NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION
Ascent Solar Technologies, Inc. (“Ascent”) was incorporated on October 18, 2005 from the separation of ITN Energy Systems, Inc's (“ITN”) Advanced Photovoltaic Division and all of that division’s key personnel and core technologies. ITN, a private company incorporated in 1994, is an incubator dedicated to the development of thin-film, photovoltaic (“PV”), battery, fuel cell, and nano technologies. Through its work on research and development contracts for private and governmental entities, ITN developed proprietary processing and manufacturing know-how applicable to PV products generally, and to Copper-Indium-Gallium-diSelenide (“CIGS”) PV products in particular. ITN formed Ascent to commercialize its investment in CIGS PV technologies. In January 2006, in exchange for
5,140
shares of common stock of Ascent, ITN assigned to Ascent certain CIGS PV technologies and trade secrets and granted to Ascent a perpetual, exclusive, royalty-free worldwide license to use, in connection with the manufacture, development, marketing and commercialization of CIGS PV to produce solar power, certain of ITN’s existing and future proprietary and control technologies that, although non-specific to CIGS PV, Ascent believes will be useful in its production of PV modules for its target markets. Upon receipt of the necessary government approvals and pursuant to novation in early 2007, ITN assigned government-funded research and development contracts to Ascent and also transferred the key personnel working on the contracts to Ascent.
Currently, the Company is focusing on integrating its PV products into high value markets such as aerospace, satellites, near earth orbiting vehicles, fixed-wing unmanned aerial vehicles (UAV), military, and emergency preparedness. Ascent has the capability to design and develop finished products for end users in these areas as well as collaborate with strategic partners to design and develop custom integrated solutions for products like fixed-wing UAVs. Ascent sees significant overlap of the needs of end users across some of these industries and can achieve economies of scale in sourcing, development, and production in commercializing products for these customers.
Sale of EnerPlex Brand
In February 2017, Ascent announced the sale of our EnerPlex brand and related intellectual properties and trademarks associated with EnerPlex to our battery product supplier, Sun Pleasure Co. Limited (“SPCL”), in an effort to better allocate its resources and to continue to focus on its core strength in the high-value specialty PV market. Effective February 27, 2017, Ascent no longer produces or sells Enerplex-branded consumer products. Ascent will supply solar PV products to SPCL, supporting the continuous growth of EnerPlex™ with Ascent’s proprietary and award-winning thin-film solar technologies and products.
Ascent continues to design and manufacture its own line of PV integrated consumer electronics, as well as portable power applications for commercial, military, and emergency management.
NOTE 2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been derived from the accounting records of Ascent Solar Technologies, Inc., Ascent Solar (Asia) Pte. Ltd., and Ascent Solar (Shenzhen) Co., Ltd. (collectively, "the Company") as of
June 30, 2018
and
December 31, 2017
, and the results of operations for the
three and six
months ended
June 30, 2018
and
2017
. Ascent Solar (Shenzhen) Co., Ltd. is wholly owned by Ascent Solar (Asia) Pte. Ltd., which is wholly owned by Ascent Solar Technologies, Inc. All significant inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
The accompanying, unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these interim financial statements do not include all of the information and footnotes typically found in U.S. GAAP audited annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. The Condensed Consolidated Balance Sheet at
December 31, 2017
has been derived from the audited financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
. These condensed consolidated financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the
six
months ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies were described in Note 3 to the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
. There have been no significant changes to our accounting policies as of
June 30, 2018
.
Recently Adopted or to be Adopted Accounting Policies
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, and has issued a number of clarifying ASUs subsequently, all of which outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2018, and interim reporting periods thereafter. Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. The implementation of ASU 2014-09 has not had a material effect on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize all leases, including operating leases, on the balance sheet as a lease asset or lease liability, unless the lease is a short-term lease. ASU 2016-02 also requires additional disclosures regarding leasing arrangements. ASU 2016-02 is effective for interim periods and fiscal years beginning after December 15, 2018, and early application is permitted. The Company continues to evaluate the impact, that the adoption of this guidance will have on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718)
. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for interim periods and fiscal years beginning after December 15, 2017, and early application is permitted. The implementation of ASU 2017-09 did not have a material effect on the Company's consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11
Part I, Earnings Per Share (Topic 260), Distinguishing Liabilities from
Equity (Topic 480), Derivatives and Hedging (Topic 815)
. ASU 2017-11 Part I changes the classification analysis of certain equity linked financial instruments with down round features. ASU 2017-11 Part I is effective, for public business entities, for interim periods and fiscal years beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.
NOTE 4. LIQUIDITY AND CONTINUED OPERATIONS
During the
six
months ended
June 30, 2018
and the year ended
December 31, 2017
, the Company entered into multiple financing agreements to fund operations. Further discussion of these transactions can be found in Notes 7 through 15, and Note 18 of the financial statements presented as of, and for, the
six
months ended,
June 30, 2018
, and in Notes 8 through 22 and Note 30 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
.
The Company has continued limited PV production at its manufacturing facility. The Company does not expect that sales revenue and cash flows will be sufficient to support operations and cash requirements until it has fully implemented its product strategy. During the
six
months ended
June 30, 2018
the Company used
$2.2 million
in cash for operations. The Company's primary significant long term cash obligation consists of a note payable of
$5.3 million
to a financial institution secured by a mortgage on its headquarters and manufacturing building in Thornton, Colorado. Total payments of approximately
$0.3 million
, including principal and interest, will come due in the remainder of 2018.
Additional projected product revenues are not anticipated to result in a positive cash flow position for the year
2018
overall and, as of
June 30, 2018
, the Company has negative working capital. As such, cash liquidity sufficient for the year ending
December 31, 2018
will require additional financing.
The Company continues to accelerate sales and marketing efforts related to its consumer and military solar products and specialty PV application strategies through expansion of its sales and distribution channels. The Company has begun activities related to securing additional financing through strategic or financial investors, but there is no assurance the Company will be able to raise additional capital on acceptable terms or at all. If the Company's revenues do not increase rapidly, and/or additional financing is not obtained, the Company will be required to significantly curtail operations to reduce costs and/or sell assets. Such actions would likely have an adverse impact on the Company's future operations.
As a result of the Company’s recurring losses from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern. The Company has scaled down its operations, due to cash flow issues, and does not expect to ramp up until significant financing is obtained.
Management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes property, plant and equipment as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Building
|
|
$
|
5,828,960
|
|
|
$
|
5,828,960
|
|
Furniture, fixtures, computer hardware and computer software
|
|
489,421
|
|
|
489,421
|
|
Manufacturing machinery and equipment
|
|
30,327,481
|
|
|
30,327,481
|
|
Property, plant and equipment
|
|
36,645,862
|
|
|
36,645,862
|
|
Less: Accumulated depreciation and amortization
|
|
(32,130,988
|
)
|
|
(32,013,686
|
)
|
Net property, plant and equipment
|
|
$
|
4,514,874
|
|
|
$
|
4,632,176
|
|
The Company analyzes its long-lived assets for impairment, both individually and as a group, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. No assets were impaired for the
three and six
months ended
June 30, 2018
.
