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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended May 31, 2014

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 333-127953
 
NEW ENERGY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
59-3509694
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
10632 Little Patuxent Parkway, Suite 406
   
Columbia, Maryland
 
21044
(Address of principal executive offices)
 
(Zip Code)
 
(800) 213-0689
(Registrant’s telephone number, including area code)

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 T No o

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 T No o

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
o
 
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
Smaller reporting company
x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 24,306,612 shares of common stock, par value $0.001, were outstanding on July 8, 2014.



 
 

 
NEW ENERGY TECHNOLOGIES, INC.
FORM 10-Q

For the Quarterly Period Ended May 31, 2014
Table of Contents
 
PART I FINANCIAL INFORMATION
     
         
Item 1.
Consolidated Financial Statements (Unaudited)
    3  
           
 
Consolidated Balance Sheets
    3  
           
 
Consolidated Statements of Operations
    4  
           
 
Consolidated Statements of Stockholders’ Equity (Deficit)
    5  
           
 
Consolidated Statements of Cash Flows
    7  
           
 
Notes to Consolidated Financial Statements
    8  
           
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 16  
           
Item 4.
Controls and Procedures
    21  
           
PART II OTHER INFORMATION
       
           
Item 6.
Exhibits
    22  
           
Signatures
    23  
           
Certifications        
 
 
2

 
 
PART I — FINANCIAL INFORMATION

 
Item 1. Consolidated Financial Statements (Unaudited)
 
NEW ENERGY TECHNOLOGIES, INC.
           
(A Development Stage Company)
           
CONSOLIDATED BALANCE SHEETS
           
MAY 31, 2014 AND AUGUST 31, 2013
           
             
   
May 31,
   
August 31,
 
   
2014
   
2013
 
 
 
(Unaudited)
       
ASSETS  
Current assets
           
Cash and cash equivalents
  $ 1,364,454     $ 347,493  
Deferred research and development costs
    150,000       150,000  
Prepaid expenses and other current assets
    13,405       22,379  
Total current assets
    1,527,859       519,872  
                 
Equipment, net of accumulated depreciation of $16,500 and $12,025, respectively
    11,290       13,823  
Total assets
  $ 1,539,149     $ 533,695  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
Current liabilities
               
Accounts payable
  $ 127,885     $ 122,356  
Interest payable
    137,788       -  
Convertible promissory note, net of discount of $2,984,172 as of May 31, 2014
    15,828       -  
Total current liabilities
    281,501       122,356  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
Preferred stock: $0.10 par value; 1,000,000 shares authorized, no
    shares issued and outstanding
    -       -  
Common stock: $0.001 par value; 300,000,000 shares authorized,
    24,306,612 and 24,194,713 shares issued and outstanding at May 31,
    2014 and August 31, 2013, respectively
    24,306       24,194  
Additional paid-in capital
    20,688,098       17,441,034  
Deficit accumulated during the development stage
    (19,454,756 )     (17,053,889 )
Total stockholders' equity
    1,257,648       411,339  
Total liabilities and stockholders' equity
  $ 1,539,149     $ 533,695  
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
3

 
 
NEW ENERGY TECHNOLOGIES, INC.
                             
(A Development Stage Company)
                             
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
                         
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2014 AND 2013 AND FOR THE
             
PERIOD FROM INCEPTION (MAY 5, 1998) TO MAY 31, 2014
                         
                               
                           
Cumulative
 
                           
May 5, 1998
 
   
Three Months Ended May 31,
   
Nine Months Ended May 31,
   
(Inception) to
 
   
2014
   
2013
   
2014
   
2013
   
May 31, 2014
 
 
                             
Revenue
  $ -     $ -     $ -     $ -     $ -  
                                         
Operating expense
                                       
Selling, general and administrative
    690,521       468,166       1,775,114       2,511,763       16,046,951  
Research and development
    171,875       115,813       472,137       224,490       3,419,153  
Total operating expense
    862,396       583,979       2,247,251       2,736,253       19,466,104  
                                         
Loss from operations
    (862,396 )     (583,979 )     (2,247,251 )     (2,736,253 )     (19,466,104 )
                                         
Other income (expense)
                                       
Interest income
    -       -       -       -       98,582  
Interest expense - other
    (54,403 )     -       (137,788 )     (30,325 )     (206,737 )
Interest expense - accretion of debt discount
    (15,464 )     -       (15,828 )     (999,485 )     (1,015,828 )
Loss on disposal of fixed assets
    -       -       -       -       (5,307 )
Gain on dissolution of foreign subsidiary
    -       -       -       -       59,704  
Foreign exchange loss
    -       -       -       -       (86,428 )
Change in fair value of warrant liability
    -       -       -       -       2,128,331  
Payable written off
    -       -       -       -       186,109  
Total other income (expense)
    (69,867 )     -       (153,616 )     (1,029,810 )     1,158,426  
                                         
Loss from continuing operations
    (932,263 )     (583,979 )     (2,400,867 )     (3,766,063 )     (18,307,678 )
                                         
Loss from discontinued operations
    -       -       -       -       (404,307 )
                                         
Net loss
  $ (932,263 )   $ (583,979 )   $ (2,400,867 )   $ (3,766,063 )   $ (18,711,985 )
                                         
Basic and Diluted Loss per Common Share
  $ (0.04 )   $ (0.02 )   $ (0.10 )   $ (0.17 )        
                                         
Weighted average number of common shares outstanding - basic and diluted
    24,306,612       24,174,652       24,270,086       22,174,541          
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
4

 
 
NEW ENERGY TECHNOLOGIES, INC.
                             
