NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Ascent Solar Technologies, Inc. (“Ascent”) was incorporated on October 18, 2005 from the separation by ITN Energy Systems, Inc. (“ITN”) of its Advanced Photovoltaic Division and all of that division’s key personnel and core technologies. ITN, a private company incorporated in 1994, is an incubator dedicated to the development of thin film, photovoltaic (“PV”), battery, fuel cell and nano technologies. Through its work on research and development contracts for private and governmental entities, ITN developed proprietary processing and manufacturing know how applicable to PV products generally, and to Copper-Indium-Gallium-diSelenide (“CIGS”) PV products in particular. ITN formed Ascent to commercialize its investment in CIGS PV technologies. In January 2006, in exchange for
102,800
shares of common stock of Ascent, ITN assigned to Ascent certain CIGS PV technologies and trade secrets and granted to Ascent a perpetual, exclusive, royalty free worldwide license to use, in connection with the manufacture, development, marketing and commercialization of CIGS PV to produce solar power, certain of ITN’s existing and future proprietary and control technologies that, although non-specific to CIGS PV, Ascent believes will be useful in its production of PV modules for its target markets. Upon receipt of the necessary government approvals and pursuant to novation in early 2007, ITN assigned government funded research and development contracts to Ascent and also transferred the key personnel working on the contracts to Ascent.
Currently, the Company is focusing on integrating its PV products into high value markets such as aerospace, satellites, near earth orbiting vehicles, and fixed-wing unmanned aerial vehicles (UAV). The value proposition of Ascent’s proprietary solar technology not only aligns with the needs of customers in these industries, but also overcomes many of the obstacles other solar technologies face in these unique markets. Ascent has the capability to design and develop finished products for end users in these areas as well as collaborate with strategic partners to design and develop custom integrated solutions for products like fixed-wing UAVs. Ascent sees significant overlap of the needs of end users across some of these industries and can achieve economies of scale in sourcing, development, and production in commercializing products for these customers.
Reverse Stock Split
On May 26, 2016, the Company, a Delaware corporation, filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, par value
$0.0001
per share, at a ratio of one-for-
twenty
(the “Reverse Stock Split”). The Certificate of Amendment did not change the number of authorized shares, or the par value, of the Company’s common stock. The Certificate of Amendment provides that every twenty shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been derived from the accounting records of Ascent Solar Technologies, Inc., Ascent Solar (Asia) Pte. Ltd., and Ascent Solar (Shenzhen) Co., Ltd. (collectively, "the Company") as of
December 31, 2016
and
December 31, 2015
, and the results of operations for the years ended
December 31, 2016
and
2015
. Ascent Solar (Shenzhen) Co., Ltd. is wholly owned by Ascent Solar (Asia) Pte. Ltd., which is wholly owned by Ascent Solar Technologies, Inc. All significant inter-company balances and transactions have been eliminated in the accompanying consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents:
The Company classifies all short-term investments in interest bearing bank accounts and highly liquid debt securities purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances which may exceed federally insured limits. The Company does not believe this results in significant credit risk.
Fair Value Estimates:
Fair value is defined 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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses fair value hierarchy based on three levels of inputs, of which, the first two are considered observable and the last unobservable, to measure fair value:
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•
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Level 1 - Quoted prices in active markets for identical assets or liabilities.
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•
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Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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•
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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
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Certain long-lived assets and current liabilities have been measured at fair value on a recurring and non-recurring basis. See Note 6. Property, Plant and Equipment, Note 10. Convertible Note, Series D Preferred Stock and Series D-1 Preferred Stock, Note 12. Series E Preferred Stock, Note 13. Series F Preferred Stock, Note 14. Series G Preferred Stock, Note 15. Series H Preferred Stock and July 2016 Convertible Notes, Note 16. Series I Preferred Stock and Series I Convertible Notes, Note 17. Series J Preferred Stock and Series J-1 Preferred Stock, Note 18. Adar Bays Convertible Notes and Exchange of Series A Preferred Stock and Note 19. Make-whole Dividend Liability. The carrying amount of our long term debt outstanding approximates fair value because our current borrowing rate does not materially differ from market rates for similar bank borrowings. The carrying value for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other assets and liabilities approximate their fair values due to their short maturities.
Related Party Transactions:
The Company's largest shareholder is Tertius Financial Group Pte Ltd of which Mr. Victor Lee, President and Chief Executive Officer of the Company, is Managing Director and
50%
shareholder. TFG is also a joint venture partner with Radiant Group, in TFG Radiant. In April 2012, we appointed the Chairmen of TFG Radiant, Mr. Winston Xu (aka Xu Biao), as a member of our Board of Directors. Accounting for transactions under these agreements is consistent with those defined in our Significant Accounting Policies. See Notes 9, 20, and 23 for further information.
Foreign Currencies:
Bank account balances held in foreign currencies are translated to U.S. dollars utilizing the period end exchange rate. Gains or losses incurred in connection with the Company’s accounts held in foreign currency were not material for the years ended
December 31, 2016
and
2015
and were recorded in “Other Income/(Expense)” in the Consolidated Statements of Operations.
Revenue Recognition:
Product revenue
- The Company generated product revenues of
$1,700,000
and
$6,205,000
for the year ended
December 31, 2016
and
2015
, respectively. Product revenue is generated from commercial sales of flexible PV modules and PV integrated consumer electronics, non-PV integrated power banks and associated accessories. Products are sold through the Company's own e-commerce website, online retailers, direct to retailers and indirectly to retailers through distributors. Revenue is recognized as products are shipped or delivered and title has transferred to the customer. In certain instances, the Company has agreed to refund a portion of the purchase price to customers if the Company decreases its standard retail price. The Company estimates the effect of this price protection and records the difference as a reduction of revenue at the time of sale. We also, in certain instances have provided customers with a right of return provision. In these instances, we defer the recognition of revenues until the provision period has expired. Estimated costs of returns and allowances, other than those specifically pertaining to a right of return provision, and discounts are accrued as a reduction to sales when revenue is recognized. See Marketing and Advertising Costs below for accounting treatment related to cooperative advertising programs.
Government contracts revenue
- Revenue from governmental research and development contracts is generated under terms that are cost plus fee or firm fixed price. Revenue from cost plus fee contracts is recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the fixed fee. Revenue from firm fixed price contracts is recognized under the percentage-of-completion method of accounting, with costs and estimated profits included in contract revenue as work is performed. If actual and estimated costs to complete a contract indicate a loss, provision is made currently for the loss anticipated on the contract.
Marketing and Advertising Costs:
The Company advertises in print, television, online and through social media. The Company will also authorize customers to run advertising campaigns on its behalf through various media outlets. Marketing and advertising costs are expensed as incurred. Marketing and advertising expenses were
$2,078,000
and
$3,369,000
for the years ended
December 31, 2016
and
2015
, respectively.
Some of the Company's distributor relationships allow for discounts to be taken to fund cooperative advertising programs. These discounts are applied as credits against outstanding receivable balances and recorded net of revenue. Large cooperating advertising campaigns, funded either by cash payments by the Company, or as credits against outstanding receivables, are expensed as incurred and included in Selling, general and administrative costs if, and only if, the following criteria are met: 1) the Company receives an identifiable benefit (goods or services) in exchange for the consideration, with the identifiable benefit being sufficiently separable from the distributor's purchase of the Company’s products; and 2) the Company can reasonably estimate the fair value of the identifiable benefit. If the amount of consideration paid by the Company exceeds the estimated fair value of the benefit received, that excess amount shall be characterized as a reduction of revenue.
Shipping and Handling Costs:
The Company classifies shipping and handling costs for products shipped to customers as a component of “Cost of revenues” on the Company’s Consolidated Statements of Operations. Customer payments of shipping and handling costs are recorded as a component of Revenues.
Receivables and Allowance for Doubtful Accounts:
Trade accounts receivable are recorded at the invoiced amount as the result of transactions with customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates the collectability of accounts receivable using analysis of historical bad debts, customer credit-worthiness and current economic trends. Reserves are established on an account-by-account basis. Account balances are written off against the allowance in the period in which the Company determines that is it probable that the receivable will not be recovered. As of
December 31, 2016
and
2015
, the Company had an allowance for doubtful accounts of
$106,000
and
$60,000
, respectively.
Product Warranties:
The Company provides a limited warranty to the original purchaser of products against defective materials and workmanship. The Company also guarantees that standalone modules and PV integrated consumer electronics will achieve and maintain the stated conversion efficiency rating for certain products. Warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms, historical experience and analysis of peer company product returns. The Company assesses the adequacy of its liabilities and makes adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available.
Convertible Preferred Stock:
The Company evaluates its preferred stock instruments under FASB ASC 480,
"Distinguishing Liabilities from Equity"
to determine the classification, and thereby the accounting treatment, of the instruments. Refer to Notes 10, 12, 13, 14, 15, 16, 17, 18, 19, and 20 for further discussion on the classification of each instrument.
Derivatives:
The Company evaluates its financial instruments under FASB ASC 815,
"Derivatives and Hedging"
to determine whether the instruments contain an embedded derivative. When an embedded derivative is present, the instrument is evaluated for a fair value adjustment upon issuance and at the end of every period. Any adjustments to fair value are treated as gains and losses in fair values of derivatives and are recorded in the Consolidated Statements of Operations. Refer to Notes 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, and 20 for further discussion on the embedded derivatives of each instrument.
Warrant Liability:
Warrants to purchase the Company's common stock with nonstandard anti-dilution provisions, regardless of the probability or likelihood that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their estimated fair value at each reporting period. Any change in fair value of these warrants is recorded at each reporting period in Other income/(expense) on the Company's statement of operations.
Convertible Notes
: The Company issues, from time to time, convertible notes. Refer to Notes 10, 11, 15, 16 and 18 for further information.
Patents:
At such time as the Company is awarded patents, patent costs are amortized on a straight-line basis over the legal life on the patents, or over their estimated useful lives, whichever is shorter. As of
December 31, 2016
and
2015
, the Company had
$1,648,000
and
$1,568,000
of net patent costs, respectively. Of these amounts
$619,000
and
$50,000
represents costs net of amortization incurred for awarded patents, and the remaining
$1,028,000
and
$1,518,000
represents costs incurred for patent applications to be filed as of
December 31, 2016
and
2015
, respectively. During the year ended
December 31, 2016
and
2015
, the Company capitalized
$189,000
and
$309,000
in patent costs, respectively, as it worked to secure design rights and trademarks for newly developed products. Amortization expense was
$110,000
and
$47,000
for the years ended
December 31, 2016
and
2015
, respectively. Amortization expense is expected to remain consistent or increase slightly in future periods.
Inventories:
All inventories are stated at the lower of cost or market, with cost determined using the weighted average method. Inventory balances are frequently evaluated to ensure they do not exceed net realizable value. The computation for net realizable value takes into account many factors, including expected demand, product life cycle and development plans, module efficiency, quality issues, obsolescence and others. Management's judgment is required to determine reserves for obsolete or excess inventory. As of
December 31, 2016
and
2015
, the Company had inventory reserve balances of
$737,000
and
$653,000
, respectively. If actual demand and market conditions are less favorable than those estimated by management, additional inventory write downs may be required. During the years ended
December 31, 2016
and
December 31, 2015
, the Company recognized no lower of cost or market adjustments.
Property, Plant and Equipment:
Property, plant and equipment are recorded at the original cost to the Company. Assets are being depreciated over estimated useful lives of three to forty years using the straight-line method, as presented in the table below, commencing when the asset is placed in service. Leasehold improvements are depreciated over the shorter of the remainder of the lease term or the life of the improvements. Upon retirement or disposal, the cost of the asset disposed of and the related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. Expenditures for repairs and maintenance are expensed as incurred.
