NanoFlex Power Corp - Quarter Report: 2019 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, 2019

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 every Interactive Data File required to be submitted 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 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 ☒

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 203,605,099 shares of common stock are issued and outstanding as of November 8, 2019.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONTENTS

NANOFLEX POWER CORPORATION

CONSOLIDATED BALANCE SHEETS

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 CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

See accompanying notes to unaudited consolidated financial statements.

NANOFLEX POWER CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCCOUNTING POLICIES

Background

NanoFlex Power Corporation (‘we” “our”, the “Company”), formerly known as Universal Technology Systems, Corp., was incorporated in the State of Florida on January 28, 2013. On September 24, 2013, the Company completed the acquisition of Global Photonic Energy Corporation, a Pennsylvania corporation (“GPEC”), pursuant to a Share Exchange Agreement (the “Share Exchange Transaction”). Immediately following the closing of the Share Exchange Transaction, the Company owned 100% of the equity interests of GPEC and GPEC became a wholly owned subsidiary of the Company. On November 25, 2013, the Company changed its name from “Universal Technology Systems, Corp.” to “NanoFlex Power Corporation” and its trading symbol was changed to “OPVS” on December 26, 2013.

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

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

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

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

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

Going Concern

The Company has generated limited revenue to date. The Company has a working capital deficit of $12,416,389 and an accumulated deficit of $243,776,350 as of September 30, 2019. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. To date, the Company has funded its initial operations primarily by way of the sale of equity securities, convertible note financing, short term financing from private parties, and advances from related parties.

Basic and Diluted Earnings per share

Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive as shown below:

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets. As of adoption of ASC 842 and as of January 1, 2019, the Company was not party to finance lease arrangements.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Under the available practical expedient, we account for the lease and non-lease components as a single lease component.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, and using the modified retrospective method. The Company also elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. Therefore, there was no impact recorded to beginning retained earnings or the statement of operations. The Company took advantage of the practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases. There was an increase in assets and liabilities of $56,047 due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases. See Note 5 for details.

The Company reviewed other newly issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material effect is expected on the Company’s financial statements upon future adoption.

2. RELATED PARTY TRANSACTIONS

Short Term Convertible Debt – Related Party

During the nine months ended September 30, 2019, the Company entered into various note and share purchase agreements with related parties pursuant to which the related parties purchased convertible notes in the aggregate amount of $1,328,006, along with additional shares of the Company’s common stock to be issued upon maturity.  Total cash of $1,332,000 was received and $36,006 was accrued interest rolled into principal. Additionally, $60,000 of related party advances were modified into a convertible note and were included in the related party convertible debt amount at September 30, 2019. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates on the outstanding notes range from October to December 2019. On the maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with a value worth 50% of the note’s principal amounts. In addition, the shareholder shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date.  The Company may not prepay the notes prior to the maturity dates.  The number of shares to be issued upon maturity calculated on inception was determined to be 14,172,270 based on a 20-day lookback from the inception date, subject to a minimum of $0.10 per share. Total debt discount and share issuance obligation of $1,098,010 was recorded at inception. The debt discount was amortized straight line over the 90-day period. This obligation was determined to be a liability under ASC 480. Total amortization for the period from inception through September 30, 2019 was $535,833. As of September 30, 2019, the fair value of the shares was determined to be $648,201 and a year-to-date loss on change in value of share obligation of $125,517 was recorded.

During the nine months ended September 30, 2019, an aggregate of $5,513,010 of convertible notes matured and the Company issued 27,565,050 shares of its common stock to various noteholders. The Company recalculated the fair value of the share issuance obligation at the maturity date to be $1,921,051 and recorded a loss on change in fair value of $183,694. The Company wrote off the share issuance obligation to common stock and APIC upon issuance of the shares. Convertible notes totaling $4,072,759 and $101,819 of accrued interest were converted into 4,176 shares of Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”). Additionally, notes totaling $1,440,250 that matured in the current period, plus accrued interest totaling $36,006, were rolled into a new note with the same terms.

As of September 30, 2019, and December 31, 2018, the Company had outstanding short-term related party convertible notes payable of $1,328,006 and $3,972,759, respectively. 

Advances – Related Party

During the nine months ended September 30, 2019, the Company received advances from related parties totaling $135,000, and repaid advances totaling $61,903 which includes $4,603 of non-cash repayment through the use of the Company’s credit card. Such advances accrue interest at 6% per year and are payable upon demand. The Company paid interest of $6,805 during the nine months ended September 30, 2019. The Company received advances from related parties totaling $8,000 and repaid advances totaling $172,193 during the nine months ended September 30, 2018.

As of September 30, 2019, and December 31, 2018, the aggregate outstanding balance of advances to related parties was $120,561 and $107,464, respectively.

3. DEBT

Short Term Convertible Debt

As of September 30, 2019, and December 31, 2018, the Company had outstanding short-term convertible notes payable of $4,577,742 and $1,012,038, respectively, net of unamortized discounts of $1,074,444 and $2,158,944, respectively.

