NanoFlex Power Corp - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number 333-187308

NANOFLEX POWER CORPORATION

(Exact name of registrant as specified in its charter)

480-585-4200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 67,016,567 shares of common stock are issued and outstanding as of November 6, 2017.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONTENTS

NANOFLEX POWER CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

NANOFLEX POWER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

NANOFLEX POWER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

NANOFLEX POWER CORPORATION

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 equity interests of GPEC and GPEC became a wholly-owned subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal Technology Systems, Corp.” to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS” on December 26, 2013.

GPEC was incorporated in Pennsylvania on February 7, 1994. The Company is organized to fund, develop, commercialize and license advanced photovoltaic technologies that enable thin film solar products with what we believe to be industry-leading efficiencies, light weight, flexibility, and low total system cost.

These technologies are targeted at certain broad applications, including: (a) portable and off-grid power generation, (b) building applied photovoltaics (“BAPV”), (c) building integrated photovoltaics (“BIPV”), (d) space vehicles and unmanned aerial vehicles (“UAVs”), (e) semi-transparent solar power generating windows or glazing, and (f) ultra-thin solar films for automobiles or other consumer applications.

We believe these technologies have been demonstrated in a laboratory environment with our research partners. The Company is currently taking steps to pursue product development and commercialization on some of these technologies in collaboration with industry partners and potential customers.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures have been or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 included in our Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures. Actual results may differ from these estimates.

Revenue Recognition

We recognize revenue from our services when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured. Revenue from our Joint Development Agreements (“JDA’s”) are recognized as services are provided and are limited to the total dollar amount specified in the agreement. R&D engineering services, through JDAs 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

Going Concern

The Company has generated limited revenue to date. The Company has a working capital deficit of $11,984,707 and an accumulated deficit of $208,102,681 as of September 30, 2017. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. To date, the Company has funded its initial operations primarily by way of the sale of equity securities, convertible note financing, short term financing from private parties, and advances from related parties.

Fair Value

ASC 820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.

As of September 30, 2017, the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.

The following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of September 30, 2017 and December 31, 2016:

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:

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. The Company expects to adopt the standard using the modified retrospective method. The Company is currently evaluating the impact of this amendment on its financial statements.

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 is currently evaluating the impact this standard will have on the Company’s consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments.  As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the implementation date and the impact of this amendment on its financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. Specifically, the guidance creates better alignment of hedge accounting with risk management activities, eliminates the separate measurement and recording of hedge ineffectiveness, simplifies effectiveness assessments, and improves presentation and disclosure. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively. The Company is currently evaluating the impact of this amendment on its financial statements.

2. DEBT

Short Term Debt

The Company has a note payable of $100,000 due to its former Chief Executive Officer and President. The note bears an interest rate at the minimum applicable rate for loans of similar duration, which was 0.5% as of September 30, 2017. In June of 2017, an agreement was signed to extend the maturity date of this note to April 26, 2018.

On August 31, 2016, the Company issued a promissory note of $300,000. The term of the note expires one year from the effective date and has an interest rate of 10%. 600,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share in lieu of cash interest. The relative fair value of the warrants of $235,188 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $39,198 and $156,792 associated with the amortization of debt discount for the three and nine months ended September 30, 2017, respectively.

On June 22, 2017, the Company issued a promissory note of $1,000,000. The term of the note expires seven months from the effective date and has an interest amount of 40,000 upon maturity. 3,000,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share in lieu of cash interest. The relative fair value of the warrants of $597,565 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $261,790 and $284,554 associated with the amortization of debt discount for the three and nine months ended September 30, 2017, respectively.

On July 28, 2017, the Company issued a promissory note of $20,000. The term of the note expires eight months from the effective date and has interest of $1,600 due upon maturity. 60,000 warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share. The relative fair value of the warrants of $10,951 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $2,920 associated with the amortization of debt discount for the three and nine months ended September 30, 2017.

On July 31, 2017, the Company issued a promissory note of $100,000. The term of the note expires ten months from the effective date and has interest of $8,000 due upon maturity. 300,000 warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share. The relative fair value of the warrants of $53,562 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $10,891 associated with the amortization of debt discount for the three and nine months ended September 30, 2017.

On August 10, 2017, the Company issued a promissory note of $30,000. The term of the note expires ten months from the effective date and has interest $2,400 due upon maturity. 90,000 warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share. The relative fair value of the warrants of $9,110 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $1,549 associated with the amortization of debt discount for the three and nine months ended September 30, 2017.

On August 21, 2017, the Company issued a promissory note of $20,000. The term of the note expires eight months from the effective date and has interest of $1,600 due upon maturity. 60,000 warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share. The relative fair value of the warrants of $9,764 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $1,627 associated with the amortization of debt discount for the three and nine months ended September 30, 2017.

On August 21, 2017, the Company issued four promissory notes totaling $200,000. The term of the notes expires one year from the effective date and have interest of $8,000 due upon maturity. 1,200,000 warrants for the Company’s common shares were issued with the debt at a strike price of $0.50 per share. The relative fair value of the warrants of $133,975 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 $14,886 associated with the amortization of debt discount for the three and nine months ended September 30, 2017.

As of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of non-convertible notes payable was $1,770,000 and $400,000, and unamortized discount was $498,499 and $156,792, respectively.

Notes Payable – Related Party

On January 27, 2017, the Company borrowed $380,000 under a short-term note agreement with a major shareholder. Under the terms of this agreement, the note is to be repaid within four months of funding along with $19,000 paid at the maturity of the note in lieu of interest. On July 17, 2017, the Company entered into a letter agreement to extend the maturity date to September 27, 2017 and increase the note amount to include accrued interest. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.

On March 6, 2017, the Company borrowed $120,000 under a short-term note agreement with a major shareholder. Under the terms of this agreement, the note is to be repaid within four months of funding along with $6,000 paid at the maturity of the note in lieu of interest. On July 17, 2017, the Company entered into a letter agreement to extend the maturity date to November 7, 2017 and increase the note amount to include accrued interest. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.

On April 4, 2017, the Company borrowed $100,000 under a short-term note agreement with a major shareholder. Under the terms of this agreement, the note is going to be repaid within four months of funding along with $5,000 paid at the maturity of the note in lieu of interest. On July 17, 2017, the Company entered into a letter agreement to extend the maturity date to December 4, 2017 and increase the note amount to include accrued interest. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.

On July 17, 2017, the Company entered into a letter agreement with a major shareholder pursuant to which the Company agreed that the shareholder’s non-convertible notes totaling $1,100,000 in the aggregate shall each have their maturity date extended and each note amount has been increased to include accrued interest on the notes. Pursuant to this agreement, the Company agreed to issue the investor a warrant to purchase 1,000,000 shares of the Company’s Common Stock with a 10-year term and an exercise price of $.50. The Company recorded an additional amount of $122,884 to principal which increased the aggregate balance of the notes to $1,222,884 under the letter agreement. The new maturity dates of the notes range from August 27, 2017 to December 4, 2017 with an interest rate of 5%. The relative fair value of the 1,000,000 warrants was $495,044 which was recorded as a loss on extinguishment of debt since the change in value was greater than 10%. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.

