☒ ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Securities registered under Section 12(g)
of the Exchange Act: common stock, par value $0.0001 per share
Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See definitions of “large accelerated filer,” “accelerated filer,” “small
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting
and non-voting common stock of the issuer held by non-affiliates, computed by reference to the price at which the common stock
was sold on June 30, 2018, was approximately $5,123,735.
The number of shares of registrant’s
common stock outstanding, as of March 15, 2019 was 71,614,917.
PART I
Overview
We are developing innovative
technologies to increase the capacity and reduce the cost of storing electrical energy. We have previously developed an innovative
material technology to reduce the cost per watt of electricity produced by Photovoltaic, or PV, solar modules.
We are currently working
on a silicon anode additive material technology intended to increase the storage capacity of current and future generation of lithium-ion
batteries while lowering the cost of storing electrical energy. The lower cost of electrical energy storage will result in reduced
cost per watt of electricity produced by PV solar modules as well.
Industry Overview
The solar industry
relies on two distinctly different solar energy technologies. Solar energy can be converted directly into electricity using PV
devices or into heat by solar thermal devices. PV devices convert sunlight directly into electricity through a photovoltaic cell,
commonly called a solar cell, a non-mechanical device usually made from silicon alloys. Solar thermal devices, on the other hand,
are typically used for directly heating swimming pools, heating water for domestic use, and space heating of buildings.
Our product development
focus had been based on PV technology, thus we are currently a part of the PV segment of the industry. Photovoltaics is derived
from the words photo, meaning light, and voltaic, meaning voltage producing. Sunlight, not heat, fuels photovoltaic cells. The
cells, made mostly of the semiconductor silicon, convert sunlight directly into electricity.
With all of these PV
panels being installed, there is still one major challenge that prevents solar from being a primary and reliable source of power
– the sun does not shine at night. As a result, solar users will switch to using electricity from the local power company
during the evening hours. This switch causes sudden spikes in power demand on the grid and creates havoc at the local power company
because the grid is not designed to respond to rapid demand changes. The key to solving this problem is efficient electrical energy
storage systems that can be charged and discharged rapidly, day in and day out. This will time-shift daytime solar energy for nighttime
use with minimal reliance on the power grid.
According to a 2015
report by Solar Energy Industries Association, the demand for rooftop solar paired with energy storage systems will reach $1 billion
in the U.S. by 2020, and will create pent up demand for cost effective solar energy storage solutions. Pairing solar panels with
batteries means users can store power during the day and use it at night, reducing electricity bills. Those savings can be more
significant for customers who pay higher rates for electricity during peak periods.
With a modern world
running on electricity, the need for battery storage has never been greater. The ability to store energy, take it on the go, and
use it later, has opened up a new world of “Killer Apps” such as long range electric vehicles, iPhones, and storage
of renewable wind and solar energy for later use. The key to enabling these Killer Apps is better and lower cost batteries.
According to a 2014
report from Lux Research, the global energy storage market will rise to $50 billion by the year 2020, with a compound annual growth
rate of 8%. Much of the growth will be in electric vehicles, which will rise to $21 billion, followed by the incumbent consumer
electronics segment such as iPhones, which will rise to $27 billion, with the remainder of $2.8 billion in stationary applications
such as solar, back-up power, and grid storage.
Research and Development
We previously developed
robust bio-based components that meet the stringent thermal and durability requirements of current PV module manufacturing processes.
We identified certain bio-based materials that are inherently durable, and we then applied proprietary material processes to enhance
the desirable characteristics of these bio-based materials – turning them into robust and durable materials to be used as
solar panel components. Based on long term environmental testing performed by the Company, we believe our BioBacksheet
R
is more durable than conventional petroleum based back sheets available in the market today.
The BioBacksheet
R
successfully obtained Underwriters Laboratories’ (UL) material certification in February 2011. This version of
our back sheet is designed for conventional c-Si solar modules, which currently represents over 75 percent of solar modules produced
in the world, as well as for certain thin film solar modules. The relative thermal index (RTI) rating of 130
°
C by UL was issued during the 3rd quarter of 2012, and a number of PV panel manufacturers obtained certifications on their
PV panels incorporating BioBacksheet
R
for UL/IEC.
