NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
BACKGROUND, BASIS OF PRESENTATION, AND GOING CONCERN:
Background
NanoFlex
Power Corporation (‘we” “our”, the “Company”, formerly known as Universal Technology Systems,
Corp., was incorporated in the State of Florida on January 28, 2013. On September 24, 2013, the Company completed the acquisition
of Global Photonic Energy Corporation, a Pennsylvania corporation (“GPEC”), pursuant to a Share Exchange Agreement
(the “Share Exchange Transaction”). Immediately following the closing of the Share Exchange Transaction, the Company
owned 100% of equity interests of GPEC and GPEC became a wholly-owned subsidiary of the Company. On November 25, 2013, the Company
changed its name from “Universal Technology Systems, Corp.” to “NanoFlex Power Corporation” and its trading
symbol was changed to “OPVS” on December 26, 2013.
GPEC
was incorporated in Pennsylvania on February 7, 1994. The Company is organized to fund, develop, commercialize and license advanced
photovoltaic technologies that enable thin film solar products with what we believe to be industry-leading efficiencies, light
weight, flexibility, and low total system cost.
These
technologies are targeted at certain broad applications, including: (a) portable and off-grid power generation, (b) building applied
photovoltaics (“BAPV”), (c) building integrated photovoltaics (“BIPV”), (d) space vehicles and unmanned
aerial vehicles (“UAVs”), (e) semi-transparent solar power generating windows or glazing, and (f) ultra-thin solar
films for automobiles or other consumer applications.
We
believe these technologies have been demonstrated in a laboratory environment with our research partners. The Company is currently
taking steps to pursue product development and commercialization on some of these technologies in collaboration with industry
partners and potential customers.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been or omitted pursuant to such rules and regulations. In the opinion
of management, the accompanying consolidated financial statements include normal recurring adjustments that are necessary for
a fair presentation of the results for the interim periods presented. These consolidated financial statements should be read in
conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 included
in our Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2017 are not necessarily
indicative of results to be expected for the full fiscal year or any other periods.
The
preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and
related disclosures. Actual results may differ from these estimates.
Revenue
Recognition
We
recognize revenue from our services when it is probable that the economic benefits associated with the transactions will flow
to the Company and the amount of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence
of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection
is reasonably assured. Revenue from our Joint Development Agreements (“JDA’s”) are recognized as services are
provided and are limited to the total dollar amount specified in the agreement. R&D engineering services, through JDAs are
a core component of the Company’s operations and business model, since they are a necessary prerequisite to obtaining intellectual
property licensing agreements with customers. As such, R&D engineering services are expected to be a sustained revenue stream
for the Company as it works with additional customers and the services constitute a portion of the Company’s ongoing central
operations
Going
Concern
The
Company has generated limited revenue to date. The Company has a working capital deficit of $11,984,707 and an accumulated deficit
of $208,102,681 as of September 30, 2017. The ability of the Company to continue as a going concern is dependent on raising capital
to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these
factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event the Company cannot continue in existence. To date, the Company has funded
its initial operations primarily by way of the sale of equity securities, convertible note financing, short term financing from
private parties, and advances from related parties.
Fair
Value
ASC
820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities
that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Valuations may be obtained from, or corroborated by, third-party pricing services.
Level
3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the
measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs
are available without undue cost and effort.
As
of September 30, 2017, the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of September 30, 2017
and December 31, 2016:
|
|
Fair Value Measurements as of
September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
2,437,832
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
847,778
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,285,610
|
|
|
|
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
|
|
The
following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level
3 in the fair value hierarchy:
|
|
Significant Unobservable
|
|
|
Significant Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
4,955,163
|
|
|
$
|
9,307,216
|
|
|
$
|
11,985,141
|
|
|
$
|
18,207,333
|
|
Change in fair value
|
|
|
(1,669,553
|
)
|
|
|
3,274,387
|
|
|
|
(8,793,076
|
)
|
|
|
(6,170,172
|
)
|
Additions reclassified from equity
|
|
|
-
|
|
|
|
-
|
|
|
|
93,545
|
|
|
|
-
|
|
Additions recognized as compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
544,442
|
|
Ending balance
|
|
$
|
3,285,610
|
|
|
$
|
12,581,603
|
|
|
$
|
3,285,610
|
|
|
$
|
12,581,603
|
|
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02
,” Leases” (Topic 842)
which includes a lessee accounting model
that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the
balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease.
New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of
cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing
information about the amounts recorded in the financial statements. ASU 2016-02 will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect its adoption
of this standard, if any, on our consolidated financial position, results of operations or cash flows.
In
May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
”, to clarify certain core recognition principles including collectability, sales tax presentation,
noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the
full retrospective transition method is adopted. The effective date and transition requirements for these amendments are. annual
reporting periods beginning after December 15, 2017, including interim reporting periods therein, and that would also permit
public entities to elect to adopt the amendments as of the original effective date as applicable to reporting periods beginning
after December 15, 2016. The new guidance allows for the amendment to be applied either retrospectively to each prior reporting
period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company expects to adopt
the standard using the modified retrospective method. The Company is currently evaluating the impact of this amendment on its
financial statements.
In
May 2017, the FASB issued ASU No. 2017-09,
“Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting”,
to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying
the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment
award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017,
and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including
adoption in an interim period. The Company is currently evaluating the impact this standard will have on the Company’s consolidated
financial statements and related disclosures.
In
July 2017, the FASB issued ASU No. 2017-11,
“Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”.
The ASU was issued to address the complexity
associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics
of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when
analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial
instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result
of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and
should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently
evaluating the implementation date and the impact of this amendment on its financial statements.
In
August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities
, to (1) improve the transparency and understandability of information conveyed to financial statement users
about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships
with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.