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Useful Lives
in Years
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Buildings
|
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40
|
Manufacturing machinery and equipment
|
|
5 - 10
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Furniture, fixtures, computer hardware/software
|
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3 - 7
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Leasehold improvements
|
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life of lease
|
Interest Capitalization
: Historically the Company has capitalized interest cost as part of the cost of acquiring or constructing certain assets during the period of time required to get the asset ready for its intended use. The Company capitalized interest to the extent that expenditures to acquire or construct an asset have occurred and interest cost has been incurred.
Impairment of Long-lived Assets:
The Company analyzes its long-lived assets (property, plant and equipment) and definitive-lived intangible assets (patents) for impairment, both individually and as a group, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Events that might cause impairment would include significant current period operating or cash flow losses associated with the use of a long-lived asset or group of assets combined with a history of such losses, significant changes in the manner of use of assets and significant negative industry or economic trends. An undiscounted cash flow analysis is calculated to determine if impairment exists. If impairment is determined to exist, any related loss is calculated using the difference between the fair value and the carrying value of the assets. During the years ended
December 31, 2016
and
2015
, the Company incurred impairments of its manufacturing facilities and equipment in the amounts of
$0
and
$13,000
, respectively. The impairments incurred for the years ended
December 31, 2016
and
2015
were based on estimates prepared by management.
Net Loss per Common Share:
Basic loss per share does not include dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect the potential securities that could share in the earnings of the Company, similar to fully diluted earnings per share. Common stock equivalents outstanding as of
December 31, 2016
and
2015
of approximately
301.1 million
and
48.8 million
shares have been omitted from loss per share because they are anti-dilutive. Common stock equivalents consist of stock options, unvested restricted stock, warrants, preferred stock, preferred stock make-whole dividend liability amounts (assuming the make-whole dividend liability is paid in common stock in lieu of cash), and convertible notes (assuming the amortization payments are paid in common stock in lieu of cash). Net loss per common share was the same for both basic and diluted methods for the periods ended
December 31, 2016
and
2015
.
Research, Development and Manufacturing Operations Costs:
Research, development and manufacturing operations expenses were
$6.6 million
and
$6.7 million
for the years ended
December 31, 2016
and
2015
, respectively. Research, development and manufacturing operations expenses include: 1) technology development costs, which include expenses incurred in researching new technology, improving existing technology and performing federal government research and development contracts, 2) product development costs, which include expenses incurred in developing new products and lowering product design costs, and 3) pre-production and production costs, which include engineering efforts to improve production processes, material yields and equipment utilization, and manufacturing efforts to produce saleable product. Research, development and manufacturing operations costs are expensed as incurred, with the exception of costs related to inventoried raw materials, work-in-process and finished goods, which are expensed as Cost of revenue as products are sold.
Income Taxes:
Deferred income taxes are provided using 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 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 the changes in tax laws and rates as of the date of enactment. Interest and penalties, if applicable, would be recorded in operations.
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years (
2012
-
2016
) in these jurisdictions. The Company believes its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded.
Share-Based Compensation:
The Company measures and recognizes compensation expense for all share-based payment awards made to employees, officers, directors, and consultants based on estimated fair values. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s Statements of Operations. Share-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates. For purposes of determining estimated fair value of share-based payment awards on the date of grant the Company uses the Black-Scholes option-pricing model (“Black-Scholes Model”) for option awards. The Black-Scholes Model requires the input of highly subjective assumptions. Because the Company’s employee stock options may have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of the Company’s employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which result in changes to these assumptions and methodologies, which could materially impact the Company’s fair value determination. The Company estimates the fair value of its restricted stock awards as its stock price on the grant date.
The accounting guidance for share-based compensation may be subject to further interpretation and refinement over time. There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and the Company employs different assumptions in the accounting for share-based compensation in future periods, or if the Company decides to use a different valuation model, the compensation expense the Company records in the future may differ significantly from the amount recorded in the current period and could materially affect its loss from operations, net loss and net loss per share.
Reclassifications:
Certain reclassifications have been made to the
2015
financial information to conform to the
2016
presentation. Such reclassifications had no effect on the net loss.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The update will establish a comprehensive revenue recognition standard for virtually all industries in GAAP. ASU 2014-09 will change the amount and timing of revenue and cost recognition, implementation, disclosures and documentation. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.
The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09 is now effective for the Company in fiscal year 2018. The Company is researching whether the adoption of ASU 2014-09 will have a material effect on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide certain disclosures if it concludes that substantial doubt exists. ASU 2014-15 is effective for all entities for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. The Company has adopted ASU 2014-15.
In July 2015, the FASB issued ASU No. 2015-11
, Inventory (Topic 330): Simplifying the Measurement of Inventory
, which states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective within annual periods beginning on or after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize all leases, including operating leases, on the balance sheet as a lease asset or lease liability, unless the lease is a short-term lease. ASU 2016-02 also requires additional disclosures regarding leasing arrangements. ASU 2016-02 is effective for interim periods and fiscal years beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions, including 1) accounting for income taxes, 2) classification of excess tax benefits in the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements, 5) cash flow classification of employee taxes withheld in the form of shares, 6) the practical expedient for estimating the expected term, and 7) intrinsic value. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect the implementation of ASU 2016-09 to have a material effect on its consolidated financial statements.
NOTE 4. LIQUIDITY AND CONTINUED OPERATIONS
During the years ended December 31, 2016 and 2015, the Company entered into multiple financing agreements to fund operations. Further discussion of these transactions can be found in Notes 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 and 19.
We have continued PV production at our manufacturing facility. We do not expect sales revenue and cash flows will be sufficient to support operations and cash requirements until we have fully implemented our new strategy focusing on high value PV products. Changes in the level of expected operating losses, the timing of planned capital expenditures or other factors may negatively impact cash flows and reduce current cash and investments faster than anticipated. During
2016
we used
$16.9 million
in cash for operations, or an average of
$4.2 million
per quarter. During the fourth quarter of
2016
we used
$3.3 million
in cash for operations. Our primary significant long term obligation consists of a note payable of
$5.5 million
to a financial institution secured by a mortgage on our headquarters and manufacturing building in Thornton, Colorado. Total payments of
$0.5 million
, including principal and interest, will come due in 2017. Additionally, we owe
$0.3 million
as of
December 31, 2016
related to a litigation settlement reached in April 2014, which is being paid in equal installments over
40
month which began April 2014.
Additional projected product revenues are not anticipated to result in a positive cash flow position for the year 2017 overall. As such, cash liquidity sufficient for the year ending December 31, 2017 will require additional financing. Subsequent to the year ended
December 31, 2016
the Company completed certain other financing transactions. See Note 27. Subsequent Events, for further information on these transactions.
The Company continues to accelerate sales and marketing efforts related to its PV strategy by focusing on the Company's propriety technology. The Company has begun activities related to securing additional financing through strategic or financial investors, but there is no assurance the Company will be able to raise additional capital on acceptable terms or at all. If the Company's revenues do not increase rapidly, and/or additional financing is not obtained, the Company will be required to significantly curtail operations to reduce costs and/or sell assets. Such actions would likely have an adverse impact on the Company's future operations. As a result of the Company’s recurring losses from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern.
NOTE 5. TRADE RECEIVABLES
Trade receivables consist of amounts generated from product sales and government contracts. Accounts receivable totaled
$0.55 million
and
$1.99 million
as of
December 31, 2016
and
2015
, respectively. Product revenue for the year ended
December 31, 2016
includes
$0.87 million
of sales to one major customer ("Customer A"), representing
51%
of total product revenue. Product revenue for a different major customer ("Customer B") was
$2.73 million
, representing
44%
of total product revenue, for the year ended
December 31, 2015
. Receivables from Customer A were negative at
December 31, 2016
due to the customer's right of return provision outlined below. Receivables from Customer B were
$1.13 million
at
December 31, 2015
representing
57%
of total receivables. Customer A has a right of return provision in the purchase contract allowing return of up to 100% of the product within a 90 day period. There have been no returns for the year ended
December 31, 2016
.
Provisional Indirect Cost Rates - The Company bills the government under cost-based research and development contracts at provisional billing rates which permit the recovery of indirect costs. These rates are subject to audit on an annual basis by the government agencies’ cognizant audit agency. The cost audit may result in the negotiation and determination of the final indirect cost rates. In the opinion of management, re-determination of any cost-based contracts will not have a material effect on the Company’s financial position or results of operations.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes property, plant and equipment as of
December 31, 2016
and
December 31, 2015
:
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|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Building
|
|
$
|
5,828,960
|
|
|
$
|
5,828,960
|
|
Furniture, fixtures, computer hardware and computer software
|
|
489,421
|
|
|
480,976
|
|
Manufacturing machinery and equipment
|
|
30,321,079
|
|
|
31,265,800
|
|
Depreciable property, plant and equipment
|
|
36,639,460
|
|
|
37,575,736
|
|
Manufacturing machinery and equipment in progress
|
|
—
|
|
|
—
|
|
Property, plant and equipment
|
|
36,639,460
|
|
|
37,575,736
|
|
Less: Accumulated depreciation and amortization
|
|
(30,983,448
|
)
|
|
(28,484,708
|
)
|
Net property, plant and equipment
|
|
$
|
5,656,012
|
|
|
$
|
9,091,028
|
|
The Company analyzes its long-lived assets for impairment, both individually and as a group, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Depreciation expense for the years ended
December 31, 2016
and
2015
was
$3,487,000
and
$5,583,000
, respectively. Depreciation expense is recorded under “Depreciation and amortization expense” in the Consolidated Statements of Operations.
NOTE 7. INVENTORIES
Inventories consisted of the following at
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2015
|
Raw materials
|
|
$
|
832,806
|
|
|
$
|
925,064
|
|
Work in process
|
|
635,130
|
|
|
671,746
|
|
Finished goods
|
|
1,101,880
|
|
|
2,675,570
|
|
Total
|
|
$
|
2,569,816
|
|
|
$
|
4,272,380
|
|
NOTE 8. DEBT
On February 8, 2008, the Company acquired a manufacturing and office facility in Thornton, Colorado, for approximately
$5.5 million
. The purchase was financed by a promissory note, deed of trust and construction loan agreement (the “Construction Loan”) with the Colorado Housing and Finance Authority (“CHFA”), which provided the Company borrowing availability of up to
$7.5 million
for the building and building improvements. In 2009, the Construction Loan was converted to a permanent loan pursuant to a Loan Modification Agreement between the Company and CHFA (the “Permanent Loan”). The Permanent Loan, collateralized by the building, has an interest rate of
6.6%
and the principal will be amortized through its term to January 2028. Further, pursuant to certain covenants in the Permanent Loan, the Company may not, among other things, without CHFA’s prior written consent (which by the terms of the deed of trust is subject to a reasonableness requirement): create or incur additional indebtedness (other than obligations created or incurred in the ordinary course of business); merge or consolidate with any other entity; or make loans or advances to the Company’s officers, shareholders, directors or employees.
On November 1, 2016, the Company and the CFHA agreed to modify the original agreement described above with the addition of a forbearance period. Per the modification agreement, no payments of principal and interest shall be due under the note during the forbearance period commencing on November 1, 2016 and continuing through April 1, 2017. The amount of interest that should have been paid by the Company during the forbearance period in the total amount of
$180,043
shall be added to the outstanding principal balance of the note. As a result, on May 1, 2017, the principal balance of the note will be
$5,704,932
. Commencing on May 1, 2017, the monthly payments of principal and interest due under the note shall resume at
$57,801
, and the Company shall continue to make such monthly payments over the remaining term of the note ending on February 1, 2028.
