NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
BACKGROUND, BASIS OF PRESENTATION, AND GOING CONCERN:
Background
NanoFlex
Power Corporation, formerly known as Universal Technology Systems, Corp., was incorporated in the State of Florida on January
28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation, a Pennsylvania corporation
(“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”). Immediately following
the closing of the Share Exchange Transaction, the Company owned 100% of equity interests of GPEC and GPEC became a wholly-owned
subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal Technology Systems, Corp.”
to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS” on December 26, 2013.
GPEC
was incorporated in Pennsylvania on February 7, 1994. The Company is organized to fund, develop, commercialize and license advanced
configuration solar technologies which enable unique thin-film solar cell implementations with industry-leading efficiencies,
light weight, flexibility, and low total system cost.
These
technologies are targeted at certain broad applications, including: (a) mobile and field power generation, (b) building applied
photovoltaics ("BAPV"), (c) building integrated photovoltaics ("BIPV"), (d) space vehicles and unmanned aerial
vehicles ("UAVs"), (e) semi-transparent solar power generating windows or glazing, and (f) ultra-thin solar films or
paints for automobiles or other consumer applications.
We
believe these technologies have been demonstrated in a laboratory environment with our research partners. The Company is currently
taking steps to pursue product development and commercialization on some of these technologies in collaboration with industry
partners and potential customers.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures have been or omitted pursuant to
such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include normal
recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These
consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes
thereto for the fiscal year ended December 31, 2015 included in our Annual Report on Form 10-K. The results of operations for
the three and six months ended June 30, 2016 are not necessarily indicative of results to be expected for the full fiscal
year or any other periods.
The
preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and
related disclosures. Actual results may differ from these estimates.
Revision
of Previously-Issued Financial Statements
During
the three months ended June 30, 2016, the Company identified errors in its financial statements for the third and fourth quarters
of the fiscal year ended December 31, 2015, and first quarter of the fiscal year ended March 31, 2016, as included in the Company’s
10-Q for the period ended September 30, 2015 and March 31, 2016, and its 2015 annual report on Form 10-K, related to the accounting
for conversion option derivative liabilities. Specifically, the Company accounted for all of its convertible debt instruments
assuming that each contained an embedded conversion feature that met the criteria for bifurcation when, in fact, several of the
outstanding notes contained embedded conversion features that did not require bifurcation. The Company has made adjustments in
each period related to this.
The
Company assessed the effect of the above errors in the aggregate on prior periods’ financial statements in accordance with
the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors,
determined that the errors were not material to any of the Company’s prior interim and annual financial statements.
The
Company determined that the correction of the cumulative amounts of the errors would be material to its consolidated financial
statements for the three and six months ended June 30, 2016. Therefore, the Company revised its previously-issued financial statements
as of December 31, 2015 and for the third and fourth quarters of fiscal 2015 and first quarter of fiscal 2016. The balance sheet
as of December 31, 2015 included in this Form 10-Q is revised as described below for those adjustments.
All
financial information contained in the accompanying notes to these financial statements has been revised to reflect the correction
of these errors.
The
following tables present the effect of the aforementioned revisions on the Company’s consolidated balance sheet for the
year ended June 30, 2016:
|
|
As
of December 31, 2015
|
|
|
|
As
Reported
|
|
|
Revision
|
|
|
As
Revised
|
|
Conversion option derivative
liability
|
|
$
|
8,145,160
|
|
|
$
|
(2,733,973
|
)
|
|
$
|
5,411,187
|
|
Convertible debt,
net of unamortized discounts
|
|
|
1,051,545
|
|
|
|
72,273
|
|
|
|
1,123,818
|
|
Total current liabilities
|
|
|
28,168,610
|
|
|
|
(2,661,700
|
)
|
|
|
25,506,910
|
|
Total liabilities
|
|
|
28,168,610
|
|
|
|
(2,661,700
|
)
|
|
|
25,506,910
|
|
Accumulated deficit
|
|
|
(204,989,355
|
)
|
|
|
3,484,877
|
|
|
|
(201,504,478
|
)
|
Additional paid in capital
|
|
|
176,932,064
|
|
|
|
(823,177
|
)
|
|
|
176,108,887
|
|
Total stockholders'
deficit
|
|
|
(28,052,143
|
)
|
|
|
2,661,700
|
|
|
|
(25,390,443
|
)
|
Going
Concern
The Company has only generated limited revenue to date. The Company has a working capital deficit
of $15,483,148 and an accumulated deficit of $201,963,635 as of June 30, 2016. The ability of the Company to continue
as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to
attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability
to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot
continue in existence. To date, the Company has funded its initial operations primarily by way of the sale of equity securities,
convertible note financing, short term financing from private parties, and advances from related parties.
