The accompanying notes are an integral part
of these unaudited condensed financial statements.
The accompanying notes are an integral part
of these unaudited condensed financial statements.
The accompanying notes are an integral part
of these unaudited condensed financial statements.
The accompanying notes are an integral part
of these unaudited condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
The accompanying unaudited condensed
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2018. For further information refer to the financial statements and footnotes thereto included
in the Company’s Form 10-K for the year ended December 31, 2017.
Going Concern
The accompanying condensed financial
statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization
of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect
any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant
revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue
as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis
is dependent upon, among other things, additional cash infusion. The Company has historically obtained funds through private placements
offerings of equity and debt. Management believes that it will be able to continue to raise funds by sale of its securities to
its existing shareholders and prospective new investors to provide the additional cash needed to meet the Company’s obligations
as they become due, and will allow the development of its core of business. There is no assurance that the Company will be able
to continue raising the required capital for its operations.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
This summary of significant
accounting policies of the Company are presented to assist in understanding the Company’s financial statements. The financial
statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently
applied in the preparation of the financial statements.
Revenue Recognition
The Company will recognize revenue
when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and
risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably
assured. To date, the Company has not had significant revenues and is in the development stage.
Cash and Cash Equivalent
The Company considers all highly
liquid investments with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements,
include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, derivative liabilities and
the fair value of stock options. Actual results could differ from those estimates.
Intangible Assets
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, 2018, 15,950,000 stock options are outstanding.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Net Earnings (Loss) per Share
Calculations
Net earnings (Loss) per share
dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are
computed by dividing by the weighted average number of common shares outstanding during the year. Diluted net earnings (loss) per
share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the effect of
stock options and stock based awards (Note 4), plus the assumed conversion of convertible debt (Note 5).
For the 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.
For the three months ended March 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 has excluded 15,975,000 stock options and warrants of 150,000, and the shares issuable from convertible debt
of $1,879,200, 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, 2018, the amounts reported for cash, inventory, prepaid expenses, accounts payable, and accrued expenses,
approximate the fair value because of their short maturities.
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active
markets;
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable such as quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not active;
and
|
|
●
|
Level
3, defined as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions, such as valuations derived from valuation
techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We
measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring
basis are as follows at March 31, 2018:
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
5,453,635
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,453,635
|
|
|
Total Liabilities measured at fair value
|
|
$
|
5,453,635
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,453,635
|
|
The
following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair
value:
|
Balance as of December 31, 2017
|
|
$
|
5,239,073
|
|
|
Fair value of derivative liabilities issued
|
|
|
17,753
|
|
|
Loss on conversion of debt and change in derivative liability
|
|
|
196,809
|
|
|
Balance as of March 31, 2018
|
|
$
|
5,453,635
|
|
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.
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.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
During the three months ended March
31, 2018, the Company issued 8,704,271 shares of common stock upon conversion of convertible promissory notes in the amount of
$58,430, plus accrued interest of $20,441, with an aggregate fair value loss of $163,474 at prices ranging from $0.025 - $0.031.
Stock
Options
The
Company did not grant any stock options during the three months ended March 31, 2018 and 2017, respectively.
|
|
|
3/31/2018
|
|
|
3/31/2017
|
|
|
|
|
Number of Options
|
|
|
Weighted average exercise price
|
|
|
Number of Options
|
|
|
Weighted average exercise price
|
|
|
Outstanding as of the beginning of the periods
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(25,000
|
)
|
|
$
|
0.40
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of the end of the periods
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
15,975,000
|
|
|
$
|
0.23
|
|
|
Exercisable as of the end of the periods
|
|
|
15,950,000
|
|
|
$
|
0.23
|
|
|
|
12,097,000
|
|
|
$
|
0.23
|
|
The
weighted average remaining contractual life of options outstanding as of March 31, 2018 and 2017 was as follows:
|
3/31/2018
|
|
|
3/31/2017
|
|
|
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
|
|
|
|
0.92
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,450,000
|
|
|
|
3.98
|
|
|
$
|
0.09
|
|
|
|
2,450,000
|
|
|
|
2,352,000
|
|
|
|
4.98
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
|
|
4.43
|
|
|
$
|
0.26
|
|
|
|
13,500,000
|
|
|
|
9,720,000
|
|
|
|
5.43
|
|
|
|
|
|
|
|
15,950,000
|
|
|
|
15,950,000
|
|
|
|
|
|
|
|
|
|
|
|
15,975,000
|
|
|
|
12,097,000
|
|
|
|
|
|
The
stock-based compensation expense recognized in the statement of operations during the three months ended March 31, 2018 and 2017,
related to the granting of these options was $0 and $392,942, respectively.