New Debt

During the nine months ended September 30, 2019, the Company borrowed an aggregate of $1,193,830, net of original issue discounts and fees of $220,770 under short-term convertible notes payable. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per annum and mature between August 2019 and August 2020. Certain of these notes are convertible at fixed rates ranging from $0.25 - $0.50 per share for the first 180 days. After 180 days or upon default, the conversion rates become variable with prices ranging from 55% - 61% of the lowest sale price of the common stock during the 15 to 25 consecutive trading days prior to the date of conversion.

During the nine months ended September 30, 2019, the Company entered into various note and share purchase agreements with accredited investors pursuant to which the investors purchased convertible notes in the aggregate of $4,291,468, along with additional shares of the Company’s common stock to be issued upon maturity. In addition, existing promissory and convertible notes totaling $1,777,250 were modified into these note and share purchase agreements. Also, $3,022,493 of convertible notes that matured including $73,469 accrued interest were rolled into another bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates on the outstanding notes range from October to December 2019. On the maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with a value worth 50% of the note’s principal amounts. In addition, the investors shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date.  The Company may not prepay the notes prior to the maturity dates.  The number of shares in aggregate was determined to be 30,921,624 based on a 20-day lookback from the inception date subject to a minimum of $0.10 per share. Total debt discount and share issuance obligation of $2,494,420 was recorded at inception. The debt discount was amortized straight line over the 90-day period. This obligation was determined to be a liability under ASC 480. Total amortization for the period from inception through September 30, 2019 was $1,122,835. As of September 30, 2019, the fair value of the shares was determined to be $1,569,939 based on the stock price on September 30, 2019 and a year-to-date loss on change in value of share obligation of $201,704 was recorded. Total cash proceeds received from convertible debt for the nine months ended September 30, 2019 was $2,842,330.

Modifications

During the nine months ended September 30, 2019, the Company entered into various letter agreements with convertible noteholders, pursuant to which a prepayment penalty of $47,500 was added to principal and an aggregate of 7,480,000 shares of the Company’s common stock were issued in exchange for extending the maturity dates of these notes. The Company fair valued all of the common stock on the modification date and concluded that it qualified as debt extinguishment. Therefore, the Company recorded a total loss on extinguishment of debt of $711,500 on these convertible note transactions.

Payoffs and Conversions

During the nine months ended September 30, 2019, and 2018, the Company paid off short-term convertible debt of $1,277,000 and $790,838, respectively.

During the nine months ended September 30, 2019, the Company signed an agreement with an investor to modify the conversion price of an existing note from $0.50 to $0.10 and to convert the $50,000 convertible note. This increased the number of shares received upon conversion from 100,000 to 500,000. These transactions met the requirements of, and are being recorded as, an inducement of the conversion of debt. The difference in the fair value of the securities were measured on the dates the signed agreements were received and were recorded as a loss on induced conversion of debt totaling $24,948. The full principal balance of $50,000 with accrued interest of $4,000 was converted into 540,000 shares of common stock.

During the nine months ended September 30, 2019, an aggregate of $3,966,775 of convertible notes matured and the Company issued 19,833,875 shares of its common stock to various noteholders. The Company recalculated the fair value of the share issuance obligation at the maturity date to be $1,805,495 and recorded a loss on change in fair value of $462,274. The Company wrote off the share issuance obligation into common stock and APIC upon issuance of the shares. Convertible notes totaling $643,316 and accrued interest of $15,033 were converted into 622 shares of Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”). Convertible notes totaling $246,500 and accrued interest of $6,513 were forgiven in exchange for the exercise of warrants totaling $199,684 and the issuance of 61 preferred shares for the remainder. Additionally, an aggregate of $3,123,775 of notes that matured plus accrued interest totaling $73,469, were rolled into new notes with the same terms.

Short Term Non-Convertible Debt

As of September 30, 2019, and December 31, 2018, the Company had outstanding notes payable of $100,000 and $1,687,518, respectively, net of unamortized discounts of $0.

New Debt

During the nine months ended September 30, 2019, the Company borrowed $45,000 under non-convertible notes payable from an investor. This note had 0% interest and no maturity date.

Modifications

During the nine months ended September 30, 2019, the Company entered into various letter agreements with non-convertible noteholders, pursuant to which an aggregate of $57,500 was added to principal and $20,000 in cash was paid in exchange for extending the maturity dates of these notes. The Company recorded this as loss on extinguishment of debt.

During the nine months ended September 30, 2019, existing non-convertible promissory notes totaling $1,595,000 were modified into convertible note and share purchase agreements. See convertible debt section above for details.

Payoffs

During the nine months ended September 30, 2019, the Company paid off short-term non-convertible debt of $95,000.

Advances

During the nine months ended September 30, 2019, the Company received an unsecured, due on demand, non-interest bearing, advance from an investor of $100,000. This advance was repaid in full along with the issuance of 100,000 shares of the Company’s common stock during the nine months ended September 30, 2019. The Company fair valued the stock and recorded the value as long on extinguishment of debt. See equity footnote for details.

