NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2017 AND 2016
NOTE 1 – Organization and Going Concern
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 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 solar cells, applied to glass and plastics, thereby creating a “photovoltaic” effect. Photovoltaics are best known as a method for generating electric power by using solar cells to convert energy from the sun into a flow of electrons. Typically, conventional PV power is generated by making use of solar modules composed of a number of cells containing PV and electricity-conducting materials. These materials are usually opaque (i.e., not see-through) and only effectively generate electricity with sun light. The Company’s researchers have replaced these materials with compounds that allow our SolarWindow™ technology to remain see-through or “transparent,” while generating electricity when exposed to either sun or artificial light.
The Company’s SolarWindow™ product development programs involve ongoing product 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.
Going Concern
The Company does not have any commercialized products, has not generated any revenue since inception and has sustained recurring losses and negative cash flows from operations since inception. Due to the “start-up” nature of our business, we expect to incur losses as we continue development of our products and technologies. These are conditions that initially indicated substantial doubt about the Company’s ability to continue as a going concern. Over the past year, the Company has been funded through the sale of equity securities. As of August 31, 2017, the Company had approximately $670,853 of cash. On September 29, 2017, the Company completed a private placement with a group of private investors, whereby the Company received proceeds of $2,555,176 from the sale of common stock and warrants. From September 9, 2017 through October 31, 2017, the Company received $248,000 upon the exercise of 80,000 Series O Warrants. On November 3, 2017, the Company entered into the Third Amendment to the 2013 Bridge Loan Agreement with the Investor pursuant to which the Company and the Investor amended the 2013 Note (with a principal balance of $3,000,000) to extend the maturity date to December 31, 2019. On November 3, 2017, the Company entered into the Third Amendment to the 2015 Bridge Loan Agreement with the Investor pursuant to which the Company and the Investor amended the March 2015 loan (with a principal balance of $600,000) to extend the maturity date to December 31, 2019. The Company believes that, as a result of the recent financings and note maturity date extensions, it currently has sufficient cash to meet its funding requirements over the next year and these events alleviate the conditions which initially indicated substantial doubt about the Company's ability to continue as a going concern. However, the Company has experienced and continues to experience negative cash flows from operations, as well as an ongoing requirement for substantial additional capital investment. The Company expects that it will need to raise substantial additional capital to accomplish its business plan over the next several years. The Company expects to seek to obtain additional funding through private equity or convertible debt. There can be no assurance as to the availability or terms upon which such financing and capital might be available.
NOTE 2 – Summary of Significant Accounting Policies
Principles of Consolidation
Kinetic Energy Corporation (“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.
These consolidated financial statements presented are those of the Company and its wholly owned subsidiaries, KEC, and New Energy Solar. All significant intercompany balances and transactions have been eliminated.
Estimates
The preparation of the Company’s consolidated financial statements requires management to make estimates and use assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. On an on-going basis, the Company evaluates its estimates. Actual results and outcomes may differ materially from these estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents includes highly liquid investments with original maturities of three months or less. The Company has amounts deposited with financial institutions in excess of federally insured limits.
Property, Plant, and Equipment
Fixed assets are carried at cost, less accumulated depreciation and amortization. Major improvements are capitalized, while repair and maintenance are expensed when incurred. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.
Depreciation is computed on a straight-line basis over estimated useful lives of the related assets. The estimated useful lives of depreciable assets are:
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Estimated
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Useful Lives
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|
|
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Office equipment
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3-5 years
|
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Furniture & equipment
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5 - 7 years
|
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Fair Value Measurement
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The Company utilizes a three-tier hierarchy which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. The Company has no assets or liabilities measured and recorded on a recurring or nonrecurring basis with Level 1 inputs.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. The Company has no assets or liabilities measured and recorded on a recurring or nonrecurring basis with Level 2 inputs.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no assets or liabilities measured and recorded on a recurring or nonrecurring basis with Level 3 inputs.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and interest payable approximate their fair value because of the short-term nature of these instruments and their liquidity. It is not practical to determine the fair value of the Company’s notes payable due to the complex terms. Management is of the opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Research and Development
Research and development costs represent costs incurred to develop the Company’s technology, including salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, supplies, equipment purchase and repair and other costs. Research and development costs are expensed when incurred, except for nonrefundable advance payments for future research and development activities which are capitalized and recognized as expense as the related services are performed.
