NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
1.
|
ORGANIZATION AND LINE OF BUSINESS
|
Organization
BioSolar,
Inc. (the "Company") was incorporated in the state of Nevada on April 24, 2006. The Company, based in Santa Clarita,
California, began operations on April 25, 2006 to develop and market Photovoltaic solar technology products.
Line
of Business
We
are engaged in the development of innovative technologies and materials that will reduce the cost per watt of electricity generated
by Photovoltaic solar modules. We have developed BioBacksheet
R
, a high performance green back sheet for Photovoltaic
solar modules. We are currently developing technologies and materials for storing electrical energy produced by Photovoltaic solar
modules as well as other means of electrical energy generation. We are focusing our research and product development efforts on
silicon alloy anode materials for next generation high capacity lithium-ion batteries.
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.
Property
and Equipment
Property
and equipment are stated at cost, and are depreciated using straight line over its estimated useful lives:
Computer equipment
|
|
5 Years
|
Machinery and equipment
|
|
10 Years
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $3,085 and $6,772, respectively.
Research
and Development
Research and development costs
are expensed as incurred. Total research and development costs were $226,881 and $190,565 for the years ending December 31, 2016
and 2015, respectively.
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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 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.
Income
Taxes
Deferred
income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes
in tax laws and rates of the date of enactment.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax
benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon examination.
Net
Earnings (Loss) per Share Calculations
Net
earnings (Loss) per share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings
(loss) per share are computed by dividing by the weighted average number of common shares outstanding during the year. Diluted
net earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased
to include the effect of stock options and stock based awards (Note 4), plus the assumed conversion of convertible debt (Note
5).
For
the year ended December 31, 2016, the Company calculated the dilutive impact of the outstanding stock options and warrants of
1,650,000, and the convertible debt of $1,800,000, which is convertible into shares of common stock. The stock options and warrants
were included in the calculation of net earnings per share, because their impact was dilutive.
For
the year ended December 31, 2015, the Company’s diluted loss per share is the same as the basic loss per share, and the
inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss. The Company has
excluded 15,978,333 stock options, 245,000 warrants, and the shares issuable from convertible debt of $1,384,500, because their
impact was anti-dilutive.
|
|
|
For the years ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) to common shareholders (Numerator)
|
|
$
|
199,799
|
|
|
$
|
(5,792,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding (Denominator)
|
|
|
22,971,319
|
|
|
|
15,599,745
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding (Denominator)
|
|
|
39,096,319
|
|
|
|
15,599,745
|
|
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Fair
Value of Financial Instruments
Fair
Value of Financial Instruments, requires disclosure of the fair value information, whether recognized in the balance sheet, where
it is practicable to estimate that value. As of December 31, 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 December 31, 2015:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
7,878,599
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,878,599
|
|
|
Total Liabilities measured at fair value
|
|
$
|
7,878,599
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,878,599
|
|
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 December 31, 2016:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
5,044,897
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,044,897
|
|
|
Total Liabilities measured at fair value
|
|
$
|
5,044,897
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,044,897
|
|
The
following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair
value:
|
Balance as of January 1, 2015
|
|
$
|
3,320,943
|
|
|
Fair value of derivative liabilities issued
|
|
|
471,144
|
|
|
Loss on conversion of debt and change in derivative liability
|
|
|
4,086,512
|
|
|
Balance as of December 31, 2015
|
|
$
|
7,878,599
|
|
|
Fair value of derivative liabilities issued
|
|
|
301,111
|
|
|
Gain on conversion of debt and change in derivative liability
|
|
|
(3,134,813
|
)
|
|
Balance as of December 31, 2016
|
|
$
|
5,044,897
|
|
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
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
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 year ended December 31, 2016, the Company issued 8,437,636 shares of common stock at prices of $0.00847 and $0.01333 per share
upon conversion of $84,500 in convertible promissory notes, including $17,934 in accrued interest; issued 3,085,816 shares of
common stock at a price of $0.056 to $0.115 per share upon conversion of related party convertible promissory notes with a fair
value of $185,000, plus accrued interest of $21,507.
During
the year ended December 31, 2015, the Company issued 3,961,907 shares of common stock at prices of $0.0133 to $0.0367 per share
upon conversion of $55,500 in principle of convertible promissory notes, including $8,448 in accrued interest; issued 2,187,692
shares of common stock at a price of $0.065 per share upon conversion of related party convertible promissory notes with a fair
value of $130,000, plus accrued interest of $12,200.
