NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. BACKGROUND, BASIS OF PRESENTATION,
AND GOING CONCERN
Background
NanoFlex Power Corporation (‘we”
“our”, the “Company”), formerly known as Universal Technology Systems, Corp., was incorporated in the State
of Florida on January 28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation,
a Pennsylvania corporation (“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”).
Immediately following the closing of the Share Exchange Transaction, the Company owned 100% of the equity interests of GPEC and
GPEC became a wholly-owned subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal
Technology Systems, Corp.” to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS”
on December 26, 2013.
GPEC was incorporated in Pennsylvania on
February 7, 1994. The Company is organized to fund, develop, commercialize and license advanced photovoltaic technologies that
enable thin film solar products with what we believe to be industry-leading efficiencies, light weight, flexibility, and low total
system cost.
These technologies are targeted at certain
broad applications, including: (a) portable and off-grid power generation, (b) building applied photovoltaics (“BAPV”),
(c) building integrated photovoltaics (“BIPV”), (d) space vehicles and unmanned aerial vehicles (“UAVs”),
(e) semi-transparent solar power generating windows or glazing, (f) ultra-thin solar films for automobiles or other consumer applications
and (g) solar powered sensors.
We believe these technologies have been
demonstrated in a laboratory environment with our research partners. The Company is currently taking steps to pursue product development
and commercialization on some of these technologies in collaboration with industry partners and potential customers.
Basis of Presentation
The accompanying unaudited interim consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated
financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim
periods presented. These consolidated financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the fiscal year ended December 31, 2017 included in our Annual Report on Form 10-K. The results
of operations for the three and six months ended June 30, 2018 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.
Certain balances were reclassified from
Convertible debt, net of unamortized discounts and deferred financing costs to short-term debt, net of unamortized discounts, net
for the year ended December 31, 2017 to conform to the current year presentation.
Revenue Recognition
Adoption of ASC Topic 606, "Revenue
from Contracts with Customers"
On January 1, 2018, we adopted Topic 606
using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with our historic accounting under Topic 605.
There was no impact to the opening balance
of accumulated deficit or revenues for the six months ended June 30, 2018 as a result of applying Topic 606.
The Company applies a five-step approach
in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying
the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the
performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially
all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
The Company generates revenue from our
Joint Development Agreements (“JDA’s”) and our ARL contract. R&D engineering services through JDA’s
are a core component of the Company’s operations and business model, since they are a necessary prerequisite to obtaining
intellectual property licensing agreements with customers. As such, R&D engineering services are expected to be a sustained
revenue stream for the Company as it works with additional customers and the services constitute a portion of the Company’s
ongoing central operations. The Company has identified the promise to provide engineering services as its performance obligation,
which is satisfied over time. The Company has a right to consideration from its customer an amount that corresponds directly with
the value to the customer of the Company’s performance completed to date. As allowed by a practical expedient in Topic 606,
the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing and when payment
is due is not significant.
Due to the fact that the client only has
one type of service and only a few customers, disaggregation is deemed unnecessary.
Going Concern
The Company has generated limited revenue
to date. The Company has a working capital deficit of $11,940,129 and an accumulated deficit of $223,790,122 as of June 30, 2018.
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.
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
7,503,405
|
|
|
$
|
-
|
|
|
$
|
11,985,141
|
|
|
Change in fair value
|
|
|
-
|
|
|
|
(2,641,787
|
)
|
|
|
-
|
|
|
|
(7,123,523
|
)
|
|
Additions reclassified from equity
|
|
|
-
|
|
|
|
93,545
|
|
|
|
-
|
|
|
|
93,545
|
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
4,955,163
|
|
|
$
|
-
|
|
|
$
|
4,955,163
|
|
Recent Accounting Pronouncements
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 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 annual reporting periods beginning after December 15,
2017, including interim reporting periods therein, and that would also permit public entities to elect to adopt the amendments
as of the original effective date as applicable to reporting periods beginning after December 15, 2016. The new guidance allows
for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect
adjustment as of the date of adoption. We have identified changes to our business processes and internal controls relating
to contracts and disclosures that are needed upon the adoption of the new guidance. We adopted the new guidance on January 1, 2018,
using the modified retrospective method applied to those contracts which were not completed as of that date. See revenue recognition
policy above for further details.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting”,
to provide clarity and reduce both (1) diversity in
practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change
to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for
fiscal years beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption
date. Early adoption is permitted, including adoption in an interim period. The Company adopted the standard on January 1, 2018
and this amendment did not have a material impact on its consolidated financial statements.