Stock-Based Compensation
The Company measures all employee stock-based compensation awards using a fair value method on the date of grant and recognizes such expense in its consolidated financial statements over the requisite service period. The Company has granted stock options with performance conditions to certain nonemployee consultants. At each reporting date, the Company evaluates whether the achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon the assessment of achievement of each performance condition or the occurrence of the event which will trigger the options to vest. The Company uses the Black-Scholes-Merton formula to determine the fair value of stock-based compensation awards on the date of grant. The Black-Scholes-Merton formula requires management to make assumptions regarding the option lives, expected volatility, and risk free interest rates. See “NOTE 6 – Common Stock and Warrants” and “NOTE 7 - Stock Options” for additional information on the Company’s stock-based compensation plans.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. The Company reports a liability for unrecognized tax benefits resulting from uncertain income tax positions, if any, taken or expected to be taken in an income tax return. Estimated interest and penalties are recorded as a component of interest expense or other expense, respectively.
Segment Reporting
The Company’s business is considered to be operating in one segment based upon the Company’s organizational structure, the way in which the operations are managed and evaluated, the availability of separate financial results and materiality considerations.
Net Income (Loss) Per Share
The computation of basic earnings per share (“EPS”) is based on the weighted average number of shares that were outstanding during the period, including shares of common stock that are issuable at the end of the reporting period. The computation of diluted EPS is based on the number of basic weighted-average shares outstanding plus the number of common shares that would be issued assuming the exercise of all potentially dilutive common shares outstanding using the treasury stock method. The computation of diluted net income per share does not assume conversion, exercise or contingent issuance of securities that would have an antidilutive effect on earnings per share. Therefore, when calculating EPS if the Company experienced a loss, there is no inclusion of dilutive securities as their inclusion in the EPS calculation is antidilutive. Furthermore, options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants (they are in the money). See “NOTE 8 - Net Loss Per Share” for further discussion.
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.
NOTE 3 - 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”), a private corporation owning in excess of 10% of our issued and outstanding shares of common stock. 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, upon the conversion of $548,700 of the principal owed under the December 2015 Loan Agreement, the Investor received 177 PPM Units pursuant to the March 2016 Private Placement (defined below) 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 4).
During the year ended August 31, 2017 and 2016, the Company recognized $695 and $17,604, respectively, of interest expense. Accretion related to the debt discount for the December 2015 Loan Agreement amounted to $0 and $458,777 during the years ended August 31, 2017 and 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. (which has since been merged with and into the Investor, herinafter 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 The Investor 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, The Investor 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 The Investor 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 The Investor 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.
On November 3, 2017, the Company entered into the Third Amendment to the 2015 Bridge Loan Agreement with the Investor pursuant to which the Company and the Investor amended the March 2015 loan to extend the maturity date to December 31, 2019. As consideration for the note extension, the interest rate was increased to 10.5% and all outstanding warrants held by the Investor had their maturity date extended to December 31, 2022.
During the years ended August 31, 2017 and 2016, the Company recognized $47,832 and $44,742, respectively, of interest expense. Accretion related to the debt discount for the March 2015 Loan, Series L Warrant and Series M Warrant amounted to $74,702 and $170,614 during the years ended August 31, 2017 and 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”).
On November 3, 2017, the Company entered into the Third Amendment to the 2013 Bridge Loan Agreement with the Investor pursuant to which the Company and the Investor amended the 2013 Note to extend the maturity date to December 31, 2019. As consideration for the note extension, the interest rate was increased to 10.5% and all outstanding warrants held by the Investor had their maturity date extended to December 31, 2022.
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 $263,668 and $246,637 during the years ended August 31, 2017 and 2016, respectively.
Accretion of the debt discount related to the 2013 Loan Agreement as amended amounted to $1,236,743 and $1,706,563 during the years ended August 31, 2017 and 2016, respectively. The remaining debt discount related to the Series N Warrants and Series I, J and K Warrant expiration date extensions totals $413,377 and will be amortized through December 31, 2017.
