NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
BACKGROUND, BASIS OF PRESENTATION, AND GOING CONCERN:
Background
NanoFlex
Power Corporation, formerly known as Universal Technology Systems, Corp., was incorporated in the State of Florida on January
28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation, a Pennsylvania corporation
(“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”). Immediately following
the closing of the Share Exchange Transaction, the Company owned 100% of equity interests of GPEC and GPEC became a wholly-owned
subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal Technology Systems, Corp.”
to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS” on December 26, 2013.
GPEC
was incorporated in Pennsylvania on February 7, 1994. The Company is organized to fund, develop, commercialize and license advanced
configuration solar technologies which enable unique thin-film solar cell implementations with industry-leading efficiencies,
light weight, flexibility, and low total system cost.
These
technologies are targeted at certain broad applications, including: (a) mobile and field power generation, (b) building applied
photovoltaics ("BAPV"), (c) building integrated photovoltaics ("BIPV"), (d) space vehicles and unmanned aerial
vehicles ("UAVs"), (e) semi-transparent solar power generating windows or glazing, and (f) ultra-thin solar films or
paints for automobiles or other consumer applications.
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 or 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, 2015 included in our Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30,
2016 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.
Revision
of Previously-Issued Financial Statements
During
the three months ended June 30, 2016, the Company identified errors in its financial statements for the third and fourth quarters
of the fiscal year ended December 31, 2015, and first quarter of the fiscal year ended March 31, 2016, as included in the Company’s
10-Q for the periods ended September 30, 2015 and March 31, 2016, and its 2015 annual report on Form 10-K, related to the accounting
for conversion option derivative liabilities. Specifically, the Company accounted for all of its convertible debt instruments
assuming that each contained an embedded conversion feature that met the criteria for bifurcation when, in fact, several of the
outstanding notes contained embedded conversion features that did not require bifurcation. The Company has made adjustments in
each period related to this.
The
Company assessed the effect of the above errors in the aggregate on prior periods’ financial statements in accordance with
the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors,
determined that the errors were not material to any of the Company’s prior interim and annual financial statements.
The
Company determined that the correction of the cumulative amounts of the errors would be material to its consolidated financial
statements for the three and six months ended June 30, 2016. Therefore, the Company revised its previously-issued financial statements
as of December 31, 2015 and for the third and fourth quarters of fiscal 2015 and first quarter of fiscal 2016. The balance sheet
as of December 31, 2015 and the statement of operations for the three and nine months ended September 30, 2015 included in this
Form 10-Q are revised as described below for those adjustments.
All
financial information contained in the accompanying notes to these financial statements has been revised to reflect the correction
of these errors.
The
following tables present the effect of the aforementioned revisions on the Company’s consolidated balance sheet for the
year ended December 31, 2015:
|
|
As of December 31, 2015
|
|
|
|
As Reported
|
|
|
Revision
|
|
|
As Revised
|
|
Conversion option derivative liability
|
|
$
|
8,145,160
|
|
|
$
|
(2,733,973
|
)
|
|
$
|
5,411,187
|
|
Convertible debt, net of unamortized discounts
|
|
|
1,051,545
|
|
|
|
72,273
|
|
|
|
1,123,818
|
|
Total current liabilities
|
|
|
28,168,610
|
|
|
|
(2,661,700
|
)
|
|
|
25,506,910
|
|
Total liabilities
|
|
|
28,168,610
|
|
|
|
(2,661,700
|
)
|
|
|
25,506,910
|
|
Accumulated deficit
|
|
|
(204,989,355
|
)
|
|
|
3,484,877
|
|
|
|
(201,504,478
|
)
|
Additional paid in capital
|
|
|
176,932,064
|
|
|
|
(823,177
|
)
|
|
|
176,108,887
|
|
Total stockholders' deficit
|
|
|
(28,052,143
|
)
|
|
|
2,661,700
|
|
|
|
(25,390,443
|
)
|
The
following tables present the effect of the aforementioned revisions on the Company’s consolidated statement of operations
for the three and nine months ended September 30, 2015:
|
|
Three Months Ended September
30, 2015
|
|
|
|
As Reported
|
|
|
Revision
|
|
|
As Revised
|
|
Gain (loss) on change in fair value of derivative
|
|
$
|
(10,461,536
|
)
|
|
$
|
1,484,035
|
|
|
$
|
(8,977,501
|
)
|
Interest expense
|
|
|
(526,378
|
)
|
|
|
(221,099
|
)
|
|
|
(747,477
|
)
|
Total other expense
|
|
|
(10,987,914
|
)
|
|
|
1,262,936
|
|
|