A key ingredient of
BioBacksheet
R
is Nylon 11 derived from castor bean oil. We do not currently have an agreement with Arkema, Inc, a global
producer of high performance materials including Nylon 11, for the supply of Nylon 11 and there is currently no other known supplier
of Nylon 11. If Nylon 11 becomes unavailable in the future, alternative materials such as Nylon 1010 or Nylon 12 can be substituted,
for which there are many known suppliers. The Company currently does not manufacture BioBacksheet
R
, but the product
is available for licensing.
We initially focused
our energy storage development effort on high capacity cathode materials since most of today’s Li-ion batteries are “cathode
limited.” With the goal of creating the company’s next generation super battery technology, we are currently investigating
high capacity anode materials recognizing the fact that the overall battery capacity is determined by a combination of both cathode
and anode.
Silicon (Si) is one
of the most promising anode materials being considered for next generation, high energy and high power lithium ion batteries (Li-Bs).
However, Si anodes suffer from large capacity fading and tremendous volume changes during lithium-ion charge-discharge cycling.
The strains due to the huge volume changes actually pulverizes the Si material and eventually lead to electrode shattering and
delamination, which adversely affect the battery performance and cycle life. These are the primary challenges to the commercial
use of Si for battery anodes, which the Company intends to overcome.
We previously sponsored
a research program at the North Carolina Agricultural and Technical State University to strengthen the engineering development
efforts of its battery technology. Dr. Sung-Jin Cho, Assistant Professor in the Nanoengineering Department at the university, was
the lead investigator of the sponsored research program. Dr. Sungjin Cho is currently the technology advisor to BioSolar’s
battery technology development program.
Marketing Strategy
We will begin marketing
our energy storage component material technology as soon as demonstration prototypes become available. Our marketing plan includes
engaging with large Lithium-ion battery manufacturers, as well as identifying potential licensing partners in the following industries:
electric vehicles, consumer electronics and grid electrical storage.
We are currently outsourcing
our promotion efforts to a public relations firm that is assisting us with comprehensive advertising and promotion of the Company
and its silicon additive technology.
Backlog of Orders
We do not have any
backlog of orders.
Government Contracts
We do not have any government contracts
at this time.
Compliance with Environmental Laws and Regulations
Our operations are
subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date, our compliance
with these regulations has had no material effect on our operations, capital, earnings, or competitive position, and the cost of
such compliance has not been material. We are unable to assess or predict at this time what effect additional regulations or legislation
could have on our activities.
Manufacturing and Distribution
We currently do not
have any mechanism for the manufacture and distribution of our BioBacksheet
R
, nor do we have adequate financing to undertake
these efforts on our own. BioBacksheet
R
is currently available for licensing.
Intellectual Property
On May 19, 2011, we
filed a U.S. patent to protect the intellectual property rights for “Photovoltaic Module Backsheet, Materials for Use in
Module Backsheet and Process for Making the Same,” application number 13/093,549. The inventor listed on the patent
application is Stanley Levy, our Chief Technology Officer. The Company is listed as assignee. This patent was issued
on July 14, 2015.
On March 26, 2018,
North Carolina Agricultural and Technical State University filed a U.S. patent application U.S. Serial No. 62/473,772 titled “Prelithiated
Silicon Particles for Lithium Ion Batteries”, and we signed an Exclusive License Agreement for the use of the technology
effective September 25, 2017.
We rely upon confidentiality
agreements signed by our employees, consultants and third parties to protect our intellectual property.
Competition
There are a number
of companies manufacturing lithium-ion batteries including: Panasonic, Samsung, LG Chem, and Tesla. We plan to seek licensing arrangements
for our lithium-ion battery technology with a select group of companies such as the ones listed above, and do not expect to be
their direct competition.
Technology Development Partners
The Company has entered
into a research agreement, effective August 17, 2016 (the “Agreement”), with North Carolina Agricultural and Technical
State University, a constituent member of the University of North Carolina system (the “University”), pursuant to which
the Company sponsors the University’s project which includes the research, testing and evaluation of a proposal. On September
11, 2017, the Company and the University extended the initial term of the Agreement for another twelve months, through September
11, 2018. The agreement ended on September 11, 2018.
On September 28,
2017, the Company entered into an Exclusive License Agreement (the “License Agreement”) with the University related
to the use of the University’s intellectual property in the Company’s business of developing, producing and marketing
lithium-ion batteries.
