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 nine months ended September 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, the Company’s 2014 annual report on Form 10-K, and Company’s first quarter of 2015 interim reports on Form 10-Q, 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 nine months ended September 30, 2015 financial statements, and as such, the Company revised its previously-issued financial statements for each period in 2013, 2014 and 2015. The financial statements for the quarter and nine months ended September 30, 2014 included in this Form 10-Q are revised as described below for those adjustments.

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

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

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

Going Concern

The Company has not generated revenues to date. The Company had a working capital deficit of $26,167,045 as of September 30, 2015 and has generated net losses since inception. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. To date, the Company has funded its initial operations primarily by way of the sale of equity securities, convertible note financing, short term financing from private parties, and advances from related parties.

Fair Value

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

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

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

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

As of September 30, 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 September 30, 2015 and December 31, 2014:

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:

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 September 30, 2015. As of September 30, 2015, the outstanding balance under this note is $100,000.

During the three months ended September 31, 2015, the Company issued promissory note of $50,000. The term of the note expires 120 days from the effective date. 100,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50/share in lieu of cash interest. As of September 30, 2015, the outstanding balance under these notes is $50,000. The relative fair value of the warrants of $45,283 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $24,517 associated with the amortization of debt discount for the three and nine months ended September 30, 2015. 

As of September 30, 2015, the aggregate outstanding balance of notes payable was $304,277, net of unamortized discounts of $145,723.

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 September 30, 2015, $1,989 of interest was paid to the related party and $1,002 was recorded as accrued interest relating to this note.

During the three months ended September 31, 2015, the Company issued promissory notes to a related party in aggregate of $300,000. The term of each note expires 120 days from the effective date. 600,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50/share in lieu of cash interest. As of September 30, 2015, the outstanding balance under these notes is $300,000. The relative fair value of the warrants of $239,259 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note. The Company recognized interest expense of $114,302 associated with the amortization of debt discount for the three and nine months ended September 30, 2015. 

Advances - Related Party

During the three and nine months ended September 30, 2015, the Company received advances totaling $55,000 and $193,350, respectively, and repaid advances totaling $91,000 and $451,500, respectively. Such advances are payable upon demand. The Company paid interest of $2,246 during the three and nine months ended September 30, 2015. Accrued interest and advances due at September 30, 2015 were $126 and $170,000, respectively.

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 was 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. 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. 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 was 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. 

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.

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.

On July 8, 2015, the Company received proceeds of $50,000 in exchange for a convertible note and the issuance of 50,000 warrants with a five year life and an exercise price of $0.50 per share. The convertible note has a principal amount of $50,000, interest of 8% per annum, a maturity date of June 2016 and is convertible into 100,000 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, $8,731 was allocated to the warrants, and $5,047 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 $13,778 which is being amortized on a straight-line basis over the term of the note.

On July 13, 2015, the Company’s common stock began actively trading. As a result, the embedded conversion and anti-dilution features of the Company’s convertible debt agreements were determined to meet the definition of a derivative per ASC 815, Derivatives and Hedging. This resulted in the recording of a derivative liability, which was a reclassification out of additional paid-in capital of $9,146,853 for the Company’s convertible note agreements representing the fair value of the conversion options as of the date the Company’s common stock began actively trading. The fair value of the convertible feature was determined based on a fair value of $4,970,141 and $4,176,712 assigned to the warrant and common stock conversion options, respectively.

From July 13, 2015 to September 30, 2015, the Company received aggregate proceeds of $377,500 in exchange for convertible notes and the issuance of 377,500 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes have an aggregate principal amount of $377,500, interest of 8% per annum, a maturity date of one year and are convertible into 755,000 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 relative fair value of the 377,500 warrants issued with the debt was determined to be $274,625 and it was recognized as a discount to the debt. The fair value of the conversion options in the note was determined to be $4,892,969 of which $102,875 was recognized as an additional discount to the debt and $4,790,094 was recognized as a loss on derivatives. The fair value of the convertible feature was determined based on a fair value of $2,532,710 and $2,360,259 assigned to the warrant and common stock conversion options, respectively. The total debt discount of $377,500 is being amortized on a straight-line basis over the term of the note.