|
(9,724,978
|
)
|
Net loss
|
|
|
(12,918,546
|
)
|
|
|
1,262,936
|
|
|
|
(11,655,610
|
)
|
Net loss per share (basic and diluted)
|
|
|
(0.26
|
)
|
|
|
(0.02
|
)
|
|
|
(0.24
|
)
|
|
|
Nine Months Ended September
30, 2015
|
|
|
|
As Reported
|
|
|
Revision
|
|
|
As Revised
|
|
Gain (loss) on change in fair value of derivative
|
|
$
|
(12,902,458
|
)
|
|
$
|
1,484,035
|
|
|
$
|
(11,418,423
|
)
|
Interest expense
|
|
|
(1,064,377
|
)
|
|
|
(221,099
|
)
|
|
|
(1,285,476
|
)
|
Total other expense
|
|
|
(14,116,835
|
)
|
|
|
1,262,936
|
|
|
|
(12,853,899
|
)
|
Net loss
|
|
|
(19,065,163
|
)
|
|
|
1,262,936
|
|
|
|
(17,802,227
|
)
|
Net loss per share (basic and diluted)
|
|
|
(0.41
|
)
|
|
|
(0.03
|
)
|
|
|
(0.38
|
)
|
These
revisions to the consolidated statements of cash flows for the nine months ended September 30, 2015 did not result in any changes
to the amounts previously reported for net cash from (used in) operating, investing and financing activities.
Going
Concern
The
Company has generated limited revenue to date. The Company has a working capital deficit of $18,983,497 and an accumulated
deficit of $207,732,287 as of September 30, 2016. The ability of the Company to continue as a going concern is dependent
on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly,
these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event the Company cannot continue in existence. To date, the Company has funded
its initial operations primarily by way of the sale of equity securities, convertible note financing, short term financing from
private parties, and advances from related parties.
Fair
Value
ASC
820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities
that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Valuations may be obtained from, or corroborated by, third-party pricing services.
Level
3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the
measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs
are available without undue cost and effort.
As
of September 30, 2016 the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of September 30, 2016
and December 31, 2015:
|
|
Fair Value Measurements as
of
September 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
8,990,943
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
3,590,660
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,581,603
|
|
|
|
Fair Value Measurements as
of
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
12,796,146
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
5,411,187
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,207,333
|
|
The
following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level
3 in the fair value hierarchy:
|
|
Significant Unobservable
|
|
|
Significant Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
9,307,216
|
|
|
$
|
3,596,052
|
|
|
$
|
18,207,333
|
|
|
$
|
847,791
|
|
Change in fair value
|
|
|
3,274,387
|
|
|
|
8,977,501
|
|
|
|
(6,170,172
|
)
|
|
|
11,418,423
|
|
Additions reclassified from equity
|
|
|
-
|
|
|
|
5,743,021
|
|
|
|
-
|
|
|
|
5,819,389
|
|
Additions recognized as compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
544,442
|
|
|
|
230,971
|
|
Ending balance
|
|
$
|
12,581,603
|
|
|
$
|
18,316,574
|
|
|
$
|
12,581,603
|
|
|
$
|
18,316,574
|
|
2.
DEBT
Notes
Payable
The
Company has a note payable of $100,000 due to its former Chief Executive Officer and President. The note is due on demand and
bears an interest rate at the minimum applicable rate for loans of similar duration, which was 0.5% as of September 30, 2016.
During
the year ended December 31, 2015, the Company issued a promissory note of $50,000. The term of the note expires 120 days from
the effective date. 100,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price
of $0.50/share in lieu of cash interest.. The relative fair value of the warrants of $45,243 was recognized as a debt discount
which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $45,243
associated with the amortization of debt discount for the year ended December 31, 2015. On May 12, 2016, this note was forgiven
in exchange for a new convertible note that bears interest of 8% per annum, a maturity date of one year and is convertible into
units at $0.50 per unit, with each unit consisting of a share of common stock and a warrant with a five year life from the date
of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. This modification qualifies
as an extinguishment of debt. The fair value of 50,000 warrants issued in connection with the modification which have a term of
5 years and are exercisable at $0.50 per share resulted in a loss on extinguishment of debt of $44,044. The modified note also
gave rise to a beneficial conversion feature of $37,584 which is recognized as additional paid in capital and a corresponding
debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains
an additional warrant expense of $12,415 associated with the warrants that are to be issued upon conversion, which is to be recognized
only upon conversion.