Principal maturities for notes payable for the years ending August 31 are as follows (See “NOTE 11 – Subsequent Events” below):
2018
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-
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2019
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-
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2020
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3,600,000
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Total
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$
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3,600,000
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|
NOTE 4 – Private Placements
July 2017 Private Placement
On July 24, 2017, the Company completed a self-directed offering of 300,000 units at a price of $2.30 per unit for $690,000 in aggregate proceeds (the “
July 2017 Private Placement
”). Each unit consisted of one share of common stock and one Series S-A Stock Purchase Warrant (each, a “
Series S-A Warrant
”) to purchase one (1) share of common stock at an exercise price of $2.53 per share through July 24, 2022. The warrants may be exercised on a cashless basis. All of the units of the July 2017 Private Placement were purchased by the Investor.
The relative fair value of the common stock was estimated to be $414,000. The relative fair value of the Series S-A Warrants was estimated to be $276,000 as determined based on the relative fair value allocation of the proceeds received. The Series S-A Warrants were valued using the Black-Scholes option pricing model using the following variables: market price of common stock - $3.20 per share; estimated volatility – 76.13%; 5-year risk free interest rate – 1.83%; expected dividend rate - 0% and expected life - 5 years.
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 (each, a “
Series Q 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 (each, a “
Series R 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 “
March 2016 Private Placement
”) 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 March 2016 Private Placement, 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 March 2016 Private Placement provided for a onetime reset adjustment (the “Reset Adjustment”) such that if, within 6 months from the March 2016 Private Placement Termination Date, the Company sold equity securities at a price less than $3.10 per share (“Reset Price”), each of the subscribers having purchased Units in the March 2016 Private Placement would 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 5 - Derivative Liability Related to the PPM Units
The Reset Adjustment contained in the March 2016 Private Placement did not have fixed settlement provisions because the number of PPM Units issued may be adjusted higher if the Company sells securities at lower prices in the future; therefore, the Company concluded that the Reset Adjustment feature was not indexed to the Company’s stock and is to be treated as a derivative liability for accounting purposes. The accounting treatment for derivative financial instruments requires that the Company allocate a portion of the equity proceeds to the derivative for an amount equal to its initial fair value. Subsequently, on each reporting date, the fair value of the derivative is measured with changes in value recorded to other income/expense. In determining the fair value of the derivative liabilities, the Company used a Monte Carlo simulation at the date the instrument was issued and at each quarter end until the termination date of the Reset Adjustment on September 30, 2016.
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s derivative liability that is categorized within Level 3 of the fair value hierarchy during the year ended August 31, 2016 as follows:
Common stock issuable upon exercise of Series O Warrants
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618,000
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|
Common stock issuable upon exercise of Series P Warrants
|
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309,000
|
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Stock price
|
|
$3.13 - $4.19
|
|
Volatility (Annual)
|
|
80% - 83%
|
|
Strike price
|
|
$3.10, Series O Warrants; $3.70, Series P Warrants
|
|
Risk-free rate
|
|
0.71% - 0.80% Series O Warrants; 0.71% - 0.79%, Series P Warrants
|
|
Term
|
|
1.4 – 1.7 years Series O Warrants; 2.1 - 2.2 years, Series P Warrants
|
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Probability of Reset Adjustment
|
|
0% - 100%
|
|
As of August, 31, 2016, as a result of the June 2016 Private Placement, the Company had no plans to raise capital prior to the expiration date of the Reset Adjustment. As a result, the Company determined that the Reset Adjustment had no value as of August 31, 2016 resulting in the reclassification of the derivative liability balance to additional paid-in capital.
The following table sets forth the Company’s derivative liabilities that were accounted for at fair value on a recurring basis categorized within Level 3 of the fair value hierarchy during the year ended August 31, 2016:
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Balance at August 31, 2015
|
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Initial valuation of derivative liabilities upon issuance of new securities during the period
|
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Increase (decrease) in fair value of derivative liabilities
|
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Balance at August 31, 2016
|
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|
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|
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|
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|
|
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Warrant liability
|
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$
|
-
|
|
|
$
|
1,714,395
|
|
|
$
|
(1,714,395
|
)
|
|
$
|
-
|
|
NOTE 6 – Common Stock and Warrants
Common Stock
At August 31, 2017, the Company had 300,000,000 authorized shares of common stock with a par value of $0.001 per share, 34,329,691 shares of common stock outstanding and 2,072,580 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 on October 10, 2006 that provides for the grant of stock options to employees, directors, officers and consultants (See “NOTE 7 - Stock Options”).
