Securities registered pursuant to Section
12(b) of the Securities Exchange Act:
None
Securities registered pursuant to Section
12(g) of the Securities Exchange Act:
None
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
x
As of June 30, 2017, the last day of the
registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant was $16,602,764, at $0.45 per share, based on the price at which the registrant’s
common equity was last sold as of June 30, 2017.
As of March 26, 2018, the number of shares of the registrant’s
common stock outstanding was 69,281,778.
Except as otherwise indicated by the context,
references in this Report to:
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 and internet of things applications (IoT) including sensors.
The results we have achieved in a laboratory environment with our research partners have resulted in collaboration
with industry partners and potential customers to commercialize certain of our technologies.
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 can 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 which resulted from sponsored research programs with the universities. 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, 2017, there were approximately 74 issued patents and 48 pending non-provisional applications,
1 pending provisional application and 6 Patent Cooperation Treaty (“PCT”) 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 81 issued patents and 184 pending patent applications. These numbers exclude issued and pending patents
that the Company has identified for abandonment 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, (f) ultra-thin solar films for automobiles or other consumer applications and sensors and other devices for the Internet
of Things (“IoT”). 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 established an engineering team comprised
of four employees 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. In May 2017, SolAero was awarded an approximately $6.3 million
contract with the Army Research Laboratory to design power mats. A power mat would replace the 25 pounds of batteries typically
carried by a soldier into battle. It is powered by GaaS and will generate approximately 310 watts under one sun and will weigh
approximately three pounds. The Company is a subcontractor to SolAero and our portion of this contract is approximately $3.3 million
of which $1.6 million is subcontracted out to the University of Michigan over a four-year period.
As reported in the Company’s Current Report on Form 8-K filed
with the SEC on February 7, 2017, on February 2, 2017, the Company entered into a License Agreement with SolAero pursuant to which,
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 (the “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 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.
By establishing our own engineering team, we have also been able
to become less reliant on our university partners. As a result, we have suspended our sponsored research agreement with the University
of Southern California which covered our OPV technologies and on August 31, 2017, suspended our research agreements with the University
of Michigan and established a time and materials contract to access Michigan’s LNF lab as needed to continue to commericialize
our technologies.
The Company’s business model is oriented around licensing
and sublicensing processes and technologies to large, well-positioned commercial partners which can provide manufacturing and marketing
capabilities to enable rapid commercial growth. 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.
The Company is continuing to seek additional partners for its GaAs-based
processes and technologies and our engineering team is focused on further development of these processes and technologies.
The Company is in the development stage as it has not yet commercialized any products or 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 based on its need to continue raising capital to support its activities.
Sponsored Research and License Agreements
Research and development of the Company’s
high efficiency solar thin films and OPV technologies have been 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.
The Company suspended these research agreements with Michigan on August 31, 2017 and established a time and materials contract
to access Michigan’s LNF lab as needed.
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. 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 was required to 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. The final installment was paid in January 2018.
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, which have been paid.
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, 2017
and 2016, we incurred research and development costs pertaining to our sponsored research efforts and our establishment of our
internal engineering team of $708,840 and $1,683,464, 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 currently focusing its efforts on 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. The Company is also seeking partners to commercialize its
OPV thin film solar technologies which 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, other applications that demand design
flexibility and light weight and solar powered IoT sensors. 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. Further, 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-efficiency 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.
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
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, 2017, U.S. issuances and applications were as follows: approximately
74 issued patents, 48 pending non-provisional applications, 1 pending provisional applications, and 6 PCT applications. For regions
outside of the U.S.: approximately 81 issued patents, and 184 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 currently being
filed are part of a dynamic, comprehensive development strategy to protect our commercialization rights. Following this developmental
strategy, current work builds on 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.
Exemplary U.S. patents related to our
high efficiency thin film solar technologies include U.S. Patent Nos. 8,378,385, 8,927,319, 9,118,026, 9,548,218, 9,461,193, and
9,412,960, which will expire on September 9, 2030, October 23, 2030, September 14, 2031, February 7, 2033, August 7, 2033, and
December 16, 2033, respectively. In addition to these issued patents, we are pursuing additional protection for our high efficiency
thin film portfolio in 15 pending U.S. patent applications, 4 pending PCT applications, which will be filed in the U.S. 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.
Exemplary U.S. patents related to our OPV-related technologies include U.S. Patent Nos. 9,666,816, 9,391,284,
9,515,275, 8,912,036, 8,158,972, 9,768,402, 8,785,624, 9,447,107, 8,816,332, 9,130,170 and 9,847,487, which will expire on August
22, 2028, August 28, 2028, October 26, 2029, March 19, 2030, March 24, 2030, April 6, 2031, June 27, 2031, September 9, 2031, February
21, 2032, November 1, 2032, and November 22, 2033, respectively. In addition to these issued patents, we are pursuing additional
protection for our OPV-related portfolio in over 30 pending U.S. patent applications.
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 collaborative research and development with industry
partners, including existing compound semiconductor solar cell manufacturers. Our engineering team is in position to support the
transfer of technologies from university laboratories to implementation in industry partners’ commercial product designs
and fabrication processes.
The engineering team is 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.
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 tasked with serving several key functions, including working closely with the Company’s
industry partners to integrate and customize our proprietary processes and technologies into the partner’s existing product
designs and fabrication processes. In addition, the Company is pursuing commercialization efforts in the emerging IoT market with
solar powered sensors. In conjunction with facilitating technology transfer, our engineering team is working 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.
In addition, our dedicated OPV team is
in the process of building OPV solar cells and prototypes to prove the efficacy of the technology.
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 $10 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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Cost cutting and containment to reduce our cash operating expenses;
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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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Focusing research and development investments on near-term commercialization opportunities;
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Collaborating with strategic partners to accelerate joint development and licensing of our technologies; and
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Raising adequate capital (approximately $10 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. The Company remains focused on increasing its revenue
through joint development agreements and license agreements with industry partners. 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, 90 GW in 2017 and are forecast to reach 108 GW in 2018.
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 and IoT applications for solar
powered sensors and devices. 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
as well as IoT applications for solar powered sensors and devices.
Global BIPV installations were 4.9 GW in 2017 and are projected to increase to 11.1 GW in 2020, according
to Science Direct Energy Procedia (2017) 993-999.. 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 seven full-time personnel – our Chief Executive Officer,
Executive Chief Financial Officer, four 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.
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 2017 and 2016, our independent registered public accounting firm
expressed substantial doubt about our ability to continue as a going concern. The Company had current liabilities of $10,087,199
and current assets of $147,200 as of December 31, 2017. As of December 31, 2017, the Company had a working capital deficit of $9,939,999
and an accumulated deficit of $216,545,120. We generated revenues of $199,080 and $115,400 for the years ended December 31, 2017
and 2016, respectively, 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 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
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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
$3.4 million in outstanding accounts payable and accrued liabilities as of December 31, 2017.
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 have entered into convertible note transactions which contain
variable conversion prices which could result in substantial dilution to our shareholders.
As disclosed in our filings with the SEC, we have entered into a
number of financing transactions in which we have sold convertible notes which, if not paid by the stipulated maturity date, can
convert into shares of our common stock at a significant discount to the market price. In connection with each of these transactions,
we have been required to reserve a significant number of shares for conversion with our transfer agent in the event that conversion
occurs. For instance, in a transaction on January 23, 2018 for a $130,000 convertible note, we reserved 13,944,630 shares of our
common stock.
While the Company plans to repay each of these convertible notes prior to maturity, and in fact has paid
off previous notes with similar terms, there can be no assurance that monies will be available to do so as the Company needs to
raise additional capital. In the event any of these notes are converted by their holders and such holders sell our common stock
in the market, it is anticipated that this will result in a substantial decrease in our stock price and substantial dilution to
our shareholders as a result of the discounted prices at which the holders will obtain our common stock. The more stock that is
sold by a holder of these notes, the more likely it is that our stock price will be substantially lowered by such selling activity
as the market for our common stock is not well developed or active.
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, 2017, we had total indebtedness
of approximately $6.7 million. Our substantial indebtedness could have important consequences to our stockholders. For example,
it makes it more difficult to raise additional equity or debt capital; it could require us to dedicate a substantial portion of
our cash flow from operations, when and if such cash flow commences 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 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.
As 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, 2017, there were outstanding
warrants to purchase 79,381,367 shares of our common stock. Furthermore, as of December 31, 2017, outstanding warrants to purchase
a total of 17,888,500 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 7,333,500 shares of our common stock, as of December 31, 2017,
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, 2017, the
Company had outstanding options to purchase 215,000 shares of our common stock, with a weighted average exercise price of $0.65
per share, and convertible notes outstanding in the aggregate amount of $2,253,184, 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.
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 was 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 have settled the matter. Pursuant to the settlement, all claims against
the Company have been dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and a promissory
note for $125,000. This resulted in a loss on settlement of $633,292. This note is currently in default and accruing interest at
12% per annum.
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 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
|
|
Fiscal Year 2017
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
0.95
|
|
|
$
|
0.41
|
|
Second Quarter
|
|
$
|
0.80
|
|
|
$
|
0.35
|
|
Third Quarter
|
|
$
|
0.53
|
|
|
$
|
0.33
|
|
Fourth Quarter
|
|
$
|
0.48
|
|
|
$
|
0.18
|
|
Common Stock
As of the date of this Report, the Company
had 69,069,778 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 769 record holders of our common
stock, par value $.0001, issued and outstanding as of December 31, 2017.
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 79,381,367 shares of our common stock as of December 31, 2017. 77,781,367 warrants are 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 215,000 shares of our Common Stock issued and outstanding as of December 31, 2017. 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
Private
Placement of the Company’s Notes
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 $0.50 conversion
price and 200,000 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 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 5-year term. The Note automatically converted by its terms 30 days after issuance, on April 8, 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 $0.50 conversion
price and 5-year warrants with an exercise price of $0.50 and a cashless conversion feature.
