Note 1 – Description of Business and Summary of Significant Accounting Policies
Description of Business
Cool Technologies, Inc. and subsidiary, (we, us, our, the "Company" or "Cool Technologies") was incorporated in the State of Nevada in July 2002. In April 2014, we formed Ultimate Power Truck, LLC ("Ultimate Power Truck" or "UPT"), of which we own 95% and a shareholder of Cool Technologies owns 5%. We were formerly known as Bibb Corporation, as Z3 Enterprises, and as HPEV Inc. On August 20, 2015, we changed our name to Cool Technologies, Inc.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2015, has been derived from audited financial statements. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited financial statements and in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. All intercompany transactions have been eliminated in consolidation. Noncontrolling interest represents the 5% third party ownership of our subsidiary, UPT. Operating results and cash flows for interim periods are not necessarily indicative of results that can be expected for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern. We have incurred net losses of $42,502,169 since inception and have not fully commenced operations, raising substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise capital, generate revenue, achieve profitable operations and repay our obligations when they come due. We will have to obtain additional debt and / or equity financing; however, we cannot provide investors with assurance that we will be able to raise sufficient capital to fund our operations. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. As of the filing date of this Quarterly Report on Form 10-Q, management is negotiating additional funding arrangements to support completion of the commercialization phases of our business plan: to license its thermal technologies and applications, including submersible dry-pit applications; and to license and sell mobile generation retrofit kits (our Ultimate Power Truck business) as well as retrofitted vehicles that incorporate our proprietary gearing system. There can be no assurance, however, that we will be successful in raising additional financing and accomplishing these objectives.
Recently Issued Accounting Pronouncements
Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2016-09 "Compensation – Stock Compensation (Topic 718)"
– In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2016-10 "Revenue from Contracts with Customers (Topic 606)"
– In April 2016, the FASB issued ASU 2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
Note 2 – Customer deposits – Related party
These represent advance payments of $400,000 received on orders that have not yet been fulfilled, with companies controlled by the individual who is the 5% owner of UPT and a shareholder.
Note 3 – Debt
Debt consists of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Notes payable -- original issue discount
|
|
$
|
-
|
|
|
$
|
400,000
|
|
Convertible notes payable
|
|
|
873,915
|
|
|
|
365,350
|
|
Test vehicle financing
|
|
|
69,539
|
|
|
|
77,075
|
|
Note payable – related party
|
|
|
237
|
|
|
|
22,910
|
|
Note payable – UPT minority owner
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
1,193,691
|
|
|
|
1,115,335
|
|
Debt discount
|
|
|
(222,386
|
)
|
|
|
(339,629
|
)
|
|
|
|
971,305
|
|
|
|
775,706
|
|
Less: current portion
|
|
|
(922,274
|
)
|
|
|
(697,903
|
)
|
|
|
$
|
49,031
|
|
|
$
|
77,803
|
|
Notes payable – original issue discount
In October 2015, we received $350,000 under two notes payable with an original issue discount of $50,000, in lieu of interest. The $400,000 principal balance was payable in full on March 31, 2016. In the event of default, the interest rate will be 18% per annum. The notes were amended on April 28, 2016. In exchange for the note holders refraining from taking legal action in relation to non-payment of the notes until May 16, 2016, the Company agreed to pay liquidated damages of $80,000 and forebearance fees of $5,000 each. In the event that the notes were not paid in full by the end of the forebearance period, then the note holders would be due additional liquidated damages of $98,000. Payment was not made, so the damages were added to the balance due. On May 23, 2016, one of the note holders agreed to extend the maturity date of his note until September 30, 2016. In exchange, the note holder received the right to convert a portion or all of the unpaid principal balance at a rate of 75% of the average of the volume weighted average price (VWAP) in the twelve trading days immediately preceding the request for conversion date as well as continued accrual of 3% liquidated damages each month and 18% interest on the total balance due.