During the year ended August 31, 2017, we entered into the following securities related transactions:
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·
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On July 24, 2017, the Company completed the July 2017 Private Placement of 300,000 units at a price of $2.30 per unit for $690,000 in aggregate proceeds. Each unit consisted of one share of common stock and one Series S-A Warrant to purchase one (1) share of common stock at an exercise price of $2.53 per share through July 24, 2022. The warrants may be exercised on a cashless basis. All of the units of the July 2017 Private Placement were purchased by the Investor (See “NOTE 4 – Private Placements”).
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|
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·
|
On July 7, 2017, the Company finalized and executed two consulting agreements with third parties to provide business development services. The terms and conditions of each consulting agreement are similar and provide for combined compensation of $26,000 per month in cash and the grant of 1,500,000 common stock purchase options which vest upon the attainment of certain milestones and upon Board approval. During August 2017, the Company issued 13,622 shares of common stock, valued at $40,000 (based on the closing price of the Company’s stock on the date transferred), to pay consulting fees incurred under the agreements.
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·
|
On July 7, 2017, the Company issued 5,282 shares of common stock in exchange for services valued at $15,000 (based on the closing price of the Company’s stock on the date transferred).
|
|
|
|
|
·
|
In June 2017, the Investor exercised 129,000 Series M Warrants at an exercise price of $2.34 per share and paid the Company $301,860 in exchange for 129,000 shares of common stock.
|
|
|
|
|
·
|
On March 2, 2017, the Investor exercised all Series I, J, K and L Warrants (7,642,631 shares in total) on a cashless basis and received 5,215,046 shares of common.
|
|
|
|
|
·
|
On November 15, 2016 each director was issued 40,000 shares of common stock for a total issuance of 120,000 shares of common stock valued at $3.28 per share, the fair market value of our common stock on the date of issuance.
|
|
|
|
|
·
|
issued 46,520 shares of common stock upon the cashless exercise of 130,000 options.
|
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 March 2016 Private Placement for the purchase of 441 PPM Units resulting in the issuance of 441,000 shares of common stock (See “NOTE 4 – 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 3 – 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 4 – Private Placements”).
|
Warrants
Each of the Company’s warrants outstanding 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 August 31, 2017 and 2016 is as follows:
|
|
Shares of Common Stock Issuable
from Warrants Outstanding as of
|
|
|
Weighted
Average
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
Exercise
|
|
|
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
Price
|
|
|
Expiration
|
|
Series I
|
|
|
-
|
|
|
|
921,875
|
|
|
$
|
1.37
|
|
|
December 31, 2020
|
|
Series J
|
|
|
-
|
|
|
|
3,110,378
|
|
|
$
|
1.12
|
|
|
December 31, 2020
|
|
Series K
|
|
|
-
|
|
|
|
3,110,378
|
|
|
$
|
1.20
|
|
|
December 31, 2020
|
|
Series L
|
|
|
-
|
|
|
|
500,000
|
|
|
$
|
1.20
|
|
|
December 7, 2020
|
|
Series M
|
|
|
246,000
|
|
|
|
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
|
|
Series S-A
|
|
|
300,000
|
|
|
|
-
|
|
|
$
|
2.53
|
|
|
July 24, 2022
|
|
Total
|
|
|
4,115,000
|
|
|
|
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 I Warrant was exercised in full and on a cashless basis on March 2, 2017 resulting in the issuance of 584,634 shares of common stock.
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 J and K Warrant were exercised in full and on a cashless basis on March 2, 2017 resulting in the issuance of 4,293,900 shares of common stock.
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. The Series L Warrant was exercised in full and on a cashless basis on March 2, 2017 resulting in the issuance of 336,512 shares of common stock.