On March 9, 2017,
the Company entered into note purchase agreements with an investor pursuant to which the investor purchased a promissory note from
the Company in exchange for $150,000, and a warrant to purchase 300,000 shares of the company’s common stock, respectively,
with a $0.50 exercise price and 5-year term. The Note automatically converted by its terms 30 days after issuance, on April 9,
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
$0.50 conversion price and 5-year warrants with an exercise price of $0.50 and a cashless conversion feature.
On March 12, 2017,
the Company entered into note purchase agreement with an investor pursuant to which the investor purchased a promissory note from
the Company in exchange for $100,000, respectively, and a warrant to purchase 200,000 shares of the Company’s common stock,
respectively, with a $0.50 exercise price and 5-year term. The Note automatically converted by its terms 30 days after issuance,
on April 12, 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 $0.50 conversion price and 5-year warrants with an exercise price of $0.50 and a cashless conversion feature.
On March 7, 2017,
the Company issued a Non-Convertible Promissory Note for $120,000 to an investor in exchange for $120,000. 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
$6,000 in cash within three days of the expiration of such note.
On
April 8, 2017, pursuant to an automatic conversion of a $200,000 promissory note originally issued on March 8, 2017, into an investment
in the principal amount of the note in the Company’s convertible notes and warrants, upon automatic conversion, an investor
was issued a $200,000 one year promissory note, convertible into shares of the Company’s Common Stock at a $0.50 conversion
price and 5-year warrants to purchase 200,000 shares of the Company’s Common Stock with an exercise price of $0.50 and a
cashless conversion feature.
On
April 9, 2017, pursuant to an automatic conversion of a $150,000 promissory note originally issued on March 9, 2017, into an investment
in the principal amount of the note in the Company’s convertible notes and warrants, an investor was issued a $150,000 one
year promissory note convertible into shares of the Company’s Common Stock at a $0.50 conversion price and 5-year warrants
to purchase 150,000 shares of the Company’s Common Stock with an exercise price of $0.50 and a cashless conversion feature.
On
April 12, 2017, pursuant to an automatic conversion of a $100,000 promissory note originally issued on March 12, 2017, into an
investment in the principal amount of the note in the Company’s convertible notes and warrants, upon automatic conversion,
an investor was issued a $100,000 one year promissory note 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 the Company’s Common Stock with an exercise price of $0.50
and a cashless conversion feature.
On
April 2, 2017, the Company issued a Non-Convertible Promissory Note for $100,000 to an investor in exchange for $100,000. The 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 $5,000 in cash within three days of the expiration of such note.
On April 24, 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 $58,500. On April 25, 2017, the Company issued Power Up a $58,500 convertible
promissory note. This note entitles the holder to 12% interest per annum and matures on February 10, 2018. Power Up may convert
the note into common stock beginning on the date which is 180 days from the issuance date of the note, at a price equal to 61%
of the average of the lowest two trading prices during the 15 trading day period ending on the last complete trading date prior
to the date of conversion, provided, however, that Power Up may not convert the note to the extent that such conversion would result
in Power Up’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together
with all shares owned by Power Up and its affiliates. If the Company prepays the note within 30 days of its issuance, the Company
must pay all of the principal at a cash redemption premium of 110%; if such prepayment is made between the 31
st
day
and the 60
th
day after the issuance of the note, then such redemption premium is 115%; if such repayment is made
from the sixty first 61
st
to the 90th day after issuance, then such redemption premium is 120%; if such repayment
is made from the 91
st
to the 120
th
day after issuance, then such redemption premium is 125%; if
such repayment is made from the 121
st
to the 150th day after issuance, then such redemption premium is 130%; and
if such prepayment is after the 151
st
day and before the 181
st
date of issuance of the note then
such redemption premium is 135%. The foregoing descriptions of the Securities Purchase Agreement and note 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 10.2 and 10.3, respectively, to the Company’s quarterly report for the quarter ended March 31, 2017
filed with the SEC on May 10, 2017 and are incorporated by reference herein. In connection with this note, the Company’s
transfer agent reserved 1,018,424 shares of the Company’s common stock, in the event that the note is converted.
On April 25, 2017, the Company borrowed
$115,000 from JSJ Investments, Inc. and issued to JSJ a $115,000 convertible promissory note with a maturity date of January 25,
2018. The interest under the note is 12% and the default interest under the note is 18%. Under the note originally as issued JSJ
was entitled, at its option, to convert all or a portion of the outstanding principal amount and accrued interest of the note
at any time after issuance of the note. However pursuant to an amendment to the note executed on July 28, 2017, a copy of which
is filed herewith as Exhibit 10.9 and is incorporated by reference herein, JSJ now is entitled to convert all or a portion of
the outstanding principal amount and accrued interest under the note, at its option at any time after the 180th day after the
issuance date of the note into shares of the Company’s common stock at a conversion price for each share of common stock
equal to a price which is a 40% discount to the lowest trading price during the 20 days prior to the day that JSJ requests conversion.
JSJ may not convert the Note to the extent that such conversion would result in JSJ’s beneficial ownership being in excess
of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by JSJ and its affiliates.
If the Company prepays the note within 60 days of its issuance, the Company must pay all of the principal at a cash redemption
premium of 110%; if such prepayment is made from the 61
st
to the 91
st
day after issuance, then
such redemption premium is 120%; and if such prepayment is after the one 120
th
date of issuance of the note then
such redemption premium is 140%. The foregoing description of the note is not complete and is qualified in its entirety by reference
to the full text of the form of the note, a copy of which was filed as Exhibit 10.1 to the Company’s quarterly report for
the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and is incorporated by reference herein. In connection with
the issuance of this note, the Company’s transfer agent reserved 2,400,000 shares of the Company’s common stock, in
the event that the note is converted. The Company paid off this note in full on October 19, 2017 resulting in a prepayment
penalty loss of $52,730.
On April 28, 2017, the Company entered
into a Securities Purchase Agreement with Silo Equity Partners Venture Fund, LLC pursuant to which Silo purchased a convertible
promissory note evidencing a loan of $100,000. On April 27, 2017, the Company issued Silo a $100,000 convertible promissory note
evidencing the loan. This note entitles the holder to 8% interest per annum and matures on April 24, 2018. The default interest
under this note is 24%. Silo may convert the note into common stock beginning on the date which is 180 days from the issuance date
of the note, at a price equal to 55% of the lowest two trading prices during the 20 trading day period ending on the last complete
trading date prior to the date of conversion, provided, however, that Silo may not convert the note to the extent that such conversion
would result in Silo’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common
stock together with all shares owned by Silo and its affiliates. If the Company prepays the note within 60 days of its issuance,
the Company must pay all of the principal at a cash redemption premium of 120%; if such prepayment is made between the 61
st
day
and the 121
st
day after the issuance of the note, then such redemption premium is 130%; if such repayment is made
from the 122
nd
to the 181
st
day after issuance, then such redemption premium is 135%. The foregoing
descriptions of the Securities Purchase Agreement and note are not complete and are qualified in their entirety by reference to
the full text of the form of Securities Purchase Agreement and form note, copies of which were filed as Exhibit 10.4 and 10.5,
respectively, to the Company’s quarterly report for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and
are incorporated by reference herein. In connection with this note, the Company’s transfer agent reserved 3,000,000 shares
of the Company’s common stock, in the event that the note is converted.
On May 4, 2017, the Company agreed to borrowed
$315,790 from JMJ Financial 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 amount of the promissory note funded by JMJ on May 4, 2017 was $315,790. Mr. Dean Ledger, our CEO and
sole member of the Company’s board of directors, agreed to personally guarantee this note, pursuant to a Personal Guaranty
and Recourse Agreement entered into between Mr. Ledger and JMJ. In connection with the note, the Company also entered into a Representation
and Warranties Agreement Regarding Debt and Variable Securities, pursuant to which the Company made certain representation and
warranties to JMJ, including that the Company will not issue any debt within 90 days of the issuance of the note without written
consent from JMJ, unless the proceeds of such debt are used to repay the note within 2 business days. In the RW Agreement, the
Company also agreed not to issue any convertible security or any variable security within 90 days of the issuance of the note,
unless the proceeds of same are used to pay off the note in 2 business days. Further subsequent to the issuance of the JMJ Note,
and within 90 days thereof, the Company has issued short term debt and warrants, and has used such funds for operating costs of
the Company’s business. The Company paid off the JMJ Note in full on August 4, 2017. A portion of the funds used to pay off
the JMJ Note were borrowed from a shareholder as further described in Note 6 of the financial statements included herein. The foregoing
descriptions of the note, the Personal Guaranty and Recourse Agreement, and the RW Agreement are not complete and are qualified
in their entirety by reference to the full text of the form of the note, Personal Guaranty and Recourse Agreement, and RW Agreement,
copies of which were filed as Exhibits 10.6, 10.7 and 10.8 to the Company’s quarterly report for the quarter ended March
31, 2017 filed with the SEC on May 10, 2017, and are incorporated by reference herein.
On
June 22, 2017, the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $1,000,000 in
a non-convertible 7-month unsecured promissory note issued on June 22, 2017, and in consideration of the investor making the loan
to the Company as evidenced by the note, the Company issued to the investor, a 10-year warrant to purchase 3,000,000 shares of
the Company’s Common Stock on June 22, 2017. The interest under the note is a cash payment of $40,000.
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 Securities Act of 1933, as amended (the “1933 Act”), for such issuances.
Issuance of Promissory Notes and Warrants
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 converted the note 60
days after issuance on September 15, 2017 into 400,000 shares of Common Stock and a warrant to purchase 400,000 shares of Common
Stock.
