Note 1 – Description of Business and Summary of Significant Accounting Policies
Description of Business
Cool Technologies, Inc. and subsidiary, (we, us, our, the "Company" or "Cool Technologies") was incorporated in the State of Nevada in July 2002. In April 2014, we formed Ultimate Power Truck, LLC ("Ultimate Power Truck" or "UPT"), of which we own 95% and a shareholder of Cool Technologies owns 5%. We were formerly known as Bibb Corporation, as Z3 Enterprises, and as HPEV, Inc. On August 20, 2015, we changed our name to Cool Technologies, Inc.
We have developed and intend to commercialize heat dispersion technologies in various product platforms, and have developed and intend to commercialize an electric load assist technology around which we have designed a vehicle retrofit system. In preparation, we have applied for trademarks for one of our technologies and its acronym. We currently own one trademark: TEHPC. We believe that our proprietary technologies, including our patent portfolio and trade secrets, can help increase the efficiency and positively affect manufacturing cost structure in several large industries beginning with motors/generators and fleet vehicles. The markets for products utilizing our technology include consumer, industrial and military markets, both in the U.S. and worldwide.
Our technologies are divided into three distinct but complementary categories: a) mobile power generation, b) heat dispersion technology and c) electric load assist. As of December 31, 2017, we have seven US patents, one granted Mexican patent, four pending applications (2 in Canada, 1 in Brazil, 1 US) and one US filed provisional application pending in the area of composite heat structures, motors, and related structures, heat pipe architecture, applications (commonly referred to as "thermal" or "heat dispersion technology") and a parallel vehicle power platform. We also have Patent Cooperation Treaty ("PCT") applications filed for a heat pipe cooled brake system, a parallel power input gearing system (PPIG) and radial vent thermal technology.
We intend to commercialize our patents by licensing our thermal technologies and applications to electric motor, pump and vehicle component manufacturers; by licensing or selling a mobile electric power system powered by our proprietary gearing system to commercial vehicle and fleet owners; and by licensing a plug-in hybrid conversion system for heavy duty trucks, buses and tractor trailers to fleet owners and service centers.
Basis of Presentation, Use of Estimates and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cool Technologies, Inc. and Ultimate Power Truck, LLC. Intercompany accounts and transactions have been eliminated. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
Noncontrolling interest represents the 5% third-party interest in UPT. There are no restrictions on the transfer of funds or net assets from UPT to Cool Technologies.
Going Concern and Management’s Plan
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. We have incurred net losses of $45,247,740 since inception and have not fully commenced operations, raising substantial doubt about our ability to continue as a going concern. Management believes that the company's ability to continue as a going concern is dependent on our ability to generate revenue, achieve profitable operations and repay our obligations when they come due. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. As of the filing date of this Annual Report on Form 10-K, management is negotiating additional non-dilutive funding arrangements to support completion of the initial phases of our business plan: to license its thermal technologies and applications, including submersible dry-pit applications and to license and sell mobile generation retrofit kits (our Ultimate Power Truck business) driven by our proprietary gearing system. There can be no assurance, however, that we will be successful in accomplishing these objectives.
Summary of Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits with banks, and investments that are highly liquid and have maturities of three months or less at the date of purchase.
Intangible assets
Our intangible assets consist of patents on our technology, recorded at cost. Cost is based on third party expenditures for patent applications. We will begin amortizing our intangibles over their estimated remaining useful life when we begin revenue-producing activities. We will determine the useful lives of our intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations that could impact the useful life of the asset, and other economic factors, including competition and specific market conditions.
Equipment
Equipment consists of vehicles we use for testing and demonstrating our technology to potential customers. Depreciation is recorded using the straight-line method over five years, the estimated useful life.
Impairment of long-lived assets
When facts and circumstances indicate that the carrying value of long-lived assets may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of revenues and the resulting gross profit and cash flows. These estimated future cash flows are consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized, if any, is the amount by which the carrying amount of the asset (or asset group) exceeds the fair value. We may use a variety of methods to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use. We have not recorded any impairment expense on our long-lived assets as of December 31, 2017.
Debt – original issue discount
When we issue notes payable with a face value higher than the proceeds we receive, we record the difference as a debt discount and amortize it through interest expense over the life of the underlying note payable.
Derivative financial instruments
When we issue debt that contains a conversion feature, we first evaluate whether the conversion feature meets the requirements to be treated as a derivative: a) one or more underlyings, typically the price of the company's stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. There are certain scope exceptions from derivative treatment, but these typically exclude conversion features that provide for a variable number of shares.
When we issue warrants to purchase our common stock, we must evaluate whether they meet the requirements to be treated as a derivative. Generally, warrants would be treated as a derivative if the provisions of the warrant agreement create uncertainty as to a) the number of shares to be issued upon exercise; or b) whether shares may be issued upon exercise.
If the conversion feature within convertible debt or warrants meet the requirements to be treated as a derivative, we estimate the fair value of the derivative liability using the Black-Scholes Option Pricing Model upon the date of issuance. If the fair value of the derivative liability is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the derivative liability is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The derivative liability is revalued at the end of each reporting period and any change in fair value is recorded as a change in fair value in the consolidated statement of operations. The debt discount is amortized through interest expense over the life of the debt. Derivative instrument liabilities and the host debt agreement are classified on the balance sheet as current or non-current based on whether settlement of the derivative instrument could be required within twelve months of the balance sheet date.
The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into warrant agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.
Research and development costs
Internal costs related to research and development efforts on existing or potential products are expensed as incurred. External costs incurred for intangible assets, such as attorney fees for patents, are capitalized.
Share-based payments
All of our share-based awards are classified as equity. We do not have any liability classified share-based awards. Each warrant or stock option is exercisable for one share of our common stock.
Nonemployees
–
We may enter into agreements with nonemployees to make share-based payments in return for services. These payments may be made in the form of common stock or common stock warrants. We recognize expense for fully-vested warrants at the time they are granted. For awards with service or performance conditions, we generally recognize expense over the service period or when the performance condition is met; however, there may be circumstances in which we determine that the performance condition is probable before the actual performance condition is achieved. In such circumstances, the amount recognized as expense is the pro rata amount, depending on the estimated progress towards completion of the performance condition. Nonemployee share-based payments are measured at fair value, based on either the fair value of the equity instrument issued or on the fair value of the services received. Typically, it is not practical to value the services received, so we determine the fair value of common stock grants based on the price of the common stock on the measurement date (which is the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, if there are sufficient disincentives to ensure performance, or the date at which the counterparty's performance is complete), and the fair value of common stock warrants using the Black-Scholes option-pricing model ("Black-Scholes"). We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option. For awards that are recognized when a performance condition is probable, the fair value is estimated at each reporting date. The cost ultimately recognized is the fair value of the equity award on the date the performance condition is achieved. Accordingly, the expense recognized may change between interim reporting dates and the date the performance condition is achieved.
Employees
– We issue two types of common stock options to employees: 1) fully-vested at the time of grant and 2) market price-based vesting. We recognize expense for fully-vested stock options on the date of grant at the estimated fair value of the options using Black-Scholes. We recognize expense for market price-based options at the estimated fair value of the options using the lattice-based option valuation model ("Lattice Model") over the estimated life of the options used in the Lattice Model. We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option.
Modification of share-based payment awards
– In the event we modify the terms of a nonvested share-based payment award, we would incur additional expense for the excess of the fair value of the modified share-based payment award, measured at the date of modification, over the fair value of the original share-based payment award. The incremental expense would be recognized ratably over the remaining vesting period.
Sale of common stock with warrants
– When we sell common stock we may also issue common stock warrants. We treat the value of these warrants as equity issuance costs. Accordingly, the value of the common stock warrants is included as a component of additional paid-in capital upon recording the sale of common stock.