4.
|
STOCK OPTIONS AND WARRANTS
|
Stock
Options
Transactions involving stock options
are summarized as follows for the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
Number of Options
|
|
|
Weighted average exercise price
|
|
|
Number of Options
|
|
|
Weighted average exercise price
|
|
Outstanding, January 1, 2016
|
|
|
15,978,333
|
|
|
$
|
0.23
|
|
|
|
836,667
|
|
|
$
|
1.43
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
(3,333
|
)
|
|
$
|
4.05
|
|
|
|
(808,334
|
)
|
|
$
|
1.45
|
|
Outstanding, December 31, 2016
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
|
15,978,333
|
|
|
$
|
0.23
|
|
Exercisable as of December 31, 2016
|
|
|
10,183,000
|
|
|
|
|
|
|
|
2,530,333
|
|
|
$
|
0.21
|
|
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
4.
|
STOCK OPTIONS AND WARRANTS (Continued)
|
The
weighted average remaining contractual life of options outstanding as of December 31, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
|
0.40
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
1.17
|
|
|
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,058,000
|
|
|
|
5.23
|
|
|
|
0.26
|
|
|
|
13,500,000
|
|
|
|
8,100,000
|
|
|
|
5.70
|
|
|
|
Total
|
|
|
|
15,975,000
|
|
|
|
10,183,000
|
|
|
|
|
|
The
weighted average remaining contractual life of options outstanding as of December 31, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
|
|
$4.05
|
|
|
|
3,333
|
|
|
|
3,333
|
|
|
|
0.23
|
|
|
|
2.92
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
2.17
|
|
|
|
0.09
|
|
|
|
2,450,000
|
|
|
|
882,000
|
|
|
|
6.23
|
|
|
|
0.26
|
|
|
|
13,500,000
|
|
|
|
1,620,000
|
|
|
|
6.68
|
|
|
|
Total
|
|
|
|
15,978,333
|
|
|
|
2,530,333
|
|
|
|
|
|
The
stock-based compensation expense recognized in the statement of operations during the years ended December 31, 2016 and 2015,
related to the granting of these options was $1,571,769 and $446,296, respectively.
As
of December 31, 2016, there was no intrinsic value with regards to the outstanding options.
Warrants
During
the year ended December 31, 2016, 95,000 purchase warrants expired in October 2016. The Company granted no warrants during
the period. The warrants outstanding as of December 31, 2016 and 2015, were 150,000 and 245,000, respectively. The remaining warrants
have a five (5) year term with an expiration date of October 2017.
|
|
2016
|
|
|
2015
|
|
|
|
Number of Warrants
|
|
|
Weighted average exercise price
|
|
|
Number of Warrants
|
|
|
Weighted average exercise price
|
|
Outstanding, January 1, 2016
|
|
$
|
245,000
|
|
|
$
|
0.97
|
|
|
$
|
245,000
|
|
|
$
|
0.97
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(95,000
|
)
|
|
$
|
1.80
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
$
|
150,000
|
|
|
$
|
0.55
|
|
|
$
|
245,000
|
|
|
$
|
0.97
|
|
Exercisable at the end of period
|
|
$
|
150,000
|
|
|
$
|
0.55
|
|
|
$
|
245,000
|
|
|
$
|
0.97
|
|
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
5.
|
CONVERTIBLE PROMISSORY NOTES
|
On
January 18, 2013, the Company entered into a securities purchase agreement for the sale of 10% convertible promissory note (the
“January 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 a tranche of $10,000. On April 16, 2013,
the Company received an additional tranche of $25,000. The total tranches 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 January Note from six (6) months to eighteen (18)
months from the effective date of each tranche. The January Note was fully converted on January 26, 2016, at which time the Company
issued 192,192 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 (the “May 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 a
tranche in the amount of $50,000. On various dates, the Company received additional tranches 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 year ended December 31, 2016, the Company issued 8,245,443 shares of common stock for principal in the amount of
$82,500, plus accrued interest of $17,378, leaving a principal balance of $385,000. Each tranche matures eighteen (18) months
from the effective date of each tranche, which was extended on January 12, 2016 to sixty (60) months, with maturity dates
ranging from June 12, 2019 to December 21, 2019. The May 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
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 May Note has been determined by using the Binomial lattice formula with an expected life of sixty (60) months from the
effective date of each tranche. The Company recorded amortization of debt discount, which was recognized as interest expense
in the amount of $23,097 during the year ended December 31, 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 (the January 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 a tranche in the amount of
$50,000. On various dates, the Company received additional tranches in the aggregate sum of $450,000. The principal balance at
December 31, 2016 was $500,000. Each tranche matured eighteen (18) months from the effective date of each tranche, which was extended
on January 12, 2016 to sixty (60) months from the effective date of each tranche, with maturity dates ranging from January 29,
2020 to August 25, 2020. The January 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 January 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 January Note has been determined by using the Binomial
lattice formula with an expected life of sixty (60) months from the effective date of each tranche. The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $83,230 during the year ended December 31, 2016.
On
October 1, 2015, the Company entered into a securities purchase agreement, providing for the sale by the Company of 10% unsecured
convertible note (the “October 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 a tranche in the amount
of $90,000. On various dates, the Company received additional tranches in the aggregate sum of $395,000. The principal balance
at December 31, 2016 was $485,000. Each tranche matures twelve (12) months from the effective date of each tranche, which was
extended on October 13, 2016 to sixty (60) months from the effective date of each tranche, with maturity dates ranging from October
1, 2020 to March 9, 2021.The October 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 October 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 $169,917 during the year ended December 31, 2016. As of December 31, 2016, there was unamortized debt discount in the amount of $35,810.