2. DEBT
Short Term Convertible Debt
During the six months ended June 30, 2018,
the Company borrowed an aggregate of $1,281,220, net of original issue discounts and fees of $158,530, under short term convertible
notes payable. As of June 30, 2018 and December 31, 2017, the Company had outstanding short term convertible notes payable of $2,830,538
and $2,069,208, net of unamortized discounts of $342,601 and $390,687, respectively. The outstanding convertible notes of the Company
are unsecured, bear interest between 0% and 12% per annum and mature between July 2018 and June 2019. These notes are convertible
at fixed rates ranging from $0.25 - $0.50 per share for the first 180 days. After 180 days or upon default, the conversion rates
become variable with prices ranging from 58% - 61% of the lowest sale price of the common stock during the 20 to 25 consecutive
trading days prior to the date of conversion. These gave rise to a beneficial conversion feature which is recognized as additional
paid in capital and a corresponding debt discount. If warrants were issued with the debt, the Company valued the warrants and recorded
the relative fair value as additional debt discount.
During the six months ended June 30, 2018,
the Company paid off short-term convertible debt of $664,278. This resulted in a prepayment penalty loss recorded as total loss
on debt extinguishment of $268,408.
During the six months ended June 30, 2018,
an aggregate of $19,056 of original issue discounts were added to two convertible notes as a result of the Most Favored Nations
Provision triggered by a transaction with another noteholder. In addition, 158,333 warrants to purchase shares of the Company’s
common stock were issued with a 10-year term and an exercise price of $1.00 per share. The Company valued the warrants using the
black-scholes model and recorded a loss on extinguishment of debt of $33,237.
On June 29, 2018, the Company signed an
agreement with an investor to modify the conversion price of an existing note from $0.50 to $0.10 and to convert the $206,000 note.
This increased the number of shares received upon conversion from 412,000 to 2,060,000. This transaction met the requirements of,
and is being recorded as, an inducement of the conversion of debt. The investor signed the conversion agreement on June 29, 2018.
However, as of June 30, 2018, the common shares had not been issued by the transfer agent. The difference in the fair value of
the securities was measured as of June 29, 2018 and recorded as a loss on induced conversion of debt of $598,425. The conversion
of debt will be recorded subsequent to June 30, 2018 when the shares are issued.
Short Term Convertible Debt - Related
Party
In October 2017, the Company entered into
an agreement with a major shareholder pursuant to which the Company and the major shareholder agreed to convert six previously
issued promissory notes issued to the major shareholder upon their specific expiration dates, together with an additional investment
amount of $1,000,000, which was received by the Company on October 18, 2017, into a convertible promissory note which totaled $2,496,478.
This note has a term of one year and accrues interest at 10% for every four months that it is issued and can be converted at the
option of the major shareholder into an investment into the Company’s next offering of its convertible promissory notes and
warrants, at a 15% discount thereto. Further, pursuant to this agreement, on October 18, 2017, the major shareholder was issued
a warrant, with a ten-year term, to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.50.
The relative fair value of the 1,000,000 warrants was $247,586 which was recorded as a loss on extinguishment of debt since the
change in value was greater than 10%. This note also gave rise to a beneficial conversion feature which is recognized as additional
paid in capital and a corresponding debt discount.. The note also contains an additional warrant expense of $1,132,999 associated
with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.
As of June 30, 2018, and December 31, 2017,
the Company had outstanding short-term related party convertible notes payable of $2,496,478.
Long Term Convertible Debt
During the six months ended June 30, 2018,
the Company borrowed $157,500, net of original issue discounts and fees of $17,500, under long-term convertible notes payable.