Specifically, the guidance creates better alignment of hedge accounting with risk management activities, eliminates the separate
measurement and recording of hedge ineffectiveness, simplifies effectiveness assessments, and improves presentation and disclosure.
The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment
related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding
adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments
in this update. The amended presentation and disclosure guidance is required only prospectively. The Company is currently evaluating
the impact of this amendment on its financial statements.
2.
DEBT
Short
Term Debt
The
Company has a note payable of $100,000 due to its former Chief Executive Officer and President. The note bears an interest rate
at the minimum applicable rate for loans of similar duration, which was 0.5% as of September 30, 2017. In June of 2017, an agreement
was signed to extend the maturity date of this note to April 26, 2018.
On
August 31, 2016, the Company issued a promissory note of $300,000. The term of the note expires one year from the effective date
and has an interest rate of 10%. 600,000 cashless warrants for the Company’s common shares were issued with the debt at
a strike price of $0.50 per 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 $39,198 and $156,792 associated with the amortization of debt discount for the three and nine months ended September
30, 2017, respectively.
On
June 22, 2017, the Company issued a promissory note of $1,000,000. The term of the note expires seven months from the effective
date and has an interest amount of 40,000 upon maturity. 3,000,000 cashless warrants for the Company’s common shares were
issued with the debt at a strike price of $0.50 per share in lieu of cash interest. The relative fair value of the warrants of
$597,565 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company
recognized interest expense of $261,790 and $284,554 associated with the amortization of debt discount for the three and nine
months ended September 30, 2017, respectively.
On
July 28, 2017, the Company issued a promissory note of $20,000. The term of the note expires eight months from the effective date
and has interest of $1,600 due upon maturity. 60,000 warrants for the Company’s common shares were issued with the debt
at a strike price of $0.50 per share.
The relative
fair value of the warrants of $10,951 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 $2,920 associated with the amortization of debt discount for
the three and nine months ended September 30, 2017.
On
July 31, 2017, the Company issued a promissory note of $100,000. The term of the note expires ten months from the effective date
and has interest of $8,000 due upon maturity. 300,000 warrants for the Company’s common shares were issued with the debt
at a strike price of $0.50 per share.
The relative
fair value of the warrants of $53,562 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 $10,891 associated with the amortization of debt discount for
the three and nine months ended September 30, 2017.
On
August 10, 2017, the Company issued a promissory note of $30,000. The term of the note expires ten months from the effective date
and has interest $2,400 due upon maturity. 90,000 warrants for the Company’s common shares were issued with the debt at
a strike price of $0.50 per share.
The relative
fair value of the warrants of $9,110 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 $1,549 associated with the amortization of debt discount for
the three and nine months ended September 30, 2017.
On
August 21, 2017, the Company issued a promissory note of $20,000. The term of the note expires eight months from the effective
date and has interest of $1,600 due upon maturity. 60,000 warrants for the Company’s common shares were issued with the
debt at a strike price of $0.50 per share.
The
relative fair value of the warrants of $9,764 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 $1,627 associated with the amortization of debt discount
for the three and nine months ended September 30, 2017.
On
August 21, 2017, the Company issued four promissory notes totaling $200,000. The term of the notes expires one year from the effective
date and have interest of $8,000 due upon maturity. 1,200,000 warrants for the Company’s common shares were issued with
the debt at a strike price of $0.50 per share.
The
relative fair value of the warrants of $133,975 was recognized as a debt discount which is being amortized on a straight-line
basis over the term of the notes. The Company recognized interest expense of $14,886 associated with the amortization of debt
discount for the three and nine months ended September 30, 2017.
As
of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of non-convertible notes payable was $1,770,000
and $400,000, and unamortized discount was $498,499 and $156,792, respectively.
Notes
Payable – Related Party
On
January 27, 2017, the Company borrowed $380,000 under a short-term note agreement with a major shareholder. Under the terms of
this agreement, the note is to be repaid within four months of funding along with $19,000 paid at the maturity of the note in
lieu of interest. On
July 17, 2017
, the Company entered into a letter agreement to extend
the maturity date to September 27, 2017 and increase the note amount to include accrued interest. The foregoing note has been
consolidated into the Conversion Note, as such term is defined below.
On
March 6, 2017, the Company borrowed $120,000 under a short-term note agreement with a major shareholder. Under the terms of this
agreement, the note is to be repaid within four months of funding along with $6,000 paid at the maturity of the note in lieu of
interest. On
July 17, 2017
, the Company entered into a letter agreement to extend the maturity
date to November 7, 2017 and increase the note amount to include accrued interest. The foregoing note has been consolidated into
the Conversion Note, as such term is defined below.
On
April 4, 2017, the Company borrowed $100,000 under a short-term note agreement with a major shareholder. Under the terms of this
agreement, the note is going to be repaid within four months of funding along with $5,000 paid at the maturity of the note in
lieu of interest. On
July 17, 2017
, the Company entered into a letter agreement to extend
the maturity date to December 4, 2017 and increase the note amount to include accrued interest. The foregoing note has been consolidated
into the Conversion Note, as such term is defined below.
On
July 17, 2017
, the Company entered into a letter agreement with a major shareholder pursuant
to which the Company agreed that the shareholder’s non-convertible notes totaling $1,100,000 in the aggregate shall each
have their maturity date extended and each note amount has been increased to include accrued interest on the notes. Pursuant to
this agreement, the Company agreed to issue the investor a warrant to purchase 1,000,000 shares of the Company’s Common
Stock with a 10-year term and an exercise price of $.50. The Company recorded an additional amount of $122,884 to principal which
increased the aggregate balance of the notes to $1,222,884 under the letter agreement. The new maturity dates of the notes range
from August 27, 2017 to December 4, 2017 with an interest rate of 5%. The relative fair value of the 1,000,000 warrants was $495,044
which was recorded as a loss on extinguishment of debt since the change in value was greater than 10%. The foregoing note has
been consolidated into the Conversion Note, as such term is defined below.
