1. Basis of Presentation
The accompanying unaudited 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 sixnine months ended JuneSeptember 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company received a purchase order from a specialty PV manufacturer during 2013, and expects to receive additional orders during 2014. The Company has historically obtained funds from its shareholders since its inception through the sixnine months ended JuneSeptember 30, 2014. Management believes existing shareholders and prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and towill 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.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Investments
Certificate of Deposits with banking institutions are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, derivative liabilities and the fair value of stock options. Actual results could differ from those estimates.
Intangible Assets
Intangible assets consist of patents that are initially measured at the lower of cost or fair value. The patents are deemed to have an indefinite life and are not amortized. The patents are assessed annually for impairment, or whenever conditions indicate the asset may be impaired, and any such impairment will be recognized in the period identified.
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 is required to provide service in exchange for the award (the vesting period).
Compensation expense for options granted to 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 to non-employees is re-measured each period.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2014
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Determining the appropriate fair value of the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based payment and stock price volatility. The Company uses the Black-Scholes option-pricing model to value its stock option awards which incorporate the Company’s stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life.
Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the sixnine months ended JuneSeptember 30, 2014, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss. The Company has excluded 736,667774,167 exercisable options and 245,000 warrants for the sixnine months ended JuneSeptember 30, 2014.
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of JuneSeptember 30, 2014, the amounts reported for cash, inventory, prepaid expenses, accounts payable, and accrued expenses, approximate the fair value because of their short maturities.
We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
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 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
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.· | 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 JuneSeptember 30, 2014:
| | | | | | | | | | | | |
Derivative Liability | | $ | 558,541 | | | $ | - | | | $ | - | | | $ | 558,541 | |
| | | | | | | | | | | | | | | | |
Total liabilities measured at fair value | | $ | 558,541 | | | $ | - | | | $ | - | | | $ | 558,541 | |
| | | | | | | | | | | | | | | | |
| | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | |
Derivative Liability | | $ | 1,261,681 | | | $ | - | | | $ | - | | | $ | 1,261,681 | |
| | | | | | | | | | | | | | | | |
Total liabilities measured at fair value | | $ | 1,261,681 | | | $ | - | | | $ | - | | | $ | 1,261,681 | |
The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
Beginning balance as of January 1, 2014 | | $ | 361,170 | | | $ | 361,170 | |
Fair value of derivative liabilities issued | | 84,492 | | | 154,485 | |
Loss on change in derivative liability, Net | | | 112,879 | | |
Ending balance as of June 30, 2014 | | $ | 558,541 | | |
Conversion of notes payable | | | (109,504 | ) |
Loss on change in derivative liability | | | | 855,530 | |
Ending balance as of September 30, 2014 | | | $ | 1,261,681 | |
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2014
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
Management has reviewed recently issued accounting pronouncements and has adopted the following;
On June 10,August 27, 2014, the Company adopted the amendment to (Topic 915)ASU 2014-15 on Development Stage Entities,Presentation of Financial Statements Going Concern (Subtopic 205-40). The amendment provides for guidance to reduce diversity in the eliminationtiming and content of footnote disclosures. The amendment requires management to assess the Company’s ability to continue as a going concern by incorporating and expanding upon certain disclosuresprinciples that are currently in U.S. auditing standards. The Company has to define the term of substantial doubt, which has to be evaluated every reporting period including interim periods. Management has to provide principles for considering the mitigating effect of its plan, and disclose when substantial doubt is alleviated as well as when it is not alleviated. The Company is required under U.S. generally accepted accounting principles (GAAP) into assess managements plan for a period of one year after the financial statements for development stage entities.are issued (or available to be issued). The amendment removes the definition of a development stage entity, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. The Company has eliminated the inception-to-date information in the statements of income, cash flows, and shareholder equity. The financial statements are no longer labeled as a development stage entity, and no disclosure is requiredeffective for a description of the development stage activities the entityannual periods ending after December 15, 2016. Early adoption is engaged or when they are no longer a development stage entity.permitted. The Company does not believe the accounting standards currently adopted will have a material effect on the accompanying condensed financial statements.
