NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND, BASIS OF PRESENTATION,
AND GOING CONCERN
Background
NanoFlex Power Corporation (‘we”
“our”, the “Company”), formerly known as Universal Technology Systems, Corp., was incorporated in the
State of Florida on January 28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation,
a Pennsylvania corporation (“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”).
Immediately following the closing of the Share Exchange Transaction, the Company owned 100% of 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 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, (f) ultra-thin solar films for automobiles or other consumer applications
and (g) solar powered sensors.
We believe these technologies have been
demonstrated in a laboratory environment with our research partners. The Company is currently taking steps to pursue product development
and commercialization on some of these technologies in collaboration with industry partners and potential customers.
Basis of Presentation
The accompanying unaudited interim consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated
financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim
periods presented. These consolidated financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the fiscal year ended December 31, 2017 included in our Annual Report on Form 10-K. The results
of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected
for the full fiscal year or any other periods.
The preparation of the consolidated financial
statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates
and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures. Actual results may differ
from these estimates.
Certain balances were reclassified from
Convertible debt, net of unamortized discounts and deferred financing costs to short-term debt, net of unamortized discounts,
net for the year ended December 31, 2017 to conform to the current year presentation.
Revenue Recognition
Adoption of ASC Topic 606, “Revenue
from Contracts with Customers”
On January 1, 2018, we adopted Topic 606
using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with our historic accounting under Topic 605.
There was no impact to the opening balance
of accumulated deficit or revenues for the nine months ended September 30, 2018 as a result of applying Topic 606.
The Company applies a five-step approach
in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying
the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the
performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially
all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
The Company generates revenue from our
Joint Development Agreements (“JDA’s”) and our ARL contract. R&D engineering services through JDA’s
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. The Company has identified the promise to provide engineering services as its performance obligation,
which is satisfied over time. The Company has a right to consideration from its customer an amount that corresponds directly with
the value to the customer of the Company’s performance completed to date. As allowed by a practical expedient in Topic 606,
the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing and when payment
is due is not significant.
Due to the fact that the client only has
one type of service and only a few customers, disaggregation is deemed unnecessary.
Going Concern
The Company has generated limited revenue
to date. The Company has a working capital deficit of $11,377,544 and an accumulated deficit of $232,559,206 as of September 30,
2018. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and
carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt
as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue in existence. To date, the Company has funded its initial operations primarily
by way of the sale of equity securities, convertible note financing, short term financing from private parties, and advances from
related parties.
Fair Value
ASC 820 Fair Value Measurements and Disclosures
(“ASC 820”) defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair
value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels
of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven
valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or
corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure
fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable
inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost
and effort.
The following table sets forth a reconciliation
of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
Significant Unobservable
|
|
|
Significant Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
4,955,163
|
|
|
$
|
-
|
|
|
$
|
11,985,141
|
|
Change in fair value
|
|
|
-
|
|
|
|
(1,669,553
|
)
|
|
|
-
|
|
|
|
(8,793,076
|
)
|
Additions reclassified from
equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93,545
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
3,285,610
|
|
|
$
|
-
|
|
|
$
|
3,285,610
|
|
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. 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.
See revenue recognition policy above for further details.
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 this amendment did not have a material impact on its consolidated financial statements.
2. DEBT
Short Term Convertible Debt
During the nine months ended
September 30, 2018, the Company borrowed an aggregate of $1,414,620, net of original issue discounts and fees of $178,130
under short-term convertible notes payable. As of September 30, 2018, and December 31, 2017, the Company had outstanding
short-term convertible notes payable of $2,095,991 and $2,069,208, net of unamortized discounts of $140,096 and $390,687,
respectively. The outstanding convertible notes of the Company are unsecured, bear interest between 0% and 12% per annum and
mature between November 2018 and August 2019. These notes are convertible at fixed rates ranging from $0.25 - $0.50 per share
for the first 180 days. After 180 days or upon default, the conversion rates become variable with prices ranging from 58% -
61% of the lowest sale price of the common stock during the 20 to 25 consecutive trading days prior to the date of
conversion. These gave rise to a beneficial conversion feature which is recognized as additional paid in capital and a
corresponding debt discount. If warrants were issued with the debt, the Company valued the warrants and recorded the relative
fair value as additional debt discount.
