NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCCOUNTING POLICIES
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, 2018 included in our Annual Report on Form 10-K. The results
of operations for the three and nine months ended September 30, 2019 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.
Going Concern
The Company has generated limited revenue
to date. The Company has a working capital deficit of $12,416,389 and an accumulated deficit of $243,776,350 as of September 30,
2019. 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.
Basic and Diluted Earnings per share
Net loss per share is provided in accordance
with FASB ASC 260-10, “Earnings per Share”. Basic loss per share is computed by dividing losses available to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share gives effect
to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares
if their effect is anti-dilutive as shown below:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2019
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|
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2018
|
|
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2019
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|
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2018
|
|
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Stock options
|
|
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300,000
|
|
|
|
150,000
|
|
|
|
300,000
|
|
|
|
150,000
|
|
|
Warrants
|
|
|
77,017,485
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|
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|
97,965,843
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|
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77,017,485
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|
|
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97,965,843
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|
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Shares issuable under convertible notes
|
|
|
24,023,768
|
|
|
|
11,401,568
|
|
|
|
24,023,768
|
|
|
|
11,401,568
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|
|
Convertible preferred stock
|
|
|
48,394,410
|
|
|
|
-
|
|
|
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48,394,410
|
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-
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Leases
The Company determines if an arrangement
is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating
lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities,
and other long-term liabilities in our consolidated balance sheets. As of adoption of ASC 842 and as of January 1, 2019, the Company
was not party to finance lease arrangements.
ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information available at commencement date in determining the present value of
lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease
payments made and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over
the lease term.
Under the available practical expedient,
we account for the lease and non-lease components as a single lease component.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that requires a lessee to record a
ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption
is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities
to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of
fiscal year 2019, and using the modified retrospective method. The Company also elected the practical expedient under ASU 2018-11
“Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s
adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized
and measured leases existing at January 1, 2019 but without retrospective application. Therefore, there was no impact recorded
to beginning retained earnings or the statement of operations. The Company took advantage of the practical expedient options, which
allows an entity not to reassess whether any existing or expired contracts contain leases. There was an increase in assets and
liabilities of $56,047 due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations
that are currently classified as operating leases. See Note 5 for details.
The Company reviewed other newly issued
accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material
effect is expected on the Company’s financial statements upon future adoption.
2. RELATED PARTY TRANSACTIONS
Short Term Convertible Debt –
Related Party
During the nine months ended September
30, 2019, the Company entered into various note and share purchase agreements with related parties pursuant to which the related
parties purchased convertible notes in the aggregate amount of $1,328,006, along with additional shares of the Company’s
common stock to be issued upon maturity. Total cash of $1,332,000 was received and $36,006 was accrued interest rolled into
principal. Additionally, $60,000 of related party advances were modified into a convertible note and were included in the related
party convertible debt amount at September 30, 2019. The notes expire on the 90-day anniversary of the issuance date and accrue
interest at a rate of 10% per annum. The maturity dates on the outstanding notes range from October to December 2019. On the
maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with
a value worth 50% of the note’s principal amounts. In addition, the shareholder shall have the right to convert all or any
portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after
the maturity date. The Company may not prepay the notes prior to the maturity dates. The number of shares to be issued
upon maturity calculated on inception was determined to be 14,172,270 based on a 20-day lookback from the inception date, subject
to a minimum of $0.10 per share. Total debt discount and share issuance obligation of $1,098,010 was recorded at inception. The
debt discount was amortized straight line over the 90-day period. This obligation was determined to be a liability under ASC 480.
Total amortization for the period from inception through September 30, 2019 was $535,833. As of September 30, 2019, the fair value
of the shares was determined to be $648,201 and a year-to-date loss on change in value of share obligation of $125,517 was recorded.
During the nine months ended September
30, 2019, an aggregate of $5,513,010 of convertible notes matured and the Company issued 27,565,050 shares of its common stock
to various noteholders. The Company recalculated the fair value of the share issuance obligation at the maturity date to be $1,921,051
and recorded a loss on change in fair value of $183,694. The Company wrote off the share issuance obligation to common stock and
APIC upon issuance of the shares. Convertible notes totaling $4,072,759 and $101,819 of accrued interest were converted into 4,176
shares of Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”). Additionally, notes totaling
$1,440,250 that matured in the current period, plus accrued interest totaling $36,006, were rolled into a new note with the same
terms.