As of June 30, 2018, and December 31, 2017, the Company had outstanding convertible notes payable of $9,589 and $0, net of unamortized
discounts of $65,411 and $0, respectively. The outstanding convertible notes are unsecured, have interest rates ranging from 8%
to 12% and mature between June 2021 and April 2023. One of the notes is convertible at $0.25 per share for the first 180 days following
its issuance, and thereafter at a conversion price equal to 60% of the lowest sale price of the common stock during the 20 consecutive
trading days prior to the date of conversion. Two of the notes are convertible at $0.60 per share. These notes also gave rise to
a beneficial conversion feature which is recognized as additional paid in capital and a corresponding debt discount.
On May 25, 2018, two notes were modified
and resulted in extinguishing the debt, returning the original shares and warrants issued with the debt, and issuing an aggregate
of one million shares of the Company’s common stock in exchange for the original cash proceeds totaling $100,000. This transaction
resulted in a loss on extinguishment of debt of $125,682. See the common stock and warrants section in Note 3 for more details.
Long Term Convertible Debt - Related
Party
In March 2018, the Company borrowed $300,000
pursuant to a verbal agreement with a major shareholder. The note accrues interest at 8% per year payable in stock the first two
years and in cash or stock thereafter, at the shareholders choice, and has a 5-year term. Further, the major shareholder was issued
140,000 shares of common stock and a warrant to purchase 500,000 shares of the Company’s common stock with a 7-year term
and an exercise price of $0.60 per share. This note was convertible at $0.60 per share into common stock. The relative fair value
of the warrants and the shares issued with debt was recognized as a debt discount and will be amortized over the term of the note.
On June 1, 2018, this agreement was modified
and resulted in extinguishing the debt, returning the original shares and warrants issued with the note, and issuing three million
shares of the Company’s common stock in exchange for the original cash proceeds of $300,000. This transaction resulted in
a loss on extinguishment of debt of $459,050. See the common stock and warrants section in Note 3 for more details.
As of June 30, 2018, and December 31, 2017,
the Company had outstanding long term related party convertible notes payable of $0.
Short Term Non-Convertible Debt
During the six months ended June 30, 2018,
the Company borrowed an aggregate of $275,000 under non-convertible notes payable. As of June 30, 2018, and December 31, 2017,
the Company had outstanding notes payable of $2,081,518 and $1,719,690, net of unamortized discounts of $33,502 and $175,311. These
notes payable of the Company are unsecured, bear interest between 0% and 12% per annum and mature between January 2018 and September
2018. The relative fair value of the warrants issued with the debt was recognized as a debt discount and will be amortized over
the term of the note.
During the six months ended June 30, 2018,
the Company entered into letter agreements with four non-convertible noteholders, pursuant to which an aggregate of 7,300,000 warrants
and 350,000 shares of the Company’s common stock were issued in exchange for extending the maturity dates of these notes.
The warrants have a 10-year term and exercise prices ranging from $0.25 to $0.50 per share. The modification of these non-convertible
notes resulted in loss on extinguishment of debt of $2,244,928, accrued interest added to principal of $40,000, and an additional
$30,000 added to principal, which was included in loss on extinguishment of debt.
During the six months ended June 30, 2018,
the Company paid off short-term non-convertible debt of $125,000.
In summary, total debt discount due to
beneficial conversion feature and common stock and warrants issued with debt was $597,624 and $1,135,456 for the six months ended
June 30, 2018 and 2017, respectively. All debt discounts are being amortized over the term of the notes. Total amortization of
the debt discounts on all debt was $716,930 and $1,011,483 for the six months ended June 30, 2018 and 2017, respectively.
Advances – Related Party
During the three and six months ended June
30, 2018, the Company received advances from its Chief Executive Officer totaling $0 and $8,000, respectively, and repaid advances
totaling $30,000 and $111,645, respectively. During the three and six months ended June 30, 2017, the Company received advances
from its Chief Executive Officer totaling $59,500 and $69,500, respectively, and repaid advances totaling $144,500 and $184,500,
respectively.
