Attached files

file filename
EX-31.1 - CERTIFICATION - NanoFlex Power Corpf10q0615ex31i_nanoflexpower.htm
EX-32.1 - CERTIFICATION - NanoFlex Power Corpf10q0615ex32i_nanoflexpower.htm
EX-31.2 - CERTIFICATION - NanoFlex Power Corpf10q0615ex31ii_nanoflexpower.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2015

 

or

 

o   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)

 

Florida   46-1904002

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
17207 N Perimeter Dr., Suite 210    
Scottsdale, AZ   85255
(Address of principal executive offices)   (Zip Code)

 

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if smaller reporting company)

 

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: 49,175,215 shares of common stock are issued and outstanding as of August 7, 2015.

 

 

 

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION  
     
ITEM 1. FINANCIAL STATEMENTS 3
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
     
ITEM 4. CONTROLS AND PROCEDURES 18
     
PART II. OTHER INFORMATION  
     
ITEM 1 LEGAL PROCEEDINGS 20
     
ITEM 1A. RISK FACTORS 21
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 21
     
ITEM 6. EXHIBITS 21
     
SIGNATURES 22

 

2
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CONTENTS

 

FINANCIAL STATEMENTS   Page
     
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)   4
     
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)   5
     
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)   6
     
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   7

 

3
 

 

NANOFLEX POWER CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,
2015
   December 31,
2014
 
         
ASSETS        
         
CURRENT ASSETS:
Cash  $6,455   $168 
Prepaid expenses and other current assets   10,351    5,519 
Total current assets   16,806    5,687 
           
Property and equipment, net   11,045    13,678 
           
TOTAL ASSETS  $27,851   $19,365 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable  $2,984,351   $1,857,911 
Accounts payable- related party   51,949    48,064 
Accrued expenses   1,605,510    1,958,403 
Warrant liability   3,596,052    847,791 
Short-term debt   100,000    100,000 
Short-term debt- related party   150,000    150,000 
Convertible debt, net of unamortized discounts   1,230,211    673,389 
Advances - related party   206,000    428,150 
Total current liabilities   9,924,073    6,063,708 
TOTAL LIABILITIES   9,924,073    6,063,708 
           
STOCKHOLDERS' DEFICIT:          
Common stock, 250,000,000 authorized, $0.0001 par value, 49,175,215 and 44,306,278 issued and outstanding as of June 30, 2015 and December 31, 2014, respectively   4,918    4,431 
Additional paid in capital   

174,433,436

    172,139,185 
Accumulated deficit   (184,334,576)   (178,187,959)
Total stockholders' deficit   (9,896,222)   (6,044,343)
           
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $27,851   $19,365 

 

See accompanying notes to consolidated financial statements.

 

4
 

  

NANOFLEX POWER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
                 
OPERATING EXPENSES:        
Research and development  $275,040   $155,151   $500,749   $705,151 
Patent application and prosecution fees   616,024    327,966    1,169,014    742,402 
Selling, general and administrative expenses   729,316    595,746    1,347,933    1,327,687 
Total operating expenses   1,620,380    1,078,863    3,017,696    2,775,240 
                     
LOSS FROM OPERATIONS   (1,620,380)   (1,078,863)   (3,017,696)   (2,775,240)
                     
OTHER INCOME (EXPENSES):                    
Gain (loss) on change in fair value of derivative   14,561    15,118    (2,440,922)   26,965 
Loss on extinguishment of debt   (150,000)   -    (150,000)   - 
Interest expense   (443,377)   -    (537,999)   - 
Total other expense   (578,816)   15,118    (3,128,921)   26,965 
                     
LOSS BEFORE INCOME TAX BENEFIT   (2,199,196)   (1,063,745)   (6,146,617)   (2,748,275)
                     
INCOME TAX BENEFIT   -    -    -    - 
                     
NET LOSS  $(2,199,196)  $(1,063,745)  $(6,146,617)  $(2,748,275)
                     
NET LOSS per share (basic and diluted)  $(0.05)  $(0.02)  $(0.14)  $(0.06)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,                    
BASIC and DILUTED   

45,976,649

    43,324,966    45,372,975    43,174,938 

 

 See accompanying notes to consolidated financial statements.

 

5
 

 

NANOFLEX POWER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

   Six Months Ended June 30,  
   2015   2014 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss  $(6,146,617)  $(2,748,275)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   2,633    1,266 
Amortization of debt discounts   251,250    - 
(Gain) loss on change in fair value of derivative liabilities   2,440,922    (26,965)
Loss on extinguishment of debt   150,000    - 
Warrants issued for services   230,971    - 
Interest expense of warrants related to conversion of debt   246,460    - 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (4,832)   11,229 
Accounts payable   1,126,440    1,152,854 
Accounts payable - related party   3,885    - 
Accrued expenses   (302,893)   314,370 
Net cash used in operating activities   (2,001,781)   (1,295,521)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of fixed assets   -    (794)
Net cash used in investing activities   -    (794)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from exercise of warrants   914,218    - 
Proceeds from sale of common shares and warrants   86,000    760,001 
Advances received from related party   138,350    251,500 
Advances repaid to related party   (360,500)   (34,500)
Borrowings on related party debt   -    150,000 
Borrowings on convertible debt   1,230,000    - 
Net cash provided by financing activities   2,008,068    1,127,001 
           
NET INCREASE (DECREASE) IN CASH   6,287    (169,314)
Cash, beginning of the period   168    197,004 
           
Cash, end of the period  $6,455   $27,690 
           
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Warrants and common shares issued for debt  $700,000   $- 
Discount on beneficial conversion feature and warrants   424,428    - 
Reclassification of warrants as derivative liabilities   76,368    271,991 
Accrued interest converted to debt   50,000    - 

Issuance of common stock related to PIPE II anti-dilution provision

   155    - 

 

See accompanying notes to consolidated financial statements.