Within thirty (30)
days after entering into the License Agreement, the Company paid to the University a one-time, non-refundable license fee in the
sum of $15,000. Pursuant to the terms of the License Agreement, the Company is obligated to pay all costs of preparing, filing,
prosecution, issuance and maintenance related to the patents underlying the intellectual property licensed by the Company. In addition,
the Company is obligated to make certain royalty payments and sub-licensing fees. On September 28, 2018, the Company again paid
to the University a one-time, non-refundable licensee fee in the sum of $15,000.
To assist us in the
development of our technology, we intend to seek out and enter into technology development agreements with other entities with
battery testing and materials expertise.
Corporate Information and History
We were incorporated
in the State of Nevada on April 24, 2006, as BioSolar Labs, Inc. Our name was changed to BioSolar, Inc. on June 8, 2006. Our principal
executive offices are located at 27936 Lost Canyon Road, Suite 202, Santa Clarita, California 91387, and our telephone number is
(661) 251-0001. Our fiscal year end is December 31.
EMPLOYEES
As of March 15, 2019, we
had one (1) full time employee. We have not experienced any work stoppages and we consider relations with our employees to be good.
WE HAVE A LIMITED HISTORY OF LOSSES
AND HAVE NEVER REALIZED REVENUES TO DATE.
Since inception, we
have incurred losses and have negative cash flows from operations and have realized only minimal revenues. From inception
through December 31, 2018, we have an accumulated deficit of $28,653,206. These factors, among others discussed in Note 1 to the
financial statements included in this Annual Report, raise substantial doubt about our ability to continue as a going concern.
We expect to continue to incur net losses until we are able to realize revenues to fund our continuing operations. We may fail
to achieve any or significant revenues from sales or achieve or sustain profitability. Accordingly, there can be no assurance of
when, if ever, we will be profitable or be able to maintain profitability.
WE ARE A DEVELOPMENT STAGE COMPANY AND
MAY BE UNABLE TO MANAGE OUR GROWTH OR IMPLEMENT OUR EXPANSION STRATEGY IF WE ARE ABLE TO LAUNCH OUR PRODUCT AND SERVICE OFFERINGS.
We are a development
stage company that was formed on April 24, 2006 and may not be able to launch our product and service offerings or implement
the other features of our business strategy at the rate or to the extent presently planned. If we are able to launch our product
and service offerings, our projected growth will place a significant strain on our administrative, operational and financial resources.
If we are unable to successfully manage our future growth, establish and upgrade our operating and financial control systems, recruit
and hire necessary personnel or effectively manage unexpected expansion difficulties, our financial condition and results of operations
could be materially and adversely affected.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE
OUR TECHNOLOGIES WHICH WOULD RESULT IN CONTINUED LOSSES.
While we have made
progress in the development of our products, we have generated only minimal revenues and are unable to project when we will achieve
profitability, if at all. As is the case with any new technology, we are a development stage company and expect the development
process to continue. We may not be able to develop our product offering, develop a customer base and markets, or implement the
other features of our business strategy at the rate or to the extent presently planned. Growth beyond the product development stage
will place a significant strain on our administrative, operational and financial resources. In addition, our operations will
not be able to move out of the development stage without additional funding.
OUR REVENUES ARE DEPENDENT UPON ACCEPTANCE
OF OUR PRODUCTS BY THE MARKET; THE FAILURE OF WHICH WOULD CAUSE TO CURTAIL OR CEASE OPERATIONS.
We believe that virtually
all of our revenues will come from the sale or license of our products. As a result, we will continue to incur substantial operating
losses until such time as we are able to sell and license our products from the sale or license of our products. There can be no
assurance that businesses and customers will adopt our technology and products, or that businesses and prospective customers will
agree to pay for or license our products. In the event that we are not able to significantly increase the number of customers that
purchase or license our products, or if we are unable to charge the necessary prices or license fees, our financial condition and
results of operations will be materially and adversely affected.
WE DO NOT MAINTAIN THEFT OR CASUALTY
INSURANCE, AND ONLY MAINTAIN MODEST LIABILITY AND PROPERTY INSURANCE COVERAGE AND THEREFORE WE COULD INCUR LOSSES AS A RESULT OF
AN UNINSURED LOSS.
We do not maintain
theft or casualty insurance and we have modest liability and property insurance coverage. We cannot assure you that we will not
incur uninsured liabilities and losses as a result of the conduct of our business. Any such uninsured or insured loss or liability
could have a material adverse effect on our results of operations.