As of June 30, 2018, and December 31, 2017,
the aggregate outstanding balance of advances to related parties was $240,035 and $343,680, respectively.
Derivative Liabilities - Convertible Notes
As of January 1, 2017, The Company changed
its method of accounting for the debt and warrants through the early adoption of ASU 2017-11. The Company reclassified the December
31, 2016, conversion option derivative liabilities balance of $3,156,736 to additional paid in capital and accumulated deficit
on its January 1, 2017 consolidated balance sheets. The statements of operations and cash flows for the three and six months ended
June 30, 2017 have not been restated.
Accounts Payable - Related Party
As of June 30, 2018, and December 31, 2017,
there is $1,556 and $12,372, respectively, due to related parties, which is non-interest bearing and due on demand.
3. EQUITY
Common Stock
On January 15, 2018, the Company issued
30,303 shares of its common stock to a consultant pursuant to a consulting agreement. The fair value of the common stock was determined
to be $10,000 based on the stock price on January 15, 2018.
On February 12, 2018, the Company entered
into a letter agreement with an investor pursuant to which, the investor agreed to extend the maturity date of a promissory note
which expired on February 12, 2018, to a new maturity date of May 14, 2018, and in exchange for agreeing to extend the maturity
date of such note, the investor was issued 100,000 shares of the Company’s common stock and a warrant to purchase 2,000,000
shares of the Company’s common stock with a $0.50 exercise price per share and a 10 year term. The fair value of the warrants
was determined to be $599,096 using the Black-Scholes option pricing model. The fair value of the common stock was determined to
be $30,900 based on the stock price on February 12, 2018. These fair values were recorded as a total loss on extinguishment of
debt of $629,996. On May 14, 2018, the Company entered into a letter agreement with the same investor pursuant to which, the investor
agreed to extend the maturity date of the promissory note which expired on May 14, 2018, to a new maturity date of August 14, 2018,
and in exchange for agreeing to extend the maturity date of such note, the investor was issued 250,000 shares of the Company’s
common stock and a warrant to purchase 2,000,000 shares of the Company’s common stock with a $0.25 exercise price per share
and a 10 year term. The fair value of the warrants was determined to be $422,124 using the Black-Scholes option pricing model.
The fair value of the common stock was determined to be $52,775 based on the stock price on May 14, 2018. These fair values were
recorded as a total loss on extinguishment of debt of $474,898.
On February 23, 2018, the Company issued
1,750,000 shares of its common stock related to the settlement with John Kuhns. The fair value of the common stock was determined
to be $681,625 based on the stock price on August 29, 2017, which was the original grant date.
On March 5, 2018, the Company issued 140,000
shares of the Company’s common stock to a related party pursuant to a letter agreement. The relative fair value of the common
stock was determined to be $25,040 and is included in the beneficial conversion feature discount discussed in the warrants section
below. On June 1, 2018, this agreement was modified and resulted in extinguishing the associated debt, cancelling the original
shares and warrants, and issuing three million shares of the Company’s common stock in exchange for the original cash proceeds
of $300,000. This transaction resulted in a loss on extinguishment of debt of $459,050.
In March 2018, the Company issued 112,000
shares of the Company’s common stock to certain note holders in exchange for accrued interest of $56,000. The fair value
of the common stock was determined to be $23,200 and resulted in a gain on settlement of accrued interest of $32,800.
On April 23, 2018, the Company issued an aggregate
of 50,000 shares of the Company’s common stock to two investors pursuant to a letter agreement. The relative fair value of
the common stock was determined to be $8,894 and is included in the beneficial conversion feature discount discussed in the warrants
section below. On March 25, 2018, these agreements were modified and resulted in extinguishing the associated debt, cancelling
the original shares and warrants, and issuing an aggregate of one million shares of the Company’s common stock in exchange
for the original cash proceeds of $100,000. This transaction resulted in a loss on extinguishment of debt of $125,682.
During the six months ended June 30, 2018,
the Company issued 5,187,810 shares of the Company’s common stock at $0.10 per share in exchange for proceeds of $518,781.
