The accompanying notes are an integral part of these unaudited condensed financial statements.
BIOSOLAR, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016 AND 2015
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
534,526
|
|
|
|
130,830
|
|
|
|
1,596,708
|
|
|
|
385,477
|
|
Research and development
|
|
|
55,646
|
|
|
|
75,481
|
|
|
|
198,539
|
|
|
|
146,257
|
|
Depreciation and amortization
|
|
|
672
|
|
|
|
2,105
|
|
|
|
2,204
|
|
|
|
6,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
590,844
|
|
|
|
208,416
|
|
|
|
1,797,451
|
|
|
|
538,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS BEFORE OTHER INCOME
|
|
|
(590,844
|
)
|
|
|
(208,416
|
)
|
|
|
(1,797,451
|
)
|
|
|
(538,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME/(EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
15
|
|
|
|
12
|
|
|
|
45
|
|
|
|
31
|
|
Gain on sale of equipment
|
|
|
-
|
|
|
|
9,862
|
|
|
|
-
|
|
|
|
9,862
|
|
Gain (Loss) on conversion of debt and change in derivative liability
|
|
|
(502,473
|
)
|
|
|
7,692,906
|
|
|
|
(179,194
|
)
|
|
|
(9,646,439
|
)
|
Interest expense
|
|
|
(156,087
|
)
|
|
|
(165,400
|
)
|
|
|
(470,863
|
)
|
|
|
(353,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER (EXPENSES)/INCOME
|
|
|
(658,545
|
)
|
|
|
7,537,380
|
|
|
|
(650,012
|
)
|
|
|
(9,990,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS)/INCOME
|
|
$
|
(1,249,389
|
)
|
|
$
|
7,328,964
|
|
|
$
|
(2,447,463
|
)
|
|
$
|
(10,528,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
|
|
$
|
(0.05
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
|
|
|
25,337,081
|
|
|
|
17,721,019
|
|
|
|
21,582,493
|
|
|
|
14,792,232
|
|
The accompanying notes are an integral part of these unaudited condensed financial statements.
BIOSOLAR, INC.
CONDENSED STATEMENT OF SHAREHOLDERS'
DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016 AND 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
17,995,953
|
|
|
$
|
1,799
|
|
|
$
|
7,474,644
|
|
|
$
|
(16,201,152
|
)
|
|
$
|
(8,724,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for converted promissory notes and accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
7,449,438
|
|
|
|
745
|
|
|
|
93,322
|
|
|
|
-
|
|
|
|
94,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for related party converted promissory notes and accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
571,217
|
|
|
|
57
|
|
|
|
65,633
|
|
|
|
-
|
|
|
|
65,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,178,827
|
|
|
|
-
|
|
|
|
1,178,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss for the nine months ended September 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,447,463
|
)
|
|
|
(2,447,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016 (unaudited)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
26,016,608
|
|
|
$
|
2,601
|
|
|
$
|
8,812,426
|
|
|
$
|
(18,648,615
|
)
|
|
$
|
(9,833,588
|
)
|
The accompanying notes are an integral part of these unaudited condensed financial statements.
BIOSOLAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2016 AND 2015
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net (loss)Income
|
|
$
|
(2,447,463
|
)
|
|
$
|
(10,528,388
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
2,204
|
|
|
|
6,304
|
|
Stock based compensation
|
|
|
1,178,827
|
|
|
|
53,354
|
|
Loss on net change in derivative liability and conversion of debt
|
|
|
179,194
|
|
|
|
9,646,439
|
|
Amortization of debt discount recognized as interest expense
|
|
|
351,265
|
|
|
|
279,532
|
|
(Gain) on sale of asset
|
|
|
-
|
|
|
|
(9,862
|
)
|
Changes in Assets and Liabilities
|
|
|
|
|
|
|
|
|
(Increase) Decrease in:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
44,729
|
|
|
|
(21,722
|
)
|
Increase (Decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
13,500
|
|
|
|
52
|
|
Accrued expenses
|
|
|
118,894
|
|
|
|
73,554
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(558,850
|
)
|
|
|
(500,737
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
(759
|
)
|
Proceeds from sale of asset
|
|
|
-
|
|
|
|
23,000
|
|
Patent expenditures
|
|
|
(1,984
|
)
|
|
|
(8,964
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY/(USED) IN INVESTING ACTIVITIES
|
|
|
(1,984
|
)
|
|
|
13,277
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from convertible promissory notes
|
|
|
603,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
603,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
42,166
|
|
|
|
12,540
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
|
202,610
|
|
|
|
146,640
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
244,776
|
|
|
$
|
159,180
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
704
|
|
|
$
|
719
|
|
Taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes and accrued interest
|
|
$
|
159,757
|
|
|
$
|
206,148
|
|
The accompanying notes are an integral part of these unaudited condensed financial statements.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANICAL STATEMENTS
– (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2016
The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion
of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results
for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016. For further information refer to the financial statements and footnotes thereto included in the Company's Form
10-K for the year ended December 31, 2015.
