CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER
31, 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 S-X
Regulation Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair
presentation have been included. Operating results for the six months ended December 31, 2017 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2018. For further information refer to the financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 2017.
Going
Concern
The
accompanying unaudited 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 financial statements do not reflect any adjustments that might result if the Company is
unable to continue as a going concern. The Company does not generate 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 placement 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 business. There is no assurance that the Company will be able to continue
raising the required capital.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
This
summary of significant accounting policies of HyperSolar, Inc. is presented to assist in understanding the Company’s
unaudited 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.
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 financial statements.
Significant estimates made in preparing these unaudited financial statements include the estimate of useful lives of
intangible assets, and the deferred tax valuation allowance. 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 assessed
annually for impairment, or whenever conditions indicate the asset may be impaired, and any such impairment will be
recognized in the period identified. Patents are amortized straight-line over 15 years.
Net
Earnings (Loss) per Share Calculations
Net
earnings (Loss) per share dictates the calculation of basic earnings (loss) per share and diluted earnings (loss) per share.
Basic earnings (loss) per share are computed by dividing by the weighted average number of common shares outstanding during
the year. Diluted net earnings (loss) per share is computed similar to basic earnings (loss) per share except that the
denominator is increased to include the effect of stock options and stock based awards (Note 4), plus the assumed conversion
of convertible debt (Note 5).
For
the six months ended December 31, 2017, the Company calculated the dilutive impact of the outstanding stock options of 10,250,000,
and the convertible debt of $1,706,100, which is convertible into shares of common stock. The stock options and the convertible
debt were not included in the calculation of net loss per share, because their impact was antidilutive.
For
the six months ended December 31, 2016, the dilutive impact of the outstanding stock options of 500,000, and the convertible debt
of $1,465,000, which is convertible into shares of common stock. The stock options and the convertible debt were included in the
calculation of net earnings per share, because their impact on the loss per share was dilutive.
Stock
based Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the
HYPERSOLAR,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER
31, 2017
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Stock
based Compensation
(Continued)
authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized
over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements
by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period
of the measurement date.
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 December 31, 2017, the amounts reported for cash, accrued interest and other
expenses, notes payables, and derivative liability approximate the fair value because of their short maturities.
We
adopted ASC Topic 820 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 1measurements) 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, 2017 (See Note 6):
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
3,571,895
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,571,895
|
|
|
Total derivative liabilities measured at fair value
|
|
$
|
3,571,895
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,571,895
|
|
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 July 1, 2017
|
|
$
|
2,482,842
|
|
|
Fair value of derivative liabilities issued
|
|
|
34,892
|
|
|
Loss on change in derivative liability
|
|
|
1,054,161
|
|
|
Balance as of December 31, 2017
|
|
$
|
3,571,895
|
|
Accounting
for Derivatives
The
Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average
series Binomial lattice formula pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
Reclassification
of Expenses
Certain
expenses for the period ended December 31, 2016, were reclassified to conform with the expenses for the period ended December
31, 2017.
HYPERSOLAR,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER
31, 2017
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recently
Issued Accounting Pronouncements
In
May 2017, FASB issued accounting standards update ASU-2017-09, “Compensation-Stock Compensation” (Topic 718) –Modification
Accounting”, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the
guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award.
The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period for public entities for
reporting periods for which financial statements have not yet been issued, and all other entities for reporting periods for which
financial statements have not yet been made available for issuance. The Company is currently evaluating the impact of the adoption
of ASU 2017-09 on the Company’s financial statements.
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. 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 on the Company’s financial
statements.
Management does not believe
that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on
the accompanying condensed unaudited financial statements.
During
the six months ended December 31, 2017, the Company issued 60,426,825 shares of common stock upon conversion of convertible notes
in the amount of $126,900 in principal, plus accrued interest of $37,642, with an aggregate fair value loss on settlement of $227,764,
based upon conversion prices of $0.0070 and $0.0058.
Options
As
of December 31, 2017, 10,250,000 non-qualified common stock options were outstanding. Each option expires on the date specified
in the option agreement, which date is not later than the fifth (5
th
) anniversary from the grant date of the options.
As of December 31, 2017, 250,000 options are fully vested with a maturity date of March 31, 2020, and are exercisable at an exercise
price of $0.02245 per share. On October 2, 2017, the Company issued 10,000,000 shares of non-qualified common stock options, which
vest one-third immediately, and one-third the second and third year, whereby, the options are fully vested with a maturity date
of October 2, 2022, and are exercisable at an exercise price of $0.01 per share.