As of
December 31, 2016
, future principal payments on long-term debt are due as follows:
|
|
|
|
|
|
|
2017
|
$
|
243,113
|
|
2018
|
343,395
|
|
2019
|
366,757
|
|
2020
|
391,709
|
|
2021
|
418,358
|
|
Thereafter
|
3,941,600
|
|
|
$
|
5,704,932
|
|
NOTE 9. PROMISSORY NOTES
On August 29, 2016, the Company entered into a note purchase agreement with Tertius Financial Group Pte. Ltd. ("TFG”) for the private placement of
$330,000
of the Company’s original issue discount notes with an original maturity date of November 26, 2016. The notes bear interest of
6%
per annum and principal and interest on the notes are payable upon maturity. The notes are unsecured and not convertible into equity shares of the Company.
During October 2016, the Company received
$420,000
from a private investor. These funds were rolled into a promissory note executed in January 2017. The aggregate funds of this promissory note was
$700,000
. Refer to Note 27 for further information on this transaction.
On December 6, 2016, the Company issued a new
$600,000
original issue discount note to TFG in exchange for (i)
$200,000
of additional gross proceeds and (ii) cancellation of the existing outstanding
$330,000
note. The outstanding balance of the new note is
$602,000
(including accrued and unpaid interest) with a discount of
$60,000
as of
December 31, 2016
.
The new TFG note bears interest at a rate of
6%
per annum and matures on December 31, 2017. Principal and interest on the new TFG note is payable at maturity. The new TFG note is unsecured and is not convertible into equity shares of the Company.
During December 2016, the Company initiated three non-convertible, unsecured promissory notes with a private investor. The promissory notes bear interest of
12%
per annum and mature six months from the date of issuance and the interest is computed on the basis of 365 days in a year. Unless paid in advance, the principal and interest of these promissory notes are payable upon maturity.
On December 1, 2016, the Company received
$380,000
in exchange for a promissory note with a maturity date of June 1, 2017.
On December 13, 2016, the Company received
$380,000
in exchange for a promissory note with a maturity date of June 13, 2017.
On December 30, 2016, the Company received
$250,000
in exchange for a promissory note with a maturity date of June 30, 2017.
As of December 31, 2016, the outstanding principal balance on these promissory notes is
$1,010,000
.
NOTE 10. CONVERTIBLE NOTE, SERIES D PREFERRED STOCK, AND SERIES D-1 PREFERRED STOCK
Convertible Note and Series D Preferred Stock
On November 14, 2014, the Company entered into a securities purchase agreement (the "November 2014 Purchase Agreement") with one institutional and accredited investor (the "Investor"). Pursuant to the terms of the November 2014 Purchase Agreement, the Company sold to the Investor (i)
$3,000,000
(
3,000
shares) of Series D Convertible Preferred Stock (the "Series D Preferred Stock"), and (ii)
$32,000,000
original principal amount of senior secured convertible notes (the "Notes"). The Series D Preferred Stock was fully converted as of
December 31, 2016
. On September 4, 2015, the Company entered into a Cancellation and Waiver Agreement (the “Cancellation Agreement”), between the Company and the Investor to retire the Notes. The Cancellation Agreement was amended on October 8, 2015 and November 22, 2015. As of
December 31, 2016
and
2015
the total Notes outstanding balance was
$0
and
$53,000
. The value of the corresponding embedded derivative liability was
$0
and
$61,000
as of
December 31, 2016
and
2015
.
The Investor had available to them a new conversion price beginning on November 4, 2015 as a result of the Series E Preferred Stock transaction further described in Note 12. The Investor could elect to convert a portion of the Notes into shares of common stock using a conversion price equal to
80%
of the average of the
two
lowest volume weighted average prices ("VWAP") of our common stock for the
ten
consecutive trading day period prior to each specific conversion date (the "Variable Price"). During the year ended
December 31, 2016
, the Investor elected to convert the remaining Notes outstanding balance of
$53,000
using the Variable Price, resulting in the issuance of
48,993
shares of common stock. The Company paid interest in the amount of
$300
on the Notes, resulting in the issuance of
248
shares of common stock during the year ended
December 31, 2016
.
A net gain on extinguishment of
$55,000
was recorded to "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the year ended
December 31, 2016
as a result of the final conversion of the Notes.
Series D-1 Preferred Stock
On February 19, 2015, the Company entered into a securities purchase agreement to issue
2,500
shares of Series D-1 Preferred Stock to an investor in exchange for
$2,500,000
. All
2,500
shares were converted into shares of the Company’s common stock during the first quarter of 2015.
NOTE 11. SEPTEMBER 2015 CONVERTIBLE NOTES
On September 4, 2015, the Company entered into a note purchase agreement between the Company and accredited investors. Pursuant to the new loan agreement, the Company issued to the accredited investors
$1.5 million
original principal amount of secured subordinated convertible notes on September 4, 2015, and an additional
$0.5 million
original principal amount of secured subordinated convertible notes on September 28, 2015 (collectively, the “September 2015 Convertible Notes”).
All amounts due under the September 2015 Convertible Notes are convertible at any time, in whole or in part, at the option of the accredited investors into shares of Common Stock at a fixed conversion price, which is subject to adjustment for stock splits, stock dividends, combinations or similar events, of
$2.40
per share (the “Conversion Price”). The Company, however, was prohibited from issuing shares of Common Stock pursuant to the September 2015 Convertible Notes unless stockholder approval of such issuance of securities is obtained as required by applicable NASDAQ listing rules. The Company received stockholder approval of such share issuances at a special stockholders meeting held on December 18, 2015. This provision resulted in a contingent beneficial conversion feature that was recognized once the contingency was resolved based on its intrinsic value at the commitment date. Accordingly, a beneficial conversion feature in the amount of
$1.38 million
was recorded as a debt discount
on December 18, 2015. The debt discount will be recognized as additional interest expense over the life of the September 2015 Convertible Notes.
Unless earlier converted or redeemed, the September 2015 Convertible Notes will mature on September 4, 2016 (the “Maturity Date”). The September 2015 Convertible Notes bear interest at a rate of
8%
per annum. Principal and interest on the September 2015 Convertible Notes is payable on the Maturity Date. The Company had accrued
$100,000
and
$49,000
of interest as of
December 31, 2016
and
2015
, respectively.
There are no registration rights applicable to the September 2015 Convertible Notes. Accordingly, any shares of Common Stock issued upon conversion of the September 2015 Convertible Notes will be restricted and may only be sold in compliance with Rule 144 or in accordance with another exemption from registration.
On April 29, 2016, the Company entered into Exchange Agreements (the “Exchange Agreements”) with the accredited investors. Under the terms of the Exchange Agreements, the September 2015 Convertible Notes (approximately
$2.1 million
of outstanding principal and accrued interest) were canceled. In exchange, the Company has issued to the accredited investors rights to receive a fixed number of shares of common stock of the Company in accordance with the terms of Rights to Receive Common Stock dated April 29, 2016 (the “April 2016 Rights”). The April 2016 Rights obligate the Company to issue to the holders (without the payment of any additional consideration) an aggregate of approximately
2.1 million
shares of common stock (the "April 2016 Rights Shares"). The number of April 2016 Rights Shares is fixed, and is only subject to customary non-price based ratable adjustments. The April 2016 Rights are immediately exercisable and expire on April 29, 2021.
A net loss on extinguishment of
$0.89 million
was recorded to "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations for the year ended
December 31, 2016
as a result of the cancellation of the September 2015 Convertible Notes and issuance of the April 2016 Rights. During year ended
December 31, 2016
, the accredited investors exercised their April 2016 Rights to receive and the Company has delivered
2,052,865
shares of common stock.
NOTE 12. SERIES E PREFERRED STOCK AND THE COMMITTED EQUITY LINE
Series E Preferred Stock
On November 4, 2015, the Company entered into a securities purchase agreement with a private investor to issue
2,800
shares of Series E Preferred Stock to an investor in exchange for
$2,800,000
. The proceeds were fully received upon effectiveness of the Company’s registration statement covering the re-sale of the common stock underlying the Series E Preferred Stock in December of 2015.
Shares of the Series E Preferred Stock (including the amount of any accrued and unpaid dividends thereon) are convertible at the option of the holder into common stock at a variable conversion price equal to
80%
of the average of the
2
lowest volume weighted average prices of the Company's common stock for the
ten
consecutive trading day period prior to the conversion date. If certain defined default events occur, then the conversion price would thereafter be reduced (and only reduced), to equal
70%
of the average of the
2
lowest VWAPs of the Company's common stock for the
twenty
consecutive trading day period prior to the conversion date. During the years ended
December 31, 2016
and
2015
, the private investor exercised their option to convert
2,203
and
477
Series E Preferred Shares, representing a value of
$2,203,000
and
$477,000
, resulting in the issuance of
41,895,161
and
247,879
shares of common stock, respectively.
Holders of the Series E Preferred Stock will be entitled to dividends in the amount of
7%
per annum, payable when, as and if declared by the Board of Directors in its discretion. During the years ended
December 31, 2016
and
2015
, the Company paid dividends in the amount of
$68,000
and
$4,000
on the Series E Preferred Stock, resulting in the issuance of
2,279,830
and
2,121
shares of common stock, respectively.
The Company has issued
18,000
shares of common stock to the private investor as a commitment fee relating to the Series E Preferred Stock. Costs associated with the Series E Preferred Stock, such as legal fees and commitment shares are capitalized and reported as deferred financing costs on the Consolidated Balance Sheets. The total gross debt issuance cost incurred by the Company related to the Series E Preferred Stock was
$104,000
. These debt issuance costs will be recognized as additional interest expense over the life of the Series E Preferred Stock.
At any time after March 31, 2016, the private investor will have the option to redeem for cash all or any portion of the outstanding shares of the Series E Preferred Stock at a price per share equal to
$1,250
plus any accrued but unpaid dividends thereon.
At any time after the third anniversary of the date of the initial issuance of Series E Preferred Stock, the Company will have the option to redeem for cash all outstanding shares of the Series E Preferred Stock at a price per share equal to
$1,250
plus any accrued but unpaid dividends thereon.
The Company classified the Series E Preferred Stock as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception. There are
120
and
2,323
shares of Series E Preferred Stock outstanding as of
December 31, 2016
and
2015
.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Series E Preferred Stock were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$1,485,000
was recorded. The debt discount will be charged to interest expense ratably over the life of the Series E Preferred Stock.
The derivative liability associated with the Series E Preferred Stock is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
December 31, 2016
and
2015
, the Company conducted a fair value assessment of the embedded derivative associated with the Series E Preferred Stock. As a result of the fair value assessment, the Company recorded a
$412,000
and
$932,000
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$141,000
and
$553,000
as of
December 31, 2016
and
2015
respectively.
The derivative associated with the Series E Preferred Stock approximates management’s estimate of the fair value of the embedded derivative liability at
December 31, 2016
and
2015
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
59%
and
54%
, present value discount rate of
12%
and
12%
and dividend yield of
0%
and
0%
, respectively.
The Committed Equity Line
On November 10, 2015, the Company and the private investor entered into a committed equity line purchase agreement (the "CEL"). Under the terms and subject to the conditions of the CEL purchase agreement, at its option the Company has the right to sell to the private investor, and the private investor is obligated to purchase from the Company, up to
$32.2 million
of the Company’s common stock, subject to certain limitations, from time to time, over the
36
-month period commencing on December 18, 2015, the date that the registration statement was declared effective by the SEC.
From time to time, the Company may direct the private investor, at its sole discretion and subject to certain conditions, to purchase an amount of shares of common stock up to the lesser of (i)
$1,000,000
or (ii)
300%
of the average daily trading volume of the Company’s common stock over the preceding
ten
trading day period. The per share purchase price for shares of common stock to be sold by the Company under the CEL purchase agreement shall be equal to
80%
of the average of the
two
lowest VWAPs of the common stock for the
ten
consecutive trading day period prior to the purchase date. During the years ended
December 31, 2016
and
2015
, the Company directed the private investor to purchase
$1,056,000
and
$2,000,000
of common stock which resulted in the issuance of
525,454
and
842,546
shares of common stock, respectively.
