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
photovoltaic technologies that enable thin film solar products with what we believe to be industry-leading efficiencies, light
weight, flexibility, and low total system cost.
These
technologies are targeted at certain broad applications, including: (a) portable and off-grid power generation, (b) building applied
photovoltaics (“BAPV”), (c) building integrated photovoltaics (“BIPV”), (d) space vehicles and unmanned aerial
vehicles (“UAVs”), (e) semi-transparent solar power generating windows or glazing, and (f) ultra-thin solar films 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, 2016 included
in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2017 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 year ended December 31, 2016. Therefore, the Company revised its previously-issued financial statements as
of December 31, 2015 and for the first quarter of fiscal 2016. The consolidated statement of operations for the three months ended
March 31, 2016 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 statement of operations
for the three months ended March 31, 2016:
|
|
Three Months Ended
March 31, 2016
|
|
|
|
As Reported
|
|
|
Revision
|
|
|
As Revised
|
|
Gain on change in fair value of derivative
|
|
$
|
3,125,584
|
|
|
$
|
5,133,394
|
|
|
$
|
8,258,978
|
|
Interest expense
|
|
|
(2,539,348
|
)
|
|
|
20,063
|
|
|
|
(2,519,285
|
)
|
Total other expense
|
|
|
(3,046,706
|
)
|
|
|
5,153,457
|
|
|
|
2,106,751
|
|
Net income (loss)
|
|
|
(4,506,426
|
)
|
|
|
5,153,457
|
|
|
|
647,031
|
|
Net income (loss) per share - basic
|
|
|
(0.08
|
)
|
|
|
0.09
|
|
|
|
0.01
|
|
Net income (loss) per share - diluted
|
|
|
(0.08
|
)
|
|
|
(
0.01
|
)
|
|
|
(0.09)
|
|
These
revisions to the consolidated statements of cash flows for the three months ended March 31, 2016 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 $15,031,834 and an accumulated deficit
of $205,991,063 as of March 31, 2017. 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 March 31, 2017 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 March 31, 2017
and December 31, 2016:
|
|
Fair Value Measurements as of
March 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
5,640,376
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
1,863,029
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
7,503,405
|
|
|
|
Fair Value Measurements as of
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
8,828,405
|
|
Conversion option derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
3,156,736
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
11,985,141
|
|
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
|
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
11,985,141
|
|
|
$
|
18,207,333
|
|
Change in fair value
|
|
|
(4,481,736
|
)
|
|
|
(8,258,978
|
)
|
Ending balance
|
|
$
|
7,503,405
|
|
|
$
|
9,948,355
|
|
Recent
Accounting Pronouncements
In
September 2015, the FASB issued ASU No. 2015-16,
“Simplifying the Accounting for Measurement-Period Adjustments”.
This ASU 2015-16 simplifies the treatment of adjustments to provisional amounts recognized in the period for items in a business
combination for which the accounting is incomplete at the end of the reporting period. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2015. As this applies to future business combinations, the adoption of this ASU
has no impact on the Company’s current consolidated financial position, results of operations or cash flows.
In
November 2015, the FASB issued ASU 2015-17,
“Income Taxes (Topic 470): Balance Sheet Classification of Deferred Taxes”.
The amendments in ASU 2015-17 eliminate the requirement to bifurcate deferred taxes between current and non-current on the
balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The amendments
for ASU-2015-17 can be either applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented and early adoption is permitted. The Company is currently evaluating the effect of adoption of this standard, if any,
on its consolidated financial position, results of operations or cash flows.
In
January 2016, the FASB issued ASU No. 2016-01,
“Financial Instruments – Overall (Subtopic 825-10), Recognition
and Measurement of Financial Assets and Financial Liabilities”,
which addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years, and early adoption is not permitted. The Company is currently evaluating
the effect its adoption of this standard, if any, on our consolidated financial position, results of operations or cash flows.
