(The accompanying notes are an integral part of these consolidated financial statements)
(The accompanying notes are an integral part of these consolidated financial statements)
(The accompanying notes are an integral part of these consolidated financial statements)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Basis of Presentation, Organization, Recent Accounting Pronouncements and Going Concern
Basis of Presentation
The unaudited financial statements of SolarWindow Technologies, Inc. (the “Company”) as of February 28, 2017, and for the three and six months ended February 28, 2017 and February 29, 2016, have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial reporting and include the Company’s wholly-owned subsidiaries, Kinetic Energy Corporation (“KEC”), and New Energy Solar Corporation (“New Energy Solar”). Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended August 31, 2016, as filed with the Securities and Exchange Commission as part of the Company’s Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included. The Company did not record an income tax provision during the periods presented due to net taxable losses. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.
Organization
SolarWindow Technologies, Inc. was incorporated in the State of Nevada on May 5, 1998, under the name “Octillion Corp.” On December 2, 2008, the Company amended its Articles of Incorporation to effect a change of name to New Energy Technologies, Inc. Effective as of March 9, 2015, the Company amended its Articles of Incorporation to change its name to SolarWindow Technologies, Inc. to align the company name with its brand identity. The Company’s ticker symbol changed to WNDW. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, KEC and New Energy Solar.
KEC was incorporated on June 19, 2008, in the State of Nevada and holds the patents related to the Company’s MotionPower™ technology. The Company’s business activities related to the MotionPower™ technology are conducted through KEC.
New Energy Solar was incorporated on February 9, 2009, in the State of Florida and entered into agreements with The University of South Florida Research Foundation (“USF”) to sponsor research related to the Company’s SolarWindow™ technology. On February 18, 2015, the Company terminated the license agreement entered into with USF which originated on June 21, 2010.
The Company has been developing two sustainable electricity generating systems. These novel technologies are branded as SolarWindow™ and MotionPower™. On March 2, 2015, the Company announced its exclusive focus on SolarWindow™.
The Company’s SolarWindow™ technology provides the ability to harvest light energy from the sun and artificial sources and generate electricity from a transparent coating of organic photovoltaic (“OPV”) layers. The Company’s SolarWindow™ transparent electricity generating coatings are the subject of 14 patent pending technologies. SolarWindow™ coatings are being developed for application on glass, and flexible glass and plastic surfaces and could potentially be used on any of the more than 85 million commercial and residential buildings in the United States alone.
The Company’s SolarWindow™ product development programs involve ongoing research and development efforts, and the commitment of significant resources to support the extensive invention, design, engineering, testing, prototyping, and intellectual property initiatives carried-out by its contract engineers, scientists, and consultants. The Company’s activities are subject to significant risks and uncertainties, including, but not limited to, the Company’s failure to secure, on a timely basis, adequate additional funding to commercialize the Company’s SolarWindow™ technology or the development of a similar technology and products, by existing or potential future competitors, that may gain earlier market entry or greater market acceptance than the Company’s technology and products.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718)”, which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance will be effective for the fiscal year beginning after December 15, 2016, including interim periods within that year. The Company does not expect adoption of ASU 2016-09 to have a material impact on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)”, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC 842, Leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect this accounting update to have a material effect on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The Company has determined that the adoption of ASU 2015-17 will currently have no impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08 to further clarify the implementation guidance on principal versus agent considerations. The guidance is effective for annual and interim periods beginning after December 15, 2017. The Company does not expect this accounting update to have a material effect on its consolidated financial statements.
The Company reviews new accounting standards as issued. Although some of these accounting standards issued or effective after the end of the Company’s previous fiscal year may be applicable, the Company has not identified any standards that the Company believes merit further discussion. The Company believes that none of the new standards will have a significant impact on the financial statements.
Going Concern
The Company does not have any commercialized products and has not generated any revenue since inception. The Company has a retained deficit of $36,685,128 and cash and cash equivalents of $876,009 as of February 28, 2017, and does not have positive cash flows from operating activities. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern, which is dependent upon the Company’s ability to establish itself as a profitable business.
Based upon its current and near term anticipated level of operations and expenditures, the Company believes that cash on hand should be sufficient to enable it to continue operations through June 2017.