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 the Investor to extend the maturity date of the March 2015 Loan from September 4, 2015 to December 21, 2016. In June 2017, the Investor exercised 129,000 Series M Warrants.
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 Warrants were issued in connection with the March 2016 Private Placement and the Series Q and Series R Warrants were issued in connection with the June 2016 Private Placement; see “NOTE 4 – Private Placements.”
The Series S-A Warrant was issued in connection with the July 2017 Private Placement; see “NOTE 4 – Private Placements.”
On November 3, 2017, the term of the Series M Warrant, Series N Warrant, Series P Warrant for 213,500 shares, Series R Warrant for 468,750 shares, and Series S-A Warrant were extended to December 31, 2022, as contemplated by the Amendments described in Note 11.
There are a total of approximately 2,870,739 warrants issuable pursuant to the 2013 Loan Agreement as described above under “NOTE 3 – Debt:
October 7, 2013, $3,000,000 Convertible Promissory Note
.”
NOTE 7 - 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 2,072,580 remain available for grant and 1,013,334 were issued pursuant to the exercise of vested options as of August 31, 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 2006 Plan was approved by stockholders on February 7, 2011 and expires according to its terms on February 7, 2021.
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:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
Expected stock price volatility
|
|
|
79% - 81
|
%
|
|
|
82
|
%
|
Risk-free interest rate
|
|
|
1.95% - 2.03
|
%
|
|
|
2.06
|
%
|
Expected term (in years)
|
|
|
5.00 - 7.67
|
|
|
|
7.67
|
|
Exercise price
|
|
$
|
2.71
|
|
|
$
|
3.46
|
|
Weighted-average grant date fair-value
|
|
$
|
1.85
|
|
|
$
|
2.64
|
|
A summary of the Company’s stock option activity for the years ended August 31, 2017 and 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
|
|
|
1,535,000
|
|
|
|
2.71
|
|
|
|
|
|
|
Exercises
|
|
|
(130,000
|
)
|
|
|
2.62
|
|
|
|
|
|
|
Outstanding at August 31, 2017
|
|
|
2,125,001
|
|
|
|
2.84
|
|
|
5.31 years
|
|
|
2,969,800
|
|
Exercisable at August 31, 2017
|
|
|
237,501
|
|
|
|
3.51
|
|
|
6.01 years
|
|
|
233,900
|
|
Available for grant at August 31, 2017
|
|
|
2,072,580
|
|
|
|
|
|
|
|
|
|
|
|
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 August 31, 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 $4.20 on August 31, 2017 and 2,075,000 outstanding options have an exercise price below $4.20 per share, as of August 31, 2017, there is intrinsic value to the Company’s outstanding, in-the-money stock options, including 187,500 options that are exercisable and in-the-money.
During the year ended August 31, 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.
During the year ended August 31, 2016, there were 556,667 options exercised on a cashless basis resulting in the issuance of 282,106 shares of common stock. The aggregate intrinsic value of the options exercised during the year ended August 31, 2016 was $1,277,834.
On November 15, 2016, the Company granted 35,000 options to two employees with an exercise price of $3.28.
On July 7, 2017, the Company finalized and executed two consulting agreements with third parties to provide business development services. The terms and conditions of each consulting agreement are similar and provide for combined compensation of $26,000 per month in cash and the grant of 1,500,000 common stock purchase options with an exercise price of $2.70 per share, and which vest upon the achievement of performance conditions and upon Board approval. The 1,500,000 stock options granted to consultants had a grant date fair value of $1.84 per option. As of August 31, 2017, the Company determined the achievement of the performance conditions was not probable. Compensation expense will be recorded for the options with performance conditions when and if the performance conditions become probable of being achieved.
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 years ended August 31, 2017 and 2016:
|
|
Years Ended
|
|
|
|
August 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock Compensation Expense:
|
|
|
|
|
|
|
SG&A
|
|
$
|
118,969
|
|
|
$
|
211,406
|
|
R&D
|
|
|
80,630
|
|
|
|
97,357
|
|
Total
|
|
$
|
199,599
|
|
|
$
|
308,763
|
|
As of August 31, 2017, the Company had $2,792,847 of unrecognized compensation cost related to unvested stock options. Of the unrecognized compensation expense, $32,847 is expected to be recognized over a period of 1.25 years and $2,760,000 of compensation expense will be recorded when and if the performance conditions become probable of being achieved.