Fair
Value
ASC
820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities
that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Valuations may be obtained from, or corroborated by, third-party pricing services.
Level
3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the
measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs
are available without undue cost and effort.
As
of June 30, 2016 the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of June 30, 2016 and
December 31, 2015:
|
|
Fair
Value Measurements as of
June 30, 2016
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
6,683,299
|
|
Conversion
option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
2,623,917
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
9,307,216
|
|
|
|
Fair
Value Measurements as of
December 31, 2015
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
12,796,146
|
|
Conversion
option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
5,411,187
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
18,207,333
|
|
The
following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level
3 in the fair value hierarchy:
|
|
Significant
Unobservable
|
|
|
Significant
Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level
3)
|
|
|
(Level
3)
|
|
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
9,948,356
|
|
|
$
|
3,379,642
|
|
|
$
|
18,207,333
|
|
|
$
|
847,791
|
|
Change in fair value
|
|
|
(1,185,582
|
)
|
|
|
(14,561
|
)
|
|
|
(9,444,559
|
)
|
|
|
2,440,922
|
|
Additions reclassified from equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,368
|
|
Additions
recognized as compensation expense
|
|
|
544,442
|
|
|
|
230,971
|
|
|
|
544,442
|
|
|
|
230,971
|
|
Ending balance
|
|
$
|
9,307,216
|
|
|
$
|
3,596,052
|
|
|
$
|
9,307,216
|
|
|
$
|
3,596,052
|
|
2.
DEBT
Notes
Payable
The
Company has a note payable of $100,000 due to its former Chief Executive Officer and President. The note is due on demand and
bears an interest rate at the minimum applicable rate for loans of similar duration, which was 0.5% as of June 30, 2016.
During the year ended December 31,
2015, the Company issued a promissory note of $50,000. The term of the note expires 120 days from the effective date. 100,000
cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50/share in lieu of
cash interest. As of March 31, 2016, the outstanding balance under these notes is $50,000. The relative fair value of the warrants
of $45,243 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The
Company recognized interest expense of $45,243 associated with the amortization of debt discount for the year ended December 31,
2015. On May 12, 2016, this note was forgiven in exchange for a new convertible note that bears interest of 8% per annum, a maturity
date of one year and is convertible into units at $0.50 per unit, with each unit consisting of a share of common stock and a warrant
with a five year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions.
This modification qualifies as an extinguishment of debt. The fair value of 50,000 warrants issued in connection with the modification
which have a term of 5 years and are exercisable at $0.50 per share resulted in a loss on extinguishment of debt of $44,044. The
modified note also gave rise to a beneficial conversion feature of $37,584 which is recognized as additional paid in capital and
a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The
note also contains an additional warrant expense of $12,415 associated with the warrants that are to be issued upon conversion,
which is to be recognized only upon conversion.
As
of June 30, 2016 and December 31, 2015, the aggregate outstanding balance of non-convertible notes payable was $100,000 and $150,000,
respectively.
Notes
Payable – Related Party
On
February 26, 2014, the Company borrowed $150,000 under a short term note agreement with a related party, the Chief Executive Officer’s
son. Under the terms of this agreement, the note was to be repaid within 6 months of funding. In November 2014, the note
agreement was amended to extend the due date to February 26, 2015, and in April of 2015, the note agreement was amended to extend
the maturity date to February 26, 2016 and set a 4% simple interest rate on the note. This note was paid in full in January of
2016 along with $509 of accrued interest.