On July 25, 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 $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, field with the SEC on August 9, 2017, and are incorporated by reference herein.
On July 28, 2017, the Company entered into
a Loan Agreement with an investor pursuant to which, the investor invested $20,000 in a non-convertible 8-month unsecured promissory
note issued on July 28, 2017, and in consideration of the investor making the loan to the Company as evidenced by the note, the
Company issued to the investor, a 5-year warrant to purchase 60,000 shares of the Company’s Common Stock at an exercise price
of $0.50 on July 28, 2017. The interest under the note is a cash payment of $1,600.
On July 31, 2017, the Company entered into
a Loan Agreement with an investor pursuant to which, the investor invested $100,000 in a non-convertible 10-month unsecured promissory
note issued on July 31, 2017, and in consideration of the investor making the loan to the Company as evidenced by the note, the
Company issued to the investor, a 5-year warrant to purchase 300,000 shares of the Company’s Common Stock at an exercise
price of $0.50 on July 31, 2017. The interest under the note is a cash payment of $8,000.
On August 3, 2017, the Company entered
into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange
for $15,000, and a warrant to purchase 30,000 shares of the Company’s Common Stock, with a $0.50 exercise price and 10-year
term. There is no interest under the promissory note. The promissory note has a clause that automatically converted the note 60
days after issuance, on October 2, 2017 into 30,000 shares of Common Stock and a warrant to purchase 30,000 shares of Common Stock.
On August 10, 2017 the Company entered
into a Loan Agreement with an investor pursuant to which, the investor invested $30,000 in a non-convertible 10-month unsecured
promissory note issued on August 10, 2017, and in consideration of the investor making the loan to the Company as evidenced by
the note, the Company issued to the investor, a 5-year warrant to purchase 90,000 shares of the Company’s Common Stock at
an exercise price of $0.50 on August 10, 2017. The interest under the note is a cash payment of $1,600.
On August 10, 2017, the Company took a
short-term loan for $200,000 from a major shareholder, the proceeds of which were used by the Company to pay off the JMJ note as
further described in the Company’s quarterly report for the quarter ended June 30, 2017, filed with the SEC on August 9,
2017.
On August 21, 2017 the Company entered
into a Loan Agreement with an investor pursuant to which, the investor invested $20,000 in a non-convertible 8-month unsecured
promissory note issued on August 21, 2017, and in consideration of the investor making the loan to the Company as evidenced by
the note, the Company issued to the investor, a 5-year warrant to purchase 60,000 shares of the Company’s Common Stock at
an exercise price of $0.50 on August 21, 2017. The interest under the note is a cash payment of $1,600.
On August 21, 2017 the Company entered
into Note Purchase Agreements with 4 investors pursuant to which, each of the investors invested $50,000 into non-convertible 12-month
unsecured promissory notes, which were issued on August 21, 2017, and pursuant to the agreements, the Company issued to each of
the four investors, 5-year warrants to purchase 300,000 shares of the Company’s Common Stock at an exercise price of $0.50
on August 21, 2017. The interest under each of the notes is a cash payment of $2,000.
On September 7, 2017, the Company entered
into note purchase agreement 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 converted the note 60
days after issuance, on November 6, 2017, into 50,000 shares of Common Stock and a warrant to purchase 50,000 shares of Common
Stock.
On September 26, 2017, the Company entered
into note purchase agreement 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 500,000 shares of the Company’s Common Stock, with a $0.50 exercise price and 5-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.
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 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 $1,191,884 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 for a total of $2,496,478. 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.
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, 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 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 21,
2017, the Company borrowed $108,000 from JSJ Investments, Inc. (“JSJ”) and issued to JSJ a $108,000 convertible promissory
note with a maturity date of November 21, 2018 (the “Note”). The interest rate under the Note is 12% and the default
interest rate under the Note is 18%. Under the Note JSJ is entitled at its option, to convert all or a portion of the outstanding
principal amount and accrued interest of the Note at any time after the 180th day after the issuance date of the Note (the “Pre-Payment
Date”) into shares of the Company’s common stock at a conversion price for each share of common stock a price
which is either $.50 if the conversion is made prior to the Pre-Payment Date or if the conversion is made after the Pre-Payment
Date or pursuant to an event of default under the Note, a price equal to a 42% discount to the lowest trading price during the
20 days prior to the day that JSJ requests conversion. JSJ may not convert the Note to the extent that such conversion would result
in JSJ’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together
with all shares owned by JSJ and its affiliates. If the Company, without any demand from JSJ, prepays the Note within 90
days of its issuance, the Company must pay all of the principal at a cash redemption premium of 135%; if such prepayment is made
from the 91st to the 120th day after issuance, then such redemption premium is 140%; and if such prepayment is after the 121st
date of the issuance of the Note and prior to the Pre-Payment Date, then such redemption premium is 145%, if such prepayment is
made after the Pre-Payment Date and before the maturity date, then such redemption premium is 150%. JSJ can also demand that
the Company pay the principal balance together with all interest accrued on the Note at any time prior to the maturity date of
the Note. In connection with the issuance of this Note, the Company’s transfer agent reserved 4,400,000 shares of the
Company’s common stock, in the event that the Note is converted.
On November 22, 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 $100,000 and received a warrant to purchase 300,000 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 December 12,
2017, the Company issued Power Up a $128,000 convertible promissory note (the “Power Up Note”). The Power Up Note entitles
the holder to 12% interest per annum and matures on September 20, 2018. Power Up may convert the Power Up Note into shares of the
Company’s common stock beginning on the date which is 180 days from the issuance date of the Power Up 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 Power Up 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 Power Up 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 Power Up 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%; and if such repayment is
made from the 91st to the 180th day after issuance, then such redemption premium is 125%. After the expiration of the 180 days
following the issuance, there shall be no further right of pre-payment. In connection with the Power Up Note, the Company’s
transfer agent reserved 4,728,700 shares of the Company’s common stock, in the event that the Power Up Note is converted.
The funds for the Power Up Note were received by the Company on December 15, 2017.
On December 12,
2017, the Company entered into a Securities Purchase Agreement with Morningview Financial, LLC (“MV”) pursuant to which
MV purchased a convertible promissory note evidencing a loan of $100,000. On December 12, 2017, the Company issued MV a $100,000
convertible promissory note (the “MV Note”) which had a purchase price of $95,000 and an original issue discount of
$5,000. The MV Note entitles the holder to 8% interest per annum and matures on December 12, 2018. MV may convert the MV Note at
any time after the issuance date of the note and up until the 180th calendar day after the issuance date of the MV Note into shares
of the Company’s common stock at a conversion price of $.50 per share. After the 180th calendar day after the issuance date
of the MV Note, MV can convert the MV Note into shares of the Company’s common stock, at a price equal to 58% of the lowest
trading price during the 20 trading day period ending on the last complete trading date prior to the date of conversion, provided,
however, that MV may not convert the note to the extent that such conversion would result in MV’s beneficial ownership being
in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by MV and its affiliates.
MV also has the right under the MV note to waive such 4.99% limit and increase this up to 9.99%. If the Company prepays the MV
Note within 90 days of its issuance, the Company must pay all of the principal at a cash redemption premium of 130%; if such prepayment
is made between the 91st day and the 120th day after the issuance of the MV Note, then such redemption premium is 135%; and if
such repayment is made from the 121
st
day after issuance to the 180th day after issuance, then such redemption
premium is 130%. After the expiration of the 180 days following the issuance, there shall be no further right of pre-payment. In
connection with the MV Note, the Company’s transfer agent reserved 8,679,728 shares of the Company’s common stock,
in the event that the MV Note is converted. The funds for the MV Note were received by the Company on December 19, 2017.
On December 15,
2017, the Company entered into a Securities Purchase Agreement with Firstfire Global Opportunities Fund, LLC (“First”)
pursuant to which First purchased a convertible promissory note evidencing a loan of $135,000. On December 15, 2017, the Company
issued First a $135,000 convertible promissory note (the “First Note”). The First Note entitles the holder to 12% interest
per annum and matures nine months from the issuance date. First may convert the First Note at any time after the issuance date
of the First Note and up until the 179
th
calendar date of the issuance of the Fist Note, into shares of the Company’s
common stock at a conversion price of $.50 per share. However, after the earlier of the 180
th
date after issuance
of the First Note or upon the occurrence of an event of default under the First Note, then the conversion price shall be the lower
of $.50 or a price equal to 60% of the lowest trading price during the 20 trading day period ending on the last complete trading
date prior to the date of conversion, provided, however, that First may not convert the note to the extent that such conversion
would result in First’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common
stock together with all shares owned by First and its affiliates. First also has the right under the First Note to waive such 4.99%
limit. If the Company prepays the First Note within 90 days of its issuance, the Company must pay all of the principal at a cash
redemption premium of 135%; if such prepayment is made between the 91st day and the 120th day after the issuance of the First Note,
then such redemption premium is 140%; and if such repayment is made from the 121st day after issuance to the 180th day after issuance,
then such redemption premium is 145%. After the expiration of the 180 days following the issuance, there shall be no further right
of pre-payment. In connection with the First Note, the Company’s transfer agent reserved 20,000,000 shares of the Company’s
common stock, in the event that the First Note is converted. The funds for the First Note were received by the Company on December
21, 2017. Pursuant to the Securities Purchase Agreement with First, on December 15, 2017, the Company also issued to First a warrant
to purchase 100,000 shares of the Company’s common stock at an exercise price of $.50 per share subject to certain anti-dilution
adjustments. The warrant has a 3-year term and expires on December 15, 2020.
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 Securities Act of 1933, as amended (the “1933 Act”), for such issuances.
Issuance of Common Stock and Warrants
In
April of 2017, the Company sold and issued 502,000 shares of its Common Stock and warrants to purchase 502,000 shares of its common
stock in exchange for aggregate proceeds of $251,000.