If adequate funds are not available on reasonable terms, or at all, it would result in a material adverse effect on the Company’s business, operating results, financial condition and prospects. In particular, the Company may be required to delay; reduce the scope of or terminate its research and development programs; sell rights to its SolarWindow™ technology and/or MotionPower™ technology, or other technologies or products based upon these technologies; or license the rights to these technologies or products on terms that are less favorable to the Company than might otherwise be available.
In view of these conditions, the ability of the Company to continue as a going concern is in substantial doubt and dependent upon achieving a profitable level of operations and on the ability of the Company to obtain necessary financing to fund ongoing operations. These consolidated financial statements do not give effect to any adjustments which will be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
NOTE 2 - Debt
December 7, 2015, $550,000 Bridge Loan
On December 7, 2015, the Company entered into a Bridge Loan Agreement (the “December 2015 Loan Agreement”) with Kalen Capital Corporation (the “Investor”). Pursuant to the December 2015 Loan Agreement, the Company received $550,010 (Includes an additional $10 related to wire fees). The December 2015 Loan was evidenced by a promissory note with an annual interest rate of 10% and maturity date of September 1, 2016. The December 2015 Loan was convertible at any time into shares of common stock at a conversion price equal to 85% of the thirty day volume weighted average price of the Company’s common stock. In connection with the December 2015 Loan Agreement, the Company issued the Investor a Series M Stock Purchase Warrant (the “Series M Warrant”) to purchase up to 275,000 shares of the Company’s common stock for a period of five years, with an exercise price of $2.34.
The debt discount attributable to the warrants and beneficial conversion feature amounted to $458,777 and discount was accreted through March 31, 2016.
On March 31, 2016, the Investor received 177 PPM Units (as defined below under Note 3) from the conversion of $548,700 of the principal owed under the December 2015 Loan Agreement resulting in a remaining balance of $18,146. The remaining balance was evidenced by a new promissory note (the “March 2016 Note”) dated March 31, 2016. The March 2016 Note accrued interest at 10% and was due September 1, 2016. The March 2016 Note was repaid on November 14, 2016.
The PPM Units issued in exchnge for the conversion of principal owed under the December 2015 Loan Agreement contained terms that were more beneficial to the Investor resulting in the Company recognizing a loan conversion inducement expense of $36,176 related to the common stock issued and $529,230 related to the warrant component of the PPM Units (i.e., the Series O Warrant and Series P Warrant as defined below under Note 3).
During the three months ended February 28, 2017 and February 29, 2016, the Company recognized $0 and $12,072, respectively, of interest expense. During the six months ended February 28, 2017 and February 29, 2016, the Company recognized $695 and $12,072, respectively, of interest expense. Accretion related to the debt discount for the December 2015 Loan Agreement amounted to $0 and $143,262 during the three months ended February 28, 2017 and February 29, 2016, respectively, and $0 and $143,262 during the six months ended February 28, 2017 and February 29, 2016, respectively.
March 4, 2015, $600,000 Bridge Loan
On March 4, 2015, the Company entered into a Bridge Loan Agreement (the “Bridge Loan Agreement”) with 1420468 Alberta Ltd. (the “Creditor”) (which has since been merged with and into the Investor). Pursuant the Bridge Loan Agreement, the Company borrowed $600,000 at an annual interest rate of 7% (the “March 2015 Loan”), compounded quarterly, with a default rate of 15%. The March 2015 Loan was evidenced by a promissory note with an initial maturity date of the earlier of: (a) the closing of any equity financing by the Company in excess of $600,000, or (b) September 4, 2015. In connection with the Bridge Loan Agreement, the Company issued Creditor a Series L Stock Purchase Warrant (the “Series L Warrant”) to purchase up to 500,000 shares of the Company’s common stock, which was initially exercisable from September 5, 2015 through March 4, 2020, with an exercise price of $1.20.
The debt discount attributable to the relative fair value of the Series L Warrant issued with the March 2015 Loan, amounted to $299,750 and was accreted over the original term of the March 2015 Loan through September 4, 2015.