(A Development Stage Company)
                             
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
                         
FROM MAY 5, 1998 (INCEPTION) TO MAY 31, 2014
                     Deficit        
                      Accumulated       Total  
                Additional    
During the
   
Stockholders'
 
   
Common Stock
    Paid-in     Development     Equity  
   
Shares
   
Amount
   
Capital
   
 Stage
   
(Deficit)
 
Restricted common stock issued to related parties for management services at $0.001 per share
    3,000,000     $ 3,000     $ -     $ -     $ 3,000  
Unrestricted common stock sales to third parties at $0.40 per share
    375,000       375       149,625       -       150,000  
   Net loss for the year ended August 31, 1998
    -       -       -       (12,326 )     (12,326 )
Balance, August 31, 1998
    3,375,000       3,375       149,625       (12,326 )     140,674  
                                         
   Net loss for the year ended August 31, 1999
    -       -       -       (77,946 )     (77,946 )
Balance, August 31, 1999
    3,375,000       3,375       149,625       (90,272 )     62,728  
                                         
   Net loss for the year ended August 31, 2000
    -       -       -       (12,446 )     (12,446 )
Balance, August 31, 2000
    3,375,000       3,375       149,625       (102,718 )     50,282  
                                         
   Net loss for year ended August 31, 2001
    -       -       -       (12,904 )     (12,904 )
Balance, August 31, 2001
    3,375,000       3,375       149,625       (115,622 )     37,378  
                                         
   Net loss for the year ended August 31, 2002
    -       -       -       (54,935 )     (54,935 )
Balance, August 31, 2002
    3,375,000       3,375       149,625       (170,557 )     (17,557 )
                                         
Restricted common stock issued at $0.001 per share to two related parties to satisfy outstanding management fees.
    10,333,200       10,333       92,999       -       103,332  
   Net loss for the year ended August 31, 2003
    -       -       -       (97,662 )     (97,662 )
Balance, August 31, 2003
    13,708,200       13,708       242,624       (268,219 )     (11,887 )
                                         
   Net loss for the year ended August 31, 2004
    -       -       -       (19,787 )     (19,787 )
Balance, August 31, 2004
    13,708,200       13,708       242,624       (288,006 )     (31,674 )
                                         
   Net loss for the year ended August 31, 2005
    -       -       -       (103,142 )     (103,142 )
Balance, August 31, 2005
    13,708,200       13,708       242,624       (391,148 )     (134,816 )
                                         
Issuance of common stock and warrants at $0.50 per share
    1,000,000       1,000       499,000       -       500,000  
   Net loss for the year ended August 31, 2006
    -       -       -       (157,982 )     (157,982 )
Balance, August 31, 2006
    14,708,200       14,708.00       741,624.00       (549,130 )     207,202  
                                         
Exercise of Class A Warrants  at $0.50 per share
    1,000,000       1,000       499,000       -       500,000  
Exercise of Class B Warrants  at $0.55 per share
    1,000,000       1,000       549,000       -       550,000  
Exercise of Class C Warrants  at $1.50 per share
    326,667       327       489,673       -       490,000  
Exercise of Class D Warrants  at $1.65 per share
    293,333       293       483,707       -       484,000  
Exercise of Class E Warrants  at $1.80 per share
    293,333       293       527,707       -       528,000  
Issuance of common stock and warrants at $1.50 per share
    333,333       333       499,667       -       500,000  
Dividend paid - spin off of MircoChannel Technologies Corporation
    -       -       -       (400,000 )     (400,000 )
   Net loss for the year ended August 31, 2007
    -       -       -       (1,442,769 )     (1,442,769 )
Balance, August 31, 2007
    17,954,866       17,954       3,790,378       (2,391,899 )     1,416,433  
                                         
Common stock and warrants issued for cash and services at $3.00 per Unit
    1,225,000       1,225       3,394,730       -       3,395,955  
Exercise of Class C Warrants  at $1.50 per share
    6,667       7       9,993       -       10,000  
Exercise of Class D Warrants  at $1.65 per share
    6,667       7       10,993       -       11,000  
Exercise of Class F Warrants  at $3.75 per share
    58,333       58       218,692       -       218,750  
Stock based compensation
    -       -       3,600,303       -       3,600,303  
   Net loss for the year ended August 31, 2008
    -       -       -       (5,721,545 )     (5,721,545 )
Balance, August 31, 2008
    19,251,533       19,251       11,025,089       (8,113,444 )     2,930,896  
 
 
5

 
 
                 
Additional
   
Deficit Accumulated
During the
     Total
Stockholders'
 
   
Common Stock
    Paid-in     Development     Equity  
   
Shares
   
Amount
   
 Capital
   
Stage
   
(Deficit)
 
Exercise of Class E Warrants  at $1.80 per share
    6,667       7       11,993       -       12,000  
Exercise of Class F Warrants  at $3.75 per share
    275,333       275       1,032,225       -       1,032,500  
Stock based compensation
    -       -       183,312       -       183,312  
Reversal of stock based compensation due to forfeiture of stock options
    -       -       (3,591,093 )     -       (3,591,093 )
   Net income for the year ended August 31, 2009
    -       -       -       1,961,175       1,961,175  
Balance, August 31, 2009
    19,533,533       19,533       8,661,526.00       (6,152,269 )     2,528,790  
                                         
Stock based compensation
    -       -       661,040       -       661,040  
Reversal of stock based compensation due to forfeiture of stock options
    -       -       (478,971 )     -       (478,971 )
Cumulative adjustment upon adoption of ASC 815-40
    -       -       (1,785,560 )     (342,771 )     (2,128,331 )
   Net loss for the year ended August 31, 2010
    -       -       -       (233,136 )     (233,136 )
Balance, August 31, 2010
    19,533,533       19,533       7,058,035       (6,728,176 )     349,392  
                                         
Rounding due to reverse one for three stock split effective March 16, 2011
    (3 )     -       -       -       -  
Exercise of Class F Warrants at $3.75 per share
    1,054,512       1,055       3,953,320       -       3,954,375  
Exercise of stock options
    50,318       50       30,750       -       30,800  
Stock based compensation
    -       -       2,855,630       -       2,855,630  
Reversal of stock based compensation due to forfeiture of stock options
    -       -       (1,304,551 )     -       (1,304,551 )
   Net loss for the year ended August 31, 2011
    -       -       -       (3,619,750 )     (3,619,750 )
Balance, August 31, 2011
    20,638,360       20,638       12,593,184       (10,347,926 )     2,265,896  
                                         
Stock based compensation
    -       -       237,046       -       237,046  
Reversal of stock based compensation due to forfeiture of stock options
    -       -       (31,948 )     -       (31,948 )
Discount on convertible promissory note due to detachable warrants
    -       -       547,050       -       547,050  
Discount on convertible promissory note due to beneficial conversion feature
    -       -       452,950       -       452,950  
   Net loss for the year ended August 31, 2012
    -       -       -       (2,433,431 )     (2,433,431 )
Balance, August 31, 2012
    20,638,360       20,638       13,798,282       (12,781,357 )     1,037,563  
                                         