During the nine months ended September
30, 2018, an aggregate of $19,056 of original issue discounts were added to two convertible notes as a result of the Most Favored
Nations Provision triggered by a transaction with another noteholder. In addition, 158,333 warrants to purchase shares of the
Company’s common stock were issued with a 10-year term and an exercise price of $1.00 per share. The Company valued the
warrants using the black-scholes model and recorded a loss on extinguishment of debt.
During the nine months ended September
30, 2018, the Company entered into letter agreements with two convertible noteholders, pursuant to which an aggregate of 4,250,000
warrants and 450,000 shares of the Company’s common stock were issued in exchange for extending the maturity dates of these
notes. The warrants have a 10-year term and exercise prices ranging from $0.25 to $0.50 per share. The Company also entered into
two letter agreements with one noteholder, pursuant to which $8,782 was added to the principal balance of the loan in exchange
for extending the conversion date of the note. The modification of these convertible notes resulted in loss on extinguishment
of debt, accrued interest added to principal of $35,000, and an additional $8,782 added to principal, which was included in loss
on extinguishment of debt.
During the nine months ended September
30, 2018, the Company paid off short-term convertible debt of $790,838. This resulted in a prepayment penalty loss recorded as
total loss on debt extinguishment.
During the nine months ended September
30, 2018, the Company signed agreements with 15 investors to modify the conversion prices of existing notes from $0.50 to $0.10
and to convert an aggregate amount of $1,099,600 of convertible notes. This increased the number of shares received upon conversion
from 2,202,000 to 11,266,000. These transactions met the requirements of, and are being recorded as, an inducement of the conversion
of debt. The difference in the fair value of the securities were measured on the dates the signed agreements were received and
were recorded as a loss on induced conversion of debt totaling $4,412,952. The full principal balances totaling $1,076,000 with
accrued interest of $23,600 were converted into 10,996,000 shares of common stock and 5,000,000 warrants. Upon conversion, the
Company accelerated the recognition of all remaining debt discount and also recognized additional interest expense of $149,599
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. The conversion of debt on two notes totaling $25,000 was recorded subsequent
to September 30, 2018 when the shares were issued.
Short Term Convertible Debt - Related
Party
In October 2017, the Company entered into
an agreement with a major shareholder pursuant to which the Company and the major shareholder agreed to convert six previously
issued 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 which totaled
$2,496,478. This 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 into the Company’s next offering of its convertible promissory
notes and warrants, at a 15% discount thereto. Further, pursuant to this agreement, on October 18, 2017, the major shareholder
was issued a warrant, with a ten-year term, to purchase 1,000,000 shares of the Company’s common stock at an exercise price
of $0.50. The 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 which is recognized as additional
paid in capital and a corresponding debt discount. 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. During the nine months
ended September 30, 2018, accrued interest of $524,261 was added to principal pursuant to the agreement.
As of September 30, 2018, and December
31, 2017, the Company had outstanding short-term related party convertible notes payable of $3,020,739 and $2,496,478, respectively.
Long Term Convertible Debt
During the nine months ended September
30, 2018, the Company borrowed $157,500, net of original issue discounts and fees of $17,500, under long-term convertible notes
payable. As of September 30, 2018, and December 31, 2017, the Company had outstanding convertible notes payable of $31,164 and
$0, net of unamortized discounts of $43,836 and $0, respectively. The outstanding convertible notes are unsecured, have interest
rates ranging from 8% to 12% and mature between June 2021 and April 2023. One of the notes is convertible at $0.25 per share for
the first 180 days following its issuance, and thereafter at a conversion price equal to 60% of the lowest sale price of the common
stock during the 20 consecutive trading days prior to the date of conversion. Two of the notes are convertible at $0.60 per share.