The Company may not direct the private investor to purchase shares of common stock more frequently than once each
ten
business days. The Company’s sales of shares of common stock to the private investor under the CEL purchase agreement are limited to no more than the number of shares that would result in the beneficial ownership by the private investor and its affiliates, at any single point in time, of more than
9.99%
of the Company’s then outstanding shares of common stock.
As consideration for entering into the CEL purchase agreement, the Company has agreed to issue to the private investor
132,000
shares of common stock (the “Commitment Shares”). The Commitment Shares will be issued to the private investor in four increments which commenced upon the date that the registration statement was declared effective by the SEC. During the year ended
December 31, 2016
and
2015
, the Company issued
107,000
and
25,000
Commitment Shares to the private investor, respectively.
NOTE 13. SERIES F PREFERRED STOCK
Series F Preferred Stock
On January 19, 2016, the Company entered into a securities purchase agreement with a private investor to issue
7,000
shares of Series F Preferred Stock in exchange for
$7,000,000
. The Company received gross proceeds of
$500,000
at Closing. The remaining
$6,500,000
of the proceeds was received through
14
weekly increments of
$250,000
or
$500,000
beginning on January 25, 2016 and ending on April 25, 2016. The net proceeds received by the Company from the sale of the Series F Preferred Stock has been used for general corporate purposes and working capital requirements.
Shares of the Series F Preferred Stock (including the amount of any accrued and unpaid dividends thereon) will be convertible at the option of the holder into common stock at a fixed conversion price equal to
$5
per share. If certain defined default events occur, then the conversion price would thereafter be reduced (and only reduced), to equal
70%
of the average of the
two
lowest weighted average prices (“VWAPs”) of our common stock for the twenty consecutive trading day period prior to the conversion date. During the year ended
December 31, 2016
, the private investor exercised their option to convert
6,840
Series F Preferred Stock, representing a value of
$6,840,000
, resulting in the issuance of
113,059,991
shares of common stock.
Holders of the Series F Preferred Stock will be entitled to dividends in the amount of
7%
per annum, payable when, as and if declared by the Board of Directors in its discretion. During the year ended
December 31, 2016
, the Company paid dividends in the amount of
$150,000
on the Series F Preferred Stock, resulting in the issuance of
4,967,115
shares of common stock.
The Company started making weekly redemptions of
250
shares of Series F Preferred Stock (including any accrued and unpaid dividends thereon) beginning February 15, 2016. The redemption price shall be payable in cash at a price per share equal to
$1,250
plus any accrued but unpaid dividends thereon.
The Company shall have the option to make such redemption payments in shares of common stock provided certain specified equity conditions are satisfied at the time of payment. The number of shares to be issued would be calculated using a per share price equal to
80%
of the
one
lowest VWAP of our common stock for the
ten
consecutive trading day period prior to the payment date.
For redemption payments made in shares of common stock, the Company will have the option to increase the number of shares of Series F Preferred Stock to be redeemed in each weekly installment so long as the number of shares of common stock to be issued does not exceed
12%
of the aggregate composite trading volume for the Company’s common stock during the preceding calendar week.
The Company classified the Series F Preferred Stock as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception. There were
160
shares of Series F Preferred Stock outstanding as of
December 31, 2016
.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Series F Preferred Stock were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$1,666,000
was recorded. The debt discount will be charged to interest expense ratably over the life of the Series F Preferred Stock.
The derivative associated with the Series F Preferred Stock approximates management’s estimate of the fair value of the embedded derivative liability at close of the stock sale and purchase based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
60%
, present value discount rate of
12%
and dividend yield of
0%
.
Amendment of Outstanding Series F Preferred Stock Conversion Price
On October 5, 2016, the Company filed a Certificate of Amendment to the Certificate of Designations of Preferences, Rights and Limitations of Series F Preferred Stock with the Secretary of State of the State of Delaware. The Certificate of Amendment amends the conversion price at which the Series F Preferred Stock can be converted into shares of common stock. The Company had approximately
$336,000
of Series F Preferred Stock remaining outstanding as of October 5, 2016.
As amended, the conversion price will now be equal to the lowest of (i)
50%
of the lowest weighted average price (“VWAP”) of our common stock for the
10
consecutive trading day period prior to the conversion date or (ii)
50%
of the lowest closing bid price of our common stock for the
10
consecutive trading day period prior to the conversion date. If certain “Triggering Events” specified in the terms of the Series F Preferred Stock occur, then the conversion price of the Series F Preferred Stock shall be thereafter reduced, and only reduced, to equal
50%
of the average of the lowest traded price of the common stock for the
twenty
consecutive trading day period prior to the conversion date.
At
December 31, 2016
, the Company performed a fair value assessment of the embedded derivative associated with the Series F Preferred Stock. As a result of the fair value assessment, the Company recorded a
$1,411,000
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$255,000
as of
December 31, 2016
.
The derivative associated with the Series F Preferred Stock approximates management’s estimate of the fair value of the embedded derivative liability at close of the stock sale and purchase based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
57%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 14. SERIES G PREFERRED STOCK
Series G Preferred Stock
On April 29, 2016, the Company entered into a securities purchase agreement with private investors to issue
2,000
shares of Series G Preferred Stock for
$2,000,000
. At Closing, the Company issued a total of
500
shares of Series G Preferred Stock to the private investors in exchange for
$500,000
. The Company issued an additional
1,500
shares of Series G Preferred Stock to the private investors during the months of May and June 2016, which resulted in additional gross proceeds to the Company of
$1,500,000
.
Holders of the Series G Preferred Stock will be entitled to dividends in the amount of
10%
per annum. One year after issuance, the Company is required to redeem for cash all or any portion of the outstanding shares of the Series G Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends thereon.
Beginning September 19, 2016, the two private investors (the “Series G Sellers”) entered into Assignment Agreements with accredited investors (the “Series G Purchasers”). Under the terms of the Assignment Agreements, the Series G Sellers may sell all
2,000
outstanding shares of Series G Preferred Stock to the Series G Purchasers in a series of installments occurring during September through December 2016 for a purchase price of
$1,000
per share of Series G Preferred Stock (plus the amount of any accrued and unpaid dividends thereon). During the year ended
December 31, 2016
, the Series G Sellers had sold
1,096
shares of Series G Preferred Stock to the Series G Purchasers.
The Series G Purchasers exercised their options to convert
852
of Series G Preferred Stock, representing a value of
$852,000
, resulting in the issuance of
224,019,803
shares of common stock during the year ended
December 31, 2016
. The Series G Purchasers also exercised
$36,000
of accrued dividends related to the
852
shares exercised, resulting in the issuance of
10,731,010
shares of common stock during the year ended
December 31, 2016
. One of the Series G Sellers exercised its option to convert
40
shares of Series G Preferred Stock, representing
$40,000
, resulting in the issuance of
10,389,610
shares of common stock during the year ended
December 31, 2016
. The Series G Seller also exercised
$2,000
of accrued dividends related to the
40
shares resulting in the issuance of
585,860
shares of common stock for the year ended
December 31, 2016
.
On September 21, 2016, the Company filed a Certificate of Amendment to the Certificate of Designations of Preferences, Rights and Limitations of Series G Preferred Stock with the Secretary of State of the State of Delaware. The Certificate of Amendment amends the conversion price at which the Series G Preferred Stock can be converted into shares of common stock. Shares of the Series G Preferred Stock (including the amount of any accrued and unpaid dividends thereon) were previously convertible at the option of the private investors into common stock at a fixed conversion price of
$1.00
per share. As amended, the conversion price is equal to the lowest of (i)
$0.045
, (ii)
70%
of the lowest volume weighted average price of the Company’s common stock for the
ten
consecutive trading day period prior to the conversion date or (iii)
70%
of the lowest closing bid price of the Company’s common stock for the
ten
consecutive trading day period prior to the conversion date.
The Company classified the Series G Preferred Stock as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception. There were
1,108
shares of Series G Preferred Stock outstanding as of
December 31, 2016
.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Series G Preferred Stock were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$1,263,000
was recorded. The debt discount will be charged to interest expense ratably over the life of the Series G Preferred Stock.
The derivative liability associated with the Series G Preferred Stock is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
December 31, 2016
, the Company conducted a fair value assessment of the embedded derivative associated with the Series G Preferred Stock. As a result of the fair value assessment, the Company recorded a
$901,000
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the year ended
December 31, 2016
to properly reflect the fair value of the embedded derivative of
$362,000
as of
December 31, 2016
.
The derivative associated with the Series G Preferred Stock approximates management’s estimate of the fair value of the embedded derivative liability at
December 31, 2016
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
47%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 15. SERIES H PREFERRED STOCK AND JULY 2016 CONVERTIBLE NOTES
Series H Preferred Stock
On June 9, 2016, the Company entered into a securities purchase agreement with a private investor to issue
2,500
shares of Series H Preferred Stock for
$2,500,000
. The Company received gross proceeds of
$250,000
at Closing. Additional gross proceeds of
$580,000
were received by the Company through July 7, 2016. The Company agreed to exchange outstanding Series H Preferred Stock for Senior Secured Convertible Notes (“July 2016 Notes”) on July 13, 2016. At the date of the exchange, the Company had sold and issued
830
shares of Series H Preferred Stock to private investor in exchange for
$830,000
of gross proceeds. Refer to the section below for details of the exchange.
Holders of the Series H Preferred Stock will be entitled to dividends in the amount of
7%
per annum. If a Triggering Event occurs, the dividend rate shall automatically increase to
20%
per annum.
The conversion price for the Series H Preferred Stock shall equal the lower of (i)
70%
of the lowest VWAP of the common stock for the
10
consecutive trading day period prior to the conversion date of (ii)
70%
of the lowest closing bid price of the common stock for the
10
consecutive trading day period prior to the conversion date, subject to adjustment herein; provided, however, if a Triggering Event occurs the conversion price shall be thereafter reduced, and only reduced, to equal
60%
of the average of the
two
lowest VWAPs of the common stock for the
twenty
consecutive trading day period prior to the conversion date, subject to adjustment herein. In no event, however, shall the conversion price be less than
$0.005
per share.
At any time after the occurrence of certain defined Trigger Events, the Series H Preferred Stock holder will have the option to redeem for cash all or any portion of the outstanding shares of the Series H Preferred Stock at a price per share equal to
$1,250
plus any accrued but unpaid dividends thereon.
At any time after the third anniversary date of the initial issuance of Series H Preferred Stock, the Company will have the option to redeem for cash all outstanding shares of the Series H preferred Stock at a price per share equal to
$1,250
plus any accrued but unpaid dividends thereon.
The Company classified the Series H Preferred Stock as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception.
Pursuant to a number of factors outlined in ASC Topic 815, Derivatives and Hedging, the conversion option in the Series H Preferred Stock was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$146,000
were recorded. The debt discount will be charged to interest expense ratably over the life of the Series H Preferred Stock.
July 2016 Convertible Notes
On July 13, 2016, the Company entered into a securities purchase agreement with a private investor for the placement of up to
$2,080,000
of the Company’s
4%
Original Issue Discount Senior Secured Convertible Promissory Notes (“July 2016 Notes”). The Company sold and issued
$364,000
principal amount of July 2016 Notes to private investor in exchange for
$350,000
of gross proceeds.
The Company sold and issued the remaining
$1,716,000
principal amount of July 2016 Notes to private investor in exchange for
$1,650,000
of gross proceeds in
six
additional weekly tranches between July and August 2016.
