11-Aug-2014

Quarterly Report

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, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed on March 31, 2014.

Overview

NanoFlex is engaged in the development, commercialization, and licensing of advanced photovoltaic technologies and intellectual property. We have agreements with Princeton University which were assigned to University of Southern California and the University of Michigan (collectively, the "Universities"), pursuant to which we have developed certain technologies and prosecuted and paid for more than 744 issued or pending patents covering materials, architectures, and fabrication processes for organic and inorganic flexible, thin-film photovoltaic technologies. While each patent is issued in the names of the respective university that developed the subject technology, we have exclusive commercial license rights to all of the patents and their attendant technologies and the patents are referred to herein as being our patents.

Unlike conventional thin film solar, the materials platforms that we have developed and are developing for solar cells are capable of ultrahigh efficiency accessible only by single crystalline inorganic materials such as silicon and gallium arsenide. The technologies we are developing allow the solar energy generating surfaces to be sufficiently flexible to be wrapped around 1 centimeter diameter cylinders without damage or loss of performance. Their ultra-light weight impacts other traditional costs associated with solar such as eliminating the need for costly, complex and robust panel mounts. We believe that these solar energy generating "films" can be used on architectural surfaces, on windows as attractive semi-transparent energy-generating coatings and even paints. Their flexibility allows their application to surfaces such as tents, clothing and other oddly shaped or "mobile" surfaces, including space-borne applications. Finally, the ability to be rolled around cylinders permits compact and low cost transport for deployment at remote sites.

We currently hold exclusive rights to more than 744 issued or pending patents worldwide 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

Plan of Operation and Liquidity and Capital Resources

We have made contact with major solar cell and electronics manufacturers world-wide and are finding commercial interest in both our GaAs and OPV technologies. We plan to work closely with those companies interested in our technology solutions, both in our own technology development center, as well as within partner facilities, to develop proof-of-concept prototypes and processes to mitigate commercialization risks and gain early market entry and acceptance.

Although we currently do not have any 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 qualify our technologies at a manufacturing scale. We believe that the best manner to do this is to develop our own technology development center in Ann Arbor, Michigan. The principal function of the facility will be to demonstrate our ability to prototype our inorganic and organic solar cells utilizing our proprietary technologies. In addition, we anticipate that advancements at the facility can attract other industry players to acquire early licenses to use our intellectual property. Finally, we believe that having a technology development center will allow us to obtain government funding from the National Aeronautics and Space Administration, the Department of Defense and the Department of Energy, each of which have interests in businesses that can deliver ultra lightweight, high-efficiency technologies for space, mobile warfighter, and grid-deployment applications.

The technology development center can also make us highly competitive to receive government grants to support GaAs and OPV research and development. A second revenue source is in joint development projects with existing solar cell manufacturers. The largest near-term opportunity will be in partnerships exploiting GaAs solar technology with existing GaAs cell manufacturers in the space programs, military operations and other suitable end use. We anticipate that partnerships with one or more of these companies will be supported by the facility, and will result in early revenue opportunities.

We believe that the costs of establishing the facility will be approximately $5,500,000 and that it can be in place by third quarter of 2014.

Our plan of operation is dependent upon our ability to raise additional capital to support our research and development operations. Since our inception, we have raised over $53,000,000 in equity from various investors, which has been invested primarily in research and development activities and maintaining our patent portfolio. We anticipate that we will need to raise approximately $17,700,000 over the next 24 months until we earn sufficient revenue to support our operations, including our continuing research and development activities and patent prosecutions and to maintain our intellectual property portfolio. The following is a breakdown of the $17,700,000 budget:

Working Capital $ 2,700,000
R&D Sponsored Research $ 3,600,000
R&D Operating Expenses (technology development center) $ 1,300,000
R&D Equipment Purchases (technology development center) $ 2,400,000
Patent Prosecution and App Fees $ 3,600,000
General and Administrative $ 4,100,000

There can be no assurance that financing will be available to us to fund our $17,700,000 budget, or, if available, that it will be on terms acceptable to us.