During September 2015, the full principal balances of certain notes totaling $745,000 and accrued interest were converted pursuant to the terms of the notes into 1,515,190 shares of the Company’s common stock and 1,515,190 warrants to purchase common stock. Of the 1,515,190 shares of common stock issued, 25,190 shares related to the payment of interest of $12,595. Upon conversion, the Company wrote-off the fair value of the derivative liability associated with the converted notes of $3,670,697 to additional paid-in capital.

For the remaining outstanding convertibles notes as of September 30, 2015, the fair value of the derivative liability conversion options was $7,320,770 as of September 30, 2015.

Aggregate amortization of the discounts on the convertible notes for the nine months ended September 30, 2015 was $617,371. As of September 30, 2015, the aggregate outstanding balance of convertible notes payable was $901,331, net of unamortized discounts of $311,169.

Derivative Liabilities - Convertible Notes

On July 13, 2015, the Company’s common stock began actively trading. As a result, the embedded conversion and anti-dilution features of the Company’s convertible debt agreements were determined to meet the definition of a derivative per ASC 815, Derivatives and Hedging. This resulted in the recording of a derivative liability on July 13, 2015, which was a reclassification out of additional paid-in capital of $9,146,853 representing the fair value of the conversion options in the outstanding derivative notes as of July 13, 2015.

Additional convertible note borrowings between July 14, 2015 and September 30, 2015 resulted in additional derivative liabilities recognized of $4,892,969 for which $102,875 was recognized as a discount to the debt and $4,790,094 was recognized as a loss on derivatives. Due to conversion of the convertible debt to common stock during the period from July 14, 2015 through September 30, 2015, the fair value of the derivative liabilities associated with the converted notes of $3,670,697 was reclassified to additional paid-in capital. As of September 30, 2015, the fair value of the outstanding convertible note derivatives was determined to be $7,320,770.

The valuation of the derivative liabilities attached to the convertible debt was arrived at through the use of Black-Scholes Option Pricing Model and the following assumptions:

Accounts Payable - Related Party

As of September 30, 2015, there is $68,063 due to a related party which is non interest bearing due on demand.

3. EQUITY

Common Stock

During the nine months ended September 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.

During the nine months ended September 30, 2015, the Company issued an aggregate of 2,915,190 shares of its common stock related to the conversion of $1,445,000 of principal and $12,595 of accrued interest on convertible notes. Of the common shares issued, 25,190 shares related to the payment of interest.

During the nine months ended September 30, 2015, the Company issued an aggregate of 1,828,436 shares of its common stock related to the exercise of 1,828,436 warrants and received cash proceeds of $914,218.

Pursuant to an anti-dilution provision in the subscription agreements executed by the $1.00 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 nine months ended September 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 nine months ended September 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 ended March 31, 2015, the Company offered to reduce the exercise price of certain warrants of the Company to $0.50 per share 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. The Company determined that this transaction did not constitute a modification under ASC 718-10 or ASC 505-50 as it met the scope exceptions for a transaction with an investor. 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 466,667 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 per share as an incentive to the holders to exercise such warrants (“April 2015 Warrant Price Reduction”). Through September 30, 2015, warrant holders exercised 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. These warrants were recognized as derivative liabilities.

On September 1, 2015 the Company entered into an Employment Agreement (the “Employment Agreement”) with Mark Tobin in his capacity as the Company’s Chief Financial Officer. Pursuant to the Employment Agreement, on September 1, 2015 the Company issued Mr. Tobin warrants to purchase 1,500,000 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”). 375,000 of the Warrant Shares vested on September 1, 2015, an additional 375,000 warrant shares will vest on the first anniversary date of the Employment Agreement, an additional 375,000 warrant shares will vest on the second anniversary date of the Employment Agreement, and, an additional 375,000 warrant shares will vest on the third anniversary date of the Employment Agreement. A copy of the Agreement is filed herewith as Exhibit 10.1.

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. These warrants were recognized as derivative liabilities.