In connection with the offering of the July 2016 Notes, the Company and the private investor also entered into an Exchange Agreement dated July 13, 2016 (the “Exchange Agreement”). Under the terms of the Exchange Agreement, the outstanding shares of Series H Preferred Stock (approximately
$833,000
of capital and accrued dividends) were canceled. In exchange, the Company issued to the private investor approximately
$866,000
of July 2016 Notes. A net gain on extinguishment of the Series H Preferred Stock and related embedded derivative of
$126,000
was recorded to "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations for the year ended
December 31, 2016
.
Accordingly, the Company had (i) an aggregate of
$2,946,000
principal amount of July 2016 Notes outstanding and (ii)
0
shares of Series H Preferred Stock outstanding as of July 13, 2016. The Company and the private investor have agreed to cancel any remaining obligations under the Series H securities purchase agreement to issue and purchase any additional shares of Series H Preferred Stock.
Unless earlier converted or prepaid, all of the July 2016 Notes will mature on July 13, 2017 (the “Maturity Date”). The July 2016 Notes bear interest at a rate of
10%
per annum, subject to increase to
24%
per annum upon the occurrence and continuance of an event of default (as described below). Principal on the July 2016 Notes is payable on the Maturity Date. Interest on the July 2016 Notes is payable quarterly. Principal and interest are payable in cash or, if specified equity conditions are met, shares of common stock. During the year ended
December 31, 2016
, the private investor converted a principal amount
$152,000
of convertible notes in exchange for
64,000,000
common shares. There was
$2,794,000
of July 2016 Notes outstanding as of
December 31, 2016
.
At December 9, 2016 the July 2016 Notes were in default due to the Company's insufficient amount of authorized and unissued shares not meeting the minimum amount of reserve share requirement outlined in the July 2016 Note Agreement. Further, on December 14, 2016 the Company's stock price fell below
$0.005
per share triggering another event of default per the July 2016 Note Agreement. Upon default the interest rate increases to
24%
per annum and the holder of the July 2016 Notes has the option to accelerate the Note and demand cash payment of the Mandatory Default Amount consisting of a
25%
premium of the principal balance plus any accrued and unpaid interest. The Company has accrued interest at the
24%
starting on December 9, 2016 through
December 31, 2016
. At
December 31, 2016
all amounts related to the July 2016 Notes have been included in short term liabilities.
All principal and accrued interest on the July 2016 Notes are convertible at any time, in whole or in part, at the option of the private investor into shares of common stock at a variable conversion price equal to the lowest of (i)
$0.045
, (ii)
70%
of the lowest volume weighted average price (“VWAP”) of our common stock for the
10
consecutive trading day period prior to the conversion date or (iii)
70%
of the lowest closing bid price of our common stock for the
10
consecutive trading day period prior to the conversion date. If certain defined triggering events occur, then the conversion price would thereafter be reduced (and only reduced), to equal
60%
of the lower of (i) the lowest closing bid price of the common stock for the
30
consecutive trading day period prior to the conversion date or (ii) the lowest VWAP of the common stock for the thirty consecutive trading day period prior to the conversion date. In addition, on the 90
th
day and also on the 180
th
day from the day of the July 2016 Notes securities purchase agreement, the private investor may reset the Fixed Conversion Price to thereafter be equal to the VWAP of the common stock for such day or if such 90
th
or 180
th
day is not a trading day, then the VWAP for the immediately preceding trading day.
The Company classified the July 2016 Notes as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the July 2016 Notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$3,155,000
was recorded. The debt discount will be charged to interest expense ratably over the life of the July 2016 Notes.
The derivative liability associated with the July 2016 Notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
December 31, 2016
, the Company conducted a fair value assessment of the embedded derivative associated with the July 2016 Notes. As a result of the fair value assessment, the Company recorded a
$1,923,000
loss as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the year ended December 31, 2016 to properly reflect the fair value of the embedded derivative of
$5,079,000
as of
December 31, 2016
.
The derivative associated with the July 2016 Notes approximates management’s estimate of the fair value of the embedded derivative liability at
December 31, 2016
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
59%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 16. SERIES I PREFERRED STOCK AND SERIES I CONVERTIBLE NOTES
Series I Preferred Stock
On July 26, 2016, the Company entered into a securities purchase agreement with a private investor for the placement of approximately
$536,000
of the Company’s Series I Preferred Stock. At Closing, the Company issued a total of
536
shares of Series I Preferred Stock to the private investor in exchange for the cancellation of an outstanding
$536,000
promissory note (including accrued interest) of the Company held by the private investor.
Shares of the Series I Preferred Stock (including the amount of any accrued and unpaid dividends thereon) are convertible at the option of the holder into common stock at a fixed conversion price of
$0.03
per share. Holders of the Series I Preferred Stock are entitled to dividends in the amount of
10%
per annum. One year after issuance, the Company is required to redeem for cash all or any portion of the outstanding shares of the Series I Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends thereon.
The Series I Preferred Stock is classified outside of permanent equity, in mezzanine equity, on the Company’s Consolidated Balance Sheets as a result of this redemption feature in accordance with ASC Topic 480,
Distinguishing liabilities from equity,
as well as other applicable guidance. As of
December 31, 2016
, there were
0
shares of Series I Preferred Stock outstanding. See
Series I Convertible Notes
section below for more on the exchange of Series I Preferred Shares for Series I Convertible Notes.
A beneficial conversion feature in the amount of
$286,000
was recorded as a discount upon issuance of the shares. The unamortized discount was written off upon the exchange of the Preferred Shares for the Series I Convertible Notes for the period ended
December 31, 2016
.
Series I Convertible Notes
On September 13, 2016, the Series I Holder entered into an assignment agreement with another investor. Pursuant to the assignment agreement, the investor has the option to purchase, from time to time, all or any portion of the outstanding shares of Series I Preferred Stock from the Series I Holder for cash. The Company had
326
shares of Series I Preferred Stock that remained outstanding as of September 13, 2016.
On September 13, 2016, the Company and the investor also entered into an exchange agreement, whereby the investor has the right, from time to time, to surrender to the Company for cancellation and exchange any shares of Series I Preferred Stock it acquires pursuant to the assignment agreement. Any surrendered shares of Series I Preferred Stock would be exchanged for newly issued Series I Convertible Notes. The principal amount of the Series I Convertible Notes to be issued in exchange shall be equal to (i)
$1,000
for each share of Series I Preferred Stock surrendered for exchange plus (ii) the amount of any dividends accrued and unpaid on such Series I Preferred Stock surrendered for exchange.
Unless earlier converted or prepaid, all of the Series I Convertible Notes will mature one year after issuance. The Series I Convertible Notes bear interest at a rate of
10%
per annum, subject to increase to
24%
per annum upon the occurrence and continuance of an event of default (as described below). Principal and interest on the Series I Convertible Notes is payable on the maturity date or upon any earlier conversion. Principal and interest are payable in cash or, if specified equity conditions are met, shares of common stock. During the year ended
December 31, 2016
, the investor exercised their option to exchange
326
Series I Preferred Shares, representing a value of
$326,000
, resulting in the creation of
$333,000
of Series I Convertible Notes.
During the year ended
December 31, 2016
, the investor exercised their option to convert
$107,000
of Series I Convertible Notes, resulting in the issuance of
14,816,862
shares of common stock. A principal balance of
$226,000
of the Series I Convertible Notes was outstanding at
December 31, 2016
.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Series I Convertible Notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$275,000
was recorded. The debt discount will be charged to interest expense ratably over the life of the Series I Convertible Notes.
The derivative liability associated with the Series I Convertible Notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
December 31, 2016
, the Company conducted a fair value assessment of the embedded derivative associated with the Series G Preferred Stock. As a result of the fair value assessment, the Company recorded a
$78,000
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the year ended December 31, 2016 to properly reflect the fair value of the embedded derivative of
$197,000
as of
December 31, 2016
.
The derivative associated with the Series I Convertible Notes approximates management’s estimate of the fair value of the embedded derivative liability at
December 31, 2016
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
64%
present value discount rate of
12%
and dividend yield of
0%
.
NOTE 17. SERIES J PREFERRED STOCK AND SERIES J-1 PREFERRED STOCK
Series J Preferred Stock
On September 13, 2016, the Company entered into a securities purchase agreement with a private investor to issue
1,350
shares of Series J Preferred Stock for
$1,350,000
. At closing, the Company issued a total of
225
shares of Series J Preferred Stock to the private investor in exchange for gross proceeds of
$225,000
. The Company issued an additional
1,125
shares of Series J Preferred Stock in exchange for gross proceeds of
$1,125,000
in five subsequent closings occurring in October and November 2016.
Shares of the Series J Preferred Stock (including the amount of any accrued and unpaid dividends thereon) will be convertible at the option of the holder into common stock at a fixed conversion price of
$0.015
per share. Holders of the Series J Preferred Stock will be entitled to dividends in the amount of
10%
per annum. One year after issuance, the Company is required to redeem for cash all or any portion of the outstanding shares of the Series J Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends thereon. During the year ended
December 31, 2016
, the investor did not exercise their option to exchange any Series J Preferred Shares for common stock. There were
1,350
shares of Series J Preferred Stock outstanding at
December 31, 2016
.
The Company classified the Series J Preferred Stock as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception.
Series J-1 Preferred Stock
On October 14, 2016, the Company entered into a securities purchase agreement with a private investor to issue
1,000
shares of Series J-1 Preferred Stock for
$1,000,000
. At Closing, the Company issued a total of
100
shares of Series J-1 Preferred Stock to the private investor in exchange for gross proceeds of
$100,000
. The Company has issued an additional
900
shares of Series J Preferred Stock in exchange for gross proceeds of
$900,000
in six subsequent closings occurring between November 2016 and February 2017. The Company had
700
shares of Series J-1 Preferred Stock issued and outstanding as of
December 31, 2016
.
Shares of the Series J-1 Preferred Stock (including the amount of any accrued and unpaid dividends thereon) will be convertible at the option of the holder into common stock at a fixed conversion price of
$0.0125
per share. Holders of the Series J-1 Preferred Stock will be entitled to dividends in the amount of
10%
per annum. One year after issuance, the Company is required to redeem for cash all or any portion of the outstanding shares of Series J-1 Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends thereon.
The Company classified the Series J-1 Preferred Stock as a liability pursuant to ASC 480 on the closing date due to the structure of the financing agreement, whereby the Company has an unconditional obligation that the Company may settle by issuing a variable number of common shares with a monetary value that is fixed and known at inception.
NOTE 18. ADAR BAYS CONVERTIBLE NOTES AND EXCHANGE OF SERIES A PREFERRED STOCK
Adar Bays Convertible Notes
On October 5, 2016, the Company entered into a securities purchase agreement with a private investor (“Adar Bays”) for the private placement of
$330,000
principal amount of Adar Bays Convertible Notes. At Closing, the Company sold and issued
$330,000
principal amount of Adar Bays Convertible Notes to Adar Bays in exchange for
$300,000
of gross proceeds.
Unless earlier converted or prepaid, (i)
$110,000
principal amount of the Adar Bays Convertible Notes will mature on December 5, 2016, (ii)
$110,000
principal amount of the Adar Bays Convertible Notes will mature on January 3, 2017, and (iii)
$110,000
principal amount of the Adar Bays Convertible Notes will mature on February 3, 2017. The maturity dates of these notes were subsequently extended to December 31, 2017. The Adar Bays Convertible Notes bear interest at a rate of
6%
per annum, subject to increase to
24%
per annum upon the occurrence and continuance of an event of default (as described below). During the year ended
December 31, 2016
the holder redeemed
$128,000
of the Adar Bays Convertible Notes along with accrued interest of
$2,000
resulting in the issuance of
42,857,508
shares of common stock including the 50% Make-Whole Dividend discussed in Note 19. After conversions the remaining balance was
$202,000
of the Adar Bays Convertible Notes as of
December 31, 2016
.