IF WE LOSE KEY EMPLOYEES AND CONSULTANTS
OR ARE UNABLE TO ATTRACT OR RETAIN QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER.
Our success is highly
dependent on our ability to attract and retain qualified scientific, engineering and management personnel. We are highly dependent
on our sole officer, Dr. David Lee, who has been critical to the development of our technologies and business. The loss of the
services of Dr. Lee could have a material adverse effect on our operations. We do not have an employment agreement with Dr. Lee
and do not maintain key man insurance with respect to Dr. Lee. Accordingly, there can be no assurance that he will remain
associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition
from a development stage company to a company with commercialized products and services. If we were to lose Dr. Lee, or any other
key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing
our business strategies.
THE LOSS OF STRATEGIC RELATIONSHIPS
USED IN THE DEVELOPMENT OF OUR PRODUCTS AND TECHNOLOGY COULD IMPEDE OUR ABILITY TO COMPLETE OUR PRODUCT.
We may rely on strategic
relationships with technology development partners to provide personnel, and expertise in the research and development of our technology
and manufacturing process underlying our product. A loss of these relationships for any reason could cause us to experience difficulties
in completing the development of our product and implementing our business strategy. There can be no assurance that we could establish
other relationships of adequate expertise in a timely manner or at all.
OUR PATENT APPLICATION FOR OUR TECHNOLOGY
IS PENDING AND THERE IS NO ASSURANCE THAT THIS APPLICATION WILL BE GRANTED. FAILURE TO OBTAIN THE PATENT FOR OUR APPLICATION COULD
PREVENT US FROM SECURING ROYALTY PAYMENTS IN THE FUTURE, IF APPROPRIATE.
We have filed a US
patent to protect our intellectual property rights on BioBacksheet, “Photovoltaic Laminated Module Backsheet, Material for
Use In Module Backsheet and Process for Making the Same,” and this patent application was granted on July 14, 2015.
OUR CURRENT AND POTENTIAL COMPETITORS,
SOME OF WHOM HAVE GREATER RESOURCES THAN WE DO, MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAY CAUSE DEMAND FOR, AND THE PRICES
OF, OUR PRODUCTS TO DECLINE.
While there are a number
of companies manufacturing components for PV devices and electrical energy storage devices, we do not know of any employing the
use of bio-based materials or polymer-based supercapacitor designs. We may face competition from these companies as they may expand
or combine with other combines to extend their product offering to incorporate bio-based materials. In addition, other companies
may enter our markets by acquiring or entering into strategic relationships with our competitors. Current and potential competitors
have established, or may establish, cooperative relationships among themselves or with third parties to increase the abilities
of their PV components to address the needs of our prospective customers.
Many of our current
and potential competitors have longer operating histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able
to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry
trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their products
than we do. Accordingly, we may not be able to compete effectively in our markets, competition may intensify and future competition
may harm our business.
WE ARE CONTROLLED BY CURRENT OFFICERS,
DIRECTORS AND PRINCIPAL STOCKHOLDERS.
Our directors, executive
officers and principal stockholders and their affiliates beneficially own approximately 32.1% of the outstanding shares of
our common stock as of December 31, 2018. Accordingly, our executive officers, directors, principal stockholders and certain of
their affiliates will have the ability to control the election of our Board of Directors and the outcome of matters submitted to
a vote of our stockholders.
Risks Related to Our Common Stock
BECAUSE THERE IS A LIMITED MARKET IN
OUR COMMON STOCK, STOCKHOLDERS MAY HAVE DIFFICULTY IN SELLING OUR COMMON STOCK AND OUR COMMON STOCK MAY BE SUBJECT TO SIGNIFICANT
PRICE SWINGS.
There is a very limited
market for our common stock. Since trading commenced in February 2007, there has been little activity in our common stock and on
some days there is no trading in our common stock. Because of the limited market for our common stock, the purchase or sale of
a relatively small number of shares may have an exaggerated effect on the market price for our common stock. We cannot assure stockholders
that they will be able to sell common stock or, that if they are able to sell their shares, that they will be able to sell the
shares in any significant quantity at the quoted price.
