As of March 13, 2017, the number of shares of the registrant’s
common stock outstanding was 60,771,521.
PART
I
ITEM
1. BUSINESS
Introduction
NanoFlex
Power Corporation, formerly known as Universal Technology Systems, Corp., was incorporated in the State of Florida on January
28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation, a Pennsylvania corporation
(“GPEC”) pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”). Immediately following
the closing of the Share Exchange Transaction and as a result, the Company owned 100% of the 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 was organized to fund, develop, commercialize and license advanced
photovoltaic technologies that enable thin film solar products with industry-leading efficiencies, light weight, flexibility,
and low total system cost.
These
technologies are targeted at certain broad applications, including: (a) mobile and off-grid solar 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 glazing or windows, 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
engaged in product development and commercialization on some of these technologies in collaboration with industry partners and
potential customers.
Our
Business
The
Company is engaged in the research, development, and commercialization of advanced photovoltaic technologies that enable thin
film solar products with what we believe will be industry-leading efficiencies, light weight, flexibility, and low total system
cost. Our sponsored research programs at the University of Southern California (“USC”), the University of Michigan
(“Michigan”), and Princeton University (“Princeton”) have resulted in an extensive portfolio of issued
and pending patents worldwide covering flexible, thin-film photovoltaic technologies. Pursuant to our license agreement with our
university research partners, we have obtained the exclusive worldwide license and right to sublicense any and all intellectual
property resulting from our sponsored research programs. While each patent is issued in the name of the respective university
that developed the subject technology, the Company has exclusive commercial license rights to all of the patents and their attendant
technologies and the patents are referred to herein as being the Company’s patents.
As
of December 31, 2016, there were approximately 81 issued patents, 54 pending non-provisional applications and 3 pending provisional
applications in the U.S. and 7 pending Patent Cooperation Treaty applications. In addition, in countries and regions outside the
U.S., including, but not limited to, China, European Patent Convention, India, Japan, Korea and Taiwan, there were a total of
approximately 74 issued patents and 153 pending patent applications. The patent numbers presented exclude issued and pending patents
that the Company has identified for abandonment in order to optimize its patent portfolio and reduce unnecessary or redundant
costs while still protecting critical technologies. The duration of the issued U.S. and foreign patents is typically 20 years
from their respective first effective filing dates.
These
patented and patent-pending technologies fall into two general categories – (1) cost reducing and performance-enhancing
fabrication processes and device architectures for ultra-high efficiency Gallium Arsenide (“GaAs”)-based solar thin
films and (2) organic photovoltaic (“OPV”) materials, architectures, and fabrication processes for low cost, ultra-thin
solar films offering high quality aesthetics, such as semi-transparency and tinting, and highly flexible form factors. The technologies
are targeted at certain broad applications that require high power conversion efficiency, flexibility, and light weight. These
applications include: (a) mobile and off-grid solar power generation, (b) BAPV, (c) BIPV, (d) space vehicles and UAVs, (e) semi-transparent
solar power generating glazing or windows, and (f) ultra-thin solar films for automobiles or other consumer applications. The
Company believes these technologies have been demonstrated in a laboratory environment with our research partners.
The
Company is working with industry partners to commercialize its technologies for key applications where it believes they present
compelling competitive advantages. For example, the Company has begun staffing its engineering team to support the transfer of
technologies from university laboratories to implementation in industry partners’ commercial product designs and fabrication
processes. To this end, on August 26, 2015, the Company signed a Joint Development Agreement with SolAero Technologies Corp. (“SolAero”).
The Company’s Joint Development Agreement with SolAero provides for the joint development of high efficiency solar cells
utilizing our proprietary manufacturing processes in conjunction with SolAero’s advanced high efficiency solar cell technologies.
The
Company’s business model is oriented around licensing and sublicensing processes and technologies to large, well-positioned
commercial partners who can provide manufacturing and marketing capabilities to enable rapid commercial growth. Further, the Company
plans to license or sublicense its intellectual property to industry partners and customers. These manufacturing partners can
supply customers directly, from which the Company expects to receive license royalties. Additionally, these manufacturing partners
can also serve as a source of solar cell supply for the Company to provide products to customers on its own through a “fab-less”
manufacturing model, particularly in the early stages of market development.
As
reported in the Company’s Form 8-K filed with the SEC on February 7, 2017, on February 2, 2017, the “Company entered
into a License Agreement (the “Agreement”) with SolAero. In the Agreement, the Company agreed to grant SolAero a non-exclusive
worldwide license to use, sell, offer for sale, import or otherwise dispose of certain products (the “Licensed Products”)
using the Company’s patented proprietary manufacturing processes relating to Gallium Arsenide-based photovoltaic cells (the
“Licensed Patents”) within the space and near-space fields of use (“Licensed Field”). SolAero is to pay
the Company a royalty based on sales of the Licensed Products within the Licensed Field. The Agreement does not provide SolAero
with the right to sublicense the Licensed Patents. The term of the Agreement runs from February 2, 2017, through to the expiration
date of the last expiring patent included in the Licensed Technology. However, each party may terminate the agreement upon a material
breach by the other party.
The
Company has identified high efficiency solar technologies as its nearest term market opportunity. We are executing a plan to commercialize
the patented GaAs-based processes and technologies on an accelerated program. We have begun staffing our engineering team to support
the transfer of technologies from university laboratories to implementation in industry partners’ commercial products through
joint development agreements (“JDAs”). Upon successful completion of joint development, our intention is to enter
into licensing and supply agreements, similar to the one entered into with SolAero with industry partners. We are also in discussions
with system integrators, installers, and architects to assist with requirements, definition and technology development for several
targeted applications. Additionally, we are working with our university researchers as well as industry partners to submit proposals
for government programs to advance our technology development for both high efficiency and OPV technologies.
The
Company is currently in the development stage and has not sold any products nor received any royalties licensing its intellectual
property. The Company’s auditors’ opinion states that there is substantial doubt about the Company’s ability
to continue as a going concern.
Sponsored
Research and License Agreements
Research
and development of the Company’s high efficiency solar thin films and OPV technologies are conducted in collaboration with
University partners through sponsored research agreements.
The
Company established direct research and development agreements with Michigan on June 16, 2016, which were amended on July 21,
2016, to provide engineering support and facility access associated with technology transfer and commercialization of its high
efficiency thin film solar technologies.
A
separate Research Agreement, dated December 20, 2013, among the Company and USC (the “2013 Research Agreement”), governs
research conducted by USC and Michigan on high efficiency thin film and OPV technologies. Michigan is a subcontractor to USC on
this research agreement. Under the 2013 Research Agreement, the Company made a deposit of $550,000 (the “Deposit”)
in early 2014. This Deposit was used by USC to pay for research costs and expenses as it incurred them, including payments to
Michigan, during any billing quarter. When the Company pays the related quarterly billing, the funds go to replenish the Deposit
back to the full amount of $550,000, which is to continue until the end of the 2013 Research Agreement. The 2013 Research Agreement
expires on January 31, 2021.
On
August 8, 2016, the Company amended the 2013 Research Agreement with USC, suspending the agreement effective as of August 15,
2016. The Company requested this amendment to temporarily suspend its OPV-related sponsored research activities to reduce near-term
expenditures while it seeks a development partner for OPV commercialization and to allow the Company to bring its account with
USC current through a payment plan. The suspension is to continue until the date that is 30 days after expenses incurred by USC
have been reimbursed by the Company. Under this amendment, the Company will repay expenses to USC in quarterly installments through
February 2018, unless earlier repaid at the Company’s option. The amended agreement provides USC with the option to terminate
the agreement upon any late installment payments.
Under
the Company’s currently effective License Agreement, as amended on August 22, 2016, among the Company and USC, Michigan,
and Princeton (the “Fourth Amendment to License Agreement”), wherein the Company has obtained the exclusive worldwide
license and right to sublicense any and all intellectual property resulting from the Company’s sponsored research agreements,
we have agreed to pay for all reasonable and necessary out of pocket expenses incurred in the preparation, filing, maintenance,
renewal and continuation of patent applications designated by the Company. In addition, the Company is required to pay to the
Universities 3% of net sales of licensed products or licensed processes used, leased or sold by the Company, 3% of revenues received
by the Company from the sublicensing of patent rights and 23% of revenues (net of costs and expenses, including legal fees) received
by the Company from final judgments in infringement actions respecting the patent rights licensed under the agreement. A previous
amendment to the License Agreement (the Third Amendment to License Agreement dated December 20, 2013) amended the minimum royalty
section to eliminate the accrual of any such royalties until 2014. Furthermore, the amounts of the non-refundable minimum royalties,
which would be applicable starting in 2014, were adjusted to be lower than the amounts in the previous License Agreement. The
Fourth Amendment to the License Agreement sets out a payment schedule for the minimum royalties due in 2014 and 2015 to be paid
in 2016 and 2017.
There
is currently no ongoing research activity at Princeton related to the Company, although the Company maintains licensing rights
to technology previously developed by Princeton.
During
the years ended December 31, 2016 and 2015, we incurred research and development costs pertaining to our sponsored research efforts
and our establishment of our internal engineering team of $1,683,464 and $2,325,539, respectively.
Founding
Researchers
Dr.
Stephen R. Forrest (University of Michigan)
Professor
Stephen R. Forrest has been working with the Company since 1998 under the Company's Sponsored Research Program with Princeton
University, USC, and Michigan. Professor Forrest is one of the Company's Founding Research Scientists; his focus is on organic
and GaAs photovoltaics. In 2006, he rejoined the University of Michigan as Vice President for Research, and as the William Gould
Dow Collegiate Professor in Electrical Engineering, Materials Science and Engineering, and Physics. A Fellow of the APS, IEEE
and OSA and a member of the National Academy of Engineering, he received the IEEE/LEOS Distinguished Lecturer Award in 1996-97,
and in 1998 he was co-recipient of the IPO National Distinguished Inventor Award as well as the Thomas Alva Edison Award for innovations
in organic LEDs. In 1999, Professor Forrest received the MRS Medal for work on organic thin films. In 2001, he was awarded the
IEEE/LEOS William Streifer Scientific Achievement Award for advances made on photodetectors for optical communications systems.
In 2006 he received the Jan Rajchman Prize from the Society for Information Display for invention of phosphorescent OLEDs, and
is the recipient of the 2007 IEEE Daniel Nobel Award for innovations in OLEDs. Professor Forrest has been honored by Princeton
University establishing the Stephen R. Forrest Faculty Chair in Electrical Engineering in 2012. Professor Forrest has authored
525 papers in refereed journals, and has 247 patents. He is co-founder or founding participant in several companies and is on
the Board of Directors of Applied Materials and PD-LD, Inc. He has also served from 2009-2012 as Chairman of the Board of Ann
Arbor SPARK, the regional economic development organization, and serves on the Board of Governors of the Technion – Israel
Institute of Technology, as well as the Vanderbilt University School of Engineering Board of Visitors. From 1979 to 1985, Professor
Forrest worked at Bell Labs investigating photodetectors for optical communications. In 1992, Professor Forrest became the James
S. McDonnell Distinguished University Professor of Electrical Engineering at Princeton University. He served as director of the
National Center for Integrated Photonic Technology, and as Director of Princeton's Center for Photonics and Optoelectronic Materials
(POEM). From 1997-2001, he served as the Chair of the Princeton’s Electrical Engineering Department. He was appointed the
CSM Visiting Professor of Electrical Engineering at the National University of Singapore from 2004-2009. In 2011, Professor Forrest
was named number 13 of the top 100 most influential material scientists in the world by Thomson-Reuters, based largely on his
work with organic electronics. Professor Forrest is a graduate of the University of Michigan (MSc Physics, 1974 and PhD Physics,
1979) and the University of California at Berkeley (B.A. Physics, 1972).
Dr.
Mark E. Thompson (University of Southern California)
Professor
Mark E. Thompson has been working with the Company since 1994 under the Company's Sponsored Research Program with Princeton University,
USC and Michigan. Professor Thompson is one of the Company’s Founding Research Scientists and is a professor of Chemistry
at USC. Professor Thompson, in conjunction with Professor Stephen R. Forrest, was instrumental in the discovery of phosphorescent
materials central to the highly efficient OLED technology marketed by Universal Display Corporation (NASDAQ: OLED). In 2013, Professor
Thompson was named a Fellow of the American Association for the Advancement of Science. In 2012, Professor Thompson received the
prestigious Alexander von Humboldt Research Award. In 2011, Professor Thompson was named number 12 of the top 100 most influential
chemists in the world by Thomson-Reuters, based largely on his work with organic electronics. In 2007, Professor Thompson was
awarded USC’s Associate’s Award for Excellence in Research (given to one faculty member per year). In 2006, he was
awarded the MRS Medal by the Materials Research Society, and in the same year, Professors Forrest and Thompson were the co-recipients
of the Jan Rajchman Prize from the Society for Information Display. Both the MRS medal and the Rajchman Prize were based on the
invention of phosphorescent OLEDs. In 1998, Professor Thompson was co-recipient of The Intellectual Property Owners Association
National Distinguished Inventor Award as well as the Thomas Alva Edison Award for innovations in organic LEDs. Professor Thompson
joined The University of Southern California in 1995, and from 2005 through 2008, he served as the Department of Chemistry Chairman
at USC. From 1987 to 1995, Professor Thompson worked at Princeton University. From 1985 to 1987, Professor Thompson worked at
Oxford University and was an S.E.R.C. Research Fellow. From 1983 to 1985, Professor Thompson worked at E.I. duPont de Nemours
& Company as a Visiting Scientist. Professor Thompson has authored over 200 papers in refereed journals, and has 75 patents.
Professor Thompson is a graduate of the California Institute of Technology (Ph.D. Inorganic Chemistry, 1985) and the University
of California Berkley (B.S. Chemistry with honors, 1980).
Philosophy
and Approach
The
Company is focusing on two parallel technology development efforts: (a) its architectures, manufacturing processes, and technologies
aim to provide manufacturers of compound semiconductor solar cells with the capability of producing ultra-high efficiency GaAs
solar cells in thin-film form factors at a substantially reduced cost that is competitive with existing thin-film solar technologies.
We believe this has the potential to open new market segments such as portable field generation, mobile power, BAPV, BIPV and
aerospace which are not well-served by crystalline silicon solar technologies; and (b) its portfolio of OPV thin film solar technologies
aim to provide highly flexible solar energy solutions for new applications such as BIPV (semi-transparent solar films for glass)
and ultra-thin films for coatings on automobiles and other applications that demand design flexibility and light weight. Additionally,
we believe OPV technologies have the potential to achieve a very low cost structure relative to other solar technologies due to
minimal material usage and compatibility with roll-to-roll processing.
The
Company plans to license or sublicense its intellectual property to industry partners and customers. These manufacturing partners
can supply customers directly, but also serve as a source of solar cell supply for the Company to provide products to customers
on its own, particularly in the early stages of market development. This business model is oriented around licensing and sublicensing
processes and technologies to large, well-positioned commercial partners who can provide manufacturing and marketing capabilities
to enable rapid commercial growth. This model is also intended to quickly establish the Company as an important player in the
solar industry with rapid, high-margin revenue growth. Potential partners for our high efficiency technologies include current
manufacturers of compound semiconductor solar cells, who recognize the potential for our technology to dramatically reduce production
costs, improve their margins, and open new market opportunities. Potential partners for our OPV technologies include manufacturers
of electronics, including organic electronics, existing developers of OPV solar technologies, producers of advanced materials
and films, manufacturers of building materials, and glass manufacturers.
In
addition, the Company believes that there are several avenues for early revenue generation that become possible with the establishment
of its developmental engineering team. First among these avenues is government funding. The Department of Energy (“DOE”),
Department of Defense (“DoD”), and National Aeronautics and Space Administration (“NASA”) all have interests
in technologies that can deliver lightweight, high-efficiency solar power that contribute toward ubiquitous solar.
The
Company also anticipates that advancements achieved by its engineering team can attract other industry partners to acquire early
licenses to use its intellectual property. Finally, new licenses and agreements can be made possible by ongoing technology development,
especially that relating to perfecting and broadening of the Company’s intellectual property in ultra-thin-film semi-transparent
organic solar cells.
High
Efficiency Thin Film Solar Technologies
The
Company’s first technology platform is focused on improving the manufacturing process and device architecture of solar cells
based on III-V compound semiconductors, including GaAs, and is currently advancing toward commercialization. GaAs is a key component
of many ultra-high performance electronic technologies used in cellular telephones and military applications. The very highest
single-junction and multi-junction solar cell efficiencies (approximately 29% and 44%, respectively, according to the National
Renewable Energy Laboratory (“NREL”)) are based on GaAs. However, they are prohibitively expensive for mass markets
and hence are only considered for specialty applications where performance and weight requirements outweigh cost considerations,
such as space-borne applications. Broader market acceptance of ultra-high efficiency compound semiconductor solar technologies
requires substantial cost reductions.
The
Company’s patented technology has the potential to enable these cost reductions in two ways: (a) reducing the cost of the
solar cell by re-using expensive GaAs source material and (b) using mini-concentrators to decrease the size of the active solar
cell used within a solar module. Furthermore, the Company’s technology combines the high power conversion efficiency of
compound semiconductor solar cells with an extremely light weight and flexible form factor that meets requirements for applications
that are not well-served by crystalline silicon technologies, due to heavy weight and rigidity, or by other thin films due to
low power conversion efficiency.
The
primary cost in fabricating GaAs-based solar cells is the very high cost of the GaAs substrates on which the thin active region
(called the epitaxial layers) is grown. These substrates, or “parent wafers,” constitute the largest portion of the
total cost of a GaAs-based solar cell. During the fabrication process currently used in industry, these expensive parent wafers
are destroyed when the solar cell layer is removed, yielding only a single solar thin film for each expensive parent wafer. Existing
GaAs solar cell fabricators continue to seek methods to prevent damage to the parent wafer to enable multiple re-growths thereby
fabricating multiple solar thin films from a single parent wafer. The Company, through its researchers, has developed an architecture
and process enabling the active solar cell layer (approximately 1/1,000th of the thickness of a human hair) to be removed from
the parent wafer on which it is grown in a non-destructive manner without degradation in surface area, thereby allowing for the
re-use of the wafer multiple times. Furthermore, lab tests also reflect no degradation in solar cell performance from each growth
and removal cycle.
We
believe this patented ND-ELO process revolutionizes the cost structure of GaAs-based compound semiconductor solar cell technology,
allocating the high cost of the parent wafer to multiple solar thin films, substantially reducing the total cost per watt for
each solar cell. Further, as part of the ND-ELO process, the ultra-thin photovoltaic layer is bonded to a flexible and thin secondary
substrate such as plastic or metal foil using our adhesive-free, lightweight, ultra-strong and flexible process called cold-weld
bonding. The cold-weld bonding process enables highly flexible and lightweight thin film solar cells.
A
second aspect of the Company’s high efficiency thin film solar technology centers on minimizing the required size of the
high efficency solar cell through the use of mini-concentrators, thereby further reducing cost. In this design, narrow strips
of thin-film cells are placed at the trough of low-profile plastic parabolic concentrators. The concentrators harvest solar energy
using a wide acceptance angle and focus it into the small solar cell. This enables solar energy harvesting throughout the day
and the integrated device is able to capture approximately the equivalent energy production density (measured in kW-hrs/m2) as
a full-sized solar cell at a substantially reduced cost.
With
the combination of the high conversion efficiencies of compound semiconductor solar cells and the cost reductions associated with
implementing our proprietary ND-ELO processes and mini-concentration technologies, we believe the costs of ultra-high efficiency
GaAs-based solar cells can approach cost-per-Watt metrics associated with competing solar technologies, particularly thin films
such as CIGS, while providing substantial performance advantages associated with power per surface area and power per weight.
Organic
Photovoltaic Technologies
The
Company’s second technology platform is based on flexible, thin-film OPV technologies that have been researched and developed
over the last two decades by our sponsored research partners. Relative to other solar technologies, we believe OPV presents compelling
advantages relating to form factor flexibility and aesthetics and has the potential to realize extremely low production costs.
Because
the organic films are lightweight and extremely thin (in this case the entire structure is approximately 1/10,000th of the thickness
of a human hair), they can be made semitransparent and adjusted to any desirable color. As a result, we believe there are significant
opportunities to achieve heretofore unrealizable applications such as window glazing and ultra-thin films or coatings to be incorporated
into non-conformal or non-planar surfaces.
OPV
technologies have potential to achieve a very low cost structure, derived from low materials cost and highly efficient roll-to-roll
processing. The ultra-thin layer of OPV requires small quantities of materials. Furthermore, layers of OPV material can be deposited
directly onto plastic or metal foils and there is no need for energy-intensive fabrication processes required by other solar technologies,
such as silicon. Rather, there is the opportunity to “print” organic solar cells onto continuous rolls of plastic
in high-speed and low energy intensity manufacturing process. We believe the potential for printed electronics - making solar
films roll-to-roll rather than by batch processing - makes OPV a potentially revolutionary step in the widespread acceptance and
deployment of solar energy.
The
Company’s approach has been to advance all dimensions of OPV technology, including the invention and development of new
materials, new high efficiency device architectures, and high-speed, low-energy-intensity production processes such as organic
vapor phase deposition and solar cell modulization.
Our
sponsored research efforts aim to advance the practical viability of OPV by demonstrating reliable, large area and high-efficiency
organic multi-junction cells based on small molecule materials systems. The Company’s development targets aim to achieve
greater than 15% power conversion efficiencies on organic solar cells with operational lifetimes of 20 years on barrier-coated
plastic or metal foil substrates, and to demonstrate roll-to-roll fabrication of solar cells on plastic or metal foil substrates.