These notes also gave rise to a beneficial conversion feature which is recognized as additional paid in capital and a corresponding
debt discount.
On May 25, 2018, two notes were modified
and resulted in the extinguishment of debt, returning the warrants issued with the debt, and issuing an aggregate of one million
shares of the Company’s common stock in exchange for the original cash proceeds totaling $100,000. This transaction resulted
in a loss on extinguishment of debt. See the common stock and warrants section in Note 3 for more details.
Long Term Convertible Debt - Related
Party
In March 2018, the Company borrowed $300,000
pursuant to a verbal agreement with a major shareholder. The note accrues interest at 8% per year payable in stock the first two
years and in cash or stock thereafter, at the shareholders choice, and has a 5-year term. Further, the major shareholder was issued
140,000 shares of common stock and a warrant to purchase 500,000 shares of the Company’s common stock with a 7-year term
and an exercise price of $0.60 per share. This note was convertible at $0.60 per share into common stock. The relative fair value
of the warrants and the shares issued with debt was recognized as a debt discount and will be amortized over the term of the note.
On June 1, 2018, this agreement was modified
and resulted in extinguishing the debt, returning the original shares and warrants issued with the note, and issuing three million
shares of the Company’s common stock in exchange for the original cash proceeds of $300,000. This transaction resulted in
a loss on extinguishment of debt of $459,050. See the common stock and warrants section in Note 3 for more details.
As of September 30, 2018, and December
31, 2017, the Company had outstanding long-term related party convertible notes payable of $0.
Short Term Non-Convertible Debt
During the nine months ended September
30, 2018, the Company borrowed an aggregate of $275,000 under non-convertible notes payable. As of September 30, 2018, and December
31, 2017, the Company had outstanding notes payable of $1,959,018 and $1,719,690, net of unamortized discounts of $0 and $175,311.
These notes payable of the Company are unsecured, bear interest between 0% and 12% per annum and mature between January 2019 and
June 2019. An aggregate of 350,000 warrants were issued with the notes. The relative fair value of the warrants issued with the
debt was recognized as a debt discount and will be amortized over the term of the note.
During the nine months ended September
30, 2018, the Company entered into letter agreements with nine non-convertible noteholders, pursuant to which an aggregate of
16,660,000 warrants and 1,950,000 shares of the Company’s common stock were issued in exchange for extending the maturity
dates of these notes. The warrants have a 10-year term and exercise prices ranging from $0.25 to $0.50 per share. The modification
of these non-convertible notes resulted in accrued interest added to principal of $79,000, an interest payment of $17,500 and
an additional $30,000 added to principal which was included in loss on extinguishment of debt. The Company fair valued the common stock and warrants issued and recorded them as loss on extinguishment
of debt.
During the nine months ended September
30, 2018, the Company entered into a letter agreement with a non-convertible noteholder, pursuant to which a $25,000 note was
forgiven in exchange for 250,000 shares of the Company’s common stock with a fair value of $47,500. The modification of
this non-convertible note resulted in loss on extinguishment of debt.
During the nine months ended September
30, 2018, the Company paid off short-term non-convertible debt of $295,000.
In summary, total debt discount due to
beneficial conversion feature and common stock and warrants issued with debt was $597,624 and $1,631,138 for the nine months ended
September 30, 2018 and 2017, respectively. All debt discounts are being amortized over the term of the notes. Total amortization
of the debt discounts on all debt was $1,058,463 and $1,579,108 for the nine months ended September 30, 2018 and 2017, respectively.
Total loss on extinguishment of debt from promissory, convertible and related party notes was $6,049,189 which excludes $344,998
of loss due to cash payoff prepayment penalties.
Advances – Related Party
During the nine months ended September
30, 2018, the Company received advances from its Chief Executive Officer totaling $8,000, and repaid advances totaling $172,193.