As of September 30, 2019, and December
31, 2018, the Company had outstanding short-term related party convertible notes payable of $1,328,006 and $3,972,759, respectively.
Advances – Related Party
During the nine months ended September
30, 2019, the Company received advances from related parties totaling $135,000, and repaid advances totaling $61,903 which includes
$4,603 of non-cash repayment through the use of the Company’s credit card. Such advances accrue interest at 6% per year and
are payable upon demand. The Company paid interest of $6,805 during the nine months ended September 30, 2019. The Company received
advances from related parties totaling $8,000 and repaid advances totaling $172,193 during the nine months ended September 30,
2018.
As of September 30, 2019, and December
31, 2018, the aggregate outstanding balance of advances to related parties was $120,561 and $107,464, respectively.
3. DEBT
Short Term Convertible Debt
As of September 30, 2019, and December
31, 2018, the Company had outstanding short-term convertible notes payable of $4,577,742 and $1,012,038, respectively, net of unamortized
discounts of $1,074,444 and $2,158,944, respectively.
New Debt
During the nine months ended September
30, 2019, the Company borrowed an aggregate of $1,193,830, net of original issue discounts and fees of $220,770 under short-term
convertible notes payable. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per
annum and mature between August 2019 and August 2020. Certain of 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 55% - 61% of the lowest sale price of the common stock during the 15 to 25 consecutive trading days prior to the date of conversion.
During the nine months ended September
30, 2019, the Company entered into various note and share purchase agreements with accredited investors pursuant to which the investors
purchased convertible notes in the aggregate of $4,291,468, along with additional shares of the Company’s common stock to
be issued upon maturity. In addition, existing promissory and convertible notes totaling $1,777,250 were modified into these
note and share purchase agreements. Also, $3,022,493 of convertible notes that matured including $73,469 accrued interest were
rolled into another bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue
interest at a rate of 10% per annum. The maturity dates on the outstanding notes range from October to December 2019. On the
maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with
a value worth 50% of the note’s principal amounts. In addition, the investors shall have the right to convert all or any
portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after
the maturity date. The Company may not prepay the notes prior to the maturity dates. The number of shares in aggregate
was determined to be 30,921,624 based on a 20-day lookback from the inception date subject to a minimum of $0.10 per share. Total
debt discount and share issuance obligation of $2,494,420 was recorded at inception. The debt discount was amortized straight line
over the 90-day period. This obligation was determined to be a liability under ASC 480. Total amortization for the period from
inception through September 30, 2019 was $1,122,835. As of September 30, 2019, the fair value of the shares was determined to be
$1,569,939 based on the stock price on September 30, 2019 and a year-to-date loss on change in value of share obligation of $201,704
was recorded. Total cash proceeds received from convertible debt for the nine months ended September 30, 2019 was $2,842,330.
Modifications
During the nine months ended September
30, 2019, the Company entered into various letter agreements with convertible noteholders, pursuant to which a prepayment penalty
of $47,500 was added to principal and an aggregate of 7,480,000 shares of the Company’s common stock were issued in exchange
for extending the maturity dates of these notes. The Company fair valued all of the common stock on the modification date and concluded
that it qualified as debt extinguishment. Therefore, the Company recorded a total loss on extinguishment of debt of $711,500 on
these convertible note transactions.
Payoffs and Conversions
During the nine months ended September
30, 2019, and 2018, the Company paid off short-term convertible debt of $1,277,000 and $790,838, respectively.
During the nine months ended September
30, 2019, 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 $50,000 convertible note. This increased the number of shares received upon conversion from 100,000 to 500,000.
These transactions met the requirements of, and are being recorded as, an inducement of the conversion of debt. The difference
in the fair value of the securities were measured on the dates the signed agreements were received and were recorded as a loss
on induced conversion of debt totaling $24,948. The full principal balance of $50,000 with accrued interest of $4,000 was converted
into 540,000 shares of common stock.