On
August 10, 2017, the Company entered into a Loan Agreement with a major shareholder pursuant to which, the shareholder invested
$200,000 in a non-convertible 30-day unsecured promissory note issued on August 10, 2017. The interest under the note is a cash
payment of $30,000 due at maturity.
The foregoing
note has been consolidated into the Conversion Note, as such term is defined below.
As
of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of notes payable to related parties was $1,422,884
and $500,000, respectively. The aggregate amortization of the discounts on the promissory notes for the nine months ended
September 30, 2017 was $473,220.
On
October 11, 2017, the Company entered into a Note Conversion Agreement and on October 18, 2017, the Company entered into an amendment
thereto (referred herein to together as the “Note Conversion Agreement”) with a major shareholder pursuant to which
the Company and the major shareholder agreed to convert six promissory notes issued to the major shareholder upon their specific
expiration dates, together with an additional investment amount of $1,000,000, which was received by the Company on October 18,
2017, into a convertible promissory note (the “Conversion Note”). The original principal amount under the Conversion
Note was the total of four promissory notes that had passed their maturity date as of the date of the entry into the Note Conversion
Agreement, which equaled $1,221,844 An additional $1,000,000 was added to the principal amount of the Conversion Note on October
18, 2017, upon its receipt by the Company. Further, upon the end of the term of another of the six notes on November 7, 2017,
the amount due on that note which equals $126,000 shall be added to the total amount due under the Conversion Note. Further, upon
the end of the term of the last of the six notes on December 4, 2017, the amount due on that note which equals $105,000 shall
be added to the total amount due under the Conversion Note. The Conversion Note has a term of one year and accrues interest at
10% for every four months that it is issued and can be converted at the option of the major shareholder into an investment in
the Company’s offering of its convertible promissory notes and warrants (the “Note Offering”), at a 15% discount.
Further pursuant to the Note Conversion Agreement, on October 18, 2017, the major shareholder was issued a warrant to purchase
1,000,000 shares of the Company’s Common Stock with a ten-year term and an exercise price of $.50. The foregoing descriptions
of the Note Conversion Agreement and Conversion Note is not complete and is qualified in its entirety by reference to the full
text of the form the Note Conversion Agreement (and amendment thereto) and the Conversion Note and warrant, copies of which are
filed as Exhibit 10.1 and 10.2, respectively, to this report, and are incorporated by reference herein. The form of subscription
agreement, form of note and form of warrant for the Note Offering, are filed as Exhibit 10.3 to this report.
Advances
– Related Party
During
the three and nine months ended September 30, 2017, the Company received advances from its Chief Executive Officer totaling $69,000
and $138,500, respectively, and repaid advances totaling $20,000 and $204,500, respectively.
As
of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of advances to related parties was $444,000 and
$510,000, respectively.
Convertible
Notes Payable
On
January 27, 2017, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased
a promissory note from the Company in exchange for $200,000 and a warrant to purchase 400,000 shares of the company’s common
stock with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified it 30 days
after issuance into a convertible note. The convertible note was issued on February 27, 2017, pursuant to the agreement, with
a principal amount of $200,000, includes the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date
of one year and is convertible into 400,000 units, with each unit consisting of a share of common stock and a warrant with a five-year
life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative
fair value of the 600,000 warrants was $125,931 which was recognized as a discount to the debt. This note also gave rise to a
beneficial conversion feature of $38,655 which is recognized as additional paid in capital and a corresponding debt discount.
All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional
warrant expense of $35,414 associated with the warrants that are to be issued upon conversion, which is to be recognized only
upon conversion.
On
March 8, 2017, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a promissory
note from the Company in exchange for $200,000 and a warrant to purchase 400,000 shares of the company’s common stock with
a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified it 30 days after issuance
into a convertible note. The convertible note was issued on April 8, 2017, pursuant to the agreement, with a principal amount
of $200,000, includes the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year and is
convertible into 400,000 units, with each unit consisting of a share of common stock and a warrant with a five-year life from
the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair
value of the 600,000 warrants was $130,207 which was recognized as a discount to the debt. This note also gave rise to a beneficial
conversion feature of $36,196 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts
are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense
of $33,596 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On
March 9, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory
note from the Company in exchange for $150,000, respectively, and a warrant to purchase 300,000 shares of the company’s
common stock, respectively, with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically
modified it 30 days after issuance into a convertible note. The convertible note was issued on April 9, 2017, pursuant to the
agreement, with a principal amount of $150,000, includes the issuance of 150,000 additional warrants, interest of 8% per annum,
a maturity date of one year and is convertible into 300,000 units, with each unit consisting of a share of common stock and a
warrant with a five-year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution
provisions. The relative fair value of the 450,000 warrants was $96,019 which was recognized as a discount to the debt. This note
also gave rise to a beneficial conversion feature of $28,018 which is recognized as additional paid in capital and a corresponding
debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains
an additional warrant expense of $25,963 associated with the warrants that are to be issued upon conversion, which is to be recognized
only upon conversion.
On
March 12, 2017, the Company entered into note purchase agreements with two investors, pursuant to which investors purchased a
promissory note from the Company in exchange for $100,000 and a warrant to purchase 200,000 shares of the company’s common
stock, respectively, with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified
it 30 days after issuance into a convertible note. The convertible note was issued on April 12, 2017, pursuant to the agreement
with a principal amount of $100,000, includes the issuance of 100,000 additional warrants, interest of 8% per annum, a maturity
date of one year and is convertible into 200,000 units, with each unit consisting of a share of common stock and a warrant with
a five-year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions.