Stock based compensation
    -       -       334,305       -       334,305  
Reversal of stock based compensation due to forfeiture of stock options
    -       -       (10,075 )     -       (10,075 )
Issuance of common stock and warrants at $0.64 per unit
    1,875,000       1,875       1,198,125       -       1,200,000  
Issuance of common stock upon the conversion of note at $0.64 per share
    1,650,869       1,651       1,054,905       -       1,056,556  
Exercise of stock options
    22,672       22       (22 )     -       -  
Issuance of common stock upon the exercise of Series H Warrants
    7,812       8       6,476       -       6,484  
Expense related to issuance of Series H Warrants as inducement to convert the 2012 Promissory Note
    -       -       1,059,038       -       1,059,038  
   Net loss for the year ended August 31, 2013
    -       -       -       (4,272,532 )     (4,272,532 )
Balance, August 31, 2013
    24,194,713       24,194       17,441,034       (17,053,889 )     411,339  
                                         
Stock based compensation
    30,000       30       604,119       -       604,149  
Reversal of stock based compensation due to forfeiture of stock options
    -       -       (356,973 )     -       (356,973 )
Exercise of stock options
    81,899       82       (82 )     -       -  
Discount on convertible promissory note due to detachable warrants
    -       -       1,137,149       -       1,137,149  
Discount on convertible promissory note due to beneficial conversion feature
    -       -       1,862,851       -       1,862,851  
   Net loss for the nine months ended May 31, 2014
    -       -               (2,400,867 )     (2,400,867 )
Balance, May 31, 2014
    24,306,612     $ 24,306     $ 20,688,098     $ (19,454,756 )   $ 1,257,648  
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
6

 
 
NEW ENERGY TECHNOLOGIES, INC.
                 
(A Development Stage Company)
                 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                 
FOR THE NINE MONTHS ENDED MAY 31, 2014 AND 2013 AND FOR THE
                 
PERIOD FROM INCEPTION (MAY 5, 1998) TO MAY 31, 2014
                 
               
Cumulative
 
               
May 5, 1998
 
   
Nine Months Ended May 31,
   
(Inception) to
 
   
2014
   
2013
   
May 31, 2014
 
Cash flows from operating activities
                 
Loss from continuing operations
  $ (2,400,867 )   $ (3,766,063 )   $ (18,265,073 )
Add: loss from discontinued operations
    -       -       (404,307 )
Adjustments to reconcile net loss to net cash used in operating activities
                       
Depreciation
    4,475       4,607       20,982  
Stock based compensation expense
    604,149       284,806       8,475,786  
Reversal of stock based compensation expense due to forfeiture of stock options
    (356,973 )     (10,075 )     (5,773,611 )
Warrants issued to note holder
    -       1,059,038       1,059,038  
Change in fair value of warrant liability
    -       -       (2,128,331 )
Loss on disposal of fixed assets
    -       -       5,307  
Payable written off
    -       -       (186,109 )
Common stock issued for services
    -       -       3,000  
Common stock issued for debt settlement
    -       -       103,332  
Accretion of debt discount
    15,828       999,485       1,015,828  
Changes in operating assets and liabilities:
                       
Decrease (increase) in deferred research and development costs
    -       (117,405 )     (150,000 )
Decrease (increase) in prepaid expenses and other current assets
    8,974       5,476       (13,405 )
Increase (decrease) in accounts payable
    5,529       (27,760 )     115,280  
Increase (decrease) in accrued liabilities
    137,788       30,325       350,453  
Net cash used in operating activities
    (1,981,097 )     (1,537,566 )     (15,771,830 )
                         
Cash flows from investing activity
                       
Purchase of equipment
    (1,942 )     -       (37,579 )
Net cash used in investing activity
    (1,942 )     -       (37,579 )
                         
Cash flows from financing activities
                       
Proceeds from the issuance of common stock, exercise of warrants and stock options, net
    -       1,206,483       13,573,863  
Repayment of promissory note
    -       -       (155,000 )
Proceeds from promissory notes
    3,000,000       -       4,155,000  
Dividend paid
    -       -       (400,000 )
Net cash provided by financing activities
    3,000,000       1,206,483       17,173,863  
                         
Increase (decrease) in cash and cash equivalents
    1,016,961       (331,083 )     1,364,454  
                         
Cash and cash equivalents at beginning of period
    347,493       1,046,918       -  
                         
Cash and cash equivalents at end of period
  $ 1,364,454     $ 715,835     $ 1,364,454  
                         
Supplemental disclosure of cash flow information:
                       
Interest paid in cash
  $ -     $ -     $ -  
Income taxes paid in cash
  $ -     $ -     $ -  
                         
Supplemental disclosure of non-cash transactions:
                       
Accrued management fees converted to equity
  $ -     $ -     $ 103,332  
Debt discount recorded for value of warrants issued
  $ 1,137,149     $ -     $ 1,684,199  
Debt discount recorded for beneficial conversion feature
  $ 1,862,851     $ -     $ 2,315,801  
Warrants issued for broker commissions
  $ -     $ -     $ 642,980  
Common stock issued for conversion of note payable
  $ -     $ 1,056,556     $ 1,056,556  
                         
(The accompanying notes are an integral part of these consolidated financial statements)
 

 
7

 

NEW ENERGY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - Basis of Presentation, Recent Accounting Pronouncements, Organization and Going Concern

Basis of Presentation

The unaudited financial statements of New Energy Technologies, Inc. as of May 31, 2014, and for the three and nine months ended May 31, 2014 and 2013, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and include the Company’s wholly-owned subsidiaries, Sungen Energy, Inc. (“Sungen”), Kinetic Energy Corporation (“KEC”), and New Energy Solar Corporation (“New Energy Solar”). Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended August 31, 2013, as filed with the Securities and Exchange Commission as part of the Company's Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included. The Company did not record an income tax provision during the periods presented due to net taxable losses. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year.

Recent Accounting Pronouncements

On June 10, 2014, accounting principles generally accepted in the United States were amended to remove the definition of a development stage entity thereby removing the financial reporting distinction between development stage entities and other reporting entities. In addition, the amendments eliminate the requirements for the Company to present inception-to-date information and to label the consolidated financial statements as those of a development stage entity. The amendments are effective for the Company’s consolidated financial statements as of August 31, 2016, and interim periods therein; however, early application of each of the amendments is permitted for any reporting period. As of the date these consolidated financial statements were issued, the Company was in the process of evaluating the impact of implementing the amendments. Subsequent to the Company’s adoption of the amendments, the Company will no longer present inception-to-date information in the consolidated statements of operations, stockholders' equity, and cash flows. In addition, the consolidated financial statements will no longer be labeled as those of a development stage entity.