On December 7, 2015, Creditor agreed to extend the maturity date of the March 2015 Loan from September 4, 2015 to December 31, 2016 and extend the expiration date of the Series L Warrant from March 4, 2020 to December 7, 2020. As consideration the Company issued Creditor a Series M Stock Purchase Warrant to purchase 100,000 shares of the Company’s common stock through December 7, 2020, at an exercise price of $2.34 per share. As a result, the Company recognized an additional debt discount for the fair value of the Series M Stock Purchase Warrant and extension of the expiration date of the Series L Warrant amounting to $205,800 and $33,000, respectively.
On January 5, 2017, the Company and the Creditor entered into the Second Amendment to Bridge Loan Agreement extending the maturity date of the March 2015 Loan from December 31, 2016 to December 31, 2017. No consideration was exchanged for this extension in the maturity date.
During the three months ended February 28, 2017 and February 29, 2016, the Company recognized $11,690 and $11,025, respectively, of interest expense. During the six months ended February 28, 2017 and February 29, 2016, the Company recognized $23,306 and $21,861, respectively, of interest expense. Accretion related to the debt discount for the March 2015 Loan, Series L Warrant and Series M Warrant amounted to $18,982 and $51,434 during the three months ended February 28, 2017 and February 29, 2016, respectively, and $74,702 and $57,950 during the six months ended February 28, 2017 and February 29, 2016, respectively.
October 7, 2013, $3,000,000 Convertible Promissory Note
On October 7, 2013, the Company entered into a Bridge Loan Agreement (the “2013 Loan Agreement”) with the Investor. Pursuant to the 2013 Loan Agreement, the Company received proceeds of $3,000,000 and issued a 7% unsecured Convertible Promissory Note (the “2013 Note”) initially due on October 6, 2014, with interest compounded quarterly and issued a Series I Stock Purchase Warrant (the “Series I Warrant”) for the purchase up to 921,875 shares of the Company’s common stock at an initial exercise price of $1.37 for a period of five years. According to the original terms of the 2013 Loan Agreement, the Investor may have elected to convert all or any portion of the outstanding principal amount of the 2013 Note, and accrued interest thereon into units, with each unit consisting of (a) one share of common stock; (b) one Series J Stock Purchase Warrant for the purchase of one share of common stock (the “Series J Warrant”); and (c) one Series K Stock Purchase Warrant for the purchase of one share of common stock (the “Series K Warrant”).
On November 10, 2014, the Company entered into an Amended Bridge Loan Agreement (the “2015 Loan Agreement”) with the Investor pursuant to which the maturity date was extended to December 31, 2015 (the “Amended Note”). According to the terms of the 2015 Loan Agreement, the Investor may elect to convert principal and accrued interest into units of the Company’s equity securities (collectively, the “Units”), with each Unit consisting of (a) one share of common stock; and (b) one Stock Purchase Warrant for the purchase of one share of common stock. The conversion price for each Unit is the lesser of (i) $1.37; or (ii) 70% of the 20 day average closing price of the Company’s common stock prior to conversion, subject to a floor of $1.00 with the exercise price of each Warrant being equal to 60% of the 20 day average closing price of the Company’s common stock prior to conversion. If issued, the Warrant included in the Units will be exercisable for a period of five years.
In order to induce the Investor to enter into the 2015 Loan Agreement and extend the maturity date to December 31, 2015, the Company issued a Series J Warrant to purchase 3,110,378 shares of its common stock at an exercise price of $1.12 and a Series K Warrant to purchase 3,110,378 shares of its common stock at an exercise price of $1.20. Each of the Series J Warrant and Series K Warrant was initially exercisable through November 9, 2019. As a result of the modification (which did not result in a gain or loss due to the related party nature of the transaction), the fair value of the Warrant amounting to $3,629,309 (limited to the $3,000,000 face value of the note) was recognized as a debt discount as of November 10, 2014.
On December 31, 2015, the Company entered into a Second Amended Bridge Loan Agreement (the “2015 Second Amended Loan Agreement”) with the Investor, pursuant to which the Company and the Investor amended the 2015 Loan Agreement by amending the 2013 Note to extend the maturity date to December 31, 2017 (the “Second Amended Note”).
As consideration for the Investor agreeing to extend the 2013 Note maturity date to December 31, 2017, the Company issued a Series N Warrant and extended the maturity date of certain of the Investor’s existing warrants, as described below, resulting in an additional debt discount of $2,476,875 as of December 31, 2015. The modification did not result in a gain or loss due to the related party nature of the transaction.