Depreciation expense for the
three and six
months ended
June 30, 2018
was
$58,566
and
$117,302
, respectively, compared to depreciation expense of
$288,493
and
$623,116
for the
three and six
months ended
June 30, 2017
, respectively. Depreciation expense is recorded under “Depreciation and amortization expense” in the Condensed Consolidated Statements of Operations.
NOTE 6. INVENTORIES
Inventories consisted of the following at
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
653,680
|
|
|
$
|
688,904
|
|
Work in process
|
|
25,040
|
|
|
11,878
|
|
Finished goods
|
|
321,530
|
|
|
337,072
|
|
Total
|
|
$
|
1,000,250
|
|
|
$
|
1,037,854
|
|
The Company analyzes its inventory for impairment, both categorically and as a group, whenever events or changes in circumstances indicate that the carrying amount of the inventory may not be recoverable. During the
six
months ended
June 30, 2018
, the Company did not impair inventory, compared to an impairment of
$363,758
, for the
six
months ended
June 30, 2017
.
Inventory amounts are shown net of allowance of
$457,617
and
$562,140
as of
June 30, 2018
and
December 31, 2017
, respectively.
NOTE 7. NOTES PAYABLE
On
February 24, 2017
, the Company entered into an agreement with a vendor to convert the balance of their account into
three
notes payable in the aggregate amount of
$765,784
. The notes bear interest of
6%
per annum and matured on
February 24, 2018
; all outstanding principal and accrued interest is due and payable upon maturity. On June 5, 2018, the Company entered into another agreement with the same vendor to convert the balance of their account into a fourth note payable with a principal amount of
$308,041
, this note also bears interest at a rate of
6%
per annum, and matures on July 31, 2018. As of
June 30, 2018
, the Company had not made any payments on these notes; the total outstanding principal and accrued interest were
$1,073,825
and $
63,950
, respectively, and the note is due upon demand.
On
March 23, 2017
, the Company entered into an agreement with a vendor to convert the balance of their account into a note payable in the amount of $
356,742
. The note bears interest of
5%
per annum and matured on
March 31, 2018
; all outstanding principal and accrued interest is due and payable upon maturity. As of
June 30, 2018
, the Company had not made any payments on the note, the accrued interest was $
22,675
, and the note is due upon demand. Subsequent to the date of this report, the note was redeemed in stock; please see Note 18 for further information.
On June 30, 2017, the Company entered into an agreement with a vendor to convert the balance of their account into a note payable in the amount of $
250,000
. The note bears interest of
5%
per annum and matured on
February 28, 2018
; all outstanding principal and accrued interest is due and payable upon maturity. As of
June 30, 2018
, the Company had not made any payments on these notes, the accrued interest was
$12,500
, and the note is due upon demand.
On September 30, 2017, the Company entered into a settlement agreement with a customer to convert the credit balance of their account into a note payable in the amount of $
215,234
. The note bears interest of
5%
per annum and matures on
September 30, 2018
. The Company has not made the monthly payments of
$18,426
that were to commence on October 30, 2017; as of
June 30, 2018
the company had paid principal of
$22,529
and interest of
$897
. The remaining principal and interest balances, as of
June 30, 2018
, were
$192,705
and
$6,607
, respectively.
NOTE 8. DEBT
On February 8, 2008, the Company acquired a manufacturing and office facility in Thornton, Colorado, for approximately
$5.5 million
. The purchase was financed by a promissory note, deed of trust and construction loan agreement (the “Construction Loan”) with the Colorado Housing and Finance Authority (“CHFA”), which provided the Company borrowing availability of up to
$7.5 million
for the building and building improvements. In 2009, the Construction Loan was converted to a permanent loan pursuant to a Loan Modification Agreement between the Company and CHFA (the “Permanent Loan”). The Permanent Loan, collateralized by the building, has an interest rate of
6.6%
and the principal will be amortized through its term to January 2028. Further, pursuant to certain negative covenants in the Permanent Loan, the Company may not, among other things, without CHFA’s prior written consent (which by the terms of the deed of trust is subject to a reasonableness requirement): create or incur additional indebtedness (other than obligations created or incurred in the ordinary course of business); merge or consolidate with any other entity; or make loans or advances to the Company’s officers, shareholders, directors or employees.
On November 1, 2016, the Company and the CFHA agreed to modify the original agreement described above with the addition of a forbearance period. Per the modification agreement, no payments of principal and interest shall be due under the note during the forbearance period commencing on November 1, 2016 and continuing through April 1, 2017. The amount of interest that should have been paid by the Company during the forbearance period in the total amount of
$180,043
shall be added to the outstanding principal balance of the note. As a result, on May 1, 2017, the principal balance of the note was
$5,704,932
. Commencing on May 1, 2017, the monthly payments of principal and interest due under the note resumed at
$57,801
, and the Company shall continue to make such monthly payments over the remaining term of the note ending on February 1, 2028.
The outstanding principal balance of the Permanent Loan was
$5,292,946
and
$5,461,819
as of
June 30, 2018
and
December 31, 2017
, respectively.
As of
June 30, 2018
, remaining future principal payments on long-term debt are due as follows:
|
|
|
|
|
|
|
2018
|
$
|
174,523
|
|
2019
|
366,757
|
|
2020
|
391,709
|
|
2021
|
418,358
|
|
2022
|
446,821
|
|
Thereafter
|
3,494,778
|
|
|
$
|
5,292,946
|
|
NOTE 9. SECURED PROMISSORY AND CONVERTIBLE NOTES
Global Ichiban Secured Promissory Notes
On
November 30, 2017
, the Company, entered into a note purchase and exchange agreement (the “Note SPA”) with Global Ichiban Ltd (“Investor”), for the private placement of up to
$2,000,000
of the Company’s Secured Convertible Promissory Notes (“Notes”) in exchange for
$2,000,000
of gross proceeds in several tranches through June 2018, The closing of each tranche is conditioned upon the Company having an average daily trading volume for its Common Stock of at least
$50,000
for the
20
trading day period preceding such future tranche closing dates.