On
April 5, 2016, the Company entered into a securities purchase agreement, providing for the sale by the Company of 10% unsecured
convertible note (the “April 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 a tranche in the amount
of $48,000. On various dates, the Company received additional tranches in the aggregate sum of $382,000. The principal balance
at December 31, 2016 was $430,000. Each tranche matures twelve (12) months from the effective date of each tranche through November
15, 2017. The April 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 April 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 April 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 $124,013 during the year ended December 31, 2016.
As of December 31, 2016, there was unamortized debt
discount in the amount of $100,320.
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
RELATED
PARTY CONVERTIBLE PROMISSORY NOTES
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. The fair value of the notes has been
determined by using the Binomial lattice formula with an expected life of two (2) years. As of December 31, 2016, the note was
fully converted.
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. On December 19, 2016, the Company issued 2,514,599 shares of common stock upon conversion
of principal in the amount of $128,000, plus accrued interest of $12,818. The fair value of the notes had 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 $46,354 during the year ended December 31, 2016. As of December 31, 2016,
the Note was fully converted.
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 per the stock price fluctuations.
6.
|
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 year ended December 31, 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 $304,049,
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 year ended December 31, 2016, the Company converted $269,500 in principal of convertible notes, plus accrued interest of $39,441.
As a result of the conversion of these notes and the change in fair value of the remaining notes, the Company recorded a gain
on net change in derivative and conversion of debt in the amount of $3,134,813 in the statement of operations for the year ended
December 31, 2016. At December 31, 2016, the fair value of the derivative liability was $5,044,897.
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
6.
|
DERIVATIVE LIABILITIES (Continued)
|
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:
|
|
|
|
12/31/2016
|
|
|
Risk free interest rate
|
|
|
0.29% - 1.93
|
%
|
|
Stock volatility factor
|
|
|
16.93% - 184.98
|
%
|
|
Weighted average expected option life
|
|
|
1 years - 5 years
|
|
|
Expected dividend yield
|
|
|
None
|
|
The
Company has patent applications to protect the inventions and processes behind its proprietary bio-based back-sheet, a protective
covering for the back of photovoltaic solar cells traditionally made from petroleum-based film. During the years ended December
31, 2016 and 2015, the Company reviewed the capitalized patents for impairment in accordance with ASC 350, and determined there
was no impairment. As of December 31, 2016 and 2015, the carrying value of the patents was $74,787 and $70,270, respectively.
As of December 31, 2016 and 2015, no amortization has been expensed for the patents, since approval of the patents are pending.
The
Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company
is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before
2014.
Deferred
income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against
the deferred tax assets for amount when the realization is uncertain. Included in the balance at December 31, 2016 and 2015, are
no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of
such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the
shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing
authority to an earlier period.
The
Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating
expenses. During the periods ended December 31, 2016 and 2015, the Company did not recognize interest or penalties.
At
December 31, 2016, the Company had net operating loss carry-forwards of approximately $7,368,000, which expires 20 years after
the NOL year. No tax benefit has been reported in the December 31, 2016 and 2015 financial statements, since the potential tax
benefit is offset by a valuation allowance of the same amount.
The
income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income
from continuing operations for the years ended December 31, 2016 and 2015 due to the following:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Book income (loss)
|
|
$
|
79,830
|
|
|
$
|
(2,317,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,590
|
)
|
|
|
(730
|
)
|
|
Meals and entertainment
|
|
|
160
|
|
|
|
370
|
|
|
Non-deductible non-cash charges
|
|
|
(380,530
|
)
|
|
|
1,986,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
302,130
|
|
|
|
330,970
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the difference between the reported amounts of assets and liabilities and their tax bases.
BIOSOLAR,
INC.
NOTES
TO FINANCIAL STATEMENTS – AUDITED
YEARS
ENDED DECEMBER 31, 2016 AND 2015
8.
|
DEFERRED
TAXES (Continued)
|
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Net
deferred tax liabilities consist of the following components as of December 31, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
NOL carryover
|
|
$
|
(2,947,120
|
)
|
|
$
|
2,614,500
|
|
|
R & D credit
|
|
|
87,480
|
|
|
|
59,250
|
|
|
Depreciation
|
|
|
10,740
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
(3,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
|
2,848,900
|
|
|
|
(2,670,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax
reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may
be limited as to use in future years.
The
Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
9.
|
COMMITMENT AND CONTINGENCIES
|
During
the year ended December 31, 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.
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
In
January and February, the Company received two tranches for an aggregate amount of $70,000 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.
During
the month of January and February 2017, the Company issued 2,358,429 shares of common stock upon conversion of a convertible promissory
note for principal in the amount of $15,800, plus accrued interest of $4,168.
F-14