  

6
 

 

NANOFLEX POWER CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BACKGROUND, BASIS OF PRESENTATION, AND GOING CONCERN:

 

Background

 

NanoFlex Power Corporation, 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 configuration solar technologies which enable unique thin-film solar cell implementations with industry-leading efficiencies, light weight, flexibility, and low total system cost.

 

These technologies are targeted at certain broad applications, including: (a) mobile and field 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 or paints for automobiles or other consumer applications. Laboratory feasibility prototypes have been developed that successfully demonstrate key building block principles for these applications and the Company is working with industry partners to commercialize its technologies.

 

Basis of Presentation

 

The accompanying unaudited interim 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 condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2014 included in our Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

 

The preparation of the condensed 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.

 

Revision of Previously-Issued Financial Statements

 

During the three months ended June 30, 2015, the Company identified errors in its financial statements for the last quarter of the fiscal year ended December 31, 2013, all quarters of fiscal year ended December 31, 2014, and the first quarter of fiscal year ended December 31, 2015 as included in the Company’s 2013 annual report on Form 10-K, the Company’s 2014 interim reports on Form 10-Q, and the Company’s 2014 annual report on Form 10-K, respectively, related to an unrecorded derivative liability and the related gain or loss on the change in fair value of the derivative liability. The derivative liability is associated with certain warrants containing anti-dilution features that cause the instruments to no longer be indexed to the Company’s own stock. The Company has made adjustments in each period related to this.

The Company assessed the effect of the above errors in the aggregate on prior periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not material to any of the Company’s prior interim and annual financial statements.

The Company determined that the correction of the cumulative amounts of the errors would be material to the three and six months ended June 30, 2015 financial statements, and as such, the Company revised its previously-issued financial statements for each period in 2013, 2014 and 2015.

All financial information contained in the accompanying notes to these financial statements has been revised to reflect the correction of these errors.

 

7
 

 

The following table presents the effect of the aforementioned revision on the Company’s consolidated balance sheet as of December 31, 2014:

 

   As of December 31, 2014 
   As Reported   Revision   As Revised 
Warrant liability  $-   $847,791   $847,791 
Total current liabilities   5,215,917    847,791    6,063,708 
Total liabilities   5,215,917    847,791    6,063,708 
Accumulated deficit   (178,226,456)   38,497    (178,187,959)
Additional paid in capital   173,025,473    (886,288)   172,139,185 
Total stockholders' deficit   (5,196,552)   (847,791)   (6,044,343)
Total liabilities and stockholders' deficit   19,365    -    19,365 

 

The following tables present the effect of the aforementioned revisions on the Company’s consolidated statements of operations for the three and six months ended June 30, 2014:

 

   Three Months Ended June 30, 2014 
   As Reported   Revision   As Revised 
Gain (loss) on change in fair value of derivative  $-   $15,118   $15,118 
Total other expense   -    15,118    15,118 
Loss before income tax benefit   (1,078,863)   15,118    (1,063,745)
Net loss   (1,078,863)   15,118    (1,063,745)
Net loss per share (basic and diluted)   (0.02)   (0.00)   (0.02)

 

   Six Months Ended June 30, 2014 
   As Reported   Revision   As Revised 
Gain (loss) on change in fair value of derivative  $-   $26,965   $26,965 
Total other expense   -    26,965    26,965 
Loss before income tax benefit   (2,775,240)   26,965    (2,748,275)
Net loss   (2,775,240)   26,965    (2,748,275)
Net loss per share (basic and diluted)   (0.06)   (0.00)   (0.06)

 

The following tables present the effect of the aforementioned revisions on the Company’s consolidated statements of cash flows for the six months ended June 30, 2014.

 

   Six Months Ended June 30, 2014 
   As Reported   Revision   As Revised 
Cash flows from operating activities:               
Net loss  $(2,775,240)   26,965    (2,748,275)
Adjustments to reconcile net loss to net cash used in operating activities:               
(Gain) loss on change in fair value of derivative   -    (26,965)   (26,965)
NON-CASH INVESTING AND FINANCING ACTIVITIES               
Reclassification of warrants as derivative liabilities   -    271,991    271,991 

 

The Company also made other adjustments, consisting of accrued expenses that should have been recorded in the first quarter of 2015. Total expenses related to this were approximately $31,000.

 

Going Concern

 

The Company has not generated revenues to date.  The Company has a working capital deficit of $9,907,267 and an accumulated deficit of $184,334,576 as of June 30, 2015.  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.