Organization

New Energy Technologies, Inc. (the “Company,”) was incorporated in the State of Nevada on May 5, 1998, under the name “Octillion Corp.” On December 2, 2008, the Company amended its Articles of Incorporation to effect a change of name to New Energy Technologies, Inc. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Sungen, KEC, and New Energy Solar. The Company’s common stock, par value $0.001 per share, is quoted on The OTC Markets Group, Inc. QB tier under the ticker symbol “NENE.”

The Company is a renewable and alternative energy company, developing two novel technologies for generating sustainable electricity, one of which collects light energy from the sun and artificial sources (SolarWindow™), and the other harvests kinetic energy present in moving vehicles (MotionPower™). The Company’s proprietary, patent-pending technologies and products, which are the subjects of one hundred and one (101) patent-filings, have been invented, designed, engineered, and prototyped in preparation for further field testing, product development, and eventual commercial deployment.

The Company’s SolarWindow™ technology generates electrical energy when the electricity-generating coating is applied to glass and flexible plastic surfaces creating semi-transparent, see-through organic photovoltaic (OPV) solar cells. If successfully developed, SolarWindow™ could potentially be used on any of the more than 85 million commercial and residential buildings in the United States alone (U.S. Census Bureau, 2007 American Housing Survey & U.S. Energy Information Administration, 2003 Commercial Buildings Energy Consumption Survey). The Company’s SolarWindow™ technology is the subject of forty-two (42) patent filings.
 
 
8

 

The Company’s MotionPower™ technology harvests, or captures, the “kinetic” or “motion” energy of cars, trucks, buses, and heavy commercial vehicles when they pass over the system or slow down. MotionPower™ captures kinetic energy and converts it into electricity. If successfully developed, MotionPower™ could potentially be used to harvest kinetic energy generated by any of the estimated 250 million vehicles registered in America (U.S. Department of Transportation Federal Highway Administration, 2008 Highway Statistics), which drive approximately six billion miles on our nation’s roadways every day (U.S. Environmental Protection Agency). The Company’s MotionPower™ technology is the subject of fifty-nine (59) patent filings.

The Company’s product development programs involve ongoing research and development efforts, and the commitment of significant resources to support the extensive invention, design, engineering, testing, prototyping, and intellectual property initiatives carried-out by its contract engineers, scientists, and consultants.

The Company continues to assess the ongoing development and value propositions of its novel SolarWindow™ and MotionPower™ technologies. This assessment helps the Company strategically focus on specific technology development which best delivers significant long-term commercial competitive advantages.

As of May 31, 2014, the Company had accumulated a total deficit of $19,454,756 from operations in pursuit of the Company’s development and commercialization objectives.

The Company intends to finance its operations primarily through existing cash and possible future financing transactions. As of May 31, 2014, the Company had cash and cash equivalents of $1,364,454. Based upon the Company’s current and near term anticipated level of operations and expenditures, the Company believes that cash on hand should be sufficient to enable the Company to continue operations into the Company’s fiscal year ending August 31, 2015.

The Company is subject to a number of risks, including its ability to successfully develop SolarWindow™ and MotionPower™ technologies into commercially viable products, the Company’s ability to obtain financing as and when the Company needs it, competition from existing and new products, fluctuation of quarterly financial results, loss of key personnel, uncertain protection for the Company’s intellectual property, litigation or other proceedings, dependence on corporate partners and collaborators and future changes in its target markets that may adversely affect the Company.

NOTE 2 - Convertible Promissory Note

On October 7, 2013 (the “Closing Date”), the Company entered into a Bridge Loan Agreement (the “Loan Agreement”) with Kalen Capital Corporation (the “Investor”), a private corporation owning in excess of 10% of the Company’s issued and outstanding shares of common stock. Pursuant to the Loan Agreement, the Company received proceeds of $3,000,000 and issued a 7% unsecured Convertible Promissory Note (the “Note”) due on October 6, 2014, with interest compounded quarterly and issued a Series I Stock Purchase Warrant (the “Series I Warrant”) allowing the holder to purchase up to 921,875 shares of the Company’s common stock at an initial exercise price of $1.37 for a period on five (5) years. The Series I Warrant is exercisable on a “cashless basis.” According to the original terms of the Loan Agreement, the Investor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Note, and any or all accrued and unpaid interest thereon into units (collectively, the “Units”), with each Unit consisting of (a) one share of common stock; (b) one Series J Stock Purchase Warrant for the purchase of one share of common stock (the “Series J Warrants”); and (c) one Series K Stock Purchase Warrant for the purchase of one share of common stock (the “Series K Warrants”). The conversion price for each Unit is the lesser of (i) $1.37, with the exercise price of each Series J Warrant set at $1.47 and the exercise price of each Series K Warrant set at $1.57; or (ii) 70% of the 20 day average closing price of the Company’s common stock prior to conversion, subject to a floor of $1.00 with the exercise price of each Series J Warrant included in the Units issued upon conversion being equal to 107.3% of the unit exercise price and the exercise price of each Series K Warrant included in the Units issued upon conversion being equal to 114.6% of the unit exercise price.
 
 
9

 

Together with the Loan Agreement, the Company entered into (a) a Lock-Up Agreement whereby the Investor agreed not to sell any shares of common stock owned by the Investor, including any shares issued upon conversion of the Note or upon exercise of any warrants held by Investor, whether issued pursuant to this Loan Agreement or otherwise, for a period of one (1) year from the Closing Date (as defined in the Loan Agreement) and (b) a Registration Rights Agreement that requires the Company to prepare and file a registration statement on Form S-1 no later than the 90th day prior to the expiration of the Lock-Up Agreement covering the resale of all shares of common stock issuable upon conversion of any portion of the Note and the shares of common stock issuable upon exercise of the Series I, Series J and Series K Warrants.

The Company calculated the debt discount related to the Note and Series I Warrants by first allocating the respective fair value of the Loan and the Series I Warrants based upon their relative fair values to the total Note proceeds. The fair value of the Series I Warrants issued with the Note was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock - $2.12 per share; estimated volatility - 165.67%; risk free interest rate - 1.41%; expected dividend rate - 0% and expected life - 5.0 years. The resulting fair value of $1,137,149 was allocated to the Series I Warrants.

The intrinsic value of the beneficial conversion feature amounted to $1,862,851. The resulting $3,000,000 discount to the Note is being accreted over the one year term of the Note using the effective interest method.