In
February, 2016, the FASB issued ASU No. 2016-02
,” Leases” (Topic 842)
which includes a lessee accounting model
that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the
balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease.
New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of
cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing
information about the amounts recorded in the financial statements. ASU 2016-02 will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect its adoption
of this standard, if any, on our consolidated financial position, results of operations or cash flows.
In March 2016, the
FASB issued ASU 2016-09, “
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
”
(“ASU 2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The
standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the accounting
for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding
requirements, classification of awards as either equity or liabilities, and classification of employee taxes paid on the statement
of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for interim and annual
reporting periods beginning January 1, 2017. The Company adopted this new standard as of March 31, 2017. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing
”, to clarify the following two aspects of Topic 606: 1) identifying performance obligations,
and 2) the licensing implementation guidance. The effective date and transition requirements for these amendments are the same
as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact of this amendment
on its financial statements.
In
May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
”, to clarify certain core recognition principles including collectability, sales tax presentation,
noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the
full retrospective transition method is adopted. The effective date and transition requirements for these amendments are the same
as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact of this amendment
on its financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”.
This update addresses how certain cash inflows and outflows are classified in the statement of cash
flows to eliminate existing diversity in practice. This update is effective for annual and interim reporting periods beginning
after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this amendment on its
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”
(a consensus
of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents
in the statement of cash flow. The amendments should be applied using a retrospective transition method, and are effective for
fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently
evaluating the impact of these amendments on its financial statements.
In
January, 2017, the FASB issued ASU No. 2017-01, “
Business Combinations (Topic 805): Clarifying the Definition of a Business”,
to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments should be applied prospectively,
and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Company is currently evaluating the impact of these amendments on its consolidated financial statements.
In
January 2017, the Financial Accounting Standards Board FASB issued ASU 2017-04, “
Intangibles - Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment”.
This update simplifies the subsequent measurement of goodwill by
eliminating “Step 2” from the goodwill impairment test. This update is effective for annual and interim reporting
periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact this standard
will have on the Company’s consolidated financial statements and related disclosures.
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 March 31, 2017.
On
August 31, 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 $58,797 associated with the amortization of debt discount for the three months ended March 31, 2017.
As
of March 31, 2017 and December 31, 2016, the aggregate outstanding balance of non-convertible notes payable was $400,000, and
unamortized discount was $97,995 and $156,792, respectively.
Notes
Payable – Related Party
On
January 27, 2017, the Company borrowed $380,000 under a short term note agreement with a majority shareholder. Under the
terms of this agreement, the note is to be repaid within four months of funding along with $19,000 paid at the maturity of
the note in lieu of interest.
On
March 6, 2017, the Company borrowed $120,000 under a short term note agreement with a majority shareholder. Under the terms
of this agreement, the note is to be repaid within four months of funding along with $6,000 paid at the maturity of the note
in lieu of interest.
As
of March 31, 2017 and December 31, 2016, the aggregate outstanding balance of notes payable to related parties was $1,000,000
and $500,000, respectively.
Advances
– Related Party
During
the three months ended March 31, 2017, the Company received advances from its Chief Executive Officer totaling $10,000, and repaid
advances totaling $40,000.
As
of March 31, 2017 and December 31, 2016, the aggregate outstanding balance of advances to related parties was $480,000 and $510,000,
respectively.
Convertible
Notes Payable
On
January 27, 2017, 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 $200,000 and a warrant to purchase 400,000 shares of the company’s common
stock with a $0.50 exercise price and 5 year term. The promissory note had a clause that automatically modified it 30 days after
issuance into a convertible note. The convertible note was issued on February 27, 2017, pursuant to the agreement, with a principal
amount of $200,000, includes the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year
and is convertible into 400,000 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 600,000 warrants was $125,931 which was recognized as a discount to the debt. This note also gave rise to a
beneficial conversion feature of $38,655 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 $35,414 associated with the warrants that are to be issued upon conversion, which is to be recognized only
upon conversion.