As
of March 31, 2018, and 2017, respectively, there was no intrinsic value with regards to the outstanding options.
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As
of March 31, 2018, the outstanding convertible promissory notes net of debt discount are summarized as
follows:
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
2,278,773
|
|
|
Less current portion
|
|
|
296,699
|
|
|
Total long-term liabilities
|
|
$
|
1,982,074
|
|
Maturities
of long-term debt for the next five years are as follows:
|
Year Ending March 31,
|
|
Amount
|
|
|
2020
|
|
$
|
730,000
|
|
|
2021
|
|
|
755,000
|
|
|
2022
|
|
|
399,074
|
|
|
2023
|
|
|
98,000
|
|
|
|
|
$
|
1,982,074
|
|
At
March 31, 2018, the $2,298,200 in convertible promissory notes had a remaining debt discount of $19,427, leaving a net balance
of $2,278,773.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
On
May 2, 2014, the Company issued a 10% unsecured convertible note (the “May Note”) in the aggregate principal amount
of up to $500,000, to be advanced in amounts at the lender’s discretion. Upon execution of the convertible promissory note,
the Company received a tranche in the amount of $50,000. On various dates, the Company received additional tranches in the aggregate
sum of $450,000, for a total aggregate sum of $500,000. As of December 31, 2017, the remaining principal balance was $306,630.
During the three months ended March 31, 2018, the Company issued 8,704,272 shares of common stock for principal in the amount of
$58,430, plus accrued interest of $20,441, leaving a principal balance of $248,200. Each tranche matures eighteen (18) months from
the effective date of each tranche, which was extended on January 12, 2016 to sixty (60) months, with maturity dates ranging from
June 12, 2019 to December 21, 2019. The May Note is convertible into shares of common stock of the Company at a price equal to
a variable conversion price of a) the lesser of $0.25 per share of common stock, b) fifty percent (50%) of the average three (3)
lowest trading prices of three (3) separate trading days recorded after the effective date, or c) the lowest effective price granted
to any person or entity after the effective date to acquire common stock. If the Company fails to deliver shares in accordance
with the timeframe of three (3) business days of the receipt of a notice of conversion, 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 Company.
In no event shall the lender be entitled to convert any portion of the May Note such that would result in beneficial ownership
by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company.
In
addition, for each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion),
a penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion)
until the shares are delivered. The fair value of the May Note has been determined by using the Binomial lattice formula with an
expected life of sixty (60) months from the effective date of each tranche.
On
January 30, 2015, the Company issued a 10% unsecured convertible note (the “January Note”) in the aggregate principal
amount of up to $500,000, to be advanced in amounts at the lender’s discretion. Upon execution of the convertible promissory
note, the Company received a tranche in the amount of $50,000. On various dates, the Company received additional tranches in the
aggregate sum of $450,000. The principal balance at March 31, 2018 was $500,000. Each tranche matured eighteen (18) months from
the effective date of each tranche, which was extended on January 12, 2016 to sixty (60) months from the effective date of each
tranche, with maturity dates ranging from January 29, 2020 to August 25, 2020. The January Note is convertible into shares of common
stock of the Company at a price equal to a variable conversion price of a) the lesser of $0.15 per share of common stock, b) fifty
percent (50%) of the lowest trade price recorded since the original effective date of the January Note, or c) the lowest effective
price per share granted to any person or entity after the effective date to acquire common stock. If the Company fails to deliver
shares in accordance with the timeframe of three (3) business days of the receipt of a notice of conversion, 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 Company. In no event shall the lender be entitled to convert any portion of the January Note such that would result
in beneficial ownership by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company.