On August 10, 2017, the Company entered into a Loan Agreement with a major shareholder pursuant to which, the shareholder invested $200,000 in a non-convertible 30-day unsecured promissory note issued on August 10, 2017. The interest under the note is a cash payment of $30,000 due at maturity. The foregoing note has been consolidated into the Conversion Note, as such term is defined below.

As of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of notes payable to related parties was $1,422,884 and $500,000, respectively. The aggregate amortization of the discounts on the promissory notes for the nine months ended September 30, 2017 was $473,220.

On October 11, 2017, the Company entered into a Note Conversion Agreement and on October 18, 2017, the Company entered into an amendment thereto (referred herein to together as the “Note Conversion Agreement”) with a major shareholder pursuant to which the Company and the major shareholder agreed to convert six 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 (the “Conversion Note”). The original principal amount under the Conversion Note was the total of four promissory notes that had passed their maturity date as of the date of the entry into the Note Conversion Agreement, which equaled $1,221,844 An additional $1,000,000 was added to the principal amount of the Conversion Note on October 18, 2017, upon its receipt by the Company. Further, upon the end of the term of another of the six notes on November 7, 2017, the amount due on that note which equals $126,000 shall be added to the total amount due under the Conversion Note. Further, upon the end of the term of the last of the six notes on December 4, 2017, the amount due on that note which equals $105,000 shall be added to the total amount due under the Conversion Note. The Conversion 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 in the Company’s offering of its convertible promissory notes and warrants (the “Note Offering”), at a 15% discount. Further pursuant to the Note Conversion Agreement, on October 18, 2017, the major shareholder was issued a warrant to purchase 1,000,000 shares of the Company’s Common Stock with a ten-year term and an exercise price of $.50. The foregoing descriptions of the Note Conversion Agreement and Conversion Note is not complete and is qualified in its entirety by reference to the full text of the form the Note Conversion Agreement (and amendment thereto) and the Conversion Note and warrant, copies of which are filed as Exhibit 10.1 and 10.2, respectively, to this report, and are incorporated by reference herein. The form of subscription agreement, form of note and form of warrant for the Note Offering, are filed as Exhibit 10.3 to this report.

Advances – Related Party

During the three and nine months ended September 30, 2017, the Company received advances from its Chief Executive Officer totaling $69,000 and $138,500, respectively, and repaid advances totaling $20,000 and $204,500, respectively.

As of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of advances to related parties was $444,000 and $510,000, respectively.

Convertible Notes Payable

On January 27, 2017, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a promissory note from the Company in exchange for $200,000 and a warrant to purchase 400,000 shares of the company’s common stock with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified it 30 days after issuance into a convertible note. The convertible note was issued on February 27, 2017, pursuant to the agreement, with a principal amount of $200,000, includes the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible into 400,000 units, with each unit consisting of a share of common stock and a warrant with a five-year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the 600,000 warrants was $125,931 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $38,655 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $35,414 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.

On March 8, 2017, the Company entered into a note purchase agreement with an investor pursuant to which an investor purchased a promissory note from the Company in exchange for $200,000 and a warrant to purchase 400,000 shares of the company’s common stock with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified it 30 days after issuance into a convertible note. The convertible note was issued on April 8, 2017, pursuant to the agreement, with a principal amount of $200,000, includes the issuance of 200,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible into 400,000 units, with each unit consisting of a share of common stock and a warrant with a five-year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the 600,000 warrants was $130,207 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $36,196 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $33,596 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.

On March 9, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $150,000, respectively, and a warrant to purchase 300,000 shares of the company’s common stock, respectively, with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified it 30 days after issuance into a convertible note. The convertible note was issued on April 9, 2017, pursuant to the agreement, with a principal amount of $150,000, includes the issuance of 150,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible into 300,000 units, with each unit consisting of a share of common stock and a warrant with a five-year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the 450,000 warrants was $96,019 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $28,018 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $25,963 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion. 

On March 12, 2017, the Company entered into note purchase agreements with two investors, pursuant to which investors purchased a promissory note from the Company in exchange for $100,000 and a warrant to purchase 200,000 shares of the company’s common stock, respectively, with a $0.50 exercise price and five-year term. The promissory note had a clause that automatically modified it 30 days after issuance into a convertible note. The convertible note was issued on April 12, 2017, pursuant to the agreement with a principal amount of $100,000, includes the issuance of 100,000 additional warrants, interest of 8% per annum, a maturity date of one year and is convertible into 200,000 units, with each unit consisting of a share of common stock and a warrant with a five-year life from the date of conversion and an exercise price of $0.50 per share, subject to certain anti-dilution provisions. The relative fair value of the 300,000 warrants was $64,386 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $18,479 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $17,135 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.

On April 24, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which Power Up purchased a convertible promissory note evidencing a loan of $58,500. The Company paid off this note in full on October 19, 2017.

On April 25, 2017, the Company borrowed $115,000 from JSJ Investments, Inc. (“JSJ”) and issued to JSJ a $115,000 convertible promissory note with a maturity date of January 25, 2018. The Company paid off this note in full on October 19, 2017.

On April 28, 2017, the Company entered into a Securities Purchase Agreement with Silo Equity Partners Venture Fund, LLC (“Silo”) pursuant to which Silo purchased a convertible promissory note evidencing a loan of $100,000. The Company paid off the this note in full on October 19, 2017.

On May 4, 2017, the Company agreed to borrow up to $500,000 from JMJ Financial (“JMJ”) and issued to JMJ a convertible promissory note of up to $500,000, evidencing the loan with a maturity date of May 4, 2018. The Company paid off the this note in full in two tranches, a payment on August 3, 2017 and a payment on August 4, 2017 in equal amounts, with both payments totaling $416,842 of which $101,053 penalty on prepayment was recorded as loss on debt extinguishment.

On July 17, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $200,000, and a warrant to purchase 800,000 shares of the company’s common stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 60 days after issuance into 400,000 shares of Common Stock and a warrant to purchase 400,000 shares of Common Stock. The relative fair value of the 800,000 warrants was $132,889 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $34,955 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $32,156 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion.  The note was automatically converted on September 15, 2017.

On July 25, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. pursuant to which Power Up purchased a convertible promissory note evidencing a loan of $43,000. This note entitles the holder to 12% interest per annum and matures on April 30, 2018. Power Up may convert the note into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of the note, at a price equal to 61% of the average of the lowest two trading prices during the 15 trading day period ending on the last complete trading date prior to the date of conversion, provided, however, that Power Up may not convert the note to the extent that such conversion would result in Power Up’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by Power Up and its affiliates. If the Company prepays the note within 30 days of its issuance, the Company must pay all of the principal at a cash redemption premium of 110%; if such prepayment is made between the 31st day and the 60th day after the issuance of the note, then such redemption premium is 115%; if such repayment is made from the sixty first 61st to the 90th day after issuance, then such redemption premium is 120%; if such repayment is made from the 91st to the 120th day after issuance, then such redemption premium is 125%; if such repayment is made from the 121st to the 150th day after issuance, then such redemption premium is 130%; and if such prepayment is after the 151st day and before the 181st date of issuance of the note then such redemption premium is 135%. In connection with the Note and Securities Purchase Agreement the Company paid $3,000 for Power Up’s legal fees incurred in connection with the note and Securities Purchase Agreement and therefore only received $40,000 under the note. The Company agreed that so long as it has any obligation under the note, that is shall not sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business without the written consent of Power Up. The Company’s transfer agent reserved 1,040,469 shares of the Company’s common stock, in the event that the note is converted. The foregoing descriptions of the Securities Purchase Agreement and note is not complete and is qualified in its entirety by reference to the full text of the form of Securities Purchase Agreement and form note, copies of which were filed as Exhibit 10.10 and 10.11, respectively, to the Company’s quarterly report for the quarter ended June 30, 2017, which was filed with the SEC on August 9, 2017, and are incorporated by reference herein.