Pursuant to the terms of the Note SPA, the Company and the Investor also agreed to exchange certain outstanding securities held by the Investor for additional Notes. As of
November 30, 2017
, the Investor surrendered for cancellation (i) its outstanding promissory note dated
September 13, 2017
(
$3,359,539
principal and accrued interest), (ii) its outstanding promissory note dated
October 31, 2017
(
$252,466
principal and accrued interest), and (iii) its
400
shares of outstanding Series J Preferred Stock (
$445,222
of capital and accrued dividends). In exchange, the Company issued to the Investor
$4,057,227
aggregate principal amount of additional Notes. Please refer to Note 11 and Note 21 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for further discussion on the canceled promissory notes and the canceled Series J Preferred Stock shares.
All principal and accrued interest on the Notes are convertible at any time, in whole or in part, at the option of the Investor into shares of Common Stock at a variable conversion price equal to the lowest of (i)
85%
of the average VWAP for the shares over the prior
5
trading days, (ii) the closing bid price for the shares on the prior trading day, or (iii)
$2.00
per share
The Notes may not be converted and shares of Common Stock may not be issued pursuant to the Notes if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
9.99%
of the outstanding shares of Common Stock.
Of the Notes issued on
November 30, 2017
,
$3,359,539
aggregate principal amount will mature on
December 15, 2020
. Principal and interest was originally to be payable in
36
equal monthly installments of
$111,585
beginning
January 15, 2018
. During the three months ended
June 30, 2018
, principal of
$176,000
was converted into
1,035,295
shares of common stock, and during the
six
months ended
June 30, 2018
$140,355
of interest was converted to principal. The remaining note is payable in
30
equal monthly installments of
$80,360
beginning
July 15, 2018
. The following table summarizes the conversion activity of this note:
|
|
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Interest Converted
|
Common Shares Issued
|
Q1 2018
|
$
|
1,250,000
|
|
$
|
—
|
|
2,450,981
|
|
Q2 2018
|
$
|
176,000
|
|
$
|
—
|
|
1,035,295
|
|
|
$
|
1,426,000
|
|
$
|
—
|
|
3,486,276
|
|
Of the Notes issued on
November 30, 2017
,
$697,688
aggregate principal amount will mature on
November 30, 2018
. Principal and interest will be payable upon maturity.
The
$2,000,000
aggregate principal amount of Notes, issued in eight tranches, will mature on the first anniversary of the respective issuance date. Principal and interest will be payable upon maturity. As of
June 30, 2018
, the closing dates, closing amounts, and maturity dates on completed Note SPA tranches are as follows:
|
|
|
|
|
|
Closing Date
|
Closing Amount
|
Maturity Date
|
11/30/2017
|
$
|
250,000
|
|
11/30/2018
|
12/28/2017
|
$
|
250,000
|
|
12/28/2018
|
1/11/2018
|
$
|
250,000
|
|
1/11/2019
|
1/25/2018
|
$
|
250,000
|
|
1/25/2019
|
2/8/2018
|
$
|
250,000
|
|
2/8/2019
|
2/21/2018
|
$
|
250,000
|
|
2/21/2019
|
3/7/2018
|
$
|
250,000
|
|
3/7/2019
|
3/21/2018
|
$
|
250,000
|
|
3/21/2019
|
The Notes will be secured by a security interest on substantially all of the Company’s assets, bear interest at a rate of
12%
per annum and contain standard and customary events of default including but not limited to: (i) failure to make payments when due under the Notes, and (ii) bankruptcy or insolvency of the Company. There are no registration rights applicable to the Notes.
As of
June 30, 2018
, the aggregate principal and interest balance of the Notes were
$4,771,582
and
$183,618
, respectively.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the Notes approximates management’s estimate of the fair value of the embedded derivative liability based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions identified below.
Due to the varying terms and varying issue dates, the tranches of this instrument were broken into four separate instruments for valuation purposes.
|
|
1)
|
The first valuation was done on the November 30, 2017 Note with term of
three
years. The derivative value of this note was
$3,742,002
as of
December 31, 2017
.
|
|
|
1)
|
The second valuation was done on the group of Notes dated November 30, 2017, that had a term of
one
year. The derivative value of this group of notes was
$888,168
as of
December 31, 2017
.
|
|
|
2)
|
The third valuation was done on the Note dated December 28, 2017, which had a term of
one
year. The derivative value of this note was
$267,008
on
December 31, 2017
.
|
|
|
3)
|
For the Notes dated in the first quarter of
2018
, we did a fourth valuation. Although the notes were entered into at various dates, we used a weighted average issuance date of
February 15, 2018
for a combined valuation purpose. Management's analysis, using the following assumptions: annual volatility of
54%
present value discount rate of
12%
and a dividend yield of
0%
, resulted in a fair value of the embedded derivative associated with these Notes of
$1,151,162
as of
February 15, 2018
. The value of the embedded derivative associated with these Notes was recorded as a debt discount.
|
The derivative liability associated with the Notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
June 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the three valuation groups discussed above.
|
|
1)
|
For the November 30, 2017 3yr Note: Management conducted a fair value assessment with the following assumptions: annual volatility of
62%
present value discount rate of
12%
and a dividend yield of
0%
as of
June 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$424,530
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$3,317,472
as of
June 30, 2018
.
|
|
|
2)
|
For the November 30, 2017 1yr Notes: Management conducted a fair value assessment with the following assumptions: annual volatility of
35%
present value discount rate of
12%
and a dividend yield of
0%
as of
June 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$204,697
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$683,471
as of
June 30, 2018
.
|
|
|
3)
|
For the December 28, 2017 1yr Note: Management conducted a fair value assessment with the following assumptions: annual volatility of
35%
present value discount rate of
12%
and a dividend yield of
0%
as of
June 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$86,708
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$180,300
as of
June 30, 2018
.
|
|
|
4)
|
For the first quarter
2018
1yr Notes: Management conducted a fair value assessment with the following assumptions: annual volatility of
52%
present value discount rate of
12%
and a dividend yield of
0%
as of
June 30, 2018
. As a result of the fair value assessment, the Company recorded a net gain of
$69,365
as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Consolidated Statements of Operations to properly reflect the fair value of the embedded derivative of
$1,081,797
as of
June 30, 2018
.
|
During the three months ended
June 30, 2018
, a cumulative net gain of
$798,258
was recorded as a change in fair value. The total cumulative net gain for the six months ended
June 30, 2018
was
$785,300
to reflect a total derivative liability of
$5,263,040
as of
June 30, 2018
. Subsequent to the date of this report, the COmpany entered into another promissory note under this security agreement. Please refer to Note 18 for more information.
St. George Secured Convertible Note
On May 8, 2018, the Company, entered into a note purchase agreement with St. George Investments LLC, for the private placement of a
$575,000
Secured Convertible Promissory Note. The Company received
$500,000
in aggregate proceeds for the Secured Convertible Promissory Note in two tranches and recorded and original issue discount of
$50,000
and debt financing costs of
$25,000
. The original issue discount and the financing costs will be recognized as interest expense, ratably, over the life of the note. The Secured Convertible Promissory Note bears interest at a rate of
10%
per annum and matures on May 9, 2019. All unredeemed principal and accrued interest is payable upon maturity. The note contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the Note, and (ii) bankruptcy or insolvency of the Company. In the event of default the interest rate increases to
22%
per annum. The Secured Convertible Promissory Note is secured by a junior security interest on the Company's headquarters building, located in Thorton, Colorado. There are no registration rights applicable to this agreement.