Convertible notes payable
September 2015 Convertible Note --
In September 2015, we entered into a convertible note agreement, which allows us to borrow up to $250,000, bearing interest at 10%, with principal and interest payable on September 15, 2017. We borrowed $75,000 in September 2015 and $50,000 in November 2015, for a total of $125,000 due on September 15, 2017. At the holder's option, a portion or all of the unpaid principal and interest may be converted into shares of our common stock at the lesser of $0.305 per share or 65% of the volume weighted average price of our common stock during the five consecutive trading days immediately preceding the applicable conversion date. We determined that the conversion feature meets the requirements for derivative treatment and have recorded a derivative liability and a corresponding debt discount on the condensed consolidated balance sheet. In March, April and May 2016, the $75,000 note and interest of $16,667 were converted in exchange for 771,429 shares of our common stock. In May and June, 2016, the remaining $50,000 note and $14,256 of interest were converted in exchange for 649,450 shares of our common stock.
December 2015 Convertible Notes --
In December 2015, we entered into a convertible note agreement, bearing interest payable quarterly at 10%, allowing us to borrow up to $248,800. In December 2015, we received $200,000 under the convertible note agreement, with an original issue discount of $20,350 and $20,000 distributed to the lender's legal counsel, for a total amount of $240,350 due on December 1, 2016, with a debt discount of $40,350. In January 2016, we received the remaining $48,800 with an original issue discount of $5,850, for a total amount of $54,650 due on February 26, 2017. At the holder's option, a portion or all of the unpaid principal balance may be converted into shares of our common stock at a rate of $0.12 per share. In the event of a default, the conversion price becomes 70% of the volume weighted average price of our common stock during the three consecutive trading days immediately preceding the applicable conversion date. We also issued warrants to purchase 500,000 shares of our common stock in two separate tranches for 250,000 shares each, with exercise prices of 125% and 150% of our common stock price on the day prior to closing the agreement, or $0.175 per share and $0.21 per share. We determined that the conversion feature and the warrants meet the requirements for derivative treatment and have recorded a derivative liability and a corresponding debt discount on the condensed consolidated balance sheet. The convertible notes have prepayment penalties of 115%, 120%, 125% and 130%, respectively, in the event the note is settled within 45 days, 46-90 days, 91-120 days, and 121 days through the due date. We placed 12,291,667 shares of our common stock in escrow as collateral for this agreement.
On May 30, 2016, we executed an amendment to the convertible note agreement. In consideration for removing limitations, until November 15, 2016, on sales of securities of at least $500,000 including variable rate transactions, convertible notes and third party transactions set forth in the Securities Purchase Agreement signed on December 3, 2015 as well as authorizing the withdrawal of a registration statement filed on January 11, 2016, we agreed to file a new registration statement covering the shares issuable to the holder of the Notes.
In consideration for amending the Notes to permit borrowings by the Company of up to $6,500,000, we agreed to amend the Notes to enable the conversion price to be equal to the lesser of $0.12 and 70% of the average of three VWAPs from the 20 trading days prior to the notice of conversion. Futhermore, we agreed that if it were to issue new notes with greater discounts than those detailed above, the existing Notes would be reset to match the lower conversion price. Finally, we agreed to lower the exercise prices (from $0.21 to$0.168, and from $0.175 to $0.140, respectively) on two existing warrants totaling 500,000 shares previously issued to the holder of the Notes and to issue a cashless, two year warrant to purchase 250,000 shares at an exercise price of $0.168 per share.
February 2016 Convertible Note
– In February 2016, we entered into a convertible note agreement. We received $125,000, with an original issue discount of $15,500 in lieu of interest, for a total amount of $140,500 due on August 10, 2016. On August 17, 2016, we signed an Amendment to the Convertible Promissory Note which extended the maturity date of the note by two weeks to August 24, 2016. In exchange for the extension, we agreed to pay the lender an extension fee of $15,000 payable in conversion shares. The conversion shares totaled $25,000. The remaining $10,000 was used to reduce the outstanding balance of the note. In the event of default, the interest rate will be 22% per annum. At any time following an event of default, the lender has the right to convert a portion or all of the unpaid principal balance at a rate of 65% of the average of the three lowest closing prices in the twenty trading days immediately preceding the request for conversion date. We determined that the conversion feature meets the requirements for derivative treatment and have recorded a derivative liability and a corresponding debt discount on the condensed consolidated balance sheet.
May 2016 Convertible Note
– In May 2016, we entered into a convertible note agreement. We received $120,600, bearing interest at 12%, with principal and interest payable on September 15, 2017 in a total amount of $141,102. In the event of default, the interest rate will be 18% per annum. At any time following after the 180th day from the date of issuance, the lender has the right to convert a portion or all of the unpaid principal balance at a rate of 60% of the average of the lowest trading price in the fifteen trading days immediately preceding the request for conversion date. We determined that the conversion feature meets the requirements for derivative treatment and have recorded a derivative liability and a corresponding debt discount on the condensed consolidated balance sheet.