Nonemployee stock option
– In 2012, we issued an equity-based award in the form of stock options to a nonemployee, which have been aggregated and classified with nonemployee common stock warrants, as the terms are similar to the common stock warrants we issued to nonemployees. The stock options were exercised on a cashless basis in 2013.
Cashless exercise
– Most of our common stock warrants and stock options may be exercised on a cashless basis. The number of shares of our common stock received upon exercising on a cashless basis is based on a) the volume weighted-average price of our common stock for three trading days immediately preceding the exercise date; b) the exercise price of the warrant or option; and c) the number of common shares issuable under the instrument.
Income taxes
We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax assets and evaluate the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax positions and would record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities. Our assessment of tax positions as of December 31, 2017 and 2016, determined that there were no material uncertain tax positions.
UPT is a limited liability company ("LLC"), which is treated as a partnership for income tax purposes, where all tax obligations flow through to the owners of the LLC during the period in which income taxes were incurred.
Fair value of financial instruments
Our financial instruments include cash and cash equivalents, accounts payable, accrued liabilities, and debt. The carrying value of these financial instruments is considered to be representative of their fair value due to the short maturity of these instruments. The carrying amount of our debt approximates fair value, because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us. Our derivative liabilities were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
Fair value is defined 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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities.
Reportable segments
We have identified our operating segments, our chief operating decision maker ("CODM"), and the discrete financial information reviewed by the CODM. After evaluating this information, we have determined that we have one reportable segment.
Recently Issued Accounting Pronouncements
Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU 2016-02 "Leases (Topic 842)"–
In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-17"Income Taxes (Topic 740)" –
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-16 "Business Combinations (Topic 805)," or ASU 2015-16
- In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. Currently, this has not impact.
FASB ASU 2015-11 "Inventory (Topic 330): Simplifying the Measurement of Inventory," or ASU 2015-11
- In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. We do not expect the adoption of this ASU to have a significant impact on our financial position, results of operations and cash flows.
FASB ASU 2015-03 "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost," or ASU 2015-03
- In April 2015, the FASB issued ASU 2015-03, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. We do not expect the adoption of this ASU to have a significant impact on our financial position, results of operations and cash flows.
FASB ASU 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis," or ASU 2015-02
- In February 2015, the FASB issued ASU 2015-02, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This ASU is effective for annual reporting periods beginning after December 15, 2015 and we are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)," or ASU 2014-09
- In May 2014, the FASB issued ASU 2014-09, which supersedes the revenue recognition requirements of Accounting Standards Codification, or ASC, Topic 605 "Revenue Recognition." This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
Note 2 – Equipment
Equipment consists of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Test vehicles
|
|
$
|
124,687
|
|
|
$
|
124,687
|
|
Other
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
129,687
|
|
|
|
129,687
|
|
Less: accumulated depreciation
|
|
|
(83,959
|
)
|
|
|
(58,023
|
)
|
|
|
$
|
45,728
|
|
|
$
|
71,664
|
|
Depreciation expense for the years ended December 31, 2017 and 2016, was $25,936 and $25,853, respectively.
Note 3 – Customer deposits – Related party
These represent advance payments of $400,000 received on orders that have not yet been fulfilled, with companies controlled by the individual who is the 5% owner of UPT and is a shareholder of Cool Technologies.
Note 4 – Debt
Debt consists of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Notes payable -- original issue discount
|
|
$
|
--
|
|
|
$
|
225,000
|
|
Convertible notes payable
|
|
|
795,803
|
|
|
|
641,129
|
|
Test vehicle financing
|
|
|
42,444
|
|
|
|
61,811
|
|
Note payable – related party
|
|
|
7,490
|
|
|
|
237
|
|
Note payable – UPT minority owner
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
1,095,737
|
|
|
|
1,178,177
|
|
Debt discount
|
|
|
(339,416
|
)
|
|
|
(334,696
|
)
|
|
|
|
756,321
|
|
|
|
843,481
|
|
Less: current portion
|
|
|
659,312
|
|
|
|
825,170
|
|
Long-term portion
|
|
$
|
97,009
|
|
|
$
|
18,311
|
|
Notes payable – original issue discount
Convertible notes payable
August 2016 Convertible Note–
In August 2016, the Company entered into a senior convertible note agreement. We received $400,000, bearing interest at 3%, with principal and interest payable on August 24, 2018. In addition, the Company received the right to require the buyer to purchase from the company four million restricted shares of common stock at a purchase price of $0.05 per share and a warrant to purchase four million shares of common stock with an exercise price of $0.06 per share. At the same time, the Company granted the buyer the right to require the company to sell to the buyer four million restricted shares of common stock at a purchase price of $0.05 per share and a warrant to purchase four million shares of common stock with an exercise price of $0.06 per share. In the event of default, the interest rate will be 18% per annum, require the Company to (i) redeem all or any portion of the note at a premium of 150% or (ii) convert any portion of this note then held by noteholder into shares of common stock at the conversion price of $0.025, equal to a number of shares of common stock equal to the principal amount outstanding on the note (divided by 0.025) and multiplied by the premium of 150%.
The note may be converted at any time into shares of the common stock at the conversion price pursuant to the terms of the note. The buyer may not, however, convert more than 50% of the note’s purchase price prior to September 30, 2016.
On April 18, 2017, KHIC was issued 1,132,000 shares of common stock after converting $28,300 in debt at $0.025 per share.
On May 30, 2017, the Company signed an amendment to the securities purchase agreement originally signed with KHIC on August 24, 2016. In exchange for $100,000, KHIC extended the KHIC’s right to require the Company to sell to the buyer, four million restricted shares of common stock at a purchase price of $0.05 per share and a warrant to purchase four million shares of common stock with an exercise price of $0.06 per share until June 7, 2017. The right was originally due to expire on May 31, 2017. On June 7, 2017, KHIC exercised the right and was issued the requisite shares and warrants.
November 2016 Convertible Note
– In November 2016, the Company entered into a convertible note agreement. We issued 350,000 inducement shares of common stock and received $100,000, with an original issue discount of $10,000 in lieu of interest, for a total amount of $110,000 due on June 9, 2017. At the holder’s option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at $0.07 per share. In the event of default, the outstanding balance will increase by 25%. At any time following an event of default, the lender has the right to convert a portion or all of the unpaid principal balance at a rate of 65% of the average of the three lowest closing prices in the twenty trading days immediately preceding the request for conversion date. A fixed 5% interest rate/fee of $5,500.
From March 31 to June 28, 2017, a total of $115,500 were converted into 2,110,000 shares of common stock and the note was extinguished.
December 2016 Convertible Notes
-- In December 6, 2016, the Company entered into a note purchase agreement which provides for the purchase of up to an aggregate of $150,000 principal amount of convertible promissory notes (the “Notes”). The Notes have a 5% original issue discount and bear interest at 5% per annum. On December 7, 2016, $85,000 was paid pursuant to the initial Note (after the deduction of $10,000 for legal expenses) which is due on December 5, 2017. On December 28, 2016, after the filing by the Company of a registration statement with the SEC, the Company issued another Note in the original principal amount of $50,000 for $47,500.
The Notes may be prepaid in whole or in part by the Company at a 115% premium if within 120 days of the issue date or 125% after 120 days of the issue date. The Notes are convertible into common stock at a 30% discount to the lowest trading price for the ten trading days immediately prior to the delivery of a conversion notice, provided that the conversion price will not be less than $0.06 per share.
The Note Purchase Agreement also provides that it is an event of default if the Company does not obtain FINRA’s approval to effectuate a 1:15 reverse stock split no later than January 15, 2017, which was extended to January 20, 2017, then extended to February 15, 2017 and further extended to April 24, 2017. As part of the last extension to April 24, 2017, Bellridge agreed to add an increase in the authorized share capital of the Company as another method to avoid the triggering of an event of default. The increase in amounts required under the Notes held by Bellridge necessitated that the Company amend its Articles of Incorporation. This was accomplished on March 22, 2017.