The following table summarizes information about stock options outstanding and exercisable at August 31, 2017:
|
|
|
Stock Options Outstanding
|
|
|
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
|
|
|
|
5.31
|
|
|
$
|
0.80
|
|
|
|
5,000
|
|
|
|
5.31
|
|
|
$
|
0.80
|
|
|
1.40
|
|
|
|
5,000
|
|
|
|
7.30
|
|
|
|
1.40
|
|
|
|
5,000
|
|
|
|
7.30
|
|
|
|
1.40
|
|
|
2.50
|
|
|
|
10,000
|
|
|
|
3.60
|
|
|
|
2.50
|
|
|
|
10,000
|
|
|
|
3.60
|
|
|
|
2.50
|
|
|
2.70
|
|
|
|
1,500,000
|
|
|
|
5.00
|
|
|
|
2.70
|
|
|
|
-
|
|
|
|
5.00
|
|
|
|
2.70
|
|
|
2.90
|
|
|
|
455,000
|
|
|
|
6.41
|
|
|
|
2.90
|
|
|
|
105,000
|
|
|
|
6.41
|
|
|
|
2.90
|
|
|
3.28
|
|
|
|
35,000
|
|
|
|
9.21
|
|
|
|
3.28
|
|
|
|
17,500
|
|
|
|
9.21
|
|
|
|
3.28
|
|
|
3.46
|
|
|
|
65,000
|
|
|
|
8.35
|
|
|
|
3.46
|
|
|
|
45,000
|
|
|
|
8.35
|
|
|
|
3.46
|
|
|
4.98
|
|
|
|
16,667
|
|
|
|
0.52
|
|
|
|
4.98
|
|
|
|
16,667
|
|
|
|
0.52
|
|
|
|
4.98
|
|
|
5.94
|
|
|
|
33,334
|
|
|
|
3.32
|
|
|
|
5.94
|
|
|
|
33,334
|
|
|
|
3.32
|
|
|
|
5.94
|
|
Total
|
|
|
|
2,125,001
|
|
|
|
5.31
|
|
|
$
|
2.84
|
|
|
|
237,501
|
|
|
|
6.01
|
|
|
$
|
3.51
|
|
NOTE 8 - Net Loss Per Share
During the years ended August 31, 2017 and 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 years ended August 31, 2017 and 2016:
|
|
Years Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic and Diluted EPS Computation
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Loss available to common stockholders'
|
|
$
|
(5,353,425
|
)
|
|
$
|
(4,637,313
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
31,299,979
|
|
|
|
27,295,540
|
|
Basic and diluted EPS
|
|
$
|
(0.17
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2,125,001
|
|
|
|
720,001
|
|
Warrants
|
|
|
4,115,000
|
|
|
|
11,586,631
|
|
Convertible debt
|
|
|
2,870,739
|
|
|
|
2,678,280
|
|
Warrants issuable upon conversion of debt (See "NOTE 3 - Debt" above)
|
|
|
2,870,739
|
|
|
|
2,678,280
|
|
Total shares not included in the computation of diluted losses per share
|
|
|
11,981,479
|
|
|
|
17,663,192
|
|
NOTE 9 - 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 years ended August 31, 2017 and 2016, the Company recognized $321,739 and $291,951 of fees for legal services billed by firms associated with Mr. Sierchio. At August 31, 2017, the Company owed Satterlee $105,184 which is included in accounts payable. There are no accounts payable to Sierchio & Partners, LLP as of August 31, 2017. Mr. Sierchio continues to serve as a director of the Company. At August 31, 2016, the Company owed Sierchio & Partners, LLP $53,467 which is included in accounts payable.
On August 7, 2017, the Company appointed Jatinder Bhogal to the Board of Directors. Mr. Bhogal has provided consulting services to the Company through his wholly owned company, Vector Asset Management, Inc., pursuant to a Consulting Agreement dated February 1, 2014 as amended on November 11, 2016. Pursuant to the Consulting Agreement, Mr. Bhogal received compensation of $5,000 per month. During each of the years ended August 31, 2017 and 2016, the Company recognized $60,000 of expense in connection with the Consulting Agreement.