Test Vehicle Financing
In October 2014, we entered into financing agreements for the purchase of test vehicles, bearing interest at 5.99% payable monthly over five years, collateralized by the vehicles.
Note payable – related party
On February 3, 2016, an agreement was signed with the Secretary of Cool Technologies to retire a non-interest bearing note that was due on demand. The note was retired with the issuance of shares of restricted common stock on June 24, 2016.
Note payable – UPT minority owner
Held by the 5% minority owner of UPT. The terms of the note have not been finalized.
Future contractual maturities of debt are as follows:
Year ending December 31,
|
|
|
|
2016
|
|
$
|
857,654
|
|
2017
|
|
|
296,937
|
|
2018
|
|
|
20,789
|
|
2019
|
|
|
18,311
|
|
|
|
$
|
1,193,691
|
|
Note 4 – Derivative Liability
Under the terms of the convertible note agreements, we identified derivative instruments arising from embedded conversion features, as well as warrants issued with the December 2015 Convertible Note.
The following summarizes the Black-Scholes assumptions used to estimate the fair value of the derivative liability at the dates of issuance and the revaluation dates:
|
|
January 27,
2016
(1)
|
|
|
February 10,
2016
(2)
|
|
|
February 24,
2016
(3)
|
|
|
March 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
121
|
%
|
|
|
121
|
%
|
|
|
118
|
%
|
|
121 – 127
|
%
|
Risk-free interest rate
|
|
|
0.5
|
%
|
|
|
0.4
|
%
|
|
|
0.7
|
%
|
|
0.3 – 0.8
|
%
|
Expected life (years)
|
|
|
1.0
|
|
|
|
0.5
|
|
|
|
1.6
|
|
|
0.4 – 2.7
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
April 11,
2016
(3)
|
|
|
April 19,
2016
(3)
|
|
|
April 27,
2016
(3)
|
|
|
May 3,
2016
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
123
|
%
|
|
|
125
|
%
|
|
|
132
|
%
|
|
|
134
|
%
|
Risk-free interest rate
|
|
|
0.615
|
%
|
|
|
0.65
|
%
|
|
|
0.705
|
%
|
|
|
0.64
|
%
|
Expected life (years)
|
|
|
1.43
|
|
|
|
1.41
|
|
|
|
1.39
|
|
|
|
1.37
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
May 6,
2016
(3)
|
|
|
May 16,
2016
(3) (6)
|
|
|
May 17,
2016
(7)
|
|
|
May 24,
2016
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
134
|
%
|
|
|
138
|
%
|
|
118 – 139
|
%
|
|
|
139
|
%
|
Risk-free interest rate
|
|
|
0.625
|
%
|
|
0.45 - 0.570
|
%
|
|
|
0.28
|
%
|
|
|
0.69
|
%
|
Expected life (years)
|
|
|
1.36
|
|
|
0.63 - 1.33
|
|
|
0.37- 1.6
|
|
|
|
1.0
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
May 27,
2016
(3)(8)
|
|
|
June 10,
2016
(4)(7)
|
|
|
June 13,
2016
(8)
|
|
|
June 16,
2016
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
139
|
%
|
|
|
145
|
%
|
|
|
146
|
%
|
|
|
145
|
%
|
Risk-free interest rate
|
|
0.575 - 0.68
|
%
|
|
0.26 - 0.42
|
%
|
|
|
0.55
|
%
|
|
|
0.445
|
%
|
Expected life (years)
|
|
0.99 - 1.30
|
|
|
0.31 - 0.5
|
|
|
0.95- 1.6
|
|
|
|
1.25
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
June 21,
2016
(7)
|
|
|
June 29,
2016
(4)(7)
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
146
|
%
|
|
|
144
|
%
|
|
|
144
|
%
|
Risk-free interest rate
|
|
|
0.27
|
%
|
|
0.26 - 0.35
|
%
|
|
0.2 - 0.645
|
%
|
Expected life (years)
|
|
0.28 - 1.0
|
|
|
0.25 - 0.5
|
|
|
0.11 - 2.42
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
_________________
(1)
|
Additional borrowing under the December 2015 Convertible Note.