During the three and nine months ended May 31, 2014, the Company recognized $54,403 and $137,788 of interest expense related to this Note and $15,464 and $15,828 of accretion related to the debt discount. The remaining debt discount of $2,984,172 will be amortized through October 6, 2014 with $670,492 recorded during the quarter ended August 31, 2014 and $2,313,680 recorded during the quarter ended November 30, 2014.

NOTE 3 – Common Stock and Warrants

Common Stock

During the nine months ended May 31, 2014, the Company issued 1) 81,899 shares of unrestricted common stock as a result of the cashless exercise of 190,000 stock options; and 2) 10,000 shares of restricted common stock to each of the Company’s three directors (30,000 shares total) valued at $2.90 per share, the closing price of the Company's common stock on the day the stock was issued.

Warrants

Each of the Company’s warrants outstanding entitles the holder to purchase one share of the Company’s common stock for each warrant share held. A summary of the Company’s warrants outstanding and exercisable as of May 31, 2014 and August 31, 2013 is as follows:
 
  Shares of Common Stock Issuable from Warrants Outstanding as of
Description
 
May 31, 2014
   
August 31, 2013
   
Exercise Price
 
Expiration
Series G
    625,000       625,000     $ 0.64  
April 17, 2015
Series H
    1,755,126       1,755,126     $ 0.83  
February 1, 2016
Series I
    921,875       -     $ 1.37  
October 7, 2018
Total
    3,302,001       2,380,126            

The Series I Warrant was issued on October 7, 2013, in connection with the Loan Agreement more fully described above under “Note 2 - Convertible Promissory Note.” In addition, there are a total of 4,793,155 Series J warrants and Series K warrants issuable as described under “NOTE 2 - Convertible Promissory Note.”
 
 
10

 

NOTE 4 - Stock Options

On October 10, 2006, the Company’s Board of Directors (the “Board”) adopted and approved the 2006 Incentive Stock Option Plan (the “2006 Plan”) that provides for the grant of stock options to employees, directors, officers and consultants. Stock option grants vest either immediately or over one to five years and expire ten years after the date of grant. Stockholders previously approved 5,000,000 shares for grant under the 2006 Plan, of which 3,347,496 remain available for grant and 326,667 options have been exercised as of May 31, 2014. All shares approved for grant and subsequently forfeited are available for future grant. The Company does not repurchase shares to fulfill the requirements of options that are exercised. The Company issues new shares when options are exercised.

The Company measures all stock-based compensation based on the fair value on the grant date using the Black-Scholes-Merton formula and recognizes expense over the requisite service period. The Black-Scholes model requires management to make assumptions regarding option time to expiration, expected volatility, and risk-free interest rates, all of which have a significant impact on the fair value of the option.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a bond with a similar term. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is calculated based on the historical closing stock prices. The Company uses the “simplified” method for determining the expected term of its “plain vanilla” stock options. The Company recognizes compensation expense only for the portion of stock options that are expected to vest. Therefore, the Company applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. If the actual number of forfeitures differs from those estimated by the Company, additional adjustments to compensation expense may be required in future periods.

A summary of the Company’s stock option activity for the nine months ended May 31, 2014 and the year ended August 31, 2013 and related information follows:

   
Number of
Options
   
Weighted Average Exercise Price ($)
 
Weighted Average
Remaining Contractual
Term
 
Aggregate
Intrinsic
Value ($)
 
Outstanding at August 31, 2012
    861,671       2.10          
Grants
    177,500       1.59          
Exercises
    (63,333 )     1.65          
Forfeitures
    (5,000 )     3.27          
Outstanding at August 31, 2013
    970,838       2.03          
Grants
    805,000       2.90          
Exercises
    (190,000 )     1.65          
Forfeitures
    (260,001 )     1.69          
Outstanding at May 31, 2014
    1,325,837       2.68  
8.21 years
  $ 148,601  
Exercisable at May 31, 2014
    571,337       2.39  
6.31 years
  $ 148,601  
Available for grant at May 31, 2014
    3,347,496                    

The aggregate intrinsic value in the table above represents the total pretax intrinsic value for all “in-the-money” options (i.e. the difference between the Company’s closing stock price on the last trading day of the period covered by this report and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all in-the-money option holders exercised their vested options on May 31, 2014. The intrinsic value of the option changes based upon the fair market value of the Company’s common stock. Since the closing stock price was $1.96 on May 31, 2014 and 385,001 outstanding options have an exercise price below $1.96 per share, as of May 31, 2014, there is intrinsic value to the Company’s outstanding, in-the-money stock options.
 
 
11

 
 
The following table sets forth the share-based compensation cost resulting from stock option grants, including those previously granted and vesting over time, that were recorded in the Company’s Consolidated Statements of Operations for the three and nine months ended May 31, 2014 and 2013, and from May 5, 1998 (inception) to May 31, 2014 (excludes $87,000 of stock based compensation for restricted stock grants during the nine months ended May 31, 2014 described in "Note 3 - Common Stock and Warrants"):
 
                           
Cumulative
 
   
Three Months Ended
   
Nine Months Ended
   
May 5, 1998
 
   
May 31,
   
May 31,
   
(Inception) to
 
   
2014
   
2013
   
2014
   
2013
   
May 31, 2014
 
Stock Compensation Expense:
                             
SG&A - expense
  $ 237,577     $ 51,165     $ 517,149     $ 284,806     $ 8,388,786  
SG&A - income due to forfeitures
    -       -       (356,973 )     (10,075 )     (5,773,611 )
Net stock compensation cost
  $ 237,577     $ 51,165     $ 160,176     $ 274,731     $ 2,615,175  
 
As of May 31, 2014, the Company had $844,009 of unrecognized compensation cost related to unvested stock options which is expected to be recognized over a period of 4.25 years.

