NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCCOUNTING POLICIES
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, 2018 included in our Annual Report on Form 10-K. The results
of operations for the three months ended March 31, 2019 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.
Going Concern
The Company has generated limited revenue
to date. The Company has a working capital deficit of $9,427,353 and an accumulated deficit of $237,618,482 as of March 31, 2019.
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.
Basic and Diluted Earnings per share
Net loss per share is provided in accordance
with FASB ASC 260-10, “Earnings per Share”. Basic loss per share is computed by dividing losses available to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share gives effect
to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares
if their effect is anti-dilutive as shown below:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Stock options
|
|
|
300,000
|
|
|
|
215,000
|
|
|
Warrants
|
|
|
79,084,985
|
|
|
|
87,138,700
|
|
|
Shares issuable under convertible notes
|
|
|
12,163,500
|
|
|
|
12,858,902
|
|
|
Convertible preferred stock
|
|
|
45,384,150
|
|
|
|
-
|
|
Leases
The Company determines if an arrangement
is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating
lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities,
and other long-term liabilities in our consolidated balance sheets. As of adoption of ASC 842 and as of January 1, 2019, the Company
was not party to finance lease arrangements.
ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information available at commencement date in determining the present value of
lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any
lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it
is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line
basis over the lease term.
Under the available practical expedient,
we account for the lease and non-lease components as a single lease component.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02, Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that requires a lessee to
record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that
allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1,
2019, the first day of fiscal year 2019, and using the modified retrospective method. The Company also elected the practical expedient
under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic
842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements.
Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. Therefore,
there was no impact recorded to beginning retained earnings or the statement of operations. The Company took advantage of the
practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases.
There was an increase in assets and liabilities of $50,242 due to the recognition of the required right-of-use asset and corresponding
liability for all lease obligations that are currently classified as operating leases. See Note 5 for details.
The Company reviewed other newly issued
accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material
effect is expected on the Company’s financial statements upon future adoption.
2: RELATED PARTY TRANSACTIONS
Short Term Convertible Debt –
Related Party
During the three months ended March 31,
2019, the Company entered into various note and share purchase agreements with a major shareholder to which the shareholder purchased
convertible notes in the aggregate of $350,000 along with additional shares of the Company’s common stock. The notes
expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates
range from May to June 2019. On the maturity date, whether or not the notes are converted, the investors shall receive shares
of the Company’s common stock with a value worth 50% of the note’s principal amounts. In addition, the shareholder
shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities
being sold by the Company on or after the maturity date. The Company may not prepay the notes prior to the maturity dates.
The number of shares in aggregate was determined to be 1,750,000 based on a 20-day lookback from the inception date subject to
a minimum of $0.10 per share. Total debt discount and share issuance obligation of $110,875 was recorded at inception. The debt
discount was amortized straight line over the 90-day period. This obligation was determined to be a liability under ASC 480. Total
amortization for the period from inception through March 31, 2019 was $24,686. As of March 31, 2019, the fair value of the shares
was determined to be $99,225 and a gain on change in value of share obligation of $11,650 was recorded.
During the three months ended March 31,
2019, an aggregate of $3,972,759 of convertible notes matured and the Company issued 19,863,800 shares of its common stock to
various noteholders. The Company recalculated the fair value of the share issuance obligation at the maturity date to be $1,255,130
and recorded a loss on change in fair value of $93,098. The Company wrote off the share issuance obligation to common stock and
APIC upon issuance of the shares. This note and $99,319 of accrued interest were converted into 4,073 shares of Series A Redeemable
Participating Convertible Preferred Stock (“Preferred Stock”).
As of March 31, 2019, and December 31,
2018, the Company had outstanding short-term related party convertible notes payable of $350,000 and $3,972,759, respectively.
Advances – Related Party
During the three months ended March 31,
2019, the Company received advances from its Chief Executive Officer totaling $150,000, and repaid advances totaling $40,000. During
the three months ended March 31, 2018, the Company received advances from its Chief Executive Officer totaling $8,000, and repaid
advances totaling $81,645. Such advances accrue interest at 6% per year and are payable upon demand. The Company paid interest
of $6,805 and $0 during the three months ended March 31, 2019 and 2018, respectively.
As of March 31,2019, and December 31,
2018, the aggregate outstanding balance of advances to related parties was $217,464 and $107,464, respectively.