The Company also agreed to reserve the greater of (i) 1,000,000 shares of common stock or (ii) 300% of the maximum aggregate number of shares issued or issuable. The Company determined that the conversion feature meets the requirements for derivative treatment and has recorded a derivative liability and a corresponding debt discount on the consolidated balance sheet.
On May 2, 2017, the buyer converted a total of $50,780 into 469,559 shares of common stock and $101.863 into 941,867 shares of common stock and the notes were retired.
February Convertible Note
– On February 7, 2017, the Company entered into a convertible note agreement. We issued 200,000 inducement shares of restricted common stock and received $100,000, with an original issue discount of $10,000 in lieu of interest, for a total amount of $115,000 due on September 7, 2017. At the holder’s option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at $0.08 per share. In the event of default, the outstanding balance will increase by 25% and a daily penalty of $100 will accrue until the default is remedied. Shares reserved for future conversions must equal to at least 100% of the full number of shares of common stock issuable upon conversion of all outstanding amounts under this note.
On August 15, 2017, we issued 186,643 shares of our common stock pursuant to the terms of a securities purchase agreement entered into on February 7, 2017, which required the issuance of additional inducement shares if the price of our common stock decreased six months from the date of the agreement so that the aggregate value of the shares issued on the closing date would equal the aggregate value of the shares after six months.
On August 24, 2017, the company signed an amendment to the convertible promissory note which extended the maturity date until September 30, 2017 and reduced the conversion price from $0.08 to $0.05 per share.
Subsequent to the signing of the amendment, from August 25 to September 20, 2017, a total of $72,500 were converted into 1,450,000 shares of common stock. On September 27, 2017, the buyer converted $25,000 into 816,000 shares of common stock and the $113,300 note was retired.
March 2017 Convertible Note
. On March 14, 2017, the Company entered into a note purchase agreement with Bellridge which provides for the purchase of a $78,750 convertible promissory note on the same terms as the December 6, and December 28, 2016 Notes. The note has a 5% original issue discount and bears interest at 5% per annum. The maturity date is March 14, 2018. On March 14, 2017, we also issued 200,000 shares of common stock to Bellridge for agreeing to enter into such agreement.
The Note may be prepaid in whole or in part at a 115% premium if within 120 days of the issue date or 125% after 120 days of the issue date. The Note is convertible into common stock at a 30% discount to the lowest trading price for the ten trading days immediately prior to the delivery of a conversion notice, provided that the conversion price will not be less than $0.06 per share.
After 180 days the conversion floor of $0.06 expired. The Note was converted in full and 1,382,889 shares and 434,826 shares of common stock were issued to Bellridge on September 14, 2017 and September 26, 2017, respectively.
April Convertible Note
– On April 5, 2017, the Company entered into a convertible note agreement. We issued 300,000 inducement shares of restricted common stock and received $150,000, with an original issue discount of $15,000 in lieu of interest, for a total amount of $165,000 due on November 5, 2017. At the holder’s option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at $0.10 per share. In the event of default, the outstanding balance will increase by 25% and a daily penalty of $100 will accrue until the default is remedied. Shares reserved for future conversions must equal to at least 100% of the full number of shares of common stock issuable upon conversion of all outstanding amounts under this note.
On October 16, 2017, the company signed an amendment to the convertible promissory note which extended the maturity date until December 31, 2017 and reduced the conversion price from $0.10 to $0.05 per share.
Subsequent to the signing of the amendment, from October 25 to November 14, 2017, a total of $137,500 were converted into 2,750,000 shares of common stock. On November 22, 2017, the buyer converted $32,450 into 649,000 shares of common stock and the note was retired.
August Convertible Note
– On August 25, 2017, the Company entered into a convertible note agreement. We issued 300,000 inducement shares of restricted common stock and received $150,000, with an original issue discount of $15,000 in lieu of interest, for a total amount of $165,000 due on March 25, 2018. At the holder’s option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at $0.10 per share. In the event of default, the outstanding balance will increase by 25% and a daily penalty of $100 will accrue until the default is remedied.
On February 19
th
, 2018, the convertible note agreement was amended and the maturity date was extended until April 30, 2018. In exchange, the holder’s debt conversion share price was reduced to $0.025 per share.
Test Vehicle Financing
In October 2014, we entered into financing agreements for the purchase of test vehicles, bearing interest at 5.99% payable monthly over five years, collateralized by the vehicles.
Note payable – related party
On February 3, 2016, an agreement was signed with the Secretary of Cool Technologies to retire a non-interest bearing note that was due on demand. The note was retired with the issuance of 143,187 shares of restricted common stock on June 24, 2016.
Note payable – UPT minority owner
Held by the 5% minority owner of UPT. The terms of the note have not been finalized.
Warrants Issued with Debt
When we issue notes payable, we may also be required to issue warrants.
|
|
Number of Warrants
|
|
|
Weighted-average Exercise Price
|
|
|
Weighted-average Remaining Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, December 31, 2016
|
|
|
14,421,379
|
|
|
|
0.02
|
|
|
2.5
|
|
$
|
999,378
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
14,421,379
|
|
|
|
0.02
|
|
|
|
1.5
|
|
$
|
|
725,950
|
|
Exercisable, December 31, 2017
|
|
|
14,421,379
|
|
|
|
0.02
|
|
|
|
1.5
|
|
$
|
|
725,950
|
|
Future contractual maturities of debt are as follows:
Year ending December 31,
|
|
|
|
2018
|
|
|
659,312
|
|
2019
|
|
|
97,009
|
|
2020
|
|
|
--
|
|
|
|
$
|
756,321
|
|
Note 5 – Derivative Liability
Under the terms of the May 2016, December 2016 and March 2017 Convertible Notes, we identified derivative instruments arising from embedded conversion features, as well as warrants issued with the December 2015 Convertible Note.
The following summarizes the Black-Scholes assumptions used to estimate the fair value of the derivative liability at the dates of issuance and the revaluation dates:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
108%-199
|
%
|
|
|
108%-254
|
%
|
Risk-free interest rate
|
|
|
0.5%-1.8
|
%
|
|
|
0.2%-2.5
|
%
|
Expected life (years)
|
|
|
0.2 - 1.7
|
|
|
|
0.0 - 10.0
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
We determined that as of September 30, 2016 we did not have sufficient authorized but unissued shares of our common stock available to settle all of the common share equivalents represented by our convertible notes, warrants, options and convertible preferred stock. As a result, the common share equivalents that exceeded our authorized but unissued shares of common stock were reclassified from equity to derivative liabilities on a last in, first out (LIFO) basis using the inception date of the related instrument.
On March 22, 2017, we amended our certificate of incorporation to increase the number of authorized shares of our common stock. Subsequent to this amendment, we had a sufficient number of authorized but unissued shares of our common stock available to settle all of our outstanding common share equivalents. Accordingly, the common share equivalents that were previously reclassified to derivative liabilities were subject to a final mark-to-market for their change in fair value as of the date of the increase in authorized shares and were then reclassified back to equity.