During the six months ended June 30, 2018,
the Company issued an aggregate of 1,802,260 shares of its common stock related to the exercise of 1,802,260 warrants in exchange
for cash proceeds of $180,226. Additionally, an aggregate of 12,269,647 warrants were modified to reduce the exercise price to
$0.10 per share by a ratchet adjustment or debt modification resulting in the issuance of 3,101,353 additional warrants. A total
of 15,371,000 warrants were exercised cashlessly resulting in the issuance of 10,481,081 common shares.
Stock Options
A summary of stock option activity during
the three months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Outstanding at December 31, 2017
|
|
|
215,000
|
|
|
$
|
0.65
|
|
|
|
9.0
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
(39,000
|
)
|
|
|
0.91
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
176,000
|
|
|
$
|
0.59
|
|
|
|
8.5
|
|
|
Exercisable at June 30, 2018
|
|
|
72,000
|
|
|
$
|
0.67
|
|
|
|
8.2
|
|
Stock option awards are expensed on a straight-line
basis over the requisite service period. During the three months and six months ended June 30, 2018, the Company recognized expense
of $10,777, and $20,588, respectively, associated with stock option awards. During the three and six months ended June 30, 2017,
the Company recognized expense of $7,891, and $14,610, respectively, associated with stock option awards. At June 30, 2018, future
stock compensation expense (net of estimated forfeitures) not yet recognized was $82,220 and will be recognized over a weighted
average remaining vesting period of 2.4 years.
The intrinsic value of the Company’s
stock options outstanding was $0 at June 30, 2018.
Warrants
Employee 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. On May
15, 2017, Mr. Tobin terminated his employment with the Company. On May 15, 2017, the Company entered into an agreement with Mr.
Tobin allowing his third tranche of 375,000 Warrant Shares to vest on September 1, 2017 in exchange for consulting services. The
remaining fourth tranche of 375,000 warrants were forfeited upon termination of the Employment Agreement. The agreement contains
an anti-dilution provision and therefore the exercise price was reset to $0.50 per share during the year ended December 31, 2017.
Warrant expense of $124,393 and $274,609 was recognized during the three and six months ended June 30, 2017. In addition, $380,548
of expense was reversed during the quarter ended June 30, 2017 related to the forfeited warrants.
On May 18, 2017, the Company entered into
an Employment Agreement (the “Employment Agreement”) with Ron DaVella in his capacity as the Company’s Chief
Financial Officer. Pursuant to the Employment Agreement, on May 18, 2017 the Company issued Mr. DaVella warrants to purchase 1,800,000
shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”). The fair value of the warrants
was determined to be $743,416 using the Black-Scholes option pricing model. 450,000 Warrant Shares vested on May 18, 2017 and 450,000
additional warrant shares vested on May 18, 2018. An additional 450,000 warrant shares will vest on the second anniversary date
of the Employment Agreement, and, an additional 450,000 warrant shares will vest on the third anniversary date of the Employment
Agreement. Warrant expense of $69,695 and $154,878 was recognized during the three and six months ended June 30, 2018, respectively.
Warrant expense of $214,248 was recognized during the three and six months ended June 30, 2017.
Total warrant expense for employee warrants
of non-forfeited tranches was $69,695 and $154,878 for the three and six months ended June 30, 2018, respectively. Total warrant
expense for employee warrants of non-forfeited tranches was $338,641 and $488,857 for the three and six months ended June 30, 2017,
respectively.
Non-Employee Warrants
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 vested 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 value 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 600,000 Warrants Shares that
vested November 4, 2017 was $183,660 and was recognized as expense during the year ended December 31, 2017. Warrant expense
of $39,897 and $108,309 was recaptured during the three and six months ended June 30, 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 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, 250,000 warrant shares vested on May 13, 2017, and an additional 250,000 Warrant Shares vested on May 13, 2018.