|
|
|
(2)
|
Borrowing under the February 2016 Convertible Note.
|
|
|
(3)
|
Partial conversion of the September 2015 Convertible Note.
|
(4)
|
Partial conversion of the December 2015 Convertible Note.
|
|
|
(5)
|
Notes Payable Original Issue Discount converted into Exchange Notes.
|
|
|
(6)
|
Borrowing under the May 2016 Convertible Note.
|
|
|
(7)
|
Partial Conversion of Notes Payable Original Issue Discount
|
|
|
(8)
|
Partial Conversion of Exchange Notes
|
Changes in the derivative liability were as follows:
|
|
Amount
|
|
|
|
|
|
December 31, 2015
|
|
$
|
356,554
|
|
December 2015 Convertible Note – additional borrowing
|
|
|
53,951
|
|
February 2016 Convertible Note
|
|
|
252,271
|
|
Exchange – Notes Payable Original Issue Discount
|
|
|
347,672
|
|
May 2016 Convertible Note
|
|
|
200,529
|
|
Conversion – September 2015 Convertible Note
|
|
|
(171,276
|
)
|
Conversion - December 2015 Convertible Note
|
|
|
(75,305
|
)
|
Conversion – Notes Payable Original Issue Discount
|
|
|
(110,093
|
)
|
Change in fair value at June 30, 2016
|
|
|
(378,498
|
)
|
June 30, 2016
|
|
$
|
475,805
|
|
An estimated 14,128,451 number of shares were issuable if the conversion features and warrants had been exercised on June 30, 2016.
Note 5 -- Commitments and Contingencies
On December 12, 2012, we concluded negotiations on a debt settlement agreement by and among the Company, Phoenix Productions and Entertainment Group ("PPEG"), Action Media Group, LLC ("Action Media") and Spirit Bear Limited ("Spirit Bear") (PPEG and Action Media collectively, the "Debt Holders"). The Debt Holders were to return to escrow a total of 4,676,000 shares of our common stock. 3,676,000 of these shares were returned and cancelled on January 14, 2013, following our filing a registration statement with the SEC on January 11, 2013. The remaining 1,000,000 shares will be purchased by the Company or a nominee of the Company at $0.40 per share (or $400,000) at the rate of $10,000 per month commencing within 90 days of the Company achieving $1,000,000 in gross revenues for products or services from business operations. PPEG and Action Media will divide the $400,000 on a pro rata basis, based on each company's respective amount of debt forgiven. The historical cost of the shares held in escrow are reflected in equity on the condensed consolidated balance sheets as common stock held in escrow.
Effective May 1, 2015, we executed a First Amendment to Settlement Agreement (the "Amendment") with Spirit Bear and the parties identified as the assignees of Spirit Bear who are signatories to the Amendment, which amends certain provisions of our original Settlement Agreement with Spirit Bear. In accordance with the terms of the Amendment, Jay Palmer, Carrie Dwyer and Donica Holt, the Spirit Bear holdover directors, tendered their resignation from the Board of Directors of the Company. Spirit Bear also agreed that it will no longer have any rights to appoint nominees to the Board of Directors. Pursuant to the Amendment, the Company agreed to file a registration statement on Form S-1 covering an aggregate of 14,028,385 shares of common stock, preferred stock and warrants on behalf of Spirit Bear and its assignees no later than July 15, 2015, which was filed with the SEC on July 15, 2015. A representative of Spirit Bear agreed that the obligation to register the shares on a Form S-1 need only include shares of common stock and shares of common stock issuable upon conversion of the Preferred Stock and exercise of the warrants held by Spirit Bear and its assignees. The Company agreed to issue replacement warrants for certain previously-issued warrants, which will be canceled in connection with the replacement issuance. Within 10 business days of June 1, 2015, the parties agreed to dismiss all of the pending litigation between and among them.
On August 28, 2015, the parties filed a stipulation to dismiss the direct claims of the Company against Spirit Bear and of Spirit Bear against the Company in the Nevada Lawsuit. By order dated September 1, 2015, and filed September 2, 2015, the court ordered dismissal of all direct claims in the Nevada Lawsuit.