In
May of 2017, the Company sold and issued 10,000 shares of its Common Stock and warrants to purchase 10,000 shares of its common
stock in exchange for aggregate proceeds of $5,000.
In
June of 2017, the Company sold and issued 162,548 shares of its Common Stock and warrants to purchase 162,548 shares of its common
stock in exchange for aggregate proceeds of $81,274.
In August of 2017, the Company issued 40,498
shares of its Common Stock and warrants to purchase 40,498 shares of its Common Stock in exchange for aggregate proceeds of $20,249.
The above issuances 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
During January 2017, the Company issued
107,000 shares of the Company’s Common Stock upon conversion of certain promissory notes.
During February 2017, the Company issued
64,800 shares of the Company’s Common Stock upon conversion of a certain promissory note.
On February 13, 2017, the Company issued
336,000 shares of the Company’s Common Stock to certain note holders for accrued interest.
During March 2017, the Company issued 600,000
shares of the Company’s Common Stock upon conversion of certain promissory notes.
During March 2017, the Company issued 100,000
shares of the Company’s Common Stock together with warrants to purchase 100,000 shares of the Company’s Common Stock
for aggregate proceeds of $50,000.
On
June 5, 2017, the Company issued 3,400,000 shares of its common stock to an investor pursuant to a letter agreement (the “Letter
Agreement”) executed between the Company and the investor dated June 5, 2017. In the Letter Agreement, the Company and the
investor agreed that the investors loans to the company made from November of 2016 through April of 2017, totaling $1,100,000 are
to be convertible, at the investor’s option, into an investment in the company’s next financing round resulting in gross
proceeds to the Company of at least $1,000,000. Further, pursuant to the Letter Agreement, the Company agreed to provide the investor
with a one-time full ratchet anti-dilution adjustment to the Conversion Shares, as defined below, with a value equal to the Original
Conversion Price, as defined below and as a result issued the 3,400,000 shares of the Company’s Common Stock as set forth
above, based on the lowest priced financing since the offering of the Bridge Notes, as defined below, of $0.50. The Investor previously
invested a total of $6,800,000 in the Company’s 2013 Bridge Debenture Offering (the “Bridge Notes”). The Bridge Notes
were then converted into 6,849,370 shares of the Company’s common stock (the “Conversion Shares”) at a conversion price
of $1.00 (the “Original Conversion Price”) and included interest paid in kind under the Bridge Notes.
The
above issuances 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.
Issuances
Upon Note Conversion
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 $0.50 and a term of 5 years and a cashless conversion feature.
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 $0.50 and a term of 5 years and a cashless conversion feature.
During March 2017, the Company issued warrants
to purchase 600,000 shares of the Company’s Common Stock related to the conversion of certain promissory notes. Such warrants
have an exercise price of $0.50 and a term of 5 years and a cashless conversion feature.
On
April 12, 2017, the aggregate principal and interest of certain convertible notes totaling $450,000 were converted pursuant to
the terms of the notes into 900,000 shares of the Company’s common stock and 900,000 warrants to purchase common stock.
Between
September 15, 2017 and November 25, 2017, the aggregate principal and interest of certain convertible notes totaling $340,000 were
converted pursuant to the terms of the notes into 680,000 shares of the Company’s Common Stock and 900,000 warrants to purchase
common stock.
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 Service Provider Warrants
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 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. As of the date of this report, 10,000 of the warrants have
vested. The warrants have an exercise price of $0.50 and a 5-year term.
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
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 5-year term and are immediately vested.
On
May 10, 2017, the Company appointed Ronald DaVella as the Company’s Chief Financial Officer and a member of its board of
directors effective as of May 15, 2017. In connection with Mr. DaVella’s appointment, the Company entered into an Employment
Agreement with Mr. DaVella on May 18, 2017, pursuant to which the Company agreed to employ Mr. DaVella as the Chief Financial Officer
of the Company for a term of four (4) years (the “Agreement”). Under the Agreement, in addition to other compensation
as further described in the Company’s current report on Form 8-K filed with the SEC on May 18, 2017, Mr. DaVella received
warrants to purchase 1,800,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrants
shall vest in increments of 25% with the first vesting to take place immediate upon execution of the Agreement and each following
vesting to take place on the one-year anniversary of the Agreement over the three (3) years following the agreement.
On July 1, 2017, the Company entered into
an Independent Contractor Services Agreement with a service provider pursuant to which it issued to the service provider on July
1, 2017, a warrant to purchase 50,000 shares of the Company’s Common Stock with a 5-year term and an exercise price of $0.50.
25,000 of the warrant shares vested on July 1, 2017 and the remaining 25,000 shares vested on December 31, 2017.
On August 10, 2017, the Company issued
a warrant to purchase 10,000 shares of its Common Stock with a $0.50 exercise price and a 5- year term to a service provider in
consideration of services provided to the Company.
On September 21, 2017, the Company issued
a warrant to purchase 25,000 shares of 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 September 29, 2017, the Company issued
a warrant to purchase 25,000 shares of 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 4, 2017, the Company issued
a warrant to purchase 50,000 shares of 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 24, 2017, the Company issued
a warrant to purchase 500,000 shares of 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 November 8, 2017, the Company issued
a warrant to purchase 50,000 shares of its Common Stock with a $0.50 exercise price and a 10-year term to four different service
providers (an aggregate of 200,000) in consideration of services provided to the Company.
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
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.
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
November 14, 2017, 15,000 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 15-month period. The options expire in 2027.
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.
Exercise
Notices Received
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.
Issuances Pursuant to Letter Agreements
On July 17, 2017, the Company entered into
a letter agreement with an investor pursuant to which, the Company agreed that the investor’s non-convertible notes totaling
$1,100,000 in the aggregate shall each have their maturity date extended and each note amount has been increased to include accrued
interest on the notes and the Company agreed to issue the investor a warrant to purchase 1,000,000 shares of the Company’s
Common Stock with a 10-year term and an exercise price of $0.50. The new aggregate total of the notes after adding the interest
amount as discussed above is $1,155,000 and the new maturity dates of the notes range from August 27, 2017 to December 4, 2017.
On 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 $0.50 exercise price and a 10 year term.
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, 2017.
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) portable 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 and (g)sensors and other devices for the
internet of things (“IoT”). The Company believes these technologies have been demonstrated in a laboratory environment
with our research partners.
The Company currently holds 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.
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Tandem organic solar cell
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Fullerene acceptors
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Blocking layers
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New materials for visible and infrared sensitivity
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Scalable growth technologies
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Inverted solar cells
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Materials for enhanced light collection via multi-exciton generation
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Mixed layer and nanocrystalline cells
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Solar films, coatings, or paints
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Semi-transparent cells
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Ultra-low cost, ultra-high efficiency, flexible thin film GaAs cells
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Accelerated and recyclable liftoff process
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Cold-weld bonding of GaAs solar cells to plastic substrates and metal foils
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Micro-inverters monolithically integrated into GaAs solar cells
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Low cost, thermo-formed plastic mini-compound parabolic concentrator arrays
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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. 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 NanoFlex
to provide products to customers on its own through a “fab-less” manufacturing model. We believe this “fab-less”
manufacturing model is necessary during the early stages of developing new markets.
We have made contact with major solar cell
and electronics manufacturers world-wide and are finding potential 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 high efficiency thin film solar technologies as our 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 through technology transfer and joint development. 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 serves 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 addition, the Company is pursuing commercialization efforts
in the emerging IoT market with solar powered sensors. 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. In connection with our focus on potential government-sponsored research projects, on June
19, 2017, the Company announced that that it is part of a consortium that was awarded a $5.7 million contract from the Army Research
Laboratory’s Army Research Office to develop high power, flexible, and lightweight solar modules for portable power applications.
The consortium consists of NanoFlex, SolAero, the University of Michigan, and the University of Wisconsin. Pursuant to the foregoing
and as part of the consortium, SolAero was awarded a 4-year contract amounting to $5.7 million with the Army Research Lab (ARL)
to develop solar power mats. SolAero has engaged the Company as a subcontractor for $3.3 million over 4 years of which
$1.6 million will be provided to the University of Michigan as a subcontractor to the Company. The Company’s contract with
SolAero provides for direct reimbursement of the Company’s costs including indirect overheard. 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.
However, there can be no assurance that the Company can effectively pursue such research projects, nor if it can, that such pursuit
will be successful.
Another potential revenue source is from
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 Current Report on Form 8-K filed with the SEC on February 7, 2017,
on February 2, 2017, the Company entered into a License Agreement with SolAero Technologies Corp. (“SolAero”) pursuant
to which, 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 (the “License 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 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 in addition to the ARL Contract.
Near Term Operating Plan
Our near-term focus is on advancing our
product development efforts while containing costs. We require approximately $9 million to $10 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:
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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 ($10 million) to support our activities for at least 12 months.
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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 while suspending our research agreement with the University of
Michigan on August 31, 2017. 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 joint development arrangements that we are
currently pursuing in addition to the ARL contract.
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. In the event that we cannot pay all
of our patent costs, we may lose valuable patents and/or be unable to pursue patent protection for intellectual property we paid
to develop which could jeopardize our ability to commercialize out technologies
Results of Operations
For the years ended December 31, 2017
and December 31, 2016
Revenue
Revenue was $199,080 and $115,400 for the
year ended December 31, 2017 and 2016, respectively. The revenue for 2017 primarily relates to engineering services provided under
the ARL contract. The revenue for 2016 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 $235,202 and $458,576
for the year ended December 31, 2017 and 2016, respectively. This decrease was due to decreased services provided under the Joint
Development Agreement (“JDA”), while the Company focused its engineering efforts on product development for portable
power applications, partially offset by costs related to the ARL contract.