On August 3, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $15,000, and a warrant to purchase 30,000 shares of the company’s common stock, with a $0.50 exercise price and 10-year term.  There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 60 days after issuance into 30,000 shares of Common Stock and a warrant to purchase 30,000 shares of Common Stock. The relative fair value of the 30,000 warrants was $6,355 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $4,524 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $4,121 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion. 

On September 7, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $25,000, and a warrant to purchase 100,000 shares of the company’s common stock, with a $0.50 exercise price and 10-year term.  There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 60 days after issuance into 50,000 shares of Common Stock and a warrant to purchase 50,000 shares of Common Stock. The relative fair value of the 100,000 warrants was $14,374 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $5,566 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $5,060 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion. 

On September 26, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $100,000, and a warrant to purchase 400,000 shares of the company’s common stock, with a $0.50 exercise price and 10-year term.  There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 60 days after issuance into 200,000 shares of Common Stock and a warrant to purchase 200,000 shares of Common Stock. The relative fair value of the 400,000 warrants was $56,765 which was recognized as a discount to the debt. This note also gave rise to a beneficial conversion feature of $22,892 which is recognized as additional paid in capital and a corresponding debt discount. All debt discounts are being recognized on a straight-line basis over the term of the note. The note also contains an additional warrant expense of $20,343 associated with the warrants that are to be issued upon conversion, which is to be recognized only upon conversion. 

During the nine months ended September 30, 2017, the full principal balances of certain notes totaling $1,033,500 were converted pursuant to the terms of the notes into 2,071,800 shares of the Company’s common stock and 2,071,800 warrants to purchase common stock. Upon conversion, the Company accelerated the recognition of all remaining debt discount and also recognized additional interest expense of $181,442 associated with the warrants that were issued upon conversion. This additional warrant expense was immediately recognized as interest expense with an offset to additional paid-in-capital.

Aggregate amortization of the discounts on the convertible notes for the nine months ended September 30, 2017 and 2016 was $1,105,888 and $2,030,827, respectively. The amortization for the nine months ended September 30, 2017 included $25,829 of amortization of deferred financing costs. As of September 30, 2017, and December 31, 2016, the aggregate outstanding balance of convertible notes payable was $1,919,093 and $1,440,206, respectively, net of unamortized discounts of $118,086 and $343,294. The total beneficial conversion feature debt discount from convertible notes for the nine months ended September 30, 2017 was $816,211.

Derivative Liabilities - Convertible Notes

As of September 30, 2017, the fair value of the outstanding convertible note derivatives was determined to be $847,778 and the Company recognized a gain of $2,308,958. There were no new convertible note derivatives that arose during the nine months ended September 30, 2017.

Accounts Payable - Related Party

As of September 30, 2017, and December 31, 2016, there is $18,115 and $2,470, respectively, due to related parties, which is non-interest bearing and due on demand.

3. EQUITY

Common Stock

On February 13, 2017, the Company issued 336,000 shares of the Company’s common stock to certain note holders in exchange for accrued interest of $168,000. The fair value of the common stock was determined to be $201,600 and resulted in a loss on settlement of accrued interest of $33,600.

On June 5, 2017, the Company issued 3,400,000 shares of the Company’s common stock to a related party pursuant to a letter agreement. See Note 2 for details. The Company calculated the fair value of the shares on the issuance date and recorded $1,190,000 as loss on extinguishment of debt.

On August 24, 2017, 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 August 12, 2017, to a new maturity date of February 12, 2018, and in exchange to 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 $.50 exercise price and a 10 year term. The fair value of the warrants was determined to be $755,081 using the Black-Scholes option pricing model. The fair value of the common stock was determined to be $39,000 based on the stock price on August 24, 2017. These fair values were recorded as a total loss on extinguishment of debt of $794,081.

During the nine months ended September 30, 2017, the Company issued an aggregate of 2,071,800 shares of its common stock related to the conversion of $1,038,300 of principal and accrued interest on convertible notes.

During the nine months ended September 30, 2017, the Company sold an aggregate of 815,046 units, at $0.50 per unit for aggregate proceeds of $407,523. Each unit consisted of one common share and one warrant. Each warrant is exercisable for a period of five years from the date of issuance, at $0.50 per share.

Stock Options

On April 1, 2017, 50,000 stock options were granted to an employee of the Company. The options vest on a monthly basis of 1,000 shares per month over a 50-month period. The options expire in 2027. These options were valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:

The volatility used was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

A summary of stock option activity during the nine months ended September 30, 2017 is as follows:

Stock option awards are expensed on a straight-line basis over the requisite service period. During the three and nine months ended September 30, 2017 the Company recognized expense of $7,892, and $22,502, respectively, associated with stock option awards. During the three and nine months ended September 30, 2016 the Company recognized expense of $4,164 and $12,489, respectively, associated with stock option awards. At September 30, 2017, future stock compensation expense (net of estimated forfeitures) not yet recognized was $96,122 and will be recognized over a weighted average remaining vesting period of 3.0 years.

The intrinsic value of the Company’s stock options outstanding was $0 at September 30, 2017.

Warrants

On September 1, 2015, the Company entered into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company issued Mr. Tobin warrants to purchase 1,500,000 shares of the Company’s common stock at $0.50 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. Warrant expense on non-forfeited tranches of $60,087 and $334,696 was recognized during the three and nine months ended September 30, 2017, respectively. In addition, $380,548 of expense was reversed during the quarter ended June 30, 2017 related to the forfeited warrants. Warrant expense of $265,787 and $915,489 was recognized during the three and nine months ended September 30, 2016, respectively.

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 foregoing description of the Employment Agreement and warrant is not complete and is qualified in its entirety by reference to the full text of the Employment Agreement, a copy of which was filed as Exhibit 10.1, to the Company’s Current Report on Form 8-K filed with the SEC on May 18, 2017, which incorporated by reference herein. The fair value of the warrants was determined to be $743,416 using the Black-Scholes option pricing model. 450,000 of the Warrant Shares vested on May 18, 2017, an additional 450,000 warrant shares will vest on the first anniversary date of the Employment Agreement, 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 $85,183 and $299,432 was recognized during the three and nine months ended September 30, 2017, respectively.

Total warrant expense for employee warrants of non-forfeited tranches was $145,270 and $634,128 for the three and nine months ended September 30, 2017, respectively. Total warrant expense recorded for the nine months ended September 30, 2017 was $251,022.

On February 1, 2017, the Company issued warrants to purchase 30,000 shares of its Common Stock to a service provider in exchange for services provided to the Company. 5,000 of the warrants vested February 28, 2017, and 5,000 warrants shall vest on the last date of each month following February 2017, until final vesting on July 31, 2017. The warrants have an exercise price of $0.50 and a 5-year term. The fair value of the warrants was determined to be $9,516 using the Black-Scholes option pricing model of which $1,366 of expense was recaptured and $9,516 was recognized as expense during the three and nine months ended September 30, 2017, respectively.