Changes in the derivative liability were as follows:
|
|
Twelve Months Ended
December 31, 2017
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Convertible debt and other derivative liabilities at December 31, 2016
|
|
|
|
|
|
|
4,851,760
|
|
Conversions of convertible debt
|
|
|
|
|
|
|
(316,245
|
)
|
Issuance of convertible debt and other derivatives
|
|
|
|
|
|
|
306,901
|
|
Reclassification of common share equivalents to additional paid-in capital
|
|
|
|
|
|
|
(6,364,224
|
)
|
Change in fair value
|
|
|
|
|
|
|
1,529,312
|
|
Convertible debt and other derivative liabilities at December 31, 2017
|
|
|
|
|
|
|
7,504
|
|
Note 6 – Commitments and Contingencies
On December 12, 2012, we concluded negotiations on a debt settlement agreement by and among the Company, Phoenix Productions and Entertainment Group ("PPEG"), Action Media Group, LLC ("Action Media") and Spirit Bear Limited ("Spirit Bear") (PPEG and Action Media collectively, the "Debt Holders"). PPEG and Action Media were significant shareholders in our predecessor company and Spirit Bear is a related party through voting rights. The Debt Holders were to return to escrow a total of 4,676,000 shares of our common stock. 3,676,000 of these shares were returned and cancelled on January 14, 2013, following our filing a registration statement with the SEC on January 11, 2013. The remaining 1,000,000 shares will be purchased by the Company or a nominee of the Company at $0.40 per share (or $400,000) at the rate of $10,000 per month commencing within 90 days of the Company achieving $1,000,000 in gross revenues for products or services from business operations. PPEG and Action Media will divide the $400,000 on a pro rata basis, based on each company's respective amount of debt forgiven. The historical cost of the shares held in escrow are reflected in equity on the balance sheets as common stock held in escrow.
Effective May 1, 2015, we executed a First Amendment to Settlement Agreement (the "Amendment") with Spirit Bear and the parties identified as the assignees of Spirit Bear who are signatories to the Amendment, which amends certain provisions of the Settlement Agreement. In accordance with the terms of the Amendment, Jay Palmer, Carrie Dwyer and Donica Holt, the Spirit Bear holdover directors, tendered their resignation from the Board of Directors of the Company. Spirit Bear also agreed that it will no longer have any rights to appoint nominees to the Board of Directors. Pursuant to the Amendment, the Company agreed to file a registration statement on Form S-1 covering an aggregate of 14,845,072 shares of common stock, preferred stock and warrants on behalf of Spirit Bear and its assignees no later than July 15, 2015, which was filed with the SEC on July 15, 2015. A representative of Spirit Bear agreed that the obligation to register the shares on a Form S-1 need only include shares of common stock and shares of common stock issuable upon conversion of the Preferred Stock and exercise of the warrants held by Spirit Bear and its assignees. The Company agreed to issue replacement warrants for certain previously-issued warrants, which will be canceled in connection with the replacement issuance. Within 10 business days of June 1, 2015, the parties agreed to dismiss all of the pending litigation between and among them.
On November 4, 2016, Spirit Bear agreed to the withdrawal of the registration statement in exchange for confirmation that the warrants owned by Spirit Bear and its associate which were subject to a separate court action shall not expire even if the court action continued beyond the warrants’ initial expiration date. The registration had not been declared effective by the SEC and the Company filed a request to withdraw the Registration Statement on November 14, 2016.
On August 28, 2015, the parties filed a Stipulation to dismiss the direct claims of the Company against Spirit Bear and of Spirit Bear against the Company in the Nevada Lawsuit. By Order dated September 1, 2015 and filed September 2, 2015, the Court ordered dismissal of all direct claims in the Nevada Lawsuit.
Additionally, on February 20, 2015, the Court issued its preliminary approval to the derivative action settlement agreement (the "DASA") which would lead to the ultimate dismissal of the derivative suit also filed by Spirit Bear in the same action. The Court scheduled a fairness hearing for November 20, 2015 to consider giving its final approval to the DASA. No shareholder filed any objections to the DASA by April 30, 2015 which was the deadline established by the Court for filing objections. However, on October 22, 2015, Peak Finance, LLC filed a Motion to Intervene in the action seeking, among other things, approval to file a new derivative Complaint in this matter. The Company opposed this Motion.
On August 31, 2015, the Company received notice of a summons in the matter styled Peak Finance, Derivatively on Behalf of Nominal Defendant, HPEV, Inc. v. Hassett, et al., No. 2:15-cv-01590-GMN-CWH, filed in the United States District Court for the District of Nevada (the “Peak Finance Claim”). Plaintiff Peak Finance, LLC (“Peak Finance”) alleges that certain members of the Company’s Board of Directors and officers caused a misleading proxy statement to issue and breached alleged fiduciary duties from and after June 18, 2013. Peak Finance further alleges that its claim is related to the Spirit Bear Lawsuit described above. The Company has not determined that there is any merit to the allegations, and has decided to submit the claims to an Independent Director Committee consisting of Directors Christopher McKee, Richard J. “Dick” Schul, and Donald Bowman for their review and consideration. Additionally, on September 28, 2015, the Company filed a motion to dismiss the initial Complaint filed by Peak Finance. On October 22, 2015, rather than oppose the motion to dismiss, Peak Finance filed an amended complaint in this case in addition to the Motion to Intervene in the pending Spirit Bear litigation set forth above. On November 9, 2015, the Company filed a new motion to dismiss the first amended complaint filed by Peak Finance on October 22, 2015.
At the November 20, 2015 fairness hearing, the Court denied Peak Finance's Motion to Intervene. However, the Court did allow Peak Finance to formally argue its objections to the DASA. The Court ordered additional briefing on certain issues which has now been completed. The Court has ordered another hearing to consider the DASA on April 1, 2016.
On April 1, 2016, Peak Finance and the Company advised the Court that they had agreed in principle to a settlement that would include withdrawal of Peak Finance’s objection to the DASA. On April 20, 2016, the parties filed a Stipulation and Proposed Order for Withdrawal of Objection to DASA, which was granted by the Court on April 21, 2016. On May 3, 2016, the Court issued an Order, which fully and finally approved the DASA and dismissed the Peak Finance and the Spirit Bear cases, with prejudice. On May 17, 2016, the Company filed a document to show cause as to the effect of the Stipulation and Proposed Order Regarding Settlement on the pending Motion to Dismiss Amended Complaint.
Also on May 17, 2016, Peak Finance and the Company filed a Stipulation and Proposed Order to Modify Stay of Proceedings so that the stay issued on January 6, 2016 could be modified to permit the Court to consider the Stipulation and Proposed Order Regarding Settlement and for the Court and all parties to take all necessary actions to seek final approval of a settlement prior to the Court ruling on the pending Motion to Dismiss.
On October 11, 2016, the United States District Court, District of Nevada orally approved the derivative action settlement agreement (“Peak Settlement Agreement”) reached in Peak Finance, LLC v. Timothy J. Hassett et. al., Case No. 2:15-cv-01590-GMN-CWH. Noting that no non-party shareholder filed any objections to the Peak Settlement Agreement, the District Court specifically found that it is “fundamentally fair, reasonable and adequate” and serves the best interest of the Company. The Court further directed that counsel for the parties prepare a proposed formal written order finally approving the Peak Settlement Agreement and dismissing the case.
On October 20, 2016, the Derivative Action Settlement Agreement was formally approved and the case was formally dismissed with prejudice.
Subsequent to the dismissal, an Independent Directors Committee consisting of directors Christopher McKee, Richard J. "Dick" Schul and Donald Bowman reviewed the allegations made by Peak Finance, LLC to determine a proper corporate response. On December 6, 2016, a quorum of the members of the Independent Directors Committee met with Peak Finance, LLC in New York City, to fulfill the judges’ final orders. No further action is required by the Company in this matter.
On October 7, 2016, the Company received a complaint, Wang et al v. Cool Technologies, Inc. et al, filed on July 28, 2016 in the U.S. District Court for the Eastern District of New York (Brooklyn) Civil docket #1:16-CV-04101-RRM-PK against the Company and Timothy Hassett, the Company’s Chief Executive Officer, alleging damages of $1,100,000 for inter alia breach of contract for failing to register shares sold to the Plaintiffs in February and March 2014.