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 first 250,000
Warrant Shares was determined to be $93,545 using the Black-Scholes option pricing model of which $52,457 of expense was recaptured
during the year ended December 31, 2017. The fair value of the last tranche of 250,000 Warrant Shares was determined to total $74,974
as of May 13, 2018 using the Black-Scholes option pricing model of which $17,798 and $4,576 of expense was recognized during the
three and six months ended June 30, 2018, respectively. The agreement contains an anti-dilution provision and therefore the exercise
price was reset to $0.50 per share during the year ended December 31, 2016 and reset to $0.10 per share during the three months
ended June 30, 2018.
On May 8, 2018, the Company issued 300,000
warrants pursuant to a letter agreement in exchange for services. The fair value of the warrants was determined to be $65,984 and
was expensed during the three months ended June 30, 2018.
The Company expensed a total of $83,782
and $70,560 for warrants issued to non-employees for services provided during the three and six months ended June 30, 2018, respectively.
During the six months ended June 30, 2018,
the Company issued 350,000 warrants for the Company’s common shares with a strike price of $0.50 per share, with promissory
notes of $100,000. The relative fair value of the warrants of $46,256 was recognized as a debt discount which is being amortized
on a straight-line basis over the term of the notes. The Company recognized interest expense of $5,970 and $30.246 associated with
the amortization of debt discount on the notes and warrants issued during the current year for the three and six months ended June
30, 2018, respectively.
During the six months ended June 30, 2018,
the Company issued an aggregate of 2,228,333 warrants with eleven convertible notes totaling $1,238,000. The relative fair value
of the warrants was determined to be $425,127, which was recognized as a discount to the debt. These notes also gave rise to a
beneficial conversion feature of $87,014, 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 notes. Amortization expense was $239,724
and $415,048 for the three and six months ended June 30, 2018, respectively.
During the six months ended June 30, 2018,
the Company issued an aggregate of 7,458,333 warrants to purchase the Company’s common stock in conjunction with debt modification
agreements. The warrants have a 10-year term and exercise prices ranging from $0.10 to $1.00 per share. The fair value of the warrants
was determined to be $2,164,490 using the Black-Scholes option pricing model which was recognized as loss on extinguishment of
debt, along with the common stock issued for debt modification (as disclosed in the common stock section) and thus recorded a total
loss on debt extinguishment of $2,247,311 during the six months ended June 30, 2018.
During the six months ended June 30, 2018,
the Company cancelled 500,000 warrants due to a debt modification with a major shareholder. The Company recorded a loss on extinguishment
of $459,050. See additional details in the common stock section above.
During the six months ended June 30, 2018,
the Company cancelled 83,333 warrants due to debt modifications with two investors. The Company recorded a total loss on extinguishment
of $125,682. See additional details in the common stock section above.
During the six months ended June 30, 2018,
the Company modified an aggregate of 400,000 warrants to reduce their exercise price from $0.50 to $0.10 per share. All
other terms and conditions remained the same. The Company determined that this transaction did not constitute a modification
under ASC 718-10 or ASC 505-50 as it met the scope exceptions for a transaction with an investor or lender. Accordingly,
no expense was recognized in connection with these transactions.
During the six months ended June 30, 2018,
an aggregate of 1,802,260 warrants were exercised at $0.10 per share in exchange for cash proceeds of $180,226, resulting in the
issuance of 1,802,260 common shares. Additionally, an aggregate of 12,269,647 warrants were modified to reduce the exercise price
to $0.10 per share by a ratchet adjustment or debt modification resulting in the issuance of 3,101,353 additional warrants. A total
of 15,371,000 warrants were exercised cashlessly resulting in the issuance of 10,481,081 common shares.
On June 1, 2018, the Company began issuing
shares of common stock at $0.10 per share. As of June 1, 2018, the Company had 10,097,000 warrants with price reset provisions.
This resulted in the issuance of an additional 39,080,005 warrants due to price reset. The Company also reported a loss on the
fair value of $5,755,133 which is shown on the income statement as part of net income (loss) attributable to shareholders.