Debt Summary

In summary, total debt discount on share issuance obligation issued with debt was $3,592,430 for the nine months ended September 30, 2019. All debt discounts are being amortized over the term of the notes. Total amortization of the debt discounts on all debt was $4,893,201, which included the $123,366 interest expense recorded on preferred stock issued upon bridge note conversion, for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, total loss on extinguishment of debt from promissory, convertible and related party notes was $711,500, which excludes loss due to cash payoff prepayment penalties of $539,524 and gain from $147,144 of accrued liabilities expense true up.

4. EQUITY

Preferred Stock

On February 15, 2019, the Company established a series of redeemable participating convertible preferred stock, par value $0.0001 per share, pursuant to a Certificate of Designation of Series A Redeemable Participating Convertible Preferred Stock dated February 15, 2019.

Pursuant to the Certificate of Designation, the Company authorized 10,000 shares of the Series A Preferred Stock (“preferred stock”), which shall be convertible into shares of common stock of the Company at the option of the holders thereof at any time after the issuance of the preferred stock, at a conversion price equal to $0.10 subject to certain anti-dilution adjustments.

So long as 50% of the preferred stock that has been issued remains outstanding, the holders thereof will have the right to participate ratably in any offering of common stock of the Company or any other securities of the Company that would entitle the holder thereof to acquire common stock of the Company.

The holders of preferred stock shall be entitled to receive dividends when and as declared by the Board of Directors. No dividends (other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital stock ranking junior, as to dividends, to the preferred stock during any fiscal year of the Company until there shall have been paid or declared and set apart during that fiscal year for the holders of the preferred stock a dividend in an amount per share equal to (i) the number of shares of common stock issuable upon conversion of the preferred stock times (ii) the amount per share of the dividend to be paid on the common stock. No dividends were declared for the nine months ended September 30, 2019.

Upon the occurrence of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary (a “Liquidating Event”), each holder of preferred stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment shall be made in respect of the common stock, an amount per share of preferred stock equal to three (3) times the price such holder paid to purchase such preferred stock plus, accrued and unpaid dividends (the “Preferred Liquidation Preference”). Such Preferred Liquidation Preference shall be secured by a first priority security interest on all of the Company’s assets. The following events shall be deemed a Liquidating Event: (i) a sale, lease, exchange, exclusive license which has the same effect as a sale of all or substantially all of the Company’s assets or other disposition of all or substantially all of the Company’s assets in one transaction or a series of related transactions and (ii) a merger, tender offer, reorganization, business combination or other transaction as a result of which (a) holders of the Company’s issued and outstanding voting securities immediately before such transaction own or control less than a majority of the voting securities of the continuing or surviving entity immediately after such transaction or (b) any of the preferred stock is converted into any other property or security. It was determined the preferred stock has a deemed liquidation redemption feature that triggers temporary equity classification under ASC 480.

The holders of shares of preferred stock shall vote together with the holders of common stock as a single class. The holder of each share of preferred stock (i) shall be entitled to the number of votes with respect to such share equal to the number of shares of common Stock into which such share of preferred stock could be converted on the record date for the subject vote or written consent ( or, if there is no such record date, then on the date that such vote is taken or consent is effective) and (ii) shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Company. Fractional votes shall not be permitted, and any fractional voting rights resulting from the above formula (after aggregating all shares of common stock into which shares of preferred stock held by each holder could be converted) shall be reduced to the nearest whole number.

During the nine months ended September 30, 2019, the Company issued an aggregate of 4,859 shares of its preferred stock related to the conversion of $4,716,075 of debt and $123,366 of interest expense. See convertible debt discussion in Note 3 for more details.

Common Stock

During the nine months ended September 30, 2019, the Company issued 47,398,925 shares of the Company’s common stock pursuant to certain debt agreements, related to the maturity of various convertible notes totaling $9,479,785. See the convertible debt section in Note 3 for more details.

During the nine months ended September 30, 2019, the Company issued 480,000 shares of the Company’s common stock to certain note holders in exchange for accrued interest of $48,000. The fair value of the common stock was determined to be $27,216 and resulted in a gain on settlement of accrued interest of $20,784.

During the nine months ended September 30, 2019, the Company entered into a two modification agreements with an investor pursuant to which the investor agreed to extend the maturity date of a convertible note in exchange for the issuance of one million shares of the Company’s common stock on March 1, 2019, and the first day of each month through November 1, 2019.. The Company will fair value the shares on the issuance date and record it as loss on extinguishment of debt. During the nine months ended September 30, 2019, the Company issued a total of 7,000,500 shares of common stock and recorded a loss of $598,000.

During the nine months ended September 30, 2019, the Company repaid a $100,000 advance to an investor and issued 100,000 shares of the Company’s common stock. The Company fair valued the stock and recorded $8,500 as loss on extinguishment of debt.

During the nine months ended September 30, 2019, the Company issued an aggregate of 540,000 shares of its common stock related to the conversion of $50,000 of principal and $4,000 accrued interest expense on convertible notes.

During the nine months ended September 30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares.

During the nine months ended September 30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by the issuance of 47 shares of Preferred Stock.