During the nine months ended September 30, 2017, the Company received advances from its Chief Executive Officer totaling $138,500,
and repaid advances totaling $204,500.
As of September 30, 2018, and December
31, 2017, the aggregate outstanding balance of advances to related parties was $179,487 and $343,680, respectively.
Derivative Liabilities - Convertible
Notes
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 on a modified
retrospective basis. The Company reclassified the December 31, 2016, conversion option derivative liabilities balance of
$3,156,736 to additional paid in capital and accumulated deficit on its January 1, 2017 consolidated balance sheets. The
statements of operations and cash flows for the three and nine months ended September 30, 2017 have not been restated.
Accounts Payable - Related Party
As of September 30, 2018, and December
31, 2017, there is $1,700 and $12,372, respectively, due to related parties, which is non-interest bearing and due on demand.
3. EQUITY
Common Stock
On January 15, 2018, the Company issued
30,303 shares of its common stock to a consultant pursuant to a consulting agreement. The fair value of the common stock was determined
to be $10,000 based on the stock price on January 15, 2018 and was recorded as expense.
On February 23, 2018, the Company issued
1,750,000 shares of its common stock related to the settlement with John Kuhns. The fair value of the common stock was determined
to be $681,625 based on the stock price on August 29, 2017, which was the original grant date. See Note 5 for details.
In March 2018, the Company issued 112,000
shares of the Company’s common stock to certain note holders in exchange for accrued interest of $56,000. The fair value
of the common stock was determined to be $23,200 and resulted in a gain on settlement of accrued interest of $32,800.
On March 5, 2018, the Company issued 140,000
shares of the Company’s common stock to a related party pursuant to a letter agreement. The relative fair value of the common
stock was determined to be $25,040 and is recorded as a debt discount. On June 1, 2018, this agreement was modified and resulted
in extinguishing the associated debt, cancelling the original shares and warrants, and issuing three million shares of the Company’s
common stock in exchange for the original cash proceeds of $300,000. This transaction resulted in a loss on extinguishment of
debt.
On April 23, 2018, the Company issued
an aggregate of 50,000 shares of the Company’s common stock to two investors pursuant to a letter agreement. The relative
fair value of the common stock was determined to be $8,894 and is recorded as a debt discount. On March 25, 2018, these agreements
were modified and resulted in extinguishing the associated debt, cancelling the original shares and warrants, and issuing an aggregate
of one million shares of the Company’s common stock in exchange for the original cash proceeds of $100,000. This transaction
resulted in a loss on extinguishment of debt.
During the nine months ended September
30, 2018, the Company entered into various letter agreements with investors to modify existing debt agreements on both convertible
and non-convertible debt. These modifications resulted in the issuance of an aggregate of 2,650,000 common shares with an aggregate
fair value of $572,425. See Note 2 for details of these transactions.
During the nine months ended September
30, 2018, the Company issued an aggregate of 10,996,000 shares of its common stock related to the conversion of $1,076,000 of
principal and $23,600 accrued interest expense on convertible notes.
During the nine months ended September
30, 2018, the Company issued 7,237,810 shares of the Company’s common stock at $0.10 per share in exchange for proceeds
of $723,781.
During the nine months ended September
30, 2018, the Company issued an aggregate of 9,382,942 shares of its common stock related to the exercise of 9,382,942 warrants
in exchange for cash proceeds of $938,294. Additionally, an aggregate of 19,992,079 warrants were modified to reduce the exercise
price to $0.10 per share by a ratchet adjustment or debt modification resulting in the issuance of 6,900,000 additional warrants.
A total of 28,227,853 warrants were exercised cashlessly resulting in the issuance of 22,035,606 common shares. This resulted
in a reclassification of $2,203 from additional paid in capital to common stock.
