NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. BACKGROUND, BASIS OF PRESENTATION,
AND GOING CONCERN:
Background
NanoFlex Power Corporation (‘we”
“our”, the “Company”, formerly known as Universal Technology Systems, Corp., was incorporated in the State
of Florida on January 28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation,
a Pennsylvania corporation (“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”).
Immediately following the closing of the Share Exchange Transaction, the Company owned 100% of equity interests of GPEC and GPEC
became a wholly-owned subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal Technology
Systems, Corp.” to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS” on
December 26, 2013.
GPEC was incorporated in Pennsylvania
on February 7, 1994. The Company is organized to fund, develop, commercialize and license advanced photovoltaic technologies that
enable thin film solar products with what we believe to be industry-leading efficiencies, light weight, flexibility, and low total
system cost.
These technologies are targeted at certain
broad applications, including: (a) portable and off-grid power generation, (b) building applied photovoltaics (“BAPV”),
(c) building integrated photovoltaics (“BIPV”), (d) space vehicles and unmanned aerial vehicles (“UAVs”),
(e) semi-transparent solar power generating windows or glazing, and (f) ultra-thin solar films for automobiles or other consumer
applications.
We believe these technologies have been
demonstrated in a laboratory environment with our research partners. The Company is currently taking steps to pursue product development
and commercialization on some of these technologies in collaboration with industry partners and potential customers.
Basis of Presentation
The accompanying unaudited interim consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures have been or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated
financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim
periods presented. These consolidated financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the fiscal year ended December 31, 2016 included in our Annual Report on Form 10-K. The results
of operations for the three and six months ended June 30, 2017 are not necessarily indicative of results to be expected for the
full fiscal year or any other periods.
The preparation of the consolidated financial
statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates
and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures. Actual results may differ
from these estimates.
Revenue Recognition
We recognize revenue from our services
when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue
can be measured reliably. This is normally demonstrated when: (i) persuasive evidence of an arrangement exists; (ii) the fee is
fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured. Revenue from
our JDAs are recognized as services are provided and are limited to the total dollar amount specified in the agreement. R&D
engineering services, through JDAs are a core component of the Company’s operations and business model, since they are a
necessary prerequisite to obtaining intellectual property licensing agreements with customers. As such, R&D engineering services
are expected to be a sustained revenue stream for the Company as it works with additional customers and the services constitute
a portion of the Company’s ongoing central operations
Going Concern
The Company has generated limited revenue
to date. The Company has a working capital deficit of $12,760,214 and an accumulated deficit of $206,020,146 as of June 30, 2017.
The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry
out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to
the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary
in the event the Company cannot continue in existence. To date, the Company has funded its initial operations primarily by way
of the sale of equity securities, convertible note financing, short term financing from private parties, and advances from related
parties.
Fair Value
ASC 820 Fair Value Measurements and Disclosures
(“ASC 820”), defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair
value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels
of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven
valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or
corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure
fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable
inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost
and effort.
As of June 30, 2017, the significant inputs
to the Company’s derivative liability calculation were Level 3 inputs.
The following schedule summarizes the
valuation of financial instruments at fair value in the balance sheets as of June 30, 2017 and December 31, 2016:
|
|
Fair Value
Measurements as of
June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
3,743,820
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
1,211,343
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,955,163
|
|
The following table sets forth a reconciliation
of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
Significant Unobservable
|
|
|
Significant Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
7,503,405
|
|
|
$
|
9,948,356
|
|
|
$
|
11,985,141
|
|
|
$
|
18,207,333
|
|
Change in fair value
|
|
|
(2,641,787
|
)
|
|
|
(1,185,582
|
)
|
|
|
(7,123,523
|
)
|
|
|
(9,444,559
|
)
|
Additions reclassified from equity
|
|
|
93,545
|
|
|
|
-
|
|
|
|
93,545
|
|
|
|
-
|
|
Additions recognized as compensation expense
|
|
|
-
|
|
|
|
544,442
|
|
|
|
-
|
|
|
|
544,442
|
|
Ending balance
|
|
$
|
4,955,163
|
|
|
$
|
9,307,216
|
|
|
$
|
4,955,163
|
|
|
$
|
9,307,216
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
No. 2016-02
,” Leases” (Topic 842)
which includes a lessee accounting model that recognizes two types of leases
- finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities
for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows
arising from a lease by a lessee will depend on its classification as a finance or an operating lease. New disclosures to help
investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from
leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the
amounts recorded in the financial statements. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The Company is currently evaluating the effect its adoption of this standard,
if any, on our consolidated financial position, results of operations or cash flows.
In May 2016, the FASB issued ASU No. 2016-12,
“
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
”, to
clarify certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract
modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method
is adopted. The effective date and transition requirements for these amendments are. annual reporting periods beginning after
December 15, 2017, including interim reporting periods therein, and that would also permit public entities to elect to adopt
the amendments as of the original effective date as applicable to reporting periods beginning after December 15, 2016. The
new guidance allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively
as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of this amendment
on its financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”,
to provide clarity and
reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock
Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes
to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments
are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on
or after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating
the impact this standard will have on the Company's consolidated financial statements and related disclosures.
In July 2017, the FASB issued ASU No.
2017-11,
“Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging
(Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception”.
The ASU was issued to address the complexity associated with applying generally accepted
accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among
other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and
other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early
adoption is permitted, including adoption in an interim period. The Company is currently evaluating the implementation date and
the impact of this amendment on its financial statements.
