NOTES TO CONDENSED FINANCIAL STATEMENTS –
UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND
2018
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 three months ended March 31, 2019 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2019. 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, 2018.
Going Concern
The accompanying
unaudited 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 unaudited condensed 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 by sale of its securities to its existing
shareholders and prospective new investors to provide the additional cash needed to meet the Company’s obligations as
they become due, and will allow the development of its core of business. 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.
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
This summary of
significant accounting policies of the Company is presented to assist in understanding the unaudited condensed
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
unaudited condensed 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 unaudited condensed financial statements. Significant
estimates made in preparing these unaudited condensed 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 March 31, 2019, 15,950,000 stock options are outstanding.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS –
UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND
2018
|
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 three months ended March
31, 2019, 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 $2,795,990, because their impact was anti-dilutive.
For the three months ended March
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 $2,298,200, 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 March 31, 2019, the amounts reported for cash, 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 March
31, 2019:
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
10,109,093
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,109,093
|
|
Total Liabilities measured at fair value
|
|
$
|
10,109,093
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,109,093
|
|
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, 2018
|
|
$
|
14,032,942
|
|
Fair value of derivative liabilities issued
|
|
|
176,694
|
|
(Gain) on change in derivative liability
|
|
|
(4,100,543
|
)
|
Balance as of March 3,1 2019
|
|
$
|
10,109,093
|
|
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS –
UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND
2018
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|
Recently Issued Accounting
Pronouncements
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
has evaluated the impact of the adoption of ASU 2018-07, which has no effect on the Company’s financial statements.
In August 2018, the FASB issued 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 of Expenses
During the three months ended
March 31, 2019, the Company reclassified certain expenses in the financial statements, which had no material effect.
During the three months ended March
31, 2019, the Company issued 12,263,930 shares of common stock upon conversion of convertible promissory notes in the amount of
$132,670, plus accrued interest of $13,152, with an aggregate fair value loss of $204,534 at prices ranging from $0.0235 - $0.0341.
Stock Options
The Company did not grant any
stock options during the three months ended March 31, 2019 and 2018, respectively.
|
|
3/31/2019
|
|
|
3/31/2018
|
|
|
|
Number
of Options
|
|
|
Weighted
average exercise price
|
|
|
Number
of Options
|
|
|
Weighted
average exercise price
|
|
Outstanding as of the beginning
of the periods
|
|
|
15,950,000
|
|
|
$
|
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
|
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
Exercisable as of the end of the periods
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
The weighted average
remaining contractual life of options outstanding as of March 31, 2019 and 2018 was as follows:
3/31/2019
|
|
|
3/31/2018
|
|
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)
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
2.98
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
3.98
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
|
|
3.43
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
|
|
4.43
|
|
|
|
|
|
|
15,950,000
|
|
|
|
15,950,000
|
|
|
|
|
|
|
|
|
|
|
|
15,950,000
|
|
|
|
15,950,000
|
|
|
|
|
|
The stock-based compensation
expense recognized in the statement of operations during the three months ended March 31, 2019 and 2018, related to the granting
of these options was $0 and $0, respectively.
As of March 31, 2019 and 2018, respectively,
there was no intrinsic value with regards to the outstanding options.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS –
UNAUDITED
FOR THE THREE
MONTHS ENDED MARCH 31, 2019 AND 2018
|
5.
|
CONVERTIBLE
PROMISSORY NOTES
|
As of March 31, 2019,
the outstanding convertible promissory notes net of debt discount are summarized as follows:
Convertible Promissory Notes, net of debt discount
|
|
$
|
2,517,387
|
|
Less current portion
|
|
|
436,817
|
|
Total long-term liabilities
|
|
$
|
2,080,570
|
|
Maturities of
long-term debt, net of debt discount for the next five years are as follows:
March 31,
|
|
Amount
|
|
2020
|
|
|
436,817
|
|
2021
|
|
|
800,000
|
|
2022
|
|
|
525,000
|
|
2023
|
|
|
540,000
|
|
2024
|
|
|
215,570
|
|
|
|
$
|
2,517,387
|
|
At
March 31, 2019, the $2,795,990 in convertible promissory notes had a remaining debt discount of $278,603, leaving a net bala
nce
of $2,517,387.
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 three months ended March 31, 2019, the Company issued 4,490,150 shares of common stock upon conversion of principal in the
amount of $16,670, plus accrued interest of $7,352, with a fair value loss on conversion of debt in the amount of $109,072. As
of March 31, 2019, the remaining balance of the May 2014 Note was $190,490.