Stock Options
A summary of stock option activity during
the nine months ended September 30, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
Outstanding at December 31, 2017
|
|
|
215,000
|
|
|
$
|
0.65
|
|
|
|
9.0
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(65,000
|
)
|
|
|
0.90
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
150,000
|
|
|
$
|
0.54
|
|
|
|
8.3
|
|
Exercisable at September 30, 2018
|
|
|
46,000
|
|
|
$
|
0.53
|
|
|
|
7.8
|
|
Stock option awards are expensed on a
straight-line basis over the requisite service period. During the three months and nine months ended September 30, 2018, the Company
recognized expense of $9,892, and $30,480, respectively, associated with stock option awards. During the three and nine months
ended September 30, 2017, the Company recognized expense of $7,892, and $22,502, respectively, associated with stock option awards.
At September 30, 2018, future stock compensation expense (net of estimated forfeitures) not yet recognized was $72,328 and will
be recognized over a weighted average remaining vesting period of 2.1 years.
The intrinsic value of the Company’s
stock options outstanding was $0 at September 30, 2018.
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. 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.
Warrant expense of $60,087 and $334,696 was recognized during the three and nine months ended September 30, 2017. In addition,
$380,548 of expense was reversed during the quarter ended June 30, 2017 related to the forfeited warrants.
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 fair value of the warrants
was determined to be $743,416 using the Black-Scholes option pricing model. 450,000 Warrant Shares vested on May 18, 2017 and
450,000 additional warrant shares vested on May 18, 2018. 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 $38,720 and $193,598 was recognized during the three and nine months ended September 30, 2018, respectively.
Warrant expense of $85,183 and $299,432 was recognized during the three and nine months ended September 30, 2017, respectively.
Total warrant expense for employee warrants
of non-forfeited tranches was $38,720 and $193,598 for the three and nine months ended September 30, 2018, respectively. Total
warrant expense for employee warrants of non-forfeited tranches was $145,270 and $634,128 for the three and nine months ended
September 30, 2017, respectively.
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 vested 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.
Warrant expense of $34,827 and $143,136 was recaptured during the three and nine months ended September 30, 2017.
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, 250,000 warrant shares vested on May 13, 2017, and an additional 250,000 Warrant Shares vested on May 13, 2018.
The fair value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model
and was recognized as expense and as derivative liabilities during the year ended December 31, 2016. The fair value of the first
250,000 Warrant Shares was determined to be $93,545 using the Black-Scholes option pricing model of which $52,457 of expense was
recaptured during the year ended December 31, 2017. The fair value of the last tranche of 250,000 Warrant Shares was determined
to total $74,974 as of May 13, 2018 using the Black-Scholes option pricing model of which $0 and $4,576 of expense was recognized
during the three and nine months ended September 30, 2018, respectively. 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 and reset to $0.10 per share
during the three months ended June 30, 2018.
On May 8, 2018, the Company issued 300,000
warrants pursuant to a letter agreement in exchange for services. The fair value of the warrants was determined to be $65,984
and was expensed during the three months ended June 30, 2018.
The Company expensed a total of $0 and
$70,560 for warrants issued to non-employees for services provided during the three and nine months ended September 30, 2018,
respectively.
During the nine months ended September
30, 2018, the Company issued 350,000 warrants for the Company’s common shares with a strike price of $0.50 per share, with
promissory notes of $100,000. The relative fair value of the warrants of $46,256 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 $11,637 and $46,256
associated with the amortization of debt discount on the notes and warrants issued during the current year for the three and nine
months ended September 30, 2018, respectively.
During the nine months ended September
30, 2018, the Company issued an aggregate of 2,228,333 warrants with eleven convertible notes totaling $1,238,000. The relative
fair value of the warrants was determined to be $425,127, which was recognized as a discount to the debt. These notes also gave
rise to a beneficial conversion feature of $126,266, 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. Amortization expense was
$144,445 and $307,224 for the three and nine months ended September 30, 2018, respectively.