On
March 8, 2017, 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 $200,000 and a warrant to purchase 400,000 shares of the company’s common stock with
a $0.50 exercise price and 5 year term. The promissory note had a clause that automatically modified it 30 days after issuance
into a convertible note. The convertible note was issued on April 8, 2017, pursuant to the agreement, with a principal amount
of $200,000, includes the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year and is
convertible into 400,000 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 600,000 warrants was $130,207 which was recognized as a discount to the debt. This note also gave rise to a beneficial
conversion feature of $36,196 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 $33,596 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
On
March 9, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory
note from the Company in exchange for $150,000, respectively, and a warrant to purchase 300,000 shares of the company’s
common stock, respectively, with a $0.50 exercise price and 5 year term. The promissory note had a clause that automatically modified
it 30 days after issuance into a convertible note. The convertible note was issued on April 9, 2017, pursuant to the agreement,
with a principal amount of $150,000, includes the issuance of 150,000 additional warrants, interest of 8% per annum, a maturity
date of one year and is convertible into 300,000 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 450,000 warrants was $96,019 which was recognized as a discount to the debt. This note also gave
rise to a beneficial conversion feature of $28,018 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 $25,963 associated with the warrants that are to be issued upon conversion, which is to be recognized
only upon conversion.
On
March 12, 2017, the Company entered into note purchase agreements with two investors, pursuant to which investors purchased a
promissory note from the Company in exchange for $100,000 and a warrant to purchase 200,000 shares of the company’s common
stock, respectively, with a $0.50 exercise price and 5 year term. The promissory note had a clause that automatically modified
it 30 days after issuance into a convertible note. The convertible note was issued on April 12, 2017, pursuant to the agreement
with a principal amount of $100,000, includes the issuance of 100,000 additional warrants, interest of 8% per annum, a maturity
date of one year and is convertible into 200,000 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 300,000 warrants was $64,386 which was recognized as a discount to the debt. This note also gave
rise to a beneficial conversion feature of $18,479 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 $17,135 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, 2017, the full principal balances of certain notes totaling $383,500 with accrued interest of
$4,800 were converted pursuant to the terms of the notes into 771,800 shares of the Company’s common stock and 771,800 warrants
to purchase common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and also recognized
additional interest expense of $72,591 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 three months ended March 31, 2017 and 2016 was $406,971 and $191,598,
respectively. As of March 31, 2017 and December 31, 2016, the aggregate outstanding balance of convertible notes payable was $1,575,786
and $1,440,206, respectively, net of unamortized discounts of $474,214 and $343,294.
Derivative
Liabilities - Convertible Notes
As
of March 31, 2017, the fair value of the outstanding convertible note derivatives was determined to be $1,863,029 and recognized
a gain of $1,293,707. There were no new convertible note derivatives that arose during the three months ended March 31, 2017.
Accounts
Payable - Related Party
As
of March 31, 2017 and December 31, 2016, there is $0 and $2,470, 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
On
February 13, 2017, the Company issued 336,000 shares of the Company’s common stock to certain note holders in exchange for
accrued interest of $168,000. The fair value of the common stock was determined to be $201,600 and resulted in a loss on settlement
of accrued interest of $33,600.
During
the three months ended March 31, 2017, the Company sold an aggregate of 487,500 units, at $0.50 per unit for aggregate proceeds
$243,750. Each unit consisted of one common share and one warrant. Each warrant is exercisable for a period of five years from
the date of issuance, at $0.50 per share. 100,000 units were issued during the three months ended March 31, 2017. The other 387,500
were issued subsequent to the end of the quarter.
During
the three months ended March 31, 2017, the Company issued an aggregate of 771,800 shares of its common stock related to the conversion
of $383,500 of principal and $4,800 accrued interest expense on convertible notes.