On June 19, 2014, the Company adopted the amendment to (Topic 718) Stock Compensation: Accounting for Share-Based Payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendment for accounting for share based payments, when an award provides that a performance target that affects vesting could be achieved after an employee completes the requisite service period shall be accounted for as a performance condition. The performance target shall not be reflected in estimating the fair value of the award at the grant date, and compensation cost shall be recognized in the period in which it becomes probable that the performance target will be achieved and will represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost shall be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period shall reflect the number of awards that are expected to vest and shall be adjusted to reflect the awards that ultimately vest. The Company does not believe the accounting standards currently adopted will have a material effect on the accompanying condensed financial statements.
During the sixnine months ended JuneSeptember 30, 2014, the Company issued 1,418,807 shares of common stock at prices ranging from $0.046 to $0.10, uponfor conversion of $100,000 in convertible promissory notes, including $5,524 in accrued interest.
4. STOCK OPTIONS AND WARRANTS
During the sixnine months ended JuneSeptember 30, 2014, the Company did not grant any stock options.
| | | |
| | | | | Weighted | |
| | Number | | | average | |
| | of | | | exercise | |
| | Options | | | price | |
Outstanding, January 1, 2014 | | | 836,667 | | | $ | 1.43 | |
Granted | | | - | | | | - | |
Exercised | | | - | | | | - | |
Expired | | | - | | | | - | |
Outstanding, June 30, 2014 | | | 836,667 | | | $ | 1.43 | |
Exercisable at June 30, 2014 | | | 736,667 | | | $ | 1.57 | |
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2014
4. STOCK OPTIONS AND WARRANTS (Continued) | | | Weighted |
| Number | | average |
| of | | exercise |
| Options | | price |
Outstanding, January 1, 2014 | | 836,667 | | $ | 1.43 |
Granted | | - | | | - |
Exercised | | - | | | - |
Expired | | - | | | - |
Outstanding, September 30, 2014 | | 836,667 | | $ | 1.43 |
Exercisable at September 30, 2014 | | 774,167 | | $ | 1.52 |
| | | | | |
The weighted average remaining contractual life of options outstanding as of JuneSeptember 30, 2014 was as follows:
| | | | | | | Weighted | | | | | | | | | | | Weighted | |
| | | | | | | Average | | | | | | | | | | | Average | |
| | | Stock | | Stock | | Remaining | | | | | Stock | | | Stock | | | Remaining | |
Exercisable | Exercisable | | Options | | Options | | Contractual | | Exercisable | | | Options | | | Options | | | Contractual | |
Prices | Prices | | Outstanding | | Exercisable | | Life (years) | | Prices | | | Outstanding | | | Exercisable | | | Life (years) | |
$ | 4.05 | | | 236,667 | | | 236,667 | | | 1.73 | | 4.05 | | | | 236,667 | | | | 236,667 | | | | 1.48 | |
| 0.40 | | | 600,000 | | | 500,000 | | | 3.67 | | 0.40 | | | | 600,000 | | | | 500,000 | | | | 3.42 | |
Total | Total | | | 836,667 | | | 736,667 | | | | | Total | | | | 836,667 | | | | 736,667 | | | | | |
The stock-based compensation expense recognized in the statement of operations during the sixnine months ended JuneSeptember 30, 2014 and 2013, related to the granting of these options was $32,427$42,154 and 75,628,104,813, respectively.
Warrants
During the sixnine months ended JuneSeptember 30, 2014, the Company did not issuegrant any warrants. As of JuneSeptember 30, 2014, 245,000 warrants are outstanding. The term of the warrantswarrant terms are 5 years with 95,000 warrants expiring in October 2016 and 150,000 warrants expiring in October 2017.