IF WE FAIL TO REMAIN CURRENT ON OUR
REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL
OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Securities traded on
the OTCQB must be registered with the Securities and Exchange Commission and the issuer must be current with its filings pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1933, as amended in order to maintain price quotation privileges on the
OTCQB. If we fail to remain current in our reporting requirements, we could be removed from the OTCQB. As a result, the market
liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities
and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-listed
on the OTCQB, which may have an adverse material effect on our Company.
OUR COMMON STOCK IS SUBJECT TO THE “PENNY
STOCK” RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME
AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and
Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant
to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
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the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve
a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer
must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers
may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more
difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has
to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
WE DO NOT EXPECT TO PAY DIVIDENDS IN
THE FUTURE; ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK.
We do not currently
anticipate paying cash dividends in the foreseeable future. The payment of dividends on our Common Stock will depend on earnings,
financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant.
Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development
and marketing efforts. There can be no assurance that the Company will ever have sufficient earnings to declare and pay dividends
to the holders of our Common Stock, and in any event, a decision to declare and pay dividends is at the sole discretion of the
our Board of Directors. If we do not pay dividends, our Common Stock may be less valuable because a return on your investment will
only occur if its stock price appreciates.
Our headquarters are
located at 27936 Lost Canyon Road, Suite 202, Santa Clarita, California 91387. We lease our facility under a month to month lease
without an expiration date. Our monthly lease payment is $550. The size of our office is 144 square feet.
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ITEM 3.
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LEGAL PROCEEDINGS.
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We are not currently
a party to, nor are any of our property currently the subject of, any pending legal proceeding that will have a material adverse
effect on our business.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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N/A
The accompanying notes are an integral part
of these audited financial statements
The accompanying notes are an integral part
of these audited financial statements
The accompanying notes are an integral part
of these audited financial statements
The accompanying notes are an integral part
of these audited financial statements
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
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1.
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ORGANIZATION AND LINE OF BUSINESS
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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 storing electrical energy. We previously 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. We are focusing
our research and product development efforts on silicon anode additive material 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. During the year ended December
31, 2018, the Company did not generate any revenue, incurred a net loss of $9,866,829 and used cash in operations of $630,979.
As of December 31, 2018, the Company had a working capital deficiency of $15,062,687 and a shareholders’ deficit of
$17,000,210. These factors, among others raise substantial doubt about the Company’s ability to continue as
a going concern. Our independent auditors, in their report on our audited financial statements for the year ended
December 31, 2018 expressed substantial doubt about our ability to continue as a going concern.
The accompanying financial statements
have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization
of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented
in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do
not include any adjustment that might result from the outcome of this uncertainty.
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, achieving
a level of profitable operations and receiving additional cash infusions. During the year ended December 31, 2018, the Company
obtained funds from the issuance of convertible note agreements. Management believes this funding will continue from its’
current investors and from new investors. Management believes the existing shareholders, and the prospective new investors will
provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of
its core business operations. No assurance can be given that any future financing will be available or, if available, that it will
be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue
restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity
financing.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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
In
accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. These estimates and assumptions relate to useful lives and impairment of tangible and intangible assets,
accruals, income taxes, stock-based compensation expense, Binomial lattice valuation model inputs, derivative liabilities and other
factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions
could affect these estimates.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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. During the years ended December 31, 2018 and 2017 the Company reviewed
the capitalized patents for impairment in accordance with ASC 350, and determined there was no impairment. Intangible assets that
have finite useful lives continue to be amortized over their useful lives
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Useful Lives
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2018
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2017
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Patents
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$
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75,487
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$
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75,487
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|
Write-off of abandoned patents
|
|
|
|
|
(30,151
|
)
|
|
|
-
|
|
|
Less accumulated amortization
|
|
15 years
|
|
|
(9,067
|
)
|
|
|
(6,045
|
)
|
|
|
|
|
|
$
|
36,269
|
|
|
$
|
69,442
|
|
The Company recognized amortization
expense of $3,022 and $6,045 for the years ended December 31, 2018 and 2017.
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, 2018 and 2017 was $3,080 and $3,323, respectively.
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 December 31, 2018, 15,950,000 stock options are outstanding.
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.
On
December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was signed into law by the President
of the United States. The TCJA is a tax reform act that among other things, reduced corporate income tax rate to 21%, effective
January 1, 2018. Accordingly, t
he Company adjusted its deferred tax assets and liabilities at January 1, 2018,
using the new corporate rate of 21%. See Note 7.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Research and Development
Research and development costs are expensed as incurred.