In
2015, the Company issued promissory notes to a majority shareholder in aggregate of $625,000 (“Notes #1 to #4”). The
notes have a term ranging from 120 – 150 days from the effective date. 1,250,000 cashless warrants for the Company’s
common shares were issued with the debt at a strike price of $0.50/share in lieu of cash interest. On January 6, 2016, the Company
issued an additional promissory note to the same majority shareholder in the amount of $1,375,000 in exchange for a loan in that
amount (“Note #5). The Company issued 2,750,000 warrants in connection with this Note #5, for the Company’s common
stock at an exercise price of $0.50 per share. The total relative fair value of the warrants of $996,178 was recognized as a debt
discount which is being amortized on a straight-line basis over the term of the notes. Notes #1 to #4 and Note #5 shall be collectively
referred to herein as the “$2M Notes.”
On
January 22, 2016, the Company entered into a Note Conversion Agreement (the “Conversion Agreement”) with the holder
of the $2M Notes. Pursuant to the Conversion Agreement, the investor converted the $2M Notes, which totaled $2,000,000, into an
investment of $2,000,000 into the Company’s private placement of convertible notes and warrants. This extinguishment of
the $2M Notes resulted in a loss on extinguishment of debt of $3,163,303 which included an unamortized discount of $926,382 and
$2,236,921 representing the fair value of 2,000,000 warrants issued in connection with the Note Conversion Agreement. Additionally,
the Company recognized a beneficial conversion feature of $1,100,735 in accordance with the provisions of ASC 470-20 “
Debt
– Debt with Conversion and Other Options”
which is reflected as an increase in additional paid-in-capital and
a corresponding debt discount which was amortized on a straight line basis over the life of the note.
On
January 25, 2016, the investor converted the convertible note and accrued interest into 4,320,000 shares of the Company’s
common stock and a warrant to purchase 4,320,000 shares of the Company’s common stock with a ten year term and an exercise
price of $.50. Of the 4,320,000 shares of common stock, 320,000 shares represent interest paid on the convertible note pursuant
to the terms of the conversion agreement in the amount of $160,000. Upon conversion, the Company accelerated the recognition of
all remaining debt discount and also recognized an additional interest expense of $899,265 associated with the warrants that were
issued upon conversion. This contingent beneficial conversion feature was immediately recognized as interest expense with an offset
to additional paid-in-capital.
Aggregate
amortization of the discounts on the notes payable for the six months ended June 30, 2016 and 2015 was $163,714 and $113,253,
respectively. As of June 30, 2016 and December 31, 2015, the aggregate outstanding balance of notes payable to related parties
was $0 and $670,848, respectively, net of unamortized discounts of $0 and $104,152.
Advances
– Related Party
During
the three and six months ended June 30, 2016, the Company received advances from its Chief Executive Officer totaling $200,000
and $510,000 and repaid advances totaling $0 and $120,000.
As
of June 30, 2016 and December 31, 2015, the aggregate outstanding balance of advances to related parties was $500,000 and $110,000,
respectively.
Convertible
Notes Payable
In addition to the $2,000,000 convertible note described above in the notes payable-related party
section, on March 7, 2016, the Company received proceeds of $80,000 in exchange for a convertible note and the issuance of 80,000
warrants with a five year life and an exercise price of $0.50 per share. The convertible note has a principal amount of $80,000,
interest of 8% per annum, a maturity date of one year and is convertible into 160,000 units, with each unit consisting of a share
of common stock and a warrant with a five year life from the date of conversion and an exercise price of $0.50 per share, subject
to certain anti-dilution provisions. The relative fair value of the 80,000 warrants issued with the debt was determined to be
$38,205 and was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $22,290 which
is recognized as additional-paid-in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line
basis over the term of the note. The note also contains an additional warrant expense of $19,505 associated with the warrants
that are to be issued upon conversion, which is to be recognized only upon conversion.