3. DEBT
Short Term Convertible Debt
As of March 31, 2019, and December 31,
2018, the Company had outstanding short-term convertible notes payable of $2,678,474 and $1,012,038, respectively, net of unamortized
discounts of $350,258 and $2,158,944, respectively.
New Debt
During the three months ended March 31,
2019, the Company borrowed an aggregate of $120,200, net of original issue discounts and fees of $12,800 under short-term convertible
notes payable. The outstanding convertible notes of the Company are unsecured, bear interest between 0% and 12% per annum and
mature between April 2019 and February 2020. Certain of 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
60% - 61% of the lowest sale price of the common stock during the 15 to 20 consecutive trading days prior to the date of conversion.
During the three months ended March 31,
2019, the Company entered into various note and share purchase agreements with accredited investors pursuant to which the investors
purchased convertible notes in the aggregate of $468,500, along with additional shares of the Company’s common stock. In
addition, existing promissory notes and related party notes totaling $182,250 were modified into these note and share purchase
agreements. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The
maturity dates range from April 2019 to June 2019. On the maturity date, whether or not the notes are converted, the investors
shall receive shares of the Company’s common stock with a value worth 50% of the note’s principal amounts. In addition,
the investors shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note
into securities being sold by the Company on or after the maturity date. The Company may not prepay the notes prior to the
maturity dates. The number of shares in aggregate was determined to be 4,022,500 based on a 20-day lookback from the inception
date subject to a minimum of $0.10 per share. Total debt discount and share issuance obligation of $254,894 was recorded at inception.
The debt discount was amortized straight line over the 90-day period. This obligation was determined to be a liability under ASC
480. Total amortization for the period from inception through March 31, 2019 was $145,307. As of March 31, 2019, the fair value
of the shares was determined to be $228,075 based on the stock price on March 31, 2019 and a gain on change in value of share
obligation of $26,819 was recorded.
Modifications
During the three months ended March 31,
2019, the Company entered into various letter agreements with convertible noteholders, pursuant to which a prepayment penalty
of $47,500 was added to principal and an aggregate of 1,480,000 shares of the Company’s common stock were issued in exchange
for extending the maturity dates of these notes. One investor pursuant to one of these letter agreements was issued an additional
one million shares of the Company’s common stock on April 1, 2019 and an additional one million shares on May 1, 2019 as
the note was not paid in full. The modification of these convertible notes resulted in loss on extinguishment of debt.
Payoffs and Conversions
During the three months ended March 31,
2019, and 2018, the Company paid off short-term convertible debt of $153,000 and $43,000, respectively.
During the three months ended March 31,
2019, the Company signed an agreement with an investor to modify the conversion price of an existing note from $0.50 to $0.10
and to convert the $50,000 convertible note. This increased the number of shares received upon conversion from 100,000 to 500,000.
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 $24,948. The full principal balance of $50,000 with accrued interest of $4,000 was converted
into 540,000 shares of common stock.
During the three months ended March 31,
2019, an aggregate of $742,000 of convertible notes matured and the Company issued 3,710,000 shares of its common stock to various
noteholders. The Company recalculated the fair value of the share issuance obligation at the maturity date to be $234,422 and
recorded a loss on change in fair value of $17,388. The Company wrote off the share issuance obligation into common stock and
APIC upon issuance of the shares. Convertible notes totaling $414,000 and accrued interest of $10,470 were converted into 430
shares of Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”). Convertible notes totaling
$178,000 and accrued interest of $5,050 were forgiven in exchange for the exercise of warrants totaling $141,184 and the issuance
of 43 preferred shares for the remainder. Additionally, a $150,000 note that was entered into in the prior year, plus accrued
interest of $3,750, was rolled into another note with the same terms.
Short Term Non-Convertible Debt
As of March31,2019 and December 31, 2018,
the Company had outstanding notes payable of $1,745,018 and $1,687,518, respectively, net of unamortized discounts of $0.
New Debt
During the three months ended March 31,
2019, the Company borrowed $45,000 under non-convertible notes payable from an investor. This note had 0% interest and no maturity
date.
Modifications
During the three months ended March 31,
2019, the Company entered into various letter agreements with non-convertible noteholders, pursuant to which an aggregate of $57,500
was added to principal in exchange for extending the maturity dates of these notes. The Company recorded this as loss on extinguishment
of debt.