During
the three months ended September 30, 2016, the Company issued a promissory note of $300,000. The term of the note expires one
year from the effective date and has an interest rate of 10%. 600,000 cashless warrants for the Company’s common shares
were issued with the debt at a strike price of $0.50/share in lieu of cash interest. The relative fair value of the warrants of
$235,188 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company
recognized interest expense of $19,599 associated with the amortization of debt discount for the three and nine months ended September
30, 2016.
As
of September 30, 2016 and December 31, 2015, the aggregate outstanding balance of non-convertible notes payable was $400,000 and
$150,000, respectively.
Notes
Payable – Related Party
On
February 26, 2014, the Company borrowed $150,000 under a short term note agreement with a related party, the Chief Executive Officer’s
son. Under the terms of this agreement, the note was to be repaid within 6 months of funding. In November 2014, the note
agreement was amended to extend the due date to February 26, 2015, and in April of 2015, the note agreement was amended to extend
the maturity date to February 26, 2016 and set a 4% simple interest rate on the note. This note was paid in full in January of
2016 along with $509 of accrued interest.
In
2015, the Company issued promissory notes to a majority shareholder in aggregate of $625,000 (“Notes #1 to #4”). The
notes have a term ranging from 120 – 150 days from the effective date. 1,250,000 cashless warrants for the Company’s
common shares were issued with the debt at a strike price of $0.50/share in lieu of cash interest. On January 6, 2016, the Company
issued an additional promissory note to the same majority shareholder in the amount of $1,375,000 in exchange for a loan in that
amount (“Note #5). The Company issued 2,750,000 warrants in connection with this Note #5, for the Company’s common
stock at an exercise price of $0.50 per share. The total relative fair value of the warrants of $996,178 was recognized as a debt
discount which is being amortized on a straight-line basis over the term of the notes. Notes #1 to #4 and Note #5 shall be collectively
referred to herein as the “$2M Notes.”
On
January 22, 2016, the Company entered into a Note Conversion Agreement (the “Conversion Agreement”) with the holder
of the $2 million notes. Pursuant to the Conversion Agreement, the investor converted the $2 million notes, which totaled $2,000,000,
into an investment of $2,000,000 into the Company’s private placement of convertible notes and warrants. This extinguishment
of the $2 million notes resulted in a loss on extinguishment of debt of $3,163,303 which included an unamortized discount of $926,382
and $2,236,921 representing the fair value of 2,000,000 warrants issued in connection with the Note Conversion Agreement. Additionally,
the Company recognized a beneficial conversion feature of $1,100,735 in accordance with the provisions of ASC 470-20 “
Debt
– Debt with Conversion and Other Options”
which is reflected as an increase in additional paid-in-capital and
a corresponding debt discount which was amortized on a straight line basis over the life of the note.
On
January 25, 2016, the investor converted the convertible note and accrued interest into 4,320,000 shares of the Company’s
common stock and a warrant to purchase 4,320,000 shares of the Company’s common stock with a ten year term and an exercise
price of $0.50 per share. Of the 4,320,000 shares of common stock, 320,000 shares represent interest paid on the convertible note
pursuant to the terms of the conversion agreement in the amount of $160,000. Upon conversion, the Company accelerated the recognition
of all remaining debt discount and also recognized an additional interest expense of $899,265 associated with the warrants that
were issued upon conversion. This contingent beneficial conversion feature was immediately recognized as interest expense with
an offset to additional paid-in-capital.
As
of September 30, 2016 and December 31, 2015, the aggregate outstanding balance of notes payable to related parties was $0 and
$670,848, respectively, net of unamortized discounts of $0 and $104,152, respectively.
Advances
– Related Party
During
the three and nine months ended September 30, 2016, the Company received advances from its Chief Executive Officer totaling $0
and $510,000, respectively, and repaid advances totaling $150,000 and $270,000, respectively.
As
of September 30, 2016 and December 31, 2015, the aggregate outstanding balance of advances to related parties was $350,000 and
$110,000, respectively.