As of
June 30, 2018
, the aggregate principal and interest balance of the Secured Convertible Promissory Note were
$575,000
and
$8,349
, respectively.
Beginning in early November 2018, St. George shall have the option to require the Company to redeem all or a portion of the amounts outstanding under the note. The Company may pay the requested redemption amounts in cash or in the form of shares of Common Stock (subject to certain specified equity conditions). Payments in the form of Common Stock shall be calculated using a variable conversion price equal to (i)
60%
of the average of the
two
lowest closing bid prices for the shares over (ii) the prior
ten
day trading period immediately preceding the redemption.
Shares of Common Stock may not be issued pursuant to the note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock. This ownership limitation will be automatically increased to
9.99%
if the Company’s market capitalization is less than
$10 million
. The ownership limitation can also be increased at the option of the Investor (up to a maximum of
9.99%
) upon
61
days advance written notice.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the redemption option in the Secured Convertible Promissotry Note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the note approximates
management’s estimate of the fair value of the embedded derivative liability based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
50%
, present value discount rate of
12%
, and a dividend yield rate of
0%
. These assumption resulted in the fair value of the embedded derivative of
$862,439
, associated with this note at inception.
The derivative liability associated with the Secured Convertible Promissory Note is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
June 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the note. As a result of the fair value assessment, the Company recorded a
$19,432
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations, to properly reflect the fair value of the embedded derivative of
$843,007
as of
June 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the Secured Convertible Promissory Note approximates management’s estimate of the fair value of the embedded derivative liability at
June 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
33%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 10. PROMISSORY NOTES
Offering of Unsecured, Non-Convertible Notes
During October 2016, the Company received
$420,000
from a separate private investor. These funds, along with
$250,000
of additional funding, were rolled into a promissory note, executed on January 17, 2017, in the amount of
$700,000
issued with a discount of
$30,000
which will be charged to interest expense ratably over the term of the note. The note bears interest at
12%
per annum and matures on
July 17, 2017
. Principal and interest on this note are payable at maturity. This note is not convertible into equity shares of the Company and is unsecured.
On June 30, 2017, the Company and the private investor agreed to a
12
month payment plan on the balance of this promissory note. Interest will continue to accrue on this note at
12%
per annum and payments of approximately
$62,000
will be made monthly beginning in July 2017. The Company has not made all the payments according to this payment plan, and the note is payable upon demand.
As of
June 30, 2018
, $
205,563
of principal and $
45,414
of interest had been paid on this note. The outstanding principal and accrued interest balances on the note as of
June 30, 2018
were
$494,437
and $
56,549
, respectively.
On
November 16, 2017
, the Company initiated a non-convertible, unsecured promissory note with a private investor for
$275,000
. The promissory note was issued with an original issue discount of
$25,000
, resulting in proceeds to the company of
$250,000
. The note does not have a stated interest rate and matured on
December 18, 2017
. As of
June 30, 2018
, no payments had been made on this note and the Company has accrued interest at an inferred rate of
12%
resulting in an accrued interest balance of
$17,811
, as of
June 30, 2018
. This note is payable upon demand. Subsequent to the date of this report, this promissory note was exchanged for a convertible note; please refer to Note 18 for further information.
On
January 31, 2018
, the Company initiated a non-convertible, unsecured promissory note with a private investor for an aggregate principal amount of
$200,000
. The promissory note was issued with an original issue discount of
$22,500
, which will be recorded as interest expense ratably over the term of the note, resulting in proceeds to the company of
$177,500
, which was received in December 2017. The note bears interest at
12%
per annum and matures on
December 29, 2018
. All principal and interest is payable upon maturity. As of
June 30, 2018
, the remaining principal and interest on on this note were
$200,000
and
$12,033
, respectively.
On
June 6, 2018
, the Company initiated a non-convertible, unsecured promissory note with a private investor for an aggregate principal amount of
$315,000
. The promissory note was issued with an original issue discount of
$55,000
, which will be recorded as interest expense ratably over the term of the note, resulting in proceeds to the company of
$260,000
, that was received in several tranches between February 2018 and April 2018. This note bears interest at
12%
per annum and matures on
June 6, 2019
. All principal and interest is payable upon maturity. As of
June 30, 2018
, the remaining principal and interest on on this note were
$315,000
and
$7,664
, respectively.
During May and June 2018, the Company received undocumented proceeds of
$97,500
from a private investor. Subsequent to the date of this report,
$87,500
of the proceeds were documented into a promissory note (please refer to Note 18 for further information) and the remaining
$10,000
in proceeds remains undocumented as of the filing date of this report. The Company has accrued interest on these undocumented funds at an inferred rate of
12%
per annum, and the accrued interest balance was
$1,078
as of
June 30, 2018
.
NOTE 11. OCTOBER 2016 CONVERTIBLE NOTES
October 2016 Convertible Notes
On October 5, 2016, the Company entered into a securities purchase agreement with a private investor for the private placement of
$330,000
principal amount of October 2016 Convertible Notes. At Closing, the Company sold and issued
$330,000
principal amount of October 2016 Convertible Notes in exchange for
$330,000
of gross proceeds.
Unless earlier converted or prepaid, the October 2016 Convertible Notes matured on December 31, 2017. The October 2016 Convertible Notes bear interest at a rate of
6
% per annum, subject to increase to
24%
per annum upon the occurrence and continuance of an event of default (as described below). Principal and accrued interest on the October 2016 Convertible Notes is payable upon demand.
All principal and accrued interest on the October 2016 Convertible Notes are convertible at any time, in whole or in part, at the option of Adar Bays, into shares of common stock at a variable conversion price equal to
80%
of the lowest closing bid price of the Company’s common stock for the
fifteen
consecutive trading day period prior to the conversion date. After the six month anniversary of the issuance of any October 2016 Convertible Note, the conversion price for such note shall thereafter be equal to
50%
of the lowest closing bid price of the Company’s common stock for the
fifteen
consecutive trading day period prior to the conversion date.
The October 2016 Convertible Notes contain standard and customary events of default including but not limited to: (i) failure to make payments when due under the October 2016 Convertible Notes; and (ii) bankruptcy or insolvency of the Company.
Outstanding principal and accrued interest on the October 2016 Convertible Notes were
$330,000
and
$34,815
, respectively as of
June 30, 2018
.