Payoffs
During the three months ended March 31,
2019 and 2018, the Company paid off short-term non-convertible debt of $45,000 and $0, respectively.
Debt Summary
In summary, total debt discount due to
beneficial conversion feature and common stock and warrants issued with debt was $365,769 and $494,697 for the three months ended
March 31, 2019 and 2018, respectively. All debt discounts are being amortized over the term of the notes. Total amortization of
the debt discounts on all debt was $2,305,845 and $337,333 for the three months ended March 31, 2019 and 2018, respectively. During
the three months ending March 31, 2019 and 2018, total loss on extinguishment of debt from promissory, convertible and related
party notes was $173,000 and $1,802,412, respectively, which excludes loss due to cash payoff prepayment penalties of $60,287
and $18,352 respectively.
4.
EQUITY
Preferred
Stock
On
February 15, 2019, the Company established a series of redeemable participating convertible preferred stock, par value $0.0001
per share, pursuant to a Certificate of Designation of Series A Redeemable Participating Convertible Preferred Stock dated February
15, 2019.
Pursuant
to the Certificate of Designation, the Company authorized 10,000 shares of the Series A Preferred Stock (“preferred stock”),
which shall be convertible into shares of common stock of the Company at the option of the holders thereof at any time after the
issuance of the preferred stock, at a conversion price equal to $0.10 subject to certain anti-dilution adjustments.
So
long as 50% of the preferred stock that has been issued remains outstanding, the holders thereof will have the right to participate
ratably in any offering of common stock of the Company or any other securities of the Company that would entitle the holder thereof
to acquire common stock of the Company.
The
holders of preferred stock shall be entitled to receive dividends when and as declared by the Board of Directors. No dividends
(other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital stock ranking
junior, as to dividends, to the preferred stock during any fiscal year of the Company until there shall have been paid or declared
and set apart during that fiscal year for the holders of the preferred stock a dividend in an amount per share equal to (i) the
number of shares of common stock issuable upon conversion of the preferred stock times (ii) the amount per share of the dividend
to be paid on the common stock. No dividends were declared for the three months ended March 31, 2019.
Upon the occurrence of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary (a “Liquidating Event”), each holder of preferred stock
then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders,
before any payment shall be made in respect of the common stock, an amount per share of preferred stock equal to three (3) times
the price such holder paid to purchase such preferred stock plus, accrued and unpaid dividends (the “Preferred Liquidation
Preference”). Such Preferred Liquidation Preference shall be secured by a first priority security interest on all of the
Company’s assets. The following events shall be deemed a Liquidating Event: (i) a sale, lease, exchange, exclusive license
which has the same effect as a sale of all or substantially all of the Company’s assets or other disposition of all or substantially
all of the Company’s assets in one transaction or a series of related transactions and (ii) a merger, tender offer, reorganization,
business combination or other transaction as a result of which (a) holders of the Company’s issued and outstanding voting
securities immediately before such transaction own or control less than a majority of the voting securities of the continuing
or surviving entity immediately after such transaction or (b) any of the preferred stock is converted into any other property
or security. It was determined the preferred stock has a deemed liquidation redemption feature that triggers temporary equity
classification under ASC 480.
The
holders of shares of preferred stock shall vote together with the holders of common stock as a single class. The holder of each
share of preferred stock (i) shall be entitled to the number of votes with respect to such share equal to the number of shares
of common Stock into which such share of preferred stock could be converted on the record date for the subject vote or written
consent ( or, if there is no such record date, then on the date that such vote is taken or consent is effective) and (ii) shall
be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Company. Fractional votes shall not be
permitted, and any fractional voting rights resulting from the above formula (after aggregating all shares of common stock into
which shares of preferred stock held by each holder could be converted) shall be reduced to the nearest whole number.
During the three months ended March 31, 2019,
the Company issued an aggregate of 4,546 shares of its preferred stock related to the conversion of $4,449,943 of debt and $88,742
of interest expense. See convertible debt discussion in Note 3 for more details.
Common
Stock
During
the three months ended March 31, 2019, the Company issued 23,573,800 shares of the Company’s common stock pursuant to certain
debt modification agreements, related to the maturity of various convertible notes totaling $4,714,760. See the convertible debt
section in Note 3 for more details.