Total research and development costs were $239,607 and $176,306 for the years ended December 31, 2018 and 2017, respectively.
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, 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 $2,744,160, because their impact was anti-dilutive.
For the year ended December
31, 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 excluded 15,975,000 stock options,
and the shares issuable from the convertible debt of $2,193,630, because their impact was antidilutive.
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) to common shareholders (Numerator)
|
|
$
|
(9,866,829
|
)
|
|
$
|
(2,785,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding (Denominator)
|
|
|
53,667,779
|
|
|
|
35,784,211
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding (Denominator)
|
|
|
53,667,779
|
|
|
|
35,784,211
|
|
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, 2018 and 2017, 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, 2018 and 2017:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities measured at fair value as of December 31, 2018
|
|
$
|
14,032,942
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,032,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities measured at fair value as of December 31, 2017
|
|
$
|
5,239,073
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,239,073
|
|
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Fair Value of Financial Instruments
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, 2016
|
|
$
|
5,044,897
|
|
|
Fair value of derivative liabilities issued
|
|
|
15,840
|
|
|
Gain on change in derivative liability
|
|
|
178,336
|
|
|
Balance as of December 31, 2017
|
|
$
|
5,239,073
|
|
|
Fair value of derivative liabilities issued
|
|
|
402,808
|
|
|
Loss on change in derivative liability
|
|
|
8,391,061
|
|
|
Balance as of December 31, 2018
|
|
$
|
14,032,942
|
|
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.
In August 2018, the FASB issued
to accounting standards update ASU 2018-13, (Topic 820) - “Fair Value Measurement”, which changes the unrealized gains
and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements,
and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual
period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. The amendments in this update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance. The Company is currently evaluation
the impact of the adoption of ASU 2018-13, 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.
Reclassification
Certain amounts in the 2017
financial statements have been reclassified to conform to the presentation used in the 2018 financial statements. There was no
material impact on any of the Company’s previously issued financial statements.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
During the year ended December
31, 2018, the Company issued 19,154,257 shares of common stock upon conversion of convertible promissory notes in the amount of
$99,470, plus accrued interest of $36,153, with an aggregate fair value loss of $385,531 at prices ranging from $0.0157 - $0.048.
During the year ended December
31, 2017, the Company issued 11,965,646 shares of common stock upon conversion of convertible promissory notes in the amount of
$78,370, plus accrued interest of $22,939, with an aggregate fair value loss of $408,144 at prices ranging from $0.0350 and $0.0549
per share upon conversion
Stock Options
The Company did not grant any
stock options during the years ended December 31, 2018 and 2017, respectively.
|
|
|
12/31/2018
|
|
|
12/31/2017
|
|
|
|
|
Number of
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Number of
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Outstanding as of the beginning of the years
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(25,000
|
)
|
|
$
|
0.40
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of the end of the years
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
Exercisable as of the end of the years
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
15,435,000
|
|
|
$
|
0.23
|
|
The weighted average remaining
contractual life of options outstanding as of December 31, 2018 and 2017 was as follows:
|
12/31/2018
|
|
|
12/31/2017
|
|
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
|
|
|
|
0.16
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
3.23
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
4.23
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
|
|
3.37
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
|
|
4.67
|
|
|
|
|
|
|
|
15,950,000
|
|
|
|
15,950,000
|
|
|
|
|
|
|
|
|
|
|
|
15,975,000
|
|
|
|
15,975,000
|
|
|
|
|
|
The stock-based compensation expense recognized in
the statement of operations during the years ended December 31, 2018 and 2017, related to the granting of these options was $0
and $1,265,236, respectively.
As of December 31, 2018, and 2017, respectively,
there was no intrinsic value with regards to the outstanding options.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As of December 31, 2018 and 2017, the outstanding
convertible promissory notes net of debt discount are summarized as follows:
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
2,470,810
|
|
|
$
|
2,187,939
|
|
|
Less current portion
|
|
|
485,837
|
|
|
|
396,660
|
|
|
Total long-term liabilities
|
|
$
|
1,984,973
|
|
|
$
|
1,791,279
|
|
Maturities of long-term debt for the next
five years are as follows:
|
December 31,
|
|
Amount
|
|
|
2019
|
|
$
|
485,837
|
|
|
2020
|
|
|
730,000
|
|
|
2021
|
|
|
685,000
|
|
|
2022
|
|
|
472,000
|
|
|
2023
|
|
|
97,973
|
|
|
|
|
$
|
2,470,810
|
|
At December 31, 2018, the $2,736,710
in convertible promissory notes had a remaining debt discount of $265,900, leaving a net balance of $2,470,810.