During the nine months ended September
30, 2019, an aggregate of $3,966,775 of convertible notes matured and the Company issued 19,833,875 shares of its common stock
to various noteholders. The Company recalculated the fair value of the share issuance obligation at the maturity date to be $1,805,495
and recorded a loss on change in fair value of $462,274. The Company wrote off the share issuance obligation into common stock
and APIC upon issuance of the shares. Convertible notes totaling $643,316 and accrued interest of $15,033 were converted into 622
shares of Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”). Convertible notes totaling
$246,500 and accrued interest of $6,513 were forgiven in exchange for the exercise of warrants totaling $199,684 and the issuance
of 61 preferred shares for the remainder. Additionally, an aggregate of $3,123,775 of notes that matured plus accrued interest
totaling $73,469, were rolled into new notes with the same terms.
Short Term Non-Convertible Debt
As of September 30, 2019, and December
31, 2018, the Company had outstanding notes payable of $100,000 and $1,687,518, respectively, net of unamortized discounts of $0.
New Debt
During the nine months ended September
30, 2019, the Company borrowed $45,000 under non-convertible notes payable from an investor. This note had 0% interest and no maturity
date.
Modifications
During the nine months ended September
30, 2019, the Company entered into various letter agreements with non-convertible noteholders, pursuant to which an aggregate of
$57,500 was added to principal and $20,000 in cash was paid in exchange for extending the maturity dates of these notes. The Company
recorded this as loss on extinguishment of debt.
During the nine months ended September
30, 2019, existing non-convertible promissory notes totaling $1,595,000 were modified into convertible note and share purchase
agreements. See convertible debt section above for details.
Payoffs
During the nine months ended September
30, 2019, the Company paid off short-term non-convertible debt of $95,000.
Advances
During the nine months ended September
30, 2019, the Company received an unsecured, due on demand, non-interest bearing, advance from an investor of $100,000. This advance
was repaid in full along with the issuance of 100,000 shares of the Company’s common stock during the nine months ended September
30, 2019. The Company fair valued the stock and recorded the value as long on extinguishment of debt. See equity footnote for details.
Debt Summary
In summary, total debt discount on share issuance obligation issued with debt was $3,592,430 for the nine
months ended September 30, 2019. All debt discounts are being amortized over the term of the notes. Total amortization of the debt
discounts on all debt was $4,893,201, which included the $123,366 interest expense recorded on preferred stock issued upon bridge
note conversion, for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, total loss on extinguishment
of debt from promissory, convertible and related party notes was $711,500, which excludes loss due to cash payoff prepayment penalties
of $539,524 and gain from $147,144 of accrued liabilities expense true up.
4. EQUITY
Preferred Stock
On February 15, 2019, the Company established
a series of redeemable participating convertible preferred stock, par value $0.0001 per share, pursuant to a Certificate of Designation
of Series A Redeemable Participating Convertible Preferred Stock dated February 15, 2019.
Pursuant to the Certificate of Designation,
the Company authorized 10,000 shares of the Series A Preferred Stock (“preferred stock”), which shall be convertible
into shares of common stock of the Company at the option of the holders thereof at any time after the issuance of the preferred
stock, at a conversion price equal to $0.10 subject to certain anti-dilution adjustments.
So long as 50% of the preferred stock that
has been issued remains outstanding, the holders thereof will have the right to participate ratably in any offering of common stock
of the Company or any other securities of the Company that would entitle the holder thereof to acquire common stock of the Company.
The holders of preferred stock shall be
entitled to receive dividends when and as declared by the Board of Directors. No dividends (other than those payable solely in
common stock) shall be paid on the common stock or any class or series of capital stock ranking junior, as to dividends, to the
preferred stock during any fiscal year of the Company until there shall have been paid or declared and set apart during that fiscal
year for the holders of the preferred stock a dividend in an amount per share equal to (i) the number of shares of common stock
issuable upon conversion of the preferred stock times (ii) the amount per share of the dividend to be paid on the common stock.
No dividends were declared for the nine months ended September 30, 2019.