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the October 2016 Convertible Notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At closing, a derivative liability and a corresponding debt discount in the amount of
$330,000
was recorded. The fair value of the derivative was greater than the face value at issuance and the difference of
$341,114
was charged to interest expense at issuance. The remaining debt discount will be charged to interest expense ratably over the life of the October 2016 Convertible Notes. As of
December 31, 2017
, the fair value of the derivative liability was
$572,643
.
The derivative liability associated with the October 2016 Convertible Notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
June 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the October 2016 Convertible Notes. As a result of the fair value assessment, the Company recorded a
$75,575
loss as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
June 30, 2018
. A total net loss of
$137,851
was recorded for the six months ended
June 30, 2018
, to properly reflect the fair value of the embedded derivative of
$710,494
as of
June 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the October 2016 Convertible Notes approximates management’s estimate of the fair value of the embedded derivative liability at
June 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
35%
present value discount rate of
12%
and dividend yield of
0%
.
NOTE 12. ST. GEORGE CONVERTIBLE NOTE
On
September 8, 2017
, the Company entered into a securities purchase agreement with St. George Investments LLC (“Investor”), for the private placement of $
1,725,000
principal amount of the Company’s Original Issue Discount Convertible Promissory Notes.
On
September 11, 2017
, the Company sold and issued $
1,725,000
principal amount of the convertible notes to the Investor in exchange for $
1,500,000
of gross proceeds, and paid
$20,000
in financing costs. The original issue discount of
$225,000
, and the financing fee, will be charged to interest expense, ratably, over the life of the note.
Unless earlier converted or prepaid, the convertible notes will mature on
March 11, 2019
. The notes do not bear interest in the absence of an event of default.
For the first six months after the issuance of the notes, the Company will make a monthly cash repayment on the notes of approximately
$96,000
. Thereafter, the Investor may request that the Company make monthly partial redemptions of the note up to
$150,000
per month. If the Investor does not request the full
$150,000
redemption amount in any one month, the unused portion of such monthly redemption amount can be added to future monthly redemption amounts. But in no event can the amount requested by the Investor for any one month exceed
$275,000
.
Redemption amounts are payable by the Company in cash. Beginning ten months after the issuance of the convertible notes, cash redemption payments by the Company will be subject to a
15%
redemption premium.
Beginning six months after the issuance of the convertible notes, the Company also has the option (subject to customary equity conditions) to pay redemption amounts in the form of shares of common stock. Payments in the form of shares would be calculated using a variable conversion price equal to the lower of (i)
85%
of the average VWAP for the shares over the prior
five
trading days or (ii) the closing bid price for the shares on the prior trading day.
In lieu of making the December 2017 through March 2018 cash payments, the share reserve was increased by
5 million
shares, and on May 1, 2018, effective as of April 3, 2018, the parties agreed to amend the variable conversion price formula outlined in the SPA. As amended, payments in the form of shares would be calculated using a variable conversion price equal to the lower of (i)
60%
of the lowest VWAP for the shares during the prior
five
trading days or (ii) the closing bid price for the shares on the prior trading day.
All principal and accrued interest on the Notes are convertible at any time, in whole or in part, at the option of the Investor into shares of Common Stock at a fixed conversion price of
$4
per share.
The Notes contain standard and customary events of default including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. Upon the occurrence of an event of default, the Notes will begin to bear interest at the rate of
22%
per annum. In addition, upon the occurrence of an event of default, the Investor has the option to increase the outstanding balance of the Notes by
25%
.
In connection with the closing under the Note SPA, the Company issued
37,500
unregistered shares of common stock to the Investor as an origination fee. The closing stock price on the date of close was
$1.7
resulting in an interest expense of $
63,750
being recorded as of the date of close.
The Notes may not be converted and shares of Common Stock may not be issued pursuant to the Notes if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.
As of
June 30, 2018
, cash payments of
$191,667
had been made on this note, and
$391,600
had been converted into
2,270,278
shares of the Company's common stock. The remaining balance on the note was
$1,141,733
as of
June 30, 2018
. The following table summarizes the conversion activity of this note:
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Common Shares Issued
|
Q1 2018
|
$
|
75,000
|
|
187,500
|
|
Q2 2018
|
$
|
316,600
|
|
2,082,778
|
|
|
$
|
391,600
|
|
$
|
2,270,278
|
|
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Convertible Promissory Notes were deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. As of
December 31, 2017
, the derivative liability was
$394,280
.
The derivative liability associated with the Convertible Promissory Notes is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
June 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the St. George Convertible Notes. As a result of the fair value assessment, the Company recorded a
$316,636
net gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
June 30, 2018
. The total net loss recorded for the six months ended
June 30, 2018
was
$508,264
, to properly reflect the fair value of the embedded derivative of
$902,544
as of
June 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the Convertible Promissory Notes approximates management’s estimate of the fair value of the embedded derivative liability at
June 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
34%
present value discount rate of
12%
and dividend yield of
0%
.
NOTE 13. BAYBRIDGE CONVERTIBLE NOTE
On
December 6, 2017
, the Company entered into a securities exchange agreement (the “Exchange Agreement”) with BayBridge Capital Fund LP (“BayBridge”).
Pursuant to the terms of the Exchange Agreement, the Investor agreed to surrender and exchange
675
shares of outstanding Series J Preferred Stock (
$755,417
of capital and accrued dividends). In exchange, the Company issued to the Investor an unsecured promissory note with an aggregate principal amount of
$840,000
(the “Exchange Note”), with an original issue discount of
$84,583
. Please refer to Note 21 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for further discussion on the Series J Preferred Stock.
The Exchange Note is unsecured, has no applicable registration rights, bears interest at a rate of
12%
per annum, matures on
December 6, 2018
, and contains standard and customary events of default including but not limited to: (i) failure to make payments when due under the Exchange Note, and (ii) bankruptcy or insolvency of the Company. Principal and interest are payable upon maturity.
Payments of principal and accrued interest on the Exchange Note are payable in cash or, at the option of the Company, in shares of Common Stock at a variable conversion price equal to the lowest of (i)
85%
of the average VWAP for the shares over the prior
5
trading days, (ii) the closing bid price for the shares on the prior trading day, or (iii)
$3.00
per share. Payments in shares of Common Stock may not be issued pursuant to the Exchange Note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
9.99%
of the outstanding shares of Common Stock.