Stock Option Activity During the Nine Months Ended May 31, 2014

On January 27, 2014, pursuant to his employment agreement executed on January 1, 2014, John Conklin, CEO received a grant of 700,000 stock options. The 700,000 stock options granted on January 27, 2014 are exercisable at $2.90 per share, expire ten years from the date of grant, on January 27, 2024 and vest at the rate of 50,000 shares every six months beginning on June 30, 2014 through December 31, 2017 (4 years) for 400,000 options with the remaining 300,000 options vesting at such time as the Company shall have generated cumulative revenues of no less than $1,000,000 from the sale of a commercial product ("Performance Stock Options"). The stock option is further subject to the terms and conditions of a stock option agreement between the Company and Mr. Conklin. Under the terms of the stock option agreement, the stock option agreement will terminate and there will be no further vesting of stock options effective as of the date that employee ceases to be one of the Company’s employees. Upon termination of such service, the employee will have 120 days to exercise vested stock options, if any. The grant date fair value of the stock option granted was $1,862,000, or $2.66 per share, with $1,064,000 related to the ratable vesting over 4 years of 400,000 stock options and $798,000 related to the 300,000 Performance Stock Options. The grant date fair value of the stock option was estimated using a Black-Scholes model containing the following assumptions: Exercise price of $2.90, Spot price of $2.75, dividend yield of 0%, volatility of 154.0%, risk-free rate of 2.21%, and term of 7.67 years. During the three and nine months ended May 31, 2014, the Company recognized $200,271 and $267,028 of expense related to this issuance. During the nine months ended May 31, 2014, the Company reversed compensation expense amounting to $324,781 associated with 233,334 unvested performance based stock options originally granted to Mr. Conklin on August 9, 2010. The reversal was recorded when the Company determined it was no longer probable that the performance condition associated with the options would be achieved. The 233,334 performance based stock options were subsequently cancelled.

On January 9, 2014, the Board approved, and the Company granted, a stock option to each of the Company’s three directors to purchase 30,000 shares of its common stock at an exercise price of $2.90 per share, the fair market value of the Company’s common stock on the date of grant. Each stock option expires ten years from the date of grant, on January 9, 2024, and vests as follows: (a) 15,000 shares immediately on the date of grant, and (b) 15,000 shares on December 31, 2014. The stock options are further subject to the terms and conditions of a stock option agreement between the Company and each director. Under the terms of the stock option agreement, the stock option agreement will terminate and there will be no further vesting of stock options effective as of the date that the director ceases to be one of the Company’s directors. Upon termination of such service, the director will have two years to exercise vested stock options, if any. The grant date fair value of each of the stock options granted to each of the Company’s directors was $84,300, or $2.81 per share, estimated using a Black-Scholes model containing the following assumptions: Exercise price / spot price of $2.90 per share, dividend yield of 0%, volatility of 154.5%, risk-free rate of 2.41%, and a term of 7.67 years. During the three and nine months ended May 31, 2014, the Company recognized $31,613 and $179,138 of expense related to this issuance.
 
 
12

 

On January 9, 2014, the Company granted two stock options to purchase up to 15,000 (a 10,000 and 5,000 option grant, respectively) shares of the Company’s common stock at an exercise price of $2.90 per share, the fair market value of the Company’s common stock on the date of grant, to two employees as partial compensation for services. The stock options expire ten years from the date of grant, on January 9, 2024 and vest as follows: (a) 7,500 shares vest immediately on the date of grant, and (b) 7,500 shares on December 31, 2014. The stock option is further subject to the terms and conditions of a stock option agreement between the Company and the employee. Under the terms of the stock option agreement, the stock option agreement will terminate and there will be no further vesting of stock options effective as of the date that employee ceases to be one of the Company’s employees. Upon termination of such service, the employee will have two years to exercise vested stock options, if any. The grant date fair value of the stock option granted was $42,150, or $2.81 per option, estimated using the Black-Scholes model containing the following assumptions: Exercise price/spot price of $2.90 per share, dividend yield of 0%, volatility of 154.5%, risk-free rate of 2.41%, and a term of 7.67 years. During the three and nine months ended May 31, 2014, the Company recognized $5,269 and $29,856 of expense related to these two issuances.

On each of November 11, 2013 and November 13, 2013, 95,000 stock options (190,000 in the aggregate) were exercised on a cashless basis resulting in the issuance of an aggregate of 81,999 shares of unrestricted common stock. Said shares were registered under Form S-8 filed with the Securities and Exchange Commission on February 28, 2013.

On October 31, 2013, Jatinder Bhogal resigned from the Board. As a result of his resignation, Mr. Bhogal forfeited 20,000 unvested stock options originally granted on January 23, 2013, and had vested 20,000 stock options with an exercise price of $1.65 per share. The Company recorded costs relating to stock based compensation totaling $64,386 related to the amortization of the fair value of this stock option grant, including the recognition of $8,049 and $56,337 of expense for the nine months ended May 31, 2014 and the year ended August 31, 2013, respectively. Since the stock option was forfeited prior to 20,000 options vesting, $32,192 previously recognized for stock based compensation was reversed on October 31, 2013, resulting in total stock based compensation expense related to Mr. Bhogal’s January 23, 2013, stock option grant of $32,194. In total, Mr. Bhogal has 70,001 of vested stock options which will be forfeited if not exercised prior to October 31, 2015.

During the three and nine months ended May 31, 2014, the Company recognized $424 and $33,078 of expense related to options granted during prior periods and not described above.

The following table summarizes information about stock options outstanding and exercisable at May 31, 2014:
 
Stock Options Outstanding    
Stock Options Exercisable
 
Range of
Exercise
Prices
   
Number of
Options
Outstanding
   
Weighted
Average
Contractual
Life (years)
   
Weighted
Average
Exercise
Price
   
Number
of Options
Exercisable
   
Weighted Average
Remaining
Contractual
Life (Years)
   
Weighted
Average
Exercise
Price
 
$ 0.80       15,000       8.56     $ 0.80       15,000       8.56     $ 0.80  
  1.32       50,001       0.54       1.32       50,001       0.54       1.32  
  1.65       320,000       5.84       1.65       320,000       8.16       1.65  
  2.30       2,500       7.91       2.30       2,500       7.91       2.30  
  2.50       10,000       6.85       2.50       8,000       6.85       2.50  
  2.55       33,334       4.28       2.55       33,334       4.28       2.55  
  2.90       805,000       9.66       2.90       52,500       9.62       2.90  
  3.27       11,667       0.53       3.27       11,667       0.53       3.27  
  4.98       16,667       3.78       4.98       16,667       3.78       4.98  
  5.94       50,001       6.57       5.94       50,001       6.57       5.94  
  6.51       11,667       0.33       6.51       11,667       0.33       6.51  
Total
      1,325,837       8.21     $ 2.68       571,337       6.31     $ 2.39  
 
 
13

 
 
NOTE 5 - Net Loss Per Share

During the three and nine months ended May 31, 2014 and 2013, the Company recorded a net loss. Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The Company has not included the effects of warrants, stock options and convertible debt on net loss per share because to do so would be antidilutive.