Stock Options

A summary of stock option activity during the nine months ended September 30, 2019 is as follows:

Stock option awards are expensed on a straight-line basis over the requisite service period. During the nine months ended September 30, 2019, the Company recognized expense of $31,360, associated with stock option awards. At September 30, 2019, future stock compensation expense (net of estimated forfeitures) not yet recognized was $54,830 and will be recognized over a weighted average remaining vesting period of 2.1 years.

The intrinsic value of the Company’s stock options outstanding was $0 as of September 30, 2019.

Warrants

Employee Warrants

On May 18, 2017, the Company entered into an Employment Agreement (the “Employment Agreement”) with Ron DaVella in his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on May 18, 2017 the Company issued Mr. DaVella warrants to purchase 1,800,000 shares of the Company’s common stock at $0.50 per share (the “Warrant Shares”). The fair value of the warrants was determined to be $743,416 using the Black-Scholes option pricing model. 450,000 Warrant Shares vested on May 18, 2017 and 450,000 additional warrant shares vested on May 18, 2018. An additional 450,000 warrant shares will vest on the second anniversary date of the Employment Agreement, and, an additional 450,000 warrant shares will vest on the third anniversary date of the Employment Agreement. On November 28, 2018, the exercise price was reduced to $0.10 pursuant to the Board of Director’s consent. This resulted in a difference in fair value of $117,440 of which $58,720 was expensed on November 28, 2018 for the vested warrants and the remaining $58,720 will be expensed equally over the remaining term. On March 31, 2019, Mr. DaVella terminated his employment with the Company. The remaining two tranches totaling 900,000 warrants were forfeited upon termination of the Employment Agreement on March 31, 2019. Warrant expense of $248,486 was recaptured during the nine months ended September 30, 2019.

On February 5, 2019, the Company issued warrants to purchase an aggregate of 2,500,000 shares of its Common Stock to three of its employees as a bonus in exchange for services to be provided to the Company. The warrants have a 10-year term, a $0.10 exercise price and will vest 25% annually for 4 years beginning on the first anniversary date.  The aggregate fair value of the warrants was determined to be $129,906 using the Black-Scholes option pricing model. Warrant expense of $45,107 was recognized during the nine months ended September 30, 2019.

Total expense recaptured for employee warrants for the nine months ended September 30, 2019 was $203,379.

Non-Employee Service Warrants

On October 23, 2018, the Company issued warrants to purchase 2,000,000 shares of the Company’s common stock pursuant to a letter agreement in exchange for services. The warrants have an exercise price of $0.50 and a 10-year term. 20% of the warrants vested immediately and an additional 20% will vest each anniversary for four years. The fair value of the warrants was determined to be $155,397 using the Black-Scholes option pricing model. Warrant expense of $48,562 was expensed during the nine months ended September 30, 2019, respectively.

On June 1, 2019, the Company issued warrants to purchase 25,000 shares of the Company’s common stock pursuant to a letter agreement in exchange for services. The warrants have an exercise price of $0.50 and a 5-year term. The warrants vest equally over six months beginning June 1, 2019. The fair value of the warrants was determined to be $1,924 using the Black-Scholes option pricing model. Warrant expense of $1,282 was expensed during the nine months ended September 30, 2019.

Total expense for non-employee warrants for the nine months ended September 30, 2019 was $49,844.

Warrant Exercises and Reduction of Exercise Prices

During the nine months ended September 30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by the issuance of 47 shares of Preferred Stock.

During the nine months ended September 30, 2019, an aggregate of 814,848 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification but not exercised. The change in fair value of these warrants from the modification is immaterial.

During the nine months ended September 30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares.

The following summarizes the warrant activity for the nine months ended September 30, 2019:

These warrants were valued based on the grant date fair value of the instruments using a Black-Scholes option pricing model with the following assumptions:

5. COMMITMENTS AND CONTINGENCIES

Sponsored Research and License Agreements

Research and development of the Company’s high efficiency solar thin films and OPV technologies are conducted in collaboration with University partners through sponsored research agreements.

The Company established direct research and development agreements with Michigan on June 16, 2016, which were amended on July 21, 2016, to provide engineering support and facility access associated with technology transfer and commercialization of its high efficiency thin film solar technologies. Such research agreements were terminated on August 31, 2017 and replaced with a time and materials contract for access to Michigan’s Labs by the Company’s technicians.

A separate research agreement dated December 20, 2013, among the Company and USC (the “2013 Research Agreement”), governs research conducted by USC and Michigan on high efficiency thin film and OPV technologies. Michigan is a subcontractor to USC on this research agreement. The 2013 Research Agreement expires on January 31, 2021.

On August 8, 2016, the Company amended the 2013 Research Agreement with USC, suspending the agreement effective as of August 15, 2016. The Company requested this amendment to suspend its OPV-related sponsored research activities to reduce near-term expenditures to allow the Company to bring its account with USC current through a payment plan. The suspension is to continue until the date that is 30 days after expenses incurred by USC have been reimbursed by the Company. Under this amendment, the Company repaid expenses to USC in quarterly installments of $206,000 from November 2016 through February 2018.