Upon the occurrence of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary (a “Liquidating Event”), each holder of preferred
stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders,
before any payment shall be made in respect of the common stock, an amount per share of preferred stock equal to three (3) times
the price such holder paid to purchase such preferred stock plus, accrued and unpaid dividends (the “Preferred Liquidation
Preference”). Such Preferred Liquidation Preference shall be secured by a first priority security interest on all of the
Company’s assets. The following events shall be deemed a Liquidating Event: (i) a sale, lease, exchange, exclusive license
which has the same effect as a sale of all or substantially all of the Company’s assets or other disposition of all or substantially
all of the Company’s assets in one transaction or a series of related transactions and (ii) a merger, tender offer, reorganization,
business combination or other transaction as a result of which (a) holders of the Company’s issued and outstanding voting
securities immediately before such transaction own or control less than a majority of the voting securities of the continuing or
surviving entity immediately after such transaction or (b) any of the preferred stock is converted into any other property or security.
It was determined the preferred stock has a deemed liquidation redemption feature that triggers temporary equity classification
under ASC 480.
The holders of shares of preferred stock
shall vote together with the holders of common stock as a single class. The holder of each share of preferred stock (i) shall be
entitled to the number of votes with respect to such share equal to the number of shares of common Stock into which such share
of preferred stock could be converted on the record date for the subject vote or written consent ( or, if there is no such record
date, then on the date that such vote is taken or consent is effective) and (ii) shall be entitled to notice of any stockholders’
meeting in accordance with the Bylaws of the Company. Fractional votes shall not be permitted, and any fractional voting rights
resulting from the above formula (after aggregating all shares of common stock into which shares of preferred stock held by each
holder could be converted) shall be reduced to the nearest whole number.
During the nine months ended September
30, 2019, the Company issued an aggregate of 4,859 shares of its preferred stock related to the conversion of $4,716,075 of debt
and $123,366 of interest expense. See convertible debt discussion in Note 3 for more details.
Common Stock
During the nine months ended September
30, 2019, the Company issued 47,398,925 shares of the Company’s common stock pursuant to certain debt agreements, related
to the maturity of various convertible notes totaling $9,479,785. See the convertible debt section in Note 3 for more details.
During the nine months ended September
30, 2019, the Company issued 480,000 shares of the Company’s common stock to certain note holders in exchange for accrued
interest of $48,000. The fair value of the common stock was determined to be $27,216 and resulted in a gain on settlement of accrued
interest of $20,784.
During the nine months ended September
30, 2019, the Company entered into a two modification agreements with an investor pursuant to which the investor agreed to extend
the maturity date of a convertible note in exchange for the issuance of one million shares of the Company’s common stock
on March 1, 2019, and the first day of each month through November 1, 2019.. The Company will fair value the shares on the issuance
date and record it as loss on extinguishment of debt. During the nine months ended September 30, 2019, the Company issued a total
of 7,000,500 shares of common stock and recorded a loss of $598,000.
During the nine months ended September
30, 2019, the Company repaid a $100,000 advance to an investor and issued 100,000 shares of the Company’s common stock. The
Company fair valued the stock and recorded $8,500 as loss on extinguishment of debt.
During the nine months ended September
30, 2019, the Company issued an aggregate of 540,000 shares of its common stock related to the conversion of $50,000 of principal
and $4,000 accrued interest expense on convertible notes.
During the nine months ended September
30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares.
During the nine months ended September
30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification
and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company
netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by
the issuance of 47 shares of Preferred Stock.