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 September 2015, the full principal balances of these notes were converted pursuant to the terms of the notes into shares of the Company’s common stock and warrants to purchase common stock. See details in Note 2.

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. The warrants have a five year life and an exercise price of $0.50 per share.

During the three months ended September 30, 2015, the Company received aggregate proceeds of $427,500 in exchange for convertible notes and the issuance of 427,500 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 September 2015, the aggregate principal and interest of certain convertible notes totaling $757,595 were converted pursuant to the terms of the notes into 1,515,190 shares of the Company’s common stock and 1,515,190 warrants to purchase common stock. See details in Note 2.

During the nine months ended September 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. During the nine months ended September 30, 2015, the Company granted an additional 86,000 warrants to the investors due to the reset provision.

During the three months ended September 31, 2015, the Company issued promissory notes in aggregate of $350,000. 700,000 cashless warrants for the Company’s common shares were issued with the debt at a strike price of $0.50/share in lieu of cash interest. The relative fair value of the warrants of $284,542 was recognized as a debt discount which is being amortized on a straight-line basis over the term of the note.

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

The following summarizes the warrant activity for the nine months ended September 30, 2015:

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.

Derivative Liabilities - Warrants

The anti-dilution features in the freestanding warrants issued in the nine months ended September 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 nine months ended September 30, 2015 of which $76,368 was reclassified from additional paid-in capital and $230,971 was recognized as compensation expense. The Company recorded the change in the fair value of the warrant liabilities recognizing a loss of $11,160,719 for the nine months ended September 30, 2015, to reflect the value of the warrant derivative liability of $12,315,849 as of September 30, 2015.

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

4. COMMITMENTS AND CONTINGENCIES

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 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.

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

On October 19, 2015, 75,288 shares of the Company’s common stock were cancelled in exchange for convertible notes of $37,644 and the issuance of 37,644 warrants with a five year life and an exercise price of $0.50 per share, as well as 75,288 warrants with a five year life and an exercise price of $2.50 per share. The convertible notes have a principal amount of $37,644, interest of 8% per annum, a one year term, and are convertible into 37,644 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 agreement was subsequently amended to include an additional 75,288 units with each unit consisting of a share of common stock with a five year life from the date of grant and an exercise price of $2.50 per share, subject to certain anti-dilution provisions.

In October 2015, the Company received aggregate proceeds of $177,000 in exchange for convertible notes and the issuance of 177,000 warrants with a five year life and an exercise price of $0.50 per share. The convertible notes have a principal amount of $177,000, interest of 8% per annum, a one year term, and are convertible into 177,000 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. 

In October 2015, the Company also received proceeds of $150,000 in exchange for a promissory note. The term of the note expires 150 days from the effective date. The Company issued 300,000 cashless warrants for the Company’s common shares on the effective date at a strike price of $0.50/share in lieu of cash interest.

On October 31, 2015, Joey S. Stone resigned from his position as the Company’s Senior Vice President of Corporate Development effective immediately. Mr. Stone’s resignation was not the result of any disagreement with the Company on any matter relating to the Company's operations, policies or practices.

On November 4, 2015, the Company entered into an amendment to the Independent Contractor Agreement (the “Amendment”) with a service provider pursuant to which the service provider is to be issued warrants to purchase 2,400,00 shares of the Company’s common stock at $1.00 per share (the “Warrant Shares”). 1,200,00 of the Warrant Shares vested on November 4, 2015, an additional 600,000 Warrant Shares will vest on the first anniversary date of the Amendment, an additional 600,000 warrant shares will vest on the second anniversary date of the Amendment. A copy of the Amendment is filed herewith as Exhibit 10.2.

On November 5, 2015, the Company issued a warrant to purchase 3,000,000 shares of the Company’s $.0001 par value common stock to the Company’s Chief Executive Officer, Dean Ledger, in exchange for services already performed.

On November 9, 2015, the Company issued a warrant to purchase 500,000 shares of the Company’s $.0001 par value common stock to Robert J. Fasnacht, our current Executive Vice President and member of our Board of Directors, in exchange for services already performed.