A
summary of the Company’s stock option activity and related information follows:
|
|
|
12/31/2017
|
|
12/31/2016
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Number
|
|
average
|
|
Number
|
|
average
|
|
|
|
of
|
|
exercise
|
|
of
|
|
exercise
|
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
|
Outstanding, beginning of period
|
|
|
250,000
|
|
|
$
|
0.02
|
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
Granted
|
|
|
10,000,000
|
|
|
$
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding, end of period
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
Exercisable at the end of period
|
|
|
3,583,333
|
|
|
$
|
0.01
|
|
|
|
375,000
|
|
|
$
|
0.02
|
|
The
stock based compensation expense recognized in the statement of operations during the six months ended December 31, 2017 and 2016,
related to the granting of these options was $28,713 and $0, respectively.
For purpose of determining
the fair market value of the stock options, the Company used the Binomial lattice formula. The significant assumptions used in
the Binomial lattice formula of the stock options are as follows:
|
Risk free interest rate
|
|
1.94%
|
|
Stock volatility factor
|
|
208%
|
|
Weighted average expected option life
|
|
5 years
|
|
Expected dividend yield
|
|
None
|
At December 31, 2017, the
aggregate intrinsic value of the stock options was 0.
HYPERSOLAR,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER
31, 2017
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As
of December 31, 2017, the outstanding convertible promissory notes are summarized as follows:
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
1,660,389
|
|
|
Less current portion
|
|
|
559,289
|
|
|
Total long term liabilities
|
|
$
|
1,101,100
|
|
Maturities
of long-term debt for the next three years are as follows:
|
Year Ending
|
|
|
|
|
September 30,
|
|
Amount
|
|
|
2019
|
|
$
|
-
|
|
|
2020
|
|
|
561,100
|
|
|
2021
|
|
|
540,000
|
|
|
|
|
$
|
1,101,100
|
|
At
December 31, 2017, the $1,706,100 in convertible promissory notes had a remaining debt discount of $45,711, leaving a net balance
of $1,660,389.
The
Company entered into a securities purchase agreement on May 23, 2014, for the sale of a 10% convertible promissory note (the “May
Note”) in the aggregate principal amount of up to $500,000. The May Note is convertible into shares of common stock of the
Company at a price equal to a variable conversion price of the lesser of $0.0048 per share or fifty percent (50%) of the lowest
trading price after the effective date to acquire common stock. Upon execution of the securities purchase agreement, the Company
received a tranche of $50,000. The Company received additional tranches in the amount of $415,000 for an aggregate sum of $465,000.
The May Note matured on May 23, 2015 and was extended to February 23, 2016. A second extension was granted to November 23, 2016.
On January 19, 2017, the investor extended the May Note for an additional sixty (60) months from the effective date of each tranche.
The May Note matures on November 23, 2021. The Company issued 60,426,825 shares of common stock upon conversion of $126,900 in
principal, plus accrued interest of $37,642, with an aggregate fair value loss of $227,764. The remaining balance of the May Note
as of December 31, 2017 was $101,100.
The
Company entered into a securities purchase agreement on April 9, 2015, for the sale of a 10% convertible promissory note (the
“April Note”) in the aggregate principal amount of up to $500,000. The April Note is convertible into shares of common
stock of the Company at a price equal to a variable conversion price of the lesser of $0.01 per share or fifty percent (50%) of
the lowest trading price since the original effective date of each respective advance or the lowest effective price per share
granted to any person or entity after the effective date to acquire common stock. Upon execution of the securities purchase agreement,
the Company received a tranche of $50,000. The Company received additional tranches in the amount of $450,000 for an aggregate
sum of $500,000. The April Note matured nine (9) months from the effective dates of each respective tranche. A second extension
was granted to October 9, 2016. On January 19, 2017, the investor extended the April Note for an additional (60) months from the
effective date of each tranche. The April Note matures on October 31, 2021. The balance of the April Note as of December 31, 2017
was $500,000.