On March 6, 2017, the Company issued warrants to purchase 200,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed. The warrants have a five-year term and are immediately vested. The fair value of the warrants was determined to be $120,501 using the Black-Scholes option pricing model of which $120,501 was recognized as expense during the nine months ended September 30, 2017.

On April 12, 2017, the Company issued warrants to purchase 100,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed. The warrants have a five-year term and are immediately vested. The fair value of the warrants was determined to be $53,564 using the Black-Scholes option pricing model of which $53,564 was recognized as expense during the nine months ended September 30, 2017.

From April 12, 2017 through and up to June 23, 2017, the Company reduced the exercise prices of certain warrants, with a total aggregate of 1,070,744 shares of the Company’s common stock issuable upon exercise of such warrants, to $.50 and added a cashless exercise feature to such warrants. Since the warrants were already recorded as derivative liabilities, the modification has been recognized as change in fair value of derivative.

From May 28, 2017 through June 14, 2017, 23 holders of a total of 132 warrants (the “Warrants”) pursuant to which 36,547,903 shares of the Company’s common stock are issuable, submitted exercise notices to the Company, pursuant to which the holders agreed that the Warrants shall be exercised by way of a cashless exercise feature automatically upon such time as the market price for the company’s common stock reaches $1.50 on a trading date.  If this occurs, the company shall have to issue 24,365,269 shares of its common stock to the holders.

On July 1, 2017, the Company entered into an Independent Contractor Services Agreement with a service provider pursuant to which it issued to the service provider on July 1, 2017, a warrant to purchase 50,000 shares of the Company’s Common Stock with a five-year term and an exercise price of $.50. 25,000 of the warrant shares vested on July 1, 2017 and the remaining 25,000 shares are set to vest on December 31, 2017, so long as the Independent Contractor Services Agreement is not terminated prior to such date. The fair value of the warrants was determined to be $14,825 using the Black-Scholes option pricing model of which $2,883 of expense was recaptured and $7,412 was recognized as expense during the three and nine months ended September 30, 2017, respectively.

From June 22, 2017 through August 21, 2017, the Company issued 4,710,000 cashless warrants for the Company’s common shares with a strike price of $0.50/share with promissory notes of $1,370,000. The relative fair value of the warrants of $814,927 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 $293,664 and $316,428, respectively, associated with the amortization of debt discount on the notes and warrants issued during the current year for the three and nine months ended September 30, 2017.

On August 10, 2017, the Company issued warrants to purchase 10,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed. The warrants have a five-year term and are immediately vested. The fair value of the warrants was determined to be $4,868 using the Black-Scholes option and were recognized as expense during the nine months ended September 30, 2017.

On September 21, 2017, the Company issued warrants to purchase 25,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed. The warrants have a ten-year term and are immediately vested. The fair value of the warrants was determined to be $8,462 using the Black-Scholes option and were recognized as expense during the nine months ended September 30, 2017.

On September 29, 2017, the Company issued warrants to purchase 25,000 shares of its common stock at $0.50 per share to a consultant in exchange for services already performed. The warrants have a ten-year term and are immediately vested. The fair value of the warrants was determined to be $7,947 using the Black-Scholes option and were recognized as expense during the nine months ended September 30, 2017.

During the nine months ended September 30, 2017, the aggregate principal and interest of certain convertible notes totaling $1,038,300 were converted pursuant to the terms of the notes into 2,071,800 shares of the Company’s common stock and 2,071,800 warrants to purchase common stock. See details in Note 2.

The Company recorded a total of $340 on warrants issued to non-employees for services provided during the nine months ended September 30, 2017.

The following summarizes the warrant activity for the nine months ended September 30, 2017:

Derivative Liabilities - Warrants

The anti-dilution features in the freestanding warrants issued in the nine months ended September 30, 2017 cause the instruments to no longer be indexed to the Company’s own stock and requires that they be accounted for as derivative liabilities based on guidance in FASB ASC 815, Derivatives and Hedging.

The valuation of the derivative liability of the warrants was determined through the use of a Black Scholes options model, which the Company believes approximates fair value. Using this model, the Company had a balance of $8,828,405 at December 31, 2016. The Company recorded the change in the fair value of the warrant liabilities recognizing a gain of $6,484,117 for the nine months ended September 30, 2017, to reflect the value of the warrant derivative liability of $2,437,832 as of September 30, 2017.

On November 4, 2015, the Company entered into an amendment to the Independent Contractor Agreement (the “Amendment”) with a service provider pursuant to which the service provider is to be issued warrants to purchase 2,400,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”). 1,200,000 of the Warrant Shares vested on November 4, 2015, an additional 600,000 Warrant Shares vested on November 4, 2016, and an additional 600,000 Warrant Shares will vest on November 4, 2017. The fair value of the first 1,200,000 Warrants Shares was determined to be $1,115,964 using the Black-Scholes option pricing model and was recognized as expense during the year ended December 31, 2015. The fair 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 remaining tranche of 600,000 Warrant Shares was determined to total $186,907 as of September 30, 2017 using the Black-Scholes option pricing model of which $34,827 and $143,136 of expense was reversed due to a change in fair value during the three and nine months ended September 30, 2017, respectively.

On May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued warrants to purchase 1,000,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”). 500,000 of the Warrant Shares vested on May 13, 2016, an additional 250,000 warrant shares vested on the first anniversary date of the agreement, and an additional 250,000 Warrant Shares will vest on the second anniversary date of the agreement. The fair value of the first 500,000 Warrant Shares was determined to be $388,888 using the Black-Scholes option pricing model and was recognized as expense and as derivative liabilities during the year ended December 31, 2016. The fair value of the 250,000 Warrant Shares that vested May 13, 2017 was determined to be $93,545 and was recognized in additional paid in capital during the quarter ended June 30, 2017. The fair value of the remaining tranche of 250,000 Warrant Shares was determined to total $78,233 as of September 30, 2017 using the Black-Scholes option pricing model of which $7,120 and $68,343 of expense was recaptured during the three and nine months ended September 30, 2017, respectively.

On May 13, 2016, the Company entered into an agreement with a service provider pursuant to which the service provider is to be issued warrants to purchase 200,000 shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”). The Warrant Shares are immediately vested. The fair value of the Warrant Shares was determined to total $62,586 as of September 30, 2017 using the Black-Scholes option pricing model.

The warrants were valued using the Black-Scholes pricing model with the following assumptions:

4. NET EARNINGS (LOSS) PER SHARE

5. COMMITMENTS AND CONTINGENCIES

Lease Commitments

In November 2013, the Company entered into a 60-month lease agreement for its corporation facility in Arizona. Total rent expense for the three and nine months ended September 30, 2017 was $18,067 and $81,480, respectively. Total rent expense for the three and nine months ended September 30, 2016 was $21,039 and $64,375, respectively.