Convertible
Notes Payable
In
addition to the $2,000,000 convertible note described above in the Notes Payable-Related Party section, on March 7, 2016, the
Company received proceeds of $80,000 in exchange for a convertible note and the issuance of 80,000 warrants with a five year life
and an exercise price of $0.50 per share. The convertible note has a principal amount of $80,000, interest of 8% per annum, a
maturity date of one year and is convertible into 160,000 units, with each unit consisting of a share of common stock and a warrant
with a five year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions.
The relative fair value of the 80,000 warrants issued with the debt was determined to be $38,205 and was recognized as a discount
to the debt. This note also gave rise to a beneficial conversion feature of $22,290 which is recognized as additional-paid-in
capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the
note. The note also contains an additional warrant expense of $19,505 associated with the warrants that are to be issued upon
conversion, which is to be recognized only upon conversion.
From
April 18, 2016 through June 30, 2016, the Company received additional aggregate proceeds of $375,000 in exchange for eight convertible
notes and the issuance of 375,000 warrants with a five year life and exercise price of $0.50 per share. The convertible notes
have an aggregate principal amount of $375,000, interest of 8% per annum, a maturity date of one year and are convertible into
an aggregate of 750,000 units, with each unit consisting of a share of common stock and a warrant with a five year life from the
date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The aggregate relative
fair value of the 375,000 warrants issued with the debt was determined to be $158,423 and was recognized as a discount to the
debt. These notes also gave rise to a beneficial conversion feature of $116,129 which is recognized as additional paid in capital
and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note.
The note also contains an additional warrant expense of $100,449 associated with the warrants that are to be issued upon conversion,
which is to be recognized only upon conversion.
On
July 13, 2016, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a promissory
note from the Company and received 500,000 warrants with a seven year life and exercise price of $0.50 per share in exchange for
$500,000. The promissory note had a clause that automatically modified it 30 days after issuance (on August 12, 2016) into a convertible
note. The convertible note has a principal amount of $500,000, includes the issuance of 500,000 additional warrants, interest
of 8% per annum, a maturity date of one year and is convertible into 1,000,000 units, with each unit consisting of a share of
common stock and a warrant with a five year life from the date of conversion and an exercise price of $0.50 per share, subject
to certain anti-dilution provisions. The relative fair value of the 500,000 warrants issued on July 13, 2016 was $161,010. The
relative fair value of the 500,000 warrants issued on August 12, 2016 was $117,377. The total of $278,386 was recognized as a
discount to the debt. This note also gave rise to a beneficial conversion feature of $123,233 which is recognized as additional
paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term
of the note. The note also contains an additional warrant expense of $98,381 associated with the warrants that are to be issued
upon conversion, which is to be recognized only upon conversion.
From
July 6, 2016 through September 30, 2016, the Company received additional aggregate proceeds of $244,500 in exchange for 12 convertible
notes and the issuance of 244,500 warrants with a five year life and exercise price of $0.50 per share. The convertible notes
have an aggregate principal amount of $244,500, interest of 8% per annum, a maturity date of one year and are convertible into
an aggregate of 489,000 units, with each unit consisting of a share of common stock and a warrant with a five year life from the
date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The aggregate relative
fair value of the 244,500 warrants issued with the debt was determined to be $102,835 and was recognized as a discount to the
debt. These notes also gave rise to a beneficial conversion feature of $78,673 which is recognized as additional paid in capital
and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note.
The note also contains an additional warrant expense of $62,992 associated with the warrants that are to be issued upon conversion,
which is to be recognized only upon conversion.
During
the three months ended March 31, 2016, the full principal balances of certain notes of $30,000 with accrued interest of $790 were
converted pursuant to the terms of the notes into 61,578 shares of the Company’s common stock and 61,578 warrants to purchase
common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and also recognized interest
expense of $3,787 associated with the warrants that were issued upon conversion. This additional warrant expense was immediately
recognized as interest expense with an offset to additional paid-in-capital.
During
the three months ended June 30, 2016, the full principal balances of certain notes totaling $267,144 with accrued interest of
$21,371 were converted pursuant to the terms of the notes into 577,031 shares of the Company’s common stock and 577,031
warrants to purchase common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and
also recognized additional interest expense of $56,197 associated with the warrants that were issued upon exercise. This additional
warrant expense was immediately recognized as interest expense with an offset to additional paid-in-capital.