Research and Development Expenses
Research and development expenses were
$708,840 for the year ended December 31, 2017, a 58% decrease from $1,683,464 for the year ended December 31, 2016. The decrease
is attributable to an overall reduction in expense associated with our sponsored research activity including temporary suspension
of our research agreement with the University of Michigan on August 31, 2017 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. Non-cash
expenses recaptured were $51,376 for the year ended December 31, 2017 and non-cash expenses were $1,266,043 for the year ended
December 31, 2016.
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 $1,274,991 for the year ended December 31, 2017, a 16% decrease from $1,525,695 for the year ended December 31, 2016.
The year-over-year decrease is attributable to the timing of application and prosecution of patents and the result of optimizing
our patent portfolio for OPV as discussed earlier.
Legal Settlement Expense
During the year ended December 31, 2017,
the Company recorded a legal settlement expense of $633,292 relating to the settlement of the John Kuhns litigation discussed in
Note 8. The parties settled the matter and preparing 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 $125,000
in cash.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
were $2,273,440 for the year ended December 31, 2017, a 23% decrease from $2,930,222 for the year ended December 31, 2016. 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 $767,964 and $1,063,248 and for the year ended December 31, 2017 and 2016, respectively.
Other Expense
Other expense for the year ended December
31, 2017 was $5,876,781 as compared to $582,804 for the year ended December 31, 2016. 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, 2017 was $10,803,466, a 53% increase from $7,065,361 for the year ended December 31, 2016. The change in net loss is impacted
by non-cash expenses, including the gain(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, 2017, we had cash and
cash equivalents of $61,459 and a working capital deficit of $9,939,999, as compared to cash and cash equivalents of $2,986 and
a working capital deficit of $19,246,667 as of December 31, 2016. The decrease in working capital is attributable to the early
adoption of ASU 2017-11 and the elimination of derivative liabilities on the balance sheet.
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
and GaAs semiconductor-based solar cells. In the next 12 months,we need to raise approximately $10 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 $483,185 to $5,105,581 for the year ended December 31, 2017, compared to $4,622,396 for the year ended December 31, 2016. The
cash used in operating activities was attributable primarily to increased net loss, loss on extinguishment of debt, a decrease
in interest expense related to conversion of debt, a decrease in warrants and options issued as compensation, offset by the change
in fair value of derivative liabilities.
Net cash used in investing activities was
$11,060 and $0 during the years ended December 31, 2017, and 2016, respectively. This amount represents purchases of property and
equipment.
Net cash provided by financing activities
was $5,175,114 and $4,619,127 during the years ended December 31, 2017 and 2016, respectively. For the year ended December 31,
2017 this includes proceeds from the sale of common shares and warrants of $407,524, borrowings on related party debt of $1,800,000,
borrowings on promissory note debt of $1,370,000, borrowings on convertible debt of $2,353,200, advances received from related
party, partially offset by repayments on convertible debt of $589,290 and advances repaid to related party of $304,820. 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.
Going Concern
The Company has only generated limited
revenues to date. The Company has a working capital deficit of $9,939,999 and an accumulated deficit of $216,545,120 as of December
31, 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.
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 revenue
recognition, 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 consolidated 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 JDA and the ARL contract is 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, 2017 and 2016, 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, 2017 and 2016 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:
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Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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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
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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.
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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, 2017, 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, or independent director 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;
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, 2017.
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 have created a position to segregate
duties consistent with control objectives and increased our personnel resources and technical accounting expertise within the accounting
function.
(2) 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 (‘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 and (g)sensors and other devices for the internet of things (“IoT”)
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
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, derivative valuation and long lived assets.
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.
Note
2: Going Concern
The
Company has only generated limited revenues to date. The Company has a working capital deficit of $9,939,999 and an accumulated
deficit of $216,545,120 as of December 31, 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.
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 wholly owned subsidiary. Intercompany transactions
and balances are eliminated at consolidation.
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.
Basic and Diluted Earnings per share
Net loss per share is provided in accordance
with FASB ASC 260-10, “Earnings per Share”. Basic loss per share is computed by dividing losses available to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share gives effect to
all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares
if their effect is anti-dilutive.
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.
Related Party Transactions
FASB ASC 850, “Related Party Disclosures”
requires companies to include in their financial statements disclosures of material related party transactions. The Company discloses
all material related party transactions. Related parties are defined to include any principal owner, director or executive officer
of the Company and any immediate family members of a principal owner, director or executive officer.
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 property and equipment, 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 from one customer.
Revenue
Recognition
The
Company recognizes 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.
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, 2017 and 2016, 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.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of December 31,
2017 and December 31, 2016:
|
|
Fair Value Measurements as of December 31,
2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
11,985,141
|
|
|
$
|
18,207,333
|
|
Change in fair value
|
|
|
|
|
|
|
(7,326,535
|
)
|
Additions reclassified from equity
|
|
|
|
|
|
|
559,900
|
|
Adoption of ASU 2017-11
|
|
|
(11,985,141
|
)
|
|
|
|
|
Additions recognized as compensation expense
|
|
|
-
|
|
|
|
544,443
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
11,985,141
|
|
Note
5: 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 evaluation
of the impact of ASU 2014-09 on existing contracts with our customers is complete and the adoption of the new guidance will
not have a material impact to our consolidated financial statements. We have identified changes to our business
processes and internal controls relating to contracts and disclosures that are needed upon the adoption of the new guidance.
We adopted the new guidance on January 1, 2018, using the modified retrospective method applied to those contracts which were
not completed as of that date. Upon adoption, there was no cumulative effect of adopting this guidance as an
adjustment to the opening balance of accumulated deficit. We will continue to monitor industry activities and any additional
guidance provided by regulators, standards setters, or the accounting profession and adjust our assessment and implementation
plans accordingly.
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 adopted the standard on January 1, 2018
and does not anticipate this amendment will have a material impact on its consolidated financial statements.
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 early adopted the ASU 2017-11 in the three months ending December 31, 2017. See below.
Adoption
of ASU 2017-11
The Company changed its method of accounting
for the debt and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a modified
retrospective basis. Accordingly, the Company reclassified the warrant derivative and conversion option derivative liabilities
to additional paid in capital on its January 1, 2017 consolidated balance sheets totaling $9,156,956 and recorded the cumulative
effect of the adoption to the beginning balance of accumulated deficit of $2,828,185.
|
|
Convertible
Debt
|
|
|
Warrant Derivative
Liability
|
|
|
Conversion
Option Liability
|
|
|
Additional Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
Balance, January 1, 2017 (Prior to adoption of
ASU 2017-11)
|
|
$
|
1,440,206
|
|
|
$
|
8,828,405
|
|
|
$
|
3,156,736
|
|
|
$
|
189,324,088
|
|
|
$
|
208,569,839
|
|
Reclassified derivative liabilities and cumulative effect of adoption
|
|
|
-
|
|
|
|
(8,828,405
|
)
|
|
|
(3,156,736
|
)
|
|
|
9,156,956
|
|
|
|
2,828,185
|
|
Balance, January 1, 2017 (After adoption of ASU 2017-11)
|
|
$
|
1,440,206
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
198,481,044
|
|
|
$
|
211,398,024
|
|
Note
6: 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 December 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 $156,792 and $78,396 associated with the amortization of debt discount for the year ended December 31, 2017 and 2016,
respectively. This note is currently past due and in default. The Company is in process of extending the maturity date.
On
June 22, 2017, the Company issued a promissory note of $1,000,000. The term of the note expired seven months from the effective
date and had 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
$606,542 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 $546,345 associated with the amortization of debt discount for the year ended December 31, 2017.
In January 2018, the maturity date was extended to July 14, 2018 in exchange for the issuance of 3,000,000 warrants for the Company’s
common shares.
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 $7,118 associated with the amortization of debt discount
for the year ended December 31, 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 $27,316 associated with the amortization of debt discount
for the year ended December 31, 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 $4,343 associated with the amortization of debt discount for
the year ended December 31, 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 $5,370 associated with the amortization of debt discount
for the year ended December 31, 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 $49,124 associated with the amortization of debt
discount for the year ended December 31, 2017.
On August 29, 2017, the Company issued
1,750,000 shares of the Company’s Common Stock and a promissory note for $125,000 for a legal settlement. At December 31,
2017, these shares were accounted for as common stock payable with a value of $681,625 as they were not yet issued. at This note
is currently in default and is accruing interest at 12% per annum.
As of December 31, 2017, and December 31,
2016, the aggregate outstanding balance of non-convertible notes payable was $1,895,000 and $400,000, and unamortized discount
was $309,286 and $156,792, respectively. Total cash proceeds of $1,370,000 were received during the year ended December 31, 2017.
Total amortization of the debt discount for the year ended December 31, 2017 was $796,410.
Notes
Payable – Related Party
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. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.
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. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.
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.
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 $1,191,884 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 for a final amount of $2,496,478. 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 relative fair value of the 1,000,000 warrants
was $247,586 which was recorded as a loss on extinguishment of debt since the change in value was greater than 10%. This note also
gave rise to a beneficial conversion feature of $116,208 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 $1,132,999 associated with the warrants that are to be issued upon conversion, which is to be
recognized only upon conversion. 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.
As of December 31, 2017, and December 31,
2016, the aggregate outstanding balance of notes payable to related parties was $2,496,478 and $500,000, respectively. For
the year ended December 31, 2017, total new borrowings on related party debt was $1,800,000 and accrued interest added to principal
was $196, 479.
Advances
– Related Party
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 accrue interest at 6% and are payable upon demand. The Company paid interest of $16,678
during the year ended December 31, 2016.
During
the year ended December 31, 2017, the Company received advances from its Chief Executive Officer totaling $138,500 and repaid
advances totaling $304,820. Such advances do not accrue interest and are payable upon demand. The Company paid interest of $25,226
during the year ended December 31, 2017.