As of
June 30, 2018
, principal of
$788,000
and interest of
$26,807
had been converted into
3,333,242
shares of common stock and no cash payments of principal or interest had been made. The principal and accrued interest balances as of
June 30, 2018
were
$52,000
and
$685
, respectively. The following table summarizes the conversion activity of this note:
|
|
|
|
|
|
|
|
|
|
Conversion Period
|
Principal Converted
|
Interest Converted
|
Common Shares Issued
|
Q4 2017
|
$
|
275,000
|
|
$
|
—
|
|
404,412
|
|
Q1 2018
|
$
|
105,000
|
|
$
|
20,717
|
|
493,007
|
|
Q2 2018
|
$
|
408,000
|
|
$
|
6,090
|
|
2,435,823
|
|
|
$
|
788,000
|
|
$
|
26,807
|
|
3,333,242
|
|
Pursuant to a number of factors outlined in ASC Topic 815,
Derivatives and Hedging
, the conversion option in the Exchange Note was deemed to include an embedded derivative that required bifurcation and separate accounting. As such, the Company ascertained the value of the conversion option as if separate from the convertible issuance and appropriately recorded that value as a derivative liability. At
December 31, 2017
, the derivative liability associated with the promissory note was
$542,733
.
The derivative liability associated with the Exchange Note is subject to revaluation on a quarterly basis to reflect the market value change of the embedded conversion option. At
June 30, 2018
, the Company conducted a fair value assessment of the embedded derivative associated with the Exchange Note. As a result of the fair value assessment, the Company recorded a
$165,999
gain as "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three months ended
June 30, 2018
. The total gain recorded as of the six months ended
June 30, 2018
, was
$515,047
, to properly reflect the fair value of the embedded derivative of
$27,686
as of
June 30, 2018
.
The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. The derivative associated with the Exchange Note approximates management’s estimate of the fair value of the embedded derivative liability at
June 30, 2018
based on using a Monte Carlo simulation following a Geometric Brownian Motion with the following assumptions: annual volatility of
36%
, present value discount rate of
12%
and dividend yield of
0%
.
NOTE 14. SERIES A PREFERRED STOCK
In June 2013, the Company entered into a Securities Purchase Agreement with an investor to sell an aggregate of
750,000
shares of Series A Preferred Stock at a price of
$8.00
per share, resulting in gross proceeds of
$6,000,000
. This purchase agreement included warrants to purchase up to
13,125
shares of common stock of the Company. The transfer of cash and securities took place incrementally, the first closing occurring on June 17, 2013 with the transfer of
125,000
shares of Series A Preferred Stock and a warrant to purchase
2,187
shares of common stock for
$1,000,000
. The final closings took place in August 2013, with the transfer of
625,000
shares of Series A Preferred Stock and a warrant to purchase
10,938
shares of common stock for
$5,000,000
.
Holders of Series A Preferred Stock are entitled to cumulative dividends at a rate of
8%
per annum when and if declared by the Board of Directors in its sole discretion. The dividends may be paid in cash or in the form of common stock (valued at
10%
below market price, but not to exceed the lowest closing price during the applicable measurement period), at the discretion of the Board of Directors. The dividend rate on the Series A Preferred Stock is indexed to the Company's stock price and subject to adjustment. In addition, the Series A Preferred Stock contains a make-whole provision whereby, conversion or redemption of the preferred stock within
4 years
of issuance will require dividends for the full
four
year period to be paid by the Company in cash or common stock (valued at
10%
below market price, but not to exceed the lowest closing price during the applicable measurement period). This make-whole provision expired in June 2017 and future conversions and redemptions will be paid out with accrued dividends per the holding period of the shares of Series A Preferred stock. Please see Note 23 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for more information.
The Series A Preferred Stock may be converted into shares of common stock at the option of the Company if the closing price of the common stock exceeds
$232
, as adjusted, for
20
consecutive trading days, or by the holder at any time. The Company has the right to redeem the Series A Preferred Stock at a price of
$8.00
per share, plus any accrued and unpaid dividends, plus the make-whole amount (if applicable). At
June 30, 2018
, the preferred shares were not eligible for conversion to common shares at the option of the Company. The holder of the preferred shares may convert to common shares at any time, at no cost, at a ratio of
1
preferred share into 1 common share (subject to standard ratable anti-dilution adjustments). Upon any conversion (whether at the option of the Company or the holder), the holder is entitled to receive any accrued but unpaid dividends.
On October 6, 2016, the Series A Holder entered into an exchange agreement with a private investor. Pursuant to the exchange agreement, beginning December 5, 2016, the investor has the option to exchange, from time to time, all or any portion of the October 2016 Convertible Notes (see Note 11) for outstanding shares of Series A Preferred Stock from the Series A Holder.
As of March 31, 2017, the investor had elected to exchange all outstanding October 2016 Convertible Notes, in accordance with the exchange agreement, resulting in the exchange of
104,785
shares of Series A Preferred Stock. As of March 31, 2017, the investor had also converted their
104,785
shares of Series A Preferred Stock, and the related make whole dividend, which resulted in the issuance of
173,947
shares of common stock.
Except as otherwise required by law (or with respect to approval of certain actions), the Series A Preferred Stock shall have no voting rights. Upon any liquidation, dissolution or winding up of the Company, after payment or provision for payment of debts and other liabilities of the Company, the holders of Series A Preferred Stock shall be entitled to receive, pari passu with any distribution to the holders of common stock of the Company, an amount equal to
$8.00
per share of Series A Preferred Stock plus any accrued and unpaid dividends.
As of
June 30, 2018
, there were
60,756
shares of Series A Preferred Stock outstanding and accrued and unpaid dividends of
$310,362
.
NOTE 15. SERIES K PREFERRED STOCK
On February 8, 2017, the Company, entered into a securities purchase agreement (“Series K SPA”) with a private investor (“Investor”), for the private placement of up to
$20,000,000
of the Company’s newly designated Series K Convertible Preferred Stock (“Series K Preferred Stock”).
Per the terms of the Series K SPA, the Company was scheduled to sell
1,000
shares of Series K Preferred Stock to Investor in exchange for
$1,000,000
of gross proceeds on or before each of (i) February 24, 2017, (ii) March 27, 2017, (iii) April 27, 2017, (iv) May 27, 2017 and (v) June 27, 2017. The Company was also scheduled to sell
15,000
shares of Series K Preferred Stock to Investor in exchange for
$15,000,000
of gross proceeds on or before July 27, 2017. As of
June 30, 2018
, the Company had sold
9,010
shares of Series K Preferred Stock in exchange for
$9,010,000
in cash proceeds from the private investor. The Company does not expect to receive any more funding from this investor. The following summarizes the closings and proceeds received as of
June 30, 2018
:
|
|
|
|
|
|
Closing Period
|
Preferred Series K Shares Purchased
|
Closing Amount
|
Q1 2017
|
150
|
|
150,000
|
|
Q2 2017
|
4,100
|
|
4,100,000
|
|
Q3 2017
|
4,760
|
|
4,760,000
|
|
|
9,010
|
|
9,010,000
|
|
The Series K Preferred Stock ranks senior to the Company’s common stock in respect to dividends and rights upon liquidation. The Series K Preferred Stock will not have voting rights and the holders of the Series K Preferred Stock will not be entitled to any fixed rate of dividends.