On March 30, 2017, the Company and Timothy Hassett, the Company’s Chief Executive Officer, requested leave of the court to move to dismiss the matter, on both Substantive and Jurisdictional grounds. On April 13, 2017, the Honorable Roslynn R. Mauskopf granted leave to renew our March 30, 2017 request for a pre-motion conference after the initial conference before Magistrate Judge Kuo. At the initial conference, Corporate counsel informed the court that the Company, in fact, filed a registration statement for said shares in July 2014 and the Warrants were in the possession of Plaintiff Gary Zse Kong J.D. and located on his computer and printed at his office in the Law Offices of Gary Park. Magistrate Judge Peggy Kuo directed plaintiff to file an amended complaint and directed plaintiff Gary Sze Kong to preserve all computer and other records which may still be at the Law Offices of Gary Park. Defendants were also granted leave to subpoena such records if they are no longer under the control of Plaintiff Kong. On June 30
th
, Plaintiff amended their complaint inter alia admitting that the company filed the registration statement with the SEC. On August 7, 2017, Corporate Counsel requested leave for a pre-motion conference to move to dismiss the matter.
On March 27, 2018, a Subpoena has been issued and served upon the Law Offices of Gary S. Park P.C. On April 3, 2018 counsel for Plaintiffs withdrew and were replaced by Mr. Sang Joon Sim, Esq. of Sim & Record, LLP which shares an address with Mr. Park’s law offices.
From time to time, we may be a party to other legal proceedings. Management currently believes that the ultimate resolution of these matters, and after consideration of amounts accrued, will not have a material adverse effect on our consolidated results of operations, financial position, or cash flow.
Note 7 – Equity
Preferred Stock
The Company has 15,000,000 preferred shares authorized and 33 Series A and 2,727,270 Series B preferred shares issued and outstanding as of December 31, 2017.
On August 12, 2016, the Company entered into a Securities Purchase Agreement with four accredited investors pursuant to which it sold 3,636,360 shares of the Company’s Series B Convertible Preferred Stock. Each share of the preferred stock is convertible into one share of company’s common stock. The conversion price of the preferred stock is equal to the $0.055.
In addition to the preferred stock, the Securities Purchase Agreement included warrants to purchase (i) 3,636,360 shares of the Company’s common stock at an exercise price of $0.07 per share. The aggregate purchase price of the preferred stock and warrants was $200,000, of which $150,000 was paid in cash and $50,000 was paid in services.
In connection with the sale of the Preferred Stock, on October 20, 2016, the Company filed with the Secretary of the State of Nevada, an amended Certificate of Designations of the Rights, Preferences, Privileges and Restrictions, which have not been set forth in the Certificate of Designation of the Series B Convertible Preferred Stock nor the first Amendment to Certificate of Designation filed on August 12, 2016.
The preferred stock has the same rights as if each share of Series B Convertible Preferred Stock were converted into one share of common stock. For so long as the Series B Convertible Preferred Stock is issued and outstanding, the holders of such Series B Convertible Preferred Stock vote together as a single class with the holders of the common stock and the holders of any other class or series of shares entitled to vote with the common stock, with the holders of Series B Stock being entitled to 66 2/3% of the total votes on all such matters.
In the event of the death of a holder of the Class B Preferred Stock, or a liquidation, winding up or bankruptcy of a holder which is an entity, all voting rights of the Class B Preferred Stock shall cease.
The holder of any shares of Class B Preferred Stock have the right to convert their shares into common stock at any time, in a conversion ratio of one share of common stock for each share of Class B Preferred. If the Corporation’s common stock trades or is quoted at a price per share in excess of $2.25 for any twenty consecutive day trading period, the Class B Preferred Stock will automatically be convertible into the common stock of the Corporation in a conversion ratio of one share of Common Stock for each share of Class B Preferred.
The holders of Class B Preferred Stock are not entitled to receive any distributions in the event of any liquidation, dissolution or winding up of the Corporation.
The warrants cannot be exercised on a cashless basis.
On October 31 and November 1, 2016, three of the accredited investors provided $51,000 to the company and are due to receive an additional 927,270 Series B Preferred shares.
Preferred stock issuable on the consolidated balance sheet represents preferred stock to be issued for either cash received or services performed. As of December 31, 2017 and 2016, the number of shares of preferred stock to be issued was 0 and 927,270 shares, respectively.
Spirit Bear holds 30 shares of our Series A preferred stock and KHIC, Inc., a related party, holds the remaining 3 shares of our Series A preferred stock. Each share of Series A Preferred Stock ("Preferred Stock") is convertible into 50,000 shares of common stock. Each share of Preferred Stock has voting rights as if they were converted into 50,000 shares of common stock. The holders of each share of Preferred Stock then outstanding shall be entitled to be paid out of the Available Funds and Assets (as defined in the "Certificate of Designation"), and prior and in preference to any payment or distribution (or any setting apart of any payment or distribution) of any Available Funds and Assets on any shares of common stock, an amount per preferred share equal to the Preferred Stock Liquidation Price ($2,500 per share).
Common stock
On March 20, 2017, stockholders holding shares that entitled them to exercise at least a majority of the voting power, voted in favor of increasing the number of authorized shares of common stock, from 140,000,000 shares to 350,000,000 shares.
On August 19, 2015, the stockholders voted to increase the number of authorized shares of common stock from 100,000,000 shares to 140,000,000 shares.
Common stock issuable on the consolidated balance sheet represents common stock to be issued for either cash received or services performed. As of December 31, 2017 and 2016, the number of shares of common stock to be issued was 9,320,635 and 821,364 shares, respectively.
Common stock warrants issued with the sale of our common stock
When we sell shares of our common stock the buyer also typically receives fully-vested common stock warrants with a maximum contractual term of 3-5 years. A summary of common stock warrants issued with the sale of our common stock as of December 31, 2017, and changes during the year then ended is presented below:
|
|
Number of Warrants
|
|
|
Weighted-average Exercise Price
|
|
|
Weighted-average Remaining Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, December 31, 2015
|
|
|
20,726,707
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
Granted
|
|
|
14,392,309
|
|
|
|
0.12
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,073,549
|
)
|
|
|
0.60
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
34,045,467
|
|
|
|
0.30
|
|
|
|
|
|
|
|
Granted
|
|
|
25,941,558
|
|
|
|
0.08
|
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(12,549,437
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
47,437,548
|
|
|
|
0.19
|
|
|
|
2.1
|
|
|
$
|
114,000
|
|
Exercisable, December 31, 2017
|
|
|
47,437,548
|
|
|
|
0.19
|
|
|
|
2.1
|
|
|
$
|
114,000
|
|
Note 8 – Share-based payments
Amounts recognized as expense in the consolidated statements of operations related to share-based payments are as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Nonemployee common stock
|
|
$
|
139,529
|
|
|
$
|
10,000
|
|
Nonemployee preferred stock (Series B)
|
|
|
--
|
|
|
|
50,000
|
|
Nonemployee warrants – fully vested upon issuance
|
|
|
398,398
|
|
|
|
1,603,025
|
|
Nonemployee warrants – service and performance conditions
|
|
|
6,118
|
|
|
|
20,933
|
|
Employee common stock
|
|
|
188,000
|
|
|
|
277,090
|
|
Employee stock options – market price-based
|
|
|
--
|
|
|
|
327,000
|
|
Total share-based expense charged against income
|
|
$
|
732,045
|
|
|
$
|
2,288,048
|
|
|
|
|
|
|
|
|
|
|
Impact on net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
UPT management agreement
In July, 2014, we entered into a three year agreement with the company managing the operations of UPT, whereby we would issue common stock under the following conditions:
Condition
|
|
Number of Shares
|
|
UPT recognizes $100 million of revenue or a change in control
|
|
|
500,000
|
|
UPT recognizes $100 million of revenue
|
|
|
150,000
|
|
|
|
|
650,000
|
|
As of December 31, 2017 and 2016, meeting these conditions was not deemed probable, so no expense was recognized under this agreement and no common stock was issued. The fair value of these unearned shares of common stock was $58,500 as of December 31, 2017.