2. DEBT
Notes Payable
The Company has a note payable of $100,000
due to its former Chief Executive Officer and President. The note bears an interest rate at the minimum applicable rate for loans
of similar duration, which was 0.5% as of June 30, 2017. In June of 2017, an agreement was signed to extend the maturity date
of this note to April 26, 2018.
On August 31, 2016, the Company issued
a promissory note of $300,000. The term of the note expires one year from the effective date and has an interest rate of 10%.
600,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50/share in
lieu of cash interest. The relative fair value of the warrants of $235,188 was recognized as a debt discount which is being amortized
on a straight-line basis over the term of the note. The Company recognized interest expense of $58,797 and $117,594 associated
with the amortization of debt discount for the three and six months ended June 30, 2017.
On June 22, 2017, the Company issued a
promissory note of $1,000,000. The term of the note expires seven months from the effective date and has an interest rate of 8%.
3,000,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50/share in
lieu of cash interest. The relative fair value of the warrants of $597,565 was recognized as a debt discount which is being amortized
on a straight-line basis over the term of the note. The Company recognized interest expense of $22,764 associated with the amortization
of debt discount for the three and six months ended June 30, 2017.
As of June 30, 2017, and December 31,
2016, the aggregate outstanding balance of non-convertible notes payable was $1,400,000 and $400,000, and unamortized discount
was $613,999 and $156,792, respectively.
Notes Payable – Related Party
On January 27, 2017, the Company borrowed
$380,000 under a short term note agreement with a major shareholder. Under the terms of this agreement, the note is to be repaid
within four months of funding along with $19,000 paid at the maturity of the note in lieu of interest. This maturity date for
this note was extended subsequent to the end of the quarter. See Note 6 for details of the extension of the maturity date of this
note
On March 6, 2017, the Company borrowed
$120,000 under a short term note agreement with a major shareholder. Under the terms of this agreement, the note is to be repaid
within four months of funding along with $6,000 paid at the maturity of the note in lieu of interest. This maturity date for this
note was extended subsequent to the end of the quarter. See Note 6 for details of the extension of the maturity date of this note.
On April 4, 2017, the Company borrowed
$100,000 under a short term note agreement with a major shareholder. Under the terms of this agreement, the note is going to be
repaid within four months of funding along with $5,000 paid at the maturity of the note in lieu of interest. This maturity date
for this note was extended subsequent to the end of the quarter. See Note 6 for details of the extension of the maturity date
of this note.
On June 5, 2017, the Company entered into
a letter agreement with a major shareholder pursuant to which the Company agreed that the shareholder loans to the Company made
from November of 2016 through April of 2017, totaling $1,100,000 are to be convertible, at the shareholder’s option, into
an investment in the Company's next financing round resulting in gross proceeds to the Company of at least $1,000,000. Further,
pursuant to the letter agreement, the Company agreed to provide the shareholder with a one-time full ratchet anti-dilution adjustment
to the Conversion Shares, as defined below, with a value equal to the Original Conversion Price, as defined below and as a result
issued 3,400,000 shares of the Company’s common stock based on the lowest priced financing since the offering of the Bridge
Notes, as defined below, of $0.50. The shareholder previously invested a total of $6,800,000 in the Company's 2013 Bridge
Debenture Offering (the "Bridge Notes"). The Bridge Notes were then converted into 6,849,370 shares of the Company's
common stock (the "Conversion Shares") at a conversion price of $1.00 (the "Original Conversion Price") and
included interest paid in kind under the Bridge Notes. The Company calculated the fair value of the shares on the issuance date
and recorded $1,190,000 as loss on extinguishment of debt.
As of June 30, 2017, and December 31,
2016, the aggregate outstanding balance of notes payable to related parties was $1,100,000 and $500,000, respectively.
Advances – Related Party
During the three and six months ended
June 30, 2017, the Company received advances from its Chief Executive Officer totaling $59,500 and $69,500, respectively, and
repaid advances totaling $144,500 and $184,500, respectively.
As of June 30, 2017, and December 31,
2016, the aggregate outstanding balance of advances to related parties was $395,000 and $510,000, respectively.