Stock
Options
A
summary of stock option activity during the three months ended March 31, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
Outstanding at December 31, 2016
|
|
|
100,000
|
|
|
|
0.77
|
|
|
|
9.4
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
100,000
|
|
|
|
0.77
|
|
|
|
9.1
|
|
Exercisable at March 31, 2017
|
|
|
22,000
|
|
|
$
|
0.64
|
|
|
|
8.9
|
|
Stock
option awards are expensed on a straight-line basis over the requisite service period. During the three months ended March 31,
2017 and 2016 the Company recognized expense of $6,720, and $4,163, respectively, associated with stock option awards. At March
31, 2017, future stock compensation expense (net of estimated forfeitures) not yet recognized was $85,883 and will be recognized
over a weighted average remaining vesting period of 3.2 years.
The
intrinsic value of the Company’s stock options outstanding was $6,000 at March 31, 2017.
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 $147,659 and $324,851 was recognized during the three months ended March 31, 2017 and 2016, respectively. The agreement contains
an anti-dilution provision and therefore the exercise price at March 31, 2017 is $0.50 per share.
On
February 1, 2017, the Company issued warrants to purchase 30,000 shares of its Common Stock to a service provider in exchange
for services provided to the Company. 5,000 of the warrants vested February 28, 2017, and 5,000 warrants shall vest on the last
date of each month following February 2017, until final vesting on July 31, 2107. As of the date of this report, 10,000 of the
warrants have vested. The warrants have an exercise price of $0.50 and a 5 year term. The fair value of the warrants was determined
to be $18,153 using the Black-Scholes option pricing model of which $6,051 was recognized as expense during the three months ended
March 31, 2017.
On
March 6, 2017, the Company issued warrants to purchase 200,000 shares of its common stock at $0.50 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 $120,501 using the Black-Scholes option pricing model of which $120,501 was recognized as expense
during the three months ended March 31, 2017.
During
the three months ended March 31, 2017, the aggregate principal and interest of certain convertible notes totaling $388,300 were
converted pursuant to the terms of the notes into 771,800 shares of the Company’s common stock and 771,800 warrants to purchase
common stock. See details in Note 2.
The
following summarizes the warrant activity for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding as of December 31, 2016
|
|
|
60,380,521
|
|
|
$
|
0.73
|
|
|
$
|
4.6
|
|
|
$
|
57,361,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,601,800
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(12,500
|
)
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
|
|
62,969,821
|
|
|
$
|
0.67
|
|
|
$
|
4.4
|
|
|
$
|
7,150,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2017
|
|
|
61,119,821
|
|
|
$
|
0.69
|
|
|
$
|
4.4
|
|
|
$
|
6,678,781
|
|
Derivative
Liabilities - Warrants
The
anti-dilution features in the freestanding warrants issued in the three months ended March 31, 2017 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 $8,828,405 at December 31, 2016. The
Company recorded the change in the fair value of the warrant liabilities recognizing a gain of $3,188,029 for the three months
ended March 31, 2017, to reflect the value of the warrant derivative liability of $5,640,376 as of March 31, 2017.
On
November 4, 2015, the Company entered into an amendment to the Independent Contractor Agreement (the “Amendment”)
with a service provider pursuant to which the service provider is to be issued warrants to purchase 2,400,000 shares of the Company’s
common stock at $1.00 per share (the “Warrant Shares”). 1,200,000 of the Warrant Shares vested on November 4, 2015,
an additional 600,000 Warrant Shares vested on November 4, 2016, and an additional 600,000 Warrant Shares will vest on November
4, 2017. The fair value of the first 1,200,000 Warrants Shares was determined to be $1,115,964 using the Black-Scholes option
pricing model and was recognized as expense during the year ended December 31, 2015. The fair valued of the 600,000 Warrant Shares
that vested November 4, 2016 was determined to be $559,900 and was recognized as expense during the year ended December 31, 2016.