The relative fair value of the 300,000 warrants was $64,386 which was recognized as a discount to the debt. This note also gave
rise to a beneficial conversion feature of $18,479 which is recognized as additional paid in capital and a corresponding debt
discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an
additional warrant expense of $17,135 associated with the warrants that are to be issued upon conversion, which is to be recognized
only upon conversion.
On
April 24, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”)
pursuant to which Power Up purchased a convertible promissory note evidencing a loan of $58,500. The Company paid off this note
in full on October 19, 2017.
On
April 25, 2017, the Company borrowed $115,000 from JSJ Investments, Inc. (“JSJ”) and issued to JSJ a $115,000 convertible
promissory note with a maturity date of January 25, 2018. The Company paid off this note in full on October 19, 2017.
On
April 28, 2017, the Company entered into a Securities Purchase Agreement with Silo Equity Partners Venture Fund, LLC (“Silo”)
pursuant to which Silo purchased a convertible promissory note evidencing a loan of $100,000. The Company paid off the this
note in full on October 19, 2017.
On May 4, 2017, the Company agreed to borrow
up to $500,000 from JMJ Financial (“JMJ”) and issued to JMJ a convertible promissory note of up to $500,000, evidencing
the loan with a maturity date of May 4, 2018. The Company paid off the this note in full in two tranches, a payment on August
3, 2017 and a payment on August 4, 2017 in equal amounts, with both payments totaling $416,842 of which $101,053 penalty on prepayment
was recorded as loss on debt extinguishment.
On
July 17, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory
note from the Company in exchange for $200,000, and a warrant to purchase 800,000 shares of the company’s common stock,
with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause
that automatically converts the note 60 days after issuance into 400,000 shares of Common Stock and a warrant to purchase 400,000
shares of Common Stock. The relative fair value of the 800,000 warrants was $132,889 which was recognized as a discount to the
debt. This note also gave rise to a beneficial conversion feature of $34,955 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 $32,156 associated with the warrants that are to be issued upon conversion,
which is to be recognized only upon conversion. The note was automatically converted on September 15, 2017.
On
July 25, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. pursuant to which Power
Up purchased a convertible promissory note evidencing a loan of $43,000. This note entitles the holder to 12% interest per annum
and matures on April 30, 2018. Power Up may convert the note into shares of the Company’s common stock beginning on the date which
is 180 days from the issuance date of the note, at a price equal to 61% of the average of the lowest two trading prices during
the 15 trading day period ending on the last complete trading date prior to the date of conversion, provided, however, that Power
Up may not convert the note to the extent that such conversion would result in Power Up’s beneficial ownership being in
excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by Power Up and its
affiliates. If the Company prepays the note within 30 days of its issuance, the Company must pay all of the principal at a cash
redemption premium of 110%; if such prepayment is made between the 31st day and the 60th day after the issuance of the note, then
such redemption premium is 115%; if such repayment is made from the sixty first 61st to the 90th day after issuance, then such
redemption premium is 120%; if such repayment is made from the 91st to the 120th day after issuance, then such redemption premium
is 125%; if such repayment is made from the 121st to the 150th day after issuance, then such redemption premium is 130%; and if
such prepayment is after the 151st day and before the 181st date of issuance of the note then such redemption premium is 135%.
In connection with the Note and Securities Purchase Agreement the Company paid $3,000 for Power Up’s legal fees incurred
in connection with the note and Securities Purchase Agreement and therefore only received $40,000 under the note. The Company
agreed that so long as it has any obligation under the note, that is shall not sell, lease or otherwise dispose of any significant
portion of its assets outside the ordinary course of business without the written consent of Power Up. The Company’s transfer
agent reserved 1,040,469 shares of the Company’s common stock, in the event that the note is converted. The foregoing descriptions
of the Securities Purchase Agreement and note is not complete and is qualified in its entirety by reference to the full text of
the form of Securities Purchase Agreement and form note, copies of which were filed as Exhibit 10.10 and 10.11, respectively,
to the Company’s quarterly report for the quarter ended June 30, 2017, which was filed with the SEC on August 9, 2017, and
are incorporated by reference herein.
On
August 3, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a
promissory note from the Company in exchange for $15,000, and a warrant to purchase 30,000 shares of the company’s common
stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converts the note 60 days after issuance into 30,000 shares of Common Stock and a warrant to purchase
30,000 shares of Common Stock.
The relative
fair value of the 30,000 warrants was $6,355 which was recognized as a discount to the debt. This note also gave rise to a beneficial
conversion feature of $4,524 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 $4,121 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On
September 7, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased
a promissory note from the Company in exchange for $25,000, and a warrant to purchase 100,000 shares of the company’s common
stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converts the note 60 days after issuance into 50,000 shares of Common Stock and a warrant to purchase
50,000 shares of Common Stock.
The relative
fair value of the 100,000 warrants was $14,374 which was recognized as a discount to the debt. This note also gave rise to a beneficial
conversion feature of $5,566 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 $5,060 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On
September 26, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased
a promissory note from the Company in exchange for $100,000, and a warrant to purchase 400,000 shares of the company’s common
stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converts the note 60 days after issuance into 200,000 shares of Common Stock and a warrant to
purchase 200,000 shares of Common Stock.
The
relative fair value of the 400,000 warrants was $56,765 which was recognized as a discount to the debt. This note also gave rise
to a beneficial conversion feature of $22,892 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 $20,343 associated with the warrants that are to be issued upon conversion, which is to be recognized only
upon conversion.