Convertible Notes Payable
On January 27, 2017, the Company entered
into a note purchase agreement with an investor pursuant to which an investor purchased a promissory note from the Company in
exchange for $200,000 and a warrant to purchase 400,000 shares of the company’s common stock with a $0.50 exercise price
and five year term. The promissory note had a clause that automatically modified it 30 days after issuance into a convertible
note. The convertible note was issued on February 27, 2017, pursuant to the agreement, with a principal amount of $200,000, includes
the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible into 400,000
units, with each unit consisting of a share of common stock and a warrant with a five year life from the date of conversion and
an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the 600,000 warrants
was $125,931 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $38,655
which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on
a straight-line basis over the term of the note. The note also contains an additional warrant expense of $35,414 associated with
the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On March 8, 2017, the Company entered
into a note purchase agreement with an investor pursuant to which an investor purchased a promissory note from the Company in
exchange for $200,000 and a warrant to purchase 400,000 shares of the company’s common stock with a $0.50 exercise price
and five year term. The promissory note had a clause that automatically modified it 30 days after issuance into a convertible
note. The convertible note was issued on April 8, 2017, pursuant to the agreement, with a principal amount of $200,000, includes
the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible into 400,000
units, with each unit consisting of a share of common stock and a warrant with a five year life from the date of conversion and
an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the 600,000 warrants
was $130,207 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $36,196
which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on
a straight-line basis over the term of the note. The note also contains an additional warrant expense of $33,596 associated with
the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On March 9, 2017, the Company entered
into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in
exchange for $150,000, respectively, and a warrant to purchase 300,000 shares of the company’s common stock, respectively,
with a $0.50 exercise price and five year term. The promissory note had a clause that automatically modified it 30 days after
issuance into a convertible note. The convertible note was issued on April 9, 2017, pursuant to the agreement, with a principal
amount of $150,000, includes the issuance of 150,000 additional warrants, interest of 8% per annum, a maturity date of one year
and is convertible into 300,000 units, with each unit consisting of a share of common stock and a warrant with a five year life
from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative
fair value of the 450,000 warrants was $96,019 which was recognized as a discount to the debt. This note also gave rise to a beneficial
conversion feature of $28,018 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts
are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense
of $25,963 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On March 12, 2017, the Company entered
into note purchase agreements with two investors, pursuant to which investors purchased a promissory note from the Company in
exchange for $100,000 and a warrant to purchase 200,000 shares of the company’s common stock, respectively, with a $0.50
exercise price and five year term. The promissory note had a clause that automatically modified it 30 days after issuance into
a convertible note. The convertible note was issued on April 12, 2017, pursuant to the agreement with a principal amount of $100,000,
includes the issuance of 100,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible
into 200,000 units, with each unit consisting of a share of common stock and a warrant with a five year life from the date of
conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the
300,000 warrants was $64,386 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion
feature of $18,479 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are
being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $17,135
associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On April 24, 2017, the Company entered
into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which Power Up purchased
a convertible promissory note evidencing a loan of $58,500. On April 25, 2017, the Company issued Power Up a $58,500 convertible
promissory note. This note entitles the holder to 12% interest per annum and matures on February 10, 2018. Power Up may convert
the note into common stock beginning on the date which is 180 days from the issuance date of the note, at a price equal to 61%
of the average of the lowest two trading prices during the 15 trading day period ending on the last complete trading date prior
to the date of conversion, provided, however, that Power Up may not convert the note to the extent that such conversion would
result in Power Up’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common
stock together with all shares owned by Power Up and its affiliates. If the Company prepays the note within 30 days of its issuance,
the Company must pay all of the principal at a cash redemption premium of 110%; if such prepayment is made between the 31
st
day and the 60
th
day after the issuance of the note, then such redemption premium is 115%; if such repayment
is made from the sixty first 61
st
to the 90th day after issuance, then such redemption premium is 120%; if such repayment
is made from the 91
st
to the 120
th
day after issuance, then such redemption premium is 125%; if such repayment
is made from the 121
st
to the 150th day after issuance, then such redemption premium is 130%; and if such prepayment
is after the 151
st
day and before the 181
st
date of issuance of the note then such redemption premium is
135%. The foregoing descriptions of the Securities Purchase Agreement and note are qualified in their entirety by reference to
the full text of the form of Securities Purchase Agreement and form note, copies of which were filed as Exhibit 10.2 and 10.3,
respectively, to the Company’s quarterly report for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017,
and are incorporated by reference herein. In connection with this note, the Company’s transfer agent reserved 1,018,424
shares of the Company’s common stock, in the event that the note is converted.
On April 25, 2017, the Company borrowed
$115,000 from JSJ Investments, Inc. (“JSJ”) and issued to JSJ a $115,000 convertible promissory note with a maturity
date of January 25, 2018. The interest under the note is 12% and the default interest under the note is 18%. Under the note originally
as JSJ was entitled at its option, to convert all of a portion of the outstanding principal amount and accrued interest of the
note at any time after issuance of the note. However pursuant to an amendment to the note executed on July 28, 2017, a copy of
which is filed herewith as Exhibit 10.9 and is incorporated by reference herein, JSJ now is entitled to convert all or a portion
of the outstanding principal amount and accrued interest under the note, at its option at any time after the 180
th
day after the issuance date of the note into shares of common stock at a conversion price for each share of common stock equal
to a price which is a 40% discount to the lowest trading price during the 20 days prior to the day that JSJ requests conversion.
JSJ may not convert the Note to the extent that such conversion would result in JSJ’s beneficial ownership being in excess
of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by JSJ and its affiliates.
If the Company prepays the note within 60 days of its issuance, the Company must pay all of the principal at a cash redemption
premium of 110%; if such prepayment is made from the 61
st
to the 91
st
day after issuance, then such redemption
premium is 120%; and if such prepayment is after the one 120
th
date of issuance of the note then such redemption premium
is 140%. The foregoing description of the note is not complete and is qualified in its entirety by reference to the full text
of the form of the note, a copy of which was filed as Exhibit 10.1, to the Company’s quarterly report for the quarter ended
March 31, 2017 filed with the SEC on May 10, 2017, and is incorporated by reference herein. The foregoing description of the note
is not complete and is qualified in its entirety by reference to the full text of the form of the note, a copy of which is filed
as Exhibit 10.1 to this report and is incorporated by reference herein. In connection with the issuance of this note, the Company’s
transfer agent reserved 2,400,000 shares of the Company’s common stock, in the event that the note is converted.