Under the Company’s currently effective License Agreement, as amended on August 22, 2016, among the Company and USC, Michigan, and Princeton (the “Fourth Amendment to License Agreement”), wherein the Company has obtained the exclusive worldwide license and right to sublicense any and all intellectual property resulting from the Company’s sponsored research agreements, we have agreed to pay for all reasonable and necessary out of pocket expenses incurred in the preparation, filing, maintenance, renewal and continuation of patent applications designated by the Company. In addition, the Company is required to pay to USC 3% of net sales of licensed products or licensed processes used, leased or sold by the Company, 3% of revenues received by the Company from the sublicensing of patent rights and 23% of revenues (net of costs and expenses, including legal fees) received by the Company from final judgments in infringement actions respecting the patent rights licensed under the agreement. A previous amendment to the License Agreement (the Third Amendment to License Agreement dated December 20, 2013) amended the minimum royalty section to eliminate the accrual of any such royalties until 2014. Furthermore, the amounts of the non-refundable minimum royalties, which would be applicable starting in 2014, were adjusted to be lower than the amounts in the previous License Agreement. Minimum royalties are $100,000 per year for the remainder of the contract. 

There is currently no ongoing research activity at Princeton, USC and Michigan related to the Company, although the Company maintains licensing rights to technology previously developed there.

On May 20, 2019 the Company and its development partner, True Metal Solutions (TMS) were awarded an SBIR (Small Business Innovative Research) Phase 1 grant for $200K. The overall scope of the program is to design, develop, manufacture, and market the first U.S building integrated organic solar modules for building facades. Our company brings with it 20+ years of critical intellectual property development on thin film organic solar cells and combined with TMS’ leadership in designing and manufacturing building facade technology, we together will drive towards the first U.S. building integrated organic solar modules. With the anticipated award of Phase II ~ ($1.0M) in 2020 our team will complete the overall system design and scale this technology to assemble demonstration façade systems on buildings in the Phoenix area where our subcontractor already has the architectural, building owner, and general contractor relationships.

Leases

The Company has two operating leases, one for office space in Scottsdale, Arizona and one for laboratory and office space in Ann Arbor, Michigan. The office lease in Scottsdale, Arizona is renewed on a monthly basis and was therefore scoped out of ASC 842 while the laboratory and office space lease in Ann Arbor, Michigan has a remaining term of 1.3 years. When this lease expires, it becomes renewable on a monthly basis. In June 2019, an addendum was added to this lease increasing the monthly payments to $2,875 in exchange for more office space. Lease expense was $22,374 for the nine months ended September 30, 2019.

Supplemental cash flow information related to leases for the nine months ended September 30, 2019 was as follows:

Supplemental cash flow information related to leases for the nine months ending September 30, 2019 was as follows:

Supplemental balance sheet information related to leases as of September 30, 2019 was as follows:

Future minimum annual lease payments of operating leases as of September 30, 2019:

Concentrations

All of the Company’s revenue and accounts receivable were earned from one customer.

6. SUBSEQUENT EVENTS

During October and November 2019, the Company entered into various note and share purchase agreements with related parties pursuant to which the parties purchased convertible notes in the aggregate amount of $325,00, along with additional shares of the Company’s common stock to be issued on the maturity date. Also, $373,356 of convertible notes that matured including $9,106 accrued interest were rolled into another bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates range from January to February 2020. On the maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with a value 50% of the note’s principal amounts. In addition, the investors shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date.  The Company may not prepay the notes prior to the maturity dates. 

During October and November 2019, the Company entered into various note and share purchase agreements with accredited investors pursuant to which the investors purchased convertible notes in the aggregate amount of $850,400, along with additional shares of the Company’s common stock to be issued on the maturity date. Also, $1,258,311 of convertible notes that matured including $26,314 accrued interest were rolled into another bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates range from January to February 2020. On the maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with a value 50% of the note’s principal amounts. In addition, the investors shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date.  The Company may not prepay the notes prior to the maturity dates. 

In October and November 2019, an aggregate of $2,143,598 of notes matured and the Company issued 10,717,991 shares of its common stock to various noteholders. Certain noteholders also elected to convert the notes and accrued interest into Series A Redeemable Participating Convertible Preferred Stock (“Preferred Stock”). An aggregate of 80 shares of Preferred Stock were issued upon conversion as of the date of this report.

During October and November 2019, the Company borrowed an aggregate of $807,600 under short-term convertible notes payable. The outstanding convertible notes of the Company are unsecured, bear interest of 12% per annum and mature between July and November 2020. Certain of these notes are convertible at fixed rates ranging from $0.25 - $0.50 per share for the first 180 days. After 180 days or upon default, the conversion rates become variable with prices ranging from 58% - 61% of the lowest sale price of the common stock during the 15 to 20 consecutive trading days prior to the date of conversion.

During October and November 2019, the Company paid off short-term convertible debt of $823,300.