OPV’s
form factor flexibility offers the potential for solutions in various tints and transparencies, offering unique solutions well-suited
for BIPV applications, including facades, curtain walls, skylights, and windows. Our discussions with architects emphasize a need
for BIPV solutions offering design flexibility and high quality aesthetics. Furthermore, OPV also offers the potential for very
low costs due to its low material usage and suitability for roll-to-roll processing.
Intellectual
Property
As
a result of its sponsored research programs, we currently hold the exclusive commercialization rights to more than 350 issued
patents and pending patent applications worldwide which cover architecture, processes and materials for high efficiency and OPV
technologies. As of December 31, 2016, U.S. issuances and applications were as follows: approximately 81 issued patents, 54 pending
non-provisional applications, 3 pending provisional applications, and 7 Patent Cooperation Treaty (“PCT”) applications.
For regions outside of the U.S.: approximately 74 issued patents, and 153 pending patent applications. In addition to our issued
patents set forth above, we have numerous patent applications in process. The patent numbers presented exclude issued and pending
patents that the Company has identified for abandonment in order to optimize its patent portfolio and reduce unnecessary or redundant
costs while still protecting critical technologies. While each patent is issued in the name of the respective university that
developed the subject technology, the Company has exclusive commercial license rights to all of the patents and their attendant
technologies and the patents are referred to herein as being the Company’s patents.
The
patent applications being filed as a result of our sponsored research programs are part of a dynamic, comprehensive development
strategy to protect our commercialization rights. Following this developmental strategy, current work builds off of earlier work,
with new discoveries continually developed and protected. Additionally, as we progress with product development and commercialization,
we also have focused on optimizing the patent portfolio, reducing unnecessary or redundant costs while still protecting critical
technologies.
Patent
lifetimes typically run twenty years from a patent application’s effective filing date, not from when the patent was granted.
Processing time from application filing to the grant of the patent may take 3-5 years, and sometimes longer.
Our
three U.S. patents related to our high efficiency thin film solar technologies, U.S. Patent Nos. 8,378,385, 8,927,319 and 9,118,026,
will expire on September 9, 2030, October 23, 2030 and September 14, 2031, respectively. In addition to these three issued patents,
we are pursuing additional protection for our high efficiency thin film portfolio in 8 pending U.S. patent applications, 7 pending
PCT applications, which will be filed in the U.S. before their respective due dates, and 5 U.S. provisional applications, for
which non-provisional patent applications will be filed before their respective due dates. If U.S. patents are successfully issued
with respect to these pending applications, we expect that the earliest expiration date for the patents will be no earlier than
June 2032.
Some
of our technology holdings include foundational concepts in the following areas.
High
Efficiency Thin Film Solar Technologies:
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Accelerated
and recyclable liftoff process. Our research partners have invented and patented manufacturing processes and materials that
allow current manufacturers of high efficiency solar cells to reduce their existing fabrication costs, because the process
preserves the integrity of the parent substrate which can be re-used without chemo-mechanical polishing.
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Cold-weld
bonding of inorganic solar cells to plastic substrates and metal foils. This cold-weld bonding process enables the direct
bonding of active solar material to a thin plastic or metal substrate without using adhesive. This creates thin-film cells
that are lighter weight and highly flexible.
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Low
cost thermos-formed plastic mini-compound parabolic concentrator arrays. This allows a fraction of the GaAs solar cell material
while collecting an equivalent amount of energy over the course of a sun arc.
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Integrated
tracking technology. Lattice-like solar cells, with a design inspired by Kirigami, that can stretch like an accordion, allowing
them to tilt along the sun’s trajectory and capture up to an estimated 36% more energy than flat cells.
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Micro-inverters
monolithically integrated into high efficiency solar cells during production. Integrating micro-inverters into the solar cell
has the potential to greatly reduce the total cost of a photovoltaic system.
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Organic
Photovoltaics:
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Multi-junction
organic solar cell. Individual conventional solar cells have limited spectral coverage, voltage output, and tradeoff between
absorption length and charge collection length. By stacking multiple solar cells with complementary absorption profiles, voltages
of the cells can be added (at a constant current). This can make a more efficient cell. The researchers at Michigan have achieved
12.6% power conversion efficiency in the lab.
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Fullerene
acceptors. Fullerenes include molecules such as C
60
, C
70
, C
84
and derivatives that are
designed to dissolve in solvents and are the most prevalent acceptor in organic photovoltaics. Fullerenes offer better efficiency
than any other acceptor molecule implemented to date.
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Blocking
layers. In most solar cell designs, excitons must be blocked and reflected away from the metallic (or transparent) contact
so that they can be dissociated at the donor-acceptor junction. Additionally, it is desired that these layers block the wrong
carrier from contacting the electrode.
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New
materials for visible and infrared sensitivity. Current OPV materials absorb light in the visible and deep red part of the
solar spectrum, but do not collect light in the near infrared (“NIR”). Extending efficient light collection into
the NIR has the potential to increase photocurrent generation by 40%, markedly improving OPV performance.
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Scalable
growth technologies. A number of growth technologies have been developed for organic materials. These include vacuum thermal
evaporation and organic vapor phase deposition for materials that can be sublimed or evaporated directly and gravure or ink-jet
printing of dissolved materials. All of these processes are compatible with rigid planar substrates, but more importantly
can also be applied to flexible plastic or metal foil substrates, for roll-to-roll fabrication of OPVs.
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Inverted
solar cells. One of the most air sensitive parts of the OPV is the region between the anode and electron acceptor. This region
is degraded by oxygen and water in the dark and even more so under illumination. This interfacial region in a “conventional”
OPV is exposed to the atmosphere directly, requiring that the OPV be kept in a hermetic package. If the OPV is prepared as
an inverted cell, the air sensitive anode/organic interfacial region is placed below the donor, buffer layer and cathode.
Thus, the device itself provides a level of “packaging,” markedly slowing environmental degradation of the device,
minimizing packaging requirements for long term deployment in the field.
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Materials
for enhanced light collection via multi-exciton generation. An approach for improving the power conversion efficiency by collecting
the high energy part of the spectrum,
i.e.
UV-to-green, and double the energy collected from this part of the solar
spectrum using singlet fission (“SF”). SF materials absorb high energy light and generate two excitons for every
photon absorbed, thus doubling the light collection efficiency. The SF approach has the potential to give a single solar cell
efficiency well over the theoretical Shockley-Queisser limit, without increasing the cost to produce the cell.
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Mixed
layer and nanocrystalline cells. In planar (
e.g.
, bilayer) cells, the thickness of a layer is limited by the distance
an exciton is expected to travel before it recombines. If the layer is too thick, photons absorbed may never result in collected
charge. If the layers are too thin, there is insufficient material available for absorption of the light. By mixing the donor
and acceptor throughout a thicker layer, an additional donor-acceptor interface is created throughout the layer, improving photocurrent
generation capability. Nanocrystalline cells have a higher degree of phase separation between the donor and acceptor with nanocrystalline
domains, with high purity and domain sizes in the nanometer scale.
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Solar
films and coatings. OPV technology enables materials to be deposited onto virtually any smooth substrate (can be curved or
non-planar). The idea is to create solar coatings or films that can be applied quickly and easily to any surface, including,
for example, mobile communications devices, electric cars, roofing materials, building siding and glass.
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Transparent/semi-transparent
cells. In certain applications it may be desirable to have a partially transparent solar cell. These applications include
tinted windows. Instead of just absorbing or reflecting the light, the light would be absorbed and converted into energy.
The unique nature of organics allows the Company to tune the wavelengths absorbed to those that it does not want transmitted
or that are not useful for vision, such as in the infrared region of the spectrum.
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Development
Goals
If
necessary capital is available to it, of which there can be no assurance, the Company plans to accelerate the commercialization
of its high efficiency technology as set forth below. Our research and development efforts are projected to consist of a continuation
of work by our university researchers along with collaborative research and development with industry partners, including existing
compound semiconductor solar cell manufacturers. We have begun staffing our engineering team to support the transfer of technologies
from university laboratories to implementation in industry partners’ commercial product designs and fabrication processes.
To this end, on August 26, 2015, the Company signed a Joint Development Agreement with SolAero. The Company’s Joint Development
Agreement with SolAero provides for the joint development of high efficiency solar cells utilizing our proprietary manufacturing
processes in conjunction with SolAero’s advanced high efficiency solar cell technologies. Furthermore, as reported in the
Company’s Form 8-K filed with the SEC on February 7, 2017, on February 2, 2017, the Company entered into a License Agreement
with SolAero. In the Agreement, the Company agreed to grant SolAero a non-exclusive worldwide license to use, sell, offer for
sale, import or otherwise dispose of Licensed Products using the Company’s patented proprietary manufacturing processes
relating to Gallium Arsenide-based photovoltaic cells within the space and near-space fields of use. SolAero is to pay the Company
a royalty based on sales of the Licensed Products within the Licensed Field. The Agreement does not provide SolAero with the right
to sublicense the Licensed Patents. The term of the Agreement runs from February 2, 2017, through to the expiration date of the
last expiring patent included in the Licensed Technology. However, each party may terminate the agreement upon a material breach
by the other party.
To
support this joint development, the Company has established its own engineering team and plans to expand this team contingent
on its ability to secure sponsored funding or raise the necessary investment capital. This team is to be tasked with serving several
key functions, including working closely with the Company’s sponsored research organizations and its industry partners to
integrate and customize our proprietary processes and technologies into the partner’s existing product designs and fabrication
processes. Our engineering team will also work closely with downstream partners and customers such as military users for mobile
field applications, and system integrators, installers, and architects for BAPV and BIPV applications, and EPC companies and project
developers for solar farm applications. This customer interaction allows the Company to better understand application specific
requirements and incorporate these requirements into our product development cycle. Our primary technical objective is to demonstrate
the efficacy of our high efficiency solar thin film technologies. We plan to demonstrate ND-ELO technology on GaAs wafers of increasing
diameter and on compound semiconductor solar cells of increasing complexity. The Company plans to integrate mini-concentrators
with the ND-ELO and cold-weld-bonded cells to effect further cost reductions. The Company plans to produce prototypes for demonstrations,
test, and evaluation.
With
respect to its OPV technology, the Company plans to continue its sponsored research activities at the universities, when its account
is made current and funding is available. We also plan to work with system integrators, installers, and architects to assist with
requirements definition and technology development for targeted applications. Additionally, we are working with our university
researchers as well as industry partners to submit proposals for government programs to advance our technology development.
The
Company aims to achieve greater than 15% power conversion efficiencies on organic solar cells with operational lifetimes of 20
years on barrier-coated plastic or metal foil substrates, and to demonstrate roll-to-roll “printing” of solar cells
on plastic or metal foil substrates of increasing width.
Overall
Operating Plan
The
Company’s business model is oriented around licensing and sublicensing processes and technologies to large, well-positioned
commercial partners who can provide manufacturing and marketing capabilities to enable rapid commercial growth. The Company plans
to license or sublicense its intellectual property to industry partners and customers.. These manufacturing partners can supply
customers directly, but also serve as a source of solar cell supply for the Company to provide products to customers on its own
through a “fab-less” manufacturing model, particularly in the early stages of market development.
We
have made contact with major solar cell and electronics manufacturers world-wide and are finding commercial interest in both our
high efficiency and OPV technologies. We are seeking to work closely with those companies interested in our technology solutions
to develop proof-of-concept prototypes and processes to mitigate commercialization risks and gain early market entry and acceptance.
The
Company has identified its high efficiency solar technologies as its nearest term market opportunity. A key to reducing the risk
to market entry of the Company’s high efficiency technologies by our partners is for us to demonstrate our technologies
on their product designs and fabrication processes. To support this joint development, the Company has established its own engineering
team and plans to expand this team contingent on its ability to secure sponsored development funding and/or raise the necessary
capital. This team is to be tasked with serving several key functions, including working closely with the Company’s sponsored
research organizations and its industry partners to integrate and customize our proprietary processes and technologies into the
partner’s existing product designs and fabrication processes. In conjunction with facilitating technology transfer, our
engineering team will also work closely with downstream partners and customers such as military users for mobile field applications
and system integrators, installers, and architects for BAPV and BIPV applications, and engineering, procurement, and construction
(“EPC”) companies and project developers for solar farm applications. This customer interaction allows the Company
to better understand application specific requirements and incorporate these requirements into our product development cycle.
To
support this work, the Company’s engineering team leverages the facilities and equipment at the University of Michigan on
a recharge basis, which we believe is a cost effective approach to move the technologies toward commercialization. We believe
that this allows our engineering team to work directly with industry partners to acquire early licenses to use our intellectual
property without the need for large-scale capital investment in clean room facilities and solar cell fabrication equipment.
The
Company is pursuing sponsored development funding to generate revenue in the near-term. Having an established technical team enables
us to more effectively pursue and execute sponsored research projects from the DoD, DOE, and NASA, each of which has interests
in businesses that can deliver ultra-lightweight, high-efficiency solar technologies for demanding applications.
Another
potential revenue source is from JDAs with existing solar cell manufacturers. Once we are able to initially demonstrate the efficacy
of our processes and technologies on partner’s products and fabrication processes, we expect to be in a position where we
can sign agreements covering further joint development, IP licensing, solar cell supply and joint marketing, as applicable. We
anticipate that partnerships with one or more of the existing high efficiency solar cell manufacturers can be supported by the
Company’s engineering team, and result in near-term revenue opportunities, as we have demonstrated with our current joint
development partner.
There
can be no assurance that our overall operating plan will be successful or that we will be able to fulfill it as it is largely
dependent on raising capital and there can be no assurance that capital can be raised nor that we will be awarded the government
contracts that we are currently pursuing.
Near
Term Operating Plan
Our
near-term focus is on advancing our product development efforts while containing costs. The Company requires approximately $6
million to $8 million to continue its operations over the next twelve months to support its development and commercialization
activities, fund patent application and prosecution, service outstanding liabilities, and support its corporate functions. Our
operating plan over the next twelve months is comprised of the following:
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1.
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Cost
cutting and containment to reduce our cash operating expenses;
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2.
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Prioritizing
and optimizing our existing IP portfolio to align it with the commercialization strategy and reduce costs;
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3.
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Focusing
research and development investments on near-term commercialization opportunities;
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4.
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Collaborating
with strategic partners to accelerate joint development and licensing of our technologies;
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5.
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Selectively
pursuing government-sponsored projects to fund product development and commercialization; and
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6.
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Raising
adequate capital (approximately $6 million to $8 million) to support our activities for at least 12 months.
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The
Company believes that it has made progress with each of the components of this operating plan and has aligned its operations and
cost structure with expediting the development and commercialization of our high efficiency solar technologies. The Company has
taken steps to reduce patent expenses, particularly related to optimizing its OPV patent portfolio. The Company has realigned
its research and development operations with several strategic actions, including hiring Company engineers to focus on high efficiency
product development and technology transfer from Michigan to a commercial environment with our industry partner, establishing
a new sponsored research agreement with Michigan focused on research and development of high efficiency technology in support
of its commercialization efforts, and temporarily suspending its OPV-related sponsored research activities to reduce near-term
expenditures while it seeks a development partner for OPV commercialization. The Company remains focused on increasing its revenue
through joint development agreements and license agreements with industry partners and through government-sponsored research projects
and the Company believes that it is making positive progress with these efforts.
There
can be no assurance that the Company’s near term operating plan will be successful or that it will be able to fulfill it
as it is largely dependent on raising capital and there can be no assurance that capital can be raised nor that we will be awarded
the government contracts that it is currently pursuing.
In
the event that we raise less than the required amount of capital, our focus is planned to be on prioritizing our commercialization
effort to capture near-term revenue opportunities and limiting spending on general and administrative expenses and patent costs.
Market
Opportunity
There
are several key trends that we believe are reshaping the future of the global energy mix, including continued rapid growth in
the use of solar technologies, a retreat from nuclear power in some countries, and the emergence of unconventional natural gas
production. These trends are driving a pronounced shift away from oil, coal, and nuclear towards renewables and natural gas. Expectations
are building for a concerted global effort to tackle climate change, according to the International Energy Agency’s World
Energy Outlook 2016.
Expansion
of solar generation worldwide is a necessary component of any serious strategy to mitigate climate change, according to the Massachusetts
Institute of Technology (“MIT”) Energy Initiative. In recent years, solar costs have fallen substantially and installed
capacity has grown very rapidly. Nonetheless, solar energy currently accounts for only about 1% of global electricity generation.
Solar PV installations have experienced
rapid growth over the past several years. According to IHS Technology, global solar installations were estimated to have reached
77 gigawatts (“GW”) in 2016 and are forecast to reach 79 GW in 2017.
The
dominant solar photovoltaics (“PV”) technology, used in approximately 90% of installations, is wafer-based crystalline
silicon (“c-Si”), with thin-film technologies, such as cadmium telluride (“CdTe”), copper indium gallium
selenide (“CIGS”), and amorphous silicon (“a-Si”), accounting for approximately 10% of the PV market,
according to the MIT Energy Initiative. However, current c-Si technologies have inherent technical limitations, including high
processing complexity and low intrinsic light absorption, which requires a thick silicon wafer, resulting in rigidity and heavy
weight, according to the MIT Energy Initiative. We believe these form factor constraints largely limit the addressable market
for crystalline silicon-based solar to rooftop and utility-scale installations, which currently dominate the solar power installed
base.
The
Company plans to initially focus its high efficiency technologies and products on applications that are not well-served by c-Si-based
solar panels and rather demand solar solutions with some combination of high power, light weight, and flexibility. These markets
include aerospace (space vehicles and UAVs), mobile and field generation, and BIPV and BAPV, where high efficiency GaAs thin films
can be applied to multi-story rooftops as well as building facades. Likewise, the Company will focus its OPV technologies on BIPV
solutions where its highly flexible form factor and semi-transparency add value, such as glazing applications, including skylights,
curtain walls, facades, and windows.
Global
BIPV installations were 1.6 GW in 2014 and are projected to increase to 2.6 GW in 2019, according to BCC Research. We expect adoption
of BIPV solutions will be driven in part by Net Zero Energy Building (“NZEB”) regulations, which require buildings
to produce as much energy as it uses over the course of a year. NZEB goals are achieved through a combination of energy efficiency
measures and onsite renewable energy generation. The California Public Utilities Commission (“CPUC”) has set several
NZEB goals, including targeting all new residential construction and all new commercial construction within the State to be net
zero energy by 2020 and 2030, respectively, and 50% of existing buildings will be required to retrofit to meet NZEB goals by 2030.
Competition
The
Company is focused on developing commercializing and licensing advanced solar technologies that will enable entry of solar PV
into new applications and also potentially compete with established solar technologies in traditional solar markets.
The
solar PV sector is highly competitive, characterized by intense price competition among commercialized technologies and aggressive
investment in emerging technologies as companies attempt to compete within the solar markets as well as within the overall electric
power industry. The current solar market is dominated by c-Si technology, with some penetration by CdTe and CIGS thin film technologies,
according to SolarBuzz. C-Si solar cells are produced at massive scale and have established a low-cost position within the rooftop
and utility-scale PV markets. Advanced solar technology development efforts encompass various multiple technology platforms at
various stages of development.
The
Company believes its technologies will compete with established technologies as well as advanced technologies under development
by other organizations primarily on a basis of cost and performance, which is typically measured as cost per watt, largely a function
of production costs and power conversion efficiency. Within emerging applications, we anticipate our technologies will compete
primarily with advanced technologies on a basis of cost and performance, and also functionality and aesthetics as we attempt to
open new markets to solar power. Additionally, we believe that we will compete with other research and development organizations
for funding from government agencies, laboratories, research institutions, and universities. Some of our existing or future competitors
may be part of larger corporations that have greater financial resources than we do and, as a result, may be better positioned
to adapt to changes in the industry or the economy as a whole.
High
efficiency compound semiconductor solar technologies have been limited to specialty, niche applications due to their high costs;
although numerous research efforts are focused on reducing manufacturing costs. Within the high efficiency solar sector, there
are a small number of manufacturers, including Spectrolab, a subsidiary of The Boeing Company; SolAero, Azur Space (Germany);
MicroLink Devices; Sharp Corporation (Japan); Alta Devices, a subsidiary of Hanergy Thin Film (China); Spectrolab, SolAero, and
Azur Space produce commercial GaAs solar cells for highly specialized applications such as military and space-borne systems, which
are inelastic to the high prices associated with the technology. Some of these companies are attempting to reduce manufacturing
costs to enable entry of high efficiency compound semiconductor solar technologies into commercial terrestrial markets. We believe
the Company’s patented GaAs ND-ELO and mini-concentration technologies present the opportunity to significantly reduce the
cost for high efficiency solutions and believe that we could potentially license our technology to these companies.
OPV
technologies are in the development stage, with numerous activities ongoing among government laboratories, universities, and private
enterprises. Currently, we are not aware of any commercialized OPV technologies, but we believe there are a limited number of
developers planning introduction within the next several years.
Ongoing
research and development on OPV materials and devices are currently being performed by Heliatek (Dresden, Germany); Mitsubishi
Chemical Holdings Corporation; LG Chemical; BELECTRIC OPV (Kolitzheim, Germany); Solvay (Brussels, Belgium; acquired Plextronics);
Polyera (Skokie, Illinois); and Solarmer Energy (El Monte, California); among others. Research institutions may also become our
competitors, such as University of California, Los Angeles, University of California, Berkley, Fraunhofer-Institut fur Solare
Energiesysteme (ISE), Empa, a Swiss federal laboratory for materials science and technology. We believe the Company’s exclusive
intellectual property rights surrounding technologies for small molecule OPVs present a formidable obstacle for those wishing
to compete with us and present opportunities for potential partnerships.