In addition, for each conversion, in the event that shares
are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $1,500 per day shall be assessed
for each day after the third business day (inclusive of the day of the conversion) until the shares are delivered. The fair value
of the January Note has been determined by using the Binomial lattice formula with an expected life of sixty (60) months from the
effective date of each tranche.
On October 1, 2015, the Company issued a 10% unsecured convertible note (the “October Note”)
in the aggregate principal amount of up to $500,000, to be advanced in amounts at the lender’s discretion. Upon execution
of the convertible promissory note, the Company received a tranche in the amount of $90,000. On various dates, the Company received
additional tranches in the aggregate sum of $395,000. The principal balance at March 31, 2018 was $485,000. Each tranche matures
twelve (12) months from the effective date of each tranche, which was extended on October 13, 2016 to sixty (60) months from the
effective date of each tranche, with maturity dates ranging from October 1, 2020 to March 9, 2021.The October Note is convertible
into shares of common stock of the Company at a price equal to a variable conversion price of a) the lesser of $0.25 per share
of common stock, b) fifty percent (50%) of the lowest trade price recorded since the original effective date of the October Note,
or c) the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. If
the Company fails to deliver shares in accordance with the timeframe of three (3) business days of the receipt of a notice of conversion,
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 Company. In no event shall the lender be entitled to convert any portion of the October Note such that would
result in beneficial ownership by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of
the Company.
In addition, for each conversion,
in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $1,500
per day shall be assessed for each day after the third business day (inclusive of the day of the conversion) until the shares are
delivered. The fair value of the October Note has been determined by using the Binomial lattice formula with an expected life of
sixty (60) months from the effective date of each tranche. The fair value of the October Note has been determined by using the
Binomial lattice formula with an expected life of twelve (12) months.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
On April 5, 2016, the Company
issued a 10% unsecured convertible note (the “April Note”) in the aggregate principal amount of up to $500,000, to
be advanced in amounts at the lender’s discretion. Upon execution of the convertible promissory notes, the Company received
a tranche in the amount of $48,000. On various dates, the Company received additional tranches in the aggregate sum of $452,000.
The principal balance at March 31, 2018 was $500,000. Each tranche matures twelve (12) months from its’ effective date of
each tranche, which was extended on April 5, 2017 to sixty (60) months from the effective date of each tranche, with maturity dates
ranging from April 8, 2021 to February 20, 2022. The April Note is convertible into shares of common stock of the Company at a
price equal to a variable conversion price of a) the lesser of $0.13 per share of common stock, b) fifty percent (50%) of the lowest
trade price recorded since the original effective date of the April Note, or c) the lowest effective price per share granted to
any person or entity after the effective date to acquire common stock. If the Company fails to deliver shares in accordance with
the timeframe of three (3) business days of the receipt of a notice of conversion, 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 Company.
In no event shall the lender be entitled to convert any portion of the April Note such that would result in beneficial ownership
by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company. In addition, for
each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a
penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion)
until the shares are delivered. The fair value of the April Note has been determined by using the Binomial lattice formula with
an expected life of twelve (12) months. The Company recorded amortization of debt discount, which was recognized as interest expense
in the amount of $351 during the three months ended March 31, 2018.
On March 20, 2017, the Company
issued a 10% unsecured convertible note (the “March Note”) in the aggregate principal amount of up to $500,000, to
be advanced in amounts at the lender’s discretion. Upon execution of the convertible promissory note, the Company received
a tranche in the amount of $25,000. On various dates during the Company received additional tranches in the aggregate sum of $475,000.