 

8
 

 

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 June 30, 2015 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 June 30, 2015 and December 31, 2014:

 

   Fair Value Measurements as of
June 30, 2015
 
   Level 1   Level 2   Level 3 
Assets            
None  $-   $-   $- 
Total assets   -    -    - 
Liabilities               
Derivative liability   -    -    3,596,052 
Total liabilities   -    -    3,596,052 

 

   Fair Value Measurements as of
December 31, 2014
 
   Level 1   Level 2   Level 3 
Assets            
None  $-   $-   $- 
Total assets   -    -    - 
Liabilities               
Derivative liability   -    -    847,791 
Total liabilities   -    -    847,791 

  

9
 

 

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:

 

   Significant Unobservable 
   Inputs 
   (Level 3) 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
Beginning balance   3,379,642    408,668    847,791    197,674 
Total (gains) losses   (14,561)   (15,118)   2,440,922    (26,965)
Settlements   -    -    -    - 
Additions   230,971    49,150    307,339    271,991 
Ending balance   3,596,052    442,700    3,596,052    442,700 
Change in unrealized gains (losses) included in earnings relating to derivatives still held as of June 30, 2015 and 2014   (14,561)   (15,118)   2,440,922    (26,965)

 

2. DEBT

 

Notes Payable

 

The Company has a note payable due to Mr. Seligsohn, its former Chief Executive Officer and President. The note is due on demand and bears an interest rate at the minimum applicable rate for loans of similar duration, which was 0.5% as of June 30, 2015. As of June 30, 2015, the outstanding balance under this note is $100,000.

  

Notes Payable - Related Party 

 

On February 26, 2014, the Company borrowed $150,000 under a short term note agreement with a related party. Under the terms of this agreement, the note was to be repaid within 6 months of funding. In November 2014, the note agreement was amended to extend the due date to February 26, 2015, and in April of 2015, the note agreement was amended to extend the maturity date to February 26, 2016 and set a 4% simple interest rate on the note. As of June 30, 2015, $1,479 was recorded as accrued interest relating to this note.

 

10
 

 

Advances - Related Party

 

During the three and six months ended June 30, 2015, the Company received advances totaling $86,500 and $138,350, respectively, and repaid advances totaling $95,500 and $360,500, respectively. Such advances do not accrue interest and are payable upon demand. Total due at June 30, 2015 is $206,000.

 

Convertible Notes Payable

 

In July 2014, the Company borrowed $500,000 under two short term note agreements of $250,000 each. Under the terms of each agreement, the principal balance of $250,000 and interest of $16,500 is due to be repaid within 4 months of the date of the note. These agreements were amended on February 23, 2015 to extend the due date to July 21, 2015 and increase the interest amount to $25,000. The Company analyzed the amendment of the note under ASC 470 and concluded that the amendment did not qualify as a substantial modification. At June 30, 2015, $50,000 was recorded as accrued interest relating to these notes. The agreements allow the holder to convert all or a portion of the principal and accrued interest into equity as a conversion rate of $1.25. There is no beneficial conversion feature since the conversion price is $1.25 which equal to the $1.25 units being sold. On June 30, 2015, these notes and accrued interest of $50,000 were exchanged for two new convertible note agreements for $350,000 each and the issuance of 700,000 warrants with a five year life and an exercise price of $0.50 per share. The convertible note each have a principal amount of $350,000, interest of 8% per annum, a maturity date of June 30, 2016 and are convertible into 700,000 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 Company analyzed the amendment of the note under ASC 470 and concluded that the exchange gave rise to a debt extinguishment, which resulted in a loss on extinguishment of $150,000. The Company allocated the new proceeds to the warrants and the convertible debt based on their respective fair values, then, computed the effective conversion price of each instrument, noting that the convertible debt gave rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “Debt - Debt with Conversion and Other Options.” Based on this, $106,510 was allocated to the warrants, and $6,743 was allocated to the beneficial conversion feature, each of which are reflected in additional paid-in-capital.  This allocation gave rise to a debt discount of $113,253 which is being amortized on a straight-line basis over the term of the note. The full principal balance of the notes were immediately converted pursuant to the terms of the note into shares of Common Stock and Warrants to purchase Common Stock on June 30, 2015. Upon conversion, the Company recorded amortization of debt discount of $113,253 and interest expense of $246,460 related to warrants issued at conversion.

 

On December 19, 2014, the Company received aggregate proceeds of $300,000 in exchange for a convertible note and the issuance of 200,000 warrants with a five year life and an exercise price of $2.50 per share.  The convertible note has a principal amount of $300,000, interest of 8% per annum, a maturity date of December 19, 2015, 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 $1 per share, subject to certain anti-dilution provisions.  The Company allocated the proceeds to the warrants and the convertible debt based on their respective fair values, then computed the effective conversion price of each instrument, noting that the convertible debt gave rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “Debt - Debt with Conversion and Other Options.”  Of the $300,000 proceeds received, $71,369 was allocated to the warrants, and $59,546 was allocated to the beneficial conversion feature, each of which are reflected in additional paid-in-capital.  This allocation gave rise to a debt discount of $130,915 which is being amortized on a straight-line basis over the term of the note.  This note was modified on June 29, 2015 to change the conversion price and exercise price to $0.50 per share. The Company analyzed the modification of the note under ASC 470 and determined that it did not qualify as a substantial modification. The Company recognized interest expense of $32,629 and $64,920 associated with the amortization of debt discount for the three and six months ended June 30, 2015, respectively. 