Stock Options
A summary of stock option activity during
the nine months ended September 30, 2019 is as follows:
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Weighted
|
|
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Weighted
Average
|
|
|
|
|
|
|
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Average
|
|
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Remaining
|
|
|
|
|
Number
of
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|
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Exercise
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Contractual
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Shares
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|
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Price
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|
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Life
(years)
|
|
|
Outstanding
at December 31, 2018
|
|
|
300,000
|
|
|
$
|
0.52
|
|
|
|
9.0
|
|
|
Granted
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|
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-
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|
|
|
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|
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Exercised
|
|
|
-
|
|
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|
|
|
|
|
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Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September
30, 2019
|
|
|
300,000
|
|
|
$
|
0.52
|
|
|
|
8.2
|
|
|
Exercisable at September
30, 2019
|
|
|
133,000
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|
|
$
|
0.53
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|
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|
7.6
|
|
Stock option awards are expensed on a straight-line
basis over the requisite service period. During the nine months ended September 30, 2019, the Company recognized expense of $31,360,
associated with stock option awards. At September 30, 2019, future stock compensation expense (net of estimated forfeitures) not
yet recognized was $54,830 and will be recognized over a weighted average remaining vesting period of 2.1 years.
The intrinsic value of the Company’s
stock options outstanding was $0 as of September 30, 2019.
Warrants
Employee 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. On November 28, 2018, the exercise price was reduced to $0.10 pursuant to the Board of Director’s consent. This
resulted in a difference in fair value of $117,440 of which $58,720 was expensed on November 28, 2018 for the vested warrants and
the remaining $58,720 will be expensed equally over the remaining term. On March 31, 2019, Mr. DaVella terminated his employment
with the Company. The remaining two tranches totaling 900,000 warrants were forfeited upon termination of the Employment Agreement
on March 31, 2019. Warrant expense of $248,486 was recaptured during the nine months ended September 30, 2019.
On February 5, 2019, the Company issued
warrants to purchase an aggregate of 2,500,000 shares of its Common Stock to three of its employees as a bonus in exchange for
services to be provided to the Company. The warrants have a 10-year term, a $0.10 exercise price and will vest 25% annually for
4 years beginning on the first anniversary date. The aggregate fair value of the warrants was determined to be $129,906 using
the Black-Scholes option pricing model. Warrant expense of $45,107 was recognized during the nine months ended September 30, 2019.
Total expense recaptured for employee warrants
for the nine months ended September 30, 2019 was $203,379.
Non-Employee Service Warrants
On October 23, 2018, the Company issued
warrants to purchase 2,000,000 shares of the Company’s common stock pursuant to a letter agreement in exchange for services.
The warrants have an exercise price of $0.50 and a 10-year term. 20% of the warrants vested immediately and an additional 20% will
vest each anniversary for four years. The fair value of the warrants was determined to be $155,397 using the Black-Scholes option
pricing model. Warrant expense of $48,562 was expensed during the nine months ended September 30, 2019, respectively.
On June 1, 2019, the Company issued warrants
to purchase 25,000 shares of the Company’s common stock pursuant to a letter agreement in exchange for services. The warrants
have an exercise price of $0.50 and a 5-year term. The warrants vest equally over six months beginning June 1, 2019. The fair value
of the warrants was determined to be $1,924 using the Black-Scholes option pricing model. Warrant expense of $1,282 was expensed
during the nine months ended September 30, 2019.
Total expense for non-employee warrants
for the nine months ended September 30, 2019 was $49,844.
Warrant Exercises and Reduction of Exercise
Prices
During the nine months ended September
30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification
and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company
netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by
the issuance of 47 shares of Preferred Stock.
During the nine months ended September
30, 2019, an aggregate of 814,848 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification
but not exercised. The change in fair value of these warrants from the modification is immaterial.
During the nine months ended September
30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares.
The following summarizes the warrant activity
for the nine months ended September 30, 2019:
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Weighted
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|
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Average
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|
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Weighted
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Remaining
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Average
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Contractual
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Aggregate
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Number
of
Shares
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Exercise
Price
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Term
(in years)
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Intrinsic
Value
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Outstanding
as of December 31, 2018
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90,258,828
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|
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$
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0.41
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|
|
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5.2
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|
|
$
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-
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Granted
|
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2,525,000
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0.10
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|
|
|
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Expired
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(10,469,500
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)
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0.05
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|
|
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|
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Exercised
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|
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(5,296,843
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)
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0.10
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Outstanding as of
September 30, 2019
|
|
|
77,017,485
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|
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$
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0.44
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|
|
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5.4
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|
|
$
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-
|
|
|
Exercisable as of
September 30, 2019
|
|
|
71,091,295
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|
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$
|
0.45
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|
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5.4
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|
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$
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-
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These warrants were valued based on the
grant date fair value of the instruments using a Black-Scholes option pricing model with the following assumptions:
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Nine Months Ended September 30,
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2019
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2018
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Volatility
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213.95% - 217.10%
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|
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138.93% - 186.70%
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Risk-free interest rate
|
|
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1.93% - 2.72%
|
|
|
|
2.12% - 2.88%
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|
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Expected term
|
|
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5-10 years
|
|
|
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3-10 years
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5. COMMITMENTS AND CONTINGENCIES
Sponsored Research and License Agreements
Research and development of the Company’s
high efficiency solar thin films and OPV technologies are conducted in collaboration with University partners through sponsored
research agreements.