All principal and accrued interest on the Adar Bays Convertible Notes are convertible at any time, in whole or in part, at the option of Adar Bays into shares of common stock at a variable conversion price equal to
80%
of the lowest closing bid price of the Company’s common stock for the
fifteen
consecutive trading day period prior to the conversion date. After the six month anniversary of the issuance of any Adar Bays Convertible Note, the conversion price for such note shall thereafter be equal to
50%
of the lowest closing bid price of the Company’s common stock for the
fifteen
consecutive trading day period prior to the conversion date.
Principal on the Adar Bays Convertible Notes is payable on the maturity date. Principal on the Adar Bays Convertible Notes is payable in cash. Interest on the Adar Bays Convertible Notes is payable from time to time in the form of shares of common stock using the conversion price formula described above.
The Adar Bays Convertible Notes contain standard and customary events of default including but not limited to: (i) failure to make payments when due under the Adar Bays Convertible Notes; and (ii) bankruptcy or insolvency of the Company.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Adar Bays Convertible Notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$330,000
was recorded. The fair value of the derivative was greater than the face value at issuance and the difference of
$341,000
was charged to interest expense at issuance. The remaining debt discount will be charged to interest expense ratably over the life of the Adar Bays Convertible Notes.
The derivative liability associated with the Adar Bays Convertible Notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
December 31, 2016
, the Company conducted a fair value assessment of the embedded derivative associated with the Adar Bays Convertible Notes. As a result of the fair value assessment, the Company recorded a
$126,000
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the year ended
December 31, 2016
to properly reflect the fair value of the embedded derivative of
$545,000
as of
December 31, 2016
.
The derivative associated with the Adar Bays Convertible Notes approximates management’s estimate of the fair value of the embedded derivative liability at
December 31, 2016
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
67%
, present value discount rate of
12%
and dividend yield of
0%
.
Exchange of Outstanding Series A Preferred Stock for Convertible Notes
In 2013, the Company completed private placement to one accredited investor (the “Series A Holder”) of its Series A Convertible Preferred Stock. Prior to the exchange agreement described below the Company had
165,541
shares of Series A Preferred Stock that remained outstanding as of October 6, 2016.
On October 6, 2016, the Series A Holder entered into an exchange agreement (the “Exchange Agreement”) with Adar Bays. Pursuant to the exchange agreement, beginning December 5, 2016, Adar Bays has the option to exchange, from time to time, all or any portion of the Adar Bays Convertible Notes for outstanding shares of Series A Preferred Stock from the Series A Holder. As of
December 31, 2016
, the Series A Holder held
$202,000
of the Adar Bays Convertible Notes.
The parties will first calculate the number of shares of common stock that the principal and accrued but unpaid interest of the Adar Bays Convertible Notes to be exchanged are convertible into using the formula set described below (the “As-Converted Common Share Number”). The parties shall next calculate that number of shares of Series A Preferred Stock to be exchanged (including accrued and unpaid dividends and make-whole amounts) that, upon conversion in accordance with the terms of the Series A Preferred Stock, would result in the issuance, as of the effective date of the exchange, of the As-Converted Common Share Number.
The principal and accrued but unpaid interest on the exchanged portion of the Adar Bays Convertible Notes shall be calculated into the As-Converted Common Share Number by using the following formula. The As-Converted Common Share Number shall be equal to
80%
of the lowest closing bid price of the Company common stock for the
fifteen
trading days immediately preceding the date on which a notice of exchange is delivered. Subsequent to any exchange, the parties shall have the rights to convert the securities received (Adar Bays Convertible Notes or Series A Preferred Stock, as applicable) upon the exchange in accordance with the terms of such securities.
NOTE 19. MAKE-WHOLE DIVIDEND LIABILITY
In June 2013, the Company entered into a Series A Preferred Stock purchase agreement. Holders of Series A Preferred Stock are entitled to cumulative dividends at a rate of
8.0%
per annum, with the dividend rate being indexed to the Company's stock price and subject to adjustment. Conversion or redemption of the Series A Preferred Stock within
4 years
of issuance requires the Company pay a make-whole dividend to the holders, whereby dividends for the full
four
year period are to be paid in cash or common stock (valued at
10%
below market price).
The Company concluded the make-whole payments should be characterized as embedded derivatives under ASC 815. See Note 3. Summary of Significant Accounting Policies and Note 20. Stockholders' Equity. Make-whole dividends are expensed at the time of issuance and recorded as "Deemed dividends on Preferred Stock and accretion of warrants" in the Consolidated Statements of Operations and "Make-whole dividend liability" in the Consolidated Balance Sheets. The fair value of these dividend liabilities, which are indexed to the Company's common stock, must be evaluated at each period end. The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. Fair value determination required forecasting stock price volatility, expected average annual return and conversion date. As a result of this analysis, during the year ended
December 31, 2015
, the Company recorded a net increase in fair value of the liability in the amount of
$3.5 million
, recorded as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in Other Income/(Expense) in the Consolidated Statements of Operations and in the Statement of Cash Flows. During the year ended
December 31, 2016
, there was no change in the fair value of the make-whole liability from the fair value at
December 31, 2015
.
At
December 31, 2016
, there were
125,044
shares of Series A Preferred Shares outstanding. At
December 31, 2016
, the Company was entitled to redeem the outstanding Series A preferred shares for
$1.7 million
, plus a make-whole amount of
$0.5 million
, payable in cash or common shares. The fair value of the make-whole dividend liability for the Series A Preferred Shares, which approximates cash value, was
$0.5 million
as of
December 31, 2016
.
NOTE 20. STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
At
December 31, 2016
, the Company had
2,000,000,000
shares of common stock,
$0.0001
par value, authorized for issuance. Each share of common stock has the right to one vote. As of
December 31, 2016
, the Company had
554,223,320
shares of common stock outstanding. The Company has not declared or paid any dividends related to its common stock through
December 31, 2016
.
On August 26, 2014, the Company, a Delaware corporation, filed a Certificate of Amendment with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company's common stock, par value
$0.0001
per share at a ratio of one-for-
ten
. The Certificate of Amendment did not change the number of authorized shares, or the par value, of the Company’s common stock. The Certificate of Amendment provides that every ten shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split.
On May 26, 2016, the Company, a Delaware corporation, filed a Certificate of Amendment with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, par value
$0.0001
per share at a ratio of one-for-
twenty
. The Certificate of Amendment did not change the number of authorized shares, or the par value, of the Company’s common stock. The Certificate of Amendment provides that every twenty shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split.
TFG Radiant Purchases of Common Stock
In April and June 2015, the Company entered into securities purchase agreements with TFG Radiant for private placements of totaling of
100,000
shares of the Company’s common stock which resulted in gross proceeds of approximately
$2 million
to the Company.
As of
December 31, 2016
, TFG Radiant's ownership was less than
1%
of the Company's outstanding Common Stock.
Shelf Registration
In October 2014, the Company filed a “shelf” Registration Statement on Form S-3 with the SEC. With the shelf registration, the Company may from time to time sell common stock, preferred stock, warrants or some combination in one or more offerings for up to
$25.0 million
. The registration became effective October 16, 2014. This shelf registration replaces the Company's prior shelf registration statement. As of
December 31, 2016
, approximately
$22.0 million
was unused on the shelf registration.
Preferred Stock
At
December 31, 2016
, the Company had
25,000,000
shares of preferred stock,
$0.0001
par value, authorized for issuance. Preferred stock may be issued in classes or series. Designations, powers, preferences, rights, qualifications, limitations and restrictions are determined by the Company’s Board of Directors.
750,000
shares have been designated as Series A preferred stock,
3,000
shares have been designated as Series D preferred stock,
2,500
shares have been designated as Series D-1 preferred stock, and
2,800
shares have been designated as Series E preferred stock,
7,000
shares have been designated as Series F preferred stock,
2,000
shares have been designated as Series G preferred stock,
1,350
shares have been designated as Series J preferred stock, and
1,000
shares have been designated as Series J-1 preferred stock. As of
December 31, 2016
, the Company had
125,044
shares of Series A preferred stock,
0
shares of Series D preferred stock,
0
shares of Series D-1 preferred stock, and
120
shares of Series E preferred stock,
160
shares of Series F preferred stock,
1,108
shares of Series G preferred stock,
1,350
shares of Series J preferred stock, and
700
shares of Series J-1 preferred stock, outstanding. The Company has no declared unpaid dividends related to the preferred stock as of
December 31, 2016
.
Series A preferred stock:
In June 2013, the Company entered into a securities purchase agreement with an investor to sell an aggregate of
750,000
shares of Series A Preferred Stock at a price of
$8.00
per share, resulting in gross proceeds of
$6,000,000
. This purchase agreement included warrants to purchase up to
13,125
shares of common stock of the Company. The transfer of cash and securities took place incrementally, the first closing occurring on June 17, 2013 with the transfer of
125,000
shares of Series A preferred stock and a warrant to purchase
2,188
shares of common stock for
$1,000,000
. The final closing took place in August 2013, with the transfer of
625,000
shares of Series A preferred stock and a warrant to purchase
10,937
shares of common stock for
$5,000,000
.
Holders of Series A preferred stock are entitled to cumulative dividends at a rate of
8.0%
per annum when and if declared by the Board of Directors in its sole discretion. The dividends may be paid in cash or in the form of common stock (valued at
10%
below market price, but not to exceed the lowest closing price during the applicable measurement period), at the discretion of the Board of Directors. The dividend rate on the Series A preferred stock is indexed to the Company's stock price and subject to adjustment. In addition, the Series A preferred stock contains a make-whole provision whereby, conversion or redemption of the preferred stock within
4
years of issuance will require dividends for the full four year period to be paid by the Company in cash or common stock (valued at
10%
below market price, but not to exceed the lowest closing price during the applicable measurement period).
The Series A preferred stock may be converted into shares of common stock at the option of the Company if the closing price of the common stock exceeds
$232.00
, as adjusted, for
20
consecutive trading days, or by the holder at any time. The Company has the right to redeem the Series A preferred stock at a price of
$8.00
per share, plus any accrued and unpaid dividends, plus the make-whole amount (if applicable). At
December 31, 2016
, the preferred shares were not eligible for conversion to common shares, at the option of the Company. The holder of the preferred shares may convert to common shares at any time, at no cost, at a ratio of
1
preferred share into
1
common share (as adjusted for the Reverse Stock Split, subject to standard ratable anti-dilution
adjustments). Upon any conversion (whether at the option of the Company or the holder), the holder is entitled to receive any accrued but unpaid dividends and also any make-whole amount (if applicable). See Note 18. Make-whole dividend liability.
During the twelve months ended
December 31, 2016
the holders of the Series A preferred stock converted
87,346
preferred shares into
4,367
shares of common stock. As a result of these conversions, the Company paid make-whole dividends in the amount of
49,796,077
shares of common stock in lieu of a cash payment of
$349,000
.
Except as otherwise required by law (or with respect to approval of certain actions), the Series A preferred stock shall have no voting rights. Upon any liquidation, dissolution or winding up of the Company, after payment or provision for payment of debts and other liabilities of the Company, the holders of Series A preferred stock shall be entitled to receive, pari passu with any distribution to the holders of common stock of the Company, an amount equal to
$8.00
per share of Series A preferred stock plus any accrued and unpaid dividends.
The warrants offered as part of the securities purchase agreement have a
three
year term and require payment of an exercise price of
$9.00
per common share to the Company. As of December 31, 2016 these warrants had expired.
Series D and D-1 preferred stock:
Refer to Note 9 for descriptions of the Convertible Notes, Series D Preferred Stock, Series D-1 Preferred Stock, and Right Shares.
Series E preferred stock:
Refer to Note 11 for descriptions of the Series E Preferred Stock and the Committed Equity Line.