The fair value of the remaining tranche of 600,000 Warrant Shares was determined to total $1,079,740 as of March 31, 2017 using
the Black-Scholes option pricing model of which $68,412 of expense was recaptured during the three months ended March 31, 2017
and $110,285 was recognized as expense during the three months ended March 31, 2016.
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 year ended December 31, 2016. The fair value of the two tranches of 250,000
Warrant Shares was determined to total $300,799 as of March 31, 2017 using the Black-Scholes option pricing model of which $19,713
of expense was recaptured during the three months ended March 31, 2017.
On
May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued
warrants to purchase 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 $120,320 as of March 31,
2017 using the Black-Scholes option pricing model of which $155,554 was recognized as expense during the year ended December 31,
2016.
The
warrants were valued using the Black-Scholes pricing model with the following assumptions:
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Volatility
|
|
129-.70 % - 208.72%
|
|
129.70% - 132.58%
|
Risk-free interest rate
|
|
1.27% - 2.40%
|
|
0.87% - 1.78%
|
Expected term
|
|
2 - 9 years
|
|
3 - 10 years
|
4.
NET LOSS PER SHARE
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,578,776
|
|
|
$
|
647,031
|
|
Less: decrease in fair value of warrants, net of income tax
|
|
|
(2,902,756
|
)
|
|
|
(5,820,713
|
)
|
Less: decrease in fair value of convertible debt, net of income tax
|
|
|
(1,293,707
|
)
|
|
|
(2,438,221
|
)
|
Less: interest expense - convertible debt
|
|
|
(47,710
|
)
|
|
|
(29,453
|
)
|
Income (loss) available to common stockholders
|
|
|
(1,665,397
|
)
|
|
|
(7,641,356
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
60,685,049
|
|
|
|
54,824,864
|
|
|
|
|
|
|
|
|
|
|
Plus: incremental shares from assumed exercise- warrants
|
|
|
11,016,303
|
|
|
|
23,518,370
|
|
Plus: incremental shares from assumed conversion- convertible debt
|
|
|
4,100,000
|
|
|
|
2,873,954
|
|
Plus: incremental shares from assumed conversion-units
|
|
|
400,663
|
|
|
|
456,778
|
|
Adjusted weighted average common shares outstanding
|
|
|
76,202,016
|
|
|
|
81,673,966
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.09
|
)
|
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 months ended March 31, 2017 and 2016 was $29,194 and $21,832, respectively.
Future
minimum lease payments are as follows:
2017
|
|
$
|
63,271
|
|
2018
|
|
|
71,797
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
135,068
|
|
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.
The parties have exchanged document demands and are currently engaged in discovery.
Other
than the foregoing, there have been no developments in the case since Plaintiff’s response. 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
April 1, 2017, 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 over a 50 month period. The options expire in 2027.
In
April of 2017, the Company sold an aggregate of 115,000 units, at $0.50 per unit for aggregate proceeds of $57,000. Each unit
consisted of one common share and one warrant. Each warrant is exercisable for a period of five years from the date of issuance,
at $0.50 per share.
In
April of 2017, the Company issued 387,000 units, at $0.50 per unit for proceeds of $193,500 which was received during the quarter
ended March 31, 2017
On
April 12, 2017, the Company issued warrants to purchase 100,000 shares of its common stock at $0.50 per share to a consultant
in exchange for services already performed. The warrants have a five year term and are immediately vested.
On
April 12, 2017, the aggregate principal and interest of certain convertible notes totaling $450,000 were converted pursuant to
the terms of the notes into 900,000 shares of the Company’s common stock and 900,000 warrants to purchase common stock.
On
April 12, 2017, the Company reduced the exercise price of a certain warrant, with 50,226 shares of the Company’s common
stock issuable upon exercise of such warrant, to $.50 and added a cashless exercise feature to such warrant.