Regulation
The
Company has not yet introduced commercial products and, as such, has not commenced any governmental approval process. The Company
anticipates that the applicability and extent of government approval requirements will depend on the particular end-market. Successful
introduction of our products into certain markets may require significant government testing and evaluation prior to high volume
procurement. We anticipate that the installation of products based on our high efficiency and OPV technologies will be subject
to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental
protection, utility interconnection and metering and related matters.
Governments
implement various policies to facilitate the adoption of solar power, including customer-focused financial incentives such as
capital cost rebates, performance-based incentives, feed-in tariffs, tax credits, and net metering. Capital cost rebates provide
funds to customers based on the cost and size of a customer’s solar power system. Performance-based incentives provide funding
to a customer based on the energy produced by their solar power system. Feed-in tariffs pay customers for solar power system generation
based on energy produced, at a rate generally guaranteed for a period of time. Tax credits reduce a customer’s taxes at
the time the taxes are due. Net metering allows customers to deliver to the electric grid any excess electricity produced by their
on-site solar power systems, and to be credited for that excess electricity at or near the full retail price of electricity.
In
addition to the mechanisms described above, new market development mechanisms to encourage the use of renewable energy sources
continue to emerge. For example, many states in the United States have adopted renewable portfolio standards which mandate that
a certain portion of electricity delivered to customers come from eligible renewable energy resources. In certain developing countries,
governments are establishing initiatives to expand access to electricity, including initiatives to support off-grid rural electrification
using solar power.
Employees
Currently,
the Company employees consist of six full-time personnel – our Chief Executive Officer; Executive Vice President and Chief
Financial Officer; three engineers; and an office manager. The Company’s Chief Technology Officer provides support on a
consulting basis. Depending on the availability of capital, the Company plans to expand its engineering team, hiring process and
product engineers to facilitate technology transfer and commercialization. The Company’s engineering team is augmented by
numerous post-doctoral fellows and PhD candidates that are employed in our sponsored university research programs.
ITEM
1A. RISK FACTORS
Risks
Relating to Our Business
There
is doubt about our ability to continue as a going concern, which may hinder our ability to obtain financing and force us to cease
operations.
The
Company has only generated limited revenues to date. In their audit reports for the fiscal years 2015 and 2014, our independent
registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. The Company had
current liabilities of $25,506,910 and current assets of $116,467 as of December 31, 2015. As of December 31, 2016, the Company
had a working capital deficit of $19,246,667 and an accumulated deficit of $208,569,839. We generated revenues of $115,400 for
the year ended December 31, 2016, and we lack sufficient capital to fund ongoing operations, including our research and development
activities and for maintenance of our patent portfolio. The Company has funded its initial operations primarily by way of sale
of equity securities, convertible note financing, short term financing from private parties, and advances from related parties.
We anticipate that we will continue to experience net operating losses as we seek to commercialize our technologies and that the
continuation of our business and our ability to service existing liabilities will continue to be dependent primarily on raising
capital.
Our
net operating losses require that we finance our operations from outside sources through funding from the sale of our securities.
If we are unable to obtain such additional capital, we will not be able to sustain our operations and would be required to cease
our operations. Investors should consider this when determining if an investment in our company is suitable.
Even
if we do raise sufficient capital and generate sufficient revenues to support our operating expenses, there can be no assurance
that the revenue will be sufficient to enable us to develop our business to a level where it will generate sufficient profits
and cash flows from operations, or provide a return on investment. In addition, if we raise additional funds through the issuance
of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, the newly-issued
securities may have rights, preferences or privileges senior to those of existing stockholders and the trading price of our common
stock could be adversely affected. Further, if we obtain additional debt financing, a substantial portion of our operating cash
flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued
could impose significant restrictions on our operations. If we are unable to continue as a going concern, our shareholders may
lose their entire investment.
We
are presently solely dependent on raising capital to maintain the Company, our patent portfolio, research and development activities
and efforts to commercialize our technologies
.
We
are currently in the development stage and have not yet commercialized any of our technologies nor have we licensed any of our
technologies other than our Agreement with SolAero, as discussed above, or sold any products, and have only generated limited
revenues and are solely dependent on raising capital to fund our operations. We currently need to raise capital in order to maintain
the Company’s operations, our patent portfolio, research and development activities and efforts to commercialize our technologies,
as well as to pay our approximately $4.6 million in outstanding accounts payable and accrued liabilities as of December 31, 2016,
excluding derivative liabilities.
There
can be no assurance that we will be able to raise the capital that we need or that if we can, that it will be available on terms
that are acceptable to the Company or its shareholders or which would not substantially dilute existing shareholders’ interests.
If we fail to raise sufficient capital, we will be unable to maintain the Company or our patents or commercialize our technologies
which may result in a total loss of our shareholders’ investments.
We
will need additional capital to fund our growth and we may not be able to obtain sufficient capital on reasonable terms and may
be forced to limit the scope of our operations.
If
adequate additional financing is not available to us, or if available, if it is not available on reasonable terms, we may not
be able to fund our future operations and we would have to modify our business plans accordingly. There is no assurance that additional
financing will be available to us.
If
we cannot obtain additional funding, we may be required to: (i) limit internal growth (ii) limit the recruitment and retention
of additional key personnel, and (iii) limited acquisitions of businesses and technology. Such limitations could materially adversely
affect our business and our ability to compete.
Even
if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional
capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the
holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any
additional financing will be available to us, or if available, will be on terms favorable to us.
The
Company has incurred, and expects to continue to incur, significant losses as we seek to commercialize our technologies.
The
Company’s operating subsidiary was incorporated under the laws of the Commonwealth of Pennsylvania in February 1994. We
have been a development-stage company since that time, and have only generated limited revenues to date. Since the Company’s
incorporation we have incurred significant losses. We expect that our expenditures will increase to the extent we seek to continue
to develop strategic partnerships to commercialize our products. We expect these losses to continue until such time, if ever,
as we are able to generate sufficient revenues from the commercial exploitation of our high efficiency and organic photovoltaics
(“OPV”) technologies to support our operations. Our high efficiency and OPV technologies may never be incorporated
in any commercial applications. We have encountered and will continue to encounter risks and difficulties frequently experienced
by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully, our business
will suffer. The Company may never be profitable. We may be unable to satisfy our obligations solely from cash generated from
operations. If, for any reason, we are unable to make required payments under our obligations, one or more of our creditors may
take action to collect their debts. If we continue to incur substantial losses and are unable to secure additional financing or
secure financing on terms that are favorable to us, we could be forced to discontinue or further curtail our business operations;
sell assets at unfavorable prices; refinance existing debt obligations on terms unfavorable to us; or merge, consolidate or combine
with a company with greater financial resources in a transaction that may be unfavorable to us.
Our
inability to achieve and sustain profitability could cause us to go out of business and for our shareholders to lose their entire
investment.
We
are a development-stage company, and have only generated limited revenues to date. We cannot provide any assurance that any of
our business strategies will be successful or that future growth in revenues or profitability will ever be achieved or, if they
are achieved, that they can be consistently sustained or increased on a quarterly or annual basis. If we are unable to grow our
business sufficiently to achieve and maintain positive net cash flow, the Company may not be able to sustain operations and our
shareholders’ entire investment may be lost.
Our
substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to
meet our payment obligations.
As
of December 31, 2016, we had total indebtedness of approximately $2.7 million. Our substantial indebtedness could have important
consequences to our stockholders. For example, it could require us to dedicate a substantial portion of our cash flow from operations
to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures,
research and development efforts and other general corporate purposes; increase our vulnerability to and limit our flexibility
in planning for, or reacting to, changes in our business; place us at a competitive disadvantage compared to our competitors that
have less debt; limit our ability to borrow additional funds, dispose of assets, and make certain investments; and make us more
vulnerable to a general economic downturn than a company that is less leveraged.
A
high level of indebtedness increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations
and to reduce our level of indebtedness will depend on our future performance. General economic conditions and financial, business
and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be
able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing
may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of
our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance
at the time we need capital.
Our
business could be adversely affected by general economic conditions which may negatively affect our ability to be profitable.
Our
business could be adversely affected in a number of ways by general economic conditions, including higher interest rates, consumer
credit conditions, unemployment and other economic factors. Changes in interest rates may increase our costs of capital and negatively
affect our ability to secure financing on favorable terms. During economic downturns, we may have greater difficulty in gaining
new customers for our products and services. Our strategies to acquire new customers may not be successful, which, in turn, could
have a material adverse effect on our business, financial condition and results of operations.
The
Company’s access to research facilities, engineers, resources, and equipment depends upon the continued effectiveness of
the Company’s sponsored research partnerships, the termination of which could materially impair the Company’s ability
to continue its business.
The
Company conducts research and development pursuant to sponsored research agreements with the University of Southern California
(“USC”) and the University of Michigan (“Michigan”).
The
Company’s sponsored research agreement with USC covers basic research related to high efficiency thin film solar technologies
and OPV technologies. Michigan is a subcontractor to USC on this research agreement. The agreement extends until January 31, 2021,
but is terminable upon 60 days’ prior written notice in the event that, for reasons outside of the terminating party’s
control, it becomes infeasible to continue the partnership. Pursuant to this agreement, all intellectual property made jointly
by USC, Michigan and Company personnel, or solely by the Company’s personnel using USC or Michigan facilities, resources,
equipment, or funds, will be jointly owned by USC, Michigan and the Company.
On
August 8, 2016, the Company amended this research agreement with USC, suspending the agreement effective as of August 15, 2016.
The amendment was requested by the Company for the purpose of temporarily suspending our OPV-related sponsored research activities
to reduce near-term expenditures while it seeks a development partner for OPV commercialization and allow the Company to bring
its account with USC current through a payment plan. The suspension is to continue until the date that is 30 days after expenses
incurred by USC have been reimbursed by the Company, which expenses will be repaid by the Company to USC in quarterly installments
through February 2018, unless earlier repaid by the Company at its option. The amended agreement provides USC with the option
to terminate the agreement upon any late installment payments.
The
Company’s failure to timely pay any of its installments to USC may result in the termination of its sponsored research agreement
with USC. If the agreement is terminated, the Company will no longer have use of USC’s facilities, equipment and resources
to research and develop its OPV technologies and our ability to generate revenues could be substantially impaired and our business
and financial condition could be materially and adversely impacted.
The
Company established direct agreements with Michigan on June 16, 2016, which were amended on July 21, 2016, to provide engineering
support and facility access associated with technology transfer and commercialization of its high efficiency thin film solar technologies.
The Company’s failure to timely pay any of its installments to Michigan may result in the termination of its sponsored research
agreement with Michigan. If the agreement is terminated, the Company will no longer have use of Michigan’s facilities, equipment
and resources to research and develop its high efficiency technologies and our ability to generate revenues could be substantially
impaired and our business and financial condition could be materially and adversely impacted.
The
Company’s patents depend upon the continued effectiveness of the Company’s license agreement, the termination of which
could materially impair the Company’s ability to continue its business.
Pursuant
to that certain License Agreement, as amended, with USC, Michigan and Princeton University, we have obtained the exclusive worldwide
license and right to sublicense any and all intellectual property resulting from our sponsored research programs. If the License
Agreement expires or is terminated for any reason, including by the Company’s default or breach thereof, our ability to
generate revenues could be substantially impaired and our business and financial condition could be materially and adversely impacted.
The
Company is in arrears on payments to certain critical vendors and may not have sufficient capital to pay such vendors in the future
which could negatively impact the Company’s business.
The
Company is currently in arrears with regard to payments to certain of its vendors and may not have sufficient capital to pay such
vendors in the short term or long term future. If the Company continues to fall behind on these payments and if the Company is
unable to ultimately pay its vendors, the vendors may stop providing critical services to the Company. Additionally, if the Company’s
vendors remain unpaid they may seek to recover payments owed to them by bringing legal claims for such payments against the Company.
The Company may not be able to successfully defend these claims which may lead to the Company being ordered to pay such amounts
by a court of lawful jurisdiction which could have a negative effect on the Company’s business operations.
The
success of the Company is dependent in part on market acceptance of thin-film solar technology.
The
success of the Company’s business is dependent in part on market acceptance of thin-film solar technology. Thin-film technology
has a limited operating history making it difficult to predict a level at which the technology is competitive with other energy
sources without government subsidies. If thin-film technology performs below expectations or if it does not achieve cost competitiveness
with conventional or other solar or non-solar renewable energy sources without government subsidies, it could result in the failure
of the technology to be widely adopted in the market. This could significantly affect demand for thin-film solar technologies
and negatively impact our business.
The
Company may never develop or license a product that uses its high efficiency or OPV technologies.
We
have devoted substantially all of our financial resources and efforts to developing our OPV technologies and identifying potential
users of our technologies. Development and commercialization of the photovoltaic technologies is a highly speculative undertaking
and involves a substantial degree of uncertainty. Neither the Company nor anyone else has developed any product that uses our
OPV technologies, nor has the Company licensed its high efficiency or OPV technologies to anyone else who has developed such a
product. The Company may never develop a commercially viable use for those technologies, may never achieve commercially viable
performance for our OPV technologies and may never license our high efficiency or OPV technologies to anyone. Even if the Company
or a licensee of the Company does develop a commercially viable product or use, the product may never become profitable, either
because it is not developed quickly enough, it is not developed to meet industry standards, or because no market for the product
is identified, or otherwise.
Our
business is based on new and unproven technologies, and if our high efficiency or OPV technologies fail to achieve the performance
and cost metrics that we anticipate, then we may be unable to develop a demand for our products or generate sufficient revenue
to support our operations.
Our
high efficiency and OPV technologies are new and unproven at commercial scale production, and such technologies may never gain
market acceptance, if they do not compare favorably against competing products on the basis of cost, quality, efficiency and performance.
Our business plan and strategies assume that we will be able to achieve certain milestones and metrics in terms of throughput,
uniformity of cell efficiencies, yield, cost and other production parameters. We cannot assure you that our technologies will
prove to be commercially viable in accordance with our plan and strategies. Further, we or our strategic partners and licensees
may experience operational problems with such technology after its commercial introduction that could delay or defeat the ability
of such technology to generate revenue or operating profits. If we are unable to achieve our targets on time and within our planned
budget, then we may not be able to develop adequate demand for our high efficiency and OPV technologies, and our business, results
of operations and financial condition could be materially and adversely affected.
We
may not reach profitability if our high efficiency and OPV technologies are not suitable for widespread adoption or sufficient
demand for our technologies does not develop or develops slower than we anticipate.
The
extent to which solar photovoltaic (“PV’) products based on our technologies will be widely adopted is uncertain.
If our high efficiency and OPV technologies prove unsuitable for widespread adoption or demand for our high efficiency and OPV
technologies fails to develop sufficiently, we may be unable to grow our business or generate sufficient revenue from operations
to reach profitability or maintain our business. In addition, demand for solar modules in our targeted markets may not develop
or may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of solar PV
technology and demand for our high efficiency and OPV products, including the following:
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performance
and reliability of solar modules and thin film technology compared with conventional and other non-solar renewable energy
sources and products;
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cost-effectiveness
of solar modules compared with conventional and other non-solar renewable energy sources and products;
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availability
of government subsidies and incentives to support the development of the solar PV industry;
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success
of other renewable energy generation technologies, such as hydroelectric, wind, geothermal, solar thermal, concentrated PV
and biomass;
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fluctuations
in economic and market conditions that affect the viability of conventional and non-solar renewable energy sources, such as
increases or decreases in the price of oil and other fossil fuels;
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fluctuations
in economic and market conditions that affect the viability of conventional and non-solar renewable energy sources, such as
increases or decreases in the price of oil and other fossil fuels; and
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deregulation
of the electric power industry and the broader energy industry.
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If
we do not reach profitability because our PV technology is not suitable for widespread adoption or due to insufficient demand
for solar PV modules, our financial condition and business could be materially and adversely affected.
The
Company’s intellectual property rights with regard to its high efficiency and OPV technologies may be challenged.
Pursuant
to the license agreement, the Company has obtained exclusive rights to an extensive portfolio of issued and pending U.S. patents,
plus their foreign counterparts relating to advanced thin-film PV technologies. The Company may obtain rights to additional patents
and patent applications under its Sponsored Research Agreements. However, additional patent applications may never be filed and
the Company may never obtain any rights to such applications. Any patent applications now pending or filed in the future may not
result in patents being issued. Any patents now licensed to the Company, or licensed to us in the future, may not provide the
Company with any competitive advantages or prove enforceable. The Company’s rights to these patents may be challenged by
third parties. The cost of litigation to uphold the validity, or to prevent infringement of patents and to enforce licensing rights
can be substantial and beyond the Company’s financial means. Furthermore, others may independently develop similar technologies
or duplicate our high efficiency and OPV technologies licensed to the Company or design around the patented aspects of such technology.
In addition, there can be no assurance that the products and technologies the Company will seek to commercialize will not infringe
patents or other rights owned by others, or that licenses for other’s technology will be available.
Our
success is dependent on a small number of management personnel.
As
we are a development stage company, our management consists of only three management employees who together, are responsible for
all management functions in the Company, including, commercialization of our technologies, strategic development, financing, accounting
and other critical functions. We do not have key man insurance on any of our management personnel. Our future success significantly
depends on the continued service and performance of our management personnel and the loss of the services of any of them would
materially and adversely affect our business and prospects.
We
may be unable to protect our intellectual property rights or keep up with that of our competitors
.
We
regard our intellectual property rights as highly valuable to our business strategy, and intend to rely on the maximum protection
provided by law to protect our rights. We have entered into and continue to use confidentiality agreements with our employees
and contractors and, to the extent practicable, nondisclosure agreements with our suppliers and strategic partners in order to
limit access to and disclosure of our information. We cannot be sure that these contractual arrangements or the other steps taken
by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent
third-party development of similar technologies. Our failure to protect our intellectual property rights could put us at a competitive
disadvantage in the future. Any such failure could have a materially adverse effect on our future business, results of operations
and financial condition. We intend to defend vigorously our intellectual property against any known infringement, but such actions
could involve significant legal fees, and we have no guarantee that such actions will be resolved in our favor. We also cannot
be sure that any steps taken by us will be adequate to prevent misappropriation or infringement of our intellectual property.
We
also intend to sell and/or license our products and technology in countries worldwide, including some with limited ability to
protect intellectual property of products and services sold in those countries by foreign firms. We cannot be sure that the steps
taken by us will be adequate to prevent misappropriation or infringement of our intellectual property in these countries.
We
may not have sufficient funds and may need additional capital to protect and maintain our intellectual property rights.
The
Company’s sponsored research has resulted in an extensive portfolio of issued and pending U.S. patents, plus their foreign
counterparts, which are in the names of our sponsored research partners, USC, Michigan, and Princeton. The Company has the exclusive
commercial rights to these intellectual property rights and the obligation to maintain, defend and fund the defense of these patents.
The Company has only generated limited revenues from its operating business and it expects to have limited cash flow in the near
future. In the event of filing infringement lawsuits or defending any infringement suits that are filed against the Company, relevant
expenses and fees will increase substantially and could harm our profitability. We may need to raise additional funds to protect
and maintain our intellectual property rights.
If
we are unable to successfully maintain or license existing patents, our ability to generate revenues could be substantially impaired.
Our
business model includes licensing or sublicensing our proprietary high efficiency and OPV technologies to industry partners and
customers, and the Company is currently entitled to the exclusive right to sub-license an extensive portfolio of issued and pending
U.S. patents, plus their foreign counterparts. Our ability to be successful in the future therefore will depend on our continued
efforts and success in licensing existing patents, including maintaining and prosecuting our patents properly. If we are unable
to successfully maintain and license our existing patents, our ability to generate revenues could be substantially impaired and
our business and financial condition could be materially and adversely impacted.
Our
insurance coverage may be inadequate to cover all significant risk exposures.
We
will be exposed to liabilities that are unique to the products we provide. While we intend to maintain insurance for certain risks,
the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial
costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all
operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could
have a material adverse effect on our business, financial condition, results of operations and prospects.
If
we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results
accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation
and adversely impact the trading price of our common stock.
Effective
internal control is necessary for us to provide reliable financial reports and prevent fraud. The Company currently does not have
an audit committee. As a result, our small size and any current internal control deficiencies may adversely affect our financial
condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered
failures of internal controls exist, and may in the future discover areas of our internal control that need improvement. If we
cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would
if an effective control environment existed, and our business and reputation with investors may be harmed.
Risks
Relating to Our Industry
Our
industry has historically been cyclical and experienced periodic downturns.
Our
future success partly depends on continued demand for solar PV systems in the solar energy markets, including in the United States
and internationally. The solar equipment industry has historically been cyclical and has experienced periodic downturns which
may affect the demand for our solar technologies. The solar industry has undergone challenging business conditions, including
downward pricing pressure for PV modules, mainly as a result of overproduction, and reductions in applicable governmental subsidies,
contributing to demand decreases. There is no assurance that the solar industry will not suffer significant downturns in the future,
which may adversely affect demand for our solar technologies and our operations.
Existing
regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers
to the purchase and use of solar PV products, which may significantly reduce demand for our technologies.
The
market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and
policies concerning the electric utility industry, utility rates, and internal policies of electric utilities. These regulations
and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the
United States and in a number of other countries, these regulations and policies have been, and continue to be, continuously modified.