The Company issued an unsecured
convertible promissory note (the May 2014 Note”), in the amount of $500,000 on May 2, 2014. The May Note matures September
18, 2019. The May 2014 Note bears interest at 10% per annum. The May 2014 Note is convertible into shares of the Company’s
common stock at a conversion price of a) the lesser of $0.25 per share of common stock (subject to adjustment for stock splits,
dividends, combinations and other similar transactions) or 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 time frame
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 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 2014 Note has been determined by using the Binomial lattice formula from the effective date of each tranche. During
the year ended the Company issued 19,154,257 shares of common stock upon conversion of principal in the amount of $99,470, plus
accrued interest of $36,153, with a fair value loss on conversion of debt in the amount of $385,531. As of December 31, 2018, the
remaining balance of the May 2014 Note was $207,160.
The Company issued various unsecured
convertible promissory notes (the 2015-2018 Notes”) in the aggregate amount of $2,500,000 on various dates of January 30,
2015 through February 26, 2018. The 2015-2018 Notes matures on dates from January 30, 2020 thru February 26, 2023. The 2015-2018
Notes bears interest at 10% per annum. The 2015-2018 Notes are convertible into shares of the Company’s common stock at conversion
prices ranging from the a) the lesser of $0.03 to $0.25 per share of common stock (subject to adjustment for stock splits, dividends,
combinations and other similar transactions) or b) fifty percent (50%) of the lowest trade price recorded since the original effective
date, 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 within the time frame 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 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 2015-2018 Notes have been determined by using
the Binomial lattice formula from the effective date of each tranche. The Company recorded amortization of debt discount, which
was recognized as interest expense in the amount of $82,137 during the year ended December 31, 2018. As of December 31, 2018, the
remaining aggregate balances of the 2015-2018 Notes were $2,315,000.
The Company issued various unsecured
convertible promissory notes (the “Jul-Dec 2018 Notes”) in the aggregate principal amount of 222,000 on various dates
of July 23, 2018 through December 4, 2018. The July-Dec 2018 Notes matures on dates from July 23, 2019 thru December 4, 2019. The
Jul-Dec 2018 Notes bears interest at 10% per annum. The Jul-Dec 2018 Notes may be converted into shares of the Company’s
common stock at a conversion price of sixty-one (61%) percent of the lowest average two (2) trading prices during the fifteen (15)
trading day prior to the conversion date. The conversion feature of the Jul-Dec 2018 Note was considered a derivative in accordance
with current accounting guidelines because of the reset conversion features of the Jul-Dec 2018 Notes. The fair value of the Jul-Dec
2018 Notes has been determined by using the Binomial lattice formula from the effective date of each note. The Company recorded
amortization of debt discount, which was recognized as interest expense in the amount of $60,460 during the year ended December
31, 2018. As of December 31, 2018, the remaining aggregate balances of the Jul-Dec 2018 Notes were $222,000.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 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 notes have
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 year ended December
31, 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 $402,807, 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, 2018, the Company converted $99,470 in principal of convertible notes, plus accrued interest of $36,153. As a result of the
conversion of these notes the Company recorded a fair value loss on the conversion of debt in the amount of $385,531 in the statement
of operations for the year ended December 31, 2018. At December 31, 2018, the fair value of the derivative liability was $14,009,084.
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:
|
|
|
|
12/31/2018
|
|
|
Risk free interest rate
|
|
|
2.46% - 2.63
|
%
|
|
Stock volatility factor
|
|
|
89.0% - 202.0
|
%
|
|
Weighted average expected option life
|
|
|
1 years - 5 years
|
|
|
Expected dividend yield
|
|
|
None
|
|
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 2016.
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, 2018 and 2017 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, 2018 and 2017, the Company did not recognize interest or penalties.
At December 31, 2018, the Company
had net operating loss carry-forwards of approximately $8,627,000, which expires 20 years after the NOL year. No tax benefit has
been reported in the December 31, 2018 and 2017 financial statements, since the potential tax benefit is offset by a valuation
allowance of the same amount.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
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7.