The
Company entered into a securities purchase agreement January 28, 2016, for the sale of a 10% convertible promissory note (the
“January Note”) in the aggregate principal amount of up to $500,000. The January Note is convertible into shares of
common stock of the Company at a price equal to a variable conversion price of the lesser of $0.01 per share or fifty percent
(50%) of the lowest trading price since the original effective date of each respective tranche or the lowest effective price per
share granted to any person or entity after the effective date to acquire common stock. Upon execution of the securities purchase
agreement, the Company received a tranche of $10,000. The Company received additional tranches in the amount of $490,000 for an
aggregate sum of $500,000. The January Note matures twelve (12) months from the effective dates of each respective tranche. On
January 19, 2017, the investor extended the January Note for an additional sixty (60) months from the effective date of each tranche.
The January Note matures on January 27, 2022. The Company recorded amortization of debt discount, which was recognized as interest
expense in the amount of $38,514 during the six months ended December 31, 2017. The balance of the January Note as of December
31, 2017 was $500,000.
The
Company entered into a securities purchase agreement February 3, 2017, for the sale of a 10% convertible promissory note (the
“February Note”) in the aggregate principal amount of up to $500,000. The February Note is convertible into shares
of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.01 per share or fifty percent
(50%) of the lowest trading price since the original effective date of each respective tranche or the lowest effective price per
share granted to any person or entity after the effective date to acquire common stock. Upon execution of the securities purchase
agreement, the Company received a tranche of $60,000. The Company received an additional tranches in the amount of $440,000 for
an aggregate sum of $500,000. The February Note matures twelve (12) months from the effective dates of each respective tranche.
The February Note matures on February 3, 2018, with an automatic extension of sixty (60) months from the effective date of each
tranche. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $55,183
during the six months ended December 31, 2017. The balance of the February Note as of December 31, 2017 was $500,000.
HYPERSOLAR,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER
31, 2017
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
The
Company entered into a securities purchase agreement November 9, 2017, for the sale of a 10% convertible promissory note (the
“November Note”) in the aggregate principal amount of up to $500,000. The November Note is convertible into shares
of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.01 per share or fifty percent
(50%) of the lowest trading price since the original effective date of each respective tranche or the lowest effective price per
share granted to any person or entity after the effective date to acquire common stock. Upon execution of the securities purchase
agreement, the Company received a tranche of $45,000. The Company received an additional tranches in the amount of $60,000 for
an aggregate sum of $105,000. The November Note matures twelve (12) months from the effective dates of each respective tranche.
The November Note matures on November 9, 2018, with an automatic extension of sixty (60) months from the effective date of each
tranche. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $332 during
the six months ended December 31, 2017. The balance of the November Note as of December 31, 2017 was $105,000.
ASC
Topic 815 provides guidance applicable to convertible debt issued by the Company in instances where the number into which the
debt can be converted is not fixed. For example, when a convertible debt converts at a discount to market based on the stock price
on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from
the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company recorded
a liability representing the estimated present value of the conversion feature considering the historic volatility of the Company’s
stock, and a discount representing the imputed interest associated with the embedded derivative. The discount is amortized over
the life of the convertible debt, and the derivative liability is adjusted periodically according to stock price fluctuations.
|
6.
|
DERIVATIVE
LIABILITIES
|
The
convertible notes (the “Notes”) issued and described in Note 5 do not have fixed settlement provisions because their
conversion prices are not fixed. The conversion features have been characterized as derivative liabilities to be re-measured at
the end of every reporting period with the change in value reported in the statement of operations.
During
the six months ended December 31, 2017, 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 $34,892, based upon the Binomial
lattice formula. We recorded the full value of the derivative as a liability at issuance with an offset to valuation discount,
which will be amortized over the life of the Notes.
During
the six months ended December 31, 2017, the Company recorded a net loss in change in derivative of $1,054,161 in the statement
of operations due to the change in fair value of the remaining Notes. At December 31, 2017, the fair value of the derivative liability
was $3,571,895.
For
purpose of determining the fair market value of the derivative liability for the embedded conversion, the Company used the
Binomial lattice formula. The significant assumptions used in the Binomial lattice formula of the derivatives are as follows:
|
Risk
free interest rate
|
1.76%
- 2.20%
|
|
Stock
volatility factor
|
49.0%
- 128.0%
|
|
Weighted
average expected option life
|
1
year - 5 year
|
|
Expected
dividend yield
|
None
|
Management
evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
On
January 17, 2018, the Company received an additional tranche in the amount of $60,000 under the November 2017
Note.