On April 28, 2017, the Company entered
into a Securities Purchase Agreement with Silo Equity Partners Venture Fund, LLC (“Silo”) pursuant to which Silo purchased
a convertible promissory note evidencing a loan of $100,000. On April 27, 2017, the Company issued Silo a $100,000 convertible
promissory note evidencing the loan. This note entitles the holder to 8% interest per annum and matures on April 24, 2018. The
default interest under this note is 24%. Silo may convert the note into common stock beginning on the date which is 180 days from
the issuance date of the note, at a price equal to 55% of the lowest two trading prices during the 20 trading day period ending
on the last complete trading date prior to the date of conversion, provided, however, that Silo may not convert the note to the
extent that such conversion would result in Silo’s beneficial ownership being in excess of 4.99% of the Company’s
issued and outstanding common stock together with all shares owned by Silo and its affiliates. If the Company prepays the note
within 60 days of its issuance, the Company must pay all of the principal at a cash redemption premium of 120%; if such prepayment
is made between the 61
st
day and the 121
st
day after the issuance of the note, then such redemption premium
is 130%; if such repayment is made from the 122
nd
to the 181
st
day after issuance, then such redemption
premium is 135%. The foregoing descriptions of the Securities Purchase Agreement and note are not complete and are qualified in
their entirety by reference to the full text of the form of Securities Purchase Agreement and form note, copies of which were
filed as Exhibit 10.4 and 10.5, respectively, to the Company’s quarterly report for the quarter ended March 31, 2017 filed
with the SEC on May 10, 2017, and are incorporated by reference herein. In connection with this note, the Company’s transfer
agent reserved 3,000,000 shares of the Company’s common stock, in the event that the note is converted.
On May 4, 2017, the Company agreed to
borrow up to $500,000 from JMJ Financial (“JMJ”) and issued to JMJ a convertible promissory note of up to $500,000,
evidencing the loan with a maturity date of May 4, 2018. This note has a $25,000 original issue discount. The amount of the promissory
note funded by JMJ on May 4, 2017, was $315,790. Mr. Dean Ledger, our CEO and sole member of the Company’s board of directors,
agreed to personally guarantee this note, pursuant to a Personal Guaranty and Recourse Agreement entered into between Mr. Ledger
and JMJ. In connection with the note, the Company also entered into a Representation and Warranties Agreement Regarding Debt and
Variable Securities (the “RW Agreement”), pursuant to which the Company made certain representation and warranties
to JMJ, including that the Company would not issue any debt within 90 days of the issuance of the note without written consent
from JMJ, unless the proceeds of such debt are used to repay the note within 2 business days. Further subsequent to the issuance
of the JMJ Note, and within 90 days thereof, the Company has issued short term debt and warrants, and has used such funds for
operating costs of the Company’s business. The Company paid off the JMJ Note in full in two tranches, a payment on August
3, 2017 and a payment on August 4, 2017 in equal amounts, with both payments totaling $416,842 A portion of the funds used to
pay off the JMJ Note were borrowed from a shareholder as further described in Note 6 of the financial statements included herein.
During the six months ended June 30, 2017,
the full principal balances of certain notes totaling $833,500 were converted pursuant to the terms of the notes into 1,671,800
shares of the Company’s common stock and 1,671,800 warrants to purchase common stock. Upon conversion, the Company accelerated
the recognition of all remaining debt discount and also recognized additional interest expense of $149,286 associated with the
warrants that were issued upon conversion. This additional warrant expense was immediately recognized as interest expense with
an offset to additional paid-in-capital.
Aggregate amortization of the discounts
on the convertible notes for the six months ended June 30, 2017 and 2016 was $871,125 and $1,506,449, respectively. The amortization
for the six months ended June 30, 2017 included $14,610 of amortization of deferred financing costs. As of June 30, 2017, and
December 31, 2016, the aggregate outstanding balance of convertible notes payable was $2,098,440 and $1,440,206, respectively,
net of unamortized discounts of $24,670 and $343,294. The total beneficial conversion feature debt discount from convertible notes
for the six months ended June 30, 2017 was $537,891.
Derivative Liabilities - Convertible
Notes
As of June 30, 2017, the fair value of
the outstanding convertible note derivatives was determined to be $1,211,343 and the Company recognized a gain of $1,945,393.
There were no new convertible note derivatives that arose during the six months ended June 30, 2017.
Accounts Payable - Related Party
As of June 30, 2017, and December 31,
2016, there is $17,942 and $2,470, respectively, due to a related party, which is non-interest bearing and due on demand.
3. EQUITY
Common Stock
On February 13, 2017, the Company issued
336,000 shares of the Company’s common stock to certain note holders in exchange for accrued interest of $168,000. The fair
value of the common stock was determined to be $201,600 and resulted in a loss on settlement of accrued interest of $33,600.
On June 5, 2017, the Company issued 3,400,000
shares of the Company’s common stock to a related party pursuant to a letter agreement. See Note 2 for details. The Company
calculated the fair value of the shares on the issuance date and recorded $1,190,000 as loss on extinguishment of debt.
During the six months ended June 30, 2017,
the Company issued an aggregate of 1,671,800 shares of its common stock related to the conversion of $838,300 of principal and
accrued interest on convertible notes.
During the six months ended June 30, 2017,
the Company sold an aggregate of 775,048 units, at $0.50 per unit for aggregate proceeds of $387,525. Each unit consisted of one
common share and one warrant. Each warrant is exercisable for a period of five years from the date of issuance, at $0.50 per share.