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. On January 17, 2019, the Company received an additional tranche in the amount of $25,000, associated
with the February 26, 2018 Note for a total aggregate of $2,340,000. The 2015-2018 Notes matures on dates from January 30, 2020
thru January 17, 2024. 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 $47,125 during the
three months ended March 31, 2019. As of March 31, 2019, the aggregate balances of the 2015-2018 Notes were $2,340,000.
The Company issued various
unsecured convertible promissory notes (the “Jul-Feb 2019 Notes”) in the aggregate principal amount of $328,000
on various dates of July 23, 2018 through February 25, 2019. During the three months ended March 31, 2019, the Company
entered into two unsecured convertible promissory notes on January 22, 2019 in the amount of $53,000 and February 25, 2019 in
the amount of $53,000. The Jul-Feb 2019 Notes matures on dates from July 23, 2019 thru February 25, 2019. The Jul-Feb 2019
Notes bears interest at 10% per annum. The Jul-Feb 2019 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-Feb 2019 Note was considered a derivative
in accordance with current accounting guidelines because of the reset conversion features of the Jul-Feb 2019 Notes. The fair
value of the Jul-Feb 2019 Notes has been determined by using the Binomial lattice formula from the effective date of each
note. During the three months ended March 31, 2019, the Company issued 7,773,780 upon conversion of principal in the amount
of $116,000, plus accrued interest of $5,800, with a fair value loss on conversion of debt in the amount of $95,461, The
Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $111,444 during the
three months ended March 31, 2019. As of March 31, 2019, the remaining aggregate balances of the Jul-Feb 2019 Notes were
$212,000.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS –
UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND
2018
|
5.
|
CONVERTIBLE PROMISSORY
NOTES (Continued)
|
The Company issued an unsecured
convertible promissory notes on February 20, 2019 (the “Feb 2019 Note”) in the aggregate principal amount of $53,500.
The Company paid an original issue discount of $2,000 and received funds in the amount of $51,500. The Feb 2019 Note matures on
February 25, 2020. The Feb 2019 Note bears interest at 10% per annum. The Feb 2019 Note may be converted into shares of the Company’s
common stock at a conversion price of sixty-one (61%) percent of the lowest one (1) day trading price during the fifteen (15)
trading days prior to the conversion date. The parties agree that if delivery of the common stock issuable upon conversion of
this Note is not delivered by the deadline, the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the
deadline that the Borrower fails to deliver such common stock. The conversion feature of the Feb 2019 Note was considered a derivative
in accordance with current accounting guidelines because of the reset conversion features of the Feb 2019 Note. The fair value
of the Feb 2019 Note has been determined by using the Binomial lattice formula from the effective date of the note. The Company
recorded amortization of debt discount, which was recognized as interest expense in the amount of $5,423 during the three months
ended March 31, 2019. As of March 31, 2019, the balance of the Feb 2019 Note was $53,500.
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 three months ended March
31, 2019, 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 $176,694, 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 three months ended March
31, 2019, the Company converted $132,670 in principal of convertible notes, plus accrued interest of $13,152. 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 $204,534 in the statement
of operations for the three months ended March 31, 2019. At March 31, 2019, the fair value of the derivative liability was $10,109,093.
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:
|
|
3/31/2019
|
Risk free interest rate
|
|
2.21% - 2.51%
|
Stock volatility factor
|
|
85.0% - 189.0%
|
Weighted average expected option life
|
|
1 years - 5 years
|
Expected dividend yield
|
|
None
|
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS –
UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND
2018
Management has
evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following subsequent
events:
On April 5,
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 (the “Apr Note”) in the principal amount of $53,500. The Apr Note is convertible into shares
of common stock of the Company at a price equal to a variable conversion price of 61% of the lowest one (1) day trading price
for common stock during the fifteen (15) trading day period prior to the conversion date.
On April 16,
2019, the Company issued 3,567,558 shares of common stock upon conversion of principal in the amount of $13,140, plus accrued
interest of $5,946.
On April 17, 2019, the Company
issued 2,820,513 shares of common stock upon conversion of principal in the amount of $33,000.
On April 22, 2019, the Company
issued 1,935,897 shares of common stock upon conversion of principle in the amount of $20,000, plus accrued interest of $2,650.
On April 25, 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 (the “Apr Note”) in the principal amount of $63,000. The Apr 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 of the two lowest (1) day trading prices
for common stock during the fifteen (15) trading day period prior to the conversion date.