During
the three months ended September 30, 2016, the full principal balances of certain notes totaling $496,477 with accrued interest
of $39,718 were converted pursuant to the terms of the notes into 1,072,390 shares of the Company’s common stock and 1,072,390
warrants to purchase common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and
also recognized additional interest expense of $131,510 associated with the warrants that were issued upon conversion. This additional
warrant expense was immediately recognized as interest expense with an offset to additional paid-in-capital.
Aggregate
amortization of the discounts on the convertible notes for the nine months ended September 30, 2016 and 2015 was $2,030,827 and
$626,187, respectively. As of September 30, 2016 and December 31, 2015, the aggregate outstanding balance of convertible notes
payable was $1,339,144 and $1,123,818, respectively, net of unamortized discounts of $625,856 and $561,728, respectively.
Derivative
Liabilities - Convertible Notes
As
of September 30, 2016, the fair value of the outstanding convertible note derivatives was determined to be $3,590,660 and recognized
a gain of $1,820,527. There were no new convertible note derivatives that arose during the three or nine months ended September
30, 2016.
Accounts
Payable - Related Party
As
of September 30, 2016 and December 31, 2015, there is $1,420 and $62,469, respectively, due to a related party, the Company’s
Chief Financial Officer, which is non-interest bearing and due on demand.
3.
EQUITY
Common
Stock
During
the six months ended June 30, 2016, the Company issued 245,878 common shares and warrants to purchase 426,741 common shares of
the Company’s common stock in exchange for proceeds of $67,536. The Company determined a fair value for the shares and warrants
to be $617,174. The cash was received prior to December 31, 2015 and was recorded as an accrued liability at December 31, 2015.
This transaction resulted in a loss on extinguishment of liability of $549,638.
During
the three months ended March 31, 2016, the Company issued 372,263 common shares and warrants to purchase 1,140,662 common shares
of the Company’s common stock in exchange for proceeds of $172,342, $40,062 of which was received subsequent to the end
of the quarter.
During
the three months ended June 30, 2016, the Company issued 1,007,535 common shares and warrants to purchase 3,031,050 common shares
of the Company’s common stock in exchange for proceeds of $466,451.
During
the three months ended June 30, 2016, the Company issued 12,577 common shares on exercise of warrant at price of $0.50 per share
for a total of $6,288.
During
the three months ended September 30, 2016, the Company issued 54,278 common shares and warrants to purchase 205,050 common shares
of the Company’s common stock in exchange for proceeds of $25,129 and interest expense of $6,023.
Stock
Options
A
summary of stock option activity during the nine months ended September 30, 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
Outstanding at December 31, 2015
|
|
|
50,000
|
|
|
$
|
0.50
|
|
|
|
10.0
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
50,000
|
|
|
|
0.50
|
|
|
|
9.2
|
|
Exercisable at September 30, 2016
|
|
|
10,000
|
|
|
$
|
0.50
|
|
|
|
9.2
|
|
Stock
option awards are expensed on a straight-line basis over the requisite service period. During the three and nine months
ended September 30, 2016 the Company recognized expense of $4,164 and $12,489, respectively, associated with stock option awards.
During the three and nine months ended September 30, 2015 the Company recognized expense of $0 and $0, respectively, associated
with stock option awards. At September 30, 2016, future stock compensation expense (net of estimated forfeitures) not yet recognized
was $56,448 and will be recognized over a weighted average remaining vesting period of 3.4 years.
The
intrinsic value of the Company’s stock options outstanding was $26,311 at September 30, 2016.
Warrants
On
September 1, 2015 the Company entered into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in
his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company
issued Mr. Tobin warrants to purchase 1,500,000 shares of the Company’s common stock at $1.00 per share (the “Warrant
Shares”). The fair value of the warrants was determined to be $2,835,061 using the Black-Scholes option pricing model. 375,000
of the Warrant Shares vested on September 1, 2015, an additional 375,000 warrant shares vested on the first anniversary date of
the Employment Agreement, an additional 375,000 warrant shares will vest on the second anniversary date of the Employment Agreement,
and, an additional 375,000 warrant shares will vest on the third anniversary date of the Employment Agreement. Warrant expense
of $265,787 and $915,489 was recognized during the three and nine months ended September 30, 2016, respectively. The agreement
contains an anti-dilution provision and therefore the exercise price at September 30, 2016 is $0.50 per share.
