities and Exchange Commission (“SEC”) issued a Notice of Qualification for the Company's Form 1-A Offering Circular for an offering of the Company’s Common Stock shares under Regulation A+ (the "Offering") of the Securities Act of 1933 (the “Act”). The purpose of the Offering is to allow both accredited and non-accredited potential investors the opportunity to invest directly in the Company. The Offering has a minimum and maximum investment of $25,000 to at a price of $1.00 per share.

During the year ended December 31, 2022, the Company received total proceeds of $1,420,000 for the sale of 142,000 common stock shares at $1.00 per share.

During the first quarter of 2023, the Company issued 701,250 shares of common stock shares. No cash proceeds from aforementioned issue.

Preferred Stock:

The Company has authorized 19,000,000 shares of $.001 par value preferred stock.

On August 6, 2021, the Company amended its Articles of Incorporation to include Certificates of Designation for two new classes of Preferred Stock – Series C Preferred, authorized 1,000,000 shares and, Series D Preferred, authorized 18,000,000 shares.

In connection with the Merger with HyEdge, on September 15, 2021, the Company issued 1,000,000 shares of Series C Convertible Preferred stock, non-dividend, with voting rights. Each share of Series C Preferred stock is convertible into the number of shares of the Company’s common stock equal to the result of (i) 1.5 times the number of Common shares issued and outstanding calculated on a fully diluted basis at the time of conversion, (ii) divided by the total number of Series C Preferred shares issued and outstanding at the time of conversion.

Additionally, the Company issued 3,054 shares of Series D Convertible Preferred stock, non-dividend, with no voting rights. Each share of Series D Preferred stock is convertible into the number of shares of the Company’s common stock equal to 0.01% of the number of Common shares issued and outstanding at the time of conversion.

During the year ended December 31, 2022, 1,295 shares of Series D Preferred Stock were issued to an investor in connection with the execution of a Leak-Out Agreement. No shares of Series C and Series D Preferred Stock were issued during the period ended 31 March, 2023.

On July 22, 2022, the Company entered into a Memorandum of Understanding (“MOU”) with Bear Face Capital LLC (“Bear Face”) and Concorde Consulting Corp (“Concorde”) for an influx of capital. In accordance with the terms of the MOU, Gail Levy and James C. Sanborn returned 999,999 shares of Series C Preferred stock to the Company. Dawn Cames, former officer for the predecessor company (“FICAAR”), was appointed to serve as a Director and Chairman of the Board for the Company and was assigned one (1) share of Series C Preferred stock. Impact of above arrangement was recognised in the period ended March 31, 2023.

As of March 31, 2023, 999,999 shares of Series C Preferred stock and 17,995,651 shares of Series D Preferred, respectively, stock remain unissued.

NOTE 11 – INCOME TAXES

The Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. During the current period, though the Company incurred a net profit but no tax liability will be charged on account of the accumulated deficit.

The Company has U.S. federal and state net operating loss carryovers (“NOL’s”) of approximately $17 million at March 31, 2023 and December 31, 2022, which begin to expire in 2036. Section 382 of the Internal Revenue Code limits the amount of NOL’s available to offset future taxable income when a substantial change in ownership occurs.

The significant components of deferred income tax assets at March 31, 2023 and December 31, 2022 were as follows: 

The amount taken into income as deferred income tax assets must reflect that portion of the income tax loss carry forwards that is more-likely-than-not to be realized from future operations. The Company has chosen to provide a full valuation allowance against all available income tax loss carry forwards. The Company has recognized a valuation allowance for the deferred income tax asset since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years. The valuation allowance is reviewed annually. When circumstances change and which cause a change in management’s judgment about the realizability of deferred income tax assets, the impact of the change on the valuation allowance is generally reflected in current income.

NOTE 12 – RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial and operating decisions. Details of transactions between the Company and related parties, are disclosed below:

During period ended 31 March 2023, the Company received funds, totalling $165,000 (2022: 0 Nil) from Bear Face Capital LLC, one of the Company’s shareholders, to facilitate particular operating activities. These funds were classified as Other Payables as of March 31, 2023 due to their operational nature.

NOTE 13 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through May 22, 2023, which is the date the financial statements were issued, and has concluded that no such events or transactions took place which would require adjustment to or disclosure in the financial statements

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

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2022 and 2021. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.