Additionally, on February 20, 2015, the Court issued its preliminary approval to the derivative action settlement agreement (the "DASA'), which would lead to the ultimate dismissal of the derivative suit also filed by Spirit Bear in the same action. The Court has scheduled a fairness hearing for November 20, 2015, to consider giving its final approval to the DASA. No shareholder filed any objections to the DASA by April 30, 2015, which was the deadline established by the Court for filing objections. On October 22, 2015, however, Peak Finance, LLC ("Peak Finance") filed a Motion to Intervene in the action seeking, among other things, approval to file a new derivative Complaint in this matter. The Company has opposed this Motion.
On August 31, 2015, the Company received notice of a summons in the matter styled Peak Finance, Derivatively on Behalf of Nominal Defendant, HPEV, Inc. v. Hassett, et al., No. 2:15-cv-01590-GMN-CWH, filed in the United States District Court for the District of Nevada (the "Peak Finance Claim"). Plaintiff Peak Finance, LLC ("Peak Finance") alleges that certain members of the Company's Board of Directors and officers caused a misleading proxy statement to issue and breached alleged fiduciary duties from and after June 18, 2013. Peak Finance further alleges that its claim is related to the Spirit Bear Lawsuit described above. The Company has not determined that there is any merit to the allegations, and has decided to submit the claims to an Independent Director Committee consisting of Directors Christopher McKee, Richard J. "Dick" Schul, and Donald Bowman for their review and consideration. Additionally, on September 28, 2015, the Company filed a motion to dismiss the initial Complaint filed by Peak Finance. On October 22, 2015, rather than oppose the motion to dismiss, Peak Finance filed an amended complaint in this case in addition to the Motion to Intervene in the pending Spirit Bear litigation set forth above. On November 9, 2015, the Company filed a new motion to dismiss the first amended complaint filed by Peak Finance on October 22, 2015.
At the November 20, 2015, fairness hearing, the Court denied Peak Finance's Motion to Intervene. However, the Court did allow Peak Finance to formally argue its objections to the DASA. The Court ordered additional briefing on certain issues, which has not been completed. The Court further ordered another hearing to consider the DASA on April 1, 2016.
On April 1, 2016, Peak Finance and the Company advised the Court that they had agreed in principle to a settlement that would include withdrawal of Peak Finance's objection to the DASA. On April 20, 2016, the parties filed a Stipulation and Proposed Order for Withdrawal of Objection to DASA, which was granted by the Court on April 21, 2016. On May 3, 2016, the Court issued an Order, which fully and finally approved the DASA and dismissed the Peak Finance and the Spirit Bear cases, with prejudice. On May 17, 2016, the Company filed a document to show cause as to the effect of the Stipulation and Proposed Order Regarding Settlement on the pending Motion to Dismiss Amended Complaint.
Also on May 17, 2016, Peak Finance and the Company filed a Stipulation and Proposed Order to Modify Stay of Proceedings so that the stay issued on January 6, 2016 could be modified in order to permit the Court to consider the Stipulation and Proposed Order Regarding Settlement and for the Court and all parties to take all necessary actions to seek final approval of a settlement prior to the Court ruling on the pending Motion to Dismiss.
From time to time, we may be a party to other legal proceedings. Management currently believes that the ultimate resolution of these other matters, if any, and after consideration of amounts accrued, will not have a material adverse effect on our consolidated results of operations, financial position, or cash flow.
Note 6 – Equity
Common Stock
On August 19, 2015, the stockholders voted to increase the number of authorized shares of common stock from 100,000,000 shares to 140,000,000 shares.
Common stock issuable on the condensed consolidated balance sheet represents common stock to be issued for either cash received or services performed. As of June 30, 2016 and December 31, 2015, the number of shares of common stock to be issued was 265,412 and 701,018 shares, respectively.
Common stock warrants issued with the sale of our common stock
When we sell shares of our common stock the buyer also typically receives fully-vested common stock warrants with a maximum contractual term of 3-5 years. A summary of common stock warrants issued with the sale of our common stock as of June 30, 2016, and changes during the period then ended is presented below:
|
|
Number of
Warrants
|
|
|
Weighted-average
Exercise
Price
|
|
|
Weighted-average
Remaining
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
20,726,707
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,130,770
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(2,438,194
|
)
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
|
|
23,419,283
|
|
|
|
0.46
|
|
|
|
2.01
|
|
|
$
|
0
|
|
Exercisable, June 30, 2016
|
|
|
23,419,283
|
|
|
|
0.46
|
|
|
|
2.01
|
|
|
$
|
0
|
|
Included in the warrants granted and cancelled above are 3,729,164 warrants for which the life was extended by one year, for which we recorded expense of $660,000.