Results of Operations

For the Three and Six Months Ended June 30, 2014 and June 30, 2013

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2014 were $155,151, a 52% decrease from $321,896 for the three months ended June 30, 2013. The decrease is attributable to timing of research work by the Universities performed pursuant to our research agreements. Research and development expenses for the six months ended June 30, 2014 were $705,151, a 30% increase from $543,771 for the six months ended June 30, 2013. The increase is attributable to additional funding we provided to the Universities pursuant to our research agreements.

Patent Application and Prosecution Fees

Patent application and prosecution fees consist of the fees due for prosecuting and maintaining our patents and were $327,966 for the three months ended June 30, 2014, a 33% increase from $246,944 for the three months ended June 30, 2013. Patent application and prosecution fees were $742,402 for the six months ended June 30, 2014, a 30% increase from $572,421 for the six months ended June 30, 2013. The increase is attributable to an increase in the number of our patents and number of applications being researched for our technologies.

Salaries and Related Expenses

Salaries and related expenses were $409,825 for the three months ended June 30, 2014, a 1% decrease from $412,037 for the three months ended June 30, 2013. Salaries and related expenses were $842,092 for the six months ended June 30, 2014, a 57% increase from $537,296 for the six months ended June 30, 2013. The increase is attributable to a negotiated temporary decline in salaries during the first quarter of 2013 which was subsequently reinstated.

Stock-based Compensation

There was no stock-based compensation for the three and six months ended June 30, 2014 as compared to $19,210,470 and $19,406,501 for the three and six months ended June 30, 2013, respectively, relating to the vesting of awards granted in 2012. As of June 30, 2014, there was no remaining unamortized stock-based compensation associated with outstanding awards.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, consisting primarily of rent, office supplies, depreciation, workers compensation insurance, medical insurance, postage and shipping, traveling expenses and consulting fees, were $185,921 for the three months ended June 30, 2014, a 44% increase from $128,965 for the three months ended June 30, 2013. Selling, general and administrative expenses were $485,595 for the six months ended June 30, 2014, a 56% increase from $310,707 for the six months ended June 30, 2013. The increase is primarily attributable to professional fees and other compliance related costs associated with us being a public company and increased rent due to the transition to our Arizona corporate headquarters.

Interest Expense

There was no interest expense for the three and six months ended June 30, 2014 as compared to $4,178,613 and $4,445,521 for the three and six months ended June 30, 2013, respectively, due to the effects of our reverse merger which eliminated all of our interest bearing debt.

Loss on Debt Extinguishment

There was no loss on debt extinguishment for the three and six months ended June 30, 2014 as compared to $0 and $1,811,800 for the three and months ended June 30, 2013, respectively, as we have eliminated all of our interest bearing debt. The loss on debt extinguishment in 2013 related to (i) conversion of $230,000 of debt that was not originally convertible into 46,000 common shares and (ii) the issuance of 286,000 of common shares in connection with the extension of the maturity date on an aggregate of $1,400,000 of outstanding debt. We evaluated the modifications under ASC 470-50 and determined that the modifications were substantial and the revised terms constituted debt extinguishments for which a loss is recognized equal to the difference in fair value of the debt and shares before and after the modifications.

Net Loss

The net loss for the three months ended June 30, 2014 was $1,078,861, a 96% decrease from $24,498,925 for the three months ended June 30, 2013. The net loss for the six months ended June 30, 2014 was $2,775,240, a 96% decrease from $27,628,017 for the six months ended June 30, 2013. The decrease in the net loss is primarily attributable to the decrease in stock-based compensation, interest expense and loss on debt extinguishment, partially offset by increases in cash-based operating expenses, each of which is described above.

Liquidity and Capital Resources

As of June 30, 2014, we had cash and cash equivalents of $27,690 and a working capital deficit of $3,269,989, as compared to cash and cash equivalents of $197,004 and a working capital deficit of $1,255,222 as of December 31, 2013. The decrease in cash and working capital is attributable to our operating losses as we have yet to generate revenues from our operations.

We are in the process of raising additional funds in order to continue to finance our research, development and commercialize photonic energy conversion technologies utilizing organic semiconductor-based solar cells. The additional funding is expected to consist of private sales of our equity securities. However, there can be no assurance that the additional funds will be available to us when needed, particularly in the current economic environment.

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, 2014 from those set forth in "Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014.