Stock Options
On April 1, 2017, 50,000 stock options
were granted to an employee of the Company. The options vest on a monthly basis of 1,000 shares per month over a 50-month period.
The options expire in 2027. These options were valued based on the grant date fair value of the instruments, net of estimated
forfeitures, using a Black-Scholes option pricing model with the following assumptions:
|
|
Six Months
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
146.26
|
%
|
|
|
-
|
|
Risk-free interest rate
|
|
|
2.08
|
%
|
|
|
-
|
|
Expected term
|
|
|
6.06
|
|
|
|
-
|
|
The volatility used was based on historical
volatility of similar sized companies due to lack of historical data of the Company’s stock price. The risk-free interest
rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected
term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.
A summary of stock option activity during
the three months ended June 30, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
Outstanding at December 31, 2016
|
|
|
100,000
|
|
|
|
0.77
|
|
|
|
9.4
|
|
Granted
|
|
|
50,000
|
|
|
|
0.62
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
150,000
|
|
|
|
0.72
|
|
|
|
9.2
|
|
Exercisable at June 30, 2017
|
|
|
31,000
|
|
|
$
|
0.67
|
|
|
|
8.8
|
|
Stock option awards are expensed on a
straight-line basis over the requisite service period. During the three and six months ended June 30, 2017 the Company recognized
expense of $7,891, and $14,610, respectively, associated with stock option awards. During the three and six months ended June
30, 2016 the Company recognized expense of $4,164, and $8,326 respectively, associated with stock option awards. At June 30, 2017,
future stock compensation expense (net of estimated forfeitures) not yet recognized was $104,013 and will be recognized over a
weighted average remaining vesting period of 3.2 years.
The intrinsic value of the Company’s
stock options outstanding was $0 at June 30, 2017.
Warrants
On September 1, 2015, the Company entered
into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in his capacity as the Company’s Chief
Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company issued Mr. Tobin warrants to purchase
1,500,000 shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”). The fair value of
the warrants was determined to be $2,835,061 using the Black-Scholes option pricing model. 375,000 of the Warrant Shares vested
on September 1, 2015, an additional 375,000 warrant shares vested on the first anniversary date of the Employment Agreement. On
May 15, 2017, Mr. Tobin terminated his employment with the Company. On May 15, 2017, the Company entered into an agreement with
Mr. Tobin allowing his third tranche of 375,000 Warrant Shares to vest on September 1, 2017 in exchange for consulting services.
The remaining fourth tranche of 375,000 warrants were forfeited upon termination of the Employment Agreement. Warrant expense
of $124,393 and $274,609 was recognized during the three and six months ended June 30, 2017, respectively. Warrant expense of
$324,851 and $649,703 was recognized during the three and six months ended June 30, 2016, respectively. In addition, $380,548
of expense was reversed during the quarter ended June 30, 2017 related to the forfeited warrants.
On May 18, 2017, the Company entered into
an Employment Agreement (the “Employment Agreement”) with Ron DaVella in his capacity as the Company’s Chief
Financial Officer. Pursuant to the Employment Agreement, on May 18, 2017 the Company issued Mr. DaVella warrants to purchase 1,800,000
shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”). The foregoing description of
the Employment Agreement and warrant is not complete and is qualified in its entirety by reference to the full text of the Employment
Agreement, a copy of which was filed as Exhibit 10.1, to the Company’s Current Report on Form 8-K filed with the SEC on
May 18, 2017, which incorporated by reference herein. The fair value of the warrants was determined to be $743,416 using the Black-Scholes
option pricing model. 450,000 of the Warrant Shares vested on May 18, 2017, an additional 450,000 warrant shares will vest on
the first anniversary date of the Employment Agreement, an additional 450,000 warrant shares will vest on the second anniversary
date of the Employment Agreement, and, an additional 450,000 warrant shares will vest on the third anniversary date of the Employment
Agreement. Warrant expense of $214,248 was recognized during the three and six months ended June 30, 2017.
Total warrant expense for employee warrants
of non-forfeited tranches was $338,641 and $488,857 for the three and six months ended June 30, 2017, respectively.
On February 1, 2017, the Company issued
warrants to purchase 30,000 shares of its Common Stock to a service provider in exchange for services provided to the Company.
5,000 of the warrants vested February 28, 2017, and 5,000 warrants shall vest on the last date of each month following February
2017, until final vesting on July 31, 2107. As of the date of this report, 25,000 of the warrants have vested. The warrants have
an exercise price of $0.50 and a 5-year term. The fair value of the warrants was determined to be $13,058 as of June 30, 2017
using the Black-Scholes option pricing model of which $4,831 and $10,882 was recognized as expense during the three and six months
ended June 30, 2017, respectively.
On March 6, 2017, the Company issued warrants
to purchase 200,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed.
The warrants have a five-year term and are immediately vested. The fair value of the warrants was determined to be $120,501 using
the Black-Scholes option pricing model of which $120,501 was recognized as expense during the six months ended June 30, 2017.
On April 12, 2017, the Company issued
warrants to purchase 100,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed.
The warrants have a five-year term and are immediately vested. The fair value of the warrants was determined to be $53,564 using
the Black-Scholes option pricing model of which $53,564 was recognized as expense during the three and six months ended June 30,
2017.
On April 12, 2017, the Company reduced
the exercise price of a certain warrant, with 50,226 shares of the Company’s common stock issuable upon exercise of such
warrant, to $.50 and added a cashless exercise feature to such warrant.