Future minimum lease payments are as follows:

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 is 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 are in the process of settling the matter and preparing to execute the necessary documentation for same, pursuant to which all claims against the Company would be dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and a promissory note for $125,000. The 1,750,000 shares of common stock were fair valued using the stock price on August 29, 2017 and recorded as a stock payable of $681,625. The Company recognized legal settlement expense of $633,292 associated with this transaction. There can be no assurance that such settlement will occur, and if does not occur, then the Company will plan to continue to vigorously defend against the claims made by Mr. Kuhns as it believes that Mr. Kuhns’ allegations and claims are without any merit.

6. SUBSEQUENT EVENTS

On October 3, 2017, the Company entered into three note purchase agreements with three investors, pursuant to which each investor purchased a promissory note from the Company in exchange for $25,000, and each received a warrant to purchase 75,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory notes. The promissory notes have a clause that automatically converted the notes 30 days after issuance, on November 2, 2017, into an investment in the principal amount in the Company’s Note Offering and each investor was issued a one year promissory note with a principal amount of $25,000 and warrants to purchase 25,000 shares of the Company’s Common Stock with a $0.50 exercise prices and a 10-year term.

On October 4, 2017, the Company issued a warrant to purchase 50,000 shares its Common Stock with a $0.50 exercise price and a 10-year term to a service provider in consideration of services provided to the Company.

On October 5, 2017, the Company entered into a note purchase agreement with an investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $25,000, and received a warrant to purchase 75,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converted the note 30 days after issuance, on November 4, 2017 into an investment in the principal amount in the Company’s Note Offering and the investor was issued a one year promissory note with a principal amount of $25,000 and warrants to purchase 25,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10-year term.

On October 9, 2017, the Company entered into a note purchase agreement with an investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $25,000, and received a warrant to purchase 75,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converted the note 30 days after issuance, on November 8, 2017, into an investment in the principal amount in the Company’s Note Offering and the investor was issued a one year 8% $25,000 convertible promissory note and a warrant to purchase 25,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10 year term.

On October 10, 2017, the Company entered into a note purchase agreement with an investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $50,000, and received a warrant to purchase 150,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, on November 9, 2017, into an investment in the principal amount in the Company’s Note Offering and the investor was issued a one year 8% $50,000 convertible promissory note and a warrant to purchase 50,000 shares of the Company’s Common Stock with a $0.50 exercise price and a 10 year term.

On October 11, 2017, the Company entered into a Note Conversion Agreement and on October 18, 2017, the Company entered into an amendment thereto (referred herein to together as the “Note Conversion Agreement”) with a major shareholder pursuant to which the Company and the major shareholder agreed to convert six 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 (the “Conversion Note”). The original principal amount under the Conversion Note was the total of four promissory notes that had passed their maturity date as of the date of the entry into the Note Conversion Agreement, which equaled $1,221,844. An additional $1,000,000 was added to the principal amount of the Conversion Note on October 18, 2017, upon its receipt by the Company. Further, upon the end of the term of another of the six notes on November 7, 2017, the amount due on that note which equals $126,000 shall be added to the total amount due under the Conversion Note. Further, upon the end of the term of the last of the six notes on December 4, 2017, the amount due on that note which equals $105,000 shall be added to the total amount due under the Conversion Note. The Conversion 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 in the Company’s Note Offering, at a 15% discount. Further pursuant to the Note Conversion Agreement, on October 18, 2017, the major shareholder was issued a warrant to purchase 1,000,000 shares of the Company’s Common Stock with a 10-year term and an exercise price of $0.50. The foregoing descriptions of the Note Conversion Agreement and Conversion Note is not complete and is qualified in its entirety by reference to the full text of the form the Note Conversion Agreement (and amendment thereto) and the Conversion Note and warrant, copies of which are filed as Exhibit 10.1 and 10.2, respectively, to this report, and are incorporated by reference herein.

On October 17, 2017, the Company entered into a note purchase agreement with an investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $12,500, and received a warrant to purchase 37,500 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s Note Offering.

On October 17, 2017, the Company entered into a second note purchase agreement with another investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $12,500, and received a warrant to purchase 37,500 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s Note Offering.

On October 19, 2017, 50,000 stock options were granted to an employee of the Company. The options vest on a monthly basis of 1,000 shares per month over a 50-month period. The options expire in 2027.

On October 19, 2017, the Company entered into a note purchase agreement with an investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $20,000, and received a warrant to purchase 60,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s Note Offering.

On October 24, 2017, the Company issued a warrant to purchase 500,000 shares its Common Stock with a $0.50 exercise price and a 10-year term to a service provider in consideration of deferred payments for legal services provided to the Company.

On October 31, 2017, the Company entered into a note purchase agreement with an investor, pursuant to which the investor purchased a promissory note from the Company in exchange for $75,000, and received a warrant to purchase 225,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10-year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 30 days after issuance, into an investment in the principal amount in the Company’s Note Offering.

On November 8, 2017, the Company issued warrants to purchase 50,000 of its Common Stock each to four of its employees as a bonus in exchange for services provided to the Company. The warrants have a 10-year term, a $0.50 exercise price and include a cashless exercise feature. 

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed on March 15, 2017.

SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS “FORWARD-LOOKING STATEMENTS,” WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS “PLANS,” “INTENDS,” “WILL,” “HOPES,” “SEEKS,” “ANTICIPATES,” “EXPECTS” AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND THE COMPANY’S FORM 10-K FILED ON MARCH 15, 2017. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.

NanoFlex Power Corporation is engaged in the development, commercialization, and licensing of advanced photovoltaic technologies that enable thin film solar products with industry-leading efficiencies, light weight, flexibility, and low total system cost. NanoFlex has the exclusive worldwide license to the intellectual property resulting from the Company’s sponsored research programs, which have resulted in an extensive portfolio of issued and pending U.S. patents, plus their foreign counterparts. The patents are referred to herein as being the Company’s patents or as our “IP”. Building upon the sponsored research, the Company plans to work with industry partners to commercialize its technologies to target key applications where is believes products incorporating its technologies present compelling competitive advantages.

These patented and patent-pending technologies fall into two general categories – (1) cost reducing and performance-enhancing fabrication processes and device architectures for ultra-high efficiency Gallium Arsenide (“GaAs”)-based solar thin films and (2) organic photovoltaic (“OPV”) materials, architectures, and fabrication processes for low cost, ultra-thin solar films offering high quality aesthetics, such as semi-transparency and tinting, and highly flexible form factors. The technologies are targeted at certain broad applications that require high power conversion efficiency, flexibility, and light weight. These applications include: (a) portable and off-grid solar power generation, (b) BAPV, (c) BIPV, (d) space vehicles and UAVs, (e) semi-transparent solar power generating glazing or windows, and (f) ultra-thin solar films for automobiles or other consumer applications. The Company believes these technologies have been demonstrated in a laboratory environment with our research partners. 

The Company currently hold exclusive rights to an extensive portfolio of issued and pending U.S. patents, plus their foreign counterparts, which cover architecture, processes and materials for flexible, thin-film organic photovoltaic (“OPV”) and Gallium Arsenide (“GaAs”)-based solar technologies. In addition, we have an extensive collection of patents in process. Some of our technology holdings include foundational concepts in the following areas.

