Form 10-Q for FUTUREWORLD CORP.
of operationsYou should read the following discussion and analysis in conjunction with the information set forth under Item 6, Selected Consolidated Financial Data, and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Our significant accounting policies are more fully described in Note 1 to the financial statements. However, certain accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on knowledge of our industry, historical operations, terms of existing contracts, and our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.
FutureWorld (Other OTC: FWDG), a Delaware corporation, is a leading provider of advanced technologies and solutions to the global cannabis industry. FutureWorld, together with its subsidiaries, focuses on the identification, acquisition, development, and commercialization of cannabis related products and services, such as industrial Hemp. FutureWorld, through its subsidiaries, provides personal and professional THC and CBD test kits, pharmaceutical grade CBD oil solutions, SafeVape vaporizers, smart sensor technology, communication network, surveillance security, data analysis for smart cultivation and consultation for the industrial hemp and legal medicinal cannabis. Our wireless agricultural smart sensor networks offer precision to the agriculture, irrigation systems, and greenhouses for the global cannabis and hemp industry. FutureWorld and its subsidiaries do not grow, distribute or sell marijuana.
Key Elements of Operating and Financial Performance
We monitor the key elements of our operating and financial performance to help us evaluate growth trends, determine investment priorities, establish budgets, measure the effectiveness of our sales efforts and assess operational efficiencies.
Currently, we derived all of our revenue from sales of URVape vaporizer pens, PersonalAnalytics test kits, FutureLand land lease agreement and selling our CBD oil under “CBDESSENCE”. In 2014, lease and product revenue represented 100% of our total revenue.
We expect to diversify our revenue base by licensing and selling HempTech related products and services by the end of 2014 and beyond.
Cost of Revenue and Gross Profit (Loss)
Product cost of revenue consists of third party product costs, including raw materials, component parts and associated freight, and normal yield loss in the period in which we recognize the related revenue. In addition, product cost of revenue may include compensation, benefits and stock-based compensation provided to our personnel, and overhead and other direct costs, which are recognized in the period in which we recognize the related revenue. Further, we recognize certain costs, including logistics costs, expenses for inventory obsolescence, warranty obligations, lower of cost or market adjustments to inventory, and amortization of intangibles, in the period in which they are incurred or can be reasonably estimated.
Service cost of revenue includes compensation and related costs for our yearly maintenance service delivery, customer operations and customer support personnel, facilities and infrastructure cost and depreciation. In accordance with our accounting policies, we recognize service cost of revenue in the period in which it is incurred even though the associated service revenue may be required to be deferred as described under “-Critical Accounting Policies and Estimates-Revenue Recognition.”
Our gross profit (loss) varies from period to period based on the volume, average selling prices, and mix of products and services recognized as revenue, as well as product and service costs, expense for warranty obligations, and inventory write-downs. The timing of revenue recognition and related costs, which depends primarily on customer acceptance, can fluctuate significantly from period to period and have a material impact on our gross profit and gross margin results.
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses, as well as legal settlement expenses and amortization of acquired intangibles. Personnel-related expense represents a significant component of our operating expenses.
Sales and Marketing
Sales and marketing expense consists primarily of; compensation, benefits, sales commissions and stock-based compensation provided to our sales, marketing and business development personnel, as well as facility costs and other related overhead; marketing programs, including expenses associated with industry events and trade shows; and travel costs.
General and Administrative
General and administrative expense consists primarily of; compensation, benefits and stock-based compensation provided to our executive, finance, legal, human resource and administrative personnel, as well as facility costs and other related overhead; and
fees paid for professional services, including legal, tax and accounting services.
RESULTS OF OPERATIONS
Total revenue for three months ended December 31, 2014 and 2013 was $362,416 and $0.00, respectively, representing an increase of 100%. Substantially all revenue from 2014 was derived from few customers. The increase in total revenue is attributable to our successful ongoing product development efforts and inventions such as URVape and PersonalAnalytics test kits. We expect to substantially increase our total revenue by marketing HempTech related products and services for the next several quarters.
Total revenue for nine months ended December 31, 2014 and 2013 was $440,188 and $0.00, respectively, representing an increase of 100%. Substantially all revenue from 2014 was derived from few customers. The increase in total revenue is attributable to our successful ongoing product development efforts and inventions such as URVape, PersonalAnalytics test kits and our land lease. We expect to substantially increase our total revenue by marketing HempTech related products and services for the next several quarters.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses for the three months ended December 31, 2014 and 2013 were approximately $367,453 and $40,312 respectively. The increase in selling, general and administrative expenses in 2014 as compared 2013 was due primarily to the cost of additional human resources, higher professional fees related to fees associated with additional debt financings. General and administrative expenses increased due to additional expenses incurred as the result of the Company’s start of operating activities.