Going Concern
The accompanying financial statements have
been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities
and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative
cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The
ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among
other things, additional cash infusion. The Company has historically obtained funds through private placements offerings of equity
and debt. Management believes that it will be able to continue to raise funds by sale of its securities to its existing shareholders
and prospective new investors to provide the additional cash needed to meet the Company’s obligations as they become due,
and will allow the development of its core of business. There is no assurance that the Company will be able to continue raising
the required capital for its operations.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
This summary of significant accounting
policies of the Company are presented to assist in understanding the Company’s financial statements. The financial statements
and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently
applied in the preparation of the financial statements.
Revenue Recognition
The Company will recognize revenue when
services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk
of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
To date, the Company has not had significant revenues and is in the development stage.
Cash and Cash Equivalent
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements,
include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, derivative liabilities and
the fair value of stock options. Actual results could differ from those estimates.
Intangible Assets
Intangible assets consist of patents that
are initially measured at the lower of cost or fair value. The patents are deemed to have an indefinite life and are
not amortized. The patents are assessed annually for impairment, or whenever conditions indicate the asset may be impaired, and
any such impairment will be recognized in the period identified.
Stock-Based Compensation
The Company measures the cost of employee
services received in exchange for an equity award based on the grant-date fair value of the award. All grants under our stock-based
compensation programs are accounted for at fair value and that cost is recognized over the period during which an employee, consultant,
or director are required to provide service in exchange for the award (the vesting period). Compensation expense for options granted
to employees and non-employees is determined in accordance with the standard as the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for awards granted is
re-measured each period.
Determining the appropriate fair value of
the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based payment
and stock price volatility. The Company uses the Binomial option-pricing model to value its stock option awards which incorporate
the Company’s stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life. On March 24, 2015, the Company
granted 2,450,000 stock options with an exercise price of $0.09 per share, and on September 2, 2015 the Company granted an additional
13,500,000 stock options with an exercise price of $0.26 per share. The options will vest 1/25 on a monthly basis starting April
24, 2015 and October 1, 2015, respectively, and terminate seven (7) years from the date of grant or upon termination of employment.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Income (Loss) per Share Calculations
Loss per Share dictates the calculation
of basic earnings per share and diluted earnings per share are computed by dividing income available to common shareholders by
the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss
per share is the same as the basic loss per share for the nine months ended September 30, 2016, as the inclusion of any potential
shares would have had an anti-dilutive effect due to the Company generating a loss. The Company has excluded 15,975,000 options,
245,000 warrants, and the shares issuable from convertible debt of $1,852,700 for the nine months ended September 30, 2016.
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires
disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that
value. As of September 30, 2016, the amounts reported for cash, inventory, prepaid expenses, accounts payable, and accrued expenses,
approximate the fair value because of their short maturities.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active
markets;
|
|
●
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
|
We measure certain financial instruments
at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September
30, 2016:
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
8,346,067
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,346,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
8,346,067
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,346,067
|
|
The following is a reconciliation of the derivative liability
for which Level 3 inputs were used in determining the approximate fair value:
|
Beginning balance as of January 1, 2016
|
|
$
|
7,878,599
|
|
|
Fair value of derivative liabilities issued
|
|
|
288,274
|
|
|
Loss on conversion of debt and change in derivative liability
|
|
|
179,194
|
|
|
Ending balance as of September 30, 2016
|
|
$
|
8,346,067
|
|
Recently Issued Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed
financial statements.
In August 2014, FASB issued ASU 2014-15,
“Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related
footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity
in the timing and content of footnote disclosures. The amendments require management to assess an Entity’s ability to continue
as a going concern by
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recently Issued Accounting Pronouncements
(Continued)
incorporating and expanding upon certain
principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial
doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating
effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration
of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and
(6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be
issued). The amendments in this ASU are effective for public and nonpublic entities for annual periods ending after December 15,
2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15 on the Company’s
financial statements.