During
the nine months ended September 30, 2017, the full principal balances of certain notes totaling $1,033,500 were converted
pursuant to the terms of the notes into 2,071,800 shares of the Company’s common stock and 2,071,800 warrants to
purchase common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and also
recognized additional interest expense of $181,442 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 nine months ended September 30, 2017 and 2016 was $1,105,888 and
$2,030,827, respectively. The amortization for the nine months ended September 30, 2017 included $25,829 of amortization of deferred
financing costs. As of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of convertible notes payable
was $1,919,093 and $1,440,206, respectively, net of unamortized discounts of $118,086 and $343,294. The total beneficial conversion
feature debt discount from convertible notes for the nine months ended September 30, 2017 was $816,211.
Derivative
Liabilities - Convertible Notes
As
of September 30, 2017, the fair value of the outstanding convertible note derivatives was determined to be $847,778 and the Company
recognized a gain of $2,308,958. There were no new convertible note derivatives that arose during the nine months ended September
30, 2017.
Accounts
Payable - Related Party
As
of September 30, 2017, and December 31, 2016, there is $18,115 and $2,470, respectively, due to related parties, which is non-interest
bearing and due on demand.
3.
EQUITY
Common
Stock
On
February 13, 2017, the Company issued 336,000 shares of the Company’s common stock to certain note holders in exchange for
accrued interest of $168,000. The fair value of the common stock was determined to be $201,600 and resulted in a loss on settlement
of accrued interest of $33,600.
On
June 5, 2017, the Company issued 3,400,000 shares of the Company’s common stock to a related party pursuant to a letter
agreement. See Note 2 for details. The Company calculated the fair value of the shares on the issuance date and recorded $1,190,000
as loss on extinguishment of debt.
On
August 24, 2017, the Company entered into a letter agreement with an investor pursuant to which, the investor agreed to extend
the maturity date of a promissory note which expired on August 12, 2017, to a new maturity date of February 12, 2018, and in exchange
to agreeing to extend the maturity date of such note, the investor was issued 100,000 shares of the Company’s Common Stock
and a warrant to purchase 2,000,000 shares of the company’s Common Stock with a $.50 exercise price and a 10 year term.
The fair value of the warrants was determined to be $755,081 using the Black-Scholes option pricing model. The fair value of the
common stock was determined to be $39,000 based on the stock price on August 24, 2017. These fair values were recorded as a total
loss on extinguishment of debt of $794,081.
During
the nine months ended September 30, 2017, the Company issued an aggregate of 2,071,800 shares of its common stock related to the
conversion of $1,038,300 of principal and accrued interest on convertible notes.
During
the nine months ended September 30, 2017, the Company sold an aggregate of 815,046 units, at $0.50 per unit for aggregate proceeds
of $407,523. Each unit consisted of one common share and one warrant. Each warrant is exercisable for a period of five years from
the date of issuance, at $0.50 per share.
Stock
Options
On
April 1, 2017, 50,000 stock options were granted to an employee of the Company. The options vest on a monthly basis of 1,000 shares
per month over a 50-month period. The options expire in 2027. These options were valued based on the grant date fair value of
the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
146.26
|
%
|
|
|
-
|
|
Risk-free interest rate
|
|
|
2.08
|
%
|
|
|
-
|
|
Expected term
|
|
|
6.06
|
|
|
|
-
|
|
The
volatility used was based on historical volatility of similar sized companies due to lack of historical data of the Company’s
stock price. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term
of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin
No. 110.
A
summary of stock option activity during the nine months ended September 30, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(years)
|
|
Outstanding at December 31, 2016
|
|
|
100,000
|
|
|
|
0.77
|
|
|
|
9.4
|
|
Granted
|
|
|
50,000
|
|
|
|
0.62
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
150,000
|
|
|
|
0.72
|
|
|
|
8.9
|
|
Exercisable at September 30, 2017
|
|
|
40,000
|
|
|
$
|
0.68
|
|
|
|
8.7
|
|
Stock
option awards are expensed on a straight-line basis over the requisite service period. During the three and nine months ended
September 30, 2017 the Company recognized expense of $7,892, and $22,502, respectively, associated with stock option awards. During
the three and nine months ended September 30, 2016 the Company recognized expense of $4,164 and $12,489, respectively, associated
with stock option awards. At September 30, 2017, future stock compensation expense (net of estimated forfeitures) not yet recognized
was $96,122 and will be recognized over a weighted average remaining vesting period of 3.0 years.
The
intrinsic value of the Company’s stock options outstanding was $0 at September 30, 2017.
Warrants
On
September 1, 2015, the Company entered into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in
his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company
issued Mr. Tobin warrants to purchase 1,500,000 shares of the Company’s common stock at $0.50 per share (the “Warrant
Shares”). The fair value of the warrants was determined to be $2,835,061 using the Black-Scholes option pricing model. 375,000
of the Warrant Shares vested on September 1, 2015, an additional 375,000 warrant shares vested on the first anniversary date of
the Employment Agreement. On May 15, 2017, Mr. Tobin terminated his employment with the Company. On May 15, 2017, the Company
entered into an agreement with Mr. Tobin allowing his third tranche of 375,000 Warrant Shares to vest on September 1, 2017 in
exchange for consulting services. The remaining fourth tranche of 375,000 warrants were forfeited upon termination of the Employment
Agreement. Warrant expense on non-forfeited tranches of $60,087 and $334,696 was recognized during the three and nine months ended
September 30, 2017, respectively. In addition, $380,548 of expense was reversed during the quarter ended June 30, 2017 related
to the forfeited warrants. Warrant expense of $265,787 and $915,489 was recognized during the three and nine months ended September
30, 2016, respectively.
On
May 18, 2017, the Company entered into an Employment Agreement (the “Employment Agreement”) with Ron DaVella in his
capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on May 18, 2017 the Company issued
Mr. DaVella warrants to purchase 1,800,000 shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”).