 

In March 2015, the Company received aggregate proceeds of $700,000 in exchange for convertible notes and the issuance of 466,667 warrants with a five year life and an exercise price of $2.50 per share. The convertible notes have a principal amount of $700,000, interest of 8% per annum, a maturity date of March 2016 and are convertible into 700,000 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 $1 per share, subject to certain anti-dilution provisions. The Company allocated the proceeds to the warrants and the convertible debt based on their respective fair values, then, computed the effective conversion price of each instrument, noting that the convertible debt gave rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “Debt - Debt with Conversion and Other Options.”  Of the $700,000 proceeds received, $137,863 was allocated to the warrants, and $87,563 was allocated to the beneficial conversion feature, each of which are reflected in additional paid-in-capital.  This allocation gave rise to a debt discount of $225,426 which is being amortized on a straight-line basis over the term of the note. These notes were modified on June 29, 2015 to change the conversion price and exercise price to $0.50 per share. The Company analyzed the modification of the note under ASC 470 and determined that it did not qualify as a substantial modification. The Company recognized interest expense of $56,202 and $69,436 associated with the amortization of debt discount for the three and six months ended June 30, 2015, respectively.

 

In June 2015, the Company received aggregate proceeds of $530,000 in exchange for convertible notes and the issuance of 530,000 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes have a principal amount of $530,000, interest of 8% per annum, a maturity date of June 2016 and are convertible into 1,060,000 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 $.50 per share, subject to certain anti-dilution provisions. The Company allocated the proceeds to the warrants and the convertible debt based on their respective fair values, then, computed the effective conversion price of each instrument, noting that the convertible debt gave rise to a beneficial conversion feature in accordance with the provisions of ASC 470-20 “Debt - Debt with Conversion and Other Options.”  Based on this, $80,643 was allocated to the warrants, and $5,106 was allocated to the beneficial conversion feature, each of which are reflected in additional paid-in-capital.  This allocation gave rise to a debt discount of $85,749 which is being amortized on a straight-line basis over the term of the note.  The Company recognized interest expense of $3,641 associated with the amortization of debt discount for the three and six months ended June 30, 2015. 

 

11
 

 

Accounts Payable - Related Party

 

As of June 30, 2015, there is $51,949 due to related party, non interest bearing due on demand.

 

3. EQUITY

 

During the three and six months ended June 30, 2015, the Company sold an aggregate of 86,000 units, respectively, at $1.00 per unit for aggregate proceeds of $86,000, respectively. 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 $1.00 per share.

 

On June 30, 2015, the Company issued 1,400,000 shares of its common stock related to the conversion of $700,000 of convertible notes.

 

Pursuant to an anti-dilution provision in the subscription agreements executed by the $1 PIPE II and $1.25 PIPE II investors which provides for the issuance of a certain number of additional shares based on a formula in the subscription agreements, to these holders in the event that the company within 36 months of the completion of all PIPE II sales issues any common stock or securities convertible into or exercisable for shares of common stock at a lower price than the purchase price paid by the PIPE II investors.  As a result of the Company's offering of such securities at a price lower than the price paid by the PIPE II investors, the Company issued 1,554,500 shares of common stock to the PIPE II investors in the quarter ending June 30, 2015.

 

Stock Options

 

On April 28, 2013, the Board of Directors adopted the 2013 Stock Option Plan.  Under the Plan, the Company may grant incentive stock options to employees and non-qualified stock options to employees, non-employee directors and/or consultants. The Plan provides for the granting of a maximum of 2,000,000 options to purchase common stock.  The ISO exercise price per share may not be less than the fair market value of a share on the date the option is granted.  The maximum term of the options may not exceed ten years.

 

During the three and six months ended June 30, 2015, 47,000 stock options were cancelled. As of the date of this report, 2,000 options remain outstanding under the plan, and these options are set to expire on December 31, 2015.

 

Warrants

 

During the three months ending March 31, 2015, the Company offered to reduce the exercise price of certain warrants of the Company to $0.50 as an incentive to the holders to exercise such warrants (“Warrant Price Reduction”). As a result of the Warrant Price Reduction, a total of 649,650 shares of our Common Stock were issued after exercise of these warrants in exchange for $324,825 of proceeds. Company determined that this transaction did not constitute a modification under ASC 718-10 or ASC 505-50 as it met the scope exceptions for a transaction with an investor.  Accordingly, no expense was recognized in connection with these transactions. 

 

In March 2015, the Company received aggregate proceeds of $700,000 in exchange for convertible notes and the issuance of 666,667 warrants with a five year life and an exercise price of $2.50 per share. The convertible notes are convertible into 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 $1 per share, subject to certain anti-dilution provisions.

 

On April 15, 2015, the Company offered to reduce the exercise price of certain warrants of the Company to $0.50 as an incentive to the holders to exercise such warrants (“April 2015 Warrant Price Reduction”). Thus far warrant holders have sent notices to exercise their warrants for a total of 1,178,786 shares of our Common Stock, for proceeds received in the amount of $589,393.  As a result of the decrease in the warrant price, the exercise price of certain of the Company’s outstanding warrants will be permanently reduced to $0.50 per share pursuant to their terms and certain of those warrants have a provision which will cause them to increase in number by multiplying the number by a fraction equal to the original warrant exercise price divided by the new warrant exercise price.  The Company determined that this transaction does not constitute a modification under ASC 718-10 or ASC 505-50 as it met the scope exceptions for a transaction with an investor or lender.  Accordingly, no expense was recognized in connection with these transactions.