Following is the computation of basic and diluted net loss per share for the three and nine months ended May 31, 2014 and 2013:

   
Three Months Ended
   
Nine Months Ended
 
   
May 31,
   
May 31,
 
   
2014
   
2013
   
2014
   
2013
 
Basic and Diluted EPS Computation
                       
Numerator:
                       
Loss available to common stockholders'
  $ (932,263 )   $ (583,979 )   $ (2,400,867 )   $ (3,766,063 )
Denominator:
                               
Weighted average number of common shares outstanding
    24,306,612       24,174,652       24,270,086       22,174,541  
Basic and diluted EPS
  $ (0.04 )   $ (0.02 )   $ (0.10 )   $ (0.17 )
                                 
The shares listed below were not included in the computation of diluted losses
                         
per share because to do so would have been antidilutive for the periods presented:
                       
                                 
Convertible debt
    2,396,577       -       2,396,577       -  
Warrants issuable upon conversion of debt (See "NOTE 2 - Convertible Promissory Note" above)
    4,793,155       -       4,793,155       -  
Warrants
    3,302,001       2,380,126       3,302,001       2,380,126  
Stock options
    1,325,837       970,838       1,325,837       970,838  
 
 
14

 
 
NOTE 6 - Related Party Transactions

           A related party with respect to the Company is generally defined as any person (i) (and, if a natural person, inclusive of his or her immediate family) that holds 10% or more of the Company’s securities, (ii) that is part of the Company’s management, (iii) that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

For services rendered in the capacity of a Board member, non-employee Board members received $3,750 per quarter through the quarter ended February 28, 2013. The amount was increased to $4,250 per quarter beginning with the Company’s third quarter ending on May 31, 2013. New Board member compensation is pro rated in their first quarter. During the three months ended May 31, 2014 and 2013, the Company incurred $8,500 and $12,750, respectively in cash based Board compensation. During the nine months ended May 31, 2014 and 2013, the Company incurred $29,750 and $40,500, respectively in cash based Board compensation.
 
The Company grants stock options and restricted common stock for services rendered by certain individuals, including the Company’s non-employee directors and sole officer, Mr. Conklin. During the nine months ended May 31, 2014, the Company's three directors each received a grant of 30,000 stock options with Mr. Conklin receiving a grant of 700,000 stock options (see “NOTE 4 - Stock Options” above). Additionally, each director was issued 10,000 shares of restricted common stock valued at $2.90 per share, the fair market value of the Company’s common stock on the date of issuance, which the Company expensed on the date of issue on January 9, 2014. In total, during the three months ended May 31, 2014 and 2013 the Company recognized net compensation expense related to stock options and restricted stock issued to the Company’s non-employee directors and executive of $231,883 and $48,820, respectively. During the nine months ended May 31, 2014 and 2013 the Company recognized net compensation expense related to stock options and restricted stock issued to the Company’s non-employee directors and executive of $214,059 and $256,898, respectively. These amounts include the reversal of compensation expense due to pre-vesting forfeitures.

The law firm of Sierchio & Company, LLP, of which Joseph Sierchio, one of the Company’s directors, is a principal, has provided counsel to the Company since its inception. In July 2008, the Company asked Mr. Sierchio to join the Company’s Board. During the three months ended May 31, 2014 and 2013, the law firm of Sierchio & Company, LLP provided $18,275 and $18,550, respectively, of legal services. During the nine months ended May 31, 2014 and 2013, the law firm of Sierchio & Company, LLP provided $92,997 and $84,866, respectively, of legal services. At May 31, 2014, the Company owed Sierchio & Company, LLP $6,000 which is included in accounts payable.

On October 7, 2013, the Company entered into the Loan Agreement with Kalen Capital Corporation, a private corporation owning in excess of 10% of the Company’s issued and outstanding shares of common stock. In connection with the Loan Agreement, the Company issued a $3,000,000 Note and Series I Warrants (see “NOTE 2 - Convertible Promissory Note” above).

All related party transactions are recorded at the exchange amount established and agreed to between related parties and are in the normal course of business.
 
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Report on Form 10-Q contains forward-looking statements which involve assumptions and describe our future plans, strategies, and expectations, and are generally identifiable by use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project,” or the negative of these words or other variations on these words or comparable terminology. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.

Such forward-looking statements include statements regarding, among other things, (a) the potential markets for our technologies, our potential profitability, and cash flows, (b) our growth strategies, (c) expectations from our ongoing research and development activities, (d) anticipated trends in the technology industry, (e) our future financing plans, and (f) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in this Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

Although forward-looking statements in this report reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect our actual results may vary materially from those expected or projected.

Except where the context otherwise requires and for purposes of this Form 10-Q only, “we,” “us,” “our,” “Company,” “our Company,” and “New Energy” refer to New Energy Technologies, Inc., a Nevada corporation, and its consolidated subsidiaries.

Overview

We are a development stage renewable and alternative energy company developing two (2) sustainable electricity generating systems. These novel technologies are branded as SolarWindow™ and MotionPower™. Our proprietary, patent-pending technologies are collectively the subject of one hundred and one (101) patent filings. Our SolarWindow™ technology provides the ability to harvest light energy from the sun and artificial sources and generate electricity from a see-through, semi-transparent, coating of organic photovoltaic (“OPV”) solar cells applied to glass and flexible plastic surfaces. Our SolarWindow™ technology is the subject of forty-two (42) patent filings. Our MotionPower™ technology harvests “kinetic” or “motion” energy from vehicles when they slow down and converts kinetic energy into electricity. Our MotionPower™ technology is the subject of fifty-nine (59) patent filings.
 
 
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We do not currently have any commercial products and there is no assurance that we will successfully be able to design, develop, manufacture, or sell any commercial products in the future.
 
Our product development programs involve ongoing research and development efforts, and the commitment of significant resources to support the extensive invention, design, engineering, testing, prototyping, and intellectual property initiatives carried-out by our contract engineers, scientists, and consultants.

Ultimately, we plan to market any SolarWindow™ technology and/or MotionPower™ technology products through co-marketing, co-promotion, licensing and distribution arrangements with third party collaborators. We believe that this approach could provide immediate access to distribution channels developed by the collaborators, therefore potentially increasing market penetration and commercial acceptance of our products and enabling us to avoid expending significant funds for development of a large sales and marketing organization.

We cannot accurately predict the amount of funding or the time required to successfully commercialize either the SolarWindow™ technology or the MotionPower™ technology. The actual cost and time required to commercialize these technologies may vary significantly depending on, among other things, the results of our research and development efforts, the cost of developing, acquiring, or licensing various enabling technologies, changes in the focus and direction of our research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing claims with respect to patents, the regulatory approval process and manufacturing, marketing and other costs associated with commercialization of these technologies. Because of this uncertainty, even if financing is available to us, we may secure insufficient funding to effectuate our business plan.