The Company issued a Series N Warrant to purchase 767,000 shares of common stock at an exercise price of $3.38 through December 31, 2020. The fair value of the Series N Warrant was $2.102 per share, or $1,612,234 and the resulting debt discount is being accreted through December 31, 2017.
The maturity date of the Series I Warrant to purchase 921,875 shares of common stock was extended from October 6, 2018 to December 31, 2020. The Company recorded $233,234 as a debt discount to recognize the increase in value for the extension of the expiration date.
The maturity date of the Series J Warrant to purchase 3,110,378 shares of common stock was extended from November 9, 2019 to December 31, 2020. The Company recorded $304,817 as a debt discount to recognize the increase in fair value for the extension of the expiration date which is being accreted through December 31, 2017.
The maturity date of the Series K Warrant to purchase 3,110,378 shares of common stock was extended from November 9, 2019 to December 31, 2020. The Company recorded $326,590 as a debt discount to recognize the increase in fair value for the extension of the expiration date which is being accreted through December 31, 2017.
Interest expense related to the 2013 Loan Agreement, as amended, amounted to $64,437 and $60,774 during the three months ended February 28, 2017 and February 29, 2016, respectively, and $128,473 and $120,506 during the six months ended February 28, 2017 and February 29, 2016, respectively.
Accretion of the debt discount related to the 2013 Loan Agreement as amended amounted to $304,950 and $426,859 during the three months ended February 28, 2017 and February 29, 2016, respectively, and $613,289 and $1,083,109 during the six months ended February 28, 2017 and February 29, 2016, respectively. The remaining debt discount related to the Series N Warrants and Series I, J and K Warrant expiration date extensions totals $1,036,831 and will be amortized through December 31, 2017.
NOTE 3 – Private Placements
June 2016 Private Placement
On June 20, 2016, the Company completed a self-directed offering of 937,500 units at a price of $3.20 per unit for $3,000,000 in aggregate proceeds (the “June 2016 Private Placement”). Each unit consisted of (a) one share of common stock; (b) one Series Q Stock Purchase Warrant to purchase one share of common stock at an exercise price of $3.20 per share through June 20, 2019; and (c) one Series R Stock Purchase Warrant to purchase one share of common stock at a price of $4.00 per share through June 20, 2021. The warrants may be exercised on a cashless basis.
The relative fair value of the common stock was estimated to be $1,338,000. The relative fair value of the Series Q Warrants and Series R Warrants was estimated to be $783,000 and $879,000, respectively, as determined based on the relative fair value allocation of the proceeds received.
March 2016 Private Placement
Beginning on February 18, 2016 and closing on March 31, 2016, the Company completed an offering pursuant to a Private Placement Memorandum dated February 16, 2016 (the “Offering”) for the sale to accredited investors of units of the Company’s equity securities (each a “PPM Unit” and collectively, the “P
PM Units
”) at a price of $3,100 per PPM Unit with each PPM Unit comprised of (a) one thousand shares of common stock; (b) one warrant to purchase one thousand shares of common stock at a price, subject to certain adjustments, of $3.10 per share through October 31, 2017 (the “Series O Warrant”); and (c) one warrant to purchase five hundred shares common stock at a price, subject to certain adjustments, of $3.70 per share through April 30, 2018 (the “Series P Warrant”). Pursuant to the Offering, the Company issued 618 PPM Units consisting of 441 PPM Units in exchange for cash of $1,367,100 and 177 PPM Units for the conversion of $548,700 of the principal owed under the December 2015 Loan Agreement.
The terms of the Offering provided for a onetime reset adjustment (the “Reset Adjustment”) such that if, within 6 months from the Offering Termination Date, the Company sells equity securities at a price less than $3.10 per share (“Reset Price”), each of the subscribers having purchased Units in the Offering will receive additional Units (the “Reset Units”) equal to the difference between the number of Units that would have been issuable to such subscribers if the price per share of common stock included in the Units was equal to the Reset Price less the number of Units actually received by such subscriber. The Reset Adjustment expired on September 30, 2016; no Reset Units were issued. The Reset Adjustment was accounted for as a derivative, measured at fair value, during the year ended August 31, 2016. The Company determined the Reset Adjustment had no value as of August 31, 2016.
