The following Management's Discussion and Analysis should be read in conjunction with Hammer Fiber Optics Holdings Corp., financial statements and the related notes thereto. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report on Form 10-Q. The Company's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report on Form 10-Q.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2023, filed with the SEC on February 16, 2024.
Results of Operations
Three Months Ended April 30, 2024 Compared to the Three Months Ended April 30, 2023
Net revenues for the three months ended April 30, 2024, and April 30, 2023 were $770,412 and $767,527 respectively, an increase of approximately $2,885 or 0.4%. The increase was primarily due to the expansion of the Company's Over-the-Top ("OTT") business segment which includes its SMS messaging and hosting business units.
During the three months ended April 30, 2024, the Company incurred total operating expenses of $1,059,174 compared with $788,698 during the comparable period April 30, 2023. This increase of approximately $270,476 or 35% is due to an increase in selling, general and administrative expenses of $262,008 in the quarter.
The Company recorded depreciation and amortization expense of $13,471 and $14,608 during the three months ended April 30, 2024, and April 30, 2023, respectively. During the three months ended April 30, 2024, and April 30, 2023 interest expense was $21,756 and $6,379 respectively.
During the three months ended April 30, 2024, the Company incurred total other expense of $215,705 primarily consisting of interest expense, financing expense, and loss on fair value of warrant liability, of $21,756, $173,520 and, $29,250, respectively. These expenses are partially offset by other income in the quarter of $9,621, which represents income from previously written-down customer accounts receivable. During the three months ended April 30, 2023 the Company incurred total other expense of $184,540 consisting of interest expense, financing expense, and loss on fair value of warrant liability of $6,379, $175,960, and $13,500. These expenses are partially offset by other income of $11,467.
During the three months ended April 30, 2024 the Company recorded a net loss of $504,467, compared to a loss of $205,711 in the same three-month period ended April 30, 2023. The increase in loss is due to a large increase in the Company’s total other expenses and selling, general, and administrative expenses quarter over quarter.
Nine Months Ended April 30, 2024 Compared to the Nine Months Ended April 30, 2023
Net revenues for the nine months ended April 30, 2024 and April 30, 2023 were $2,506,966 and $2,311,038 respectively, an increase of approximately $195,928 or 8.5%. The increase was primarily due to the expansion of the Company's Over-the-Top ("OTT") business segment which includes its SMS messaging and hosting business units.
During the nine months ended April 30, 2024, the Company incurred total operating expenses of $3,050,369 compared with $2,768,264, an increase of approximately $282,105 or 10.2%, for the comparable period ended April 30, 2023. The increase in expenses is due to the expenses associated with the Company’s diversification into the financial services markets and increased expenses associated with the expansion of the telecommunications business segment.
The Company recorded depreciation and amortization expense of $43,441 and $45,416 during the nine months ended April 30, 2024 and April 30, 2023 respectively. During the nine months ended April 30, 2024 and April 30, 2023 interest expense was $62,061 and $7,628 respectively.
During the nine months ended April 30, 2024, the Company incurred total other expense of $38,261 primarily consisting of interest expense, financing expense, and other expenses of $62,061, $187,955, and $13,915, respectively. These expenses are partially offset by other income in the nine months ended April 30, 2023 of $178,420, which represents income from previously written-down customer accounts receivable. During the nine months ended April 30, 2023 the Company incurred total other expenses of $171,710 consisting of interest expense and financing expense of $7,628 and $316,897. These expenses are partially offset by other income, gain on fair value of warrant liability, and gain extinguishment of convertible debt of $11,467, $27,392, and $115,357.
During the nine months ended April 30, 2024 the Company recorded a net loss of $581,664, compared to a loss of $628,936 in the same nine month period ended April 30, 2023. The increase in loss is due to a large increase in the Company's total other expenses and selling, general, and administrative expenses year over year.