The Company established direct research
and development agreements with Michigan on June 16, 2016, which were amended on July 21, 2016, to provide engineering support
and facility access associated with technology transfer and commercialization of its high efficiency thin film solar technologies.
Such research agreements were terminated on August 31, 2017 and replaced with a time and materials contract for access to Michigan’s
Labs by the Company’s technicians.
A separate research agreement dated December
20, 2013, among the Company and USC (the “2013 Research Agreement”), governs research conducted by USC and Michigan
on high efficiency thin film and OPV technologies. Michigan is a subcontractor to USC on this research agreement. The 2013 Research
Agreement expires on January 31, 2021.
On August 8, 2016, the Company amended
the 2013 Research Agreement with USC, suspending the agreement effective as of August 15, 2016. The Company requested this amendment
to suspend its OPV-related sponsored research activities to reduce near-term expenditures to allow the Company to bring its account
with USC current through a payment plan. The suspension is to continue until the date that is 30 days after expenses incurred by
USC have been reimbursed by the Company. Under this amendment, the Company repaid expenses to USC in quarterly installments of
$206,000 from November 2016 through February 2018.
Under the Company’s currently effective
License Agreement, as amended on August 22, 2016, among the Company and USC, Michigan, and Princeton (the “Fourth Amendment
to License Agreement”), wherein the Company has obtained the exclusive worldwide license and right to sublicense any and
all intellectual property resulting from the Company’s sponsored research agreements, we have agreed to pay for all reasonable
and necessary out of pocket expenses incurred in the preparation, filing, maintenance, renewal and continuation of patent applications
designated by the Company. In addition, the Company is required to pay to USC 3% of net sales of licensed products or licensed
processes used, leased or sold by the Company, 3% of revenues received by the Company from the sublicensing of patent rights and
23% of revenues (net of costs and expenses, including legal fees) received by the Company from final judgments in infringement
actions respecting the patent rights licensed under the agreement. A previous amendment to the License Agreement (the Third Amendment
to License Agreement dated December 20, 2013) amended the minimum royalty section to eliminate the accrual of any such royalties
until 2014. Furthermore, the amounts of the non-refundable minimum royalties, which would be applicable starting in 2014, were
adjusted to be lower than the amounts in the previous License Agreement. Minimum royalties are $100,000 per year for the remainder
of the contract.
There is currently no ongoing research
activity at Princeton, USC and Michigan related to the Company, although the Company maintains licensing rights to technology previously
developed there.
On May 20, 2019 the Company and its development
partner, True Metal Solutions (TMS) were awarded an SBIR (Small Business Innovative Research) Phase 1 grant for $200K. The overall
scope of the program is to design, develop, manufacture, and market the first U.S building integrated organic solar modules for
building facades. Our company brings with it 20+ years of critical intellectual property development on thin film organic solar
cells and combined with TMS’ leadership in designing and manufacturing building facade technology, we together will drive
towards the first U.S. building integrated organic solar modules. With the anticipated award of Phase II ~ ($1.0M) in 2020 our
team will complete the overall system design and scale this technology to assemble demonstration façade systems on buildings
in the Phoenix area where our subcontractor already has the architectural, building owner, and general contractor relationships.