The market for electric generation equipment is also influenced by trade and local content laws, regulations and policies. These
regulations and policies could deter end-user purchases of PV products and investment in the research and development of PV technology.
For example, without a mandated regulatory exception for PV systems, utility customers are often charged interconnection or standby
fees for putting distributed power generation on the electric utility grid. If these interconnection standby fees were applicable
to PV systems, it is likely that they would increase the cost to our end-users of using PV systems which could make them less
desirable, thereby harming our business, prospects, results of operations and financial condition. In addition, electricity generated
by PV systems mostly competes with expensive peak hour electricity, rather than the less expensive average price of electricity.
Modifications to the peak hour pricing policies of utilities, such as to a flat rate for all times of the day, would require PV
systems to achieve lower prices in order to compete with the price of electricity from other sources.
The
Company has not yet introduced commercial products and, as such, has not commenced any governmental approval process. The applicability
and extent of government approval requirements will depend on the particular end-market. Successful introduction of our products
into certain markets may require significant government testing and evaluation prior to high volume procurement. We anticipate
that the installation of products based on our high efficiency and OPV technologies will be subject to oversight and regulation
in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection
and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply
with the varying standards. In addition, the U.S., European Union and Chinese governments, among others, have imposed tariffs
or are in the process of evaluating the imposition of tariffs on solar panels, solar cells, polysilicon, and potentially other
components. These tariffs may increase the price of our solar products, which could harm our results of operations and financial
condition. Any new government regulations or utility policies pertaining to our solar modules may result in significant additional
expenses to us, our resellers and their customers and, as a result, could cause a significant reduction in demand for our solar
modules.
The
solar energy industry depends, in part, on continued support in the form of rebates, tax credits and other incentives from federal,
state and local governments. An elimination or reduction of these rebates, tax credits and other incentives could negatively impact
the Company’s ability to successfully introduce products and secure capital.
Federal,
state and local governments currently provide tax credits, rebates, and other incentives to owners, users, and manufacturers of
solar energy. Any elimination or reduction of such incentives would increase the cost of solar energy, which would negatively
impact the Company’s ability to introduce products and secure necessary capital. The federal government currently provides
a 30% federal tax credit (the “ITC”) for solar systems installed on residential and commercial properties under Sections
25(d) and 48(a) of the Internal Revenue Code, respectively. In December 2015, legislation was signed into law extending the 30%
ITC for both residential and commercial projects through the end of 2019; after which the ITC drops to 26% in 2020 and 22% in
2021 before dropping permanently to 10% for commercial projects and 0% for residential projects. Unless modified by a further
change in law, the reduction of the ITC may negatively impact the demand for our solar products and our ability to obtain financing
support.
Environmental
obligations and liabilities could have a substantial negative impact on our business and financial condition.
The
solar energy industry is subject to heavy laws, rules and regulations, some of which pertain to environmental concerns. The solar
energy industry can involve the use handling, generation, processing, storage, transportation, and disposal of hazardous materials
which are subject to extensive environmental laws and regulations at the national, state, local, and international levels. These
environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management,
and disposal of hazardous materials and wastes, the cleanup of contaminated sites, and occupational health and safety. As the
Company proceeds to seek to develop and commercialize its solar technologies, we and our potential license partners will have
to comply with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation
of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures
that could have a material adverse effect on our business, results of operations, and financial condition.
Competition
is intense in the energy industry.
The
global energy industry is presently dominated by hydrocarbon, hydroelectric and nuclear-based technologies, and therefore our
solar energy-based technologies will primarily compete against the providers of these established energy sources. However, we
also compete directly against large multinational corporations (including global energy suppliers and generators) and numerous
small entities worldwide that are pursuing the development and commercialization of renewable and non-renewable technologies that
might have performance and/or price characteristics similar or even superior to our high efficiency and OPV technologies. Most
of our current competitors are significantly larger and have substantially greater market presence as well as greater financial,
technical, operational, marketing and other resources and experience than we do. We also expect that new competitors are likely
to join existing competitors in this industry.
The
Company’s attempt to develop commercially viable technologies based on Company-funded research will also encounter competition
from other academic institutions and/or governmental laboratories, which are conducting or funding research in alternative technologies
similar to our high efficiency and OPV technologies. These academic institutions and/or governmental laboratories likely will
have financial resources substantially greater than the resources available to the Company. Given the foregoing competitive environment,
the Company cannot determine at this time whether it will be successful in its development and commercialization efforts or whether
such efforts, even if successful, will be commercially viable and profitable.
There
is competition between manufacturers of crystalline silicon solar modules, as well as thin-film solar modules and solar thermal
and concentrated PV systems. If global supply exceeds global demand, it could lead to a reduction in the demand and price for
PV modules, which could adversely affect our business.
The
solar energy and renewable energy industries are highly competitive and continually evolving as participants strive to distinguish
themselves within their markets and compete with the larger electric power industry. Within the global PV industry, there is competition
from crystalline silicon solar module manufacturers, other thin-film solar module manufacturers and companies developing solar
thermal and concentrated PV technologies. Existing or future solar manufacturers might be acquired by larger companies with significant
capital resources, thereby intensifying competition. This intensified competition can lead to a large amount of supply which can
exceed the demand. Even if demand for solar modules continues to grow, the rapid manufacturing capacity expansion undertaken by
many solar module manufacturers, particularly manufacturers of crystalline silicon solar modules, has created and may continue
to cause periods of structural imbalance during which supply exceeds demand. We anticipate that competitors will continue to develop
competing solar PV technologies and will attempt to commercialize these technologies. If these competing technologies present
a compelling value proposition or are available to market sooner than our technologies, then our market opportunity could diminish.
Our
business and financial results may be harmed as a result of increases in materials and component costs.
The
cost of raw materials and key components associated with our technologies could increase in the future due to a variety of factors,
including trade barriers, export regulations, regulatory or contractual limitations, industry market requirements and changes
in technology and industry standards. If we are unable to adjust our cost structure in the future to deal with potential increases
in costs, we may not be able to achieve profitability, which could have a material adverse effect on our business and prospects.
Developments
in alternative technologies or improvements in distributed solar energy generation may have a material adverse effect on our business.
Significant
developments in alternative technologies, such as advances in other forms of distributed solar PV power generation, storage solutions
such as batteries, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other
forms of centralized power production may have a material adverse effect on our business and prospects. Any failure by us to adopt
new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence,
the loss of competitiveness of our products and lack of revenues.
A
drop in the retail price of conventional energy or non-solar alternative energy sources may negatively impact our profitability.
We
believe that an end customer’s decision to purchase or install solar energy is primarily driven by the cost and return on
investment resulting from solar energy. Fluctuations in economic and market conditions that affect the prices of conventional
and non-solar alternative energy sources, such as decreases in the prices of oil, natural gas, and other fossil fuels, could cause
the demand for solar power systems to decline, which would have a negative impact on our business.
Risks
Relating to Our Securities
An
investment in the Company’s common stock is extremely speculative and there can be no assurance of any return on any such
investment.
An
investment in the Company’s common stock is extremely speculative and there is no assurance that investors will obtain any
return on their investment. Investors will be subject to substantial risks involved in an investment in the Company, including
the risk of losing their entire investment.
The
market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results,
general trends in the market and other factors, many of which we have little or no control over. In addition, broad market fluctuations,
as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless
of our actual or projected performance.
Our
shares are subject to the Securities and Exchange Commission’s “penny stock” rules that limit trading activity
in the market, which may make it more difficult for our shareholders to sell their common stock.
Penny
stocks generally are equity securities with a price of less than $5.00. Since our common stock is trading at less than $5.00 per
share, we are subject to the penny stock rules adopted by the Securities and Exchange Commission that require broker-dealers to
deliver extensive disclosure to its customers prior to executing trades in penny stocks not otherwise exempt from the rules. The
broker-dealer must also provide its customers with current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock
held by the customer. Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established
customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s
written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with
a net worth in excess of $1,000,000, or annual income exceeding $200,000 individually, or $300,000 together with his or her spouse,
is considered an accredited investor. The additional burdens from the penny stock requirements may deter broker-dealers from effecting
transactions in our securities, which could limit the liquidity and market price of our securities. These disclosure requirements
may cause a reduction in the trading activity of our common stock, which likely would make it difficult for our stockholders to
resell their securities.
We
will continue to incur significant costs to ensure compliance with United States corporate governance and accounting requirements.
We
will continue to incur significant costs associated with our public company reporting requirements, costs associated with applicable
corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by
the Securities and Exchange Commission. We expect all of these applicable rules and regulations will result in significant legal
and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable
rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance
and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board
of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and
we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
In
order to raise sufficient funds to expand our operations, we may have to issue additional securities at prices which may result
in substantial dilution to our shareholders.
If
we raise additional funds through the sale of equity or convertible debt, our current stockholders’ percentage ownership
will be reduced. In addition, these transactions may dilute the value of our securities outstanding. We may have to issue securities
that may have rights, preferences and privileges senior to our common stock. We cannot provide assurance that we will be able
to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable
terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects,
results of operations and financial condition.
Our
shareholders’ percentage of ownership may become diluted upon conversion of our convertible promissory notes, upon the exercise
of currently outstanding warrants, or upon the issuance of new shares of stock or other securities, including issuances to consultants
as compensation.
As
of December 31, 2016, there were outstanding warrants to purchase 60,380,521 shares of our common stock. Furthermore, as of December
31, 2016, outstanding warrants to purchase a total of 16,539,500 shares of our common stock had and continue as of the date of
this report to have anti-dilution provisions and the exercise price of such warrants will be automatically reduced to a lower
price if the Company issues securities in a subsequent offering at a price which is less than each such warrant’s then-effective
exercise price. Of the Company’s warrants with anti-dilution provisions, outstanding warrants to purchase 7,389,500 shares
of our common stock, as of December 31, 2016, also provide that the number of shares of common stock that can be issued under
such warrants will be adjusted in the event of a subsequent lower price issuance such that the aggregate exercise price of such
warrants remain the same.
In
addition, as of December 31, 2016, the Company had outstanding options to purchase 100,000 shares of our common stock, with a
weighted average exercise price of $0.77 per share, and convertible notes outstanding in the aggregate amount of $1,783,500, with
a conversion price of $0.50 per share.
We
may enter into additional agreements with independent contractors, consultants, and other unaffiliated third parties for services
and compensation under such agreements may be payable in equity. The conversion of outstanding debt, the exercise of outstanding
warrants, and the issuance of new securities could result in significant dilution to existing stockholders. Additionally, securities
issued in connection with future financing activities or any potential acquisitions could have preferences and rights senior to
the rights of common stock.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not
expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate.
There
has been a limited trading market for our common stock and an active trading market for our common stock may not ever develop
which may impair your ability to sell your shares
Our
common stock is quoted on the OTCQB Marketplace (“OTCQB”), under the symbol “OPVS”. The OTCQB is an electronic
quotation system that displays real-time quotes, last-sale prices, and volume information for many over the counter securities
that are not listed on a national securities exchange. Trading volume for our common stock has been limited and OTCQB quotations
for our common stock price may not represent the true market value of our common stock. There is a limited trading market for
the Common Stock in the over-the-counter market. The lack of an active market will impair your ability to sell your shares at
the time you wish to sell them or at a price that you consider reasonable. The lack of an active market will also reduce the fair
market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock
and may impair our ability to acquire other companies or technologies by using common stock as consideration.
For
as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including
those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
In
April 2012, the President signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act contains
provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including
certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company.
For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we
will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment
of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley
Act of 2002, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”),
requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to
provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules
adopted by the PCAOB after April 5, 2012 unless the Securities and Exchange Commission determines otherwise, (4) provide certain
disclosure regarding executive compensation required of larger public companies or (5) hold shareholder advisory votes on executive
compensation.
Further,
our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal
controls over financial reporting, and will not be required to do so for as long as we are an “emerging growth company”
pursuant to the provisions of the JOBS Act.
Under
the JOBS Act we have elected to use an extended period for complying with new or revised accounting standards.
We
have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1),
which allows us to delay adoption of new or revised accounting standards that have different effective dates for public and private
companies until those standards apply to private companies. As a result of this election, our financial statements may not be
comparable to companies that comply with public company effective dates.
If
equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade
our common stock, the market price of our common stock and warrants will likely decline.
The
trading market for our common stock and warrants will rely in part on the research and reports that equity research analysts,
over whom we have no control, publish about us and our business. We may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence coverage of our company, the market price for our common stock and warrants
could decline. In the event we obtain securities or industry analyst coverage, the market price of our common stock and warrants
could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even
if it is inaccurate, or cease publishing reports about us or our business.
ITEM
2. PROPERTIES
The
Company’s executive offices are currently located at 17207 N. Perimeter Dr., Suite 210, Scottsdale, AZ 85255 and it started
leasing its offices from DTR10, LLC on November 15, 2013. The office space is approximately 3,077 square feet. Its monthly rental
is $7,518, and subject to 3% annual increases.
ITEM
3. LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that
may harm our business.
On
March 18, 2015, the Company received correspondence from the counsel of Mr. John Kuhns, the Company’s former Co-CEO and
Executive Chairman alleging that Mr. Kuhns has “Good Reason” to terminate his Employment Agreement, as amended and
dated as of October 1, 2013 (the “Employment Agreement”), for an alleged failure to pay his salary in full. On March
30, 2015, Mr. Kuhns advised that if the alleged breaches of the Employment Agreement were not cured there was a possibility that
he would pursue litigation.
As
of March 30, 2015, shareholders holding approximately 67.26% of the total shares of common stock of the Company 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. 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) tortiously 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 the next phase of the case is 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.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock commenced trading on the OTCQB Marketplace (the “OTCQB”) operated by OTC Market Group, Inc. on July 14,
2015 under the symbol “OPVS”. Trading in stocks quoted on the OTCQB is often thin and is characterized by wide fluctuations
in trading prices due to many factors that may have little to do with a company’s operations.
OTCQB
securities are not listed or traded on the floor of an organized national or regional stock exchange. Instead OTCQB securities
transactions are conducted through a telephone and computer network connecting dealers in stock.
The
following table sets forth, for the fiscal quarters indicated, the high and low sales prices of our common stock as reported by
the OTCQB:
|
Fiscal Year 2015
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Second Quarter
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Third Quarter
|
|
$
|
10.00
|
|
|
$
|
1.35
|
|
|
Fourth Quarter
|
|
$
|
3.00
|
|
|
$
|
.78
|
|
|
Fiscal Year 2016
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
1.60
|
|
|
$
|
0.80
|
|
|
Second Quarter
|
|
$
|
1.00
|
|
|
$
|
0.60
|
|
|
Third Quarter
|
|
$
|
2.10
|
|
|
$
|
0.54
|
|
|
Fourth Quarter
|
|
$
|
1.20
|
|
|
$
|
0.60
|
|
Common
Stock
As of the date of this Report, the Company had 60,771,521 shares of Common Stock issued and outstanding. The Company’s Common
Stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors,
by a plurality) of the votes entitled to be cast by all shares of our common stock that are present in person or represented by
proxy, subject to any voting rights granted to holders of any Preferred Stock. Holders of the Company’s Common Stock representing
fifty percent (50%) of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by
proxy, are necessary to constitute a quorum at any meeting of the Company’s stockholders. The Company’s Articles of
Incorporation do not provide for cumulative voting in the election of directors.
Subject
to any preferential rights of any outstanding series of Preferred Stock created by the Company’s Board of Directors from
time to time, the holders of shares of the Company’s Common Stock will be entitled to such cash dividends as may be declared
from time to time by the Company’s Board of Directors from funds available therefore.
Subject
to any preferential rights of any outstanding series of Preferred Stock created from time to time by the Company’s Board
of Directors, upon liquidation, dissolution or winding up, the holders of shares of the Company’s common stock will be entitled
to receive pro rata all assets available for distribution to such holders.
Holders
of the Company’s common stock have no preemptive rights, no conversion rights and there are no redemption provisions applicable
to our common stock.
Holders
We
had 757 record holders of our common stock, par value $.0001, issued and outstanding as of December 31, 2016.
Transfer
Agent and Registrar
VStock
Transfer, LLC at 18 Lafayette Place, Woodmere, New York 11598 is the registrar and transfer agent for our common stock. Their
telephone number is (212) 828-8436.
Warrants
There
were outstanding warrants to purchase a total of 60,380,521 shares of our common stock as of December 31, 2016. 59,030,521 warrants
shall be exercisable at any time and from time to time as provided in the warrant. The exercise prices of the outstanding warrants
range from $0.50 to $17.50 per share.
Options
There
were options to purchase a total of 100,000 shares of our Common Stock issued and outstanding as of December 31, 2016. The exercise
prices of the outstanding options range from $0.50 to $1.03 per share.
Penny
Stock Regulations
The
Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be an equity security
that has a market price of less than $5.00 per share. Our Common Stock, when and if a trading market develops, may fall within
the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited investors (generally those with assets in excess
of $1,000,000, or annual incomes exceeding $200,000 individually, or $300,000, together with their spouse).
For
transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such
securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction,
other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer must also make
a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. In addition, the broker-dealer must disclose the commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our Common Stock and may
affect the ability of investors to sell their Common Stock in the secondary market.
In
addition to the "penny stock" rules promulgated by the Securities and Exchange Commission, the Financial Industry Regulatory
Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative
low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least
some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit the investors’ ability to buy and sell our stock.
Dividend
Policy
Any
future determination as to the declaration and payment of dividends on shares of our Common Stock will be made at the discretion
of our board of directors out of funds legally available for such purpose. We are under no contractual obligations or restrictions
to declare or pay dividends on our shares of Common Stock. In addition, we currently have no plans to pay such dividends. Our
board of directors currently intends to retain all earnings for use in the business for the foreseeable future.
Securities
authorized for issuance under equity compensation plans
On
September 24, 2013 the directors of the Company unanimously approved the 2013 Equity Incentive Plan (the “Plan”) under
which the Company has reserved a number of shares of its Common Stock equal to 10% of the Company’s fully diluted Common
Stock for awards under the Plan of any stock option, stock appreciation right, restricted stock, performance share, or other stock-based
award or performance-based cash awards under the Plan.
Unregistered
Sales of Equity Securities
During
the three months ended March 31, 2016, the Company issued promissory notes to a shareholder in aggregate of $1,375,000. 2,750,000
cashless warrants for the Company’s common stock were issued with the debt at a strike price of $0.50 per share in lieu
of cash interest. These notes were converted on January 22, 2016, into shares of the Company’s Common Stock and warrants
to purchase shares of the Company’s Common Stock pursuant to the Conversion Agreement, described below in the section titled
“Issuances Pursuant to Conversion Agreement” of this Item 2.
On
August 12, 2016, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a
promissory note from the Company in exchange for $500,000. The Note automatically converted by its terms 30 days after issuance
into an investment in the principal amount of the note in the Company’s convertible notes and warrants to purchase 500,000
shares of the Company’s Common Stock with a 5 year term and $0.50 exercise price and a cashless conversion feature, upon
automatic conversion, the investor was issued a one year promissory note convertible into shares of the Company’s Common
Stock at a $.50 conversion price and 5 year warrants with an exercise price of $.50 and a cashless conversion feature.
During
the quarter ended September 30, 2016, the Company entered into a note purchase agreement with an investor pursuant to which the
investor purchased a promissory note from the Company in exchange for $300,000. Pursuant to the note purchase agreement the investor
was also issued a warrant to purchase 600,000 shares of the Company’s Common Stock with a 5 year term and $0.50 exercise
price and a cashless conversion feature.
On
October 7, 2016 the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a
promissory note from the Company in exchange for $100,000. In connection with the note, the investor was also issued a warrant
to purchase 200,000 shares of the Company’s common stock with a 5 year term and $0.50 exercise price and a cashless conversion
feature. The Note automatically converted by its terms on November 7, 2016, 30 days after issuance into an investment in the principal
amount of the note in the Company’s convertible notes and warrants, and upon automatic conversion, the investor was issued
a one year promissory note for $100,000 convertible into shares of the Company’s Common Stock at a $0.50 conversion price
and 5 year warrants to purchase 100,000 shares of Common Stock with an exercise price of $0.50 and a cashless conversion feature.
During the quarter ended
December 31, 2016, the Company issued two non-convertible promissory notes to a shareholder in exchange for $500,000. The $300,000
note expired on January 20, 2017 and the $200,000 note is set to expire on April 27, 2016. In lieu of interest under the note,
the Company agreed to pay the investor $15,000 in cash within three (3) days of the expiration of such note. As of the date of
this report, the $300,000 note is in default and the interest is accrued but not yet paid.
The
above issuance of the Company’s securities were not registered under the 1933 Act, and the Company relied on an exemption
from registration pursuant to Section 4(2) of the 1933 Act for such issuances.
Private
Placement of the Company’s Convertible Notes
On
March 7, 2016, the Company issued and sold convertible promissory notes together with warrants to purchase 80,000 shares of the
Company’s Common Stock for gross proceeds of $80,000. Such warrants have an exercise price of $.50 and a term of 5 years.
As of the date of this report, $80,000 of the notes have been converted pursuant to their terms into warrants to purchase shares
of the Company’s Common Stock and shares of Common Stock as set forth below.
During
the quarter ending June 30, 2016 the Company issued and sold convertible promissory notes totaling $425,000 together with warrants
to purchase 425,000 shares of the Company’s Common Stock for gross proceeds of $425,000 pursuant to certain note subscription
agreements entered into between the Company and investors. Such warrants have an exercise price of $.50 and a term of 5 years
and a cashless conversion feature. $50,000 of the $425,000 was issued through a note with automatic conversion in 2015. As of
the date of this report, $425,000 of the notes have been converted pursuant to their terms into warrants to purchase shares of
the Company’s Common Stock and shares of Common Stock as set forth below.