Note 7 – Share-based payments
Amounts recognized as expense in the consolidated statements of operations related to share-based payments are as follows:
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Nonemployee common stock
|
|
$
|
--
|
|
|
$
|
571,207
|
|
Nonemployee warrants – fully-vested upon issuance
|
|
|
445,390
|
|
|
|
--
|
|
Nonemployee warrants – service and performance conditions
|
|
|
9,856
|
|
|
|
31,887
|
|
Legal Settlement – replacement warrants
|
|
|
|
|
|
|
1,119,450
|
|
Employee stock options – market price-based
|
|
|
327,000
|
|
|
|
654,000
|
|
Total share-based expense charged against income
|
|
$
|
782,246
|
|
|
$
|
2,376,544
|
|
|
|
|
|
|
|
|
|
|
Impact on net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
Nonemployee common stock
UPT management agreement
In July, 2014, we entered into an agreement with the company managing the operations of UPT, whereby we would issue common stock under the following conditions:
Condition
|
|
Number of Shares
|
|
|
|
|
|
UPT recognizes $100 million of revenue or a change in control
|
|
|
500,000
|
|
UPT recognizes $100 million of revenue
|
|
|
150,000
|
|
|
|
|
650,000
|
|
As of June 30, 2016, and from the date of the agreement, meeting these conditions was not deemed probable, so no expense was recognized under this agreement and no common stock was issued.
Investor relations agreement
In June, 2014, we entered into an agreement with a company, which subsequently became a shareholder, to provide investor relations services. Under the terms of this agreement we agreed to issue 60,000 shares of common stock each quarter through May 2015, for a total of 240,000 shares. We recognized expense of $31,200, during the quarter ended March 31, 2015, for the issuance of 60,000 shares.
In January, 2016, we entered into an agreement with a company, which subsequently became a shareholder, to provide investor relations services. Under the terms of this agreement, we agreed to issue 150,000 one year warrants per month through February 2016, for a total of 300,000 warrants. In March 2016, we renewed the agreement through December 2016. Under the terms of the renewed agreement, we agreed to issue 50,000 restricted common shares and 150,000 one year warrants each month for three months. Thereafter, we agreed to issue 100,000 restricted common shares and 100,000 warrants each month for the duration of the renewed agreement. A total of 2,000,000 restricted common shares and warrants are due to be issued under the renewed agreement. We recognized expenses of $5,000 for the issuance of 25,000 shares and $65,151 for the issuance of 600,000 warrants during the quarter ended June 30, 2016.
Other
During the quarters ended June 30, 2016 and 2015, we issued no other shares of common stock in exchange for services.
Nonemployee common stock warrants -- Fully-vested upon issuance
Financing Advisory Services
In January 2016, we modified the terms of previously issued warrants and issued additional warrants to a company that provides us with financial consulting services. We lowered the exercise price on 2,533,000 warrants to $0.30 per share for warrants that previously had exercise prices ranging from $0.56 to $2.50 per share. As a result of modifying the previously issued warrants, we recognized expense of $64,000. We also issued 1,266,503 additional warrants with an exercise price of $0.30 per share that expire in five years, for which we recognized expense of $246,500.
The following summarizes the Black-Scholes assumptions used to estimate the fair value of these common stock warrants:
|
|
Replacement Warrants
|
|
|
Additional Warrants
|
|
|
|
|
|
|
|
|
Volatility
|
|
133 – 182
|
%
|
|
|
204
|
%
|
Risk-free interest rate
|
|
1.1 – 1.3
|
%
|
|
|
1.4
|
%
|
Expected life (years)
|
|
3.0 – 4.3
|
|
|
|
5.0
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
Board of Advisors
In February 2016, we issued three year warrants to purchase 400,000 shares of common stock at an exercise price of $0.27 per share and 200,000 shares of common stock at an exercise price of $0.31 per share, to five individuals serving on our board of advisors. We recognized $134,890 of expense for these warrants.