The shares of the Series K Preferred Stock will be convertible at the option of the holder into common stock at a fixed conversion price equal to
$0.004
. At no time may the Series K Preferred Stock be converted if the number of shares of common stock to be received by Investor pursuant to such conversion, when aggregated with all other shares of common stock then beneficially (or deemed beneficially) owned by Investor, would result in Investor beneficially owning more than
19.99%
of all common stock then outstanding. As of
June 30, 2018
, the investor had converted all of the Series K Preferred Stock into shares of common stock. The following table summarizes the conversion activity of Series K Preferred Stock:
|
|
|
|
|
|
|
|
|
Conversion Period
|
Preferred Series K Shares Converted
|
Value of Series K Preferred Shares
|
Common Shares Issued
|
Q2 2017
|
3,200
|
|
$
|
3,200,000
|
|
800,000
|
|
Q3 2017
|
3,000
|
|
$
|
3,000,000
|
|
750,000
|
|
Q2 2018
|
2,810
|
|
$
|
2,810,000
|
|
702,500
|
|
|
9,010
|
|
9,010,000
|
|
2,252,500
|
|
As of
June 30, 2018
, the investor owned approximately
12%
of the Company's outstanding common stock.
The Company is required to redeem for cash any outstanding shares of the Series K Preferred Stock at a price per share equal to
$1,000
plus any accrued but unpaid dividends (if any) thereon on the fifth anniversary of the date of the original issue of such shares.
Upon our liquidation, dissolution or winding up, holders of Series K Preferred Stock will be entitled to be paid out of our assets, prior to the holders of our common stock, an amount equal to
$1,000
per share plus any accrued but unpaid dividends (if any) thereon.
Upon issuance, in accordance with ASC 480-10, the Series K Preferred Stock was classified as a liability on the Consolidated Balance Sheets. Pursuant to a number of factors outlined in ASC Topic 815, the conversion option in the Series K Preferred Stock was deemed to not require bifurcation or separate accounting treatment.
NOTE 16. STOCKHOLDERS’ DEFICIT
Common Stock
Reverse Stock Split
On July 20, 2018, the Company, a Delaware corporation, filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, par value
$0.0001
per share, at a ratio of one-for-one thousand (the “Reverse Stock Split”). The Certificate of Amendment did not change the number of authorized shares, or the par value, of the Company’s common stock. The Certificate of Amendment provides that every thousand shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split.
At
June 30, 2018
, the Company had
20,000,000,000
shares of common stock,
$0.0001
par value, authorized for issuance. Each share of common stock has the right to
one
vote. As of
June 30, 2018
, the Company had
18,994,481
shares of common stock outstanding. The Company has not declared or paid any dividends related to the common stock through
June 30, 2018
.
Preferred Stock
At
June 30, 2018
, the Company had
750,000
shares of preferred stock,
$0.0001
par value, authorized for issuance. Preferred stock may be issued in classes or series. Designations, powers, preferences, rights, qualifications, limitations and restrictions are determined by the Company’s Board of Directors.
The following table summarizes the designations, shares authorized, and shares outstanding for the Company's Preferred Stock:
|
|
|
|
Preferred Stock Series Designation
|
Shares Outstanding
|
Series A
|
60,756
|
|
Series K
|
—
|
|
Series A Preferred Stock
Refer to Note 14 descriptions of Series A Preferred Stock.
Series K Preferred Stock
Refer to Note 15 descriptions of Series K Preferred Stock.
Warrants
As of December 31, 2017, the Company had
three
outstanding warrants for an aggregate of
700,000
shares of common stock: i) a warrant for
250,000
shares of common stock which is exercisable at a fixed strike price of
$4.00
and expires on
July 24, 2018
; ii) a warrant for
250,000
shares of common stock which is exercisable at a fixed strike price of
$3.00
and expires on
August 10, 2018
; and iii) a warrant for
200,000
shares of common stock which is exercisable at a fixed strike price of
$1.80
and expires on
June 30, 2018
. None of the warrants may not be exercised if, after giving effect to the exercise, the holder, together with its affiliates, would beneficially own in excess of
9.99%
of the Company's outstanding shares of common stock. Please refer to Note 24 of the financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for further information about each warrant issuance.
On
June 30, 2018
, the warrant granted for
200,000
shares of common stock, exercisable at a fixed strike price of
$1.80
, expired unexercised. As of
June 30, 2018
, the Company had
two
remaining outstanding warrants for an aggregate of
500,000
shares of common stock. Subsequent to the date of this report, these
two
warrants also expired unexercised.
The following table summarizes warrant activity:
|
|
|
|
|
|
|
|
Warrant
Shares
|
Warrant
Weighted
Average
Exercise Price
|
Outstanding at December 31, 2016
|
—
|
|
$
|
—
|
|
Granted
|
700,000
|
|
$
|
3.01
|
|
Exercised
|
—
|
|
$
|
—
|
|
Canceled/Expired
|
—
|
|
$
|
—
|
|
Outstanding at December 31, 2017
|
700,000
|
|
$
|
3.01
|
|
Granted
|
—
|
|
$
|
—
|
|
Exercised
|
—
|
|
$
|
—
|
|
Canceled/Expired
|
(200,000
|
)
|
$
|
1.80
|
|
Outstanding at June 30, 2018
|
500,000
|
|
$
|
3.50
|
|
Exercisable at June 30, 2018
|
500,000
|
|
$
|
3.50
|
|
NOTE 17. EQUITY PLANS AND SHARE-BASED COMPENSATION
Share-Based Compensation:
The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes this cost as an expense over the grant recipients’ requisite service periods for all awards made to employees, officers, directors and consultants.
The share-based compensation expense recognized in the Condensed Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2018
|
|
2017
|
|
Share-based compensation cost included in:
|
|
|
|
|
|
Research and development
|
|
$
|
642
|
|
|
$
|
16,898
|
|
|
Selling, general and administrative
|
|
20,704
|
|
|
79,013
|
|
|
Total share-based compensation cost
|
|
$
|
21,346
|
|
|
$
|
95,911
|
|
|
The following table presents share-based compensation expense by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2018
|
|
2017
|
|
Type of Award:
|
|
|
|
|
|
Stock Options
|
|
$
|
21,346
|
|
|
$
|
69,582
|
|
|
Restricted Stock Units and Awards
|
|
—
|
|
|
26,329
|
|
|
Total share-based compensation cost
|
|
$
|
21,346
|
|
|
$
|
95,911
|
|
|
Stock Options:
The Company recognized share-based compensation expense for stock options of approximately
$21,000
to officers, directors and employees for the
six
months ended
June 30, 2018
related to stock option awards ultimately expected to vest. There were no stock options granted during the
six
months ended
June 30, 2018
or during the
six
months ended
June 30, 2017
.