Series F preferred stock:
Refer to Note 12 for descriptions of the Series F Preferred Stock.
Series G preferred stock:
Refer to Note 13 for descriptions of the Series G Preferred Stock.
Series H preferred stock:
Refer to Note 14 for descriptions of the Series H Preferred Stock and July 2016 Convertible Notes.
Series I preferred stock:
Refer to Note 15 for descriptions of the Series I Preferred Stock and the Series I Convertible Notes.
Series J and J-1 preferred stock:
Refer to Note 16 for descriptions of the Series J Preferred Stock and the Series J-1 Preferred Stock.
NOTE 21. EQUITY PLANS AND SHARE-BASED COMPENSATION
Stock Option Plan: The Company’s 2005 Stock Option Plan, as amended (the “Stock Option Plan”) provides for the grant of incentive or non-statutory stock options to the Company’s employees, directors and consultants. Upon recommendation of the Board of Directors, the stockholders approved an increase in the total shares of common stock reserved for issuance under the Stock Option Plan to
270,000
as of
December 31, 2016
and
2015
.
Restricted Stock Plan: The Company’s 2008 Restricted Stock Plan, as amended (the “Restricted Stock Plan”) was adopted by the Board of Directors and was approved by the stockholders on July 1, 2008. The Restricted Stock Plan initially reserved up to
75,000
shares (as adjusted for the Reverse Stock Split) of the Company’s common stock for restricted stock awards and restricted stock units to eligible employees, directors and consultants of the Company. Upon recommendation of the Board of Directors, the stockholders approved an increase in the total shares of common stock reserved for issuance under the Restricted Stock Plan to
750,000
and
125,000
shares as of
December 31, 2016
and
2015
, respectively.
The Stock Option Plan and the Restricted Stock Plan are administered by the Compensation Committee of the Board of Directors, which determines the terms of the option and share awards, including the exercise price, expiration date, vesting schedule and number of shares. The term of any incentive stock option granted under the Stock Option Plan may not exceed
ten
years, or
5
years for options granted to an optionee owning more than
10%
of the Company’s voting stock. The exercise price of an incentive stock option granted under the Option Plan must be equal to or greater than the fair market value of the shares of the Company’s common stock on the date the option is granted. An incentive stock option granted to an optionee owning more than
10%
of the Company’s voting stock must have an exercise price equal to or greater than
110%
of the fair market value of the Company’s common stock on the date the option is granted. The exercise price of a non-statutory option granted under the Option Plan must be equal to or greater than
85%
of the fair market value of the shares of the Company’s common stock on the date the option is granted.
Share-Based Compensation:
The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes this cost as an expense over the grant recipients’ requisite service periods for all awards made to employees, officers, directors and consultants.
The share-based compensation expense recognized in the Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2016
|
|
2015
|
|
Share-based compensation cost included in:
|
|
|
|
|
|
Research, development and manufacturing operations
|
|
$
|
181,985
|
|
|
$
|
253,298
|
|
|
Selling, general and administrative
|
|
706,363
|
|
|
603,516
|
|
|
Total share-based compensation cost
|
|
$
|
888,348
|
|
|
$
|
856,814
|
|
|
The following table presents share-based compensation expense by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2016
|
|
2015
|
|
Type of Award:
|
|
|
|
|
|
Stock Options
|
|
$
|
377,653
|
|
|
$
|
550,787
|
|
|
Restricted Stock Units and Awards
|
|
510,695
|
|
|
306,027
|
|
|
Total share-based compensation cost
|
|
$
|
888,348
|
|
|
$
|
856,814
|
|
|
Stock Options:
The Company recognized share-based compensation expense for stock options of
$378,000
to officers, directors and employees for the year ended
December 31, 2016
related to stock option awards, reduced for estimated forfeitures. The weighted average estimated fair value of employee stock options granted for the years ended
December 31, 2016
and
2015
was
$1.14
and
$0.72
per share, respectively. Fair value was calculated using the Black-Scholes Option Pricing Model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2016
|
|
2015
|
|
Expected volatility
|
|
114.6
|
%
|
|
92.6
|
%
|
|
Risk free interest rate
|
|
1.5
|
%
|
|
1.7
|
%
|
|
Expected dividends
|
|
—
|
|
|
—
|
|
|
Expected life (in years)
|
|
5.8
|
|
|
5.9
|
|
|
Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate of return is based on the yield of U.S. Treasury bonds with a maturity equal to the expected term of the award. Historical data is used to estimate forfeitures within the Company’s valuation model. The Company’s expected life of stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.
As of
December 31, 2016
, total compensation cost related to non-vested stock options not yet recognized was
$97,000
which is expected to be recognized over a weighted average period of approximately
1.48
years. As of
December 31, 2016
,
67,015
shares were vested or expected to vest in the future at a weighted average exercise price of
$41.98
. As of
December 31, 2016
,
189,475
shares remained available for future grants under the Option Plan.
The following table summarizes stock option activity for grants made within the Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option
Shares
|
|
Stock Options
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2014
|
|
12,212
|
|
|
$
|
256.40
|
|
|
7.84
|
|
$
|
96
|
|
Granted
|
|
74,852
|
|
|
$
|
19.20
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Forfeited
|
|
(13,194
|
)
|
|
$
|
31.00
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
73,870
|
|
|
$
|
56.43
|
|
|
8.84
|
|
$
|
—
|
|
Granted
|
|
33,250
|
|
|
$
|
1.35
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Forfeited
|
|
(30,206
|
)
|
|
41.15
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
76,914
|
|
|
$
|
37.67
|
|
|
8.28
|
|
$
|
—
|
|
Exercisable at December 31, 2016
|
|
24,654
|
|
|
$
|
94.46
|
|
|
|
|
|
|
Restricted Stock:
The Company recognized share-based compensation expense related to restricted stock grants of
$511,000
for the year ended
December 31, 2016
. The weighted average estimated fair value of restricted stock grants for the years ended
December 31, 2016
and
2015
was
$1.97
and
$0.57
, respectively.
Total unrecognized share-based compensation expense from unvested restricted stock as of
December 31, 2016
was
$27,000
which is expected to be recognized over a weighted average period of approximately
0.17
years. As of
December 31, 2016
,
164,119
shares were expected to vest in the future. As of
December 31, 2016
,
495,848
shares remained available for future grants under the Restricted Stock Plan.
The following table summarizes non-vested restricted stock and the related activity as of and for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant-Date
Fair-Value
|
Non-vested at December 31, 2014
|
|
557
|
|
|
$
|
140.00
|
|
Granted
|
|
33,569
|
|
|
$
|
11.40
|
|
Vested
|
|
(13,624
|
)
|
|
|
Forfeited
|
|
—
|
|
|
|
Non-vested at December 31, 2015
|
|
20,502
|
|
|
$
|
5.59
|
|
Granted
|
|
245,414
|
|
|
1.97
|
|
Vested
|
|
(63,787
|
)
|
|
|
Forfeited
|
|
(36,768
|
)
|
|
|
Non-vested at December 31, 2016
|
|
165,361
|
|
|
$
|
1.84
|
|
NOTE 22. INCOME TAXES
The Company records income taxes using the liability method. Under this method, deferred tax assets and liabilities are computed for the expected future impact of temporary differences between the financial statement and income tax bases of assets and liabilities using current income tax rates and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. ASC 740 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold before a benefit is recognized in the financial statements.
At
December 31, 2016
, the Company had
$294,689,000
of cumulative net operating loss carryforwards for federal income tax purposes that were available to offset future taxable income through the year
2036
. Under the Internal Revenue Code, the future utilization of net operating losses may be limited in certain circumstances where there is a significant ownership change. The Company prepared an analysis for the year ended December 31, 2012 and determined that a significant change in ownership
has occurred as a result of the cumulative effect of the sales of common stock through its offerings. Such change limited the Company's utilizable net operating loss carryforwards to
$207,647,000
for the year ended
December 31, 2016
. Available net operating loss carryforwards may be further limited in the event of another significant ownership change.
Deferred income taxes reflect an estimate of the cumulative temporary differences recognized for financial reporting purposes from that recognized for income tax reporting purposes. At
December 31, 2016
and
2015
, the components of these temporary differences and the deferred tax asset were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
2016
|
|
2015
|
Deferred Tax Asset
|
|
|
|
|
Current:
|
|
|
|
|
Accrued Expenses
|
|
$
|
192,000
|
|
|
$
|
412,000
|
|
Inventory Allowance
|
|
234,000
|
|
|
253,000
|
|
Other
|
|
43,000
|
|
|
26,000
|
|
Total Current
|
|
469,000
|
|
|
691,000
|
|
Non-current:
|
|
|
|
|
Stock Based Compensation-Stock Options and Restricted Stock
|
|
1,919,000
|
|
|
1,730,000
|
|
Tax effect of NOL carryforward
|
|
79,384,000
|
|
|
65,935,000
|
|
Depreciation
|
|
17,406,000
|
|
|
20,859,000
|
|
Amortization
|
|
(637,000
|
)
|
|
(607,000
|
)
|
Warranty reserve
|
|
68,000
|
|
|
102,000
|
|
Total Non-current
|
|
98,140,000
|
|
|
88,019,000
|
|
Net deferred tax asset
|
|
98,609,000
|
|
|
88,710,000
|
|
Less valuation allowance
|
|
(98,609,000
|
)
|
|
(88,710,000
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical losses and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is not "more-likely-than-not" that the Company will realize the benefits of these deductible differences at
December 31, 2016
. The Company’s deferred tax valuation allowance of
$98,609,000
reflected above is an increase of
$9,899,000
from the valuation allowance reflected as of
December 31, 2015
of
$88,710,000
, resulting from the decrease in net loss.
As of
December 31, 2016
, the Company has not recorded a liability for uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax (benefit)/expense. No interest and penalties related to uncertain tax positions were accrued at
December 31, 2016
.
The Company’s effective tax rate for the years ended
December 31, 2016
and
2015
differs from the statutory rate due to the following (expressed as a percentage of pre-tax income):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
State statutory rate
|
|
2.6
|
%
|
|
3.5
|
%
|
Change in rate
|
|
—
|
%
|
|
(0.9
|
)%
|
Permanent tax differences
|
|
(0.1
|
)%
|
|
(0.3
|
)%
|
Change in fair value of derivatives
|
|
0.9
|
%
|
|
(44.3
|
)%
|
Deemed interest expense on debt discount
|
|
(5.1
|
)%
|
|
(0.9
|
)%
|
Loss on extinguishment of liabilities
|
|
(5.9
|
)%
|
|
43.7
|
%
|
Other
|
|
(1.8
|
)%
|
|
(0.3
|
)%
|
Increase in valuation allowance
|
|
(25.6
|
)%
|
|
(35.6
|
)%
|
|
|
—
|
%
|
|
—
|
%
|
NOTE 23. RELATED PARTY TRANSACTIONS
TFG Radiant owns less than
1%
of the Company's outstanding common stock as of
December 31, 2016
.
On August 29, 2016, the Company entered into a note purchase agreement with Tertius Financial Group Pte. Ltd. (“Tertius" or "TFG”) for the private placement of
$330,000
of the Company’s original issue discount notes (“Notes”). On August 29, 2016, the Company sold and issued
$330,000
principal amount of Notes to Tertius in exchange for
$300,000
of gross proceeds.
Tertius is an investment firm located in Singapore. Victor Lee, the Company’s President and CEO, is a managing director and
50%
owner of Tertius. As of
December 31, 2016
, Tertius owned
13%
of the Company's outstanding common stock.
The Notes will mature November 29, 2016. The Notes bear interest at a rate of
6%
per annum. Principal and interest on the Notes are payable on November 29, 2016. The Notes are unsecured and not convertible into equity shares of the Company.