The following summarizes the warrant activity
for the six months ended June 30, 2018:
|
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|
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|
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Weighted
|
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|
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|
|
|
|
|
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Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
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Average
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Remaining
|
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Aggregate
|
|
|
|
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Number of
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Exercise
|
|
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Contractual
|
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Intrinsic
|
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Shares
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Price
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Term (in years)
|
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Value
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|
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|
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Outstanding as of December 31, 2017
|
|
|
79,381,367
|
|
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$
|
0.51
|
|
|
|
4.4
|
|
|
$
|
10,700
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|
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Granted
|
|
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10,597,666
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|
|
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0.40
|
|
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|
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|
|
|
|
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Warrants issued due to reset provision
|
|
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39,080,005
|
|
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0.10
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|
|
|
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|
|
|
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Expired
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|
|
(583,333
|
)
|
|
|
0.60
|
|
|
|
|
|
|
|
|
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Exercised
|
|
|
(17,173,260
|
)
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|
|
0.40
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|
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|
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|
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|
|
|
|
|
|
|
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|
|
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Outstanding as of June 30, 2018
|
|
|
111,302,445
|
|
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$
|
0.41
|
|
|
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4.6
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$
|
11,615,241
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|
|
|
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|
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Exercisable as of June 30, 2018
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110,402,445
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$
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0.41
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4.6
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$
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11,615,241
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Derivative Liabilities - Warrants
As of January 1, 2017, the Company changed
its method of accounting for the debt and warrants through the early adoption of ASU 2017-11. The Company reclassified the December
31, 2016 warrant derivative liabilities balance of $8,828,405 to additional paid in capital and accumulated deficit on its January
1, 2017 consolidated balance sheets. The statements of operations and cash flows for the three and six months ended June 30, 2017
have not been restated.
4. NET EARNINGS (LOSS) PER SHARE
|
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Three Months Ended
June
30,
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Six Months Ended
June 30,
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2018
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2017
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2018
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2017
|
|
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|
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|
|
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Net income (loss)
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$
|
(3,867,487
|
)
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$
|
(29,083
|
)
|
|
$
|
(7,245,002
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)
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$
|
2,549,693
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Loss on reduction of price of warrants
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(5,755,133
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)
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-
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|
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|
(5,755,133
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)
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|
|
-
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Net income (loss) attributable to shareholders
|
|
|
(9,622,620
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)
|
|
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(29,083
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)
|
|
|
(13,000,135
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)
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2,549,693
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Less: decrease in fair value of warrants, net of income tax
|
|
|
-
|
|
|
|
(4,184,993
|
)
|
|
|
-
|
|
|
|
(2,703,231
|
)
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|
Less: decrease in fair value of convertible debt, net of income tax
|
|
|
-
|
|
|
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(651,686
|
)
|
|
|
-
|
|
|
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(1,945,393
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)
|
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Less: interest expense - convertible debt
|
|
|
-
|
|
|
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19,836
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|
|
|
-
|
|
|
|
39,671
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|
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Loss available to common stockholders
|
|
|
(9,622,620
|
)
|
|
|
(4,845,926
|
)
|
|
|
(13,000,135
|
)
|
|
|
(2,059,260
|
)
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|
|
|
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|
|
|
|
|
|
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|
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Basic weighted average common shares outstanding
|
|
|
73,579,555
|
|
|
|
63,734,774
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|
|
|
70,883,984
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|
|
|
62,218,336
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|
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Plus: incremental shares from assumed exercise- options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,036
|
|
|
Plus: incremental shares from assumed exercise- warrants
|
|
|
-
|
|
|
|
192,755
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|
|
|
-
|
|
|
|
7,068,234
|
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Plus: incremental shares from assumed conversion- convertible debt
|
|
|
-
|
|
|
|
23,529
|
|
|
|
-
|
|
|
|
128,571
|
|
|
Plus: incremental shares from assumed conversion-units
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
Adjusted weighted average common shares outstanding
|
|
|
73,579,555
|
|
|
|
65,951,058
|
|
|
|
70,883,984
|
|
|
|
71,417,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.03
|
)
|
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In November 2013, the Company entered into
a 60-month lease agreement for its corporate facility in Arizona. Total rent expense for the three and six months ended June 30,
2018 was $18,423 and $53,581, respectively. Total rent expense for the three and six months ended June 30, 2017 was $34,219
and $63,412, respectively.