In March 2016, FASB issued accounting standards
update ASU-2016-09, “Compensation –Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment
Accounting”. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations
that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payments award transactions
are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification
on the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December
15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual
period. The Company is currently evaluating the impact of the adoption of ASU 2016-9 on the Company’s financial statements.
In March 2016, FASB issued accounting standards
update ASU-2016-06, “Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments”.
The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that
are determined to have a debt host) with embedded call (put) options. U.S. GAAP provides specific guidance for assessing whether
call (put) options that can accelerate the repayment of principal on a debt instrument meet the clearly and closely related criterion.
The guidance states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only
to interest rates or credit risk. Public companies must apply the new requirements for fiscal years beginning after December 15,
2016 and interim periods within those fiscal years. The Company is currently evaluation the impact of the adoption of ASU 2016-06
on the Company’s financial statements.
In August 2016, FASB issued accounting standards
update ASU-2016-15, “Statement of Cash Flows” (Topic 230) – Classification of Certain Cash Receipts and Cash
Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement
of cash flows. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December
15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption
in an interim period. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on the Company’s financial
statements.
During the nine months ended September 30,
2016, the Company issued 7,449,437 shares of common stock at prices of $0.00847 and $0.0133 per share upon conversion of $77,800
in convertible promissory notes, including $16,267 in accrued interest.
During the nine months ended September 30,
2016, the Company issued 571,217 shares of common stock at a price of $0.115 per share upon conversion of related party convertible
promissory notes with a fair value of $57,000, plus accrued interest of $8,690.
4.
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STOCK OPTIONS AND WARRANTS
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During the nine months ended September 30,
2016, the Company did not grant any stock options.
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September 30, 2016
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Weighted
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Number
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average
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of
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exercise
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Options
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price
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Outstanding, January 1, 2016
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15,978,333
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$
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0.23
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Granted
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-
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-
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Exercised
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-
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-
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Expired
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(3,333
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)
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$
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4.05
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Outstanding, September 30, 2016
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15,975,000
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$
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0.23
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Exercisable at the end of period
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8,269,0000
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$
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0.22
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4.
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STOCK OPTIONS AND WARRANTS (Continued)
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The weighted average remaining contractual
life of options outstanding as of September 30, 2016 was as follows:
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Weighted
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Average
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Stock
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Stock
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Remaining
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Exercisable
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Options
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Options
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Contractual
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Prices
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Outstanding
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Exercisable
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Life (years)
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0.40
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25,000
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25,000
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1.42
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0.09
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2,450,000
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1,764,000
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5.48
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0.26
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13,500,000
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6,480,000
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5.93
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Total
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15,975,000
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8,269,000
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The stock-based compensation expense recognized in the statement
of operations during the nine months ended September 30, 2016 related to the granting of these options was $1,178,827.
As of September 30, 2016, there was no intrinsic
value with regards to the outstanding options.
During the nine months ended September 30,
2016, the Company granted no warrants. As of September 30, 2016, 245,000 warrants are outstanding. The warrant terms are 5 years
with 95,000 warrants expiring in October 2016 and 150,000 warrants expiring in October 2017.
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September 30, 2016
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Weighted
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Number
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average
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of
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exercise
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Warrants
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price
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Outstanding, January 1, 2016
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245,000
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$
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0.97
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Granted
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-
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-
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Exercised
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-
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-
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Expired
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-
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-
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Outstanding, September 30, 2016
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245,000
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$
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0.97
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Exercisable at the end of period
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245,000
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$
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0.97
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5.
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CONVERTIBLE PROMISSORY NOTES
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On January 18, 2013, the Company entered
into a securities purchase agreement for the sale of 10% convertible promissory note in the aggregate principal amount of up to
$80,000, to be advanced in amounts at the lender’s discretion. Upon execution of the securities purchase agreement, the
Company received an advance of $10,000. On April 16, 2013, the Company received an additional advance of $25,000. The total advances
received were $35,000, of which principal in the amount of $25,000, and $2,886 in accrued interest was converted into 183,481
shares of common stock at fair value of $0.43 and $0.367 per share on September 29, 2013 and October 3, 2014. On July 6, 2015
the Company issued 735,153 shares of common stock at a fair value of $0.0133 upon conversion of principal in the amount of $8,000,
plus accrued interest of $1,778, leaving a balance of $2,000. During the month of July 2013, the Company extended the maturity
date of the note from six (6) months to eighteen (18) months from the effective date of each advance. The note was fully converted
on January 26, 2016, at which time the Company issued 192,193 shares of common stock.