NOTE 4 – Common Stock and Warrants
Common Stock
At February 28, 2017, the Company had 300,000,000 authorized shares of common stock with a par value of $0.001 per share, 28,666,741 shares of common stock outstanding and 3,061,665 shares reserved for issuance under the Company’s 2006 Long-Term Incentive Plan (the “2006 Plan”) as adopted and approved by the Company’s Board of Directors (the “Board”) on October 10, 2006 that provides for the grant of stock options to employees, directors, officers and consultants (See “NOTE 5 - Stock Options”).
During the six months ended February 28, 2017, the Company had the following common stock related transactions:
|
·
|
issued 46,520 shares of common stock upon the cashless exercise of 130,000 options.
|
|
|
|
|
·
|
issued 40,000 shares of common stock on November 15, 2016 to each of the Company’s three directors pursuant to the 2006 Plan (120,000 shares total) valued at $3.28 per share, the closing price of the Company’s common stock on the day the stock was granted.
|
During the year ended August 31, 2016, the Company had the following common stock related transactions:
|
·
|
issued 282,106 shares of common stock upon the cashless exercise of 556,667 options.
|
|
|
|
|
·
|
issued 30,000 shares of common stock on January 5, 2016 to each of the Company’s three directors pursuant to the 2006 Plan (90,000 shares total) valued at $3.75 per share, the closing price of the Company’s common stock on the day the stock was granted.
|
|
|
|
|
·
|
received $1,367,100 pursuant to the Offering for the purchase of 441 PPM Units resulting in the issuance of 441,000 shares of common stock (See “NOTE 3 – Private Placements”).
|
|
|
|
|
·
|
converted loan principal of $548,700 from the December 2015 Loan Agreement in exchange for 177 PPM Units resulting in the issuance of 177,000 shares of common stock (See “NOTE 2 – Debt”).
|
|
|
|
|
·
|
received $3,000,000 pursuant to the June 2016 Private Placement for the purchase of 937,500 units resulting in the issuance of 937,500 shares of common stock (See “NOTE 3 – Private Placements”).
|
Warrants
Each of the Company’s outstanding warrants entitles the holder to purchase one share of the Company’s common stock for each warrant share held. Other than the Series O Warrants and Series P Warrants, all of the following warrants may be exercised on a cashless basis. A summary of the Company’s warrants outstanding and exercisable as of February 28, 2017 and August 31, 2016 is as follows:
|
|
Shares of Common
Stock Issuable
from
Warrants Outstanding as of
|
|
|
Weighted
Average
|
|
|
|
|
|
|
February 28,
|
|
|
August 31,
|
|
|
Exercise
|
|
|
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
Price
|
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series I
|
|
|
921,875
|
|
|
|
921,875
|
|
|
$
|
1.37
|
|
|
December 31, 2020
|
|
Series J
|
|
|
3,110,378
|
|
|
|
3,110,378
|
|
|
$
|
1.12
|
|
|
December 31, 2020
|
|
Series K
|
|
|
3,110,378
|
|
|
|
3,110,378
|
|
|
$
|
1.20
|
|
|
December 31, 2020
|
|
Series L
|
|
|
500,000
|
|
|
|
500,000
|
|
|
$
|
1.20
|
|
|
December 7, 2020
|
|
Series M
|
|
|
375,000
|
|
|
|
375,000
|
|
|
$
|
2.34
|
|
|
December 31, 2020
|
|
Series N
|
|
|
767,000
|
|
|
|
767,000
|
|
|
$
|
3.38
|
|
|
December 31, 2020
|
|
Series O
|
|
|
618,000
|
|
|
|
618,000
|
|
|
$
|
3.10
|
|
|
October 31, 2017
|
|
Series P
|
|
|
309,000
|
|
|
|
309,000
|
|
|
$
|
3.70
|
|
|
April 30, 2018
|
|
Series Q
|
|
|
937,500
|
|
|
|
937,500
|
|
|
$
|
3.20
|
|
|
June 20, 2019
|
|
Series R
|
|
|
937,500
|
|
|
|
937,500
|
|
|
$
|
4.00
|
|
|
June 20, 2021
|
|
Total
|
|
|
11,586,631
|
|
|
|
11,586,631
|
|
|
|
|
|
|
|
|
The Series I Warrant was issued on October 7, 2013, in connection with the 2013 Loan Agreement. On December 31, 2015, as consideration for the Investor agreeing to extend the 2013 Note maturity date to December 31, 2017, the Company extended the maturity date of the Series I Warrant from October 6, 2018 to December 31, 2020.