On
September 23, 2016, the Company issued warrants to purchase 15,000 shares of the Company’s common stock at $1.00 per share
to a consultant in exchange for services already performed. The warrants have a five year term and are immediately vested. The
fair value of the warrants was determined to be $13,618 using the Black-Scholes option pricing model of which $13,618 was recognized
as expense during the three and nine months ended September 30, 2016.
The
following summarizes the warrant activity for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding as of December 31, 2015
|
|
|
40,026,431
|
|
|
$
|
1.83
|
|
|
|
4.6
|
|
|
$
|
54,932,218
|
|
Granted
|
|
|
19,254,051
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(110,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12,577
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2016
|
|
|
59,157,905
|
|
|
$
|
0.83
|
|
|
|
4.9
|
|
|
$
|
60,709,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2016
|
|
|
57,220,405
|
|
|
$
|
0.83
|
|
|
|
4.9
|
|
|
$
|
60,709,026
|
|
Derivative
Liabilities - Warrants
The
anti-dilution features in the freestanding warrants issued in the nine months ended September 30, 2016 cause the instruments to
no longer be indexed to the Company’s own stock and requires that they be accounted for as derivative liabilities based
on guidance in FASB ASC 815, Derivatives and Hedging.
The
valuation of the derivative liability of the warrants was determined through the use of a Black Scholes options model, which the
Company believes approximates fair value. Using this model, the Company had a balance of $12,796,146 at December 31, 2015. The
Company recorded the change in the fair value of the warrant liabilities recognizing a gain of $4,349,645 and warrant expense
of $1,277,699 for the nine months ended September 30, 2016, to reflect the value of the warrant derivative liability of $8,990,943
as of September 30, 2016.
On
November 4, 2015, the Company entered into an amendment to the Independent Contractor Agreement (the “Amendment”)
with a service provider pursuant to which the service provider is to be issued warrants to purchase 2,400,000 shares of the Company’s
common stock at $1.00 per share (the “Warrant Shares”). 1,200,000 of the Warrant Shares vested on November 4, 2015,
an additional 600,000 Warrant Shares vested on the first anniversary date of the Amendment, and an additional 600,000 Warrant
Shares will vest on the second anniversary date of the Amendment. The fair value of the first 1,200,000 Warrants Shares was determined
to be $1,115,964 using the Black-Scholes option pricing model and was recognized as expense during the year ended December 31,
2015. The fair value of the two tranches of 600,000 Warrant Shares was determined to total $1,195,985 as of September 30, 2016
using the Black-Scholes option pricing model of which $373,008 and $604,187 was recognized as expense during the three and nine
months ended September 30, 2016, respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 1,000,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
500,000 of the Warrant Shares vested on May 13, 2016, an additional 250,000 warrant shares will vest on the first anniversary
date of the agreement, an additional 250,000 Warrant Shares will vest on the second anniversary date of the agreement. The fair
value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model and was recognized
as expense and as derivative liabilities during the quarter ended June 30, 2016. The fair value of the two tranches of 250,000
Warrant Shares was determined to total $500,539 as of September 30, 2016 using the Black-Scholes option pricing model of which
$92,842 and 517,958 was recognized as expense during the three and nine months ended September 30, 2016, respectively.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 200,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”).
The Warrant Shares are immediately vested. The fair value of the Warrant Shares was determined to total $199,905 as of September
30, 2016 using the Black-Scholes option pricing model of which $155,554 was recognized as expense during the three and nine months
ended September 30, 2016.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
Nine
Months Ended September 30,
|
|
2016
|
|
2015
|
Volatility
|
129-.70
% - 183.62%
|
|
113.46%
- 141.78%
|
Risk-free
interest rate
|
0.44%
- 1.78%
|
|
0.08%
- 1.88%
|
Expected
term
|
2.25
- 10 years
|
|
0.25
- 5 years
|
4.