During
the quarter ended September 30, 2016 the Company issued and sold convertible promissory notes totaling $744,500 together with
warrants to purchase 744,500 shares of the Company’s Common Stock for gross proceeds of $744,500 pursuant to certain note
subscription agreements entered into between the Company and investors. Such warrants have an exercise price of $0.50 and a term
of 5 years and a cashless conversion feature. $500,000 of the total $733.500 was issued upon automatic conversion of the promissory
note issued on August 12, 2016.
During
the quarter ended December, 2016, the Company issued and sold a convertible promissory note totaling $258,500 together with warrants
to purchase 258,500 shares of the Company’s Common Stock for gross proceeds of $258,500 pursuant to certain note subscription
agreements entered into between the Company and an investor. Such warrants have an exercise price of $0.50 and a term of 5 years
and a cashless conversion feature. As of the date of this report, $258,500 of the notes have been converted pursuant to their
terms into warrants to purchase shares of the Company’s Common Stock and shares of Common Stock as set forth below. $100,000
of the total $158,500 was issued upon automatic conversion of the promissory note issued on October 7, 2016.
The
above issuance of the Company’s securities were not registered under 1933 Act, and the Company relied on an exemption from
registration provided by Rule 506(b) of Regulation D promulgated under the 1933 Act for such issuances.
Issuance
of Common Stock
On
February 23, 2016, the Company issued 145,878 shares of Common Stock and warrants to purchase 426,741 shares of the Company’s
Common Stock in exchange for proceeds of $67,536. The cash was received prior to December 31, 2015 and was recorded as an accrued
liability at December 31, 2015. The Company determined a fair value for the shares and warrants to be $537,175. This transaction
resulted in a loss on extinguishment of liability of $469,639.
During
the three months ended March 31, 2016, the Company issued 372,263 shares of Common Stock and warrants to purchase 257,990 shares
of the Company’s Common Stock in exchange for proceeds of $187,271, $14,928 of which was received in the prior year. In
addition, the Company issued warrants to purchase 1,000,000 shares of its common stock related to the conversion of certain convertible
notes which were issued in connection with rescission agreements. Such warrants have an exercise price of $.50 and a term of 5
years.
On
May 6, 2016 the Company issued 100,000 shares of its Common Stock to an investor pursuant to a purchase agreement where the investor
as payment for the shares, surrendered a $50,000 promissory note of the Company held by the investor.
On
June 14, 2016, the Company issued 12,577 shares of its Common Stock to an investor upon the exercise of a warrant for gross proceeds
of $6,288.50.
During
the three months ended June 30, 2016, the Company issued 1,007,535 shares of the Company’s Common Stock and warrants to
purchase $3,031,050 shares upon conversion of certain promissory notes in connection with rescission agreements. Such warrants
have an exercise price of $.50 and a term of 5 years.
During
the three months ended June 30, 2016, the Company issued 638,639 shares of the Company’s Common Stock upon conversion of
certain promissory notes.
During
the quarter ended September 30, 2016, the Company issued 1,072,390 shares of the Company’s Common Stock upon conversion
of certain promissory notes.
During
the three months ended September 30, 2016, the Company issued 54,278 shares of Common Stock and warrants to purchase 257,212 shares
of Common Stock in exchange for proceeds of $25,129 and interest expense of $6,023. The warrants have an exercise price of $0.50
and a term of 5 years.
During
October 2016, the Company issued 122,400 shares of the Company’s Common Stock upon conversion of certain promissory notes.
During
November, 2016, the Company issued 812,800 shares of the Company’s Common Stock upon conversion of certain promissory notes.
On
November 29, 2016, the Company issued 125,834 shares of its Common Stock to a shareholder pursuant to the exercise of certain
warrants.
On
December 1, 2016, the Company issued 6,000 shares of its Common Stock to a shareholder pursuant to the exercise of a certain warrant.
During
January, 2017, the Company issued 107,000 shares of the Company’s Common Stock upon conversion of certain promissory notes.
The
above issuance of the Company’s securities were not registered under 1933 Act, and the Company relied on an exemption from
registration provided by Rule 506(b) of Regulation D promulgated under the 1933 Act for such issuances.
Issuance
of Warrants Upon Note Conversion
During
the three months ended June 30, 2016, the Company issued warrants to purchase 577,031 shares of its common stock related to the
conversion of certain convertible notes. Such warrants have an exercise price of $0.50 and a term of 5 years and a cashless conversion
feature.
During
the quarter ended September 30, 2016, the Company issued warrants to purchase 1,072,390 shares of its Common Stock related to
the conversion of certain convertible notes. Such warrants have an exercise price of $.50 and a term of 5 years and a cashless
conversion feature.
During
the quarter ended December 31, 2016, the Company issued warrants to purchase 935,200 shares of its Common Stock related to the
conversion of certain convertible notes. Such warrants have an exercise price of $.50 and a term of 5 years and a cashless conversion
feature.
During
January, 2017 the Company issued warrants to purchase 107,000 shares of its Common Stock related to the conversion of certain
convertible notes. Such warrants have an exercise price of $.50 and a term of 5 years and a cashless conversion feature.
The
above issuances of the Company’s securities were not registered under the 1933 Act, and the Company relied on an exemption
from registration pursuant to Section 4(2) of the 1933 Act for such issuances.
Issuances
Pursuant to Conversion Agreement
On
January 22, 2016, the Company entered into a Note Conversion Agreement (the “Conversion Agreement”) with an investor
(the “Investor”). A form of the Conversion Agreement was filed as Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed with the SEC on January 27, 2016. Pursuant to the Conversion Agreement, the Investor converted his promissory
notes in the Company, which totaled $2,000,000, into an investment of $2,000,000 into the Company’s private placement of
convertible notes and warrants. For $2,000,000, the Investor received a convertible note (the “Convertible Note”)
and a warrant to purchase 2,000,000 shares of Common stock (the “Warrant”). The Warrant has a ten year term and an
exercise price of $0.50 per share. The Convertible Note accrued interest of 8% per annum, had a maturity date of one year and
was convertible at $0.50 per unit, into units, with each unit consisting of a share of the Company’s Common Stock and a
warrant to purchase a share of Common Stock with a ten year term and an exercise price of $.50 per share.
Pursuant
to the Conversion Agreement, if the Investor converted the Convertible Note within thirty (30) days of its issuance, the Company
was required to pay the Investor the interest under the Convertible Note in shares of its Common Stock as if the Investor did
not convert the Convertible Note for a period of one (1) year from the date of issuance. On January 25, 2016 the Investor converted
the Convertible Note into 4,320,000 shares of the Company’s Common Stock and a warrant to purchase 4,320,000 shares of the
Company’s Common Stock with a ten year term and an exercise price of $.50. Of the 4,320,000 shares of Common Stock, 320,000
shares represent interest paid on the Convertible Note pursuant to the terms of the Conversion Agreement.
The
securities issued pursuant to the Conversion Agreement as referenced above, were not registered under 1933 Act and the relied
on the exemptions under Rule 506 of Section 4(a)(2) of the 1933 Act for such issuances and the Investor provided a written representation
to the Company that he qualifies as an “accredited investor” as that term is defined in Rule 501 of Regulation D under
the 1933 Act.
Issuance
of Warrants to Service Providers
On
May 13, 2016 the Company issued warrants to purchase 1,200,000 shares of its Common Stock to service providers in exchange for
services provided to the Company. The warrants have an exercise price of $1 and a 10 year term. 700,000 of the warrants are subject
to vesting and 250,000 warrants shall vest on May 13, 2017 and an additional 250,000 warrants shall vest on May 13, 2018.
During
the quarter ended September 30, 2016, the Company issued warrants to purchase 15,000 shares of its Common Stock to a service provider
in exchange for services provided to the Company. The warrants have an exercise price of $1 and a 5 year term.
On
November 4, 2016, the Company issued warrants to purchase 1,200,000 shares of its Common Stock to a service provider in exchange
for services provided to the Company. The warrants were issued pursuant to a service agreement between the Company and the service
provider which was signed on November 4, 2015. The warrants have an exercise price of $0.50 and a 10 year term. 600,000 of the
warrants vested immediately upon issuance of the warrant and 600,000 of the warrants shall vest on November 4, 2017.
The
above issuances of the Company’s securities were not registered under the 1933 Act, and the Company relied on an exemption
from registration pursuant to Section 4(2) of the 1933 Act for such issuances.
Issuance
of Options
On
October 3, 2016, 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 beginning on October 3, 2016, over a 50 month period. The options expire 5 years after vesting.
The
above issuance of the Company’s securities were not registered under the 1933 Act, and the Company relied on an exemption
from registration pursuant to Section 4(2) of the 1933 Act for such issuances.
Except
as disclosed above, all unregistered sales of the Company’s securities have been disclosed on the Company’s current
reports on Form 8-K and the Company’s quarterly reports on Form 10-Q.
Purchases
of Equity Securities by the Registrant and Affiliated Purchasers
We
have not repurchased any shares of our common stock during the fiscal year ended December 31, 2016.
ITEM
6. SELECTED FINANCIAL DATA
Disclosure
in response to this item is not required of a smaller reporting company.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.
Certain
statements in this Report constitute forward-looking statements. These forward-looking statements include statements, which involve
risks and uncertainties, regarding, among other things, (a) our projected revenue, profitability, and cash flows, (b) our growth
strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of,
working capital. They are generally identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend,”
or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties,
there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place
undue reliance on these forward-looking statements.
The
forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities
laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on
which the statements are made or to reflect the occurrence of unanticipated events.
The
"Company", "we," "us," and "our," refer to (i) NanoFlex Power Corporation and (ii) Global
Photonic Energy Corporation.
Overview
NanoFlex
Power Corporation is engaged in the development, commercialization, and licensing of advanced photovoltaic technologies that enable
thin film solar products with industry-leading efficiencies, light weight, flexibility, and low total system cost. NanoFlex has
the exclusive worldwide license to the intellectual property resulting from the Company's sponsored research programs, which have
resulted in an extensive portfolio of issued and pending U.S. patents, plus their foreign counterparts. The patents are referred
to herein as being the Company’s patents or as our “IP”. Building upon the sponsored research, the Company plans
to work with industry partners to commercialize its technologies to target key applications where is believes products incorporating
its technologies present compelling competitive advantages.
These
patented and patent-pending technologies fall into two general categories – (1) cost reducing and performance-enhancing
fabrication processes and device architectures for ultra-high efficiency Gallium Arsenide (“GaAs”)-based solar thin
films and (2) organic photovoltaic (“OPV”) materials, architectures, and fabrication processes for low cost, ultra-thin
solar films offering high quality aesthetics, such as semi-transparency and tinting, and highly flexible form factors. The technologies
are targeted at certain broad applications that require high power conversion efficiency, flexibility, and light weight. These
applications include: (a) mobile and off-grid solar power generation, (b) BAPV, (c) BIPV, (d) space vehicles and UAVs, (e) semi-transparent
solar power generating glazing or windows, and (f) ultra-thin solar films for automobiles or other consumer applications. The
Company believes these technologies have been demonstrated in a laboratory environment with our research partners.
The
Company currently hold exclusive rights to an extensive portfolio of issued and pending U.S. patents, plus their foreign counterparts,
which cover architecture, processes and materials for flexible, thin-film organic photovoltaic (“OPV”) and Gallium
Arsenide (“GaAs”)-based solar technologies. In addition, we have an extensive collection of patents in process. Some
of our technology holdings include foundational concepts in the following areas.
|
|
●
|
Tandem
organic solar cell
|
|
|
|
|
|
|
●
|
Fullerene
acceptors
|
|
|
|
|
|
|
●
|
Blocking
layers
|
|
|
|
|
|
|
●
|
New
materials for visible and infrared sensitivity
|
|
|
|
|
|
|
●
|
Scalable
growth technologies
|
|
|
|
|
|
|
●
|
Inverted
solar cells
|
|
|
|
|
|
|
●
|
Materials
for enhanced light collection via multi-exciton generation
|
|
|
|
|
|
|
●
|
Mixed
layer and nanocrystalline cells
|
|
|
|
|
|
|
●
|
Solar
films, coatings, or paints
|
|
|
|
|
|
|
●
|
Semi-transparent
cells
|
|
|
|
|
|
|
●
|
Ultra-low
cost, ultra-high efficiency, flexible thin film GaAs cells
|
|
|
|
|
|
|
●
|
Accelerated
and recyclable liftoff process
|
|
|
|
|
|
|
●
|
Cold-weld
bonding of GaAs solar cells to plastic substrates and metal foils
|
|
|
|
|
|
|
●
|
Micro-inverters
monolithically integrated into GaAs solar cells
|
|
|
|
|
|
|
●
|
Low
cost, thermo-formed plastic mini-compound parabolic concentrator arrays
|
Plan
of Operation and Liquidity and Capital Resources
Overall
Operating Plan
Our
business model is oriented around licensing and sublicensing processes and technologies to large, well-positioned commercial partners
who can provide manufacturing and marketing capabilities to enable rapid commercial growth. We plan to license or sublicense our
intellectual property to industry partners and customers. These manufacturing partners can supply customers directly, from which
we expect to receive license royalties. Additionally, these manufacturing partners can also serve as a source of solar cell supply
for us to provide products to customers on its own through a “fab-less” manufacturing model, particularly in the early
stages of market development.
We
have made contact with major solar cell and electronics manufacturers world-wide and are finding commercial interest in both our
high efficiency and OPV technologies. We are seeking to work closely with those companies interested in our technology solutions
to develop proof-of-concept prototypes and processes to mitigate commercialization risks and gain early market entry and acceptance.
We
have identified its high efficiency thin film solar technologies as its nearest term market opportunity. A key to reducing the
risk to market entry of our high efficiency technologies by our partners is for us to demonstrate our technologies on their product
designs and fabrication processes. To support this joint development, we have established our own engineering team and plan to
expand this team contingent on our ability to secure sponsored development funding and/or raise the necessary capital. This team
is to be tasked with serving several key functions, including working closely with our sponsored research organizations and its
industry partners to integrate and customize our proprietary processes and technologies into the partner’s existing product
designs and fabrication processes. In conjunction with facilitating technology transfer, our engineering team will also work closely
with downstream partners and customers such as military users for mobile field applications, system integrators, installers, and
architects for BAPV and BIPV applications, and engineering, procurement, and construction (“EPC”) companies and project
developers for solar farm applications. This customer interaction allows us to better understand application specific requirements
and incorporate these requirements into its product development cycle.
To
support this work, our engineering team leverages the facilities and equipment at the University of Michigan on a recharge basis,
which we believe is a cost effective approach to move the technologies toward commercialization. We believe that this allows our
engineering team to work directly with industry partners to acquire early licenses to use our intellectual property without the
need for large-scale capital investment in clean room facilities and solar cell fabrication equipment.
We
are pursuing sponsored development funding to generate revenue in the near-term. Having an established technical team enables
us to more effectively pursue and execute sponsored research projects from the Department of Defense (“DoD”), the
Department of Energy (“DOE”), and the National Aeronautics and Space Administration (“NASA”), each of
which has interests in businesses that can deliver ultra-lightweight, high-efficiency solar technologies for demanding applications.
Another
potential revenue source is from joint development agreements (“JDAs”) and license agreements with existing solar
cell manufacturers, similar to the JDA with SolAero. Once we are able to initially demonstrate the efficacy of our processes and
technologies on partner’s products and fabrication processes, we expect to be in a position where we can sign licenses covering
further joint development, IP licensing, solar cell supply, and joint marketing, as applicable. We anticipate that partnerships
with one or more of the existing high efficiency solar cell manufacturers can be supported by our engineering team, and result
in near-term revenue opportunities, as we have demonstrated with our current joint development partner.
As
reported in the Company’s Form 8-K filed with the SEC on February 7, 2017, on February 2, 2017, the “Company entered
into a License Agreement with SolAero. In the Agreement, the Company agreed to grant SolAero a non-exclusive worldwide license
to use, sell, offer for sale, import or otherwise dispose of certain products using the Company’s patented proprietary manufacturing
processes relating to Gallium Arsenide-based photovoltaic cells within the space and near-space fields of use. SolAero is to pay
the Company a royalty based on sales of the Licensed Products within the Licensed Field. The Agreement does not provide SolAero
with the right to sublicense the Licensed Patents. The term of the Agreement runs from February 2, 2017, through the expiration
date of the last expiring patent included in the Licensed Technology. However, each party may terminate the agreement upon a material
breach by the other party.
There
can be no assurance that our overall term operating plan will be successful or that we will be able to fulfill it as it is largely
dependent on raising capital and there can be no assurance that capital can be raised nor that we will be awarded the government
contracts that we are currently pursuing.
Near
Term Operating Plan
Our
near-term focus is on advancing our product development efforts while containing costs. We require approximately $6 million to
$8 million to continue our operations over the next twelve months to support our development and commercialization activities,
fund patent application and prosecution, service outstanding liabilities, and support our corporate functions. Our operating plan
over the next twelve months is comprised of the following:
|
|
1.
|
Cost
cutting and containment to reduce our cash operating expenses;
|
|
|
2.
|
Prioritizing
and optimizing our existing IP portfolio to align it with the commercialization strategy and reduce costs;
|
|
|
3.
|
Focusing
research and development investments on near-term commercialization opportunities;
|
|
|
4.
|
Collaborating
with strategic partners to accelerate joint development and licensing of our technologies;
|
|
|
|
|
|
|
5.
|
Selectively
pursuing government-sponsored projects to fund product development and commercialization; and
|
|
|
6.
|
Raising
adequate capital (approximately $6 million to $8 million) to support our activities for at least 12 months.
|
We
believe that we have made progress with each of the components of this operating plan and have aligned our operations and cost
structure with expediting the development and commercialization of our high efficiency solar technologies. We have taken steps
to reduce patent expenses, particularly related to optimizing our OPV patent portfolio. We have realigned our research and development
operations with several strategic actions, including hiring Company engineers to focus on high efficiency product development
and technology transfer from the University of Michigan to a commercial environment with our industry partner, establishing a
new sponsored research agreement with the University of Michigan focused on research and development of high efficiency technology
in support of our commercialization efforts, and temporarily suspending our OPV-related sponsored research activities to reduce
near-term expenditures while we seek a development partner for OPV commercialization. We remain focused on increasing our revenue
through JDAs and license agreements with industry partners and through government-sponsored research projects and we believe that
we are making positive progress with these efforts.
There
can be no assurance that our near term operating plan will be successful or that we will be able to fulfill it as it is largely
dependent on raising capital and there can be no assurance that capital can be raised nor that we will be awarded the government
contracts that we are currently pursuing.
In
the event that we raise less than the required amount of capital, our focus is planned to be on prioritizing our commercialization
effort to capture near-term revenue opportunities and limiting spending on general and administrative expenses and patent costs.
Results
of Operations
For
the years ended December 31, 2016 and December 31, 2015
Revenue
Revenue
was $115,400 and $119,998 for the year ended December 31, 2016 and 2015, respectively. This relates to engineering services provided
under our JDA.
We
do not believe that inflation or changing prices have had a material effect on our business, financial condition, or results of
operations.
Cost
of Services
Cost
of services was $458,576 and $114,947 for the year ended December 31, 2016 and 2015, respectively. This increase was due to expenses
associated with a full year of engineering services under our JDA during 2016 compared to only a portion of the year in 2015.
Research
and Development Expenses
Research
and development expenses were $1,683,464 for the year ended December 31, 2016, a 28% decrease from $2,325,539 for the year ended
December 31, 2015. The decrease is attributable to an overall reduction in expense associated with our sponsored research activity
as we increased our focus on product development and commercialization. The, decrease was also due to a decrease in non-cash expenses
consisting of warrants issued for services, which were $1,266,043 and $1,334,017 for the years ended December 31, 2016 and 2015,
respectively.
Patent
Application and Prosecution Fees
Patent
application and prosecution fees consist of the fees due for prosecuting and maintaining the patents resulted from the research
program sponsored by the Company and were $1,525,695 for the year ended December 31, 2016, a 12% decrease from $1,724,988 for
the year ended December 31, 2015. The year-over-year decrease is attributable to reduced submittal and processing of patent applications
resulting from efforts to optimize the patent portfolio to align it with the Company’s development and commercialization
strategy.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $2,930,222 for the year ended December 31, 2016, a 58% decrease from $7,018,803 for the
year ended December 31, 2015. The decrease is primarily attributable to a reduction in non-cash expenses associated with warrants
issued to employees during the year. Non-cash expenses were $1,063,248 and $4,747,101 for the year ended December 31, 2016 and
2015, respectively.
Other
Expense
Other
expense for the year ended December 31, 2016 was $582,804 as compared to $12,252,240 for the year ended December 31, 2015. These
changes are primarily due to the gain (loss) on change in fair value of derivative liabilities, the timing of entering into interest
bearing debt agreements and the timing of the conversion of existing debt and extinguishment of old debt.
Net
Loss
The
net loss for the year ended December 31, 2016 was $7,065,361, a 70% decrease from $23,316,519 for the year ended December 31,
2015. The change in net loss is impacted by non-cash expenses, including the loss on change in fair value of the derivative liability
and an increase in interest expense offset by changes in research and development, patent application and prosecution fees, and
selling, general and administrative expenses, each of which is described above.