On
April 24, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power
Up”) pursuant to which Power Up purchased a convertible promissory note evidencing a loan of $58,500. On April 25,
2017, the Company issued Power Up a $58,500 convertible promissory note. This note entitles the holder to 12% interest per
annum and matures on February 10, 2018. Power Up may convert the note into common stock beginning on the date which is 180
days from the issuance date of the note, at a price equal to 61% of the average of the lowest two trading prices during the
15 trading day period ending on the last complete trading date prior to the date of conversion, provided, however, that Power
Up may not convert the note to the extent that such conversion would result in Power Up’s beneficial ownership being in
excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by Power Up and its
affiliates. If the Company prepays the note within 30 days of its issuance, the Company must pay all of the principal at a
cash redemption premium of 110%; if such prepayment is made between the 31
st
day and the 60
th
day after
the issuance of the note, then such redemption premium is 115%; if such repayment is made from the sixty first
61
st
to the 90th day after issuance, then such redemption premium is 120%; if such repayment is made from the
91
st
to the 120
th
day after issuance, then such redemption premium is 125%; if such repayment is made
from the 121
st
to the 150th day after issuance, then such redemption premium is 130%; and if such prepayment is
after the 151
st
day and before the 181
st
date of issuance of the note then such redemption premium is
135%. The foregoing descriptions of the Securities Purchase Agreement and note is not complete and is qualified in its
entirety by reference to the full text of the form of Securities Purchase Agreement and form note, copies of which are filed
as Exhibit 10.2 and 10.3, respectively, to this report and are incorporated by reference herein. In connection with this
note, the Company’s transfer agent reserved 1,018,424 shares of the Company’s common stock, in the event that the
note is converted.
On
April 25, 2017, the Company borrowed $115,000 from JSJ Investments, Inc. (“JSJ”) and issued to JSJ a $115,000 convertible
promissory note with a maturity date of January 25, 2018. The interest under the note is 12% and the default interest under the
note is 18%. JSJ is entitled, at its option, at any time after the issuance of the note, to convert all or a portion of the outstanding
principal amount and accrued but unpaid interest into Company common stock at a conversion price for each share of common stock
equal to a price which is a 40% discount to the lowest trading price during the 20 days prior to the day that JSJ requests conversion.
JSJ may not convert the Note to the extent that such conversion would result in JSJ’s beneficial ownership being in excess
of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by JSJ and its affiliates.
If the Company prepays the note within 60 days of its issuance, the Company must pay all of the principal at a cash redemption
premium of 110%; if such prepayment is made from the 61
st
to the 91
st
day after issuance, then such redemption
premium is 120%; and if such prepayment is after the one 120
th
date of issuance of the note then such redemption premium
is 140%. The foregoing description of the note is not complete and is qualified in its entirety by reference to the full text
of the form of the note, a copy of which is filed as Exhibit 10.1 to this report and is incorporated by reference herein. In connection
with the issuance of this note, the Company’s transfer agent reserved 2,400,000 shares of the Company’s common stock,
in the event that the note is converted.
On April 28, 2017, the Company entered
into a Securities Purchase Agreement with Silo Equity Partners Venture Fund, LLC (“Silo”) pursuant to which Silo purchased
a convertible promissory note evidencing a loan of $100,000. On April 27, 2017, the Company issued Silo a $100,000 convertible
promissory note evidencing the loan. This note entitles the holder to 8% interest per annum and matures on April 24, 2018. The
default interest under this note is 24%. Silo may convert the note into common stock beginning on the date which is 180 days from
the issuance date of the note, at a price equal to 55% of the lowest two trading prices during the 20 trading day period ending
on the last complete trading date prior to the date of conversion, provided, however, that Silo may not convert the note to the
extent that such conversion would result in Silo’s beneficial ownership being in excess of 4.99% of the Company’s
issued and outstanding common stock together with all shares owned by Silo and its affiliates. If the Company prepays the note
within 60 days of its issuance, the Company must pay all of the principal at a cash redemption premium of 120%; if such prepayment
is made between the 61
st
day and the 121
st
day after the issuance of the note, then such redemption premium
is 130%; if such repayment is made from the 122
nd
to the 181
st
day after issuance, then such redemption
premium is 135%. The foregoing descriptions of the Securities Purchase Agreement and note are not complete and are qualified in
their entirety by reference to the full text of the form of Securities Purchase Agreement and form note, copies of which are filed
as Exhibit 10.4 and 10.5, respectively, to this report and are incorporated by reference herein. In connection with this note,
the Company’s transfer agent reserved 3,000,000 shares of the Company’s common stock, in the event that the note is
converted.