In July, 2014, we entered into a three year agreement with the company managing the operations of UPT, whereby we would issue common stock warrants under the following conditions:
|
|
|
|
Number of
|
|
Vesting Condition
|
|
Category
|
|
Warrants
|
|
Fully vest upon UPT generating $1 million of revenue
|
|
Performance
|
|
|
350,000
|
|
45,945 warrants for every $3 million of revenue generated by UPT up to $100 million
|
|
Performance
|
|
|
1,530,000
|
|
60,000 warrants for every three months of completed service managing UPT
|
|
Service
|
|
|
720,000
|
|
|
|
|
|
|
2,600,000
|
|
The common stock warrants have a three year life and an exercise price of $1.00 per share. The grant date fair value was $2,586,000. As of December 31, 2017, we did not conclude that meeting the performance conditions was probable, so no expense was recognized and no common stock warrants vested. During the year ended December 31, 2017, 120,000 of the common stock warrants under the service condition vested with the passage of time and we recognized expense of $6,118. During the year ended December 31, 2016, 240,000 of the common stock warrants under the service condition vested with the passage of time and we recognized expense of $20,933. As of December 31, 2017, the fair value of the 1,880,000 unvested common stock warrants, which is also the estimated unrecognized expense, was $84,693. We cannot estimate the period over which the expense for the performance awards will be recognized, if at all. There is no remaining service award expense to recognize.
Nonemployee common stock
Investor relations agreement
In January, 2016, we entered into a 2 month agreement with a company, which subsequently became a shareholder, to provide corporate consulting, communications and market outreach services. Under the terms of this agreement we agreed to pay $25,000 in fees and agreed to issue a total of 300,000 one year warrants with an exercise price of $0.18 per share through February 2016.
In March 2016, we renewed the agreement for a period ending December 31, 2016. Under the terms of this renewal, we agreed to pay a total of $102,000 in fees and agreed to issue a total of 425,000 shares of restricted common stock per and 575,000 warrants with an exercise price of $0.40 per share. We recognized expense of $70,151 during the year ended December 31, 2016.
Financial advisory agreements
During the quarter ended June 30, 2015, we entered into separate agreements with three companies, which subsequently became shareholders, to provide financial advisory services, including developing, studying and evaluating a financing plan, strategic and financial alternatives, and merger and acquisition proposals. Under the terms of the agreements, we agreed to issue an aggregate of 333,332 shares of common stock each month through June 2016, as services were delivered, for a total of 5,000,000 shares over the term of the agreements. These agreements may be canceled by either party with a 30 day notice. During the three months ended June 30, 2015, we recorded expense at fair value of $510,007 for the issuance of 1,000,013 shares. If the services are provided and the agreements are not canceled, an additional 3,999,987 shares remain to be issued. At management's request, no further services have been provided, and no stock was earned or issued under these agreements after June 30, 2015.
Other
During the years ended December 31, 2017 and 2016, we issued or accrued an additional 4,651,525 and 2,859,909 shares of common stock in exchange for services, with a fair value of $364,530 and $360,000, respectively.
Nonemployee common stock warrants -- Fully-vested upon issuance
We may issue fully-vested common stock warrants with a maximum contractual term of 5 years to non-employees in return for services or to satisfy liabilities, such as accrued interest. The following summarizes the activity for common stock warrants that were fully-vested upon issuance:
|
|
Number of Warrants
|
|
|
Weighted-average Exercise Price
|
|
|
Weighted-average Remaining Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, December 31, 2015
|
|
|
7,664,568
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
Granted
|
|
|
5,749,503
|
|
|
|
0.49
|
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(2,548,000
|
)
|
|
|
1.09
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
10,866,071
|
|
|
|
0.49
|
|
|
|
|
|
|
|
Granted
|
|
|
5,550,000
|
|
|
|
0.08
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(3,470,235
|
)
|
|
|
.59
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
12,945,836
|
|
|
|
0.29
|
|
|
|
2.3
|
|
|
$
|
46,000
|
|
Exercisable, December 31, 2017
|
|
|
12,945,836
|
|
|
|
0.29
|
|
|
|
2.3
|
|
|
$
|
46,000
|
|
The following summarizes the Black-Scholes assumptions used to estimate the fair value of fully-vested common stock warrants:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
144–155
|
%
|
|
|
102–272
|
%
|
Risk-free interest rate
|
|
|
1.2–2.2
|
%
|
|
|
0.5--1.5
|
%
|
Expected life (years)
|
|
|
2.4 – 5.0
|
|
|
|
1.0 -- 5.0
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
No fully-vested common stock warrants were exercised in 2017 and 2016.
Nonemployee common stock warrants -- Service and performance conditions
The following summarizes the terms for warrants we granted that are subject to performance and service conditions.
Financing advisory services
In March, 2014, we entered into an agreement with a company, which is also a shareholder, to provide financing advisory services, in return for 400,000 common stock warrants having a five year life and an exercise price of $2.50, with vesting in March, 2015 upon satisfactory performance under the agreement. In addition, a second issuance of 400,000 warrants with an exercise price of $2.50 would be due on the one year anniversary of the execution of the agreement. As of December 31, 2014, we deemed it probable that the vesting conditions will be met. Accordingly, during the year ended December 31, 2014, we recognized expense of $200,379. When the warrants vested in March 2015, the fair value was $179,964. The change in fair value between December 31, 2014 and March 2015, of $20,415 was recognized as a reduction of expense in 2015. The grant date fair value of these warrants was $352,000.
In May of 2015, the exercise price of the first and second issuance of warrants was reduced to $0.45. The fair value of the first issuance increased from $180,484 to $188,525 and the second issuance increased from $203,010 to $203,569.
In January of 2016, the exercise price of the first and second issuance of warrants was reduced from $0.45 to $0.30. The fair value of the first issuance decreased from $188,525 to $54,950 and the second issuance decreased from $203,569 to $74,464.
Summary
The following summarizes the activity for warrants that have performance and service conditions. There were no grants in 2017.
|
|
Number of Warrants
|
|
|
Weighted-average Exercise Price
|
|
|
Weighted-average Remaining Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, December 31, 2016
|
|
|
3,400,000
|
|
|
|
0.84
|
|
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(120,000
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
3,280,000
|
|
|
|
0.83
|
|
|
|
0.3
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
1,280,000
|
|
|
$
|
0.56
|
|
|
|
0.7
|
|
|
$
|
--
|
|
The following summarizes of the status of our nonvested common stock warrants with performance and service conditions as of December 31, 2017, and changes during the year then ended:
|
|
Number of
|
|
|
Weighted-average Grant Date
|
|
|
|
Warrants
|
|
|
Fair Value
|
|
Non vested, December 31, 2016
|
|
|
2,000,000
|
|
|
$
|
0.99
|
|
Vested
|
|
|
(120,000
|
)
|
|
|
0.99
|
|
Non vested, December 31, 2017
|
|
|
1,880,000
|
|
|
$
|
0.99
|
|
The following summarizes the Black-Scholes assumptions used to estimate the fair value of warrants with performance and service conditions:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
141 -- 144
|
%
|
|
|
121 -- 148
|
%
|
Risk-free interest rate
|
|
|
1.5 -- 1.6
|
%
|
|
|
0.7 -- 1.5
|
%
|
Expected life (years)
|
|
|
3.0
|
|
|
|
3.0
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
Legal settlement – Replacement warrants
Under the First Amendment to Settlement Agreement (the "Amendment") with Spirit Bear, we agreed to issue replacement warrants for certain previously-issued warrants. The 7,000,000 previously-issued warrants were issued in 2012, had exercise prices ranging from $0.35 to $0.75 per warrant, and expiration dates from April 2015 to April 2017. All of the replacement warrants have an exercise price of $0.25, while 6,000,000 expire in January 2017 and 1,000,000 expired in December 2015.