Plan of Operation and Liquidity and Capital Resources

Overall Operating Plan

Our business model is oriented around licensing and sublicensing processes and technologies to large, well-positioned commercial partners who can provide manufacturing and marketing capabilities to enable rapid commercial growth. These manufacturing partners can supply customers directly, from which we expect to receive license royalties. Additionally, these manufacturing partners can also serve as a source of solar cell supply for NanoFlex to provide products to customers on its own through a “fab-less” manufacturing model. We believe this “fab-less” manufacturing model is necessary during the early stages of developing new markets.

We have made contact with major solar cell and electronics manufacturers world-wide and are finding potential commercial interest in both our high efficiency and OPV technologies. We are seeking to work closely with those companies interested in our technology solutions to develop proof-of-concept prototypes and processes to mitigate commercialization risks and gain early market entry and acceptance.

We have identified high efficiency thin film solar technologies as our nearest term market opportunity. A key to reducing the risk to market entry of our high efficiency technologies by our partners is for us to demonstrate our technologies on their product designs and fabrication processes through technology transfer and joint development. To support this joint development, we have established our own engineering team and plan to expand this team contingent on our ability to secure sponsored development funding and/or raise the necessary capital. This team serves several key functions, including working closely with our sponsored research organizations and its industry partners to integrate and customize our proprietary processes and technologies into the partner’s existing product designs and fabrication processes. In conjunction with facilitating technology transfer, our engineering team will also work closely with downstream partners and customers such as military users for mobile field applications, system integrators, installers, and architects for BAPV and BIPV applications, and engineering, procurement, and construction (“EPC”) companies and project developers for solar farm applications. This customer interaction allows us to better understand application specific requirements and incorporate these requirements into its product development cycle.

To support this work, our engineering team leverages the facilities and equipment at the University of Michigan on a recharge basis, which we believe is a cost-effective approach to move the technologies toward commercialization. We believe that this allows our engineering team to work directly with industry partners to acquire early licenses to use our intellectual property without the need for large-scale capital investment in clean room facilities and solar cell fabrication equipment.

We are pursuing sponsored development funding to generate revenue in the near-term. In connection with our focus on potential government-sponsored research projects, on June 19, 2017, the Company announced that that it is part of a consortium that was awarded a $5.7 million contract from the Army Research Laboratory’s Army Research Office to develop high power, flexible, and lightweight solar modules for portable power applications. The consortium consists of NanoFlex, SolAero, the University of Michigan, and the University of Wisconsin. Pursuant to the foregoing and as part of the consortium, SolAero was awarded a 4-year contract amounting to $5.7 million with the Army Research Lab (ARL) to develop solar power mats.  SolAero has engaged the Company as a subcontractor for $3.3 million over 4 years of which $1.6 million will be provided to the University of Michigan as a subcontractor to the Company. The Company’s contract with SolAero provides for direct reimbursement of the Company’s costs including indirect overheard. Having an established technical team enables us to more effectively pursue and execute sponsored research projects from the Department of Defense (“DoD”), the Department of Energy (“DOE”), and the National Aeronautics and Space Administration (“NASA”), each of which has interests in businesses that can deliver ultra-lightweight, high-efficiency solar technologies for demanding applications. However, there can be no assurance that the Company can effectively pursue such research projects, nor if it can, that such pursuit will be successful.  

Another potential revenue source is from JDAs and license agreements with existing solar cell manufacturers, similar to the JDA with SolAero. Once we are able to initially demonstrate the efficacy of our processes and technologies on partner’s products and fabrication processes, we expect to be in a position where we can sign licenses covering further joint development, IP licensing, solar cell supply, and joint marketing, as applicable. We anticipate that partnerships with one or more of the existing high efficiency solar cell manufacturers can be supported by our engineering team, and result in near-term revenue opportunities, as we have demonstrated with our current joint development partner.

As reported in the Company’s Form 8-K filed with the SEC on February 7, 2017, on February 2, 2017, the Company entered into a License Agreement with SolAero Technologies Corp. (“SolAero”) pursuant to which, the Company agreed to grant SolAero a non-exclusive worldwide license to use, sell, offer for sale, import or otherwise dispose of certain products (the “Licensed Products”) using the Company’s patented proprietary manufacturing processes relating to Gallium Arsenide-based photovoltaic cells (the “Licensed Patents’) within the space and near-space fields of use (the “License Field”). SolAero is to pay the Company a royalty based on sales of the Licensed Products within the Licensed Field. The agreement does not provide SolAero with the right to sublicense the Licensed Patents. The term of the agreement runs from February 2, 2017, through the expiration date of the last expiring patent included in the Licensed Technology. However, each party may terminate the agreement upon a material breach by the other party.

There can be no assurance that our overall term operating plan will be successful or that we will be able to fulfill it as it is largely dependent on raising capital and there can be no assurance that capital can be raised nor that we will be awarded the government contracts that we are currently pursuing in addition to the ARL Contract.

Near Term Operating Plan

Our near-term focus is on advancing our product development efforts while containing costs. We require approximately $9 million to $10 million to continue our operations over the next twelve months to support our development and commercialization activities, fund patent application and prosecution, service outstanding liabilities, and support our corporate functions. Our operating plan over the next twelve months is comprised of the following:

We believe that we have made progress with each of the components of this operating plan and have aligned our operations and cost structure with expediting the development and commercialization of our high efficiency solar technologies. We have taken steps to reduce patent expenses, particularly related to optimizing our OPV patent portfolio. We have realigned our research and development operations with several strategic actions, including hiring Company engineers to focus on high efficiency product development and technology transfer from the University of Michigan to a commercial environment with our industry partner while suspending our research agreement with the University of Michigan on August 30, 2017, and temporarily suspending our OPV-related sponsored research activities to reduce near-term expenditures while we seek a development partner for OPV commercialization. We remain focused on increasing our revenue through JDAs and license agreements with industry partners and through government-sponsored research projects and we believe that we are making positive progress with these efforts. 

There can be no assurance that our near term operating plan will be successful or that we will be able to fulfill it as it is largely dependent on raising capital and there can be no assurance that capital can be raised nor that we will be awarded the government contracts that we are currently pursuing in addition to the ARL contract.

In the event that we raise less than the required amount of capital, our focus is planned to be on prioritizing our commercialization effort to capture near-term revenue opportunities and limiting spending on general and administrative expenses and patent costs. In the event that we cannot pay all of our patent costs, we may lose valuable patents and/or be unable to pursue patent protection for intellectual property we paid to develop which could jeopardize our ability to commercialize out technologies.

Results of Operations

For the three and nine months ended September 30, 2017 and 2016

Revenue was $80,807 and $130,787 for the three and nine months ended September 30, 2017, respectively. Revenue was $85,000 and $115,400 for the three and nine months ended September 30, 2016, respectively. The revenue for 2017 primarily relates to engineering services provided under the ARL contract. The revenue for 2016 relates to engineering services provided under our JDA.

We do not believe that inflation or changing prices have had a material effect on our business, financial condition, or results of operations.

Cost of Services

Cost of services was $80,807 and $167,089 for the three and nine months ended September 30, 2017, respectively. Cost of services was $97,829 and $331,710 for the three and nine months ended September 30, 2016, respectively. This decrease was due to decreased services provided under the Joint Development Agreement (“JDA”), while the company focused its engineering efforts on product development for portable power applications, partially offset by costs related to the ARL contract.