As
of December 31, 2017, and 2016, the aggregate outstanding balance of advances to related parties was $343,680 and $510,000, respectively.
Convertible
Notes Payable
In
addition to the 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 full
principal balance of the note was converted pursuant to the terms of the note on November 22, 2016.
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. The full principal balances of these notes were converted pursuant to the terms of the notes during the second
and third quarter of 2016.
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. This note is currently past due and in default. The Company is in process of extending the maturity date.
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. The full principal balances of these notes were converted pursuant to the terms
of the notes during the third and fourth quarter of 2016.
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. The full principal balance of this note was converted
pursuant to the terms of the note on March 9, 2017.
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.
The full principal balances of these notes were converted pursuant to the terms of the notes through the first quarter of 2017.
$24,761 of the warrant expense was recognized upon conversion during 2017.
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 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.
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. The full principal balance of the note was converted pursuant to the terms of the note on March 7, 2017.
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.
The full principal balance of the note was converted pursuant to the terms of the note on April 12, 2017.
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. The full principal balance of the note was converted pursuant to the terms of the note on April 12,
2017.
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. The full principal balance of the note was converted pursuant to the terms of the note on April 12, 2017.
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 resulting
in a prepayment penalty loss recorded as loss on debt extinguishment of $25,070.
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 resulting in a prepayment penalty loss recorded
as loss on debt extinguishment of $52,730.
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 resulting in a prepayment penalty loss recorded as loss on debt extinguishment
of $40,030.
On May 4, 2017, the Company borrowed $315,790
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.
The full principal balance of the note was converted pursuant to the terms of the note on October 2, 2017.
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. The
full principal balance of the note was converted pursuant to the terms of the note on November 6, 2017.
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. The full principal balance of the note was converted pursuant to the terms of the note on November 25, 2017.
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. The relative fair value of each of the 75,000 warrants was $13,674 which was recognized as a discount
to the debt. The notes also gave rise to a beneficial conversion feature of $4,674 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 notes.
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.
The relative fair value of the 75,000 warrants was $13,446 which was recognized as a discount to the debt. The notes also gave
rise to a beneficial conversion feature of $3,446 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 notes.
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. The relative
fair value of the 75,000 warrants was $13,796 which was recognized as a discount to the debt. The notes also gave rise to a beneficial
conversion feature of $4,796 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 notes.
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. The relative
fair value of the 150,000 warrants was $26,879 which was recognized as a discount to the debt. The notes also gave rise to a beneficial
conversion feature of $5,379 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 notes.
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 at which time
an additional warrant to purchase 12,500 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year term
were issued. The relative fair value of the 37,500 warrants was $6,097 which was recognized as a discount to the debt. All debt
discounts are being recognized on a straight-line basis over the term of the notes.
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 at which
time an additional warrant to purchase 12,500 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year
term were issued. The relative fair value of the 37,500 warrants was $6,097 which was recognized as a discount to the debt. All
debt discounts are being recognized on a straight-line basis over the term of the notes.
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 at which time
an additional warrant to purchase 20,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year term
were issued. The relative fair value of the 60,000 warrants was $11,074 which was recognized as a discount to the debt. The notes
also gave rise to a beneficial conversion feature of $824 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 notes.
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 at which time
an additional warrant to purchase 75,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year term
were issued. The relative fair value of the 225,000 warrants was $43,350 which was recognized as a discount to the debt. The notes
also gave rise to a beneficial conversion feature of $15,600 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 notes.
On November 21,
2017, the Company borrowed $108,000 from JSJ Investments, Inc. (“JSJ”) and issued to JSJ a $108,000 convertible promissory
note with a maturity date of November 21, 2018 (the “Note”) and an original issue discount of $5,000. The interest
rate under the Note is 12% and the default interest rate under the Note is 18%. Under the Note JSJ is entitled at its option, to
convert all or a portion of the outstanding principal amount and accrued interest of the Note at any time after the 180th day after
the issuance date of the Note (the “Pre-Payment Date”) into shares of the Company’s common stock at a conversion
price for each share of common stock a price which is either $0.50 if the conversion is made prior to the Pre-Payment Date or if
the conversion is made after the Pre-Payment Date or pursuant to an event of default under the Note, a price equal to a 42% discount
to the lowest trading price during the 20 days prior to the day that JSJ requests conversion. JSJ may not convert the Note to the
extent that such conversion would result in JSJ’s beneficial ownership being in excess of 4.99% of the Company’s issued
and outstanding common stock together with all shares owned by JSJ and its affiliates. If the Company, without any demand
from JSJ, prepays the Note within 90 days of its issuance, the Company must pay all of the principal at a cash redemption premium
of 135%; if such prepayment is made from the 91st to the 120th day after issuance, then such redemption premium is 140%; and if
such prepayment is after the 121st date of the issuance of the Note and prior to the Pre-Payment Date, then such redemption premium
is 145%, if such prepayment is made after the Pre-Payment Date and before the maturity date, then such redemption premium is 150%.
JSJ can also demand that the Company pay the principal balance together with all interest accrued on the Note at any time prior
to the maturity date of the Note. In connection with the issuance of this Note, the Company’s transfer agent reserved
4,400,000 shares of the Company’s common stock, in the event that the Note is converted.
On November 22, 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 $100,000 and received a warrant to purchase 300,000 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 at which time
an additional warrant to purchase 100,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year
term were issued... The relative fair value of the 300,000 warrants was $58,824 which was recognized as a discount to the debt.
The notes also gave rise to a beneficial conversion feature of $17,846 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 notes.
On December 12,
2017, the Company issued Power Up a $128,000 convertible promissory note (the “Power Up Note”). The Power Up Note entitles
the holder to 12% interest per annum, a default interest rate of 22% and matures on September 20, 2018. Power Up may convert the
Power Up Note into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of
the Power Up 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 Power Up
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 Power
Up 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 Power Up 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%;
and if such repayment is made from the 91st to the 180th day after issuance, then such redemption premium is 125%. After the expiration
of the 180 days following the issuance, there shall be no further right of pre-payment. In connection with the Power Up Note, the
Company’s transfer agent reserved 4,728,700 shares of the Company’s common stock, in the event that the Power Up Note
is converted. The funds for the Power Up Note were received by the Company on December 15, 2017.
On December 12,
2017, the Company entered into a Securities Purchase Agreement with Morningview Financial, LLC (“MV”) pursuant to which
MV purchased a convertible promissory note evidencing a loan of $100,000. On December 12, 2017, the Company issued MV a $100,000
convertible promissory note (the “MV Note”) which had a purchase price of $95,000 and an original issue discount of
$5,000. The MV Note entitles the holder to 8% interest per annum, a default interest rate of 18% and matures on December 12, 2018.
MV may convert the MV Note at any time after the issuance date of the note and up until the 180th calendar day after the issuance
date of the MV Note into shares of the Company’s common stock at a conversion price of $0.50 per share. After the 180th calendar
day after the issuance date of the MV Note, MV can convert the MV Note into shares of the Company’s common stock, at a price
equal to 58% of the lowest trading price during the 20 trading day period ending on the last complete trading date prior to the
date of conversion, provided, however, that MV may not convert the note to the extent that such conversion would result in MV’s
beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares
owned by MV and its affiliates. MV also has the right under the MV note to waive such 4.99% limit and increase this up to 9.99%.
If the Company prepays the MV Note within 90 days of its issuance, the Company must pay all of the principal at a cash redemption
premium of 130%; if such prepayment is made between the 91st day and the 120th day after the issuance of the MV Note, then such
redemption premium is 135%; and if such repayment is made from the 121
st
day after issuance to the 180th day after
issuance, then such redemption premium is 130%. After the expiration of the 180 days following the issuance, there shall be no
further right of pre-payment. In connection with the MV Note, the Company’s transfer agent reserved 8,679,728 shares of the
Company’s common stock, in the event that the MV Note is converted. The funds for the MV Note were received by the Company
on December 19, 2017.
On December 15,
2017, the Company entered into a Securities Purchase Agreement with Firstfire Global Opportunities Fund, LLC (“First”)
pursuant to which First purchased a convertible promissory note evidencing a loan of $135,000. On December 15, 2017, the Company
issued First a $135,000 convertible promissory note (the “First Note”). The First Note entitles the holder to 12% interest
per annum and matures nine months from the issuance date. First may convert the First Note at any time after the issuance date
of the First Note and up until the 179
th
calendar date of the issuance of the Fist Note, into shares of the Company’s
common stock at a conversion price of $0.50 per share. However, after the earlier of the 180
th
date after issuance
of the First Note or upon the occurrence of an event of default under the First Note, then the conversion price shall be the lower
of $0.50 or a price equal to 60% of the lowest trading price during the 20 trading day period ending on the last complete trading
date prior to the date of conversion, provided, however, that First may not convert the note to the extent that such conversion
would result in First’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common
stock together with all shares owned by First and its affiliates. First also has the right under the First Note to waive such 4.99%
limit. If the Company prepays the First Note within 90 days of its issuance, the Company must pay all of the principal at a cash
redemption premium of 135%; if such prepayment is made between the 91st day and the 120th day after the issuance of the First Note,
then such redemption premium is 140%; and if such repayment is made from the 121st day after issuance to the 180th day after issuance,
then such redemption premium is 145%. After the expiration of the 180 days following the issuance, there shall be no further right
of pre-payment. In connection with the First Note, the Company’s transfer agent reserved 20,000,000 shares of the Company’s
common stock, in the event that the First Note is converted. The funds for the First Note were received by the Company on December
21, 2017. Pursuant to the Securities Purchase Agreement with First, on December 15, 2017, the Company also issued to First a warrant
to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.50 per share subject to certain anti-dilution
adjustments. The warrant has a 3-year term and expires on December 15, 2020. The relative fair value of the 100,000 warrants was
$31,127 which was recognized as a discount to the debt. The notes also gave rise to a beneficial conversion feature of $18,977
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 notes.