From April 18, 2016 through June 30,
2016, the Company received additional aggregate proceeds of $375,000 in exchange for eight convertible notes and the issuance of
375,000 warrants with a five year life and exercise price of $0.50 per share. The convertible notes have an aggregate principal
amount of $375,000, interest of 8% per annum, a maturity date of one year and are convertible into an aggregate of 750,000 units,
with each unit consisting of a share of common stock and a warrant with a five year life from the date of conversion and an exercise
price of $0.50 per share, subject to certain anti-dilution provisions. The aggregate relative fair value of the 375,000 warrants
issued with the debt was determined to be $158,423 and was recognized as a discount to the debt. These notes also gave rise to
a beneficial conversion feature of $116,129 which is recognized as additional paid in capital and a corresponding debt discount.
All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional
warrant expense of $100,449 associated with the warrants that are to be issued upon conversion, which is to be recognized only
upon conversion.
During the three months ended March
31, 2016, the full principal balances of certain notes of $30,000 with accrued interest of $790 were converted pursuant to the
terms of the notes into 61,578 shares of the Company’s common stock and 61,578 warrants to purchase common stock. Upon conversion,
the Company accelerated the recognition of all remaining debt discount and also recognized interest expense of $3,787 associated
with the warrants that were issued upon conversion. This additional warrant expense was immediately recognized as interest expense
with an offset to additional paid-in-capital.
During the three months ended June
30, 2016, the full principal balances of certain notes totaling $267,144 with accrued interest of $182,162 were converted pursuant
to the terms of the notes into 577,031 shares of the Company’s common stock and 577,031 warrants to purchase common stock.
Upon conversion, the Company accelerated the recognition of all remaining debt discount and also recognized additional interest
expense of $56,197 associated with the warrants that were issued upon exercised. This additional warrant expense was immediately
recognized as interest expense with an offset to additional paid-in-capital.
For
the remaining outstanding convertibles notes as of June 30, 2016, the fair value of the derivative liability conversion options
was $2,623,917 as of June 30, 2016.
Aggregate
amortization of the discounts on the convertible notes for the six months ended June 30, 2016 and 2015 was $1,506,449 and $137,997,
respectively. As of June 30, 2016 and December 31, 2015, the aggregate outstanding balance of convertible notes payable was $1,354,522
and $1,123,818, respectively, net of unamortized discounts of $362,455 and $561,728.
Derivative
Liabilities - Convertible Notes
As
of June 30, 2016, the fair value of the outstanding convertible note derivatives was determined to be $2,623,917. There were no
new convertible note derivatives that arose during the three or six months ended June 30, 2016.
Accounts
Payable - Related Party
As
of June 30, 2016 and December 31, 2015, there is $0 and $62,469, respectively, due to a related party, the Company’s Chief
Financial Officer, which is non interest bearing due on demand.
3.
EQUITY
Common
Stock
During the six months ended June 30, 2016, the Company issued 245,878 common shares and warrants to purchase
426,741 common shares of the Company’s common stock in exchange for proceeds of $67,536. The Company determined a fair value
for the shares and warrants to be $617,174. The cash was received prior to December 31, 2015 and was recorded as an accrued liability
at December 31, 2015. This transaction resulted in a loss on extinguishment of liability of $549,638.
During
the three months ended March 31, 2016, the Company issued 372,263 common shares and warrants to purchase 1,140,662 common shares
of the Company’s common stock in exchange for proceeds of $172,342, $40,062 of which was received subsequent to the end
of the quarter.
During
the three months ended June 30, 2016, the Company issued 1,007,535 common shares and warrants to purchase 3,031,050 common shares
of the Company’s common stock in exchange for proceeds of $466,451.
During
the three months ended June 30, 2016, the Company issued 12,577 common shares on exercise of warrant at price of $0.50 per share
for a total of $6,288.