Research and Development Expenses

Research and development expenses were $179,021 for the three months ended September 30, 2017, an 40% decrease from $299,500 for the three months ended September 30, 2016. Research and development expenses were $494,692 for the nine months ended September 30, 2017, a 66% decrease from $1,475,847 for the nine months ended September 30, 2016. The decrease is attributable to an overall reduction in expense associated with our sponsored research activity including temporary suspension of our research agreement with the University of Michigan on August 30, 2017 as we increased our focus on product development and commercialization. The, decrease was also due to a recapture of non-cash expenses consisting of warrants issued for services which were previously expensed resulting from fair value calculation. Non-cash expenses recaptured were $28,009 for the three months ended September 30, 2017 and non-cash expenses were $470,013 for the three months ended September 30, 2016. Non-cash expenses recaptured were $172,048 for the nine months ended September 30, 2017 and non-cash expenses were $1,253,962 for the nine months ended September 30, 2016.

Patent Application and Prosecution Fees

Patent application and prosecution fees consist of the fees due for prosecuting and maintaining the patents resulted from the research program sponsored by the Company and were $251,825 for the three months ended September 30, 2017, a 61% decrease from $649,378 for the three months ended September 30, 2016. Patent application and prosecution fees were $920,144 for the nine months ended September 30, 2017, a 22% decrease from $1,187,145 for the nine months ended September 30, 2016. The year-over-year decrease is attributable to the timing of application and prosecution of patents and the result of optimizing our patent portfolio for OPV as discussed earlier.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $506,953 for the three months ended September 30, 2017, a 34% decrease from $772,508 for the three months ended September 30, 2016. Selling, general and administrative expenses were $1,553,535 for the nine months ended September 30, 2017, a 27% decrease from $2,122,330 for the nine months ended September 30, 2016. The decrease is primarily attributable to a reduction in non-cash expenses associated with warrants issued to employees during the year. Non-cash expenses were $158,148 and $279,405 for the three months ended September 30, 2017 and 2016, respectively. Non-cash expenses were $437,965 and $929,107 for the nine months ended September 30, 2017 and 2016, respectively.

Legal Settlement Expense

During the three and nine months ended September 30, 2017, the Company recorded a legal settlement expense of $633,292 relating to the settlement of the John Kuhns litigation discussed in Note 5. The parties settled the matter and preparing the necessary documentation for same, pursuant to which all claims against the Company would be dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and $125,000 in cash. 

Other Income (Expense)

Other income (expense) for the three months ended September 30, 2017, was ($511,444) as compared to ($4,034,437) for the three months ended September 30, 2016. Other income (expense) for the nine months ended September 30, 2017 was $4,105,123 as compared to ($1,226,177) for the nine months ended September 30, 2016. These changes are primarily due to the gain (loss) on change in fair value of derivative liabilities, the timing of entering into interest bearing debt agreements and the timing of the conversion of existing debt and extinguishment of old debt.

Net Income (Loss)

The net income (loss) for the three months ended September 30, 2017 was ($2,082,535), compared to ($5,768,652) for the three months ended September 30, 2016. The net income (loss) for the nine months ended September 30, 2017 was $467,158, compared to ($6,227,809) for the nine months ended September 30, 2016. The change in net income (loss) is impacted by non-cash expenses, including the gain on change in fair value of the derivative liability and a decrease in interest expense offset by changes in research and development, patent application and prosecution fees, and selling, general and administrative expenses, each of which is described above.

Liquidity and Capital Resources

Sources of Liquidity

As of September 30, 2017, we had cash and cash equivalents of $10,071 and a working capital deficit of $11,984,707, as compared to cash and cash equivalents of $2,986 and a working capital deficit of $19,246,667 as of December 31, 2016. The decrease in working capital deficit is attributable to the gain on change in fair value of derivative liabilities.

The Company needs to raise additional capital and is in the process of raising additional funds in order to continue to finance our research and development, service existing liabilities and commercialize photonic energy conversion technologies utilizing organic and GaAs semiconductor-based solar cells. We need to raise approximately $9 million $10 million in additional capital in order to continue our operations as described above and support our corporate functions. We anticipate that the additional funding can result from private sales of our equity securities. However, there can be no assurance that the additional funds will be available to us when needed, or if available, on terms that will be acceptable to us or our shareholders. If we are unable to raise sufficient funds the Company may have to cease its operations.

Analysis of Cash Flows

Net cash used in operating activities increased by $116,849 to $3,716,089 for the nine months ended September 30, 2017, compared to $3,599,240 for the nine months ended September 30, 2016. The cash used in operating activities was attributable primarily to increased net income and the change in fair value of derivative liabilities, partially offset by the loss on extinguishment of debt.

Net cash used in investing activities was $11,060 during the nine months ended September 30, 2017. This consisted of purchases of fixed assets. There were no investing activities during the nine months ended September 30, 2016.

Net cash provided by financing activities was $3,734,234 and $3,634,710 during the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, this includes proceeds from the sale of common shares and warrants of $407,524, borrowings on related party debt of $800,000, borrowings on promissory note debt of $1,370,000, borrowings on convertible debt of $1,538,500, advances received from related party of $138,500, partially offset by repayments on convertible debt of $315,790 and advances repaid to related party of $204,500.  For the nine months ended September 30, 2016 this includes proceeds for sale of common shares and warrants of $663,922, proceeds from the exercise of warrants of $6,288, borrowings from short-term debt of 300,000, borrowings on related party debt of $1,375,000, borrowings on convertible debt of $1,199,500, advances received from related party of $510,000, partially offset by advances repaid to related party of $270,000 and payments on related party debt of $150,000.

Going Concern

The Company has only generated limited revenues to date. The Company has a working capital deficit of $11,984,707 and an accumulated deficit of $208,102,681 as of September 30, 2017. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

There were no changes in our critical accounting policies during the nine months ended September 30, 2017 from those set forth in “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 15, 2017. 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based upon that evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting

There have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the period covered by this report.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

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 is 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 are in the process of settling the matter and preparing to execute the necessary documentation for same, pursuant to which all claims against the Company would be dismissed in exchange for issuing Mr. Kuhns 1,750,000 shares of the Company’s Common Stock and a promissory note for $125,000. There can be no assurance that such settlement will occur, or that it would be approved by the court, and if does not occur, then the Company will plan to continue to vigorously defend against the claims made by Mr. Kuhns as it believes that Mr. Kuhns’ allegations and claims are without any merit.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuance of Promissory Notes and Warrants

On July 17, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $200,000, and a warrant to purchase 800,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10 year term. There is no interest under the promissory note. The promissory note has a clause that automatically converted the note 60 days after issuance on September 15, 2017 into 400,000 shares of Common Stock and a warrant to purchase 400,000 shares of Common Stock.