The Series J Warrant and Series K Warrant were issued on November 10, 2014 as a condition to the Investor entering into the 2015 Loan Agreement. On December 31, 2015, as consideration for the Investor agreeing to extend the 2013 Note maturity date to December 31, 2017, the Company extended the maturity date of the Series J and K Warrants from November 9, 2019 to December 31, 2020.
The Series L Warrant was issued on March 4, 2015 in connection with the March 2015 Loan. On December 7, 2015, the expiration date of the Series L Warrant was extended from March 4, 2020 to December 7, 2020.
A Series M Warrant, with an exercise price of $2.34, to purchase 275,000 shares of common stock was issued on December 7, 2015 in connection with the December 2015 Loan. A Series M Warrant, with an exercise price of $2.34, to purchase 100,000 shares was issued on December 7, 2015 as an inducement for Creditor to extend the maturity date of the March 2015 Loan from September 4, 2015 to December 21, 2016.
The Series N Warrant to purchase 767,000 shares was issued on December 31, 2015 pursuant to the 2015 Second Amended Loan Agreement as an inducement for the Investor to extend the maturity date of the 2013 Note from December 31, 2015 to December 31, 2017.
The Series O and Series P Warrant were issued in connection with the Offering and the Series Q and Series R Warrants were issued in connection with the June 2016 Private Placement; see “NOTE 3 – Private Placements.”
There are a total of approximately 2,772,057 warrants issuable pursuant to the 2013 Loan Agreement as described above under “NOTE 2 – Debt:
October 7, 2013, $3,000,000 Convertible Promissory Note
.”
NOTE 5 - Stock Options
Stock option grants pursuant to the 2006 Plan vest either immediately or over one to five years and expire ten years after the date of grant. Stockholders previously approved 5,000,000 shares for grant under the 2006 Plan, of which 3,061,665 remain available for grant and 1,013,334 were issued pursuant to the exercise of vested options as of February 28, 2017. All shares approved for grant and subsequently forfeited are available for future grant. The Company does not repurchase shares to fulfill the requirements of options that are exercised. The Company issues new shares when options are exercised.
The Company employs the following key weighted-average assumptions in determining the fair value of stock options, using the Black-Scholes option pricing model and the simplified method to estimate the expected term of “plain vanilla” options:
|
|
Six Months
Ended
|
|
|
Year
Ended
|
|
|
|
February 28,
2017
|
|
|
August 31,
2016
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
Expected stock price volatility
|
|
|
81
|
%
|
|
|
82
|
%
|
Risk-free interest rate
|
|
|
2.03
|
%
|
|
|
2.06
|
%
|
Expected term (in years)
|
|
|
7.67
|
|
|
|
7.67
|
|
Exercise price
|
|
$
|
3.28
|
|
|
$
|
3.46
|
|
Weighted-average grant date fair-value
|
|
$
|
2.48
|
|
|
$
|
2.64
|
|
A summary of the Company’s stock option activity for the six months ended February 28, 2017 and year ended August 31, 2016 and related information follows:
|
|
Number of Shares Subject
to Option Grants
|
|
|
Weighted
Average
Exercise Price ($)
|
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate
Intrinsic
Value ($)
|
|
Outstanding at August 31, 2015
|
|
|
1,267,502
|
|
|
|
2.68
|
|
|
|
|
|
|
Grants
|
|
|
65,000
|
|
|
|
3.46
|
|
|
|
|
|
|
Forfeitures
|
|
|
(55,834
|
)
|
|
|
3.23
|
|
|
|
|
|
|
Exercises
|
|
|
(556,667
|
)
|
|
|
2.22
|
|
|
|
|
|
|
Outstanding at August 31, 2016
|
|
|
720,001
|
|
|
|
3.06
|
|
|
|
|
|
|
Grants
|
|
|
35,000
|
|
|
|
3.28
|
|
|
|
|
|
|
Exercises
|
|
|
(130,000
|
)
|
|
|
2.62
|
|
|
|
|
|
|
Outstanding at February 28, 2017
|
|
|
625,001
|
|
|
|
3.16
|
|
|
6.90 years
|
|
|
386,300
|
|
Exercisable at February 28, 2017
|
|
|
187,501
|
|
|
|
3.68
|
|
|
6.41 years
|
|
|
89,150
|
|
Available for grant at February 28, 2017
|
|
|
3,061,665
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value for all “in-the-money” options (i.e. the difference between the Company’s closing stock price on the last trading day of the period covered by this report and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all in-the-money option holders exercised their vested options on February 28, 2017. The intrinsic value of the option changes based upon the fair market value of the Company’s common stock. Since the closing stock price was $3.62 on February 28, 2017 and 575,000 outstanding options have an exercise price below $3.62 per share, as of February 28, 2017, there is intrinsic value to the Company’s outstanding, in-the-money stock options.