Under the terms of the February 2016 Waiver of Performance and Second Amendment to Settlement Agreement with Spirit Bear, we agreed to issued replacement warrants for previously amended and replaced warrants. Six million of the previously amended and replaced warrants owned by Spirit Bear and by Leonora Lorenzo had their expiration dates extended from January 29, 2017, until January 29, 2020, and had their exercise price reduced from $0.25 to $0.10 per share.
In addition, Spirit Bear consented to the withdrawal of a Registration Statement on Form S-1 that was pending before the Securities Exchange Commission (SEC). The proposed registration statement covered the common shares underlying the preferred shares owned by Spirit Bear and the common shares underlying the warrants owned by Spirit Bear and Leonora Lorenzo.
When a replacement equity instrument is issued, expense is recorded if the fair value of the new instruments is greater than the fair value of the original instruments. We recorded expense of $423,973 associated with the replacement warrants. The following summarizes the Black-Scholes assumptions used to estimate the fair value of the previously-issued warrants and the replacement warrants:
|
|
Previously-issued
|
|
|
Replacement
|
|
Volatility
|
|
|
206
|
%
|
|
|
151
|
%
|
Risk-free interest rate
|
|
|
0.5
|
%
|
|
|
1.3
|
%
|
Expected life (years)
|
|
|
0.2
|
|
|
|
3.2
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
Employee stock options – Fully-vested upon grant
We granted stock options to certain members of management in 2014 that were fully-vested at the date of grant. There were no grants in 2016 or 2017. In 2016, one member resigned and released the Company from all incentive compensation it owed to him including stock options. The following is a summary of fully-vested stock option activity with the resigning member’s stock options removed for 2016:
|
|
Number of
Shares
|
|
|
Weighted-average Exercise Price per Share
|
|
|
Weighted-average Remaining Contractual
Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, December 31, 2015 and 2014
|
|
|
5,000,000
|
|
|
|
2.00
|
|
|
|
|
|
|
|
Stock options forfeited
|
|
|
(1,000,000
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
4,000,000
|
|
|
|
2.00
|
|
|
|
--
|
|
|
$
|
--
|
|
Outstanding, December 31,2017
|
|
|
4,000,000
|
|
|
|
2.00
|
|
|
|
--
|
|
|
|
--
|
|
Exercisable, December 31, 2017
|
|
|
4,000,000
|
|
|
$
|
2.00
|
|
|
|
--
|
|
|
$
|
--
|
|
The following summarizes the Black-Scholes assumptions used to estimate the fair value of fully-vested stock option grants:
|
|
Year ended December 31, 2014
|
|
Volatility
|
|
|
325
|
%
|
Risk-free interest rate
|
|
|
2.7
|
%
|
Expected stock option life (years)
|
|
|
10
|
|
Dividend yield
|
|
|
--
|
|
We recognized expense at a fair value of $7,950,000 in the years ended December 31, 2014, for fully-vested stock option grants.
Employee stock options – Market price-based grants
We granted stock options in 2012 to a member of management that vest upon the achievement of certain stock prices for 20 days. He resigned effective October 1, 2016 and released the Company from all obligations to him including stock options.
As of December 31, 2017, there were no market price-based stock options.
Note 9 – Income Taxes
The components of our deferred tax asset are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net operating loss carryforwards
|
|
$
|
6,140,045
|
|
|
$
|
8,194,178
|
|
Equity-based instruments
|
|
|
6,458,977
|
|
|
|
9,629,824
|
|
Accrued liabilities
|
|
|
133,105
|
|
|
|
126,765
|
|
Deferred Revenue
|
|
|
96,311
|
|
|
|
150,520
|
|
Pass-through losses
|
|
|
78,682
|
|
|
|
182,966
|
|
Valuation allowance
|
|
|
(12,907,120
|
)
|
|
|
(18,284,253
|
)
|
Deferred tax asset
|
|
$
|
--
|
|
|
$
|
--
|
|
Effective January 1, 2018, the Federal corporate income tax rate has been decreased from 34% to 21%. The effect of this change on deferred taxes and the valuation allowance at December 31, 2017 was approximately $6.5 million. The NOLs that have been generated 12/31/2017 and prior are going to be 100% allowable against future income, provided that they do not expire. NOLs generated 1/1/2018 and forward will be subject to the 80% limitation.
A reconciliation of income taxes computed at the statutory rate to the income tax amount recorded is as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax benefit at statutory rate
|
|
$
|
(1,724,214
|
)
|
|
$
|
(291,001
|
)
|
State income tax, net of Federal benefit
|
|
|
(184,085
|
)
|
|
|
(31,069
|
)
|
Tax Jobs and Cuts Act
|
|
|
6,256,223
|
|
|
|
--
|
|
Convertible debt
|
|
|
988,938
|
|
|
|
(1,496,427
|
)
|
Other adjustments
|
|
|
40,037
|
|
|
|
(94,809
|
)
|
Meals and entertainment
|
|
|
235
|
|
|
|
42
|
|
Increase in valuation allowance
|
|
|
(5,377,133
|
)
|
|
|
1,913,264
|
|
Income tax benefit
|
|
$
|
--
|
|
|
$
|
--
|
|
We had no gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. We have not accrued any interest or penalties associated with income taxes. We file income tax returns in the United States federal jurisdiction. With few exceptions, we are no longer subject to U.S. federal, state or non-U.S. income tax examination by tax authorities on tax returns filed before January 31, 2011. No tax returns are currently under examination by any tax authorities.
Note 10 – Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised.
The following table presents a reconciliation of the denominators used in the computation of net loss per share – basic and diluted:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss available for stockholders
|
|
$
|
(5,059,326
|
)
|
|
$
|
(844,169
|
)
|
Weighted average outstanding shares of common stock
|
|
|
130,188,614
|
|
|
|
84,894,351
|
|
Dilutive effect of stock options and warrants
|
|
|
--
|
|
|
|
--
|
|
Common stock and equivalents
|
|
|
130,188,614
|
|
|
|
84,894,351
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
Outstanding stock options and common stock warrants are considered anti-dilutive because we are in a net loss position. The following summarizes equity instruments that may, in the future, have a dilutive effect on earnings per share:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Common stock warrants
|
|
|
75,404,803
|
|
|
|
59,932,917
|
|
Common stock issuable
|
|
|
9,320,635
|
|
|
|
821,364
|
|
Convertible notes
|
|
|
24,359,499
|
|
|
|
19,287,020
|
|
Convertible preferred stock
|
|
|
4,377,270
|
|
|
|
9,436,360
|
|
Convertible preferred stock issuable
|
|
|
--
|
|
|
|
927,270
|
|
Total
|
|
|
117,462,207
|
|
|
|
94,404,931
|
|
Total exercisable at December 31
|
|
|
108,141,572
|
|
|
|
89,019,937
|
|
Note 11 – Subsequent Events
The Company has evaluated all the events or transactions that have occurred since December 31, 2017 and determined that the following should be disclosed:
On January 2, 2018, we issued 500,000 shares of our common stock upon partial conversion of $25,000 on convertible debt of $226,325 by Lucas Hoppel.
On January 5, 2018, we issued 1,500,000 shares of our common stock upon partial conversion of $60,000 on convertible debt of $226,325 by Lucas Hoppel.
On January 8, 2018, we issued 1,000,000 shares of our common stock upon partial conversion of $40,000 on convertible debt of $141,625 by Lucas Hoppel.