During the nine months ended September
30, 2018, the Company issued an aggregate of 21,068,333 warrants to purchase the Company’s common stock in conjunction with
debt modification agreements. The warrants have a 10-year term and exercise prices ranging from $0.10 to $1.00 per share. The
fair value of the warrants was determined to be $4,904,446 using the Black-Scholes option pricing model which was recognized as
loss on extinguishment of debt, along with the common stock issued for debt modification (as disclosed in the common stock section).
During the nine months ended September
30, 2018, the Company issued a total of 5,000,000 warrants to purchase the Company’s common stock in relation to the conversion
of debt. These warrants have a strike price of $0.10 per share and a five-year term. See additional details in Note 2.
During the nine months ended September
30, 2018, the Company cancelled 500,000 warrants due to a debt modification with a major shareholder. The Company recorded a loss
on extinguishment. See additional details in the common stock section above.
During the nine months ended September
30, 2018, the Company cancelled 83,333 warrants due to debt modifications with two investors. The Company recorded a loss on extinguishment.
See additional details in the common stock section above.
During the nine months ended September
30, 2018, an aggregate of 9,382,942 warrants were exercised at $0.10 per share in exchange for cash proceeds of $938,294, resulting
in the issuance of 9,382,942 common shares. A total of 28,227,853 warrants were exercised cashlessly resulting in the issuance
of 22,035,605 common shares. Additionally, an aggregate of 19,992,079 warrants were modified to reduce the exercise price to $0.10
per share by a debt modification resulting in the issuance of 6,900,000 additional warrants. All other terms and conditions remained
the same. The Company determined that this transaction did not constitute a modification under ASC 718-10 or ASC 505-50
as it met the scope exceptions for a transaction with an investor or lender. Accordingly, no expense was recognized
in connection with these transactions.
On June 1, 2018, the Company began issuing
shares of common stock at $0.10 per share. As of June 1, 2018, the Company had 9,430,333 warrants with price reset provisions.
This resulted in the issuance of an additional 23,979,997 warrants due to price reset. The Company also reported a loss on the
fair value of $5,706,261 which is shown on the income statement as part of net income (loss) attributable to shareholders.
The following summarizes the warrant activity
for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding as of December 31, 2017
|
|
|
79,381,367
|
|
|
$
|
0.51
|
|
|
|
4.4
|
|
|
$
|
10,700
|
|
Granted
|
|
|
29,282,666
|
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
Warrants issued due to price modification
|
|
|
30,879,997
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,094,441
|
)
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,483,746
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2018
|
|
|
97,965,843
|
|
|
$
|
0.44
|
|
|
|
5.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2018
|
|
|
97,065,843
|
|
|
$
|
0.44
|
|
|
|
5.0
|
|
|
$
|
-
|
|
Derivative Liabilities - Warrants
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 December
31, 2016 warrant derivative liabilities balance of $8,828,405 to additional paid in capital and accumulated deficit on its January
1, 2017 consolidated balance sheets. The statements of operations and cash flows for the three and nine months ended September
30, 2017 have not been restated.