During the six months ended February 28, 2017, there were 130,000 options exercised on a cashless basis resulting in the issuance of 46,520 shares of common stock. The aggregate intrinsic value of the options exercised was $186,500. Additionally, the Company granted 35,000 options with an exercise price of $3.28.
The following table sets forth the share-based compensation cost resulting from stock option grants, including those previously granted and vesting over time, that were recorded in the Company’s Consolidated Statements of Operations for the three and six months ended February 28, 2017 and February 29, 2016:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Stock Compensation Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
$
|
26,667
|
|
|
$
|
65,662
|
|
|
$
|
79,722
|
|
|
$
|
127,218
|
|
R&D
|
|
|
11,695
|
|
|
|
58,300
|
|
|
|
57,240
|
|
|
|
59,958
|
|
Total
|
|
$
|
38,362
|
|
|
$
|
123,962
|
|
|
$
|
136,962
|
|
|
$
|
187,176
|
|
As of February 28, 2017, the Company had $95,483 of unrecognized compensation cost related to unvested stock options which is expected to be recognized over a period of 1.8 years.
The following table summarizes information about stock options outstanding and exercisable at February 28, 2017:
|
|
|
Stock Options Outstandin
|
|
|
Stock Options Exercisable
|
|
Range
of
Exercise
Prices
|
|
|
Number of Shares
Subject
to
Outstanding Options
|
|
|
Weighted
Average
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of Shares Subject
To Options
Exercise
|
|
|
Weighted Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.80
|
|
|
|
5,000
|
|
|
|
5.81
|
|
|
$
|
0.80
|
|
|
|
5,000
|
|
|
|
5.81
|
|
|
$
|
0.80
|
|
|
1.40
|
|
|
|
5,000
|
|
|
|
7.80
|
|
|
|
1.40
|
|
|
|
5,000
|
|
|
|
7.80
|
|
|
|
1.40
|
|
|
2.50
|
|
|
|
10,000
|
|
|
|
4.10
|
|
|
|
2.50
|
|
|
|
10,000
|
|
|
|
4.10
|
|
|
|
2.50
|
|
|
2.90
|
|
|
|
455,000
|
|
|
|
6.91
|
|
|
|
2.90
|
|
|
|
55,000
|
|
|
|
6.91
|
|
|
|
2.90
|
|
|
3.28
|
|
|
|
35,000
|
|
|
|
9.72
|
|
|
|
3.28
|
|
|
|
17,500
|
|
|
|
9.72
|
|
|
|
3.28
|
|
|
3.46
|
|
|
|
65,000
|
|
|
|
8.85
|
|
|
|
3.46
|
|
|
|
45,000
|
|
|
|
8.85
|
|
|
|
3.46
|
|
|
4.98
|
|
|
|
16,667
|
|
|
|
1.03
|
|
|
|
4.98
|
|
|
|
16,667
|
|
|
|
1.03
|
|
|
|
4.98
|
|
|
5.94
|
|
|
|
33,334
|
|
|
|
3.82
|
|
|
|
5.94
|
|
|
|
33,334
|
|
|
|
3.82
|
|
|
|
5.94
|
|
|
Total
|
|
|
|
625,001
|
|
|
|
6.90
|
|
|
$
|
3.16
|
|
|
|
187,501
|
|
|
|
6.41
|
|
|
$
|
3.68
|
|
NOTE 6 - Net Loss Per Share
During the three and six months ended February 28, 2017 and February 29, 2016, the Company recorded a net loss. Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The Company has not included the effects of warrants, stock options and convertible debt on net loss per share because to do so would be antidilutive.