On
May 3, 2017, the Company reduced the exercise price of a certain warrant, with 20,000 shares of the Company’s common stock
issuable upon exercise of such warrant, to $.50 and added a cashless exercise feature to such warrant.
On
May 1, 2017 and on May 3, 2017, the Company, by board consent, reduced the exercise price of a total of 690,518 warrants, to $.50
and added a cashless exercise feature to such warrants.
On May 4, 2017, the Company agreed to
borrow up to $500,000 from JMJ Financial (“JMJ”) and issued to JMJ a convertible promissory note of up to $500,000,
evidencing the loan with a maturity date of May 4, 2018. The amount of the promissory note funded by JMJ as of the date of this
report is $330,000. This note has a $25,000 original issue discount. Further, the principal sum due to JMJ under this note is
to be based on the consideration actually paid by JMJ with an approximate 5% original issue discount that is based on the consideration
actually paid by JMJ together with any applicable fees, as of the date of this report, the principal sum due under this note is
$330,000. The interest under the note is a one-time interest charge of 10% which shall be applied to the principal sum of the
note. JMJ is entitled, at its option, at any time after the issuance of the note, to convert all or a portion of the outstanding
principal amount and accrued but unpaid interest into Company common stock at a conversion price for each share of common stock
equal to a price which the lesser of $0.52 or 60% of the lowest trade price in the 25 trading days previous to the conversion.
JMJ may not convert the note to the extent that such conversion would result in JMJ’s beneficial ownership being in excess
of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by JMJ and its affiliates.
If the Company prepays the note within 90 days of its issuance, the Company must pay all of the principal at a cash redemption
premium of 120%; if such prepayment is made from the 91
st
to the 180
th
day after issuance, then such redemption
premium is 130%. The Company may not prepay this note starting on the 181
st
date after issuance without written approval
in advance from JMJ. This note also gives piggyback registration rights to JMJ for the next registration statement, if any, filed
by the Company. The note also contains a put notice, pursuant to which JMJ has the right, if the Company’s common stock
is not listed on either the Nasdaq or NYSE-MKT within 120 days of issuance of the note, then JMJ has a right to put the note back
to the Company with a 30 day written notice at 130% of the balance due under the note. Mr. Dean Ledger, our CEO and sole member
of the Company’s board of directors, agreed to personally guarantee this note, pursuant to a Personal Guaranty and Recourse
Agreement entered into between Mr. Ledger and JMJ. In connection with the note, the Company also entered into a Representation
and Warranties Agreement Regarding Debt and Variable Securities (the “RW Agreement”), pursuant to which the Company
made certain representation and warranties to JMJ, including that the Company will not issue any debt within 90 days of the issuance
of the note without written consent from JMJ, unless the proceeds of such debt are used to repay the note within 2 business days.
In the RW Agreement, the Company also agreed not to issue any convertible security or any variable security within 90 days of
the issuance of the note, unless the proceeds of same are used to pay off the note in 2 business days. The foregoing descriptions
of the note, the Personal Guaranty and Recourse Agreement, and the RW Agreement are not complete and are qualified in their entirety
by reference to the full text of the form of the note, Personal Guaranty and Recourse Agreement, and RW Agreement, copies of which
are filed as Exhibits 10.6, 10.7 and 10.8 to this report and are incorporated by reference herein. In connection with the issuance
of this note, the Company’s transfer agent reserved 5,000,000 shares of the Company’s common stock, in the event that
the note is converted.