When this report uses the words “we,” “us,” “our,” or “FICAAR” and the “Company,” they refer to Ficaar, Inc.

Company History and Summary

HFactor, Inc., formerly known as Ficaar, Inc. (the “Company” or “HFactor” or “Ficaar”) was incorporated in July 2001 in the State of Georgia under the name OwnerTel, Inc. The name of the Company was changed to Ficaar, Inc. in December of 2007 and to HFactor, Inc. on September 2, 2021.

The Company’s fiscal year end is December 31.

On May 28, 2021, David Cicalese (“Cicalese”), an officer and Board member of Ficaar entered into an agreement with Gail Levy whereby Cicalese agreed to sell 29,900,000 shares, representing a majority interest in Ficaar, to Levy. Acting as the majority shareholder of the Company, Levy then caused Ficaar to enter into an Agreement and Plan of Merger (the "Merger Agreement") between the Company, FCAA Merger Sub I, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Ficaar, and HyEdge, Inc. ("Target" or "HyEdge"), a Delaware corporation, wherein Merger Sub and Target would merge, with Target surviving the transaction as a wholly owned subsidiary of Ficaar (the "Merger"). The Merger Agreement was executed on August 6, 2021 and the Merger closed on August 9, 2021. The Merger effected a change in control and was accounted for as a "reverse acquisition" whereby Target is the accounting acquiror for financial statement purposes. Accordingly, for all periods subsequent to the Closing Date, the financial statements of the Company reflect the historical financial statements of HyEdge and any operations of the Company subsequent to the Merger.

Plan of Operations

BUSINESS DESCRIPTION

HFactor water was created by Gail Levy, HyEdge's founder and CEO. Gail is a successful serial entrepreneur who was looking for a new product that could alleviate the toxic side effects of the cancer chemotherapeutic drugs that had riddled a dear friend. As she researched the properties of hydrogen water, she became more and more enthralled by its potential. Ms. Levy felt she could honor her friend by making hydrogen water immaculate, effective, and accessible to everyone. Enlivened by this mission, she collected a team of experts to help her engineer a natural process to combine hydrogen with water with zero impurities and optimal impact. In 2017, she launched her flagship product through retail and ecommerce channels. HFactor was developed and is manufactured by a team of experts in the U.S. and utilizes a patented chemical-free and magnesium-free process to infuse free hydrogen into its water. Its award winning, environmentally friendly ergonomic pouch keeps the hydrogen potent and pure and makes it extremely portable.

BUSINESS DESCRIPTION (CONTINUED)

Hfactor’s anti-inflammatory and antioxidant benefits appeal to a wide population across every age group, positioning HFactor to capture significant share in an expanding market. The global market for bottled water is projected to reach $215B by 2025.

The quality of our product is achieved through a proprietary manufacturing process. A reverse osmosis filtering system and patent-protected infusion process ensures efficacy, purity, and taste. The efficacy of hydrogen water is backed by over 1,000 published peer reviewed studies demonstrating that hydrogen positively impacts fitness, health, lifestyle, recovery, and wellness.

Our sales strategy involves a diversified, multi-channel approach. Our products are currently on shelves in approximately 5,000+ retail stores across 20 chains in addition to our growing ecommerce presence. Our company prides itself on having a low carbon footprint, primarily due to our eco-conscious packaging and free mail-in recycling program through our partnership with Teracycle.

Our mission statement is to build a brand and corporate culture that, at its essence, exhibits strength in oneself and in one's community. We promote a foundation of "doing well by doing good". This foundation enables HFactor to produce and distribute the highest quality "better for you" consumer products that are conscious to the community, mind, body, and the environment

Comparison of Three Months Ended March 31, 2023 to Three Months Ended March 31, 2022

Results of Operations

Net revenues for the three months ended March 31, 2023 were $418,765 as compared to $595,623 for the three months ended March 31, 2022. Company has been striving to boost sales and operating results since merger.

Gross profit for the three months ended March 31, 2023 was also deteriorated by $88,951, in line with decline in revenues. However, company managed to control of goods sold. Hence, noticed slight improvement in GP Margin, from 54% in quarter ended March 31, 2022, to 55% in current reporting period.