In March 2019, the Company issued 480,000
shares of the Company’s common stock to certain note holders in exchange for accrued interest of $48,000. The fair value
of the common stock was determined to be $27,216 and resulted in a gain on settlement of accrued interest of $20,784.
On
March 1, 2019, the Company entered into a letter agreement with an investor pursuant to which the investor agreed to extend the
maturity date of a convertible note in exchange for 1,000,500 shares of the Company’s common stock. The fair value of the
common stock was determined to be $68,000 based on the stock price on March 1, 2019 which was recorded as loss on extinguishment
of debt. Pursuant to this agreement, an additional 1,000,000 shares of the Company’s common stock were issued on April 1,
2019 and May 1, 2019.
During
the three months ended March 31, 2019, the Company issued an aggregate of 540,000 shares of its common stock related to the conversion
of $50,000 of principal and $4,000 accrued interest expense on convertible notes.
During
the three months ended March 31, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance
of 2,200,000 common shares.
During
the three months ended March 31, 2019, an aggregate of 1,411,843 warrants were modified to reduce the exercise price to $0.10
per share pursuant to a debt modification and exercised resulting in a total issuance of 1,411,843 common shares. Rather than
receiving cash proceeds of $141,184, the Company netted this amount against convertible note payoffs totaling $178,000. The remaining
$36,816 owed to one noteholder was paid by the issuance of 37 shares of Preferred Stock.
Stock
Options
A
summary of stock option activity during the three months ended March 31, 2019 is as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Outstanding at December 31, 2018
|
|
|
300,000
|
|
|
$
|
0.52
|
|
|
|
9.0
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
300,000
|
|
|
$
|
0.52
|
|
|
|
8.7
|
|
|
Exercisable at March 31, 2019
|
|
|
97,000
|
|
|
$
|
0.53
|
|
|
|
7.8
|
|
Stock
option awards are expensed on a straight-line basis over the requisite service period. During the three months ended March 31,
2019 and 2018, the Company recognized expense of $10,424, and $9,811, respectively, associated with stock option awards. At March
31, 2019, future stock compensation expense (net of estimated forfeitures) not yet recognized was $75,767 and will be recognized
over a weighted average remaining vesting period of 2.4 years.
The
intrinsic value of the Company’s stock options outstanding was $0 at March 31, 2019.
Warrants
Employee
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. On November 28, 2018, the exercise price was reduced to $0.10 pursuant to the Board
of Director’s consent. This resulted in a difference in fair value of $117,440 of which $58,720 was expensed on November
28, 2018 for the vested warrants and the remaining $58,720 will be expensed equally over the remaining term. On March 31, 2019,
Mr. DaVella terminated his employment with the Company. The remaining two tranches totaling 900,000 warrants were forfeited upon
termination of the Employment Agreement on March 31, 2019. Warrant expense of $248,486 was recaptured during the three months
ended March 31, 2019. Warrant expense of $85,183 was recognized during the three months ended March 31, 2018.
On
February 5, 2019, the Company issued warrants to purchase an aggregate of 2,500,000 shares of its Common Stock to three of its
employees as a bonus in exchange for services to be provided to the Company. The warrants have a 10-year term, a $0.10 exercise
price and will vest 25% annually for 4 years beginning on the first anniversary date. The aggregate fair value of the warrants
was determined to be $129,906 using the Black-Scholes option pricing model. Warrant expense of $11,277 was recognized during the
three months ended March 31, 2019.
Total
warrant expense for employee warrants of non-forfeited tranches was $11,277 and $85,183 for the three months ended March 31, 2019
and 2018, respectively.
Non-Employee
Service Warrants
On
October 23, 2018, the Company issued warrants to purchase 2,000,000 shares of the Company’s common stock pursuant to a letter
agreement in exchange for services. The warrants have an exercise price of $0.50 and a 10-year term. 20% of the warrants vested
immediately and an additional 20% will vest each anniversary for four years. The fair value of the warrants was determined to
be $155,397 using the Black-Scholes option pricing model. Warrant expense of $16,187 was expensed during the three months ended
March 31, 2019.
The
Company expensed a total of $16,187 and recaptured a total of $13,222 for warrants issued to non-employees for services provided
during the three months ended March 31, 2019 and 2018, respectively.