The Company issued one million shares of the Company’s common stock on October 1, 2019 and an additional one million shares on November 1, 2019 pursuant to a letter agreement with an investor in exchange for extending the maturity date of the note.

During November 30, 2019, an aggregate of 2,759,318 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a board consent.

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

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, 2018 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 for the fiscal year ended December 31, 2018, filed on April 16, 2019.

SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Report constitute forward-looking statements. These forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected revenue, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements contained in this report on Form 10-Q and the Company’s Form 10-K filed on April 16, 2019. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

The “Company”, “we,” “us,” and “our,” refer to (i) NanoFlex Power Corporation and (ii) Global Photonic Energy Corporation. 

Background

NanoFlex Power Corporation is engaged in the research, development, and commercialization of advanced photovoltaic technologies that enable thin film solar products with what the Company believes can be industry-leading efficiencies, light weight, flexibility, and low total system cost. The Company’s sponsored research programs at the University of Southern California (“USC”), the University of Michigan (“Michigan”), and Princeton University (“Princeton”) have resulted in an extensive portfolio of issued and pending patents worldwide covering flexible, thin-film photovoltaic technologies. Pursuant to the Company’s license agreement with our university research partners, they have obtained the exclusive worldwide license and right to sublicense any and all intellectual property which resulted from sponsored research programs with the universities. While each patent is issued in the name of the respective university that developed the subject technology, the Company has exclusive commercial license rights to all of the patents and their attendant technologies, and the patents are referred to herein as being the Company’s patents.

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) mobile and off-grid solar power generation, (b) BAPV, (c) BIPV, (d) space vehicles and UAVs, (e) semi-transparent solar power generating glazing or windows, (f) ultra-thin solar films for automobiles or other consumer applications and sensors and other devices for the Internet of Things (“IoT”). The Company believes these technologies have been demonstrated in a laboratory environment with our research partners.

The Company currently holds 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 now shifting to focus on developing, manufacturing and marketing complete NanoFlex products which have a competitive advantage due to our intellectual property. NanoFlex has developed energy harvesting internet of things (IoT) complete sensor systems that utilize both our Organic Photovoltaic (OPV) and, in the future, our III-V semiconductor non-destructive lift off (ND ELO) intellectual property. These sensor systems are totally wireless with higher energy budgets for their size than any other cloud connecting wireless sensors. This high energy harvesting capability (indoor and outdoor) will enable completely wireless, “place and forget” sensor systems for many vertical IoT sensor markets inclusive of agriculture, ecology, building automation, medical, energy infrastructure, military, wearables, and other applications. Nanoflex will launch its first line of energy harvesting sensors in 2020. NanoFlex will manufacture and market these IoT sensors direct to customers and with partners. We expect to work with well-positioned commercial partners who can support manufacturing and marketing capabilities to enable rapid commercial growth.

In addition to the wireless IoT sensors NanoFlex has received support from the DOE to develop building integrated OPV. On May 20, 2019 the Company and its development partner, True Metal Solutions (TMS) were awarded an SBIR (Small Business Innovative Research) Phase 1 grant for $200K. The overall scope of the program is to design, develop, manufacture, and market the first U.S building integrated organic solar modules for building facades. Our company brings with it 20+ years of critical intellectual property development on thin film organic solar cells and combined with TMS’ leadership in designing and manufacturing building facade technology, we together will drive towards the first U.S. building integrated organic solar modules. With the anticipated award of Phase II ~ ($1.0M) in 2020 our team will complete the overall system design and scale this technology to assemble demonstration façade systems on buildings in the Phoenix area where our subcontractor already has the architectural, building owner, and general contractor relationships.

To support this work, our OPV and III-V solar engineering team operates out of our development and prototyping center in Ann Arbor, Michigan. We are enhancing and expanding this development facility with the support of the recently won phase I DOE funding. OPV modules to support both our sensor systems and building integrated designs will be manufactured in NanoFlex manufacturing facility planned for construction in the 2020- 2021 timeframe in Arizona. NanoFlex is completing the IoT electronics hardware and software designs and expects to outsource the system assembly and packaging to contract assemblers. NanoFlex will sell and market its IoT sensors under a new brand name and through an enhanced website.

We are also pursuing sponsored development funding to generate revenue in the near-term as well as subsidize our product development with non-dilutive financing. 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 $6.3 million contract from the Army Research Laboratory’s Army Research Office to develop high power, flexible, and lightweight solar panels 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 $6.3 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 overhead. On February 1, 2019 we were informed by SolAero that the Army had suspended funding to support other priorities but kept the contract in place with the intention of refunding and proceeding ahead with the program. The Company was reimbursed for all costs incurred through that date.

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.

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. On February 1, 2019 this agreement was terminated along with the ARL contract.

There can be no assurance that our overall term operating plan will be successful or that the capital needed to fulfill it can be raised.

Results of Operations

For the three and nine months ended September 30, 2019 and 2018

Revenue was $84,238 and $177,518 for the three and nine months ended September 30, 2019, respectively. Revenue was $364,768 and $736,676 for the three and nine months ended September 30, 2018, respectively. Revenue through January 31, 2019 relates to engineering services provided under the ARL contract. On February 1, 2019 we were informed by SolAero that Mantech had terminated the contract as provided for in the agreement. Revenue for the third quarter of 2019 relates to the engineering services provided under the SBIR contract.