Liquidity
and Capital Resources
Sources
of Liquidity
As
of December 31, 2016, we had cash and cash equivalents of $2,986 and a working capital deficit of $19,246,667, as compared to
cash and cash equivalents of $6,255 and a working capital deficit of $25,404,178 as of December 31, 2015. The decrease in working
capital is attributable to the change in fair value of derivative liabilities.
The
Company needs to raise additional capital and is in the process of raising additional funds in order to continue to finance our
research and development, service existing liabilities and commercialize photonic energy conversion technologies utilizing organic
semiconductor-based solar cells. We need to raise approximately $6 million $8 million in additional capital in order to continue
our operations as described above and support our corporate functions. We anticipate that the additional funding can result from
private sales of our equity securities. However, there can be no assurance that the additional funds will be available to us when
needed, or if available, on terms that will be acceptable to us or our shareholders. If we are unable to raise sufficient funds
the Company may have to cease its operations.
Analysis
of Cash Flows
Net
cash used in operating activities increased by $1,120,850 to $4,622,396 for the year ended December 31, 2016, compared to $3,501,546
for the year ended December 31, 2015. The cash used in operating activities was attributable primarily to decreased net loss,
loss on extinguishment of debt partially offset by gain on change in fair value of derivative liabilities.
Net
cash used in investing activities was $0 and $5,842 during the years ended December 31, 2016, and 2015, respectively. This amount
represents purchases of property and equipment.
Net
cash provided by financing activities was $4,619,127 and $3,513,475 during the years ended December 31, 2016 and 2015, respectively.
For the year ended December 31, 2016 this includes proceeds from sale of common shares and warrants of $663,922, proceeds from
exercise of warrants of $72,205, borrowings on short-term debt of $300,000, borrowings on related party debt of $1,875,000, borrowings
on convertible debt of $1,458,000, advances received from related party of $730,000, partially offset by payments on related party
debt of $150,000 and advances repaid to related party of $330,000. For the year ended December 31, 2015 this includes proceeds
from the sale of common shares and warrants of $136,000, proceeds from the exercise of warrants of $914,220, proceeds from short-term
debt of $50,000, borrowings on related party debt of $625,000, borrowings on convertible debt of $2,106,405, advances received
from related party of $212,350, partially offset by advances repaid to related party of $530,500.
Going
Concern
The
Company has only generated limited revenues to date. The Company has a working capital deficit of $19,246,667 and an accumulated
deficit of $208,569,839 as of December 31, 2016. The ability of the Company to continue as a going concern is dependent on raising
capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly,
these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event the Company cannot continue in existence.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,
which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and judgments that affect our reported assets and liabilities, expenses, and other financial
information. Actual results may differ significantly from our estimates under other assumptions and conditions. We believe that
our accounting policies related to stock-based compensation, research and development, impairment of long lived assets, development
stage and property plant and equipment as described below, are our “critical accounting policies” as contemplated
by the SEC.
Basis
of Accounting
The
Company’ policy is to maintain its books and prepare its combined financial statements on the accrual basis of accounting
in accordance with accounting principles generally accepted in the United States of America.
Use
of Estimates
The
preparation of combined financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those 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.
Stock-Based
Compensation
We
account for stock based compensation in accordance with FASB ASC 718 which requires companies to measure the cost of employee
services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. For stock-based
awards granted on or after January 1, 2006, stock-based compensation expense is recognized on a straight-line basis over the requisite
service period. In prior years, we accounted for stock-based awards under APB No. 25, “Accounting for Stock Issued to Employees.”
We account for non-employee share-based awards in accordance with FASB ASC 505-50.
Research
and Development
Research
and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless
they meet specific criteria related to technical, market and financial feasibility, as determined by management, including but
not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources
to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life, or written
off if a product is abandoned. At December 31, 2016 and 2015, the Company had no deferred development costs.
Impairment
of Long-Lived Assets
The
Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that
the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset
by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value
exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss
is measured as the difference between the net book value and the fair value of the long-lived asset. Fair value is estimated based
upon either discounted cash flow analysis or estimated salvage value.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method for financial
reporting purposes at rates based on the estimated useful lives of the assets. Estimated useful lives range from three to eight
years.
Off
Balance Sheet Arrangements:
We
do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons,
also known as “special purpose entities” (SPEs).
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure
in response to this item is not required of a smaller reporting company.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
Company's consolidated financial statements, together with the report of the independent registered public accounting firm thereon
and the notes thereto, are presented beginning at page F-1. The Company’s balance sheets as of December 31, 2016 and 2015
and the related statements of operations, changes in stockholders’ deficit and cash flows for the years then ended have
been audited by MaloneBailey, LLP. MaloneBailey, LLP is an independent registered public accounting firm. These financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to
Regulation S-K as promulgated by the Securities and Exchange Commission and are included herein pursuant to Part II, Item 8 of
this Form 10-K. The financial statements have been prepared assuming the Company will continue as a going concern.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosures
Control and Procedures
Pursuant
to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer and Chief Financial Officer and the Company’s Executive
Vice President, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by this Report. Based upon that evaluation, the Company’s management
concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to
be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to the Company’s management to allow timely decisions regarding required disclosure.
Internal
Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by,
or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s
board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted
in the United States of America and includes those policies and procedures that:
|
|
●
|
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
|
|
|
|
|
|
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and
|
|
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems,
no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of
internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control
over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore,
it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As
of December 31, 2016, management assessed the effectiveness of our internal control over financial reporting based on the criteria
for effective internal control over financial reporting established in Internal Control—Integrated Framework (“2013”)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting
such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls
and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely
affected our internal controls and that may be considered to be material weaknesses.
The
matters involving internal controls and procedures that our management considered to be material weaknesses were:
(1)
The Company’s board of directors has no audit committee, independent director or member with financial expertise, which
causes ineffective oversight of the Company’s external financial reporting and internal control over financial reporting;
(2)
We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size
and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to
the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed
by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our
disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness;
(3)
We lack the financial infrastructure to account for complex debt and equity transactions which may result in a greater than normal
risk that material errors may occur in the financial statements and not be detected timely;
(4)
We lack qualified resources to perform the internal audit functions properly, and the scope and effectiveness of the internal
audit function are yet to be developed. Specifically, the reporting mechanism between the accounting department and the Board
of Directors and the CFO was not effective;
The
aforementioned material weaknesses were identified by our Chief Executive Officer and Chief Financial Officer and Executive Vice
President in connection with the review of our financial statements as of December 31, 2016.
Management’s
Remediation Initiatives
In
an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated,
or plan to initiate, the following series of measures:
(1)
We previously did not have written documentation of our internal control policies and procedures. Written documentation of key
internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us.
Management previously evaluated the impact of our failure to have written documentation of our internal controls and procedures
on our assessment of our disclosure controls and procedures and had concluded that the control deficiency represented a material
weakness. In the third quarter of fiscal 2016, management completed its written documentation of internal control policies and
procedures and we now consider this weakness to be remediated.
(2)
We have created a position to segregate duties consistent with control objectives and increased our personnel resources and technical
accounting expertise within the accounting function.
(3)
We have established more reliable procedures regarding the tracking of complex debt and equity transactions that we enter into.
(4)
We plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting
in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal
controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available
to us.
Changes
in internal controls over financial reporting
There
have been no other significant changes in our internal controls or in other factors that could significantly affect those controls
subsequent to the period covered by this report.
Further,
subsequent to the period covered by the report, management plans to implement measures to remediate the material weaknesses in
internal controls over financial reporting described above to the extent sufficient capital is available to do so. Specifically,
the CEO and CFO are seeking to improve communications regarding the importance of documentation of their assessments and conclusions
of their meetings, as well as supporting analyses. As the business increases, the Company is seeking to hire accounting professionals
and it will continue its efforts to create an effective system of disclosure controls and procedures for financial reporting.
The
Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's
registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Background, Basis of Presentation:
Background
NanoFlex
Power Corporation, formerly known as Universal Technology Systems, Corp., was incorporated in the State of Florida on January
28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation, a Pennsylvania corporation
(“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”). Immediately following
the closing of the Share Exchange Transaction, the Company owned 100% of equity interests of GPEC and GPEC became a wholly-owned
subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal Technology Systems, Corp.”
to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS” on December 26, 2013.
GPEC
was founded and incorporated on February 7, 1994 and is engaged in the research, development, and commercialization of advanced
configuration solar technologies. The Company’s sponsored research programs at the University of Southern California (“USC”),
the University of Michigan (“Michigan”), and Princeton University have resulted in an extensive portfolio of issued
and pending patents worldwide. Pursuant to its sponsored research agreements, NanoFlex has obtained the exclusive worldwide license
and right to sublicense any and all intellectual property resulting from the Company’s sponsored research programs. While
each patent is issued in the name of the respective university that developed the subject technology, NanoFlex has exclusive commercial
license rights to all of the patents and their attendant technologies and the patents are referred to herein as being NanoFlex’s
patents.
These
patented and patent-pending technologies fall into two general categories. Gallium Arsenide (GaAs) solar technologies involve
fabrication processes and device architectures to substantially reduce the cost of ultra-high efficiency GaAs thin films. Organic
Photovoltaics (OPV) technologies involve the materials, architectures, and fabrication processes for ultra-thin film semi-transparent
solar cells. The technologies are targeted at, but not limited to, certain broad applications that require high power conversion
efficiency, flexibility, and light weight. These applications include, but are not limited to: (a) portable power mats and sheets
for military and field use, (b) building applied photovoltaics (“BAPV”), (c) building integrated photovoltaics (“BIPV”),
(d) space vehicles and unmanned aerial vehicles (“UAVs”), (e) semi-transparent solar power generating glazing or windows,
and (f) ultra-thin solar films for consumer applications such as mobile devices or automobiles. Laboratory feasibility prototypes
have been developed by the engineering team at University of Michigan that successfully demonstrate key building block principles
for these technology application areas and the Company is working with industry partners to commercialize its technologies.
Basis
of Presentation
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis,
we evaluate our estimates, including those related to revenue recognition, income taxes, inventory, long lived assets and contingencies.
These estimates are based on management’s best knowledge of current events, historical experience, actions that we may undertake
in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual
results could differ materially from these estimates and assumptions.
Revision
of Previously-Issued Financial Statements 2015
During
the three months ended June 30, 2016, the Company identified errors in its financial statements for the third and fourth quarters
of the fiscal year ended December 31, 2015, and first quarter of the fiscal year ended March 31, 2016, as included in the Company’s
10-Q for the periods ended September 30, 2015 and March 31, 2016, and its 2015 annual report on Form 10-K, related to the accounting
for conversion option derivative liabilities. Specifically, the Company accounted for all of its convertible debt instruments
assuming that each contained an embedded conversion feature that met the criteria for bifurcation when, in fact, several of the
outstanding notes contained embedded conversion features that did not require bifurcation. The Company has made adjustments in
each period related to this.
The
Company assessed the effect of the above errors in the aggregate on prior periods’ financial statements in accordance with
the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, determined
that the errors were not material to any of the Company’s prior interim and annual financial statements.
The
Company determined that the correction of the cumulative amounts of the errors would be material to its consolidated financial
statements for the year ended December 31, 2016. Therefore, the Company revised its previously-issued financial statements as
of December 31, 2015 and for the year then ended. The consolidated balance sheet as of December 31, 2015 and the consolidated
statement of operations for the year ended December 31, 2015 included herein are revised as described below for those adjustments.
All
financial information contained in the accompanying notes to these financial statements has been revised to reflect the correction
of these errors.
The
following tables present the effect of the aforementioned revisions on the Company’s consolidated balance sheet for the
year ended December 31, 2015:
|
|
|
As of December 31, 2015
|
|
|
|
|
As Reported
|
|
|
Revision
|
|
|
As Revised
|
|
|
Conversion option derivative liability
|
|
$
|
8,145,160
|
|
|
$
|
(2,733,973
|
)
|
|
$
|
5,411,187
|
|
|
Convertible debt, net of unamortized discounts
|
|
|
1,051,545
|
|
|
|
72,273
|
|
|
|
1,123,818
|
|
|
Total current liabilities
|
|
|
28,168,610
|
|
|
|
(2,661,700
|
)
|
|
|
25,506,910
|
|
|
Total liabilities
|
|
|
28,168,610
|
|
|
|
(2,661,700
|
)
|
|
|
25,506,910
|
|
|
Accumulated deficit
|
|
|
(204,989,355
|
)
|
|
|
3,484,877
|
|
|
|
(201,504,478
|
)
|
|
Additional paid in capital
|
|
|
176,932,064
|
|
|
|
(823,177
|
)
|
|
|
176,108,887
|
|
|
Total stockholders' deficit
|
|
|
(28,052,143
|
)
|
|
|
2,661,700
|
|
|
|
(25,390,443
|
)
|
The
following tables present the effect of the aforementioned revisions on the Company’s consolidated statement of operations
for the year ended December 31, 2015:
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
As Reported
|
|
|
Revision
|
|
|
As Revised
|
|
|
Loss on change in fair value of derivative
|
|
$
|
(13,901,957
|
)
|
|
$
|
3,708,739
|
|
|
$
|
(10,193,218
|
)
|
|
Interest expense
|
|
|
(1,685,160
|
)
|
|
|
(223,862
|
)
|
|
|
(1,909,022
|
)
|
|
Total other expense
|
|
|
(15,737,117
|
)
|
|
|
3,484,877
|
|
|
|
(12,252,240
|
)
|
|
Net loss
|
|
|
(26,801,396
|
)
|
|
|
3,484,877
|
|
|
|
(23,316,519
|
)
|
|
Net loss per share (basic and diluted)
|
|
|
(0.56
|
)
|
|
|
(0.07
|
)
|
|
|
(0.49
|
)
|
These
revisions to the consolidated statements of cash flows for the year ended December 31, 2015 did not result in any changes
to the amounts previously reported for net cash provided by (used in) operating, investing and financing activities.
Note
2: Going Concern
The
Company has only generated limited revenues to date. The Company has a working capital deficit of $19,246,667 and an accumulated
deficit of $208,565,839 as of December 31, 2016. The ability of the Company to continue as a going concern is dependent on raising
capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly,
these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event the Company cannot continue in existence. To date, the Company has funded
its initial operations primarily by way of the sale of equity securities, convertible note financing, short term financing from
private parties, and advances from related parties. The Company currently needs to raise additional capital in order to maintain
its sponsored research agreements, its patent portfolio, research and development activities and efforts to commercialize its
technologies, as well as to make payments on existing liabilities. The Company is continuing to raise capital, as it did during
the year ended December 31, 2016, in order to continue the Company’s business operations. The Company currently requires
approximately $6 million to $8 million to continue its operations over the next twelve months. There can be no assurance that
the Company will be able to continue to raise sufficient capital or that it will be available on terms that are acceptable to
the Company and its shareholders. The Company’s management is also actively seeking strategic partners for licensing and/or
joint development of Company technologies as well as prioritizing our current IP portfolio to identify opportunities for cost
reduction. The Company’s management is also seeking to reduce costs. There can be no assurance that the Company’s
management will be successful in its planned efforts, and a failure to do so may lead to the Company being unable to continue
its operations.
Note
3: Summary of Significant Accounting Policies
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its controlled subsidiaries. Intercompany transactions
and balances are eliminated at consolidation. Equity investments in which we exercise significant influence, but do not control
and are not the primary beneficiary, are accounted for using the equity method of accounting. Investments in which we do not exercise
significant influence over the investee are accounted for using the cost method of accounting.
Accounts
Receivable
Accounts
receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future
collection. Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible.
The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts.
After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method for financial
reporting purposes at rates based on the estimated useful lives of the assets. Estimated useful lives range from three to eight
years.
Impairment
of Long-lived Assets
The
Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that
the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset
by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value
exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss
is measured as the difference between the net book value and the fair value of the long-lived asset. Fair value is estimated based
upon either discounted cash flow analysis or estimated salvage value.
Stock-Based
Compensation
We
account for stock based compensation in accordance with FASB ASC 718 which requires companies to measure the cost of employee
services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based
compensation expense is recognized on a straight-line basis over the requisite service period. We account for non-employee share-based
awards in accordance with FASB ASC 505-50 under which the awards are valued at the earlier of a commitment date or upon completion
of the services, based on the fair value of the equity instruments, and are recognized as expense over the service period.
Use
of Estimates
The
preparation of these financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the
financial statements and accompanying notes. The significant estimates relate useful lives of software licenses, valuation of
beneficial conversion feature on convertible debts, valuation of warrants and stock options, and valuation allowance for deferred
income taxes. Actual results could differ from those estimates.
Concentration
of Credit Risk and Significant Customers
Cash
is maintained in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses
in such accounts and does not believe it is exposed to any significant credit risk on cash.
The
Company’s revenue and accounts receivable are currently earned primarily from one customer.
Revenue
Recognition
The
Company recognizes revenue from its 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 joint development agreements are recognized as services are provided and are limited to
the total dollar amount specified in the agreement. R&D engineering services, through joint development agreements are a core
component of NanoFlex’s operations and business model, since they are a necessary prerequisite to obtaining IP licensing
agreements with customers. As such, R&D engineering services are expected to be a sustained revenue stream for NanoFlex as
it works with additional customers and the services constitute a portion of the Company's ongoing central operations. The terms
of the joint development agreement require the counterparty to pay Nanoflex up to $120,000 for the Company’s engineering
related expenses upon successful completion of a proof of concept. Terms of the invoices are net 30 days. As of December 31, 2016,
the Company has entered into one joint development agreement.
Research
and Development
Research
and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless
they meet specific criteria related to technical, market and financial feasibility, as determined by management, including but
not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources
to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life, or written
off if a product is abandoned. At December 31, 2016 and 2015, the Company had no deferred development costs.
Fair
Value of Financial Instruments
The
carrying value of short-term financial instruments, including cash, accounts receivable, accounts payable and accrued expenses,
and short-term borrowings approximate fair value due to the relatively short period to maturity for these instruments. The long-term
borrowings approximate fair value since the related rates of interest approximates current market rates.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected
to reverse.
We
have net operating loss carry-forwards available to reduce future taxable income. Future tax benefits for these net operating
loss carry-forwards are recognized to the extent that realization of these benefits is considered more likely than not. To the
extent that we will not realize a future tax benefit, a valuation allowance is established.
We
recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position
taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely
than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes.
For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon settlement. Our practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations
are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities
during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain
tax positions could result in material increases or decreases in income tax expense in the period in which the change is made,
which could have a material impact on our effective tax position.
Note
4: Fair Value of Financial Instruments
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 December 31, 2016 the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of December 31, 2016
and December 31, 2015:
|
|
|
Fair Value Measurements as of
December 31, 2016
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
8,828,405
|
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
3,156,736
|
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
11,985,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
December 31, 2015
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
12,796,146
|
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
5,411,187
|
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
18,207,333
|
|
The
following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level
3 in the fair value hierarchy:
|
|
|
Significant Unobservable
|
|
|
|
|
Inputs
|
|
|
|
|
(Level 3)
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Beginning balance
|
|
$
|
18,207,333
|
|
|
$
|
847,791
|
|
|
Change in fair value
|
|
|
(7,326,535
|
)
|
|
|
10,193,218
|
|
|
Additions reclassified from equity
|
|
|
559,900
|
|
|
|
5,819,389
|
|
|
Additions recognized as debt discounts
|
|
|
-
|
|
|
|
-
|
|
|
Additions recognized as compensation expense
|
|
|
544,443
|
|
|
|
1,346,935
|
|
|
Ending balance
|
|
$
|
11,985,141
|
|
|
$
|
18,207,333
|
|
Note
5: Recent Accounting Pronouncements
In
September 2015, the FASB issued ASU No. 2015-16,
“Simplifying the Accounting for Measurement-Period Adjustments”.
This ASU 2015-16 simplifies the treatment of adjustments to provisional amounts recognized in the period for items in a business
combination for which the accounting is incomplete at the end of the reporting period. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2015. As this applies to future business combinations, the adoption of this ASU
has no impact on the Company’s current consolidated financial position, results of operations or cash flows.
In
November 2015, the FASB issued ASU 2015-17,
“Income Taxes (Topic 470): Balance Sheet Classification of Deferred Taxes”.
The amendments in ASU 2015-17 eliminate the requirement to bifurcate deferred taxes between current and non-current on the
balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The amendments
for ASU-2015-17 can be either applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented and early adoption is permitted. The Company is currently evaluating the effect of adoption of this standard, if any,
on its consolidated financial position, results of operations or cash flows.
In
January 2016, the FASB issued ASU No. 2016-01,
“Financial Instruments – Overall (Subtopic 825-10), Recognition
and Measurement of Financial Assets and Financial Liabilities”,
which addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years, and early adoption is not permitted. 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
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
March 2016, the FASB issued ASU 2016-09, “
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
” (“ASU 2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation (“ASC
718”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including
the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory
tax withholding requirements, classification of awards as either equity or liabilities, and classification of employee taxes paid
on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for interim
and annual reporting periods beginning January 1, 2017. Early adoption is permitted. The Company is currently evaluating the method
of adoption and impact the update will have on its consolidated financial statements and related disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing
”, to clarify the following two aspects of Topic 606: 1) identifying performance obligations,
and 2) the licensing implementation guidance. The effective date and transition requirements for these amendments are the same
as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact of this amendment
on its financial statements.
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 the same
as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact of this amendment
on its financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”.
This update addresses how certain cash inflows and outflows are classified in the statement of cash
flows to eliminate existing diversity in practice. This update is effective for annual and interim reporting periods beginning
after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this amendment on its
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”
(a consensus
of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents
in the statement of cash flow. The amendments should be applied using a retrospective transition method, and are effective for
fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently
evaluating the impact of these amendments on its financial statements.