As of May 31, 2014, we had an accumulated deficit of $19,454,756 and working capital of $1,246,358. We intend to finance our operations primarily through our existing cash and possible future financing transactions. As of May 31, 2014, we had cash and cash equivalents of $1,364,454. Based upon our current and near term anticipated level of operations and expenditures, the Company believes that cash on hand should be sufficient to enable us to continue operations into our fiscal year ending August 31, 2015.

Research and Related Agreement

We are a party to certain agreements related to the development of our SolarWindow™ technology and our MotionPower™ technology.

SolarWindow™ Technology

Stevenson-Wydler Cooperative Research and Development Agreement with the Alliance for Sustainable Energy

In efforts to advance the commercial development of the SolarWindow™ technology, on March 18, 2011, we entered into a Cooperative Research and Development Agreement (the “CRADA”) with Alliance for Sustainable Energy, LLC (“Alliance”), the operator of the National Renewable Energy Laboratory (“NREL”) under its U.S. Department of Energy contract. Under terms of the CRADA, NREL researchers will make use of our exclusive intellectual property (“IP”), newly developed IP, and possibly NREL’s background IP in order to work towards specific product development goals. Under the terms of the CRADA, we agreed to reimburse Alliance for filing fees associated with all documented, out-of-pocket costs directly related to patent application preparation and filings, and maintenance of the patent applications.

On January 16, 2013, we entered into a modification to the CRADA for the purpose of extending the date pursuant to which NREL’s researchers will make use of our exclusive IP and NREL’s background IP. As part of the extension, we advanced $150,000 to Alliance as a retainer, which will be used once the development goals are met. Until such time, however, Alliance bills us monthly for R&D related costs as they are incurred.
 
 
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On March 6, 2013, we entered into Phase II of our CRADA with Alliance, during which researchers will additionally work towards:

·  
Further improving SolarWindow™ efficiency and transparency;
·  
Optimizing electrical power (current and voltage) output;
·  
Optimizing the application of the active layer coatings which make it possible for SolarWindow™ to generate electricity on glass surfaces;
·  
Developing improved electricity-generating coatings by enhancing performance, processing, reliability, and durability;
·  
Optimizing SolarWindow™ performance on flexible substrates; and
·  
Developing high speed and large area roll-to-roll (R2R) and sheet-to-sheet (S2S) coating methods required for commercial-scale building integrated photovoltaic (BIPV) and building applied photovoltaic (BAPV) applications, and windows.

Results of Operations

Three and Nine Months Ended May 31, 2014 Compared with the Three and Nine Months Ended May 31, 2013

Operating Expenses

A summary of our operating expense for the three and nine months ended May 31, 2014 and 2013 follows:

   
Three Months Ended
             
   
May 31,
   
Increase /
   
Percentage
 
   
2014
   
2013
   
(Decrease)
   
Change
 
Operating expense
                       
Selling, general and administrative
  $ 452,944     $ 417,001     $ 35,943       9 %
Research and development
    171,875       115,813       56,062       48 %
Subtotal
    624,819       532,814       92,005       17 %
Stock compensation
    237,577       51,165       186,412       364 %
Total operating expense
  $ 862,396     $ 583,979     $ 278,417       48 %
 
   
Nine Months Ended
             
   
May 31,
   
Increase /
   
Percentage
 
   
2014
   
2013
   
(Decrease)
   
Change
 
Operating expense
                       
Selling, general and administrative
  $ 1,527,938     $ 1,177,994     $ 349,944       30 %
Research and development
    472,137       224,490       247,647       110 %
   Subtotal
    2,000,075       1,402,484       597,591       43 %
Stock compensation
    247,176       1,333,769       (1,086,593 )     -81 %
Total operating expense
  $ 2,247,251     $ 2,736,253     $ (489,002 )     -18 %
 
 
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Selling, General and Administrative

Selling, general and administrative costs include all expenditures incurred other than research and development related costs, including costs related to personnel, professional fees, travel and entertainment, public company costs, insurance and other office related costs. The nine month increase is due to an increase in professional fees and public company costs primarily related to fees paid to publicize our SolarWindow™ and MotionPower™ technologies within the industry and investor community offset by decreased expenses related to personnel and travel.

Research and Development

Research and development (“R&D”) costs represent costs incurred to develop our SolarWindow™ and MotionPower™ technologies and are incurred pursuant to our research agreements and agreements with other third party providers and certain internal R&D cost allocations. Payments under these agreements include salaries and benefits for R&D personnel, allocated overhead, contract services and other costs. R&D costs are expensed when incurred, except for non-refundable advance payments for future research and development activities which are capitalized and recognized as expense as the related services are performed. R&D costs increased during the three and nine months as a result of increasing SolarWindow™ research and development activities.
 
Stock Compensation

Expense associated with equity based transactions is calculated and expensed in our financial statements as required pursuant to various accounting rules and is non-cash in nature. Stock compensation represents the expense associated with the amortization of our stock options, issuance of restricted common stock and issuance of warrants to purchase our common stock. Stock compensation expense increased in the three month period ended May 31, 2014 compared to May 31, 2013 primarily due to the January 1, 2014 grant of stock options to Mr. Conklin, our President & CEO. The nine month stock compensation expense decrease is primarily due to the current year reversal of $324,781 of expense associated with the forfeiture of Mr. Conklin’s stock options that were issued to him on August 9, 2010 pursuant to his previous employment agreement and the prior year inclusion of $1,059,038 recognized upon the issuance of Series H Warrants granted as an inducement to convert a $1,000,000 bridge loan into shares of common stock.

Other Income (Expense)

A summary of our other income (expense) for the three and nine months ended May 31, 2014 and 2013 follows:
 
   
Three Months
Ended
May 31,
         
Three Month
   
Nine Months
Ended
May 31,
         
Nine Month
 
   
2014
   
2013
    Change    
2014
   
2013
    Change  
Other income (expense)
                                   
Interest expense - other
    (54,403 )     -     $ (54,403 )   $ (137,788 )   $ (30,325 )   $ (107,463 )
Interest expense - accretion of debt discount
    (15,464 )     -       (15,464 )     (15,828 )     (999,485 )     983,657  
Total other income (expense)
  $ (69,867 )