On July 24, 2017, the Company entered into the July 2017 Private Placement with the Investor for the sale of 300,000 units at a price of $2.30 per unit for $690,000 in aggregate proceeds. Each unit consisted of one share of common stock and one Series S-A Warrant to purchase one (1) share of common stock at an exercise price of $2.53 per share through July 24, 2022. The warrants may be exercised on a cashless basis.
On March 2, 2017, the Investor 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.
On November 14, 2016, 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.
On October 7, 2013, the Company entered into the 2013 Loan Agreement with the Investor. On November 10, 2014, the Company and the Investor entered into the 2015 Loan Agreement resulting in the extension of the 2013 Note’s maturity date to December 31, 2015 and the issuance of a Series J Warrant to purchase 3,110,378 shares of our common stock and a Series K Warrant to purchase 3,110,378 shares of our common stock. On December 31, 2015, the Company entered into the 2015 Second Amended Loan Agreement with the Investor resulting in the extension of the 2013 Note’s maturity date to December 31, 2017 and the issuance of a Series N Warrant to purchase 767,000 shares of our common stock. Additionally, 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 to purchase 921,875 shares of common stock from October 6, 2018 to December 31, 2020, and extended the maturity date of the Series J Warrant to purchase 3,110,378 shares of common stock and Series K Warrant to purchase 3,110,378 shares of common stock from November 9, 2019 to December 31, 2020. For more information, see “NOTE 3 - Debt” above.
On December 7, 2015, the Company entered into a Bridge Loan Agreement with the Investor pursuant to which the Company may borrow up to $550,000; of which $400,000 was advanced on October 7, 2015 and $150,000 on December 22, 2015 (each advance includes an additional $5 related to wire fees). As a condition to the Investor’s entry into the December 2015 Loan Agreement, the Company issued the Investor a Series M Stock Purchase 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. Additionally, 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 M Warrant to purchase 275,000 shares of common stock from December 7, 2020 to December 31, 2020. For more information, see “NOTE 3 – Debt” above.
During the year ended August 31, 2016, the Investor purchased 250 PPM Units related to the March 2016 Private Placement resulting in the Company receiving $775,000. Additionally, the Investor converted $548,700 of principal owed under the December 2015 Loan Agreement in exchange for 177 PPM units. As a result, the Company issued 427,000 shares of common stock, 427,000 Series O Warrants, and 213,500 Series P Warrants. For more information, see “NOTE 3 – Debt” and “NOTE 4 – Private Placement” above.
During the year ended August 31, 2016, the Investor purchased 468,750 units under the June 2016 Private Placement resulting in the Company receiving $1,500,000 and issuing 468,750 shares of common stock, 468,750 Series Q Warrants, and 468,750 Series R Warrants. For more information, see “NOTE 4 – Private Placement” above.
During the year ended August 31, 2016, the Company received and repaid a short term cash advance from the Investor totaling $25,720.
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 10 – Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets at August 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,120,032
|
|
|
$
|
5,995,528
|
|
Capitalized research and development
|
|
|
1,431,748
|
|
|
|
1,285,254
|
|
Depreciation
|
|
|
(7,137
|
)
|
|
|
(82
|
)
|
Stock based compensation
|
|
|
1,168,629
|
|
|
|
1,207,988
|
|
Foreign affiliate interest expense
|
|
|
296,315
|
|
|
|
190,173
|
|
Research and development credit carry forward
|
|
|
438,298
|
|
|
|
369,117
|
|
Total deferred tax assets
|
|
|
10,447,885
|
|
|
|
9,047,979
|
|
Less: valuation allowance
|
|
|
(10,447,885
|
)
|
|
|
(9,047,979
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The net increase in the valuation allowance for deferred tax assets was $1,399,906 and $1,342,798 for the years ended August 31, 2017 and 2016, respectively. The Company evaluates its valuation allowance requirements on an annual basis based on projected future operations. When circumstances change and this causes a change in management’s judgment about the realizability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current operations.