Future minimum lease payments are as follows:
|
2018 (remainder)
|
|
$
|
28,719
|
|
|
2019
|
|
|
-
|
|
|
2020
|
|
|
-
|
|
|
2021
|
|
|
-
|
|
|
2022
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
28,719
|
|
Concentrations
All of the Company’s revenue and
accounts receivable are currently earned from one customer.
Legal Matters
As reported in the Company’s prior
filings, and specifically as described in the Company’s quarterly report for the quarter ended June 30, 2017, which was filed
with the SEC on August 9, 2017, the Company was a party to a lawsuit in the United States District Court Southern District of New
York, which was brought by John D. Kuhns. The parties have settled the matter. Pursuant to the settlement, all claims against the
Company have been dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and a promissory
note for $125,000. This resulted in a loss on settlement of $633,292 recognized during 2017. The note was accruing interest at
12% per annum and was due on May 31, 2018. The common stock was issued on February 23, 2018. The $125,000 note and accrued interest
of $11,139 was paid off on June 20, 2018.
6. SUBSEQUENT EVENTS
In July 2018, the Company issued 3,450,000
shares of the Company’s common stock at $0.10 per share in exchange for proceeds of $345,000.
In July and August 2018, the Company issued
an aggregate of 3,084,832 shares of its common stock related to the exercise of 3,084,832 warrants and received cash proceeds of
$308,483. In addition, the Company issued 1,928,225 shares of its common stock related to the cashless exercise of 3,267,337 warrants.
In July 2018, the Company signed an agreement
with two investors to modify the conversion price on two existing notes from $0.50 to $0.10 and to convert the notes that have
an aggregate balance of $400,000. This increased the number of shares received upon conversion from 800,000 to 4 million. These
transactions met the requirements of, and, and is being recorded as, an inducement of the conversion of debt. The investors converted
the debt upon modification and pursuant to this conversion, issued 4,846,875 new warrants. Pursuant to these agreements, the investors
exercised an aggregate of 8,050,000 warrants cashlessly, resulting in the issuance of 3,596,875 shares. In addition, 1,250,000
warrants were exercised in exchange for proceeds of $125,000 of which $108,000 was used to pay off existing short-term debt with
interest.
In July 2018, the Company entered into a letter
agreement with a non-convertible noteholder, pursuant to which 9 million warrants were issued in exchange for extending the maturity
dates of this note. The warrants have a 7-year term and exercise prices ranging from $0.10 to $0.50 per share. In addition, 1,600,000
shares of the Company’s common stock were issued in lieu of accrued interest through the new note maturity date.
In July 2018, the Company entered into a letter
agreement with an existing convertible debt noteholder, pursuant to which the potential to convert the note was extended to August
15, 2018 in exchange for increasing the note balance by 8% as of July 15, 2018. In August 2018, the Company entered into another
letter agreement with the same noteholder, pursuant to which the potential to convert the note was extended again to September
15, 2018 in exchange for increasing the note balance by an additional 8% as of August 9, 2018.
On July 23, 2018, the Company entered into
a Securities Purchase Agreement with EMA Financial, LLC pursuant to which EMA Financial, LLC agreed to purchase a convertible note
in the aggregate principal amount of $50,000. On August 1, 2018, the Company issued the note. The interest rate is 10% per annum
and increases to 24% per annum if an event of default occurs. The note matures on April 23, 2019. The note has a fixed conversion
price of $0.25 per share for the first 180 days. After 180 days the conversion price shall be equal to 60% of the lowest trading
price of the Common Stock during the 20 prior trading days.
In August 2018, the Company signed an agreement
with an investor to modify the conversion price on an existing note from $0.50 to $0.10 and to convert the note with a balance
of $100,000. This increased the number of shares received upon conversion from 100,000 to 1 million. This transaction met the requirements
of, and is being recorded as, an inducement of the conversion of debt. The investor converted the debt upon modification and pursuant
to this conversion, issued 1,000,000 new warrants. Pursuant to this agreement, the investor exercised an aggregate of 4,816,667
warrants cashlessly, resulting in the issuance of 3,211,111 shares.