Following is the computation of basic and diluted net loss per share for the three and six months ended February 28, 2017 and February 29, 2016:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Basic and Diluted EPS Computation
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders'
|
|
$
|
(1,286,271
|
)
|
|
$
|
(1,809,083
|
)
|
|
$
|
(3,008,801
|
)
|
|
$
|
(3,133,032
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
28,666,741
|
|
|
|
26,866,729
|
|
|
|
28,615,533
|
|
|
|
26,719,672
|
|
Basic and diluted EPS
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares listed below were not included in the computation of diluted losses
per share because to do so would have been antidilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
625,001
|
|
|
|
720,001
|
|
|
|
625,001
|
|
|
|
720,001
|
|
Warrants
|
|
|
11,586,631
|
|
|
|
9,014,131
|
|
|
|
11,586,631
|
|
|
|
9,014,131
|
|
Convertible debt
|
|
|
2,772,057
|
|
|
|
2,765,294
|
|
|
|
2,772,057
|
|
|
|
2,765,294
|
|
Warrants issuable upon conversion of debt (See "NOTE 2 - Debt" above)
|
|
|
2,772,057
|
|
|
|
2,586,214
|
|
|
|
2,772,057
|
|
|
|
2,586,214
|
|
Total shares not included in the computation of diluted losses per share
|
|
|
17,755,746
|
|
|
|
15,085,640
|
|
|
|
17,755,746
|
|
|
|
15,085,640
|
|
NOTE 7 - Related Party Transactions
A related party with respect to the Company is generally defined as any person (i) (and, if a natural person, inclusive of his or her immediate family) that holds 10% or more of the Company’s securities, (ii) that is part of the Company’s management, (iii) that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
The law firm of Sierchio & Partners, LLP, of which Joseph Sierchio, one of the Company’s directors, was a principal, had provided counsel to the Company since its inception. Beginning in September 2016, Mr. Sierchio became a partner at Satterlee Stephens LLP (“Satterlee”). Concurrently with Mr. Sierchio’s move to Satterlee, the Company engaged with Satterlee to provide legal counsel with Mr. Sierchio maintaining his role as the Company’s primary attorney. During the three months ended February 28, 2017 and February 29, 2016, the Company recognized $45,005 and $100,629 of fees for legal services billed by firms associated with Mr. Sierchio. During the six months ended February 28, 2017 and February 29, 2016, the Company recognized $151,555 and $147,594 of fees for legal services billed by firms associated with Mr. Sierchio. At February 28, 2017, the Company owed Satterlee $11,213 which is included in accounts payable. There are no accounts payable to Sierchio & Partners, LLP as of February 28, 2017. Mr. Sierchio continues to serve as a director of the Company.
During the six months ended February 28, 2017, the Company paid the March 2015 Note in full resulting in a payment to the Investor totaling $19,599 representing $18,146 of principal and $1,453 of accrued interest.
All related party transactions are recorded at the exchange amount established and agreed to between related parties and are in the normal course of business.
NOTE 8 – Subsequent Events
Management has reviewed material events subsequent of the quarterly period ended February 28, 2017 and prior to the filing of financial statements in accordance with FASB ASC 855 “Subsequent Events.”
On March 2, 2017, Kalen Capital Corporation exercised outstanding warrants to purchase up to 7,642,631 shares of the Company’s common stock on a cashless basis, consisting of: (i) a Series I Warrant to purchase up to 921,875 shares; (ii) a Series J Warrant to purchase up to 3,110,378 shares; (iii) a Series K Warrant to purchase up to 3,110,378 shares; and (iv) a Series L Warrant to purchase up to 500,000 shares, resulting in the issuance of 5,215,046 shares of common stock.