On May 3, 2017, the Company reduced the
exercise price of a certain warrant, with 20,000 shares of the Company’s common stock issuable upon exercise of such warrant,
to $.50 and added a cashless exercise feature to such warrant.
On May 1, 2017 and on May 3, 2017, the
Company, by board consent, reduced the exercise price of a total of 848,018 warrants, to $.50 and added a cashless exercise feature
to such warrants.
On June 22, 2017, the Company, by board
consent, reduced the exercise price of a total of 12,500 warrants, to $.50 and added a cashless exercise feature to such warrants.
On June 23, 2017, the Company, by board
consent, reduced the exercise price of a total of 140,000 warrants, to $.50 and added a cashless exercise feature to such warrants.
On June 22, 2017, the Company issued 3,000,000
cashless warrants for the Company’s common shares with a strike price of $0.50/share with a promissory note of $1,000,000.
The relative fair value of the warrants of $597,565 was recognized as a debt discount which is being amortized on a straight-line
basis over the term of the note. The Company recognized interest expense of $22,764 associated with the amortization of debt discount
for the three and six months ended June 30, 2017.
From May 28, 2017 through June 14, 2017,
23 holders of a total of 132 warrants (the "Warrants") pursuant to which 36,547,903 shares of the Company's common stock
are issuable, submitted exercise notices to the Company, pursuant to which the holders agreed that the Warrants shall be exercised
by way of a cashless exercise feature automatically upon such time as the market price for the company's common stock reaches
$1.50 on a trading date. If this occurs, the company shall have to issue 24,365,269 shares of its common stock to the holders.
During the six months ended June 30, 2017,
the aggregate principal and interest of certain convertible notes totaling $838,300 were converted pursuant to the terms of the
notes into 1,671,800 shares of the Company’s common stock and 1,671,800 warrants to purchase common stock. See details in
Note 2.
The following summarizes the warrant activity
for the six months ended June 30, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding as of December 31, 2016
|
|
|
60,380,521
|
|
|
$
|
0.73
|
|
|
$
|
4.6
|
|
|
$
|
57,361,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,526,348
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(377,500
|
)
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
|
69,529,369
|
|
|
$
|
0.59
|
|
|
$
|
4.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2017
|
|
|
66,704,369
|
|
|
$
|
0.67
|
|
|
$
|
4.4
|
|
|
$
|
-
|
|
Derivative Liabilities - Warrants
The anti-dilution features in the freestanding
warrants issued in the six months ended June 30, 2017 cause the instruments to no longer be indexed to the Company’s own
stock and requires that they be accounted for as derivative liabilities based on guidance in FASB ASC 815, Derivatives and Hedging.
The valuation of the derivative liability
of the warrants was determined through the use of a Black Scholes options model, which the Company believes approximates fair
value. Using this model, the Company had a balance of $8,828,405 at December 31, 2016. The Company recorded the change in the
fair value of the warrant liabilities recognizing a gain of $5,178,130 for the six months ended June 30, 2017, to reflect the
value of the warrant derivative liability of $3,743,820 as of June 30, 2017.
On November 4, 2015, the Company entered
into an amendment to the Independent Contractor Agreement (the “Amendment”) with a service provider pursuant to which
the service provider is to be issued warrants to purchase 2,400,000 shares of the Company’s common stock at $1.00 per share
(the “Warrant Shares”). 1,200,000 of the Warrant Shares vested on November 4, 2015, an additional 600,000 Warrant
Shares vested on November 4, 2016, and an additional 600,000 Warrant Shares will vest on November 4, 2017. The fair value of the
first 1,200,000 Warrants Shares was determined to be $1,115,964 using the Black-Scholes option pricing model and was recognized
as expense during the year ended December 31, 2015. The fair value of the 600,000 Warrant Shares that vested November 4, 2016
was determined to be $559,900 and was recognized as expense during the year ended December 31, 2016. The fair value of the remaining
tranche of 600,000 Warrant Shares was determined to total $257,468 as of June 30, 2017 using the Black-Scholes option pricing
model of which $39,897 and $108,309 of expense was reversed due to a change in fair value during the three and six months ended
June 30, 2017, respectively. $120,895 and $231,179 was recognized as expense during the three and six months ended June 30, 2016,
respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 1,000,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
500,000 of the Warrant Shares vested on May 13, 2016, an additional 250,000 warrant shares vested on the first anniversary date
of the agreement, and an additional 250,000 Warrant Shares will vest on the second anniversary date of the agreement. The fair
value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model and was recognized
as expense and as derivative liabilities during the year ended December 31, 2016. The fair value of the 250,000 Warrant Shares
that vested May 13, 2017 was determined to be $93,545 and was recognized in additional paid in capital during the quarter ended
June 30, 2017. The fair value of the remaining tranche of 250,000 Warrant Shares was determined to total $108,486 as of June 30,
2017 using the Black-Scholes option pricing model of which $61,223 was recognized as expense during the three and six months ended
June 30, 2017, respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 200,000 shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”).
The Warrant Shares are immediately vested. The fair value of the Warrant Shares was determined to total $86,746 as of June 30,
2017 using the Black-Scholes option pricing model.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
Volatility
|
|
139.3% - 180.15%
|
|
129.70% - 180.15%
|
Risk-free interest rate
|
|
1.31% - 2.61%
|
|
0.65 - 1.78%
|
Expected term
|
|
1.5 - 9.6 years
|
|
2.5 - 10 years
|
4.