| | | |
| | | | | Weighted | |
| | Number | | | average | |
| | of | | | exercise | |
| | Warrants | | | price | |
Outstanding, January 1, 2014 | | | 245,000 | | | $ | 0.97 | |
Granted | | | - | | | | - | |
Exercised | | | - | | | | - | |
Expired | | | - | | | | - | |
Outstanding, June 30, 2014 | | | 245,000 | | | $ | 0.97 | |
Exercisable at June 30, 2014 | | | 245,000 | | | $ | 0.97 | |
9
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2014
4. STOCK OPTIONS AND WARRANTS (Continued)
| | | | | Weighted | | |
| | Number | | | average | | |
| | of | | | exercise | | |
| | Warrants | | | price | | |
Outstanding, January 1, 2014 | | | 245,000 | | | $ | 0.97 | | | |
Granted | | | - | | | | - | | | |
Exercised | | | - | | | | - | | | |
Expired | | | - | | | | - | | | |
Outstanding, September 30, 2014 | | | 245,000 | | | $ | 0.97 | | | |
Exercisable at September 30, 2014 | | | 245,000 | | | $ | 0.97 | | | |
5. CONVERTIBLE PROMISSORY NOTES
On January 18, 2013, the Company entered into a securities purchase agreement for the sale of 10% convertible promissory note infor the aggregate principal amount of $80,000, to be advanced in amounts at the lender’s discretion. Upon execution of the securities purchase agreement, the Company received an advance of $10,000. On April 16, 2013, the Company received an additional advance of $25,000. The total advances received were $35,000, of which principal in the amount of $10,000, and $687 in accrued interest was converted into 106,877 shares of common stock at fair value of $0.43 per share on September 29, 2013, leaving a balance of $25,000. During the month of July 2013, the Company extended the maturity date of the note from six (6) months to eighteen (18) months from the effective date of each advance. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of a) $0.40 per share b) fifty percent (50%) of the lowest trading price of common stock recorded on any trade day after the effective date, or c) the lowest effective price per share granted after the effective date. The fair value of the notes has been determined by using Black-Scholes pricing model with an expected life of more than a year. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $4,916$7,387 during the sixnine months ended JuneSeptember 30, 2014.
On March 1, 2013, the Company entered into a securities purchase agreement, providing for the sale by the Company of a 10% unsecured Convertible Note in the aggregate principal amount of $100,000, to be advanced in amounts at the lender’s discretion. Upon execution of the securities purchase agreement, the Company received advances of $35,000 during the year ended December 31, 2013. The note was amended on February 24, 2014, and was extended for six (6) months. The note maturesmonths to mature on August 28, 2014. The note matured and was extended to August 28, 2015. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.20 per share or fifty percent (50%) of the lowest trading price recorded on any trade day after the effective date. The fair value of the note has been determined by using the Black-Scholes pricing model with an expected life of less than a year. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $6,609$7,055 during the sixnine months ended JuneSeptember 30, 2014.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2014
5. CONVERTIBLE PROMISSORY NOTES (Continued)
| On June 5, 2013, the Company issued two 5% convertible promissory notes in exchange for services rendered by the Company’s Chief Executive Officer ($114,000) and Chief Technology Officer ($128,000) in the aggregate amount of $242,000. On March 5, 2014, the Company issued 694,191 upon partial conversion of principal in the aggregate amount of $55,000, plus accrued interest of $2,063, leaving a remaining balance of $187,000. The notes are convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.24 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The notes mature two (2) years from their effective dates. The fair value of the notes has been determined by using the Black-Scholes pricing model with an expected life of two (2) years. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $43,736$53,851 during the sixnine months ended JuneSeptember 30, 2014. |
On June 21, 2013, the Company entered into a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $100,000, to be advanced in amounts at the lender’s discretion. Upon execution of the securities purchase agreement, the Company received advances of $45,000 during the year ended December 31, 2013. During the sixnine months ended JuneSeptember 30, 2014, the Company issued 724,616 shares of common stock upon conversion of the note for principal in the amount of $45,000, plus accrued interest of $3,462. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $23,603 during the sixnine months ended JuneSeptember 30, 2014.
BIOSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS – (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2014
5. CONVERTIBLE PROMISSORY NOTES
On May 2, 2014, the Company entered into a securities purchase agreement, providing for the sale by the Company of a 10% unsecured Convertible Note in the aggregate principal amount of $500,000, to be advanced in amounts at the lender’s discretion. Upon execution of the securities purchase agreement, the Company received an advanceadditional advances in the aggregate of $50,000. On June 12, 2014,various dates, the Company received an additional advanceadvances in the aggregate sum of $80,000.$265,000. The principal balance at September 30, 2014 was $315,000. The note matures from the effective date of each advance. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.25 per share or fifty percent (50%) of the three (3) lowest trading prices recorded on any trade day after the effective date. The fair value of the note has been determined by using the Black-Scholes pricing model with an expected life of eighteen (18) months. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $5,199$31,971 during the sixnine months ended JuneSeptember 30, 2014.
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 according to the stock price fluctuations.