The Company intends
to pay off the JSJ Note, Power Up Note, the MV Note and the First Note prior to the conversion of these notes with funding it plans
to raise from additional financings. If the Company does not make such prepayments of these notes, it shall be subject to the redemption
premiums set forth in each note as described above for each such note. Further, if either the Power Up Note, the MV Note or the
First Note are converted prior to the Company paying off such notes, it would lead to substantial dilution to the Company’s
shareholders as a result of the conversion prices for such notes being below the market price. There can be no assurance that the
additional funds will be available to the Company when needed to pay of these notes, or if available, on terms that will be acceptable
to the Company or its shareholders. If the Company fails to obtain such additional financing on a timely basis, the noteholders
may convert their notes and sell the underlying shares which may result in significant dilution to shareholders due to the conversion
discount, as well as a significant decrease in our stock price.
During the year ended December 31, 2017,
the full principal balances of certain notes totaling $1,173,500 and accrued interest of $4,800 were converted pursuant to the
terms of the notes into 2,351,800 shares of the Company’s common stock and 2,351,800 warrants to purchase common stock. Upon
conversion, the Company accelerated the recognition of all remaining debt discount and also recognized additional interest expense
of $210,966 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.,
During the year ended December 31, 2017, the Company borrowed $2,353,200 and repaid $589,290 on convertible
notes. Aggregate amortization of the discounts on the convertible notes for the year ended December 31, 2017 and 2016 was $1,312,589
and $2,196,621, respectively. The amortization for the year ended December 31, 2017 included $30,304 of amortization of deferred
financing costs. As of December 31, 2017, and December 31, 2016, the aggregate outstanding balance of convertible notes payable
was $2,203,184 and $1,440,206, respectively, net of unamortized discounts of $305,816and $343,294. The total beneficial conversion
feature debt discount from convertible notes for the year ended December 31, 2017 was $1,265,021.
Derivative Liabilities - Convertible
Notes
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.
As of January 1, 2017, The Company changed
its method of accounting for the debt and warrants through the early adoption of ASU 2017-11. The Company reclassified the $3,156,736
conversion option derivative liabilities to additional paid in capital on its January 1, 2017 consolidated balance sheets. See
Note 5 for details.
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,
|
|
2017
|
|
2016
|
Volatility
|
136.85
% - 189.00%
|
|
135.41%
- 232.51%
|
Risk-free
interest rate
|
1.24%
- 1.47%
|
|
0.45%
- 1.47%
|
Expected
term
|
1
- 2.7 years
|
|
1
- 4 years
|
The
2017 values in the table above include the nine months ended September 30, 2017. The fourth quarter was not included because of
the early adoption of ASU-2017-11.
Accounts
Payable - Related Party
As
of December 31, 2017, and 2016, there is $12,372 and $2,470, respectively, due to related parties, which is non-interest bearing
due on demand.
Note
7. Equity
Common
Stock
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.
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 $0.50 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.
On December 15, 2017, the Company issued
22,908 shares of its common stock to a consultant pursuant to a consulting agreement. The Company fair valued the stock using market
price at issuance date and recorded a total of $10,000.
During the year ended December 31, 2017,
the Company issued an aggregate of 2,351,800 shares of its common stock related to the conversion of $1,173,500 of principal and
$4,800 of accrued interest on convertible notes.
During the year ended December 31, 2017,
the Company sold an aggregate of 815,046 units, at $0.50 per unit for aggregate proceeds of $407,524. 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 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 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.
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.
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 November 14, 2017, 15,000 stock options
were granted to an employee of the Company. The options vest on a monthly basis of 1,000 per month over a 15-month period. The
options expire in 2017.
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:
|
Year
Ended December 31,
|
|
2017
|
|
2016
|
Volatility
|
135.79%
-146.26%
|
|
144.36%
|
Risk-free
interest rate
|
2.08%
|
|
1.32%
|
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, 2017
and 2016, the Company recognized expense of $31,426 and $19,157, respectively, associated with stock option awards. At December
31, 2017, future stock compensation expense (net of estimated forfeitures) not yet recognized was $103,487 and will be recognized
over a weighted average remaining vesting period of 2.8 years.
A
summary of stock option activity during the year ended December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of Shares
|
|
|
Exercise
Price
|
|
|
Contractual Life (years)
|
|
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
|
|
Granted
|
|
|
115,000
|
|
|
|
0.54
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
215,000
|
|
|
|
0.65
|
|
|
|
9.0
|
|
Exercisable at December 31, 2017
|
|
|
54,000
|
|
|
$
|
0.67
|
|
|
|
8.6
|
|
The
intrinsic value of the Company’s stock options outstanding was $0 and $22,500 at December 31, 2017 and 2016, respectively.
Warrants
Employee
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 $1.00 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 $334,696 was recognized during the year ended December 31,
2017. In addition, $380,548 of expense was reversed during the quarter ended June 30, 2017 related to the forfeited warrants. Warrant
expense of $1,063,148 was recognized during the year ended December 31, 2016. The agreement contains an anti-dilution provision
and therefore the exercise price was reset to $0.50 per share during the year ended December 31, 2017.
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 $384,615 was recognized during the year ended December 31, 2017, respectively.
On November 8, 2017, the Company issued
warrants to purchase 50,000 shares 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. The fair
value of the warrants in aggregate was determined to be $60,839 using the Black-Scholes option and were recognized as expense during
the year ended December 31, 2017.
Total warrant expense for employee warrants
of non-forfeited tranches was $719,311 for the year ended December 31, 2017. Total warrant expense recorded for the year ended
December 31, 2017 was $397,044.
Non-Employee Warrants
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 600,000 Warrants Shares that vested November 4, 2017 was $183,660 and was recognized
as expense during the year ended December 31, 2017. For the year ended December 31, 2017, total warrant expense recaptured was
$138,094. For the year ended December 31, 2016, total warrant expense recognized was $663,184. The agreement contains an anti-dilution
provision and therefore the exercise price was reset to $0.50 per share 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 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 agreement contains an anti-dilution provision
and therefore the exercise price was reset to $0.50 per share during the year ended December 31, 2016. 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. During the year December 31, 2017, $52,457 of expensed
was recaptured.
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. The agreement contains an anti-dilution provision and therefore the exercise price was reset to $0.50 per share 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.
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 which was recognized as expense during the year
ended December 31, 2017.
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 which was recognized as expense during the year ended December 31, 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 which was recognized as expense during the year ended December 31, 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
vested on December 31, 2017. The fair value of the warrants was determined to be $16,192 using the Black-Scholes option pricing
model which was recognized as expense during the year ended December 31, 2017.
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 $639,617 associated with the amortization of debt discount on the notes and warrants issued during the current year
for the year ended December 31, 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 was recognized as expense during the year ended December
31, 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 was recognized as expense during the year ended December 31, 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 year ended December 31, 2017.
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. The fair value of the warrants was determined to be $14,959 using the Black-Scholes option
and were recognized as expense during the year ended December 31, 2017.
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. The fair value of the warrants was determined to be $150,351 using
the Black-Scholes option and were recognized as expense during the year ended December 31, 2017.
During the year ended December 31,
2017, the aggregate principal and interest of certain convertible notes totaling $1,178,300 were converted pursuant to the terms
of the notes into 2,351,800 shares of the Company’s common stock and 2,351,800 warrants to purchase common stock. See details
in Note 2.
The
Company recorded a total of $195,773 on warrants issued to non-employees for services provided during the year ended December
31, 2017.
The
following summarizes the warrant activity for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (in years)
|
|
|
Value
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
19,626,846
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(626,000
|
)
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
79,381,367
|
|
|
$
|
0.51
|
|
|
$
|
4.4
|
|
|
$
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2017
|
|
|
77,781,367
|
|
|
$
|
0.64
|
|
|
$
|
4.4
|
|
|
$
|
10,700
|
|
Derivative
Liabilities - Warrants
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.
As
of January 1, 2017, The Company changed its method of accounting for the debt and warrants through the early adoption of ASU 2017-11.
The Company reclassified the $8,828,405 warrant derivative liabilities to additional paid in capital on its January 1, 2017 consolidated
balance sheets. See Note 5 for details.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
Year
Ended December 31,
|
|
2017
|
|
2016
|
Volatility
|
139.5
% - 200.90%
|
|
129.70
% - 192.70%
|
Risk-free
interest rate
|
1.31%
- 2.25%
|
|
0.44
- 2.45%
|
Expected
term
|
1.25
- 8.6 years
|
|
2
- 10 years
|
The
2017 values in the table above include the nine months ended September 30, 2017. The fourth quarter was not included because of
the early adoption of ASU-2017-11.
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. Such research agreements were suspended on August 31, 2017 and replaced with a time and
materials contract for access to Michigan’s Labs by the Company’s technicians.
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,
|
|
|
|
2018
|
|
|
75,000
|
|
2019
|
|
|
100,000
|
|
2020
|
|
|
100,000
|
|
2021
|
|
|
100,000
|
|
2022
|
|
|
100,000
|
|
2023 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, 2017 and 2016 was $108,236 and $82,971, respectively.
Future
minimum lease payments are as follows:
2018
|
|
$
|
71,797
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
71,797
|
|
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 was 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 have settled the matter. Pursuant to the settlement, all claims against
the Company have been dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and a promissory
note for $125,000. This resulted in a loss on settlement of $633,292. The note is accruing interest at 12% per annum and due on
May 31, 2018.. As of December 31, 2017, the shares were accounted for as common stock payable with a value $681,625 as the shares
were not yet issued.