On May 2, 2014, the Company entered into
a securities purchase agreement, providing for the sale by the Company of 10% unsecured convertible note in the aggregate principal
amount of up to $500,000, to be advanced in amounts at the lender’s discretion. Upon execution of the securities purchase
agreement, the Company received an advance in the amount of $50,000. On various dates, the Company received additional advances
in the aggregate sum of $450,000, for a total aggregate sum of $500,000. As of December 31, 2015, the remaining principal balance
was $467,500. During the nine months ended September 30, 2016, the Company issued 7,257,246 shares of common stock for principal
in the amount of $75,800, plus accrued interest of $15,711, leaving a principal balance of $391,700. Each advance matures eighteen
(18) months from the effective date of each advance, which was extended on January 12, 2016 to sixty (60) months, with maturity
dates ranging from May 1, 2019 to December 21, 2019. The note is convertible into shares of common stock of the Company at a price
equal to a variable conversion price of a) the lesser of $0.25
5.
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CONVERTIBLE PROMISSORY NOTES (Continued)
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per share of common stock, b) fifty percent
(50%) of the average three (3) lowest trading prices of three (3) separate trading days recorded after the effective date, or c)
the lowest effective price granted to any person or entity after the effective date to acquire common stock. The fair value of
the note has been determined by using the Binomial lattice formula with an expected life of sixty (60) months from the effective
date of each advance. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount
of $23,097 during the nine months ended September 30, 2016.
On January
30, 2015,
the Company entered into a securities purchase agreement, providing for the sale
by the Company of 10% unsecured convertible note in the aggregate principal amount of up to $500,000, to be advanced in amounts
at the lender’s discretion. Upon execution of the securities purchase agreement, the Company received an advance in the amount
of $50,000. On various dates, the Company received additional advances in the aggregate sum of $450,000. The principal balance
at September 30, 2016 was $500,000. Each advance matured eighteen (18) months from the effective date of each advance, which was
extended on January 12, 2016 to sixty (60) months, with maturity dates ranging from January 29, 2020 to August 25, 2020. The note
is convertible into shares of common stock of the Company at a price equal to a variable conversion price of a) the lesser of $0.15
per share of common stock, b) fifty percent (50%) of the lowest trade price recorded since the original effective date of the note,
or c) the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. The
fair value of the note has been determined by using the Binomial lattice formula with an expected life of sixty (60) months from
the effective date of each advance. The Company recorded amortization of debt discount, which was recognized as interest expense
in the amount of $83,230 during the nine months ended September 30, 2016.
On October
1, 2015,
the Company entered into a securities purchase agreement, providing for the sale
by the Company of 10% unsecured convertible notes in the aggregate principal amount of up to $500,000, to be advanced in amounts
at the lender’s discretion. Upon execution of the securities purchase agreement, the Company received an advance in the amount
of $90,000. On various dates, the Company received additional advances in the aggregate sum of $395,000. The principal balance
at September 30, 2016 was $485,000. Each advance matures twelve (12) months from the effective date of each advance. The note is
convertible into shares of common stock of the Company at a price equal to a variable conversion price of a) the lesser of $0.25
per share of common stock, b) fifty percent (50%) of the lowest trade price recorded since the original effective date of the note,
or c) the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. The
fair value of the note has been determined by using the Binomial lattice formula with an expected life of twelve (12) months. The
Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $140,211 during the nine
months ended September 30, 2016.
On April 5,
2016,
the Company entered into a securities purchase agreement, providing for the sale by
the Company of 10% unsecured convertible notes in the aggregate principal amount of up to $500,000, to be advanced in amounts at
the lender’s discretion. Upon execution of the securities purchase agreement, the Company received an advance in the amount
of $48,000. On various dates, the Company received additional advances in the aggregate sum of $300,000. The principal balance
at September 30, 2016 was $348,000. Each advance matures twelve (12) months from the effective date of each advance. The note is
convertible into shares of common stock of the Company at a price equal to a variable conversion price of a) the lesser of $0.13
per share of common stock, b) fifty percent (50%) of the lowest trade price recorded since the original effective date of the note,
or c) the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. The
fair value of the note has been determined by using the Binomial lattice formula with an expected life of twelve (12) months. The
Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $60,214 during the nine
months ended September 30, 2016.