 

On April 17, 2015, the Company amended the Engagement Agreement originally dated October 1, 2013, between the Company and Tobin Tao & Company, Inc (“Tobin Tao”). This amendment grants Tobin Tao warrants to purchase 200,000 shares of the Company’s common stock at $0.50 per share. The anti-dilution features qualify these as a derivative instrument. The valuation of the derivative liability of the warrants was determined through the use of a Black Scholes options model for an amount of $102,654, which the Company believes approximates fair value.

 

On May 26, 2015, the Company granted 250,000 warrants with a an exercise price of $0.50 and a five year term to Darren Ofsink in exchange for services. The anti-dilution features qualify these as a derivative instrument. The valuation of the derivative liability of the warrants was determined through the use of a Black Scholes options model for an amount of $128,317, which the Company believes approximates fair value.

 

In June 2015, the Company received aggregate proceeds of $530,000 in exchange for convertible notes and the issuance of 530,000 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes are convertible into units, with each unit consisting two shares of common stock and two warrants with a five year life from the date of conversion and an exercise price $0.50 per share, subject to certain anti-dilution provisions.

 

During the three and six months ending June 30, 2015, the Company sold an aggregate of 0 and 86,000 units, respectively, at $1.00 per unit for aggregate proceeds of $86,000. 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 $1.00 per share. During three months ended June 30, 2015, the Company granted additional 86,000 warrants to the investors due to the reset provision.

 

On June 30, 2015, the Company granted 700,000 warrants to two convertible debt holders in order to modify the outstanding convertible debt. An additional 1,400,000 warrants were issued as the modified notes were immediately converted. See details in Note 2.

 

During six months ended June 30, 2015, the Company granted an additional 5,284,500 warrant to investors due to the reset provision.

 

12
 

 

The following summarizes the warrant activity for the six months ended June 30, 2015:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
   Shares   Price   Term (in years)   Value  
Outstanding as of December 31, 2014   21,332,333   $2.53    3.8   $- 
Granted     3,718,667    0.77           
Warrants issued related to reset provision   5,284,500    0.64           
Cancelled     (151,000)   3.00           
Exercised     (1,828,436)   0.50           
                     
Outstanding as of June 30, 2015   28,356,064   $1.82    3.6   $1,020,500 
                     
Exercisable as of June 30, 2015   28,356,064   $1.82    3.6   $1,020,500 

 

The reset shares are the result of reducing the exercise price of the warrants issued under Pipe I from $2.50 to $0.50, and Pipe II from $2.50 to $1.00.  The increase in shares offset the reduced exercise price therefore the net value of the Pipe I & Pipe II warrants remain constant in total.

 

The anti-dilution features in the freestanding warrants issued in the three and six months ending June 30, 2015 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 determined a fair value of $307,339 at issuance date for warrants issued during the six months ending June 30, 2015. The Company recorded the change in the fair value of the derivative liability as an unrealized gain of $14,561 and an unrealized loss of $2,440.922 for the three and six months ending June 30, 2015, to reflect the value of the derivative liability as $3,596,052 as of June 30, 2015.

 

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

 

    Six Months Ended
June 30,
 
    2015    2014 
           
Volatility   108.72% - 111.37%    98.25% - 98.61% 
Risk-free interest rate   .725% - .825%    .670% - .675% 
Expected term   3.5 - 5 years     4.5 - 5 years  

 

4. COMMITMENTS AND CONTENGENCIES

  

On March 18, 2015, the Company received correspondence from the counsel of Mr. John Kuhns, the Company’s former Co-CEO and Executive Chairman alleging that Mr. Kuhns has “Good Reason” to terminate his Employment Agreement for an alleged failure to pay his salary in full. On March 30, 2015, Mr. Kuhns advised that if the alleged breaches of the Employment Agreement were not cured there was a possibility that he would pursue litigation

 

As of March 30, 2015, shareholders holding approximately 67.26% of the total shares of common stock of NanoFlex Power Corporation (the “Company,” “we,” “our” or “us”) that are entitled to vote on all Company matters approved by written consent the removal of John D. Kuhns from his position as a member of the Company’s Board of Directors. Mr. Kuhns’ removal was for “Cause” as defined under his Employment Agreement as amended and dated as of October 1, 2013 (the “Employment Agreement”). The removal arose as a result of his documented conduct and statements, which breached his fiduciary duties to the Company in order to advance personal monetary and other interests, and thereby threatened serious financial injury to the Company, its shareholders and its debtholders.

 

On March 31, 2015, the Board of Directors terminated the Employment Agreement with Mr. Kuhns for Cause and removed him from his positions as Co-CEO, and from all other officer positions he held with the Company and its subsidiaries and affiliates, and all director positions with the Company’s subsidiaries and affiliates.

 

On April 24, 2015, the Company received a letter from Mr. Kuhns’ counsel (the “Response Letter”) stating that Mr. Kuhns disagreed with statements in the Initial Filing regarding the circumstances of his removal as a director and officer.

