NOTES
TO CONDENSED FINANCIAL STATEMENTS – UNAUDITED
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
The
accompanying unaudited condensed 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 six months ended June 30, 2018 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2018. 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, 2017.
Going
Concern
The
accompanying condensed 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 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
through the sale of its securities to its existing shareholders and prospective new investors to meet the Company’s obligations
as they become due, and to 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 is 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
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 modules traditionally made from petroleum-based film. Intangible assets that have
finite useful lives continue to be amortized over their useful lives
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 used Black Scholes to value its stock option awards
which incorporated the Company’s stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life. The stock
options terminate seven (7) years from the date of grant or upon termination of employment. As of June 30, 2018, 15,950,000 stock
options are outstanding.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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 six months ended June 30, 2018, 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 15,950,000 stock options and the shares issuable from convertible debt of $2,436,220, because their impact was anti-dilutive.
For
the six months ended June 30, 2017, 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 15,975,000 stock options and warrants of 150,000, and the shares issuable from convertible debt of $2,010,250, because
their impact was anti-dilutive.
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 June 30, 2018, 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 June 30, 2018:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
34,784,811
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
34,784,811
|
|
|
Total Liabilities measured at fair value
|
|
$
|
34,784,811
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
34,784,811
|
|
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 December 31, 2017
|
|
$
|
5,239,073
|
|
|
Fair value of derivative liabilities issued
|
|
|
80,844
|
|
|
Loss on change in derivative liability
|
|
|
29,464,894
|
|
|
Balance as of June 30, 2018
|
|
$
|
34,784,811
|
|
Reclassification
of expenses
During
the three and six month period ended June 30, 2017, certain reclassifications have been made to prior period expenses to
conform to the current period presentation. There is no material impact on any of the Company’s previously issued financial
statements.
BIOSOLAR,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS – UNAUDITED
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recently
Issued Accounting Pronouncements
In
August 2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements
to Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in
the same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning
after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company is currently
evaluating the impact of the adoption of ASU 2017-12 on the Company’s financial statements.
In
June 2018, FASB issued accounting standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with
Nonemployees”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services.
Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments
granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed
on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period.
The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have
not yet been issued. The Company is currently evaluating the impact of the adoption of ASU 2018-07 on the Company’s financial
statements.
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.
During
the six months ended June 30, 2018, the Company issued 15,445,341 shares of common stock upon conversion of convertible promissory
notes in the amount of $85,410, plus accrued interest of $30,370, with an aggregate fair value loss of $234,733 at prices ranging
from $0.0160 - $0.058.
Stock
Options
The
Company did not grant any stock options during the six months ended June 30, 2018 and 2017, respectively.
|
|
|
6/30/2018
|
|
|
6/30/2017
|
|
|
|
|
Number of Options
|
|
|
Weighted average exercise price
|
|
|
Number of Options
|
|
|
Weighted average exercise price
|
|
|
Outstanding as of the beginning of the periods
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(25,000
|
)
|
|
$
|
0.40
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of the end of the periods
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
Exercisable as of the end of the periods
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
13,815,000
|
|
|
$
|
0.23
|
|
The
weighted average remaining contractual life of options outstanding as of June 30, 2018 and 2017 was as follows:
|
6/30/2018
|
|
|
6/30/2017
|
|
|
Exercisable Price
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Exercisable Price
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.40
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
0.67
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
3.73
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
4.73
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
|
|
4.18
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
11,340,000
|
|
|
|
5.18
|
|
|
|
|
|
|
|
15,950,000
|
|
|
|
15,950,000
|
|
|
|
|
|
|
|
|
|
|
|
15,975,000
|
|
|
|
13,815,000
|
|
|
|
|
|
The
stock-based compensation expense recognized in the statement of operations during the six months ended June 30, 2018 and 2017,
related to the granting of these options was $0 and $771,027, respectively.
As
of June 30, 2018, and 2017, respectively, there was no intrinsic value with regards to the outstanding options.
BIOSOLAR,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS – UNAUDITED
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
5.
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of June 30, 2018, the outstanding convertible promissory notes net of debt discount are summarized as follows:
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
2,362,702
|
|
|
Less current portion
|
|
|
157,699
|
|
|
Total long-term liabilities
|
|
$
|
2,205,003
|
|
Maturities
of long-term debt for the next five years are as follows:
|
Year Ending
June 30,
|
|
Amount
|
|
|
2020
|
|
$
|
631,220
|
|
|
2021
|
|
|
493,000
|
|
|
2022
|
|
|
693,783
|
|
|
2023
|
|
|
289,000
|
|
|
2024
|
|
|
98,000
|
|
|
|
|
$
|
2,205,003
|
|
At
June 30, 2018, the $2,436,220 in convertible promissory notes had a remaining debt discount of $73,518, leaving a net balance
of $2,362,702.
On
May 2, 2014, the Company issued a 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 convertible promissory note,
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 June 30, 2018, the remaining principal balance was $221,220. During
the six months ended June 30, 2018, the Company issued 15,445,341 shares of common stock for principal in the amount of $85,410,
plus accrued interest of $30,370, leaving a principal balance of $221,220. 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. If the Borrower fails to deliver shares in accordance
with the timeframe of three (3) business days, the Lender, at any time prior to selling all of those shares, may rescind any portion,
in whole or in part of that particular conversion attributable to the unsold shares and have the rescinded conversion amount returned
to the Principal Sum with the rescinded conversion shares returned to the Borrower. In addition, for each conversion, in the event
that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $1,500 per day shall
be assessed for each day after the third business day (inclusive of the day of the conversion) until the shares are delivered.
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.