The principal balance as of March 31, 2018 was $500,000. Each tranche matures twelve (12) months from the effective date of each
tranche, with an extension of sixty (60) months from each tranche. The March Note is convertible into shares of common stock of
the Company at a price equal to a variable conversion price of a) the lesser of $0.13 per share of common stock, b) fifty percent
(50%) of the lowest trade price recorded since the original effective date of the March Note, or c) the lowest effective price
per share granted to any person or entity after the effective date to acquire common stock. If the Company fails to deliver shares
in accordance with the timeframe of three (3) business days of the receipt of a notice of conversion, 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 Company. In no event shall the lender be entitled to convert any portion of the March Note such that would result in beneficial
ownership by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company. In addition,
for each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion),
a penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion)
until the shares are delivered. The fair value of the March Note has been determined by using the Binomial lattice formula with
an expected life of twelve (12) months. The Company recorded amortization of debt discount, which was recognized as interest expense
in the amount of $2,847 during the three months ended March 31, 2018.
On February 26, 2018, the Company
issued a 10% unsecured convertible note (the “February Note,” and together with the May Note, January Note, October
Note, April Note and March Note, the “Notes”) in the aggregate principal amount of up to $500,000, to be advanced
in amounts at the lender’s discretion. Upon execution of the convertible promissory note, the Company received a tranche
in the amount of $15,000. On various dates during the period ended March 31, 2018, the Company received an additional tranche
in the sum of $50,000. The principal balance as of March 31, 2018 was $65,000. Each tranche matures twelve (12) months from the
effective date of each tranche, with an extension of sixty (60) months from each tranche. The February Note is convertible into
shares of common stock of the Company at a price equal to a variable conversion price of a) the lesser of $0.03 per share of common
stock, b) fifty percent (50%) of the lowest trade price recorded since the original effective date of the February Note, or c)
the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. If the
Company fails to deliver shares in accordance with the timeframe of three (3) business days of the receipt of a notice of conversion,
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 Company. In no event shall the lender be entitled to convert any portion of the February Note
such that would result in beneficial ownership by the lender and its affiliates of more than 4.99% of the outstanding shares of
common stock of the Company. In addition, for each conversion, in the event that shares are not delivered by the fourth business
day (inclusive of the day of conversion), a penalty of $1,500 per day shall be assessed for each day after the third business
day (inclusive of the day of the conversion) until the shares are delivered. The fair value of the February Note has been determined
by using the Binomial lattice formula with an expected life of twelve (12) months. The Company recorded amortization of debt discount,
which was recognized as interest expense in the amount of $818 during the three months ended March 31, 2018.
We evaluated the financing transactions
in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the Notes was not afforded
the exemption for conventional convertible instruments due to their 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 Notes 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 Notes in their 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.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
– UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
6.
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DERIVATIVE LIABILITIES
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We evaluated the financing transactions
in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the Notes 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 Notes 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 Notes in their 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 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, 2018, as a result of the Notes issued that were accounted for as derivative liabilities, we determined that the fair
value of the conversion feature of the Notes at issuance was $17,753, 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, 2018, the Company converted $58,430 in principal of the Notes, plus accrued interest of $20,441. As a result of the conversion
of these Notes and the change in fair value of the remaining notes, the Company recorded a loss on net change in derivative and
conversion of debt in the amount of $360,283 in the statement of operations for the three months ended March 31, 2018. At March
31, 2018, the fair value of the derivative liability was $5,453,635.
For
purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used the
Binomial lattice valuation model. The significant assumptions used in the Binomial lattice valuation model for the derivative
are as follows:
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3/31/2018
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Risk free interest rate
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2.09% - 2.56%
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Stock volatility factor
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83.0% - 134.0%
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Weighted average expected option life
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1 years - 5 years
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Expected dividend yield
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None
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Management
has evaluated subsequent events according to the requirements of ASC TOPIC 855 and has determined that there are the following
subsequent events:
On
April 20, 2018, the Company received an additional tranche in the amount of $55,000 on the February Note.
On April 23, 2018, the Company
issued 1,748,219 shares of common stock upon conversion of the May Note for principal in the amount of $7,500, plus accrued interest
of $2,698.