Stock
Options
A
summary of stock option activity during the six months ended June 30, 2016 is as follows:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Life (years)
|
|
Outstanding at December
31, 2015
|
|
|
50,000
|
|
|
$
|
0.50
|
|
|
|
10.0
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
50,000
|
|
|
|
0.50
|
|
|
|
9.5
|
|
Exercisable at June 30, 2016
|
|
|
7,000
|
|
|
$
|
0.50
|
|
|
|
9.5
|
|
Stock
option awards are expensed on a straight-line basis over the requisite service period. During the three and six months
ended June 30, 2016 the Company recognized expense of $4,164 and $8,326, respectively, associated with stock option awards. During
the three and six months ended June 30, 2015 the Company recognized expense of $0 associated with stock option awards. At June
30, 2016, future stock compensation expense (net of estimated forfeitures) not yet recognized was $60,612 and will be recognized
over a weighted average remaining vesting period of 3.7 years.
The
intrinsic value of the Company’s stock options outstanding was $13,495 at June 30, 2016.
Warrants
On
September 1, 2015 the Company entered into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in
his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company
issued Mr. Tobin warrants to purchase 1,500,000 shares of the Company’s common stock at $1.00 per share (the “Warrant
Shares”). The fair value of the warrants was determined to be $2,835,061 using the Black-Scholes option pricing model. 375,000
of the Warrant Shares vested on September 1, 2015, an additional 375,000 warrant shares will vest on the first anniversary date
of the Employment Agreement, an additional 375,000 warrant shares will vest on the second anniversary date of the Employment Agreement,
and, an additional 375,000 warrant shares will vest on the third anniversary date of the Employment Agreement. Warrant expense
of $324,851 and $649,703 was recognized during the three and six months ended June 30, 2016.
The
following summarizes the warrant activity for the six months ended June 30, 2016:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December
31, 2015
|
|
|
40,026,431
|
|
|
$
|
1.83
|
|
|
|
4.6
|
|
|
$
|
54,932,218
|
|
Granted
|
|
|
14,886,992
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(97,500
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12,577
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2016
|
|
|
54,803,346
|
|
|
$
|
0.88
|
|
|
|
5.1
|
|
|
$
|
42,193,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2016
|
|
|
52,478,346
|
|
|
$
|
0.90
|
|
|
|
5.1
|
|
|
$
|
42,193,096
|
|
Derivative
Liabilities - Warrants
The
anti-dilution features in the freestanding warrants issued in the six months ended June 30, 2016 cause the instruments to no longer
be indexed to the Company’s own stock and requires that they be accounted for as derivative liabilities based on guidance
in FASB ASC 815, Derivatives and Hedging.
The
valuation of the derivative liability of the warrants was determined through the use of a Black Scholes options model, which the
Company believes approximates fair value. Using this model, the Company had a balance of $12,796,146 at December 31, 2015. The
Company recorded the change in the fair value of the warrant liabilities recognizing a gain of $5,568,402 and expense of $544,442
for the six months ended June 30, 2016, to reflect the value of the warrant derivative liability of $6,683,299 as of June 30,
2016.
On
November 4, 2015, the Company entered into an amendment to the Independent Contractor Agreement (the “Amendment”)
with a service provider pursuant to which the service provider is to be issued warrants to purchase 2,400,000 shares of the Company’s
common stock at $1.00 per share (the “Warrant Shares”). 1,200,000 of the Warrant Shares vested on November 4, 2015,
an additional 600,000 Warrant Shares will vest on the first anniversary date of the Amendment, and an additional 600,000 Warrant
Shares will vest on the second anniversary date of the Amendment. The fair value of the first 1,200,000 Warrants Shares was determined
to be $1,115,964 using the Black-Scholes option pricing model and was recognized as expense during the year ended December 31,
2015. The fair value of the two tranches of 600,000 Warrant Shares was determined to total $898,465 as of June 30, 2016 using
the Black-Scholes option pricing model of which $120,895 and $231,179 was recognized as expense during the three and six months
ended June 30, 2016, respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 1,000,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
500,000 of the Warrant Shares vested on May 13, 2016, an additional 250,000 warrant shares will vest on the first anniversary
date of the agreement, an additional 250,000 Warrant Shares will vest on the second anniversary date of the agreement. The fair
value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model and was recognized
as expense and as derivative liabilities during the quarter ended June 30, 2016. The fair value of the two tranches of 250,000
Warrant Shares was determined to total $374,360 as of June 30, 2016 using the Black-Scholes option pricing model of which $36,228
was recognized as expense during the three and six months ended June 30, 2016.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 200,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
The Warrant Shares are immediately vested. The fair value of the Warrant Shares was determined to be $155,554 using the Black-Scholes
option pricing model and was recognized as expense and as derivative liabilities during the quarter ended June 30, 2016.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
|
Six
Months Ended
June 30,
|
|
|
2016
|
|
2015
|
Volatility
|
|
129-.70 % - 180.15%
|
|
108.72% - 111.37%
|
Risk-free interest rate
|
|
0.65% - 1.78%
|
|
0.725% - .87%
|
Expected term
|
|
2.5 - 10 years
|
|
3.5 - 5 years
|
4.