NET LOSS PER SHARE
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(29,083
|
)
|
|
$
|
(1,106,188
|
)
|
|
$
|
2,549,693
|
|
|
$
|
(459,157
|
)
|
Less: decrease in fair value of warrants, net of income tax
|
|
|
(4,184,993
|
)
|
|
|
-
|
|
|
|
(2,703,231
|
)
|
|
|
-
|
|
Less: decrease in fair value of convertible debt, net of income tax
|
|
|
(651,686
|
)
|
|
|
-
|
|
|
|
(1,945,393
|
)
|
|
|
-
|
|
Plus: interest expense - convertible debt
|
|
|
19,836
|
|
|
|
-
|
|
|
|
39,671
|
|
|
|
-
|
|
Income (loss) available to common stockholders
|
|
|
(4,845,926
|
)
|
|
|
(1,106,188
|
)
|
|
|
(2,059,260
|
)
|
|
|
(459,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
63,734,774
|
|
|
|
57,491,671
|
|
|
|
62,218,336
|
|
|
|
56,158,268
|
|
Plus: incremental shares from assumed exercise- options
|
|
|
-
|
|
|
|
-
|
|
|
|
2,036
|
|
|
|
-
|
|
Plus: incremental shares from assumed exercise- warrants
|
|
|
192,755
|
|
|
|
-
|
|
|
|
7,068,234
|
|
|
|
-
|
|
Plus: incremental shares from assumed conversion- convertible debt
|
|
|
23,529
|
|
|
|
-
|
|
|
|
128,571
|
|
|
|
-
|
|
Plus: incremental shares from assumed conversion-units
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
Adjusted weighted average common shares outstanding
|
|
|
65,951,058
|
|
|
|
57,491,671
|
|
|
|
71,417,177
|
|
|
|
56,158,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
5.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
In
November 2013, the Company entered into a 60-month lease agreement for its corporation facility in Arizona. Total rent expense
for the three and six months ended June 30, 2017 was $34,219 and $63,412, respectively. Total rent expense for the three and six
months ended June 30, 2016 was $21,504 and $43,336, respectively.
Future
minimum lease payments are as follows:
2017
|
|
$
|
42,309
|
|
2018
|
|
|
71,797
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
114,106
|
|
Concentrations
All
of the Company’s revenue and accounts receivable are currently earned from one customer.
Legal
Matters
As
of March 30, 2015, shareholders holding approximately 67.26% of the total shares of common stock of NanoFlex Power Corporation
(the “Company,” “we,” “our” or “us”) that are entitled to vote on all Company
matters approved by written consent the removal of John D. Kuhns from his position as a member of the Company’s Board of
Directors. Mr. Kuhns’ removal was for “Cause” as defined under his Employment Agreement as amended and dated
as of October 1, 2013 (the “Employment Agreement”). The removal arose as a result of his documented conduct and statements,
which breached his fiduciary duties to the Company in order to advance personal monetary and other interests, and thereby threatened
serious financial injury to the Company, its shareholders and its debtholders.
On
March 31, 2015, the Board of Directors terminated the Employment Agreement with Mr. Kuhns for Cause and removed him from his positions
as Co-CEO, and from all other officer positions he held with the Company and its subsidiaries and affiliates, and all director
positions with the Company’s subsidiaries and affiliates.
On
April 24, 2015, the Company received a letter from Mr. Kuhns’ counsel (the “Response Letter”) stating that Mr.
Kuhns disagreed with statements in the Initial Filing regarding the circumstances of his removal as a director and officer.
The
Response Letter was accompanied by a copy of a complaint (the “Complaint”) filed by John D, Kuhns (the “Plaintiff”)
in the United States District Court Southern District of New York against the Company, Mr. Dean L. Ledger, our current CEO and
member of our Board of Directors, Mr. Robert J. Fasnacht, our former Executive Vice President and former member of our Board of
Directors and Mr. Ronald B. Foster, a shareholder of the Company (each, a “Defendant,” collectively, the “Defendants”).
The Complaint alleges, among other things, that the Plaintiff was terminated by the Company in violation of Section 922 of the
Dodd-Frank Act, that the Company wrongfully terminated the Employment Agreement, that the Defendants made false statements to
shareholders regarding the Plaintiff, that the Defendants (other than the Company) tortuously interfered with the Plaintiff’s
Employment Agreement, and that Mr. Ledger and Mr. Fasnacht breached their fiduciary duties to the Company and its shareholders.
The
Plaintiff seeks monetary damages, including (i) two (2) times of the alleged owed compensation to him, together with interest
as well as litigation costs, expert witness fees and reasonable attorneys’ fees; (ii) damages for the alleged breach of
the Employment Agreement by the Company, estimated to be at least $2 million, plus interest and attorney’s fees; (iii) an
unspecified amount for his alleged libel claim; and (iv) damages for the alleged tortious interference with contract, including
punitive damages of at least $2 million. The Plaintiff is also seeking a declaratory judgment, claiming that he was not terminated
as a director and should continue to hold a seat on the Company’s Board of Directors.
On
September 3, 2015, the Company filed a Motion to Dismiss portions of the Complaint in the United States District Court Southern
District of New York. The United States District Court Southern District of New York heard oral argument on the Motion to Dismiss
on June 23, 2016, and at the conclusion took the Motion to Dismiss under advisement. The Court ruled on August 24, 2016, regarding
the Motion to Dismiss, and granted the motion in part and denied the motion in part.