 

The Response Letter was accompanied by a copy of a complaint (the “Complaint”) filed by John D, Kuhns (the “Plaintiff”) in the United States District Court Southern District of New York against the Company, Mr. Dean L. Ledger, our current CEO, CFO and member of our Board of Directors, Mr. Robert J. Fasnacht, our current Executive Vice President and member of our Board of Directors and Mr. Ronald B. Foster, a shareholder of the Company (each, a “Defendant,” collectively, the “Defendants”). The Complaint alleges, among other things, that the Plaintiff was terminated by the Company in violation of Section 922 of the Dodd-Frank Act, that the Company wrongfully terminated the Employment Agreement, that the Defendants made false statements to shareholders regarding the Plaintiff, that the Defendants (other than the Company) tortuously interfered with the Plaintiff’s Employment Agreement, and that Mr. Ledger and Mr. Fasnacht breached their fiduciary duties to the Company and its shareholders.

 

13
 

 

The Plaintiff seeks monetary damages, including (i) two (2) times of the alleged owed compensation to him, together with interest as well as litigation costs, expert witness fees and reasonable attorneys’ fees; (ii) damages for the alleged breach of the Employment Agreement by the Company, estimated to be at least $2 million, plus interest and attorney’s fees; (iii) an unspecified amount for his alleged libel claim; and (iv) damages for the alleged tortious interference with contract, including punitive damages of at least $2 million. The Plaintiff is also seeking a declaratory judgment, claiming that he was not terminated as a director and should continue to hold a seat on the Company’s Board of Directors. The Company believes that the allegations in the Complaint to be without any merit and will vigorously defend against the claims.

 

5. SUBSEQUENT EVENTS

 

In July and August 2015, the Company received aggregate proceeds of $190,000 in exchange for convertible notes and the issuance of 190,000 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes have a principal amount of $190,000, interest of 8% per annum, a one year term, and are convertible into 190,000 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.

 

14
 

 

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 condensed 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, 2014 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 April 10, 2015.

 

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, THE COMPANY’S FORM 10-K FILED ON APRIL 10, 2015, AND IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 2014. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.

 

Overview

 

NanoFlex Power Corporation is engaged in the development, commercialization, and licensing of advanced configuration solar technologies which enable unique thin-film solar cell implementations 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. Pursuant to its sponsored research agreements, NanoFlex has obtained the exclusive worldwide license and right to sublicense any and all intellectual property resulting from the Company’s sponsored research programs and the patents are referred to herein as being our patents. Building upon the university research, the Company plans to work with industry partners to commercialize its technologies to target key applications where we believe they present compelling competitive advantages.

 

The Company’s research programs have yielded two solar thin film technology platforms – Gallium Arsenide (GaAs) thin film technology for high power applications and organic photovoltaic (OPV) technology for applications demanding high quality, semi-transparent aesthetics and ultra-flexible form factors. These technologies are targeted at certain broad applications, including: (a) mobile and field 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 or paints for automobiles or other consumer applications. Laboratory feasibility prototypes have been developed that successfully demonstrate key building block principles for these applications and the Company is working with industry partners to commercialize its technologies.

 

15
 

 

We 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”) technologies.  In addition, we have several hundred more patents in process. Some of our technology holdings include foundational concepts in the following areas (many of which are being validated in other labs as indicated by the asterisks).

 

Tandem organic solar cell*
Fullerene acceptors*
Blocking layers*
New materials for visible and infrared sensitivity*
Scalable growth technologies*
Inverted solar cells*
Materials for enhanced light collection via multiexciton generation
Mixed layer and nanocrystalline cells
Solar paints
Transparent/semi-transparent cells
Ultralow cost, ultrahigh efficiency, flexible thin film inorganic cells
Accelerated and recyclable liftoff process
Cold-weld bonding of inorganic solar cells to plastic substrates and metal foils
Micro-inverters monolithically integrated into GaAs solar cells
Low cost, thermo-formed plastic mini-compound parabolic concentrator arrays

  

Plan of Operations

 

Overall Operating Plan

 

NanoFlex is focusing on two parallel technology development efforts: (a) its inorganic GaAs architectures, manufacturing processes, and technologies aim to provide solar cell manufacturers with the capability of producing thin film GaAs solar cells with ultra-high efficiencies at a cost below $1 per watt for applications such as mobile and field generation, BAPV, BIPV and aerospace which are not well-served by crystalline silicon solar technologies; and (b) its portfolio of OPV thin film solar technologies provide low-cost and highly flexible solar energy solutions for new applications such as BIPV (semi-transparent solar films for glass) and ultra-thin films for coatings on automobiles, etc.

 

We are finding commercial interest in both our GaAs and OPV technologies from key industry partners. We have identified GaAs as our nearest term market opportunity and are executing a plan to commercialize our patented GaAs-based processes and technologies on an accelerated program, while continuing to advance our research and development on our OPV technology. We are in discussions with industry partners to form joint development agreements to prove our GaAs technology on their fabrication processes. Meanwhile, we are in discussions with system integrators, installers, and architects to assist with requirements, definition and technology development for several targeted applications. Additionally, we are working with our University researchers as well as industry partners to submit proposals for government programs to advance our technology development for both GaAs and OPV technologies. NanoFlex plans to work closely with these partners to develop proof-of-concept prototypes and processes to mitigate commercialization risks and gain early market entry and acceptance.