RELATED PARTY CONVERTIBLE
PROMISSORY NOTES
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|
On June 5, 2013, the Company issued two 5% convertible promissory notes in exchange for services
rendered by the Company’s Chief Executive Officer ($114,000) and Chief Technology Officer ($128,000) in the aggregate amount
of $242,000. On March 5, 2014, the Company issued 694,191 upon partial conversion of principal in the amount of $55,000, plus accrued
interest of $2,063, leaving a remaining balance of $187,000. On April 17, 2015, the Company issued 2,187,692 shares of common stock
upon conversion of $130,000 in principal, plus $12,200 in accrued interest, leaving a balance of $57,000. On June 20, 2016, the
Company issued 571,217 shares of common stock upon conversion of $57,000 in principal, plus $8,960 in accrued interest. As of September
30, 2016 the note was fully converted. The fair value of the notes has been determined by using the Binomial lattice formula with
an expected life of two (2) years.
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On December 18, 2014, the Company issued two 5% convertible promissory notes in exchange for services
rendered by the Company’s Chief Executive Officer ($67,000) and Chief Technology Officer ($61,000) in the aggregate amount
of $128,000. The notes are convertible into shares of common stock of the Company at a conversion price equal to the lesser of
$0.101 per share of common stock or the closing price per share of common stock recorded on the trading day immediately preceding
the date of conversion. The notes mature two (2) years from their effective dates. The fair value of the notes has been determined
by using the Binomial lattice formula with an expected life of two (2) years. The Company recorded amortization of debt discount,
which was recognized as interest expense in the amount of $35,980 during the nine months ended September 30, 2016.
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5.
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CONVERTIBLE PROMISSORY NOTES (Continued)
|
We evaluated the financing transactions
in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory
note was not afforded the exemption for conventional convertible instruments due to its variable conversion rate. The note has
no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards
for equity classification. The Company elected to recognize the note under paragraph 815-15-25-4, whereby, there would be a separation
into a host contract and derivative instrument. The Company elected to initially and subsequently measure the note in its entirety
at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the
imputed interest associated with the embedded derivative. The derivative liability is adjusted periodically according to the stock
price fluctuations.
6.
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DERIVATIVE LIABILITIES
|
The convertible notes
issued and described in Note 5 do not have fixed settlement provisions because their conversion prices are not fixed. The conversion
feature has been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
During the nine months ended September
30, 2016, as a result of the convertible notes (“Notes”) issued that were accounted for as derivative liabilities,
we determined that the fair value of the conversion feature of the convertible notes at issuance was $288,274, based upon a Binomial-Model
calculation. We recorded the full value of the derivative as a liability at issuance with an offset to valuation discount, which
will be amortized over the life of the Notes.
During the nine months ended September
30, 2016, approximately $134,800 convertible notes were converted. As a result of the conversion of these notes and the change
in fair value of the remaining notes, the Company recorded a loss on net change in derivative and conversion of debt in the amount
of $179,194 in the statement of operations for the nine months ended September 30, 2016. At September 30, 2016, the fair value
of the derivative liability was $8,346,067.
For purpose of determining the fair market
value of the derivative liability for the embedded conversion, the Company used the Binomial lattice valuation model. The
significant assumptions used in the Binomial lattice valuation model for the derivative are as follows:
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9/30/2016
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Risk free interest rate
|
0.29% - 1.40%
|
|
Stock volatility factor
|
16.93% - 184.98%
|
|
Weighted average expected option life
|
1 month - 5 years
|
|
Expected dividend yield
|
None
|
7.
|
COMMITMENT AND CONTINGENCIES
|
During the nine months
ended September 30, 2016, we have a new material commitment for capital expenditures in the form of a sponsored research agreement
with North Carolina Agricultural and Technical State University during the next twelve months. The contract period is from September
12, 2016 through September 11, 2017 and the total cost shall not exceed the sum of $123,993. The commitment shall be financed by
the issuance of equity or debt securities.
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|
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has
determined that there are the following subsequent events:
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|
On October 11, 2016, the Company received a $50,000 advance on a securities purchase agreement
entered into on April 8, 2016. The securities purchase agreement provides for the issuance of a 10 % unsecured convertible note
in the aggregate principal amount of up to $500,000. The note is convertible into shares of common stock of the Company at a price
equal to a variable conversion price of a) the lesser of $0.13 per share of common stock, b) fifty percent (50%) of the lowest
trade price recorded on any trade day after the effective date or c) the lowest effective price per share granted to any person
or entity after the effective date to acquire common stock.
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Effective October 1, 2015, the Company issued a convertible promissory note, which had an initial
maturity date of October 1, 2016. On October 13, 2016, the Company and the borrower agreed to amend the convertible promissory
note to extend the maturity date to sixty (60) months from the effective date of the note.
|
On October 26, 2016, the Company issued
988,198 shares of common stock upon conversion of the convertible promissory note in the amount of principal of $6,700, plus accrued
interest of $1667.