For federal income tax purposes, the Company has net U.S. operating loss carry forwards at August 31, 2017 available to offset future federal taxable income, if any, of $20,941,270, which will fully expire between the period from August 31, 2020 to August 31, 2037. Accordingly, there is no current tax expense for the years ended August 31, 2017 and 2016. In addition, the Company has research and development tax credit carry forwards of $438,298 at August 31, 2017, which are available to offset federal income taxes and begin to expire during the fiscal year ending August 31, 2027.
The utilization of the tax net operating loss carry forwards may be limited due to ownership changes that have occurred as a result of sales of common stock.
The effects of state income taxes were insignificant for the years ended August 31, 2017 and 2016.
The following is a reconciliation between expected income tax benefit and actual, using the applicable statutory income tax rate of 34% for the years ended August 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Income tax benefit at statutory rate
|
|
$
|
1,820,165
|
|
|
$
|
1,576,686
|
|
Permanent differences
|
|
|
(490,980
|
)
|
|
|
(297,211
|
)
|
Research and development credit
|
|
|
70,721
|
|
|
|
63,323
|
|
Change in valuation allowance
|
|
|
(1,399,906
|
)
|
|
|
(1,342,798
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The fiscal years 2015 through 2017 remain open to examination by federal authorities and other jurisdictions in which the Company operates.
NOTE 11 – Subsequent Events
Management has reviewed material events subsequent of the period ended August 31, 2016 and prior to the filing of financial statements in accordance with FASB ASC 855 “Subsequent Events”.
On September 7, 2017, John Conklin, the Company’s President & CEO, exercised 100,000 stock purchase options on a cashless basis resulting in the issuance of 46,097 shares of common stock.
On September 7, 2017, two other employees exercised a total of 72,500 stock purchase options on a cashless basis resulting in the issuance of 33,151 shares of common stock.
On September 7, 2017, the Investor exercised their outstanding Series Q Warrant to purchase up to 468,750 shares of the Company’s common stock on a cashless basis, resulting in the issuance of 189,940 shares of common stock.
On September 7, 2017, a third party exercised their outstanding Series Q Warrant to purchase up to 468,750 shares of the Company’s common stock on a cashless basis, resulting in the issuance of 189,940 shares of common stock.
On September 11, 2017, the Company initiated and on September 29, 2017, completed a self-directed offering of 821,600 units at a price of $3.11 per unit for $2,555,176 in aggregate proceeds (the “
September 2017 Private Placement
”). The unit price was based on a 15% discount to the average of the 30 day closing price (last day being Friday September 8, 2017) of the Company’s common stock as reported on the OTCQB. Each unit consisted of one share of common stock and one Series S Stock Purchase Warrant to purchase one (1) share of common stock at an exercise price of $3.42 per share through September 29, 2017. The warrants may be exercised on a cashless basis. The closing of the transactions contemplated by the subscription agreements occurred on September 29, 2017.
Subsequent to year end, holders of our Series O Warrants exercised 80,000 warrants at an exercise price of $3.10 per share resulting in $248,000 to the Company and the issuance of 80,000 shares of common stock.
On November 3, 2017, the Company entered into the Third Amendment to the 2013 Bridge Loan Agreement with the Investor pursuant to which the Company and the Investor amended the 2013 Note to extend the maturity date to December 31, 2019.
On November 3, 2017, the Company entered into the Third Amendment to the 2015 Bridge Loan Agreement with the Investor pursuant to which the Company and the Investor amended the March 2015 loan to extend the maturity date to December 31, 2019.
Pursuant to the Third Amendment to the 2013 Bridge Loan Agreement and the Third Amendment to the 2015 Bridge Loan Agreement, the rate of interest increased to 10.5% and the following warrants, held by the Investor, had their maturity date extended to December 31, 2022: a) Series M Warrant to purchase 246,000 shares; b) Series N Warrant to purchase 767,000 shares; c) Series P Warrant to purchase 213,500 shares; d) Series R Warrant to purchase 468,750; and e) Series S-A Warrant to purchase 300,000 shares. For additional information related to our warrants, please see “NOTE 6 – Common Stock and Warrants”.