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 were $84,238 and $177,518 for the three and nine months ended September 30, 2019, respectively. Cost of services were $364,768 and $736,676 for the three and nine months ended September 30, 2018, respectively. The decrease was due to less spending on the ARL contract during the 2019 period due to the termination of the contract. 

Research and Development Expenses

Research and development expenses were $449,269 for the three months ended September 30, 2019, a 109% increase from $215,316 for the three months ended September 30, 2018. Research and development expenses were $1,120,041 for the nine months ended September 30, 2019, an 85% increase from $606,838 for the nine months ended September 30, 2018. The increase is attributable to increased costs in building prototypes and developing applications for our commercialization efforts.

Patent Application and Prosecution Fees

Patent application and prosecution fees consist of the fees due for prosecuting and maintaining the patents resulting from the research program sponsored by the Company and were $21,032 for the three months ended September 30, 2019, a 95% decrease from $389,133 for the three months ended September 30, 2018. Patent application and prosecution fees were $422,048 for the nine months ended September 30, 2019, a 66% decrease from $1,242,749 for the nine months ended September 30, 2018. The decrease is attributable to the timing of application and prosecution of patents and the result of decreased patent activity by our engineering team in commercializing and developing our technologies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $390,671 for the three months ended September 30, 2019, a 21% increase from $323,465 for the three months ended September 30, 2018. The increase is due to an increase in consulting fees during the months ended September 30, 2019. Selling, general and administrative expenses were $831,644 for the nine months ended September 30, 2019, a 36% decrease from $1,301,917 for the nine months ended September 30, 2018. The decrease is primarily attributable to a reduction in non-cash expenses associated with warrants issued to employees during the year. For the nine months ended September 30, 2019, non-cash expenses recaptured were $198,346. For the nine months ended September 30, 2018, non-cash expenses were $232,480.

Other Income (Expense)

Other income (expense) for the three months ended September 30, 2019, was ($2,699,697) as compared to ($7,841,170) for the three months ended September 30, 2018. Other income (expense) for the nine months ended September 30, 2019, was ($7,280,726) as compared to ($12,862,582) for the nine months ended September 30, 2018. These changes are primarily due to a decrease of loss on extinguishment of debt, offset by an increase in interest expense.

Net Loss

The net loss for the three months ended September 30, 2019 was $3,560,669, compared to $8,769,084 for the three months ended September 30, 2018. The net loss for the nine months ended September 30, 2019 was $9,654,459, compared to $16,014,086 for the nine months ended September 30, 2018. The decrease in net loss is primarily related to non-cash expenses, including interest expense and loss on extinguishment of debt, and changes in research and development, each of which is described above.

Liquidity and Capital Resources

Sources of Liquidity

As of September 30, 2019, we had cash and cash equivalents of $50,381 and a working capital deficit of $12,416,389, as compared to cash and cash equivalents of $27,213 and a working capital deficit of $11,991,857 as of December 31, 2018. The increase in working capital deficit is attributable to an increase in debt during the nine months ended September 30, 2019. 

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. In the next 12 months we need to raise approximately $13 million in additional capital in order to continue our operations as described above, support our corporate functions and repay some of our liabilities. 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 $230,554 to $2,787,037 for the nine months ended September 30, 2019, compared to $2,556,483 for the nine months ended September 30, 2018. The cash used in operating activities was primarily attributable to the change in net loss, the loss on extinguishment of debt and the amortization of debt discount.

Net cash used in investing activities was $114,825 and $68,851 during the nine months ended September 30, 2019 and 2018, respectively. This consisted of purchases of fixed assets.

Net cash provided by financing activities was $2,925,030 and $2,576,664 during the nine months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, this includes borrowings on related party debt of $1,332,000, borrowings on promissory note debt of $45,000, borrowings on short term convertible debt of $2,842,330, advances received of $100,000, advances received from related party of $135,000, offset by repayments of promissory note debt of $95,000, repayments on convertible debt of $1,277,000 and advances repaid to related party of $57,300.  For the nine months ended September 30, 2018, this includes proceeds from the sale of common shares and warrants of $723,781, proceeds from the exercise of warrants of $938,294, subscription proceeds received for common stock and warrants to be issued of $17,500, borrowings on related party debt of $300,000, borrowings on promissory note debt of $275,000, borrowing on convertible debt of $1,572,120, advances received from related party of $8,000, offset by repayments on promissory note debt of $295,000, repayments on convertible debt of $790,838 and advances repaid to related party of $172,193. 

Going Concern

The Company has only generated limited revenues to date. The Company has a working capital deficit of $12,416,389 and an accumulated deficit of $243,776,350 as of September 30, 2019. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. 

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, 2019 from those set forth in “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 16, 2019. 