The
Court granted a dismissal of all claims against Mr. Foster and dismissal of the Plaintiff’s declaratory judgment claim.
All other claims by the Plaintiff continue to be outstanding. The Company filed an answer to the Complaint on September 14, 2016,
and the Plaintiff responded to the Company’s counter claims contained in the Company’s answer on November 7, 2016.
The parties have exchanged document demands and are currently engaged in discovery.
Other
than the foregoing, there have been no developments in the case since Plaintiff’s response. The Company believes that the
Plaintiff’s allegations and claims are without any merit and plans to continue to vigorously defend against the claims.
There is a mediation scheduled between the parties for August 29, 2017.
6.
SUBSEQUENT EVENTS
On
July 1, 2017, the Company entered into an Independent Contractor Services Agreement with a service provider pursuant to which
it issued to the service provider on July 1, 2017, a warrant to purchase 50,000 shares of the Company’s Common Stock with
a 5 year term and an exercise price of $.50. 25,000 of the warrant shares vested on July 1, 2017 and the remaining 25,000 shares
are set to vest on December 31, 2017, so long as the Independent Contractor Services Agreement is not terminated prior to such
date.
On
July 17, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory
note from the Company in exchange for $200,000, and a warrant to purchase 800,000 shares of the company’s common stock,
with a $0.50 exercise price and 10 year term. There is no interest under the promissory note. The promissory note has a clause
that automatically converts the note 60 days after issuance into 400,000 shares of Common Stock and a warrant to purchase 400,000
shares of Common Stock.
On
July 17, 2017
, the Company entered into a letter agreement with an investor pursuant to which,
the Company agreed that the investor’s non-convertible notes totaling $1,100,000 in the aggregate shall each have their
maturity date extended and each note amount has been increased to include accrued interest on the notes and the Company agreed
to issue the investor a warrant to purchase 1,000,000 shares of the Company’s Common Stock with a 10 year term and an exercise
price of $.50. The new aggregate total of the notes after adding the interest amount as discussed above is $1,155,000 and the
new maturity dates of the notes range from August 27, 2017 to December 4, 2017.
On July 25, 2017, the Company entered into
a Securities Purchase Agreement with Power Up Lending Group Ltd. pursuant to which Power Up purchased a convertible promissory
note evidencing a loan of $43,000. This note entitles the holder to 12% interest per annum and matures on April 30, 2018. Power
Up may convert the note into shares of the Company's common stock beginning on the date which is 180 days from the issuance date
of the note, at a price equal to 61% of the average of the lowest two trading prices during the 15 trading day period ending on
the last complete trading date prior to the date of conversion, provided, however, that Power Up may not convert the note to the
extent that such conversion would result in Power Up’s beneficial ownership being in excess of 4.99% of the Company’s
issued and outstanding common stock together with all shares owned by Power Up and its affiliates. If the Company prepays the note
within 30 days of its issuance, the Company must pay all of the principal at a cash redemption premium of 110%; if such prepayment
is made between the 31st day and the 60th day after the issuance of the note, then such redemption premium is 115%; if such repayment
is made from the sixty first 61st to the 90th day after issuance, then such redemption premium is 120%; if such repayment is made
from the 91st to the 120th day after issuance, then such redemption premium is 125%; if such repayment is made from the 121st to
the 150th day after issuance, then such redemption premium is 130%; and if such prepayment is after the 151st day and before the
181st date of issuance of the note then such redemption premium is 135%. In connection with the Note and Securities Purchase Agreement
the Company paid $3,000 for Power Up’s legal fees incurred in connection with the note and Securities Purchase Agreement
and therefore only received $40,000 under the note. The Company agreed that so long as it has any obligation under the note, that
is shall not sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business
without the written consent of Power Up. The Company’s transfer agent reserved 1,040,469 shares of the Company’s common
stock, in the event that the note is converted. The foregoing descriptions of the Securities Purchase Agreement and note is not
complete and is qualified in its entirety by reference to the full text of the form of Securities Purchase Agreement and form note,
copies of which are filed as Exhibit 10.10 and 10.11, respectively, to this report and are incorporated by reference herein.
On
July 28, 2017, the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $20,000 in a
non-convertible 8 month unsecured promissory note issued on July 28, 2017, and in consideration of the investor making the loan
to the Company as evidenced by the note, the Company issued to the investor, a 5-year warrant to purchase 60,000 shares of the
Company’s Common Stock at an exercise price of $.50 on July 28, 2017. The interest under the note is a cash payment of $1,600.
On
July 31, 2017, the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $100,000 in
a non-convertible 10 month unsecured promissory note issued on July 31, 2017, and in consideration of the investor making the loan
to the Company as evidenced by the note, the Company issued to the investor, a 5-year warrant to purchase 300,000 shares of the
Company’s Common Stock at an exercise price of $.50 on July 31, 2017. The interest under the note is a cash payment of $8,000.
On August 3, 2017, the Company
entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company
in exchange for $15,000, and a warrant to purchase 30,000 shares of the company’s common stock, with a $0.50 exercise price
and 10 year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts
the note 60 days after issuance into 30,000 shares of Common Stock and a warrant to purchase 30,000 shares of Common Stock.
On August 4, 2017, the Company
took a short term loan for $200,000 from a major shareholder, the proceeds of which were used by the Company to pay off the JMJ
note as further described above.