Leases
The Company has two operating leases, one
for office space in Scottsdale, Arizona and one for laboratory and office space in Ann Arbor, Michigan. The office lease in Scottsdale,
Arizona is renewed on a monthly basis and was therefore scoped out of ASC 842 while the laboratory and office space lease in Ann
Arbor, Michigan has a remaining term of 1.3 years. When this lease expires, it becomes renewable on a monthly basis. In June 2019,
an addendum was added to this lease increasing the monthly payments to $2,875 in exchange for more office space. Lease expense
was $22,374 for the nine months ended September 30, 2019.
Supplemental cash flow information related
to leases for the nine months ended September 30, 2019 was as follows:
Supplemental cash flow information related
to leases for the nine months ending September 30, 2019 was as follows:
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
56,047
|
|
|
Cash payments for operating leases
|
|
$
|
24,000
|
|
Supplemental balance sheet information related to leases as
of September 30, 2019 was as follows:
|
Operating lease right-of-use asset
|
|
$
|
33,673
|
|
|
Operating lease liabilities
|
|
$
|
33,673
|
|
Future minimum annual lease payments of operating leases as
of September 30, 2019:
|
Remainder of 2019
|
|
$
|
8,625
|
|
|
2020
|
|
|
25,875
|
|
|
Total future lease payments
|
|
|
34,500
|
|
|
Less imputed interest
|
|
|
(827
|
)
|
|
Total lease liability balance
|
|
$
|
33,673
|
|
|
Weighted average remaining lease term
|
|
|
1.1 years
|
|
|
Weighted average discount rate
|
|
|
5.33
|
%
|
Concentrations
All of the Company’s revenue and
accounts receivable were earned from one customer.
6. SUBSEQUENT EVENTS
During October and November 2019, the Company
entered into various note and share purchase agreements with related parties pursuant to which the parties purchased convertible
notes in the aggregate amount of $325,00, along with additional shares of the Company’s common stock to be issued on the
maturity date. Also, $373,356 of convertible notes that matured including $9,106 accrued interest were rolled into another
bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate
of 10% per annum. The maturity dates range from January to February 2020. On the maturity date, whether or not the notes are
converted, the investors shall receive shares of the Company’s common stock with a value 50% of the note’s principal
amounts. In addition, the investors shall have the right to convert all or any portion of the outstanding and unpaid principal
and interest of the note into securities being sold by the Company on or after the maturity date. The Company may not prepay
the notes prior to the maturity dates.
During October and November 2019, the Company
entered into various note and share purchase agreements with accredited investors pursuant to which the investors purchased convertible
notes in the aggregate amount of $850,400, along with additional shares of the Company’s common stock to be issued on the
maturity date. Also, $1,258,311 of convertible notes that matured including $26,314 accrued interest were rolled into another
bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate
of 10% per annum. The maturity dates range from January to February 2020. On the maturity date, whether or not the notes are
converted, the investors shall receive shares of the Company’s common stock with a value 50% of the note’s principal
amounts. In addition, the investors shall have the right to convert all or any portion of the outstanding and unpaid principal
and interest of the note into securities being sold by the Company on or after the maturity date. The Company may not prepay
the notes prior to the maturity dates.
In October and November 2019, an aggregate
of $2,143,598 of notes matured and the Company issued 10,717,991 shares of its common stock to various noteholders. Certain noteholders
also elected to convert the notes and accrued interest into Series A Redeemable Participating Convertible Preferred Stock (“Preferred
Stock”). An aggregate of 80 shares of Preferred Stock were issued upon conversion as of the date of this report.
During October and November 2019, the Company
borrowed an aggregate of $807,600 under short-term convertible notes payable. The outstanding convertible notes of the Company
are unsecured, bear interest of 12% per annum and mature between July and November 2020. Certain of 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 15 to 20 consecutive
trading days prior to the date of conversion.
During October and November 2019, the Company
paid off short-term convertible debt of $823,300.
The Company issued one million shares of
the Company’s common stock on October 1, 2019 and an additional one million shares on November 1, 2019 pursuant to a letter
agreement with an investor in exchange for extending the maturity date of the note.
During November 30, 2019, an aggregate of 2,759,318 warrants were modified to reduce the exercise price
to $0.10 per share pursuant to a board consent.