Note
6: Debt
Notes
Payable
The
Company has a note payable of $100,000 due to its former Chief Executive Officer and President. The note is due on demand and
bears an interest rate at the minimum applicable rate for loans of similar duration, which was 0.5% as of December 31, 2016.
During
the year ended December 31, 2015, the Company issued a promissory note of $50,000. The term of the note expires 120 days from
the effective date. 100,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price
of $0.50/share in lieu of cash interest. The relative fair value of the warrants of $45,243 was recognized as a debt discount
which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $45,243
associated with the amortization of debt discount for the year ended December 31, 2015. On May 12, 2016, this note was forgiven
in exchange for a new convertible note that bears interest of 8% per annum, a maturity date of one year and is convertible into
units at $0.50 per unit, with each unit consisting of a share of common stock and a warrant with a five year life from the date
of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. This modification qualifies
as an extinguishment of debt. The fair value of 50,000 warrants issued in connection with the modification which have a term of
5 years and are exercisable at $0.50 per share resulted in a loss on extinguishment of debt of $44,044. The modified note also
gave rise to a beneficial conversion feature of $54,487 which is recognized as additional paid in capital and a corresponding
debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains
an additional warrant expense of $12,415 associated with the warrants that are to be issued upon conversion, which is to be recognized
only upon conversion.
During
the year ended December 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 $78,396 associated with the amortization of debt discount and the remaining unamortized discount is $156,792
as of December 31, 2016.
As
of December 31, 2016 and December 31, 2015, the aggregate outstanding balance of non-convertible notes payable was $400,000 and
$150,000, respectively.
Notes
Payable – Related Party
On
February 26, 2014, the Company borrowed $150,000 under a short term note agreement with a related party, the Chief Executive Officer’s
son. Under the terms of this agreement, the note was to be repaid within 6 months of funding. In November 2014, the note agreement
was amended to extend the due date to February 26, 2015, and in April of 2015, the note agreement was amended to extend the maturity
date to February 26, 2016 and set a 4% simple interest rate on the note. This note was paid in full in January of 2016 along with
$509 of accrued interest.
In
2015, the Company issued promissory notes to a majority shareholder in aggregate of $625,000 (“Notes #1 to #4”). The
notes have a term ranging from 120 – 150 days from the effective date. 1,250,000 cashless warrants for the Company’s
common shares were issued with the debt at a strike price of $0.50/share in lieu of cash interest. On January 6, 2016, the Company
issued an additional promissory note to the same majority shareholder in the amount of $1,375,000 in exchange for a loan in that
amount (“Note #5). The Company issued 2,750,000 warrants in connection with this Note #5, for the Company’s common
stock at an exercise price of $0.50 per share. The total relative fair value of the warrants of $996,178 was recognized as a debt
discount which is being amortized on a straight-line basis over the term of the notes. Notes #1 to #4 and Note #5 shall be collectively
referred to herein as the “$2M Notes.” Total amortization of discount during 2016 is $173,948.
On
January 22, 2016, the Company entered into a Note Conversion Agreement (the “Conversion Agreement”) with the holder
of the $2 million notes. Pursuant to the Conversion Agreement, the investor converted the $2 million notes, which totaled $2,000,000,
into an investment of $2,000,000 into the Company’s private placement of convertible notes and warrants. This extinguishment
of the $2 million notes resulted in a loss on extinguishment of debt of $3,163,303 which included an unamortized discount of $926,382
and $2,236,921 representing the fair value of 2,000,000 warrants issued in connection with the Note Conversion Agreement. Additionally,
the Company recognized a beneficial conversion feature of $995,171 in accordance with the provisions of ASC 470-20 “
Debt
– Debt with Conversion and Other Options”
which is reflected as an increase in additional paid-in-capital and
a corresponding debt discount which was amortized on a straight line basis over the life of the note.
On
January 25, 2016, the investor converted the convertible note and accrued interest into 4,320,000 shares of the Company’s
common stock and a warrant to purchase 4,320,000 shares of the Company’s common stock with a ten year term and an exercise
price of $0.50 per share. Of the 4,320,000 shares of common stock, 320,000 shares represent interest paid on the convertible note
pursuant to the terms of the conversion agreement in the amount of $160,000. Upon conversion, the Company accelerated the recognition
of all remaining debt discount and also recognized an additional interest expense of $1,004,829 associated with the warrants that
were issued upon conversion. This contingent beneficial conversion feature was immediately recognized as interest expense with
an offset to additional paid-in-capital.
On
November 21, 2016, the Company borrowed $300,000 under a short term note agreement with a majority shareholder. Under the terms
of this agreement, the note is to be repaid within 60 days of funding along with $15,000 paid at the maturity of the note in lieu
of interest.
On
December 27, 2016, the Company borrowed $200,000 under a short term note agreement with a majority shareholder. Under the terms
of this agreement, the note is to be repaid within 60 days of funding along with $10,000 paid at the maturity of the note in lieu
of interest.
As
of December 31, 2016 and December 31, 2015, the aggregate outstanding balance of notes payable to related parties was $500,000
and $670,848, respectively, net of unamortized discounts of $0 and $104,152, respectively.
Advances
– Related Party
During
the year ended December 31, 2015, the Company received advances from its Chief Executive Officer totaling $212,350, and repaid
advances totaling $530,500. Such advances are payable upon demand and do not accrue interest. The Company paid interest of $7,989
during the year ended December 31, 2015.
During
the year ended December 31, 2016, the Company received advances from its Chief Executive Officer totaling $730,000 and repaid
advances totaling $330,000. Such advances do not accrue interest and are payable upon demand. The Company paid interest of $16,678
during the year ended December 31, 2016.
As
of December 31, 2016 and 2015, the aggregate outstanding balance of advances to related parties was $510,000 and $110,000, respectively.
Convertible
Notes Payable
In
July 2014, the Company borrowed $500,000 under two short term note agreements of $250,000 each. Under the terms of each agreement,
the principal balance of $250,000 and interest of $16,500 was due to be repaid within 4 months of the date of the note. These
agreements were amended on February 23, 2015 to extend the due date to July 21, 2015 and increase the interest amount to $25,000.
The Company analyzed the amendment of the note under ASC 470 and concluded that the amendment did not qualify as a substantial
modification. The agreements allow the holder to convert all or a portion of the principal and accrued interest into equity as
a conversion rate of $1.25. On June 30, 2015, these notes and accrued interest of $50,000 were exchanged for two new convertible
note agreements for $350,000 each and the issuance of 700,000 warrants with a five year life and an exercise price of $0.50 per
share. The convertible note each have a principal amount of $350,000, interest of 8% per annum, a maturity date of June 30, 2016
and are convertible into 700,000 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 Company
analyzed the amendment of the note under ASC 470 and concluded that the exchange gave rise to a debt extinguishment, which resulted
in a loss on extinguishment of $150,000. The Company allocated the new proceeds to the warrants and the convertible debt based
on their relative fair values, then, computed the effective conversion price of each instrument, noting that the convertible debt
gave rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “
Debt - Debt with Conversion
and Other Options.”
Based on this, $106,510 was allocated to the warrants, and $6,743 was allocated to the beneficial
conversion feature, each of which are reflected in additional paid-in-capital. This allocation gave rise to a debt discount of
$113,253 which is being amortized on a straight-line basis over the term of the note. The full principal balance of the notes
was immediately converted pursuant to the terms of the note into shares of common stock and Warrants to purchase common stock
on June 30, 2015. Upon conversion, the Company recorded amortization of debt discount of $113,253 and interest expense of $246,460
related to warrants issued at conversion.
On
December 19, 2014, the Company received aggregate proceeds of $300,000 in exchange for a convertible note and the issuance of
200,000 warrants with a five year life and an exercise price of $2.50 per share. The convertible note has a principal amount of
$300,000, interest of 8% per annum, a maturity date of December 19, 2015, 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
$1 per share, subject to certain anti-dilution provisions. The Company allocated the proceeds to the warrants and the convertible
debt based on their relative fair values, then computed the effective conversion price of each instrument, noting that the convertible
debt gave rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “
Debt - Debt with Conversion
and Other Options.”
Of the $300,000 proceeds received, $71,369 was allocated to the warrants, and $59,546 was allocated
to the beneficial conversion feature, each of which are reflected in additional paid-in-capital. This allocation gave rise to
a debt discount of $130,915 which is being amortized on a straight-line basis over the term of the note. This note was modified
on June 29, 2015 to change the conversion price and exercise price to $0.50 per share. The Company analyzed the modification of
the note under ASC 470 and determined that it did not qualify as a substantial modification. This note is currently past due and
in default. The Company is in the process of renegotiating the terms of this agreement. The note also contains an additional warrant
expense of $96,771 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On July 13, 2015, the Company’s common stock began actively trading. As a result, the embedded conversion and anti-dilution
features of the Company’s convertible debt agreements were determined to meet the definition of a derivative per ASC 815,
Derivatives and Hedging.
In
March 2015, the Company received aggregate proceeds of $700,000 in exchange for convertible notes and the issuance of 466,667
warrants with a five year life and an exercise price of $2.50 per share. The convertible notes have a principal amount of $700,000,
interest of 8% per annum, a maturity date of March 2016 and are convertible into 700,000 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 $1 per share, subject
to certain anti-dilution provisions. The Company allocated the proceeds to the warrants and the convertible debt based on their
relative fair values, then, computed the effective conversion price of each instrument, noting that the convertible debt gave
rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “
Debt - Debt with Conversion
and Other Options.”
Of the $700,000 proceeds received, $137,863 was allocated to the warrants, and $87,563 was allocated
to the beneficial conversion feature, each of which are reflected in additional paid-in-capital. This allocation gave rise to
a debt discount of $225,426 which is being amortized on a straight-line basis over the term of the note. These notes were modified
on June 29, 2015 to change the conversion price and exercise price to $0.50 per share. The Company analyzed the modification of
the note under ASC 470 and determined that it did not qualify as a substantial modification. The note also contains an additional
warrant expense of $206,620 associated with the warrants that are to be issued upon conversion, which is to be recognized only
upon conversion. On July 13, 2015, the Company’s common stock began actively trading. As a result, the embedded conversion
and anti-dilution features of the Company’s convertible debt agreements were determined to meet the definition of a derivative
per ASC 815, Derivatives and Hedging. These notes are currently past due and in default.
In
June 2015, the Company received aggregate proceeds of $530,000 in exchange for convertible notes and the issuance of 530,000 warrants
with a five year life and an exercise price of $0.50 per share. The convertible notes have a principal amount of $530,000, interest
of 8% per annum, a maturity date of June 2016 and are convertible into 1,060,000 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 $.50 per share, subject
to certain anti-dilution provisions. The Company allocated the proceeds to the warrants and the convertible debt based on their
relative fair values, then, computed the effective conversion price of each instrument, noting that the convertible debt gave
rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “
Debt - Debt with Conversion
and Other Options.”
Based on this, $80,643 was allocated to the warrants, and $5,106 was allocated to the beneficial
conversion feature, each of which are reflected in additional paid-in-capital. This allocation gave rise to a debt discount of
$85,749 which is being amortized on a straight-line basis over the term of the note. The note also contains an additional warrant
expense of $186,605 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
From
July 8, 2015 to December 31, 2015, the Company received aggregate proceeds of $914,049 in exchange for convertible notes and the
issuance of 914,049 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes have an aggregate
principal amount of $914,049, interest of 8% per annum, a maturity date of one year and are convertible into 1,728,098 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 $.50 per share, subject to certain anti-dilution provisions. The aggregate relative fair value of the 914,049 warrants
issued with the debt was determined to be $594,498 and was recognized as a discount to the debt. These notes also gave rise to
a beneficial conversion feature of $172,869 which was 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 $146,682 associated with the warrants that are to be issued upon conversion, which is to be recognized only
upon conversion.
During
the year ended December 31, 2015, certain notes with principal of $1,634,928 and accrued interest of $26,687 were converted pursuant
to the terms of the notes into 3,323,230 shares of the Company’s common stock and 3,323,230 warrants to purchase common
stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and also recognized additional
interest expense of $494,730 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.
In
addition to the $2,000,000 convertible note described above in the Notes Payable-Related Party section, on March 7, 2016, the
Company received proceeds of $80,000 in exchange for a convertible note and the issuance of 80,000 warrants with a five year life
and an exercise price of $0.50 per share. The convertible note has a principal amount of $80,000, interest of 8% per annum, a
maturity date of one year and is convertible into 160,000 units, with each unit consisting of a share of common stock and a warrant
with a five year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions.
The relative fair value of the 80,000 warrants issued with the debt was determined to be $38,205 and was recognized as a discount
to the debt. This note also gave rise to a beneficial conversion feature of $20,898 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 $20,897 associated with the warrants that are to be issued upon
conversion, which is to be recognized only upon conversion.
From
April 18, 2016 through June 30, 2016, the Company received additional aggregate proceeds of $375,000 in exchange for eight convertible
notes and the issuance of 375,000 warrants with a five year life and exercise price of $0.50 per share. The convertible notes
have an aggregate principal amount of $375,000, interest of 8% per annum, a maturity date of one year and are convertible into
an aggregate of 750,000 units, with each unit consisting of a share of common stock and a warrant with a five year life from the
date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The aggregate relative
fair value of the 375,000 warrants issued with the debt was determined to be $158,423 and was recognized as a discount to the
debt. These notes also gave rise to a beneficial conversion feature of $108,291 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 $108,286 associated with the warrants that are to be issued upon conversion,
which is to be recognized only upon conversion.
On
July 13, 2016, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a promissory
note from the Company and received 500,000 warrants with a seven year life and exercise price of $0.50 per share in exchange for
$500,000. The promissory note had a clause that automatically modified it 30 days after issuance (on August 12, 2016) into a convertible
note. The convertible note has a principal amount of $500,000, includes the issuance of 500,000 additional warrants, interest
of 8% per annum, a maturity date of one year and is convertible into 1,000,000 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 500,000 warrants issued on July 13, 2016 was $161,010. The
relative fair value of the 500,000 warrants issued on August 12, 2016 was $117,377. The total of $278,386 was recognized as a
discount to the debt. This note also gave rise to a beneficial conversion feature of $116,754 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 $104,860 associated with the warrants that are to be issued
upon conversion, which is to be recognized only upon conversion.
From
July 6, 2016 through September 30, 2016, the Company received additional aggregate proceeds of $244,500 in exchange for 12 convertible
notes and the issuance of 244,500 warrants with a five year life and exercise price of $0.50 per share. The convertible notes
have an aggregate principal amount of $244,500, interest of 8% per annum, a maturity date of one year and are convertible into
an aggregate of 489,000 units, with each unit consisting of a share of common stock and a warrant with a five year life from the
date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The aggregate relative
fair value of the 244,500 warrants issued with the debt was determined to be $102,835 and was recognized as a discount to the
debt. These notes also gave rise to a beneficial conversion feature of $73,653 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 $68,012 associated with the warrants that are to be issued upon conversion,
which is to be recognized only upon conversion.
On
October 7, 2016, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a
promissory note from the Company and received 200,000 warrants with a five year life and exercise price of $0.50 per share in
exchange for $100,000. The promissory note had a clause that automatically modified it 30 days after issuance (on November 7,
2016) into a convertible note. The convertible note has 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 200,000 warrants issued on October 7, 2016
was $52,848. The relative fair value of the 100,000 warrants issued on November 7, 2016 was $21,526. The total of $74,374 was
recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $13,209 which is recognized
as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis
over the term of the note. The note also contains an additional warrant expense of $12,416 associated with the warrants that are
to be issued upon conversion, which is to be recognized only upon conversion.
From October 19, 2016 through December
31, 2016, the Company received additional aggregate proceeds of $158,500 in exchange for six convertible notes and the issuance
of 158,500 warrants with a five year life and exercise price of $0.50 per share. The convertible notes have an aggregate principal
amount of $158,500, interest of 8% per annum, a maturity date of one year and are convertible into an aggregate of 317,000 units,
with each unit consisting of a share of common stock and a warrant with a five year life from the date of conversion and an exercise
price of $0.50 per share, subject to certain anti-dilution provisions. The aggregate relative fair value of the 158,500 warrants
issued with the debt was determined to be $64,927 and was recognized as a discount to the debt. These notes also gave rise to a
beneficial conversion feature of $48,508 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 $45,064 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
During
the year ended December 31, 2016, the full principal balances of certain notes totaling $1,233,621 with accrued interest of $89,480
were converted pursuant to the terms of the notes into 2,646,199 shares of the Company’s common stock and 2,646,199 warrants
to purchase common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and also recognized
additional interest expense of $1,297,324 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 year ended December 31, 2016 and 2015 was $2,196,621 and $933,103, respectively. As of December
31, 2016 and 2015, the aggregate outstanding balance of convertible notes payable was $1,440,206 and $1,123,818, respectively,
net of unamortized discounts of $343,294 and $457,576.
Derivative
Liabilities - Convertible Notes
On
July 13, 2015, the Company’s common stock began trading, although such trading was limited. As a result, the embedded conversion
and anti-dilution features of the Company’s convertible debt agreements were determined to meet the definition of a derivative
per ASC 815, Derivatives and Hedging. This resulted in the recording of a derivative liability on July 13, 2015, which was a reclassification
out of additional paid-in capital of $5,743,021 representing the fair value of the conversion options in the outstanding derivative
notes as of July 13, 2015. The fair value of the convertible feature was determined based on a fair value of $3,132,526 and $2,610,495
assigned to the warrant and conversion options, respectively. As of December 31, 2015, the fair value of the outstanding convertible
note derivatives was determined to be $5,411,187 and recognized a gain of $331,834. As of December 31, 2016, the fair value of
the outstanding convertible note derivatives was determined to be $3,156,736 and recognized a gain of $2,254,451. There were no
new convertible note derivatives that arose during the year ended December 31, 2016.
The
valuation of the derivative liabilities attached to the convertible debt was arrived at through the use of Black-Scholes Option
Pricing Model and the following assumptions:
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
2015
|
|
Volatility
|
|
135.41% - 232.51%
|
|
135.41% - 197.50%
|
|
Risk-free interest rate
|
|
0.45% - 1.47%
|
|
0.16% - 1.54%
|
|
Expected term
|
|
1 - 4 years
|
|
0.25 - 4.25 years
|
Accounts
Payable - Related Party
As
of December 31, 2016 and 2015, there is $2,470 and $62,469, respectively, due to a related party, the Company’s Chief Financial
Officer, which is non interest bearing due on demand.
Note
7. Equity
Common
Stock
During
the year ended December 31, 2015, the Company sold an aggregate of 86,000 units, at $1.00 per unit for aggregate proceeds of $86,000,
respectively. 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 $1.00 per share.
During
the year ended December 31, 2015, the Company issued an aggregate of 3,323,230 shares of its common stock related to the conversion
of $1,634,928 of principal and $26,687 accrued interest expense on convertible notes. Of the common shares issued, 53,374 shares
related to the payment of interest.
During
the year ended December 31, 2015, the Company issued an aggregate of 1,828,437 shares of its common stock related to the exercise
of 1,828,437 warrants and received cash proceeds of $914,220.
Pursuant
to an anti-dilution provision in the subscription agreements executed by the $1.00 PIPE II and $1.25 PIPE II investors which provides
for the issuance of a certain number of additional shares based on a formula in the subscription agreements, to these holders
in the event that the company within 36 months of the completion of all PIPE II sales issues any common stock or securities convertible
into or exercisable for shares of common stock at a lower price than the purchase price paid by the PIPE II investors. As a result
of the Company's offering of such securities at a price lower than the price paid by the PIPE II investors, the Company issued
1,554,500 shares of common stock to the PIPE II investors in the year ended December 31, 2015.
On
October 19, 2015, 75,288 shares of the Company’s common stock were cancelled in exchange for convertible notes of $37,644
and the issuance of 37,644 warrants with a five year life and an exercise price of $0.50 per share, as well as 75,288 warrants
with a five year life and an exercise price of $2.50 per share. The convertible notes have a principal amount of $37,644, interest
of 8% per annum, a one year term, and are convertible into 37,644 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 agreement was subsequently amended to include an additional 75,288 units with each unit consisting of a share
of common stock with a five year life from the date of grant and an exercise price of $2.50 per share, subject to certain anti-dilution
provisions.
On
November 6, 2015, the Company issued 350,000 shares of its common stock in exchange for services pursuant to a consulting agreement.
The shares were valued at $350,000 which was based on the stock price on the grant date.
On
December 9, 2015, the Company issued units which consisted of 100,000 shares and warrants to purchase 250,000 shares of its common
stock exercisable at $0.50 per share and a term of 10 years in exchange for total proceeds of $50,000. The Company allocated the
gross proceeds of $50,000 between common stock and warrants based on their relative fair value, estimated on the date of grant,
valued common stock and the warrants at $14,532 and $35,468, respectively.
During
the year ended December 31, 2016, the Company issued 245,878 common shares and warrants to purchase 426,741 common shares of the
Company’s common stock in exchange for proceeds of $67,536. The Company determined a fair value for the shares and warrants
to be $617,175. The cash was received prior to December 31, 2015 and was recorded as an accrued liability at December 31, 2015.
This transaction resulted in a loss on extinguishment of liability of $549,639.
During
the year ended December 31, 2016, the Company issued 1,434,076 common shares and warrants to purchase 4,546,252 common shares
of the Company’s common stock in exchange for proceeds of $663,922 and interest expense of $6,023.