NET LOSS PER SHARE
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,106,188
|
)
|
|
$
|
(2,199,196
|
)
|
|
$
|
(459,157
|
)
|
|
$
|
(6,146,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
57,491,671
|
|
|
|
45,976,649
|
|
|
|
56,158,268
|
|
|
|
45,372,975
|
|
Add incremental shares for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common
shares outstanding
|
|
|
57,491,671
|
|
|
|
45,976,649
|
|
|
|
56,158,268
|
|
|
|
45,372,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.14
|
)
|
5.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
In
November 2013, the Company entered into a 60-month lease agreement for its corporation facility in Arizona. Total rent expense
for the three and six months ended June 30, 2016 was $21,504 and $23,737, respectively. Total rent expense for the three and six
months ended June 30, 2015 was $43,336 and $47,894, respectively.
Future
minimum lease payments are as follows:
2016
|
|
$
|
41,155
|
|
2017
|
|
|
84,233
|
|
2018
|
|
|
71,797
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
197,185
|
|
Concentrations
All
of the Company’s revenue and accounts receivable are currently earned from one customer.
Legal
Matters
On
March 18, 2015, the Company received correspondence from the counsel of Mr. John Kuhns, the Company’s former Co-CEO and
Executive Chairman alleging that Mr. Kuhns has “Good Reason” to terminate his Employment Agreement for an alleged
failure to pay his salary in full. On March 30, 2015, Mr. Kuhns advised that if the alleged breaches of the Employment Agreement
were not cured there was a possibility that he would pursue litigation.
As
of March 30, 2015, shareholders holding approximately 67.26% of the total shares of common stock of NanoFlex Power Corporation
(the “Company,” “we,” “our” or “us”) that are entitled to vote on all Company
matters approved by written consent the removal of John D. Kuhns from his position as a member of the Company’s Board of
Directors. Mr. Kuhns’ removal was for “Cause” as defined under his Employment Agreement as amended and dated
as of October 1, 2013 (the “Employment Agreement”). The removal arose as a result of his documented conduct and statements,
which breached his fiduciary duties to the Company in order to advance personal monetary and other interests, and thereby threatened
serious financial injury to the Company, its shareholders and its debtholders.
On
March 31, 2015, the Board of Directors terminated the Employment Agreement with Mr. Kuhns for Cause and removed him from his positions
as Co-CEO, and from all other officer positions he held with the Company and its subsidiaries and affiliates, and all director
positions with the Company’s subsidiaries and affiliates.
On
April 24, 2015, the Company received a letter from Mr. Kuhns’ counsel (the “Response Letter”) stating that Mr.
Kuhns disagreed with statements in the Initial Filing regarding the circumstances of his removal as a director and officer.
The
Response Letter was accompanied by a copy of a complaint (the “Complaint”) filed by John D, Kuhns (the “Plaintiff”)
in the United States District Court Southern District of New York against the Company, Mr. Dean L. Ledger, our current CEO and
member of our Board of Directors, Mr. Robert J. Fasnacht, our former Executive Vice President and former member of our Board of
Directors and Mr. Ronald B. Foster, a shareholder of the Company (each, a “Defendant,” collectively, the “Defendants”).