On December 6, 2016, the Company issued a new
$600,000
original issue discount note to Tertius in exchange for (i)
$200,000
of gross proceeds and (ii) cancellation of the existing outstanding
$330,000
note. The outstanding balance of the note is
$602,000
(including accrued and unpaid interest) with a discount of
$60,000
as of
December 31, 2016
.
The new Tertius note (i) will mature on December 31, 2017 and (ii) will bear interest at a rate of
6%
per annum. Principal and interest on the new Tertius note is payable at maturity. The new Tertius note is unsecured and is not convertible into equity shares of the Company.
NOTE 24. COMMITMENTS AND CONTINGENCIES
Investment Banking Settlement
On October 21, 2011, the Company was notified that a complaint claiming
$3.0 million
for an investment banking fee (the “Lawsuit”) was filed by Jefferies & Company, Inc. (“Jefferies”) against the Company in New York State Supreme Court in the County of New York. In December 2010, the Company and Jefferies entered into an engagement agreement (the “Fee Agreement”) pursuant to which Jefferies was hired to act as the Company's financial advisor in relation to certain potential transactions. In addition, Jefferies claimed an award for attorney's fees and prejudgment interest in the approximate amount of
$1.2 million
.
On April 16, 2014, the parties settled the lawsuit where the Company agreed to pay Jefferies a total of
$2.0 million
in equal installments over
40
months. The Company has paid
$1,650,000
through
December 31, 2016
.
The Company records a liability in its financial statements for costs related to claims, including settlements and judgments, where the Company has assessed that a loss is probable and an amount can be reasonably estimated. The Company accrued
$1.7 million
, the net present value of the
$2.0 million
settlement, as of December 31, 2013. As of
December 31, 2016
,
$0
was accrued for the long-term portion of this settlement and
$339,000
was recorded as Accrued litigation settlement, current portion, in the Consolidated Balance Sheets.
Patent Infringement Settlement
On March 30, 2016, the Company was notified that iPowerUp, Inc. ("IP") had filed a complaint against the Company alleging that certain products infringed on
two
patents held by IP.
On November 3, 2016, the Company and IP entered into a settlement agreement whereas the Company will pay IP
$20,000
and transfer
8,000
units of certain products to IP. The
$20,000
is payable in
12
installments over a period of January 1, 2017 through October 15, 2017. The first
two
installments will in the amount of
$5,000
followed by
10
installments in the amount of
$1,000
. The transfer
8,000
units will consist of
3
different product lines named in the complaint and are to be transfered in saleable retail condition to IP on or before December 5, 2016. Further, the Company will cease to offer the products mentioned in the compliant for sale in the United States. Upon completion of the aforementioned settlement terms both companies release all liability in regards to the complaint.
The Company records a liability in its financial statements for costs related to claims, including settlements and judgments, where the Company has assessed that a loss is probable and an amount can be reasonably estimated. As of
December 31, 2016
the Company has recorded a short term liability in the amount of
$20,000
in the Consolidated Balance Sheets for the costs related to the settlement. The Company has also recognized
$133,000
, the cost basis for the
8,000
units of inventory to be sent to IP, as an expense for the year ended
December 31, 2016
.
NOTE 25. RETIREMENT PLAN
On July 1, 2006, the Company adopted a qualified 401(k) plan which provides retirement benefits for all of its eligible employees. Under the plan, employees become eligible to participate at the first entry date, provided they are at least
21
years of age. The participants may elect through salary reduction to contribute up to ceilings established in the Internal Revenue Code. The Company will match
100%
of the first
six percent
of employee contributions. In addition, the Company may make discretionary contributions to the Plan as determined by the Board of Directors. Employees are immediately vested in all salary reduction contributions. Rights to benefits provided by the Company’s discretionary and matching contributions vest
100%
after the first year of service for all employees hired before January 1, 2010. For employees hired after December 31, 2009, matching contributions vest over a
three
-year period, one-third per year. Payments for 401(k) matching totaled
$338,230
and $
333,636
for the years ended
December 31, 2016
and
2015
, respectively. Payments for 401(k) matching are recorded under “Research, development and manufacturing operations" expense and “Selling, general and administrative" expense in the Consolidated Statements of Operations.
NOTE 26. JOINT VENTURE
On December 28, 2013, the Company entered into a definitive agreement for the establishment of a joint venture with the Government of the Municipal City of Suqian in Jiangsu Province, China (“Suqian”). The purpose of the joint venture was to build a factory located in Suqian to manufacture our proprietary photovoltaic modules. The Suqian joint venture project had progressed more slowly than originally anticipated due to a number of factors including short supply of needed technical skills in the Suqian area and other factors affecting the long term viability of the partnership. Accordingly, on August 5, 2015, Suqian and the Company mutually agreed to terminate the joint venture project.
The parties liquidated the joint venture and distributed any available proceeds to the parties pro rata in accordance with the parties' contributions to the joint venture to date. The Company received approximately
$191,000
in cash upon liquidation of the joint venture during the year ended
December 31, 2015
. The Company's contributions to the joint venture have consisted of (i)
$320,000
in cash and (ii) certain technical and engineering consulting services. The Company does not anticipate having any material current or ongoing liabilities relating to the joint venture or its termination.
NOTE 27. SUBSEQUENT EVENTS
Offering of Unsecured Non-Convertible Notes
On January 10, 2017, the Company entered into a note agreement in the amount of
$250,000
with one accredited investor. The note bears interest at
12%
per annum and matures on July 10, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On January 16, 2017, the Company entered into a note agreement in the amount of
$300,000
with one accredited investor. The note bears interest at
12%
per annum and matures on July 16, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On January 17, 2017, the Company entered into a note agreement in the amount of
$700,000
with one accredited investor. The note bears interest at
12%
per annum and matures on July 17, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On February 7, 2017, the Company entered into a note agreement in the amount of
$300,000
with one accredited investor. The note bears interest at
12%
per annum and matures on August 7, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On February 13, 2017, the Company entered into a note agreement in the amount of
$140,000
with one accredited investor. The note bears interest at
12%
per annum and matures on August 13, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On February 27, 2017, the Company entered into a note agreement in the amount of
$400,000
with one accredited investor. The note bears interest at
12%
per annum and matures on August 27, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On March 13, 2017, the Company entered into a note agreement in the amount of
$300,000
with one accredited investor. The note bears interest at
12%
per annum and matures on September 13, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On March 24, 2017, the Company entered into a note agreement in the amount of
$400,000
with one accredited investor. The note bears interest at
12%
per annum and matures on September 24, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On April 6, 2017, the Company entered into a note agreement in the amount of
$103,000
with one accredited investor. The note bears interest at
10%
per annum and matures on October 6, 2017. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
Offering of Restricted Common Stock
On January 19, 2017, the Company issued
333,333,333
shares of unregistered common stock in a private placement to Tertius Financial Group ("TFG") pursuant to a Securities Purchase Agreement (the “SPA”).
Pursuant to the SPA, the Company issued the
333,333,333
shares to TFG in exchange for cancellation of its
$600,000
promissory note (including accrued interest of approximately
$4,340
) that was issued by the Company on December 6, 2016. The SPA does not provide any registration rights for the shares issued to TFG.
The new ownership by TFG represents approximately
24%
of the outstanding shares of common stock of the Company on a post transaction basis. There are no registration rights.
TFG is a Singapore based entity controlled and
50%
owned by Ascent’s President & CEO, Victor Lee.
See Notes 9 and 23 for further information.
Offering of Series K Convertible Preferred Stock
On February 8, 2017, the Company, entered into a securities purchase agreement (“Series K SPA”) with a private investor (“Investor”), for the private placement of up to
$20,000,000
of the Company’s newly designated Series K Convertible Preferred Stock (“Series K Preferred Stock”).
The Company will sell
1,000
shares of Series K Preferred Stock to Investor in exchange for
$1,000,000
of gross proceeds on or before each of (i) February 24, 2017, (ii) March 27, 2017, (iii) April 27, 2017, (iv) May 27, 2017 and (v) June 27, 2017. The Company will sell
15,000
shares of Series K Preferred Stock to Investor in exchange for
$15,000,000
of gross proceeds on or before July 27, 2017. The closing of this tranche is conditioned upon the Company and Investor agreeing to mutually satisfactory restrictions providing that Company’s use of such
$15,000,000
proceeds shall be limited to
$1,000,000
per month. As of the issuance date,
$450,000
in cash proceeds have been received from the private investor. The Company expects to receive the full funding amount outlined above during 2017 in various tranches.
The Series K Preferred Stock ranks senior to the Company’s common stock in respect to dividends and rights upon liquidation. The Series K Preferred Stock will not have voting rights and the holders of the Series K Preferred Stock will not be entitled to any fixed rate of dividends.
The shares of the Series K Preferred Stock will be convertible at the option of the holder into common stock at a fixed conversion price equal to
$0.004
. At no time may the Series K Preferred Stock be converted if the number of shares of common stock to be received by Investor pursuant to such conversion, when aggregated with all other shares of common stock then beneficially (or deemed beneficially) owned by Investor, would result in Investor beneficially owning more than
19.99%
of all common stock then outstanding.
The Company is required to redeem for cash any outstanding shares of the Series K Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends (if any) thereon on the fifth anniversary of the date of the original issue of such shares.
If Investor defaults in closing on any tranche of the Series K Preferred Stock, the Company shall thereafter be entitled to redeem
50%
of the then outstanding shares of Series K Preferred Stock at a price per preferred share equal to the
$0.01
.
Upon our liquidation, dissolution or winding up, holders of Series K Preferred Stock will be entitled to be paid out of our assets, prior to the holders of our common stock, an amount equal to
$1,000
per share plus any accrued but unpaid dividends (if any) thereon.
Sale of Enerplex Intellectual Property Assets
Effective as of February 23, 2017, the Company sold substantially all of its intellectual property (consisting primarily of trademark rights) of its EnerPlex™ consumer brand name to Sun Pleasure Co. Ltd (“SPCL”). SPCL is a Hong Kong based privately held company which has been a primary supplier to, and contract manufacturer for, the Company in its EnerPlex consumer products business. The Company received consideration for the EnerPlex intellectual property assets of (i) a cash payment of
$150,000
, (ii) settlement of existing amounts due from the Company to SPCL of approximately
$1.1 million
, and (iii)
$100,000
credit to the Company towards the purchase of SPCL products.
As a result of the transfer of the intellectual property related to the EnerPlex brand, the Company will no longer produce or sell EnerPlex-branded consumer products beyond the sell through of the Company’s existing EnerPlex product inventories. The Company retains all intellectual property related to its solar photovoltaic (“PV”) products and business. Following the EnerPlex transfer, the Company will focus on its PV products and business. The Company has agreed to supply PV products to SPCL for incorporation into EnerPlex branded products that may be designed, manufactured and marketed by SPCL in the future.
Increase of Authorized Common Stock
On March 16, 2017, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to increase the number of authorized shares of Common Stock from
2,000,000,000
to
20,000,000,000
at a par value of
$0.0001
. The Certificate of Amendment was approved at the Company’s Special Meeting of Stockholders March 16, 2017.
Exchange of Series J Preferred Stock for Common Stock
On March 24, 2017, the Company agreed to issue
71,636,432
shares of Common Stock to one accredited investor in exchange for the cancellation of
100
shares of outstanding Series J Preferred Stock (including accrued dividends) held by such investor. The canceled shares of the Series J Preferred Stock had an original issue price of
$100,000
.
On March 31, 2017, the Company agreed to issue
125,429,895
shares of Common Stock to one accredited investor in exchange for the cancellation of
125
shares of outstanding Series J Preferred Stock (including accrued dividends) held by such investor. The canceled shares of the Series J Preferred Stock had an original issue price of
$125,000
.
See Note 17 for further information on Series J Preferred Stock.