Total operating expenses were $567,778 for the three months ended March 31, 2023 as compared to $931,214 for the three months ended March 31, 2022. Reduction in expenses by 39% was primarily attributable to the decline in sales and marketing expense by $257,348.

Significant improvement in other income, in current period, was attributable to the write-off of the salary payable balance of Gail Levy of $720,000. Consequently, other expenses of $ 195,566 in 2022 were turned into net income of $696,484.

For the three months ended March 31, 2023, the Company reported a net profit of $359,662 as compared to a net loss of $806,873 for the three months ended March 31, 2022. The net gain for the three months ended March 31, 2023 mainly arose from the write-off of the accumulated salary payable of Gail Levy. Though sales dropped off in current period by 30% on account of reduction in sales and marketing activities, the gross profit margin was still positive. Effective cost control and restructuring of marketing activities can maintain profitable operations.

Liquidity and Capital Resources

As of March 31, 2023, the Company had $36,206 in cash to fund its operations. The Company reported working capital deficit of $4,872,792 at March 31, 2023 as compared to a working capital deficit of $5,260,943 at December 31, 2022, representing decrease in working capital deficit by $388,151.

Liquidity and Capital Resources

The Company does not believe its current cash balance will be sufficient to allow the Company to fund its planned operating activities for the next twelve months. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund accumulated operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail some or all of its planned activities. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities should the Company be unable to continue as a going concern.

As the Company started to report profitable results, maintaining profitability is dependent on achieving a level of revenues adequate to support the Company's cost structure. Management intends to fund future operations through additional private or public equity offering and may seek additional capital through arrangements with strategic partners. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all. Any equity financing may be dilutive to existing shareholders, which dilution may be significant depending on the terms of the transactions.

Operating Activities:

For the three months ended March 31, 2023 net cash flow used by operating activities was $(111,848) as compared to $(574,121) for the three months ended March 31, 2022. Comparatively, less cash resources were tied up in operating activities on account of net income of $359,662, in current reporting period.

Investing and Financing Activities:

Net cash flows provided by financing activities for the three months ended March 31, 2023 were $0 as compared to $370,000 for the three months period ended March 31, 2022. No investments were made in the current and comparative reporting period.

Liquidity and Capital Resource Measures:

The Company’s primary source of liquidity in the period ended March 31, 2023 was shareholder’s loan.

Going Concern

The Company generated a net profit of $359,662 in the period ended March 31, 2023 but had an accumulated deficit of $3,835,939 as of March 31, 2023. These conditions raise substantial doubt about the Company’s ability to continue raising sufficient capital to fund continued operations. Management expects to maintain profitable results in the foreseeable future with support of additional financing and cost control. However, the accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Transaction with Related Parties:

During the first quarter of 2023, the Company received funds, totaling $165,000, from Bear Face Capital LLC, one of the Company’s shareholders, to facilitate particular operating activities. These funds were classified as Other Payables as of March 31 2023 due to their operational nature.

Critical Accounting Policies

Refer to Note 2 in the Consolidated Financial Statements for a summary of implemented accounting policies and their related effects or anticipated effects on our consolidated results of operations and financial condition.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation and Changing Prices

We do not believe that inflation nor changing prices for the three months ended March 31, 2023 had a material effect on our operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer , as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2023, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.

Internal Control Over Financial Reporting

Evaluation of Disclosure Controls and Procedures

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company had concluded that the Company's disclosure controls and procedures as of the period covered by this Quarterly Report on Form 10-Q were not effective for the following reasons:

a)  The Company has limited segregation of duties amongst its employees with respect to the Company's control activities. This deficiency is the result of the Company's limited number of employees. This deficiency may affect management's ability to determine if errors or inappropriate actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible changes in our disclosure controls and procedures.

b)  The Company's has a limited number of external board members. This deficiency may give the impression to the investors that the board is not independent from management. Management and the Board of Directors are required to apply their judgment in evaluating the cost-benefit relationship of possible changes in the composition of the Board of Directors.

Changes in internal control over financial reporting.

Management of the Company has also evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q and determined that there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

We did not have any sales of unregistered equity securities for the three months ended March 31, 2023 other than those that have been previously reported.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

SIGNATURES

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