 

Although we currently do not yet have any contractual commitments from third parties to license our technologies or otherwise provide revenue to us, we are aware of several laboratories and commercial suppliers who are exploring and positively validating technologies that we have developed and which are protected by our intellectual property portfolio.  These interested parties potentially represent some of our first partners for joint technology development and acceptance into manufacturing production.

 

A key to reducing the risk to market entry by our partners is for us to demonstrate our technologies on their fabrication processes.  To support this joint development, NanoFlex is establishing its own developmental engineering team. This team will serve several key functions, including working closely between the universities and our industry partners to integrate and customize our processes and technologies into the partner’s existing fabrication process. Our engineering team will also work closely with downstream partners such as system integrators, installers, and architects to better understand requirements and incorporate these requirements into our research and development cycle.

 

To support this work, we anticipate that this developmental engineering team will be able to utilize the facility and equipment onsite at the University of Michigan on a recharge basis, which will be cost effective in moving the technologies to the manufacturing scale. This will allow NanoFlex’s developmental engineering team to work directly with industry players to acquire early licenses to use our intellectual property without the need for any immediate standalone technology facility. 

 

Additionally, having an established technical team will enable us to more effectively pursue and execute sponsored research projects from the National Aeronautics and Space Administration, the Department of Defense and the Department of Energy, each of which has interests in businesses that can deliver ultra-lightweight, high-efficiency technologies for demanding applications.

 

A second potential revenue source is in joint development agreements (“JDAs”) with existing solar cell manufacturers or potential industry partners. Once we are able to initially demonstrate the efficacy of our GaAs processes and technologies on partner’s fabrication process, we expect to be in a position where we can sign agreements covering joint development, IP licensing, and solar cell supply. We anticipate that partnerships with one or more of the existing GaAs solar cell manufacturers can be supported by the developmental engineering team, and possibly result in early revenue opportunities.

 

16
 

 

Near Term Operating Plan

 

Our near-term focus is on advancing our development efforts while containing costs. Our current burn rate is approximately $5,500,000 per year in order to support our research and development activities, maintain our existing patent portfolio, service our existing liabilities and support our corporate functions. Our operating plan over the next twelve months is comprised of the following:

 

  1. Cost cutting and containment to reduce our annual burn rate;

 

  2. Prioritizing our existing IP portfolio to identify opportunities for cost reduction;

 

  3. Prioritizing our research and development activities and selectively expanding our IP portfolio;

 

  4. Partnering with strategic partners for licensing and/or joint development of our technologies; and

 

  5. Raising adequate capital (approximately $5 million) to support our activities for at least 12 months.

 

In the event that we raise less than the required amount of capital, our focus will be on prioritizing our GaAs commercialization effort to capture near-term revenue opportunities and less spending on general and administrative expenses and IP legal costs.

 

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.

  

Results of Operations

  

Research and Development Expenses

 

Research and development expenses were $275,040 for the three months ended June 30, 2015, a 77% increase from $155,151 for the three months ended June 30, 2014.   Research and development expenses were $500,749 for the six months ended June 30, 2015, a 29% decrease from $705,151 for the six months ended June 30, 2014.  The year-over-year variances are attributable to timing of research work by our University research partners performed pursuant to our research agreements as well as technical consulting services to assist with commercialization that were not incurred during the prior year periods.

  

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 NanoFlex and were $616,024 for the three months ended June 30, 2015, an 88% increase from $327,966 for the three months ended June 30, 2014.   Patent application and prosecution fees were $1,169,014 for the six months ended June 30, 2015, a 57% increase from $742,402 for the six months ended June 30, 2014. The increase is attributable to timing of submittal and processing of patent applications.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of salaries and fringe benefits, office supplies, workers compensation insurance, medical insurance, traveling expenses, professional and consulting fees and were $729,316 for the three months ended June 30, 2015, a 22% increase from $595,746 for the three months ended June 30, 2014.  Selling, general and administrative expenses were $1,347,933 for the six months ended June 30, 2015, a 2% increase from $1,327,687 for the six months ended June 30, 2014. The increase is primarily attributable to warrants issued for consulting services. This was partially offset by a reduction in base salaries that was negotiated with the Company’s employees in October 2014, in an effort to conserve capital resources. On May 8, 2015, Robert J. Fasnacht and Dean L. Ledger agreed to further base salary decreases. Moving forward such base salaries shall not exceed $190,000 and $210,000, respectively. The adjustments are effective retroactively to January 2015.

 

Interest Expense

 

Interest expense for the three months ended June 30, 2015 was $443,377 as compared to $0 for the three months ended June 30, 2014, respectively. Interest expense for the six months ended June 30, 2015 was $537,999 as compared to $0 for the six months ended June 30, 2014, respectively, due to new interest bearing debt agreements entered into in the last quarter of 2014 and the first and second quarters of 2015, the conversion of existing debt and extinguishment of old debt.

 

17
 

 

Net Loss

 

The net loss for the three months ended June 30, 2015 was $2,199,196 a 107% increase from $1,063,745 for the three months ended June 30, 2014. The net loss for the six months ended June 30, 2015 was $6,146,617 a 124% increase from $2,748,275 for the six months ended June 30, 2014. The increase in the net loss is impacted by increased interest expense as well as the changes in research and development, patent application and prosecution fees, and selling, general and administrative expenses, and changes in the fair value of derivative liabilities, each of which is described above.