On January 18, 2018, the company signed an agreement with Aon Risk Services Central, Inc. and Lee and Hayes, PLLC, through its operating unit, 601West, which provides intellectual property (IP) analytics, to assess the value of CoolTech’s Intellectual Property (IP). As set forth in the agreement, the assessment will be founded on historically demonstrated or contractually committed profit-earning capacities of our IP and may be used to obtain financing, including but not limited to, non-dilutive financing.
January Convertible Note
– On January 26, 2018, the Company entered into a convertible note agreement. We issued 800,000 inducement shares of restricted common stock and received $200,000, with an original issue discount of $20,000 in lieu of interest, for a total amount of $220,000 due on August 26, 2018. At the holder’s option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at $0.05 per share. In the event of default, the outstanding balance will increase by 25% and a daily penalty of $100 will accrue until the default is rmedied.
On February 12, 2018, we sold a total of 1,000,000 shares of common stock and a five-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.0714 per share, to Summit Management Consulting, the company who provides the services of our Chief Financial Officer, Quentin Ponder, in exchange for $50,000 in accrued salary. The warrant may be exercised on a cashless basis.
On February 12, 2018, we sold a total of 1,000,000 shares of common stock and a five-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.0714 per share, to our Secretary and Vice President, Judson Bibb, in exchange for $50,000 in accrued salary. The warrant may be exercised on a cashless basis.
On February 19, 2018, the Company signed an amendment to a convertible note for $165,000 originally issued on August 24, 2017 to Lucas Hoppel. The amendment extended the maturity date from March 24, 2018 to April 30, 2018. In exchange the conversion price was reduced from $0.05 to $0.025 per share.
On February 19, 2018, the Company signed an amendment to a convertible note for $226,325 originally issued on September 3, 2017. The amendment extended the maturity dated extended to March 31, 2018. In exchange, the conversion price was reduced from $0.04 to $0.025. The convertible note was originally issued to Gemini Master Fund, Ltd. On November 13, 2017, Lucas Hoppel purchased the note.
On February 19, 2018, the Company signed an amendment to a convertible note for $141,625 originally issued on February 3, 2017. The amendment extended the maturity date to March 31, 2018. In exchange, the conversion price was reduced from $0.04 to $0.025 per share. The convertible note was originally issued to Black Mountain Equities, Inc. On November 1, 2017, Lucas Hoppel purchased the note.
February Convertible Note
– On February 19, 2018, the Company entered into a convertible note agreement. We issued 2,000,000 inducement shares of restricted common stock and received $350,000, with an original issue discount of $35,000 in lieu of interest, for a total amount of $385,000 due on September 19, 2018. At the holder’s option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at $0.05 per share. In the event of default, the outstanding balance will increase by 25% and a daily penalty of $100 will accrue until the default is remedied.
On February 20, 2018, we issued 1,500,000 shares of our common stock upon partial conversion of $37,500 on convertible debt of $226,325 by Lucas Hoppel.
On February 21, 2018, we issued 1,500,000 shares of our common stock upon partial conversion of $37,500 on convertible debt of $141,625 by Lucas Hoppel.
On February 21, 2018, we issued for consideration of $11,670, 233,333 shares of our common stock and a three year warrant to purchase 116,667 shares of our common stock at a an exercise price of $0.05 to Eric Brown, a 5% stockholder. The warrant expires on February 21, 2021 and may be exercised on a cashless basis.
On February 21, 2018, we issued for consideration of $11,670, 233,333 shares of our common stock and a three year warrant to purchase 116,667 shares of our common stock at a an exercise price of $0.05 to Christopher Jones, a 5% stockholder. The warrant expires on February 21, 2021 and may be exercised on a cashless basis.
On February 25, 2018, we sold a total of 600,000 shares of common stock and a five-year warrant to purchase 600,000 shares of our common stock at an exercise price of $0.0714 per share, to Summit Management Consulting, the company who provides the services of our Chief Financial Officer, Quentin Ponder, in exchange for $30,000 in accrued salary. The warrant may be exercised on a cashless basis.
On February 26, 2018, we issued 1,428,571 shares of our common stock to an accredited investor as a result of a private offering. A five year warrant to purchase 428,571 shares of our common stock at an exercise price of $0.075 was issued on September 13, 2017. We received $100,000 as consideration for the sale of such securities.
On February 26, 2018, we issued 3,428,571 shares of our common stock to an accredited investor as a result of a private offering. A five year warrant to purchase 1,071,429 shares of our common stock at an exercise price of $0.075 was issued on September 13, 2017. We received $250,000 as consideration for the sale of such securities.
On February 26, 2018, we issued 909,091 shares of our common stock to an accredited investor as a result of a private offering. A three year warrant to purchase 909,091 shares of our common stock at an exercise price of $0.10 was issued on September 29, 2017. We received $50,000 as consideration for the sale of such securities.
On February 26, 2018, we issued 1,250,000 shares of our common stock to an accredited investor as a result of a private offering. A three year warrant to purchase 1,250,000 shares of our common stock at an exercise price of $0.12 was issued on December 13, 2017. We received $100,000 as consideration for the sale of such securities.
On February 26, 2018, we issued 1,250,000 shares of our common stock to an accredited investor as a result of a private offering. A three year warrant to purchase 1,250,000 shares of our common stock at an exercise price of $0.12 was issued on December 13, 2017. We received $100,000 as consideration for the sale of such securities.
On February 27, 2018, we issued 441,727 shares of common stock to Lucas Hoppel as per the Securities Purchase Agreement we signed on August 25, 2017. The agreement called for the issuance of 600,000 inducement shares price at the market price on the closing date. In the event the stock price declined over a six month period, the company was required to issue additional shares such that the current aggregate value of the inducement shares equaled the aggregate value of the inducement shares as of the closing date.
On March 2, 2018, we sold a total of 200,000 shares of common stock and a three-year warrant to purchase 100,000 shares of our common stock at an exercise price of $0.05 per share to an accredited investor in a private offering. We received $10,000 as consideration for the sale of such securities.
On March 5, 2018, we issued 1,653,000 shares of our common stock upon final conversion of $41,325 on convertible debt of $226,325 by Lucas Hoppel and the note was retired.
On March 5, 2018, we issued 1,565,000 shares of our common stock upon final conversion of $39,125 on convertible debt of $141,625 by Lucas Hoppel and the note was retired.
On March 23, 2018, we issued 1,500,000 shares of our common stock upon partial conversion of $37,500 on convertible debt of $169,950 by Lucas Hoppel.
On March 27, 2018, Gemini Master Fund, a 10% shareholder, exercised a warrant to purchase 13,671,379 shares by cashless exercise which resulted in the issuance of 9,603,662 shares of common stock. Gemini has no more warrants outstanding.
On March 28. 2018, we sold a total of 1,111,111 shares of our common stock and a five-year warrant to purchase 1,111,111 shares of our common stock at an exercise price of $0.10 per share to Abdalla Bamashmus, a 5% shareholder, in a private offering. We received $50,000 as consideration for the sale of such securities..
On April 4, 2018, we sold a total of 200,000 shares of common stock and a three-year warrant to purchase 100,000 shares of our common stock at an exercise price of $0.05 per share to an accredited investor in a private offering. We received $10,000 as consideration for the sale of such securities.
On April 9, 2018, we received a purchase order from Jatropha Inc for 10 Ford F-350’s with 80 kVA mobile generation (MG) systems installed. The order is the first part of the purchase commitment for 234 units that Jatropha has with the Company. The total value of the order is in excess of $1 million.
On April 10, 2018, we issued 2,025,000 shares of our common stock upon partial conversion of $50,625 on convertible debt of $374,872 by KHIC, LLC.