NET LOSS PER SHARE
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,768,652
|
)
|
|
$
|
(11,655,610
|
)
|
|
$
|
(6,227,809
|
)
|
|
$
|
(17,802,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
58,973,457
|
|
|
|
49,488,166
|
|
|
|
57,103,514
|
|
|
|
46,759,780
|
|
Add incremental shares for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common shares outstanding
|
|
|
58,973,457
|
|
|
|
49,488,166
|
|
|
|
57,103,514
|
|
|
|
46,759,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.38
|
)
|
5.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
In
November 2013, the Company entered into a 60-month lease agreement for its corporation facility in Arizona. Total rent expense
for the three and nine months ended September 30, 2016 was $21,039 and $64,375, respectively. Total rent expense for the three
and nine months ended September 30, 2015 was $22,807 and $70,701, respectively.
Future
minimum lease payments are as follows:
2016
|
|
$
|
20,770
|
|
2017
|
|
|
84,233
|
|
2018
|
|
|
71,797
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
176,800
|
|
Concentrations
All
of the Company’s revenue and accounts receivable are currently earned from one customer.
Legal
Matters
As
of March 30, 2015, shareholders holding approximately 67.26% of the total shares of common stock of NanoFlex Power Corporation
(the “Company,” “we,” “our” or “us”) that are entitled to vote on all Company
matters approved by written consent the removal of John D. Kuhns from his position as a member of the Company’s Board of
Directors. Mr. Kuhns’ removal was for “Cause” as defined under his Employment Agreement as amended and dated
as of October 1, 2013 (the “Employment Agreement”). The removal arose as a result of his documented conduct and statements,
which breached his fiduciary duties to the Company in order to advance personal monetary and other interests, and thereby threatened
serious financial injury to the Company, its shareholders and its debtholders.
On
March 31, 2015, the Board of Directors terminated the Employment Agreement with Mr. Kuhns for Cause and removed him from his positions
as Co-CEO, and from all other officer positions he held with the Company and its subsidiaries and affiliates, and all director
positions with the Company’s subsidiaries and affiliates.
On
April 24, 2015, the Company received a letter from Mr. Kuhns’ counsel (the “Response Letter”) stating that Mr.
Kuhns disagreed with statements in the Initial Filing regarding the circumstances of his removal as a director and officer.
The
Response Letter was accompanied by a copy of a complaint (the “Complaint”) filed by John D, Kuhns (the “Plaintiff”)
in the United States District Court Southern District of New York against the Company, Mr. Dean L. Ledger, our current CEO and
member of our Board of Directors, Mr. Robert J. Fasnacht, our former Executive Vice President and former member of our Board of
Directors and Mr. Ronald B. Foster, a shareholder of the Company (each, a “Defendant,” collectively, the “Defendants”).
The Complaint alleges, among other things, that the Plaintiff was terminated by the Company in violation of Section 922 of the
Dodd-Frank Act, that the Company wrongfully terminated the Employment Agreement, that the Defendants made false statements to
shareholders regarding the Plaintiff, that the Defendants (other than the Company) tortuously interfered with the Plaintiff’s
Employment Agreement, and that Mr. Ledger and Mr. Fasnacht breached their fiduciary duties to the Company and its shareholders.
The
Plaintiff seeks monetary damages, including (i) two (2) times of the alleged owed compensation to him, together with interest
as well as litigation costs, expert witness fees and reasonable attorneys’ fees; (ii) damages for the alleged breach of
the Employment Agreement by the Company, estimated to be at least $2 million, plus interest and attorney’s fees; (iii) an
unspecified amount for his alleged libel claim; and (iv) damages for the alleged tortious interference with contract, including
punitive damages of at least $2 million. The Plaintiff is also seeking a declaratory judgment, claiming that he was not terminated
as a director and should continue to hold a seat on the Company’s Board of Directors.
On
September 3, 2015 the Company filed a Motion to Dismiss portions of the Complaint in the United States District Court Southern
District of New York. The United States District Court Southern District of New York heard oral argument on the Motion to Dismiss
on June 23, 2016, and at the conclusion took the Motion to Dismiss under advisement. The Court ruled on August 24, 2016, regarding
the Motion to Dismiss, and granted the motion in part and denied the motion in part.
The Court granted a
dismissal of all claims against Mr. Foster and dismissal of the Plaintiff’s declaratory judgment claim. All other claims
by the Plaintiff continue to be outstanding. The Company filed an answer to the Complaint on September 14, 2016, and the Plaintiff
responded to the Company’s counter claims contained in the Company’s answer on November 7, 2016.
Other than the foregoing,
there have been no new developments in the case since the filing of the answer. The Company believes that the Plaintiff’s
allegations and claims are without any merit and plans to continue to vigorously defend against the claims.