On July 25, 2017, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which Power Up purchased a convertible promissory note evidencing a loan of $43,000. This note entitles the holder to 12% interest per annum and matures on April 30, 2018. Power Up may convert the note into shares of the Company’s Common Stock beginning on the date which is 180 days from the issuance date of the note, at a price equal to 61% of the average of the lowest two trading prices during the 15 trading day period ending on the last complete trading date prior to the date of conversion, provided, however, that Power Up may not convert the note to the extent that such conversion would result in Power Up’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding Common Stock together with all shares owned by Power Up and its affiliates. If the Company prepays the note within 30 days of its issuance, the Company must pay all of the principal at a cash redemption premium of 110%; if such prepayment is made between the 31st day and the 60th day after the issuance of the note, then such redemption premium is 115%; if such repayment is made from the sixty first 61st to the 90th day after issuance, then such redemption premium is 120%; if such repayment is made from the 91st to the 120th day after issuance, then such redemption premium is 125%; if such repayment is made from the 121st to the 150th day after issuance, then such redemption premium is 130%; and if such prepayment is after the 151st day and before the 181st date of issuance of the note then such redemption premium is 135%. In connection with the Note and Securities Purchase Agreement the Company paid $3,000 for Power Up’s legal fees incurred in connection with the note and Securities Purchase Agreement and therefore only received $40,000 under the note. The Company agreed that so long as it has any obligation under the note, that is shall not sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business without the written consent of Power Up. The Company’s transfer agent reserved 1,040,469 shares of the Company’s Common Stock, in the event that the note is converted. The foregoing descriptions of the Securities Purchase Agreement and note is not complete and is qualified in its entirety by reference to the full text of the form of Securities Purchase Agreement and form note, copies of which were filed as Exhibit 10.10 and 10.11, respectively, to the Company’s quarterly report for the quarter ended June 30, 2017, field with the SEC on August 9, 2017, and are incorporated by reference herein.

On July 28, 2017, the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $20,000 in a non-convertible 8 month unsecured promissory note issued on July 28, 2017, and in consideration of the investor making the loan to the Company as evidenced by the note, the Company issued to the investor, a 5-year warrant to purchase 60,000 shares of the Company’s Common Stock at an exercise price of $0.50 on July 28, 2017. The interest under the note is a cash payment of $1,600.

On July 31, 2017, the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $100,000 in a non-convertible 10 month unsecured promissory note issued on July 31, 2017, and in consideration of the investor making the loan to the Company as evidenced by the note, the Company issued to the investor, a 5-year warrant to purchase 300,000 shares of the Company’s Common Stock at an exercise price of $0.50 on July 31, 2017. The interest under the note is a cash payment of $8,000.

On August 3, 2017, the Company entered into note purchase agreements with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $15,000, and a warrant to purchase 30,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10 year term. There is no interest under the promissory note. The promissory note has a clause that automatically converted the note 60 days after issuance, on October 2, 2017 into 30,000 shares of Common Stock and a warrant to purchase 30,000 shares of Common Stock.

On August 10, 2017 the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $30,000 in a non-convertible 10 month unsecured promissory note issued on August 10, 2017, and in consideration of the investor making the loan to the Company as evidenced by the note, the Company issued to the investor, a 5-year warrant to purchase 90,000 shares of the Company’s Common Stock at an exercise price of $0.50 on August 10, 2017. The interest under the note is a cash payment of $1,600.

On August 10, 2017, the Company took a short term loan for $200,000 from a major shareholder, the proceeds of which were used by the Company to pay off the JMJ note as further described in the Company’s quarterly report for the quarter ended June 30, 2017, filed with the SEC on August 9, 2017.

On August 21, 2017 the Company entered into a Loan Agreement with an investor pursuant to which, the investor invested $20,000 in a non-convertible 8 month unsecured promissory note issued on August 21, 2017, and in consideration of the investor making the loan to the Company as evidenced by the note, the Company issued to the investor, a 5-year warrant to purchase 60,000 shares of the Company’s Common Stock at an exercise price of $0.50 on August 21, 2017. The interest under the note is a cash payment of $1,600.

On August 21, 2017 the Company entered into Note Purchase Agreements with 4 investors pursuant to which, each of the investors invested $50,000 into non-convertible 12 month unsecured promissory notes, which were issued on August 21, 2017, and pursuant to the agreements, the Company issued to each of the four investors, 5-year warrants to purchase 300,000 shares of the Company’s Common Stock at an exercise price of $0.50 on August 21, 2017. The interest under each of the notes is a cash payment of $2,000.

On September 7, 2017, the Company entered into note purchase agreement with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $25,000, and a warrant to purchase 100,000 shares of the company’s Common Stock, with a $0.50 exercise price and 10 year term. There is no interest under the promissory note. The promissory note has a clause that automatically converted the note 60 days after issuance, on November 6, 2017, into 50,000 shares of Common Stock and a warrant to purchase 50,000 shares of Common Stock.

On September 26, 2017, the Company entered into note purchase agreement with an investor, pursuant to which an investor purchased a promissory note from the Company in exchange for $100,000, and a warrant to purchase 500,000 shares of the company’s Common Stock, with a $0.50 exercise price and 5 year term. There is no interest under the promissory note. The promissory note has a clause that automatically converts the note 60 days after issuance, into 200,000 shares of Common Stock and a warrant to purchase 200,000 shares of Common Stock.

The above issuances of the Company’s securities were not registered under the 1933 Act, and the Company relied on an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”), for such issuances.

Issuance of Common Stock and Warrants

In August of 2017, the Company issued 40,498 shares of its Common Stock and warrants to purchase 40,498 shares of its Common Stock in exchange for aggregate proceeds of $20,249.

The above issuances of the Company’s securities were not registered under 1933 Act, and the Company relied on an exemption from registration provided by Rule 506(b) of Regulation D promulgated under the 1933 Act for such issuances.

Issuance of Service Provider Warrants

On July 1, 2017, the Company entered into an Independent Contractor Services Agreement with a service provider pursuant to which it issued to the service provider on July 1, 2017, a warrant to purchase 50,000 shares of the Company’s Common Stock with a 5 year term and an exercise price of $0.50. 25,000 of the warrant shares vested on July 1, 2017 and the remaining 25,000 shares are set to vest on December 31, 2017, so long as the Independent Contractor Services Agreement is not terminated prior to such date.

On August 10, 2017, the Company issued a warrant to purchase 10,000 shares its Common Stock with a $0.50 exercise price and a 5 year term to a service provider in consideration of services provided to the Company.

On September 21, 2017, the Company issued a warrant to purchase 25,000 shares its Common Stock with a $0.50 exercise price and a 10 year term to a service provider in consideration of services provided to the Company.

On September 29, 2017, the Company issued a warrant to purchase 25,000 shares its Common Stock with a $0.50 exercise price and a 10 year term to a service provider in consideration of services provided to the Company.

The above issuances of the Company’s securities were not registered under the 1933 Act, and the Company relied on an exemption from registration pursuant to Section 4(2) of the 1933 Act for such issuances.

Issuances Pursuant to Letter Agreements

On July 17, 2017, the Company entered into a letter agreement with an investor pursuant to which, the Company agreed that the investor’s non-convertible notes totaling $1,100,000 in the aggregate shall each have their maturity date extended and each note amount has been increased to include accrued interest on the notes and the Company agreed to issue the investor a warrant to purchase 1,000,000 shares of the Company’s Common Stock with a 10 year term and an exercise price of $0.50. The new aggregate total of the notes after adding the interest amount as discussed above is $1,155,000 and the new maturity dates of the notes range from August 27, 2017 to December 4, 2017.

August 24, 2017, 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 August 12, 2017, to a new maturity date of February 12, 2018, and in exchange to 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 and a 10 year term.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable. 

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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