The foregoing description of the Employment Agreement and warrant is not complete and is qualified in its entirety by reference
to the full text of the Employment Agreement, a copy of which was filed as Exhibit 10.1, to the Company’s Current Report
on Form 8-K filed with the SEC on May 18, 2017, which incorporated by reference herein. The fair value of the warrants was determined
to be $743,416 using the Black-Scholes option pricing model. 450,000 of the Warrant Shares vested on May 18, 2017, an additional
450,000 warrant shares will vest on the first anniversary date of the Employment Agreement, an additional 450,000 warrant shares
will vest on the second anniversary date of the Employment Agreement, and, an additional 450,000 warrant shares will vest on the
third anniversary date of the Employment Agreement. Warrant expense of $85,183 and $299,432 was recognized during the three and
nine months ended September 30, 2017, respectively.
Total
warrant expense for employee warrants of non-forfeited tranches was $145,270 and $634,128 for the three and nine months ended
September 30, 2017, respectively. Total warrant expense recorded for the nine months ended September 30, 2017 was $251,022.
On
February 1, 2017, the Company issued warrants to purchase 30,000 shares of its Common Stock to a service provider in exchange
for services provided to the Company. 5,000 of the warrants vested February 28, 2017, and 5,000 warrants shall vest on the last
date of each month following February 2017, until final vesting on July 31, 2017. The warrants have an exercise price of $0.50
and a 5-year term. The fair value of the warrants was determined to be $9,516 using the Black-Scholes option pricing model of
which $1,366 of expense was recaptured and $9,516 was recognized as expense during the three and nine months ended September 30,
2017, respectively.
On
March 6, 2017, the Company issued warrants to purchase 200,000 shares of its common stock at $0.50 per share to a consultant in
exchange for services already performed. The warrants have a five-year term and are immediately vested. The fair value of the
warrants was determined to be $120,501 using the Black-Scholes option pricing model of which $120,501 was recognized as expense
during the nine months ended September 30, 2017.
On
April 12, 2017, the Company issued warrants to purchase 100,000 shares of its common stock at $0.50 per share to a consultant
in exchange for services already performed. The warrants have a five-year term and are immediately vested. The fair value of the
warrants was determined to be $53,564 using the Black-Scholes option pricing model of which $53,564 was recognized as expense
during the nine months ended September 30, 2017.
From
April 12, 2017 through and up to June 23, 2017, the Company reduced the exercise prices of certain warrants, with a total aggregate
of 1,070,744 shares of the Company’s common stock issuable upon exercise of such warrants, to $.50 and added a cashless
exercise feature to such warrants. Since the warrants were already recorded as derivative liabilities, the modification has been recognized
as change in fair value of derivative.
From
May 28, 2017 through June 14, 2017, 23 holders of a total of 132 warrants (the “Warrants”) pursuant to which 36,547,903
shares of the Company’s common stock are issuable, submitted exercise notices to the Company, pursuant to which the holders agreed
that the Warrants shall be exercised by way of a cashless exercise feature automatically upon such time as the market price for
the company’s common stock reaches $1.50 on a trading date. If this occurs, the company shall have to issue 24,365,269 shares
of its common stock to the holders.
On
July 1, 2017, the Company entered into an Independent Contractor Services Agreement with a service provider pursuant to which
it issued to the service provider on July 1, 2017, a warrant to purchase 50,000 shares of the Company’s Common Stock with
a five-year term and an exercise price of $.50. 25,000 of the warrant shares vested on July 1, 2017 and the remaining 25,000 shares
are set to vest on December 31, 2017, so long as the Independent Contractor Services Agreement is not terminated prior to such
date. The fair value of the warrants was determined to be $14,825 using the Black-Scholes option pricing model of which $2,883
of expense was recaptured and $7,412 was recognized as expense during the three and nine months ended September 30, 2017, respectively.
From
June 22, 2017 through August 21, 2017, the Company issued 4,710,000 cashless warrants for the Company’s common shares with
a strike price of $0.50/share with promissory notes of $1,370,000. The relative fair value of the warrants of $814,927 was recognized
as a debt discount which is being amortized on a straight-line basis over the term of the notes. The Company recognized interest
expense of $293,664 and $316,428, respectively, associated with the amortization of debt discount on the notes and warrants issued
during the current year for the three and nine months ended September 30, 2017.
On
August 10, 2017, the Company issued warrants to purchase 10,000 shares of its common stock at $0.50 per share to a consultant
in exchange for services already performed. The warrants have a five-year term and are immediately vested. The fair value of the
warrants was determined to be $4,868 using the Black-Scholes option and were recognized as expense during the nine months ended
September 30, 2017.
On
September 21, 2017, the Company issued warrants to purchase 25,000 shares of its common stock at $0.50 per share to a consultant
in exchange for services already performed. The warrants have a ten-year term and are immediately vested. The fair value of the
warrants was determined to be $8,462 using the Black-Scholes option and were recognized as expense during the nine months ended
September 30, 2017.
On
September 29, 2017, the Company issued warrants to purchase 25,000 shares of its common stock at $0.50 per share to a consultant
in exchange for services already performed. The warrants have a ten-year term and are immediately vested. The fair value of the
warrants was determined to be $7,947 using the Black-Scholes option and were recognized as expense during the nine months ended
September 30, 2017.
During
the nine months ended September 30, 2017, the aggregate principal and interest of certain convertible notes totaling $1,038,300
were converted pursuant to the terms of the notes into 2,071,800 shares of the Company’s common stock and 2,071,800 warrants
to purchase common stock. See details in Note 2.
The
Company recorded a total of $340 on warrants issued to non-employees for services provided during the nine months ended September
30, 2017.