Liquidity and Capital Resources
The Company is at risk of remaining a going concern. Its ability to remain a going concern is dependent upon whether the company can raise debt and/or equity capital from third-party sources for both working capital and business development needs until such time as the Company may be substantially sustained as a going concern through cash flow from operations or the Company increases its cash flow from operations through sale of services in the ongoing business units, Endstream Communications, 1stPoint Communications and HammerPay.
Cash Flow from Operating Activities
During the nine months ended April 30, 2024 the Company’s total cash increased by $23,516, compared to a decrease in cash of $369,703 in the period ended April 30, 2023. Cash flow used in operating activities was $614,568, compared to $467,530 in the period ended April 30, 2023. The increase was partially due to an increase in net loss in the period as well as increases in accounts receivables, decreases in accounts payables, and decreases in deferred revenues, partially offset by a decrease in non-cash interest expense and depreciation expense.
Cash Flow from Investing Activities
During the nine months ended April 30, 2024, the Company’s investing activities used $48,349, compared to $14,138 used in investing activities during the nine months ended April 30, 2023. The increase was primarily due to an increase in the purchases of property and equipment as well as an increase in capitalized intangible assets during the period ended April 30, 2024.
Cash Flow from Financing Activities
During the nine months ended April 30, 2024, cash flow provided by financing activities was $686,433 compared with $139,334 provided during the nine months ended April 30, 2023. The increase is primarily attributable to greater borrowings of notes payable and convertible notes payable – related parties during the period. During the nine months ended April 30, 2024, the Company received approximately $77,279 more in proceeds from notes payable and approximately $452,574 more in proceeds from convertible notes payable – related parties as compared to the nine months ended April 30, 2023.
Going Concern
As of April 30, 2024, doubt existed as to the Company's ability to continue as a going concern as the Company has no certainty of earning additional revenues in the future, has a working capital deficit and an overall accumulated deficit since inception. The Company will require additional financing to continue operations either from management, existing shareholders, or new shareholders through equity financing and/or sources of debt financing. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. The financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Future Financings
We will continue to rely on equity sales of our common shares in order to continue to fund business operations. Issuances of additional shares may result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of equity securities or arrange for debt or other financing in amounts sufficient to fund our operations and other development activities.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States, applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For the nine-month period ended April 30, 2024, there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended July 31, 2023.
Recently Issued Accounting Pronouncements
In the period from July 2023 through April 2024, the FASB has not issued any additional accounting standards updates that have a significant impact on the Company. Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) that are designed to reasonably ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
At the end of the period covered by this Quarterly Report, we conducted an evaluation under the supervision and with the participation of our Principal Officer and Principal Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the foregoing, our Principal Executive Officer and Principal Financial Officer concluded that, as of April 30, 2024, the disclosure controls and procedures of our Company were not effective.
Material Weakness
Our management assessed the effectiveness of our internal control over financial reporting as of April 30, 2024. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified a material weakness in our internal control over financial reporting. Specifically, this is due to an inherent staffing limitation to properly segregate duties and provide adequate monitoring during the process leading to and including the preparation of the condensed consolidated financial statements.
Limitations on Effectiveness of Controls and Procedures
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
During the fiscal year 2024, we engaged an outsourced firm with a panel of CPA consultants to assist in building internal controls and preparing financial reports, and to establish best practices and help us document and implement all the checks and balances needed for all financial areas.
Except as listed above, there were no other changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, or proceeding by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or our subsidiary, threatened against or affecting our Company, our common stock, our subsidiary or of our companies or our subsidiary’s officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 4, 2024, the Company entered into the Second Amendment to the Mast Note, which included the issuance of 475,000 shares of the Company’s common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
There is no other information required to be disclosed under this item which has not been previously disclosed.
ITEM 6. EXHIBITS
*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | HAMMER FIBER OPTICS HOLDINGS CORP |
| | |
| Date: August 26, 2024 | /s/ Michael Cothill |
| | Michael P. Cothill |
| | Principal Executive Officer |
| | |
| Date: August 26, 2024 | /s/ Mark Stogdill |
| | Mark Stogdill |
| | Principal Financial Officer |