As of
June 30, 2018
, total compensation cost related to non-vested stock options not yet recognized was approximately
$20,000
which is expected to be recognized over a weighted average period of approximately
1.0
year,
66
shares were vested or expected to vest in the future at a weighted average exercise price of
$31,820
, and
200
shares remained available for future grants under the Option Plan.
Restricted Stock:
The Company did not recognized share-based compensation expense related to restricted stock grants for the
six
months ended
June 30, 2018
. During the
six
months ended
June 30, 2017
, the Company recognized approximately
$26,000
in share-based compensation related to restricted stock grants. There were no restricted stock grants for the
six
months ended
June 30, 2018
or the
six
months ended
June 30, 2017
.
As of
June 30, 2018
, there was no unrecognized share-based compensation expense from unvested restricted stock, no shares were expected to vest in the future, and
519
shares remained available for future grants under the Restricted Stock Plan.
NOTE 18. SUBSEQUENT EVENTS
Offering of Secured Non-Convertible Notes
On July 6, 2018, the Company issued a
$135,000
promissory note, to Global Ichiban Ltd., in exchange for gross proceeds of
$120,000
. This note bears interest at a rate of
12%
per annum and matures on July 6, 2019. Principal and interest on this note are payable at maturity. This note is secured by a security interest on substantially all of the Company's assets, pursuant to the Security Agreement dated November 30, 2017. Please refer to Note 9 for further details on the Security Agreement.
Reverse Stock Split
On July 19, 2018, the
Company
, filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (the “
Certificate of Amendment
”) with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock, par value
$0.0001
per share (the “
Common Stock
”) at a ratio of one-for-one thousand (the “
Reverse Stock Split
”).
The Certificate of Amendment provides that the Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on July 20, 2018 (the “
Effective Time
”), at which time every thousand shares of the Company’s issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share. The Certificate of Amendment provides that in the event a stockholder would otherwise be entitled to receive a fraction of a share of Common Stock, such stockholder shall receive one whole share of Common Stock in lieu of such fractional share and no fractional shares shall be issued.
Following the Reverse Stock Split, the Company has approximately
19 million
shares of Common Stock issued and outstanding. The number of authorized shares of the Company’s Common Stock remains at
20 billion
. The number of shares of the Company’s Series A preferred stock outstanding was not affected by the Reverse Stock Split. However, the number of shares of Common Stock into which each outstanding share of Series A preferred stock is convertible will be adjusted proportionately as a result of
the Reverse Stock Split. All outstanding RSUs, stock options, warrants and rights to purchase shares of Common Stock will be adjusted proportionately.
Trading of the Company’s Common Stock continued on the OTC Marketplace on a split-adjusted basis on July 23, 2018.
The Company's Common Stock will temporarily trade under the symbol "ASTID," with a "D" added for
20
trading days to signify that the Reverse Stock Split has occurred. After
20
trading days, the trading symbol will revert back to ASTI.
The new CUSIP number for the Common Stock following the Reverse Stock Split is 043635507.
At the Company’s 2018 Annual Meeting of Stockholders, the Company’s stockholders approved a reverse stock split of the Common Stock at a ratio ranging from one-for-one hundred to one-for-one thousand, with such ratio to be determined by the Company’s Board of Directors in its discretion without further approval from the Company’s stockholders. The Board of Directors of the Company subsequently authorized proceeding with the Reverse Stock Split at a ratio of one-for-one thousand.
Offering of Unsecured Promissory Note
On July 24, 2018, the Company sold and issued to a private investor a
$115,000
aggregate principal amount unsecured original issue discount note (the “Note”) in exchange for
$87,500
of gross proceeds. The Note is unsecured and non-convertible, bears interest at a rate of
12%
per annum, and will mature on January 24, 2019; principal and interest on the Note will be payable upon maturity.
Exchange of Outstanding Promissory Note for Unsecured Convertible Note
On July 25, 2017, the Company, entered into a securities exchange agreement (the “Exchange Agreement”) with a private investor. Pursuant to the terms of the Exchange Agreement, the investor agreed to surrender and exchange a promissory note with a principal balance of
$275,000
. In exchange, the Company issued to the investor an unsecured convertible note with an aggregate principal amount of
$300,000
(the “Exchange Note”).
The Exchange Note is not secured, bears interest at a rate of
12%
per annum, and will mature on January 25, 2019; principal and interest on the Exchange Note are due upon maturity.
The investor shall have the right, from and after the date of issuance of this note and then at any time until the note is fully paid, to convert any outstanding and unpaid principal into shares of the Company's common stock at a variable conversion price equal to the lesser of (i) a price equal to
$0.20
, or (ii)
80%
of the lowest traded price for the shares over the prior
ten
trading days.
Conversion to shares of common stock may not be issued pursuant to the Exchange Note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.
On August 13, 2018, the investor converted
$25,000
of principal and
$158
in accrued interest for
683,650
shares of common stock. The principal balance of the Exchange Note, as of the date of this filing, is
$275,000
.
Redemption of Note Payable
On July 25, 2018, a vendor holding a note payable with the principal amount of
$356,742
, elected to redeem the note, along with
$23,897
in accrued interest, for
2,138,421
shares of common stock. The conversion rate was based on the average of the prior
five
trading days' closing price.
Offering of Promissory Note
On July 27, 2018, the Company entered into an agreement with a vendor to convert the balance of their account into an unsecured note payable in the amount of
$41,452
. This note bears interest of
10.4%
per annum and matures on December 15, 2018, with a possible extension to March 15, 2109. This note requires
$1,000
principal payments, plus accrued interest, on a bi-weekly basis. As of the date of this filing, the installment payments have been paid by the Company per the agreed upon schedule.
Offering of Convertible Note
On August 1, 2018, the Company, entered into a note purchase (the “Note SPA”) with Power Up Lending Group LTD. (“Investor”), for the private placement of a
$130,000
Convertible Promissory Note (“Note”). On August 2, 2018, the Company received
$130,000
of gross proceeds from the offering of the Note. The note is unsecured, bears interest at a rate of
8%
per annum,
and matures on August 1, 2019; principal and interest is due upon maturity. In the event of default, the interest rate per annum increases to
22%
.
Beginning in February 2019, the Investor shall have the option to convert all or a portion of the amounts outstanding under the Note, into shares of the Company's common stock. Conversions into common stock shall be calculated using a variable conversion price equal to
65%
of the average of the three lowest closing bid prices for the shares over the prior
ten
day trading period immediately preceding the conversion.
Shares of Common Stock may not be issued pursuant to the Note if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of
4.99%
of the outstanding shares of Common Stock.