The
following summarizes the warrant activity for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding as of December 31, 2016
|
|
|
60,380,521
|
|
|
$
|
0.73
|
|
|
$
|
4.6
|
|
|
$
|
57,361,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
16,116,846
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(382,500
|
)
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2017
|
|
|
76,114,867
|
|
|
$
|
0.54
|
|
|
$
|
4.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2017
|
|
|
73,669,867
|
|
|
$
|
0.65
|
|
|
$
|
4.4
|
|
|
$
|
-
|
|
Derivative
Liabilities - Warrants
The
anti-dilution features in the freestanding warrants issued in the nine months ended September 30, 2017 cause the instruments to
no longer be indexed to the Company’s own stock and requires that they be accounted for as derivative liabilities based
on guidance in FASB ASC 815, Derivatives and Hedging.
The
valuation of the derivative liability of the warrants was determined through the use of a Black Scholes options model, which the
Company believes approximates fair value. Using this model, the Company had a balance of $8,828,405 at December 31, 2016. The
Company recorded the change in the fair value of the warrant liabilities recognizing a gain of $6,484,117 for the nine months
ended September 30, 2017, to reflect the value of the warrant derivative liability of $2,437,832 as of September 30, 2017.
On
November 4, 2015, the Company entered into an amendment to the Independent Contractor Agreement (the “Amendment”)
with a service provider pursuant to which the service provider is to be issued warrants to purchase 2,400,000 shares of the Company’s
common stock at $1.00 per share (the “Warrant Shares”). 1,200,000 of the Warrant Shares vested on November 4, 2015,
an additional 600,000 Warrant Shares vested on November 4, 2016, and an additional 600,000 Warrant Shares will vest on November
4, 2017. The fair value of the first 1,200,000 Warrants Shares was determined to be $1,115,964 using the Black-Scholes option
pricing model and was recognized as expense during the year ended December 31, 2015. The fair value of the 600,000 Warrant Shares
that vested November 4, 2016 was determined to be $559,900 and was recognized as expense during the year ended December 31, 2016.
The fair value of the remaining tranche of 600,000 Warrant Shares was determined to total $186,907 as of September 30, 2017 using
the Black-Scholes option pricing model of which $34,827 and $143,136 of expense was reversed due to a change in fair value during
the three and nine months ended September 30, 2017, respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 1,000,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
500,000 of the Warrant Shares vested on May 13, 2016, an additional 250,000 warrant shares vested on the first anniversary date
of the agreement, and an additional 250,000 Warrant Shares will vest on the second anniversary date of the agreement. The fair
value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model and was recognized
as expense and as derivative liabilities during the year ended December 31, 2016. The fair value of the 250,000 Warrant Shares
that vested May 13, 2017 was determined to be $93,545 and was recognized in additional paid in capital during the quarter ended
June 30, 2017. The fair value of the remaining tranche of 250,000 Warrant Shares was determined to total $78,233 as of September
30, 2017 using the Black-Scholes option pricing model of which $7,120 and $68,343 of expense was recaptured during the three and
nine months ended September 30, 2017, respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 200,000 shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”).
The Warrant Shares are immediately vested. The fair value of the Warrant Shares was determined to total $62,586 as of September
30, 2017 using the Black-Scholes option pricing model.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
Volatility
|
|
139.5 % - 200.90%
|
|
129.70 % - 183.62%
|
Risk-free interest rate
|
|
1.31% - 2.25%
|
|
0.44 - 1.78%
|
Expected term
|
|
1.25 - 8.6 years
|
|
2.25 - 10 years
|
4.
NET EARNINGS (LOSS) PER SHARE
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,082,535
|
)
|
|
$
|
(5,768,652
|
)
|
|
$
|
467,158
|
|
|
$
|
(6,227,809
|
)
|
Less: decrease in fair value of warrants, net of income tax
|
|
|
(1,418,223
|
)
|
|
|
-
|
|
|
|
(4,704,395
|
)
|
|
|
-
|
|
Less: decrease in fair value of convertible debt, net of income tax
|
|
|
(343,620
|
)
|
|
|
-
|
|
|
|
(2,249,122
|
)
|
|
|
-
|
|
Less: interest expense - convertible debt
|
|
|
16,427
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income (loss) available to common stockholders
|
|
|
(3,827,951
|
)
|
|
|
(5,768,652
|
)
|
|
|
(6,486,359
|
)
|
|
|
(6,227,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
66,578,958
|
|
|
|
58,973,457
|
|
|
|
63,687,700
|
|
|
|
57,103,514
|
|
Plus: incremental shares from assumed exercise- options
|
|
|
-
|
|
|
|
-
|
|
|
|
586
|
|
|
|
-
|
|
Plus: incremental shares from assumed exercise- warrants
|
|
|
261,753
|
|
|
|
-
|
|
|
|
1,932,044
|
|
|
|
-
|
|
Plus: incremental shares from assumed conversion- convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
39,407
|
|
|
|
-
|
|
Plus: incremental shares from assumed conversion-units
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
Adjusted weighted average common shares outstanding
|
|
|
68,840,711
|
|
|
|
58,973,457
|
|
|
|
67,659,737
|
|
|
|
57,103,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
5.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
In
November 2013, the Company entered into a 60-month lease agreement for its corporation facility in Arizona. Total rent expense
for the three and nine months ended September 30, 2017 was $18,067 and $81,480, respectively. Total rent expense for the three
and nine months ended September 30, 2016 was $21,039 and $64,375, respectively.
Future
minimum lease payments are as follows:
2017
|
|
$
|
21,347
|
|
2018
|
|
|
71,797
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
93,144
|
|
Concentrations
All
of the Company’s revenue and accounts receivable are currently earned from one customer.