The following summarizes the Black-Scholes assumptions used to estimate the fair value of these common stock warrants:
Volatility
|
|
|
127
|
%
|
Risk-free interest rate
|
|
|
0.9
|
%
|
Expected life (years)
|
|
|
3.0
|
|
Dividend yield
|
|
|
--
|
|
Nonemployee common stock warrants -- Service and performance conditions
UPT management agreement
In July, 2014, we entered into a three year agreement with the company managing the operations of UPT, whereby we would issue common stock warrants under the following conditions:
|
|
|
|
Number of
|
|
Vesting Condition
|
|
Category
|
|
Warrants
|
|
|
|
|
|
|
|
Fully vest upon UPT generating $1 million of revenue
|
|
Performance
|
|
|
350,000
|
|
45,945 warrants for every $3 million of revenue generated by UPT up to $100 million
|
|
Performance
|
|
|
1,530,000
|
|
60,000 warrants for every three months of completed service managing UPT
|
|
Service
|
|
|
720,000
|
|
Total
|
|
|
|
|
2,600,000
|
|
Vested – June 30, 2016
|
|
|
|
|
(480,000
|
)
|
Nonvested – June 30, 2016
|
|
|
|
|
2,120,000
|
|
The common stock warrants have a three year life and an exercise price of $1.00 per share. The grant date fair value was $2,586,000. As of June 30, 2016, and since the date of the agreement, we have not deemed it probable that the performance conditions will be met, so no expense was recognized and no common stock warrants vested. During the six months ended June 30, 2016 and 2015, 120,000 of the common stock warrants under the service condition vested with the passage of time and we recognized expense of $12,007 and $61,200, respectively.
Financing advisory services
In March, 2014, we entered into an agreement with a company, which is also a shareholder, to provide financing advisory services, in return for 400,000 common stock warrants having a five year life and an exercise price of $2.50, with vesting in March, 2015 upon satisfactory performance under the agreement. As of December 31, 2014, we deemed it probable that the vesting conditions would be met. Accordingly, during the year ended December 31, 2014, we recognized estimated expense of $200,379. As of June 30, 2015, the service conditions were met and the award was re-valued at $179,964, resulting in a reduction in expense of $20,415 during the quarter ended June 30, 2015.
Employee stock options – Fully-vested
We granted no additional fully-vested options during the three months ended June 30, 2016.
Employee stock options – Market-based
We granted no additional options that vest upon the achievement of certain stock prices during the three months ended June 30, 2016. No additional non-vested market-based options vested during the quarter ended June 30, 2016.
Note 8 – Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised.
The following table presents a reconciliation of the denominators used in the computation of net loss per share – basic and diluted:
|
|
Three months ended June 30
|
|
|
Six months ended June 30
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available for stockholders
|
|
$
|
(623,123
|
)
|
|
$
|
(2,950,004
|
)
|
|
$
|
(3,157,924
|
)
|
|
$
|
(4,228,440
|
)
|
Weighted average outstanding shares of common stock
|
|
|
82,148,475
|
|
|
|
64,093,646
|
|
|
|
88,558,027
|
|
|
|
62,845,402
|
|
Dilutive effect of stock options and warrants
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Common stock and equivalents
|
|
|
82,148,475
|
|
|
|
64,093,646
|
|
|
|
88,558,027
|
|
|
|
62,845,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
Outstanding stock options and common stock warrants are considered anti-dilutive because we are in a net loss position.
Note 9 – Subsequent Events
On August 12, 2016, we filed an Amendment to the Certificate of Designation with the State of Nevada which amended the rights and terms of the 14,500,000 authorized shares of the Company's Series B Preferred Stock. The amendment passed by Unanimous Written Consent of the Board of Directors enables the holders of shares of Series B Preferred Stock to convert the shares to common stock on a one-to- one basis, to share in dividends issued by the Company and to directly or indirectly assign, transfer, sell or otherwise dispose of the Preferred Stock without the prior written consent of the Board. The requirement for stockholders to grant an irrevocable proxy was rescinded.
Subsequent to June 30, 2016, $284,787.50 under an October 2015 Note Payable -- Original Issue Discount were converted in exchange for 8,751,606 shares of our common stock as a consequence of a Second Extension and Amendment Agreement signed May 23, 2016, in which the note holder received the right to convert a portion or all of the unpaid principal balance.
Subsequent to June 30, 2016, $140,350.01 under the December 2015 Convertible Note were converted in exchange for 5,153,403 shares of our common stock.
Subsequent to June 30, 2016, $84,176.74 under the May 2016 Convertible Note were converted in exchange for 2,409,975 shares of our common stock.