Selling, general and administrative expenses for the nine months ended December 31, 2014 and 2013 were approximately $885,818 and $147,502, respectively. The increase in selling, general and administrative expenses in 2014 as compared 2013 was due primarily to the cost of additional human resources, higher professional fees related to fees associated with additional debt financings. General and administrative expenses increased due to additional expenses incurred as the result of the Company’s start of operating activities.
Net Loss from Operations. For the quarter ended December 31, 2014 and 2013, we incurred net losses of $167,996 and $52,730, respectively. Losses also include depreciation and amortization, non-cash expenses, in the amount of $112,304 and $9,870 for the quarter ended December 31, 2014 and 2013, respectively. There were no write downs in 2014: however, impairments and write downs of certain assets occurred in 2014 and 2013, due to valuation assessments by management, incurring charges of approximately $25,338 and $31,538 respectively.
Net Loss from Operations. For the nine months ended December 31, 2014 and 2013, we incurred net losses of $816,542 and $208,677, respectively. Losses also include depreciation and amortization, non-cash expenses, in the amount of $115,109 and $42,810, respectively. There were no write downs in 2014: however, impairments and write downs of certain assets occurred in 2014 and 2013, due to valuation assessments by management, incurring charges of approximately $25,338 and $31,538 respectively
Compensation and consulting expenses were $124,296 and $39,132 for the three months ended December 31, 2014 and 2013 respectively, Compensation and consulting expenses were $354,578 and $146,055 for the nine months ended December 31, 2014 and 2013 respectively. The increases are due to the increase in operations and officer compensation.
LIQUIDITY AND CAPITAL RESOURCES
We had $150,794 in cash at December 31, 2014, and $60,047 respectively remaining on the lines of credit from Mr. Talari with which to satisfy our future cash requirements. Our management believes that the credit lines will support only limited activities for the next twelve months. The Company depends upon capital derived from future financing activities such as loans from its officers and directors, subsequent offerings of its common stock or debt financing in order to operate and grow the business either directly or through its subsidiary. There can be no assurance that the Company will be successful in raising such capital. The key factors that are not in the Company’s control and that may have a direct bearing on operating results. These factors include, but are not limited to, acceptance of the Company’s business plan, the ability to raise capital in the future, the ability to expand its customer base, and the ability to hire key employees to grow the business. There may be other risks and circumstances that management may be unable to predict. We had no other contractual obligation or material commercial commitments for capital expenditures.
Our critical accounting policies include:
Revenue Recognition. We recognize revenue from licensing our software upon the installation and acceptance of the software by customers in accordance with Statement of Position 97-2, Software Revenue Recognition. When a software sales arrangement includes rights to customer support, the portion of the license fee allocated to such support is recognized ratably over the term of the arrangement, normally one year. Revenue from professional services arrangements will be recognized in the month in which services are rendered over the term of the arrangement. We also recognize revenue from selling URVape vape pens and our THC and CBD testing kits calls, PersonalAnalytics when purchase orders received.
Long-Lived Assets – We depreciate property and equipment and amortize intangible assets, including software development costs over the respective assets’ estimated useful life and periodically review the remaining useful lives of our assets to ascertain that our estimate is still valid. If we determine a useful life has materially changed, we either change the useful life or write the asset down or if we determine the asset has exhausted its useful life, we write the asset off completely.
Stock Based Compensation – We account for stock based compensation under the provisions of Statement of Financial Accounting Standards No. 123, (revised 2004) Share-Based Payments. Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award. Calculating stock-based compensation expense requires the input of subjective assumptions, including the expected term of the option grant, stock price volatility, and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns. We estimate stock price volatility based on historical implied volatility in our stock. In addition, we are required to estimate the expected volatility rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised or cancelled.
Income Taxes – We record federal and state income tax liability in accordance with Statement of Financial Accounting Standards No. 109 – Accounting for Income Taxes. Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Recent Accounting Pronouncements
The Company reviews new accounting standards as issued. No new standards had any material effect on these financial statements. The accounting pronouncements issued subsequent to the date of these financial statements that were considered significant by management were evaluated for the potential effect on these consolidated financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these consolidated financial statements as presented and does not anticipate the need for any future restatement of these consolidated financial statements because of the retro-active application of any accounting pronouncements issued subsequent to December 31, 2014 through the date these financial statements were issued.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
Management Consideration of Alternative Business Strategies
In order to continue to protect and increase shareholder value management believes that it may, from time to time, consider alternative
management strategies to create value for the company or additional revenues. Strategies to be reviewed may include acquisitions; roll-ups; strategic alliances; joint ventures on large projects; and/or mergers.
The Company is currently in the final stages of selling all the assets of HempTech Corp to a publicly traded company. Management believes that acquisitions will be a catalyst for advancing the Company’s existing technology and products to attain greater market share. Additionally, we are seeking capital financing for the purposes of furthering our plan of operations.