6.
SUBSEQUENT EVENTS
On October 7, 2016 the Company entered
into a note purchase agreement with an investor pursuant to which an investor purchased a promissory note from the Company in
exchange for $100,000. In connection with the note, the investor was also issued a warrant to purchase 200,000 shares of the Company’s
common stock with a 5 year term and $.50 exercise price and a cashless conversion feature. The Note automatically converted by
its terms on November 7, 2016, 30 days after issuance into an investment in the principal amount of the note in the Company’s
convertible notes and warrants, and upon automatic conversion, the investor was issued a one year promissory note for $100,000
convertible into shares of the Company’s Common Stock at a $.50 conversion price and 5 year warrants to purchase 100,000
shares of Common Stock with an exercise price of $.50 and a cashless conversion feature.
During
October, 2016, the Company issued and sold a convertible promissory note totaling $25,000 together with warrants to purchase 25,000
shares of the Company’s Common Stock for gross proceeds of $25,000 pursuant to certain note subscription agreements entered
into between the Company and an investor. Such warrants have an exercise price of $0.50 and a term of 5 years and a cashless conversion
feature. As of the date of this report, the note has been converted pursuant to their terms into warrants to purchase shares of
the Company’s Common Stock and shares of Common Stock as set forth below.
During October, 2016, the Company issued
122,400 shares of the Company’s Common Stock upon conversion of certain promissory notes.
During October, 2016, the Company issued
warrants to purchase 122,400 shares of its Common Stock related to the conversion of certain convertible notes. Such warrants
have an exercise price of $.50 and a term of 5 years and a cashless conversion feature.
On
October 3, 2016, 50,000 stock options were granted to an employee of the Company. The options vest on a monthly basis of 1,000
shares per month beginning on October 3, 2016, over a 50 month period. The options expire 5 years after vesting.
On
October 21, 2016, the Company entered into an amendment to the Independent Contractor Agreement (the “Allen Amendment”)
with Mr. Norman Allen; the Allen Amendment added in a clause stating that if the Company raises not less than $6,000,000 in funds
from sales of its securities subsequent to the Allen Amendment then, the cash compensation under the Independent Contractor Agreement
would be amended from a $1,500 daily fee to a $15,000 monthly fee. A copy of the Allen Amendment is filed herewith as Exhibit
10.1.
As
reported by the Company in its current report on Form 8-K filed on October 26, 2016, on October 21, 2016, the Company entered
into a second amendment to the Employment Agreement with Dean Ledger, the Company’s Chief Executive Officer (the “Ledger
Amendment”). The Ledger Amendment added in a clause stating that if the Company raises not less than $6,000,000 in funds
from sales of its securities subsequent to the Ledger Amendment, then Mr. Ledger’s base salary would increase from $210,000
to $240,000 and reduced Mr. Ledger’s severance upon the termination of Mr. Ledger in connection with a change of control
transaction to six months. A copy of the Ledger Amendment was filed as Exhibit 10.1 to the Form 8-K. In the first amendment to
the Employment Agreement dated May 8, 2015, Mr. Ledger agreed to a salary reduction of his base salary from $300,000 to $210,000.
A copy of the first amendment to the Employment Agreement was filed as Exhibit 10.18 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2015 filed on March 18, 2016. A copy of the Employment agreement was filed as Exhibit 10.4
to the Company’s Current Report on Form 8-K filed on November 25, 2013.
Further, as reported by the Company in its
current report on Form 8-K filed on October 26, 2016, on October 21, 2016, the Company entered into an amendment (the “Tobin
Amendment”) to the Employment Agreement with Mark Tobin, the Company’s Chief Financial Officer. The Tobin Amendment
added in a clause stating that if the Company raises not less than $6,000,000 in funds from sales of its securities subsequent
to the Tobin Amendment, then Mr. Tobin’s base salary would increase from $190,000 to $225,000 and added a termination for
“Good Reason” clause, as well as a six month severance upon the termination of Mr. Tobin. The Tobin Amendment also
added the responsibilities of an Executive Vice President to Mr. Tobin’s duties and responsibilities under his Employment
Agreement. A copy of the Tobin Amendment was filed as Exhibit 10.2 to the Form 8-K. A copy of the Employment Agreement was filed
as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2015 filed on November
13, 2015 and is also field herewith as Exhibit 10.2.