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DEFERRED TAXES (Continued)
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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, 2018 and 2017 due to the following:
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2018
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2017
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Book Income (Loss)
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(2,072,035
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)
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(1,114,010
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)
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Depreciation
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125
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|
680
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Meals and entertainment
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(1,060
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)
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|
240
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Non-deductible non-cash charges
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1,924,670
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|
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879,830
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Valuation Allowance
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148,300
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233,260
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Income tax expense
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$
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-
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$
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-
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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.
Net deferred
tax assets consist of the following components as of December 31, 2018 and 2017:
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2018
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2017
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Deferred tax assets:
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NOL carryover
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(1,811,705
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)
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(3,170,060
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)
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R & D credit
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124,840
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91,630
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Depreciation
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10,735
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10,740
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Deferred tax liabilities:
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-
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Less Valuation Allowance
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1,676,130
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3,067,690
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Net deferred tax asset
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$
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-
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$
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-
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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.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future
years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018.
The Company
has applied the new tax law for its calculation of the deferred tax provision. There was no impact to the Company’s
financial statements. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of
$1,506,651, with a corresponding net adjustment to the valuation allowance of $1,506,651 as of January 1, 2018.
The Company’s tax returns
for the previous three years remain open for audit by the respective tax jurisdictions.
BIOSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS – AUDITED
YEARS ENDED DECEMBER 31, 2018 AND 2017
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7.
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COMMITMENT AND CONTINGENCIES
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On October
3, 2018, the Company amended its lease for office space by extending the lease to October 31, 2019.
Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
On January
17, 2019, the Company received an additional tranche of $25,000 pursuant to the 2015-2018 convertible promissory notes.
On January
23, 2019, the Company entered into a convertible promissory note with an investor, providing for the sale by the Company of a 10%
unsecured convertible note in the principal amount of $53,000. The Note matures on January 23, 2019. The 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.
On January
28, 2019, the Company issued 872,093 shares of common stock upon a partial conversion of the July 2018 convertible promissory note
for principal in the sum of $15,000.
On January
29, 2019, the Company issued 1,162,791 shares of common stock upon a partial conversion of the July 2018 convertible promissory
note for principal in the sum of $20,000.
On January
30, 2019, the Company issued 1,590,086 shares of common stock upon a partial conversion of the May 2014 convertible promissory
note for principal in the amount of $5,920, plus accrued interest of $2,587.
On February
1, 2019, the Company issued 1,175,088 shares of common stock upon a partial conversion of the July 2018 convertible promissory
note for principal in the sum of $20,000.
On February
5, 2019, the Company issued 671,687 shares of common stock upon a partial conversion of the July 2018 convertible promissory notes
for principal in the amount of $8,000, plus accrued interest of $3,150.
On February
18, 2019, the Company entered into an agreement with a consultant, who will provide technical consulting services of various research
expertise and strategic planning. The agreed upon monthly fee is $6,000 per month for February and March 2019.
On February
22, 2019, the Company issued 2,900,064 shares of common stock upon a partial conversion of the May 2014 convertible promissory
note for principal in the amount of $10,750, plus accrued interest of $4,765.
On February
22, 2020, the Company entered into a secured convertible promissory note with an investor, providing for the sale by the Company
of a 10% unsecured convertible note in the principal amount of $53,500 for a purchase price of $51,500, and an original issue discount
of $2,000. The Note matures on February 22, 2021. The 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 one (1) trading prices for common stock during the fifteen (15)
trading day period prior to the conversion date.
On February
25, 2019, the Company entered into a secured convertible promissory note with an investor, providing for the sale by the Company
of a 10% unsecured convertible note in the principal amount of $53,000. The Note matures on February 25, 2020. The 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 one (2)
trading prices for common stock during the fifteen (15) trading day period prior to the conversion date
On March 7,
2019, the Company issued 1,224,490 shares of common stock upon a partial conversion of the September 2018 convertible promissory
note for principal in the amount of $18,000.
On March 11,
2019, the Company issued 1,379,310 shares of common stock upon a partial conversion of the September 2018 convertible promissory
note for principal in the amount of $20,000.
On March
18, 2019, the Company issued 1,288,321 shares of common stock upon a partial conversion of the September 2018 convertible promissory
note for principal in the amount of $15,000 and interest in the amount of $2,650.
F-15