Note 9. Income Taxes
The provision for income taxes for 2017
and 2016 consisted of the following:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
Total tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation between the effective tax
rate on income from continuing operations and the statutory tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax benefit for federal statutory rate
|
|
$
|
(3,661,021
|
)
|
|
$
|
(2,402,223
|
)
|
State and local income tax net of federal benefit
|
|
|
(106,486
|
)
|
|
|
(69,872
|
)
|
Change in valuation allowance
|
|
|
(7,137,079
|
)
|
|
|
2,099,532
|
|
Change in enacted federal tax rate
|
|
|
9,873,046
|
|
|
|
-
|
|
Repurchase premium on convertible debt
|
|
|
1,030,632
|
|
|
|
371,984
|
|
Other-net
|
|
|
908
|
|
|
|
579
|
|
Income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Significant components of the deferred
tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accruals, reserves
|
|
$
|
146,533
|
|
|
$
|
232,504
|
|
Net operating loss carryforwards
|
|
|
17,463,940
|
|
|
|
24,562,130
|
|
Other
|
|
|
54,112
|
|
|
|
6,831
|
|
Subtotal
|
|
|
17,664,585
|
|
|
|
24,801,465
|
|
Less: valuation allowance
|
|
|
(17,661,957
|
)
|
|
|
(24,799,036
|
)
|
Total net defered tax assets
|
|
|
2,628
|
|
|
|
2,429
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(2,628
|
)
|
|
|
(2,429
|
)
|
Total deferred tax liabilities
|
|
|
(2,628
|
)
|
|
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
-
|
|
|
$
|
-
|
|
We have federal and state income tax net
operating loss carryforwards of $76.8 million and $24.3 million, respectively, which will expire on various dates from 2018 through
2037.
Because of the change of ownership provisions
of the Tax Reform Act of 1986, use of a portion of our NOL may be limited in future periods. Further, a portion of the carryforwards
may expire unutilized.
Management assesses the available positive
and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred
tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period
ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our projections
for future growth.
On the basis of this evaluation, as of
December 31, 2017 and 2016, a full valuation allowance of $17.7 million and $24.8 million, has been recorded against the deferred
tax assets, respectively. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of
future taxable income during the carryforward period are increased or if objective negative evidence in the form of cumulative
losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
Significant judgment is required in evaluating
the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there
are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves
for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. As of December
31, 2017, and 2016, we do not have unrecognized tax benefits as we believe the tax positions that remain subject to examination
are fully supportable.
We are subject to taxation in the United
States and various states and foreign jurisdictions. As of December 31, 2017, tax years for 1998 through 2017 are subject to examination
by the federal and state tax authorities, to the extent of available net operating loss carryforwards.
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act
makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax
rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings
of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring
a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the
corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse
tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to
uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides
guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a
company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To
the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine
a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional
estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the
tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our analysis of the
impact of the Tax Act, we have recorded a discrete tax expense of $9.9 million in the period ending December 31, 2017, resulting
directly from the reduction in the corporate tax rate. This was offset by a corresponding tax benefit equal to a reduction in the
valuation allowance for the same amount. Our accounting for changes resulting from the Tax Act is complete.
Note 10. Subsequent Events
On January 15, 2018, the Company issued 30,303 shares of its common stock to a consultant pursuant to
a consulting agreement.
In January and February 2018, the Company’s
sold $381,000 in bridge convertible notes to four investors. Along with each note, the investors received warrants to purchase
an aggregate of 1,093,000 shares of the Company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no
interest due under the promissory notes. The promissory notes have a clause that automatically converted the notes 30 days after
issuance, into an investment in the principal amount in the Company’s Note Offering.
In January, February and March 2018, the Company and certain of its noteholders agreed to extensions of
their existing notes. A noteholder agreed to extend an existing $300,000 promissory note for an additional 12 months in exchange
for increasing the face amount of the note to $330,000 and issued warrants to purchase 300,000 shares of Common Stock at $0.50
per share with a 10-year term. Interest will continue to accrue until the new maturity date. Another noteholder agreed to extend
a $500,000 promissory note for a second time until May 14, 2018 in exchange for warrants to purchase 2,000,000 shares of Common
Stock at $0.50 per share with a 10-year term and 100,000 shares of Common Stock.
Two noteholders with $100,000 notes
agreed to extend the maturity dates of their notes to March, 2019 and a noteholder with a $500,000 note agreed to an extension
until March 2019. None of these extensions required the payment of additional consideration and their notes will continue to accrue
interest until the new maturity dates. Interest to date has been paid in 112,000 shares of Company common stock.
On February 9, 2018, the Company borrowed
$50,000 from a lender and issued an interest free non-convertible promissory note with a six-month term. In connection with the
note, the Company issued to the lender warrants to purchase 150,000 shares of the Company’s Common Stock with a $0.50 exercise
prices and a 10-year term.
As set forth in the Company’s Current
Report on Form 8-K filed with the SEC on January, 25, 2018 (the “January 8-K”), on January 16, 2018, the Company entered
into a Securities Purchase Agreement (the “Power Up SPA”) with Power Up Lending Group Ltd. (“Power Up”)
pursuant to which Power Up purchased a convertible promissory note evidencing a loan of $54,000. On January 16, 2018, the Company
issued Power Up a $54,000 convertible promissory note (the “Power Up Note”). The Power Up Note entitles the holder
to 12% interest per annum and matures on October 30, 2018.
Power Up may convert the Power Up Note
into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of the Power Up
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 Power Up 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. The beneficial ownership limitation
may not be waived by Power Up.
If the Company prepays the Power Up 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%; and if such repayment is
made from the 91st to the 180th day after issuance, then such redemption premium is 125%. After the expiration of the 180 days
following the issuance, there shall be no further right of pre-payment.
As set forth in the January 8-K, on January
16, 2018, the Company entered into a Securities Purchase Agreement (the “EMA SPA”) with EMA Financial, LLC (“EMA”)
pursuant to which EMA agreed to purchase a convertible promissory note evidencing a loan of $125,000. The loan under the EMA SPA
was funded on January 24, 2018. On January 16, 2018, the Company issued to EMA a $125,000 convertible promissory note (the “EMA
Note”). EMA purchased the EMA Note for a purchase price of $117,500. The EMA Note has an interest rate of 10% per annum,
a default interest rate of 24% and matures on January 16, 2019.
On February 23, 2018, the Company issued
1,750,000 shares of its common stock related to the settlement with John Kuhns.
EMA may convert the EMA Note into shares
of the Company’s common stock beginning from the date of issuance of the EMA Note through the date which is 180 days from
the issuance date of the EMA Note, at a conversion price of $0.50 per share. Starting on the 181st date after the issuance date
of the EMA Note, EMA may convert the EMA Note into shares of the Company’s common stock at a conversion price equal to the
lower of (i) the closing price of the Company’s common stock on the principal market on the trading day immediately preceding
the date of conversion of the EMA Note or (ii) 60% of the lowest sale price for the Common Stock on the Principal Market during
the 20 consecutive trading day conversion including and immediately preceding the Conversion Date, or the closing bid price, whichever
is lower, provided, however, that EMA may not convert the EMA Note to the extent that such conversion would result in EMA’s
beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares
owned by EMA and its affiliates, unless such limit is waived by EMA. The conversion price under the EMA Note is further subject
to additional adjustments as set forth in the full text of the EMA Note.
If the Company prepays the EMA Note within
six months following the issuance date of the EMA Note, the Company must pay all of the principal at a cash redemption premium
of either (i) 150% if such prepayment is made after 90 days after the issuance date of the EMA Note or (ii) 135% if such prepayment
is made prior to or on the 90th day after the issuance of the EMA Note. After the expiration of six months following the issuance
of the EMA Note, there shall be no further right of pre-payment.
As set forth in the Company’s Current
Report on Form 8-K filed with the SEC on February 5, 2018, on January 23, 2018, the Company entered into a Securities Purchase
Agreement with Crown Bridge Partners, LLC (“CBP”) pursuant to which CBP agreed to fund the Company an amount up to
$117,000. On January 26, 2018, the Company issued CBP a $130,000 convertible promissory note (the “CBP Note”) which
includes an original issue discount of 10%. The CBP Note entitles the holder to 2% interest per annum on all amounts received form
CBP and each tranche of funding received is repayable, with interest six months from the date of funding. Any amounts not repaid
within six months shall bear an interest rate of 12% per annum.
The CBP Note may be converted into Company
common stock at any time at a conversion price of $0.50 per share, provided, however, that in the event of a default, the conversion
price is to be adjusted to the lower of $0.50 or 60% of the lowest of (i) the lowest trading price or (ii) closing bid price for
the 20-trading day period prior to conversion. If there is an event of default, conversion of the CBP Note could result in substantial
dilution to the Company’s shareholders.
Along with each tranche of funding, CBP
is entitled to receive a commitment fee in the form of a warrant to purchase a number of shares of Company common stock equal to
75% of the dollar amount of the tranche divided by $0.50. The warrants are to have a three-year term and an exercise price of $1.00
per share and may be exercised utilizing a cashless exercise feature.
An initial closing was held on January 26, 2018 and the Company received $56,000 and with the original
issue discount, is obligated to repay $65,000 on or before July 25, 2018 (this amount also reflects $2,500 in fees deducted for
the first tranche). 97,500 warrants were issued to CBP.
The transaction with CBP triggered a most favored nations provision in the transaction with EMA. As a
result, on January 26, 2018, the EMA Note was increased to an amount up to $130,000 and EMA was issued 97,500 warrants to purchase
Company Common Stock with a three-year term and an exercise price of $1.00 per share and may be exercised utilizing a cashless
exercise feature. The transaction with CBP also triggered a most favored nations provision in the Company’s transaction with
Firstfire Global Opportunities Fund, LLC which requires the addition of an original issue discount of 10% to the FirstFire note,
which is $135,000. This requires the Company repay FirstFire an additional $13,500.