Warrant
Exercises and Reduction of Exercise Prices
During
the three months ended March 31, 2019, an aggregate of 631,843 warrants were modified to reduce the exercise price to $0.10 per
share pursuant to a debt modification and exercised the warrants resulting in the issuance of 631,843 common shares. Rather than
receiving cash proceeds of $63,184, the Company netted this amount against a convertible note payoff of $100,000. The remaining
$36,816 owed to the noteholder was paid by the issuance of 37 shares of Preferred Stock.
During
the three months ended March 31, 2019, an aggregate of 780,000 warrants were modified to reduce the exercise price to $0.10 per
share pursuant to a debt modification and exercised resulting in the issuance of 780,000 common shares. The change in fair value
of these warrants from the modification is immaterial. Rather than receiving cash proceeds of $78,000, the Company netted this
amount against convertible notes payable of $78,000.
During
February and March 2019, an aggregate of 814,848 warrants were modified to reduce the exercise price to $0.10 per share pursuant
to a debt modification but not exercised. The change in fair value of these warrants from the modification is immaterial.
Between
January and March 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common
shares.
The
following summarizes the warrant activity for the three months ended March 31, 2019:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
90,258,828
|
|
|
$
|
0.41
|
|
|
|
5.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,500,000
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(8,962,000
|
)
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,711,843
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2019
|
|
|
79,084,985
|
|
|
$
|
0.44
|
|
|
|
5.8
|
|
|
$
|
-
|
|
|
Exercisable as of March 31, 2019
|
|
|
73,179,628
|
|
|
$
|
0.45
|
|
|
|
5.8
|
|
|
$
|
-
|
|
These
warrants were valued based on the grant date fair value of the instruments using a Black-Scholes option pricing model with the
following assumptions:
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Volatility
|
|
217.10%
|
|
138.93% - 185.90%
|
|
Risk-free interest rate
|
|
2.72%
|
|
2.12% - 2.87%
|
|
Expected term
|
|
10 years
|
|
3-10 years
|
5.
COMMITMENTS AND CONTINGENCIES
Sponsored
Research and License Agreements
Research
and development of the Company’s high efficiency solar thin films and OPV technologies are conducted in collaboration with
University partners through sponsored research agreements.
The
Company established direct research and development agreements with Michigan on June 16, 2016, which were amended on July 21,
2016, to provide engineering support and facility access associated with technology transfer and commercialization of its high
efficiency thin film solar technologies. Such research agreements were terminated on August 31, 2017 and replaced with a time
and materials contract for access to Michigan’s Labs by the Company’s technicians.
A
separate research agreement dated December 20, 2013, among the Company and USC (the “2013 Research Agreement”), governs
research conducted by USC and Michigan on high efficiency thin film and OPV technologies. Michigan is a subcontractor to USC on
this research agreement. The 2013 Research Agreement expires on January 31, 2021.
On
August 8, 2016, the Company amended the 2013 Research Agreement with USC, suspending the agreement effective as of August 15,
2016. The Company requested this amendment to suspend its OPV-related sponsored research activities to reduce near-term expenditures
to allow the Company to bring its account with USC current through a payment plan. The suspension is to continue until the date
that is 30 days after expenses incurred by USC have been reimbursed by the Company. Under this amendment, the Company repaid expenses
to USC in quarterly installments of $206,000 from November 2016 through February 2018.
Under
the Company’s currently effective License Agreement, as amended on August 22, 2016, among the Company and USC, Michigan,
and Princeton (the “Fourth Amendment to License Agreement”), wherein the Company has obtained the exclusive worldwide
license and right to sublicense any and all intellectual property resulting from the Company’s sponsored research agreements,
we have agreed to pay for all reasonable and necessary out of pocket expenses incurred in the preparation, filing, maintenance,
renewal and continuation of patent applications designated by the Company. In addition, the Company is required to pay to USC
3% of net sales of licensed products or licensed processes used, leased or sold by the Company, 3% of revenues received by the
Company from the sublicensing of patent rights and 23% of revenues (net of costs and expenses, including legal fees) received
by the Company from final judgments in infringement actions respecting the patent rights licensed under the agreement. A previous
amendment to the License Agreement (the Third Amendment to License Agreement dated December 20, 2013) amended the minimum royalty
section to eliminate the accrual of any such royalties until 2014. Furthermore, the amounts of the non-refundable minimum royalties,
which would be applicable starting in 2014, were adjusted to be lower than the amounts in the previous License Agreement. Minimum
royalties are $100,000 per year for the remainder of the contract.