The Complaint alleges, among other things, that the Plaintiff was terminated by the Company in violation of Section 922 of the
Dodd-Frank Act, that the Company wrongfully terminated the Employment Agreement, that the Defendants made false statements to
shareholders regarding the Plaintiff, that the Defendants (other than the Company) tortuously interfered with the Plaintiff’s
Employment Agreement, and that Mr. Ledger and Mr. Fasnacht breached their fiduciary duties to the Company and its shareholders.
The
Plaintiff seeks monetary damages, including (i) two (2) times of the alleged owed compensation to him, together with interest
as well as litigation costs, expert witness fees and reasonable attorneys’ fees; (ii) damages for the alleged breach of
the Employment Agreement by the Company, estimated to be at least $2 million, plus interest and attorney’s fees; (iii) an
unspecified amount for his alleged libel claim; and (iv) damages for the alleged tortious interference with contract, including
punitive damages of at least $2 million. The Plaintiff is also seeking a declaratory judgment, claiming that he was not terminated
as a director and should continue to hold a seat on the Company’s Board of Directors.
On
September 3, 2015 the Company filed a Motion to Dismiss portions of the Complaint in the United States District Court Southern
District of New York. The United States District Court Southern District of New York heard oral argument on the Motion to Dismiss
on June 23, 2016, and at the conclusion took the Motion to Dismiss under advisement. There has been no decision as of the date
of this report and the Company believes that the allegations in the Complaint to be without any merit and plans to vigorously
defend against the claims.
6.
SUBSEQUENT EVENTS
On
July 13, 2016, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a promissory
note from the Company in exchange for $500,000. The Note automatically converts by its terms 30 days after issuance into an investment
in the principal amount of the note in the Company’s convertible notes and warrants, upon automatic conversion, the investor
shall be issued a one year promissory note convertible into shares of the Company’s Common Stock at a $0.50 conversion price
and 7 year warrants with an exercise price of $0.50 and a cashless conversion feature.
During
the month of July 2016, the Company issued and sold convertible promissory notes totaling $216,000 together with warrants to purchase
216,000 shares of the Company’s Common Stock for gross proceeds of $216,000 pursuant to certain note subscription agreements
entered into between the Company and investors. Such warrants have an exercise price of $0.50 and a term of 5 years and a cashless
conversion feature. As of the date of this report, $216,000 of the notes have been converted pursuant to their terms into warrants
to purchase shares of the Company’s Common Stock and shares of Common Stock as set forth below.
During
the month of July 2016, the Company issued and sold convertible promissory notes totaling $37,680 together with warrants to purchase
37,680 shares of the Company’s Common Stock for gross proceeds of $37,680 in connection with Rescission Agreements entered
into between the Company and investors. During July of 2016, the Company issued 37,680 Replacement Warrants pursuant to Rescission
Agreements. Such warrants have an exercise price of $0.50 and a term of 5 years and a cashless conversion feature. The notes issued
pursuant to the Rescission Agreements were simultaneously converted upon issuance into shares of the Company’s Common Stock
and warrants to purchase shares of the Company’s Common Stock as described below.
During
the month of July 2016, the Company issued 928,800 shares of the Company’s Common Stock upon conversion of certain promissory
notes.
During
the month of July 2016, the Company issued 40,695 shares of the Company’s Common Stock upon conversion of certain promissory
notes in connection with Rescission Agreements.
During
the month of July 2016, the Company issued warrants to purchase 928,800 shares of its Common Stock related to the conversion of
certain convertible notes. Such warrants have an exercise price of $0.50 and a term of 5 years and a cashless conversion feature.
During
the month of August 2016, the Company issued and sold a convertible promissory note totaling $8,500 together with warrants to
purchase 8,500 shares of the Company’s Common Stock for gross proceeds of $8,500 pursuant to certain note subscription agreement
entered into between the Company and an investor. Such warrants have an exercise price of $0.50 and a term of 5 years and a cashless
conversion feature.