4. NET EARNINGS (LOSS) PER SHARE
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,769,084
|
)
|
|
$
|
(2,082,535
|
)
|
|
$
|
(16,014,086
|
)
|
|
$
|
467,158
|
|
Loss on reduction of price of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,706,261
|
)
|
|
|
-
|
|
Net income (loss) attributable to shareholders
|
|
|
(8,769,084
|
)
|
|
|
(2,082,535
|
)
|
|
|
(21,720,347
|
)
|
|
|
467,158
|
|
Less: decrease in fair value of warrants, net of income
tax
|
|
|
-
|
|
|
|
(1,418,223
|
)
|
|
|
-
|
|
|
|
(4,704,395
|
)
|
Less: decrease in fair value of convertible debt,
net of income tax
|
|
|
-
|
|
|
|
(343,620
|
)
|
|
|
-
|
|
|
|
(2,249,122
|
)
|
Less: interest expense - convertible
debt
|
|
|
-
|
|
|
|
16,427
|
|
|
|
-
|
|
|
|
-
|
|
Loss available to common stockholders
|
|
|
(8,769,084
|
)
|
|
|
(3,827,951
|
)
|
|
|
(21,720,347
|
)
|
|
|
(6,486,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
116,964,013
|
|
|
|
66,578,958
|
|
|
|
86,413,769
|
|
|
|
63,687,700
|
|
Plus: incremental shares from assumed exercise - options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
586
|
|
Plus: incremental shares from assumed exercise - warrants
|
|
|
-
|
|
|
|
261,753
|
|
|
|
-
|
|
|
|
1,932,044
|
|
Plus: incremental shares from assumed conversion -
convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,407
|
|
Plus: incremental shares from
assumed conversion - units
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Adjusted weighted average common shares outstanding
|
|
|
116,964,013
|
|
|
|
68,840,711
|
|
|
|
86,413,769
|
|
|
|
67,659,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.10
|
)
|
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In November 2013, the Company entered
into a 60-month lease agreement for its corporate facility in Arizona. In September 2018, this lease was extended through May
2019. In September 2018, the Company also entered into a 24-month lease agreement for its research facility in Michigan. Total
rent expense for the three and nine months ended September 30, 2018 was $34,816 and $88,399, respectively. Total rent expense
for the three and nine months ended September 30, 2017 was $18,067 and $81,480, respectively.
Future minimum lease payments are as follows:
2018 (remainder)
|
|
$
|
29,039
|
|
2019
|
|
|
65,898
|
|
2020
|
|
|
22,500
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
117,437
|
|
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 recognized during 2017. The common stock was issued on February
23, 2018. The $125,000 note and accrued interest of $11,139 was paid off on June 20, 2018.
6. SUBSEQUENT EVENTS
In October and November 2018, the Company
issued an aggregate of 2,191,966 shares of its common stock related to the exercise of 2,191,966 warrants and received cash
proceeds of $219,197.
In October 2018, the Company signed an
agreement with an investor to modify the conversion price on an existing convertible note from $0.50 to $0.10 and to convert the
note that has a balance of $25,000. This increased the number of shares received upon conversion from 50,000 to 250,000. This
transaction met the requirements of, and, and is being recorded as, an inducement of the conversion of debt. The investor converted
the principal of $25,000 and accrued interest of $2,000 upon modification into 270,000 shares and pursuant to this agreement,
exercised 150,000 warrants in exchange for $15,000, resulting in the issuance of 150,000 shares.
In October 2018, convertible notes totaling
$50,000 with accrued interest of $4,000 were converted into 540,000 shares of the Company’s common stock.
In October 2018, the Company entered into
a letter agreement with a non-convertible noteholder, pursuant to which $12,500 of accrued interest was added to the principal
balance in exchange for extending the maturity date of this note.
In October 2018, the Company entered into
a letter agreement with a non-convertible noteholder, pursuant to which a $25,000 note with $1,000 of accrued interest, was forgiven
in exchange for 260,000 shares of the Company’s common stock.
In October 2018, the Company entered into
a consulting agreement pursuant to which 2,000,000 warrants to purchase the Company’s common stock were issued in exchange
for consulting services. The warrants have an exercise price of $0.50, a ten-year term and a cashless exercise provision. Upon
execution of this agreement, 20% of the warrants will be exercisable and an additional 20% on each one-year anniversary of the
agreement for 4 years.
In October 2018, the Company received $350,000
cash from a major shareholder which was used to pay off short-term convertible debt of $210,000. The total repaid was $333,123
including prepayment penalties recorded as total loss on debt extinguishment. The terms of the repayment of the $350,000 are still
being determined.
In November 2018, the Company entered into
an amendment with a convertible noteholder, pursuant to which the maturity date and the conversion date were extended in exchange
for a cash payment of $31,080.
In November 2018, the Company received $100,000
cash from an investor. The terms of the repayment of the $100,000 are still being determined.