There
is currently no ongoing research activity at Princeton, USC and Michigan related to the Company, although the Company maintains
licensing rights to technology previously developed there.
Leases
The
Company has two operating leases, one for office space in Scottsdale, Arizona and one for laboratory and office space in Ann Arbor,
Michigan. The office lease in Scottsdale, Arizona is renewed on a monthly basis and was therefore scoped out of ASC 842 while
the laboratory and office space lease in Ann Arbor, Michigan has a remaining term of 1.6 years. When this lease expires, it becomes
renewable on a monthly basis. Lease expense was $7,500 and $0 for the three months ended March 31, 2019 and 2018, respectively.
Supplemental
cash flow information related to leases for the three months ending March 31, 2019 was as follows:
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
50,242
|
|
|
Cash payments for operating leases
|
|
$
|
7,500
|
|
Supplemental
balance sheet information related to leases as of March 31, 2019 was as follows:
|
Operating lease right-of-use asset
|
|
$
|
43,348
|
|
|
Operating lease liabilities
|
|
$
|
43,348
|
|
As of March 31, 2019, our operating lease has a remaining lease
term of 1.6 years and we utilized an incremental borrowing rate of 5.33%. Future lease payments under operating lease liabilities
as of March 31, 2019 were as follows:
|
Remainder of 2019
|
|
$
|
22,500
|
|
|
2020
|
|
|
22,500
|
|
|
Total future lease payments
|
|
|
45,000
|
|
|
Less imputed interest
|
|
|
(1,652
|
)
|
|
Total lease liability balance
|
|
$
|
43,348
|
|
Concentrations
All
of the Company’s revenue and accounts receivable are currently earned from one customer.
6.
SUBSEQUENT EVENTS
Between
April and May 2019, the Company entered into various note and share purchase agreements with accredited investors, four of which
are related parties, to which the investors purchased convertible notes in the aggregate of $1,491,681, along with additional
shares of the Company’s common stock. The notes expire on the 90-day anniversary of the issuance date and accrue interest
at a rate of 10% per annum. The maturity dates range from July to August of 2019. On the maturity date, whether or
not the note is converted, the investor shall receive a number of additional shares of the Company’s common stock equal
in value to 50% of the note balance based on the average closing price for the 20-trading day prior to the maturity date subject
to a floor of $0.10 per share. In addition, the investor shall have the right to convert all or any portion of the outstanding
and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date. The
Company may not prepay the note prior to the maturity date. In April and May of 2019, an aggregate of $520,750 of notes
matured and the Company issued 2,603,750 shares of its common stock to various noteholders. These noteholders also elected to
convert the notes and accrued interest into Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”).
An aggregate of 55 shares of Preferred Stock were issued upon conversion as of the date of this report.
During
April 2019, an aggregate of 335,000 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt
modification and exercised resulting in the issuance of 335,000 common shares. Rather than receiving cash proceeds of $33,500,
the Company netted this amount against convertible notes payables totaling $43,500. The remaining balance of the notes were paid
with the issuance of 13 shares of preferred stock.
In
May of 2019, the Company paid back advances to its Chief Executive Officer totaling $5,000.
In
April 2019, the Company entered into a letter agreement with a non-convertible noteholder, pursuant to which an aggregate of $20,000
of accrued interest was added to principal in exchange for extending the maturity date of this note. This $50,000 note and $6,000
of interest was paid off on May 8, 2019.
On
April 1, 2019 and May 1, 2019, pursuant to a letter agreement, the Company issued 1,000,000 shares of the Company’s common
stock to a convertible noteholder in exchange for extending the maturity date of this note.
In
May 2019, the Company borrowed an aggregate of $511,000 under short-term convertible notes payable. The notes are unsecured, bear
interest at a rate of 12% per annum and mature between February and May of 2020. The notes are convertible at a range of $0.25
to $.050 per share for the first 180 days. After 180 days or upon default, the conversion rate becomes variable with a price range
of 60% to 55% of the lowest sale price of the common stock during the 20 to 25 consecutive trading days prior to the date of conversion.
In
May 2019, the Company paid off short-term convertible debt of $676,500.