 

Liquidity and Capital Resources

 

As of June 30, 2015, we had cash and cash equivalents of $6,455 and a working capital deficit of $9,907,267, as compared to cash and cash equivalents of $168 and a working capital deficit of $6,058,021 as of December 31, 2014.  The decrease in cash and working capital is attributable to our operating losses as we have yet to generate revenues from our operations. 

 

On April 15, 2015, the Company offered to reduce the exercise price of certain warrants of the Company to $0.50 as an incentive to the holders to exercise such warrants (“April 2015 Warrant Price Reduction”). Thus far warrant holders have sent notices to exercise their warrants for a total of 1,178,786 shares of our Common Stock, which have yet to be issued, for proceeds received in the amount of $589,394. As a result of the decrease in the warrant price, the exercise price of certain of the Company’s outstanding warrants will be permanently reduced to $0.50 per share pursuant to their terms and certain of those warrants have a provision which will cause them to increase in number by multiplying the number by a fraction equal to the original warrant exercise price divided by the new warrant exercise price.

 

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 semiconductor-based solar cells.   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.  

 

Going Concern

 

The Company has not generated revenues to date.  The Company has a working capital deficit of $9,907,267 and an accumulated deficit of $184,334,576 as of June 30, 2015. 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 three months ended June 30, 2015 from those set forth in “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 10, 2015.

 

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

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

18
 

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

 

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

As of June 30, 2015, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

  

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were:

 

(1) We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness;

 

(2) The Company’s board of directors has no audit committee, independent director or member with financial expertise which causes ineffective oversight of the Company’s external financial reporting and internal control over financial reporting;

 

(3) We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness;

 

(4) We lack the financial infrastructure to account for complex transactions which may result in a greater than normal risk that material errors may occur in the financial statements and not be detected timely; and

 

(5) We lack qualified resources to perform the internal audit functions properly, and the scope and effectiveness of the internal audit function are yet to be developed. Specifically, the reporting mechanism between the accounting department and the Board of Directors and the CFO was not effective.

 

The aforementioned material weaknesses were identified by our Chief Executive Officer and Chief Financial Officer in connection with the review of our financial statements as of June 30, 2015.

  

Management’s Remediation Initiatives

 

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

 

We intend to create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.  We will also be working with our independent registered public accounting firm and refining our internal procedures.

 

Additionally, as reported in the Company’s Form 8-K filed with the SEC on June 24, 2015, on June 19, 2015, Mark Tobin was appointed as the Company’s Chief Financial Officer replacing Dean Ledger. With the election of Mr. Tobin, the Company now has a dedicated CFO which will help to remediate the identified weaknesses discussed above.

 

19
 

 

Changes in Internal Control over Financial Reporting

 

Our management has also evaluated our internal control over financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.

 

Subsequent to the period covered by the report, management is implementing measures to remediate the material weaknesses in internal controls over financial reporting described above. Specifically, the CEO and the CFO are seeking to improve communications regarding the importance of documentation of their assessments and conclusions of their meetings, as well as supporting analyses.  As the business increases, the Company is seeking to hire accounting professionals and it will continue its efforts to create an effective system of disclosure controls and procedures for financial reporting.

 

The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting. 

 

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. For a description of any such legal proceedings please refer to the Company’s Form 10-Q filed with the SEC on May 14, 2015.

 

20
 

 

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. Notwithstanding the foregoing, we refer you to the Company’s risk factors contained in the Company’s prospectus filed with the SEC on July 13, 2015.

 

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

 

Issuance Pursuant to Exercise of Warrants

 

During January 5 through March 16, 2015, the Company issued a total of 649,650 shares of Common Stock as a result of the exercise of the Company’s warrants by some warrant holders.

 

During April 28, 2015 through June 9, 2015, the Company issued a total of 1,178,786 shares of Common Stock as a result of the exercise of the Company’s warrants by some warrant holders.

 

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

 

Private Placement of the Company’s Convertible Notes

 

On December 19, 2014 and in March 2015, the Company issued and sold convertible promissory notes together with warrants to purchase 666,667 shares of the Company’s Common Stock for gross proceeds of $1,000,000.

 

In June 2015, the Company issued and sold convertible promissory notes together with warrants to purchase 530,000 shares of the Company’s Common Stock for gross proceeds of $530,000.

 

Issuance of Units

 

During the three and six months ended June 30, 2015, the Company sold an aggregate of 86,000 units, respectively, at $1.00 per unit for aggregate proceeds of $86,000. 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 $1.00 per share.

 

The above issuances of the Company’s securities was not registered under the Securities Act of 1933, as amended (the “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 issuance.

 

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 6.  EXHIBITS.

 

31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Executive Vice President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Principal Executive Officers and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document.**
   
101.SCH XBRL Taxonomy Extension Schema Document.**
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.**
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.**
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document.**
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.**

  

** Users of this data are advised pursuant to Rule 406T of Regulation S-X that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purpose of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

21
 

 

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.

 

  NANOFLEX POWER CORPORATION
     
Date: August 14, 2015 By: /s/ Dean L. Ledger
    Dean L. Ledger
   

Chief Executive Officer

(principal executive officer)

     
Date: August 14, 2015 By: /s/ Mark Tobin
    Mark Tobin
   

Chief Financial Officer

(principal financial and accounting officer)

 

 

22