On
January 30, 2015, the Company issued a 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 convertible promissory
note, 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 June 30, 2018 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. If the Borrower fails
to deliver shares in accordance with the timeframe of three (3) business days, the Lender, at any time prior to selling all of
those shares, may rescind any portion, in whole or in part of that particular conversion attributable to the unsold shares and
have the rescinded conversion amount returned to the Principal Sum with the rescinded conversion shares returned to the Borrower.
In addition, for each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day
of conversion), a penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day
of the conversion) until the shares are delivered. 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.
BIOSOLAR,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS – UNAUDITED
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
On
October 1, 2015, the Company issued a 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
convertible promissory note, 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 June 30, 2018 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 October Note, or c) the
lowest effective price per share granted to any person or entity after the effective date to acquire common stock. If the
Borrower fails to deliver shares in accordance with the timeframe of three (3) business days, the Lender, at any time prior
to selling all of those shares, may rescind any portion, in whole or in part of that particular conversion attributable to
the unsold shares and have the rescinded conversion amount returned to the Principal Sum with the rescinded conversion shares
returned to the Borrower. In addition, for each conversion, in the event that shares are not delivered by the fourth business
day (inclusive of the day of conversion), a penalty of $1,500 per day shall be assessed for each day after the third
business day (inclusive of the day of the conversion) until the shares are delivered. 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 fair value of the October Note has been determined by using the Binomial lattice formula with an expected
life of twelve (12) months.
On
April 5, 2016, the Company issued a 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 convertible promissory notes,
the Company received a tranche in the amount of $48,000. On various dates, the Company received additional tranches in the aggregate
sum of $452,000. The principal balance at June 30, 2018 was $500,000. Each tranche matures twelve (12) months from its’
effective date of each tranche, which was extended on April 5, 2017 to sixty (60) months from the effective date of each tranche,
with maturity dates ranging from April 8, 2021 to February 20, 2022. 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. If the Borrower fails to deliver shares
in accordance with the timeframe of three (3) business days, the Lender, at any time prior to selling all of those shares, may
rescind any portion, in whole or in part of that particular conversion attributable to the unsold shares and have the rescinded
conversion amount returned to the Principal Sum with the rescinded conversion shares returned to the Borrower. In addition, for
each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a
penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion)
until the shares are delivered. 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 $351 during the six months ended June 30, 2018.
On
March 20, 2017, the Company issued a 10% unsecured convertible note (the “March 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 convertible promissory
note, the Company received a tranche in the amount of $25,000. On various dates during the Company received additional tranches
in the aggregate sum of $475,000. The principal balance as of June 30, 2018 was $500,000. Each tranche matures twelve (12) months
from the effective date of each tranche, with an extension of sixty (60) months from each tranche. The March 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 March Note,
or c) the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. If
the Borrower fails to deliver shares in accordance with the timeframe of three (3) business days, the Lender, at any time prior
to selling all of those shares, may rescind any portion, in whole or in part of that particular conversion attributable to the
unsold shares and have the rescinded conversion amount returned to the Principal Sum with the rescinded conversion shares returned
to the Borrower. In addition, for each conversion, in the event that shares are not delivered by the fourth business day (inclusive
of the day of conversion), a penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive
of the day of the conversion) until the shares are delivered. The fair value of the March 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 $4,556 during the six months ended June 30, 2018.
On
February 26, 2018, the Company issued a 10% unsecured convertible note (the “February 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 convertible promissory
note, the Company received a tranche in the amount of $15,000. On various dates during the period ended June 30, 2018, Company
received additional tranches in the aggregate sum of $215,000. The principal balance as of June 30, 2018 was $230,000. Each tranche
matures twelve (12) months from the effective date of each tranche, with an extension of sixty (60) months from each tranche.
The February 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 $0.03 per share of common stock, b) fifty percent (50%) of the lowest trade price recorded since the original
effective date of the February Note, or c) the lowest effective price per share granted to any person or entity after the effective
date to acquire common stock. If the Borrower fails to deliver shares in accordance with the timeframe of three (3) business days,
the Lender, at any time prior to selling all of those shares, may rescind any portion, in whole or in part of that particular
conversion attributable to the unsold shares and have the rescinded conversion amount returned to the Principal Sum with the rescinded
conversion shares returned to the Borrower. In addition, for each conversion, in the event that shares are not delivered by the
fourth business day (inclusive of the day of conversion), a penalty of $1,500 per day shall be assessed for each day after the
third business day (inclusive of the day of the conversion) until the shares are delivered. The fair value of the February 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 $8,110 during the six months ended June 30, 2018.
BIOSOLAR,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS – UNAUDITED
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
5.
|
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 per the stock price fluctuations.
|
6.
|
DERIVATIVE
LIABILITIES
|
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.
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 six months ended June 30, 2018, 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
$80,844, 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 six months ended June 30, 2018, the Company converted $85,410 in principal of convertible notes, plus accrued interest of
$30,370. As a result of the conversion of these notes the Company recorded a fair value loss on the settlement of debt in the
amount of $234,733 in the statement of operations for the six months ended June 30, 2018. At June 30, 2018, the fair value of
the derivative liability was $34,784,811.
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:
|
|
|
|
6/30/2018
|
|
|
Risk free interest rate
|
|
|
2.09% - 2.73
|
%
|
|
Stock volatility factor
|
|
|
83.0% - 196.0
|
%
|
|
Weighted average expected option life
|
|
|
1 years - 5 years
|
|
|
Expected dividend yield
|
|
|
None
|
|
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
On
July 23, 2018, the Company entered into a convertible promissory note with an investor, providing for the sale by the Company
of a 10% unsecured convertible note (the “July Note”) in the principal amount of $63,000. The July Note is convertible
into shares of common stock of the Company at a price equal to a variable conversion price of 61% of the average lowest two (2)
trading prices for common stock during the fifteen (15) trading day period prior to the conversion date.