Legal
Matters
As
reported in the Company’s prior filings, and specifically as described in the Company’s quarterly report for the quarter
ended June 30, 2017, which was filed with the SEC on August 9, 2017, the Company is a party to a lawsuit in the United States
District Court Southern District of New York, which was brought by John D. Kuhns. The parties are in the process of settling the
matter and preparing to execute the necessary documentation for same, pursuant to which all claims against the Company would be
dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and a promissory note for $125,000.
The 1,750,000 shares of common stock were fair valued using the stock price on August 29, 2017 and recorded as a stock payable
of $681,625. The Company recognized legal settlement expense of $633,292 associated with this transaction. There can be no assurance
that such settlement will occur, and if does not occur, then the Company will plan to continue to vigorously defend against the
claims made by Mr. Kuhns as it believes that Mr. Kuhns’ allegations and claims are without any merit.
6.
SUBSEQUENT EVENTS
On
October 3, 2017, the Company entered into three note purchase agreements with three investors, pursuant to which each investor
purchased a promissory note from the Company in exchange for $25,000, and each received a warrant to purchase 75,000 shares of
the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory notes.
The promissory notes have a clause that automatically converted the notes 30 days after issuance, on November 2, 2017, into an
investment in the principal amount in the Company’s Note Offering and each investor was issued a one year promissory note
with a principal amount of $25,000 and warrants to purchase 25,000 shares of the Company’s Common Stock with a $0.50 exercise
prices and a 10-year term.
On
October 4, 2017, the Company issued a warrant to purchase 50,000 shares its Common Stock with a $0.50 exercise price and a 10-year
term to a service provider in consideration of services provided to the Company.
On
October 5, 2017, 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 $25,000, and received a warrant to purchase 75,000 shares of the company’s
Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converted the note 30 days after issuance, on November 4, 2017 into an investment in the principal
amount in the Company’s Note Offering and the investor was issued a one year promissory note with a principal amount of
$25,000 and warrants to purchase 25,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year term.
On October 9, 2017, 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 $25,000, and received a warrant to purchase 75,000 shares of the company’s Common Stock, with a $0.50 exercise
price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converted
the note 30 days after issuance, on November 8, 2017, into an investment in the principal amount in the Company’s Note Offering
and the investor was issued a one year 8% $25,000 convertible promissory note and a warrant to purchase 25,000 shares of the Company’s
Common Stock with a $0.50 exercise price and a 10 year term.
On
October 10, 2017, 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 $50,000, and received a warrant to purchase 150,000
shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the
promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, on November 9,
2017, into an investment in the principal amount in the Company’s Note Offering and the investor was issued a one year
8% $50,000 convertible promissory note and a warrant to purchase 50,000 shares of the Company’s Common Stock with a
$0.50 exercise price and a 10 year term.
On
October 11, 2017, the Company entered into a Note Conversion Agreement and on October 18, 2017, the Company entered into an amendment
thereto (referred herein to together as the “Note Conversion Agreement”) with a major shareholder pursuant to which
the Company and the major shareholder agreed to convert six promissory notes issued to the major shareholder upon their specific
expiration dates, together with an additional investment amount of $1,000,000, which was received by the Company on October 18,
2017, into a convertible promissory note (the “Conversion Note”). The original principal amount under the Conversion
Note was the total of four promissory notes that had passed their maturity date as of the date of the entry into the Note Conversion
Agreement, which equaled $1,221,844. An additional $1,000,000 was added to the principal amount of the Conversion Note on October
18, 2017, upon its receipt by the Company. Further, upon the end of the term of another of the six notes on November 7, 2017,
the amount due on that note which equals $126,000 shall be added to the total amount due under the Conversion Note. Further, upon
the end of the term of the last of the six notes on December 4, 2017, the amount due on that note which equals $105,000 shall
be added to the total amount due under the Conversion Note. The Conversion Note has a term of one year and accrues interest at
10% for every four months that it is issued and can be converted at the option of the major shareholder into an investment in
the Company’s Note Offering, at a 15% discount. Further pursuant to the Note Conversion Agreement, on October 18, 2017,
the major shareholder was issued a warrant to purchase 1,000,000 shares of the Company’s Common Stock with a 10-year term
and an exercise price of $0.50. The foregoing descriptions of the Note Conversion Agreement and Conversion Note is not complete
and is qualified in its entirety by reference to the full text of the form the Note Conversion Agreement (and amendment thereto)
and the Conversion Note and warrant, copies of which are filed as Exhibit 10.1 and 10.2, respectively, to this report, and are
incorporated by reference herein.
On
October 17, 2017, 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 $12,500, and received a warrant to purchase 37,500 shares of the company’s
Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s
Note Offering.
On
October 17, 2017, the Company entered into a second note purchase agreement with another investor, pursuant to which the
investor purchased a promissory note from the Company in exchange for $12,500, and received a warrant to purchase 37,500
shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the
promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, into an
investment in the principal amount in the Company’s Note Offering.
On
October 19, 2017, 50,000 stock options were granted to an employee of the Company. The options vest on a monthly basis of 1,000
shares per month over a 50-month period. The options expire in 2027.
On
October 19, 2017, 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 $20,000, and received a warrant to purchase 60,000 shares of the company’s
Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s
Note Offering.
On
October 24, 2017, the Company issued a warrant to purchase 500,000 shares its Common Stock with a $0.50 exercise price and a 10-year
term to a service provider in consideration of deferred payments for legal services provided to the Company.
On
October 31, 2017, 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 $75,000, and received a warrant to purchase 225,000 shares of the company’s
Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note
has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s
Note Offering.
On
November 8, 2017, the Company issued warrants to purchase 50,000 of its Common Stock each to four of its employees as a
bonus in exchange for services provided to the Company. The warrants have a 10-year term, a $0.50 exercise price and include
a cashless exercise feature.