During
the year ended December 31, 2016, the Company issued 144,411 common shares on exercise of warrant at price of $0.50 per share
for a total of $72,205.
During
the year ended December 31, 2016, the Company issued an aggregate of 2,646,199 shares of its common stock related to the conversion
of $1,233,621 of principal and $89,480 accrued interest expense on convertible notes.
Stock
Options
On
April 28, 2013, the Board of Directors adopted the 2013 Stock Option Plan. Under the Plan, the Company may grant incentive stock
options to employees and non-qualified stock options to employees, non-employee directors and/or consultants. The Plan provides
for the granting of a maximum of 2,000,000 options to purchase common stock. The ISO exercise price per share may not be less
than the fair market value of a share on the date the option is granted. The maximum term of the options may not exceed ten years.
On
December 23, 2015, 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 2025.
On
October 3, 2016, 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 2026.
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:
|
|
|
Years Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
144.36
|
%
|
|
|
122.87
|
%
|
|
Risk-free interest rate
|
|
|
1.32
|
%
|
|
|
1.91
|
%
|
|
Expected term
|
|
|
6.06 years
|
|
|
|
6.06 years
|
|
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.
Stock
option awards are expensed on a straight-line basis over the requisite service period. During the years ended December 31, 2016
and 2015, the Company recognized expense of $19,157 and $364, respectively, associated with stock option awards. At December 31,
2016, future stock compensation expense (net of estimated forfeitures) not yet recognized was $92,603 and will be recognized over
a weighted average remaining vesting period of 3.5 years.
A
summary of stock option activity during the year ended December 31, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Outstanding at December 31, 2014
|
|
|
49,000
|
|
|
|
11.01
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
|
|
0.50
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
(49,000
|
)
|
|
|
11.92
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
50,000
|
|
|
$
|
0.50
|
|
|
|
10.0
|
|
|
Granted
|
|
|
50,000
|
|
|
$
|
1.03
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
100,000
|
|
|
|
0.77
|
|
|
|
9.4
|
|
|
Exercisable at December 31, 2016
|
|
|
16,000
|
|
|
$
|
0.60
|
|
|
|
9.1
|
|
The
intrinsic value of the Company’s stock options outstanding was $22,500 and $55,500 at December 31, 2016 and 2015, respectively.
Warrants
During
the three months ended March 31, 2015, the Company offered to reduce the exercise price of certain warrants of the Company to
$0.50 per share as an incentive to the holders to exercise such warrants (“Warrant Price Reduction”). As a result
of the Warrant Price Reduction, a total of 649,650 shares of our Common Stock were issued after exercise of these warrants in
exchange for $324,825 of proceeds. The Company determined that this transaction did not constitute a modification under ASC 718-10
or ASC 505-50 as it met the scope exceptions for a transaction with an investor. Accordingly, no expense was recognized in connection
with these transactions.
In
March 2015, the Company received aggregate proceeds of $700,000 in exchange for convertible notes and the issuance of 466,667
warrants with a five year life and an exercise price of $2.50 per share. The convertible notes are convertible into 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 $1 per share, subject to certain anti-dilution provisions.
On
April 15, 2015, the Company offered to reduce the exercise price of certain warrants of the Company to $0.50 per share as an incentive
to the holders to exercise such warrants (“April 2015 Warrant Price Reduction”). Through December 31, 2015, warrant
holders exercised their warrants for a total of 1,178,786 shares of our Common Stock, for proceeds received in the amount of $589,393.
As a result of the decrease in the warrant price, the exercise price of certain of the Company’s outstanding warrants will
be permanently reduced to $0.50 per share pursuant to their terms and certain of those warrants have a provision which will cause
them to increase in number by multiplying the number by a fraction equal to the original warrant exercise price divided by the
new warrant exercise price. The Company determined that this transaction does not constitute a modification under ASC 718-10 or
ASC 505-50 as it met the scope exceptions for a transaction with an investor or lender. Accordingly, no expense was recognized
in connection with these transactions.
On
April 17, 2015, the Company amended the Engagement Agreement originally dated October 1, 2013, between the Company and Tobin Tao
& Company, Inc. (“Tobin Tao”). This amendment grants Tobin Tao warrants to purchase 200,000 shares of the Company’s
common stock at $0.50 per share. The anti-dilution features qualify these as a derivative instrument. The valuation of the derivative
liability of the warrants was determined through the use of a Black Scholes options model for an amount of $102,654, which the
Company believes approximates fair value.
On
May 26, 2015, the Company granted 250,000 warrants with a an exercise price of $0.50 and a five year term to Darren Ofsink in
exchange for services. The anti-dilution features qualify these as a derivative instrument. The valuation of the derivative liability
of the warrants was determined through the use of a Black Scholes options model for an amount of $128,317, which the Company believes
approximates fair value.
In
June 2015, the Company received aggregate proceeds of $530,000 in exchange for convertible notes and the issuance of 530,000 warrants
with a five year life and an exercise price of $0.50 per share. The convertible notes are convertible into units, with each unit
consisting two shares of common stock and two warrants with a five year life from the date of conversion and an exercise price
$0.50 per share, subject to certain anti-dilution provisions. During September 2015, the full principal balances of these notes
were converted pursuant to the terms of the notes into shares of the Company’s common stock and warrants to purchase common
stock.
On
June 30, 2015, the Company granted 700,000 warrants to two convertible debt holders in order to modify the outstanding convertible
debt. An additional 1,400,000 warrants were issued as the modified notes were immediately converted. The warrants have a five
year life and an exercise price of $0.50 per share.
On
September 1, 2015 the Company entered into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in
his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company
issued Mr. Tobin warrants to purchase 1,500,000 shares of the Company’s common stock at $1.00 per share (the “Warrant
Shares”). 375,000 of the Warrant Shares vested on September 1, 2015, an additional 375,000 warrant shares will vest on the
first anniversary date of the Employment Agreement, an additional 375,000 warrant shares will vest on the second anniversary date
of the Employment Agreement, and, an additional 375,000 warrant shares will vest on the third anniversary date of the Employment
Agreement. Warrant expense of $1,063,148 and $324,851 was recognized during the years ended December 31, 2016 and 2015, respectively.
The agreement contains an anti-dilution provision and therefore the exercise price at December 31, 2016 is $0.50 per share.
During
the three months ended September 30, 2015, the Company received aggregate proceeds of $377,500 in exchange for convertible notes
and the issuance of 377,500 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes are
convertible into units, with each unit consisting two shares of common stock and two warrants with a five year life from the date
of conversion and an exercise price $0.50 per share, subject to certain anti-dilution provisions.
During
September 2015, the aggregate principal and interest of certain convertible notes totaling $757,595 were converted pursuant to
the terms of the notes into 1,515,190 shares of the Company’s common stock and 1,515,190 warrants to purchase common stock.
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 the first anniversary date of the Amendment, and an additional 600,000 Warrant
Shares will vest on the second anniversary date of the Amendment.
On
November 5, 2015, the Company issued a warrant to purchase 3,000,000 shares of the Company’s $.0001 par value common stock
to the Company’s Chief Executive Officer, Dean Ledger, in exchange for services already performed. The warrants are immediately
vested, have an exercise price of $1.00 and have a 10 year term.
On
November 9, 2015, the Company issued a warrant to purchase 500,000 shares of the Company’s $.0001 par value common stock
to Robert J. Fasnacht, our former Executive Vice President, in exchange for services already performed. The warrants are immediately
vested, have an exercise price of $1.00 and have a 10 year term.
During
the three months ended December 31, 2015, the Company received aggregate proceeds of $486,549 in exchange for convertible notes
and the issuance of 486,549 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes are
convertible into units, with each unit consisting two shares of common stock and two warrants with a five year life from the date
of conversion and an exercise price $0.50 per share, subject to certain anti-dilution provisions.
During
the three months ended December 31, 2015, the aggregate principal and interest of certain convertible notes totaling $204,020
were converted pursuant to the terms of the notes into 408,040 shares of the Company’s common stock and 408,040 warrants
to purchase common stock. See details in Note 6.
During
the year ended December 31, 2015, the Company sold an aggregate of 86,000 units, respectively, at $1.00 per unit for aggregate
proceeds of $86,000. 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 $1.00 per share. During the year ended December 31, 2015, the Company granted an additional
86,000 warrants to the investors due to the reset provision.
During
the year ended December 31, 2015, the Company issued promissory notes in aggregate of $675,000. 1,350,000 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 $463,575 was recognized as a debt discount which is being amortized on a straight-line basis over
the term of the note.
During
the year ended December 31, 2015, the Company granted an additional 5,284,500 warrant to investors due to the reset provision.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 1,000,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
500,000 of the Warrant Shares vested on May 13, 2016, an additional 250,000 warrant shares will vest on the first anniversary
date of the agreement, an additional 250,000 Warrant Shares will vest on the second anniversary date of the agreement. The fair
value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model and was recognized
as expense and as derivative liabilities during the year ended December 31, 2016.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 200,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
The Warrant Shares are immediately vested. The fair value of the Warrant Shares was determined to be $155,555 using the Black-Scholes
option pricing model and was recognized as expense and as derivative liabilities during the year ended December 31, 2016.
On
September 23, 2016, the Company issued warrants to purchase 15,000 shares of the Company’s common stock at $1.00 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 $13,618 using the Black-Scholes option pricing model of which $13,618 was recognized
as expense during the year ended December 31, 2016.
During the year ended December 31, 2016,
the Company issued a total of 4,972,993 warrants in relation to the conversion of certain promissory notes. See details in Note
6.
During
the year ended December 31, 2016, the aggregate principal and interest of certain convertible notes totaling $1,233,621 were
converted pursuant to the terms of the notes into 2,646,199 shares of the Company’s common stock and 2,584,621 warrants
to purchase common stock. See details in Note 6.
During
the year ended December 31, 2016, the Company issued a promissory note of $300,000. 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. See details in Note 6.
The
following summarizes the warrant activity for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
Outstanding as of December 31, 2014
|
|
|
21,332,333
|
|
|
$
|
2.53
|
|
|
|
3.8
|
|
|
$
|
-
|
|
|
Granted
|
|
|
15,481,234
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
Warrants issued related to reset provision
|
|
|
5,284,500
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(243,200
|
)
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,828,436
|
)
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
40,026,431
|
|
|
$
|
1.83
|
|
|
|
4.6
|
|
|
$
|
54,932,218
|
|
|
Granted
|
|
|
20,647,751
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(149,250
|
)
|
|
|
7.13
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(144,411
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
60,380,521
|
|
|
$
|
0.73
|
|
|
$
|
4.6
|
|
|
$
|
57,361,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
|
|
59,030,521
|
|
|
$
|
0.73
|
|
|
$
|
4.6
|
|
|
$
|
57,361,495
|
|
The
reset shares are the result of reducing the exercise price of the warrants issued under Pipe I from $2.50 to $0.50, and Pipe II
from $2.50 to $1.00. The increase in shares offset the reduced exercise price therefore the net value of the Pipe I & Pipe
II warrants remain constant in total.
Derivative
Liabilities - Warrants
The
anti-dilution features in the freestanding warrants issued in the year ended December 31, 2015 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 $847,791 at December 31, 2014. The Company
determined a fair value of $1,423,303 at issuance date for warrants issued during the year ended December 31, 2015 of which $76,368
was reclassified from additional paid-in capital and $1,346,935 was recognized as compensation expense. The Company recorded the
change in the fair value of the warrant liabilities recognizing a loss of $10,525,052 for the year ended December 31, 2015, to
reflect the value of the warrant derivative liability of $12,796,146 at December 31, 2015.
The
Company determined a fair value of $1,104,343 at issuance date for warrants issued during the year ended December 31, 2016 of
which $559,900 was reclassified from additional paid-in capital and $544,443 was recognized as compensation expense. The Company
recorded the change in the fair value of the warrant liabilities recognizing a gain of $5,072,084 for the year ended December
31, 2016, to reflect the value of the warrant derivative liability of $8,828,405 at December 31, 2016.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
Volatility
|
|
129-.70 % - 192.70%
|
|
108.72% -132.58%
|
|
Risk-free interest rate
|
|
0.44% - 2.45%
|
|
0.725% - 2.27%
|
|
Expected term
|
|
2 - 10 years
|
|
3 - 10 years
|
Note
8. Commitments and Contingencies
Sponsored
Research and License Agreements
Research
and development of the Company’s high efficiency solar thin films and OPV technologies are conducted in collaboration with
University partners through sponsored research agreements.
The
Company established direct research and development agreements with Michigan on June 16, 2016, which were amended on July 21,
2016, to provide engineering support and facility access associated with technology transfer and commercialization of its high
efficiency thin film solar technologies.
A
separate Research Agreement, dated December 20, 2013, among the Company and USC (the “2013 Research Agreement”), governs
research conducted by USC and Michigan on high efficiency thin film and OPV technologies. Michigan is a subcontractor to USC on
this research agreement. Under the 2013 Research Agreement, the Company made a deposit of $550,000 (the “Deposit”)
in early 2014. This Deposit was used by USC to pay for research costs and expenses as it incurred them, including payments to
Michigan, during any billing quarter. When the Company pays the related quarterly billing, the funds go to replenish the Deposit
back to the full amount of $550,000, which is to continue until the end of the 2013 Research Agreement. The 2013 Research Agreement
expires on January 31, 2021.
On
August 8, 2016, the Company amended the 2013 Research Agreement with USC, suspending the agreement effective as of August 15,
2016. The Company requested this amendment to temporarily suspend its OPV-related sponsored research activities to reduce near-term
expenditures while it seeks a development partner for OPV commercialization and to allow the Company to bring its account with
USC current through a payment plan. The suspension is to continue until the date that is 30 days after expenses incurred by USC
have been reimbursed by the Company. Under this amendment, the Company will repay expenses to USC in quarterly installments of
$206,000 from November 2016 through February 2018, unless earlier repaid at the Company’s option. The amended agreement
provides USC with the option to terminate the agreement upon any late installment payments.
Under
the Company’s currently effective License Agreement, as amended on August 22, 2016, among the Company and USC, Michigan,
and Princeton (the “Fourth Amendment to License Agreement”), wherein the Company has obtained the exclusive worldwide
license and right to sublicense any and all intellectual property resulting from the Company’s sponsored research agreements,
we have agreed to pay for all reasonable and necessary out of pocket expenses incurred in the preparation, filing, maintenance,
renewal and continuation of patent applications designated by the Company. In addition, the Company is required to pay to USC
3% of net sales of licensed products or licensed processes used, leased or sold by the Company, 3% of revenues received by the
Company from the sublicensing of patent rights and 23% of revenues (net of costs and expenses, including legal fees) received
by the Company from final judgments in infringement actions respecting the patent rights licensed under the agreement. A previous
amendment to the License Agreement (the Third Amendment to License Agreement dated December 20, 2013) amended the minimum royalty
section to eliminate the accrual of any such royalties until 2014. Furthermore, the amounts of the non-refundable minimum royalties,
which would be applicable starting in 2014, were adjusted to be lower than the amounts in the previous License Agreement. The
Fourth Amendment to the License Agreement sets out a payment schedule for the minimum royalties due in 2014 and 2015 to be paid
in 2016 and 2017. Minimum royalties are as follows:
|
Years ending December 31,
|
|
|
|
|
2017
|
|
|
65,000
|
|
|
2018
|
|
|
75,000
|
|
|
2019
|
|
|
100,000
|
|
|
2020
|
|
|
100,000
|
|
|
2021
|
|
|
100,000
|
|
|
2022 and thereafter
|
|
|
100,000
|
|
There
is currently no ongoing research activity at Princeton related to the Company, although the Company maintains licensing rights
to technology previously developed there.
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 year ended December 31, 2016
and 2015 was $82,971 and $91,871, respectively.
Future
minimum lease payments are as follows:
|
2017
|
|
$
|
84,233
|
|
|
2018
|
|
|
71,797
|
|
|
2019
|
|
|
-
|
|
|
2020
|
|
|
-
|
|
|
2021
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
156,030
|
|
Concentrations
All
of the Company’s revenue and accounts receivable are currently earned from one customer.
Legal
Matters
On
March 18, 2015, the Company received correspondence from the counsel of Mr. John Kuhns, the Company’s former Co-CEO and
Executive Chairman alleging that Mr. Kuhns has “Good Reason” to terminate his Employment Agreement for an alleged
failure to pay his salary in full. On March 30, 2015, Mr. Kuhns advised that if the alleged breaches of the Employment Agreement
were not cured there was a possibility that he would pursue litigation.
As
of March 30, 2015, shareholders holding approximately 67.26% of the total shares of common stock of NanoFlex Power Corporation
(the “Company,” “we,” “our” or “us”) that are entitled to vote on all Company
matters approved by written consent the removal of John D. Kuhns from his position as a member of the Company’s Board of
Directors. Mr. Kuhns’ removal was for “Cause” as defined under his Employment Agreement as amended and dated
as of October 1, 2013 (the “Employment Agreement”). The removal arose as a result of his documented conduct and statements,
which breached his fiduciary duties to the Company in order to advance personal monetary and other interests, and thereby threatened
serious financial injury to the Company, its shareholders and its debtholders.
On
March 31, 2015, the Board of Directors terminated the Employment Agreement with Mr. Kuhns for Cause and removed him from his positions
as Co-CEO, and from all other officer positions he held with the Company and its subsidiaries and affiliates, and all director
positions with the Company’s subsidiaries and affiliates.
On
April 24, 2015, the Company received a letter from Mr. Kuhns’ counsel (the “Response Letter”) stating that Mr.
Kuhns disagreed with statements in the Initial Filing regarding the circumstances of his removal as a director and officer.
The
Response Letter was accompanied by a copy of a complaint (the “Complaint”) filed by John D, Kuhns (the “Plaintiff”)
in the United States District Court Southern District of New York against the Company, Mr. Dean L. Ledger, our current CEO and
member of our Board of Directors, Mr. Robert J. Fasnacht, our current Executive Vice President and 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 the next phase of the case is discovery. The Company believes that the allegations
in the Complaint to be without any merit and will vigorously defend against the claims.
Note
9. Income Taxes
The
Company has incurred losses since inception. As of December 31, 2016, the Company has net operating loss carry-forwards of approximately
$65,552,428 that begin to expire in 2017. Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of NOLs
and other tax attributes may be subject to substantial limitations if certain ownership changes occur during a three-year testing
period (as defined by the Internal Revenue Code). A valuation allowance was established for all the net deferred tax assets because
realization is not assured. The components of the deferred tax assets consist of the following:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net operating losses
|
|
$
|
22,000,000
|
|
|
$
|
21,000,000
|
|
|
Less: valuation allowance
|
|
|
(22,000,000
|
)
|
|
|
(21,000,000
|
)
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Note
10. Subsequent Events
During
January, 2017, the Company issued 107,000 shares of the Company’s Common Stock upon conversion of certain promissory notes.
During
January, 2017 the Company issued warrants to purchase 107,000 shares of its Common Stock related to the conversion of certain
convertible notes. Such warrants have an exercise price of $.50 and a term of 5 years and a cashless conversion feature.
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 $.50 exercise price and 5 year term. The Note automatically converted by its terms 30 days after issuance, on February
27, 2017, into an investment in the principal amount of the note in the Company’s convertible notes and warrants, upon automatic
conversion, the investor was issued a one year promissory note convertible into shares of the Company’s Common Stock at a
$.50 conversion price and 5 year warrants with an exercise price of $.50 and a cashless conversion feature.
On
January 27, 2017, the Company issued a Non-Convertible Promissory Note for $380,000 to an investor in exchange for $380,000.
This note expires on the 4 month anniversary date of the issuance date, and in lieu of interest under the note, the Company agreed
to pay the investor $19,000 in cash within three days of the expiration of such note.
On February 2, 2017, the Company entered
into a non-exclusive license agreement with SolAero for use of NanoFlex’s patented ND-ELO process and related technologies
in the space and near-space fields of use.
During
February, 2017, the Company issued 64,800 shares of the Company’s Common Stock upon conversion of a certain promissory note.
During
February, 2017 the Company issued warrants to purchase 64,800 shares of its Common Stock related to the conversion of a certain
convertible note. Such warrants have an exercise price of $.50 and a term of 5 years and a cashless conversion feature.
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 are to vest on 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. The warrants have an exercise price
of $0.50 and a 5 year term.
On February 13, 2017, the Company issued
336,000 shares of the Company’s Common Stock to certain note holders for accrued interest.
On
March 6, 2017, the Company issued warrants to purchase 200,000 shares of its Common Stock to a service provider in exchange for
services provided to the Company. The warrants have an exercise price of $0.50 and a 5 year term.
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 $.50 exercise price and 5 year term. The Note automatically converts by its terms 30 days after issuance into an investment in
the principal amount of the note in the Company’s convertible notes and warrants, upon automatic conversion, the investor
is to be issued a one year promissory note convertible into shares of the Company’s Common Stock at a $.50 conversion price
and 5 year warrants with an exercise price of $.50 and a cashless conversion feature.
On
March 9, 2017, the Company entered into note purchase agreements with two investors
pursuant to whichinvestors purchased
a promissory note from the Company in exchange for $100,000 and $150,000, respectively, and a warrant to purchase 200,000 and
300,000 shares of the company’s common stock, respectively, with a $.50 exercise price and 5 year term. The Note automatically
converts by its terms 30 days after issuance into an investment in the principal amount of the note in the Company’s convertible
notes and warrants, upon automatic conversion, the investor is to be issued a one year promissory note convertible into shares
of the Company’s Common Stock at a $.50 conversion price and 5 year warrants with an exercise price of $.50 and a cashless
conversion feature.
F-23