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, 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

Ron DaVella, the Company’s CFO resigned on March 31, 2019. An interim CFO was hired until a replacement is been found. Until a replacement is found, his resignation may impact segregation of duties. Dean Ledger, the Company’s CEO will be signing all certifications as both the Principal Executive and Financial Officer.

There have been no other 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.

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

Private Placement of the Company’s Notes

During the nine months ended September 30, 2019, the Company entered into various note and share purchase agreements with related parties pursuant to which the related parties purchased convertible notes in the aggregate amount of $1,328,006, along with additional shares of the Company’s common stock to be issued upon maturity.  Total cash of $1,332,000 was received and $36,006 was accrued interest rolled into principal. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates on the outstanding notes range from October to December 2019. On the maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with a value worth 50% of the note’s principal amounts. In addition, the shareholder shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date.  The Company may not prepay the notes prior to the maturity dates. 

During the nine months ended September 30, 2019, the Company borrowed an aggregate of $1,284,093, net of original issue discounts and fees of $130,507 under short-term convertible notes payable. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per annum and mature between August 2019 and August 2020. Certain of these notes are convertible at fixed rates ranging from $0.25 - $0.50 per share for the first 180 days. After 180 days or upon default, the conversion rates become variable with prices ranging from 55% - 61% of the lowest sale price of the common stock during the 15 to 25 consecutive trading days prior to the date of conversion.

During the nine months ended September 30, 2019, the Company entered into various note and share purchase agreements with accredited investors pursuant to which the investors purchased convertible notes in the aggregate of $4,291,468, along with additional shares of the Company’s common stock to be issued upon maturity. In addition, existing promissory and convertible notes totaling $1,777,250 were modified into these note and share purchase agreements. Also, $3,022,493 of convertible notes that matured including $78,093 accrued interest were rolled into another bridge note rather than converted. The notes expire on the 90-day anniversary of the issuance date and accrue interest at a rate of 10% per annum. The maturity dates on the outstanding notes range from October to December 2019. On the maturity date, whether or not the notes are converted, the investors shall receive shares of the Company’s common stock with a value worth 50% of the note’s principal amounts. In addition, the investors shall have the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into securities being sold by the Company on or after the maturity date.  The Company may not prepay the notes prior to the maturity dates

The 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 Promissory Notes

During the nine months ended September 30, 2019, the Company borrowed $45,000 under non-convertible notes payable from an investor. This note had 0% interest and no maturity date.

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

During the nine months ended September 30, 2019, the Company issued 47,398,925 shares of the Company’s common stock pursuant to certain debt agreements, related to the maturity of various convertible notes totaling $9,479,785.

During the nine months ended September 30, 2019, the Company issued 480,000 shares of the Company’s common stock to certain note holders in exchange for accrued interest of $48,000. The fair value of the common stock was determined to be $27,216 and resulted in a gain on settlement of accrued interest of $20,784.

During the nine months ended September 30, 2019, the Company entered into a two modification agreements with an investor pursuant to which the investor agreed to extend the maturity date of a convertible note in exchange for the issuance of one million shares of the Company’s common stock on March 1, 2019, and the first day of each month through November 1, 2019.. The Company will fair value the shares on the issuance date and record it as loss on extinguishment of debt. During the nine months ended September 30, 2019, the Company issued a total of 7,000,500 shares of common stock and recorded a loss of $598,000.

During the nine months ended September 30, 2019, the Company repaid a $100,000 advance to an investor and issued 100,000 shares of the Company’s common stock. The Company fair valued the stock and recorded $8,500 as loss on extinguishment of debt.

During the nine months ended September 30, 2019, the Company issued an aggregate of 540,000 shares of its common stock related to the conversion of $50,000 of principal and $4,000 accrued interest expense on convertible notes.

During the nine months ended September 30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares.

During the nine months ended September 30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by the issuance of 47 shares of Preferred Stock.

On February 5, 2019, the Company issued warrants to purchase an aggregate of 2,500,000 shares of its Common Stock to three of its employees as a bonus in exchange for services to be provided to the Company. The warrants have a 10-year term, a $0.10 exercise price and will vest 25% annually for 4 years beginning on the first anniversary date.  The aggregate fair value of the warrants was determined to be $129,906 using the Black-Scholes option pricing model. Warrant expense of $45,106 was recognized during the nine months ended September 30, 2019.

On June 1, 2019, the Company issued warrants to purchase 25,000 shares of the Company’s common stock pursuant to a letter agreement in exchange for services. The warrants have an exercise price of $0.50 and a 5-year term. The warrants vest equally over six months beginning June 1, 2019. The fair value of the warrants was determined to be $1,924 using the Black-Scholes option pricing model. Warrant expense of $1,282 was expensed during the nine months ended September 30, 2019.

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 Preferred Stock

During the nine months ended September 30, 2019, the Company issued an aggregate of 4,859 shares of its preferred stock related to the conversion of $4,716,075 of debt and $123,366 of interest expense.

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.

Except as disclosed above, all unregistered sales of the Company’s securities have been disclosed on the Company’s current reports on Form 8-K and the Company’s quarterly reports on Form 10-Q.

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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