CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2016
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, 2016 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2017. 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, 2016.
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
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 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 financial statements. Significant estimates made in preparing
these 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 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.
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 six months ended December 31, 2016, the Company calculated 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 was dilutive.
For
the six months ended December 31, 2015, the Company calculated the dilutive impact of the outstanding stock options of 500,000,
and the convertible debt of $1,226,000, which is convertible into shares of common stock. The stock options and $1,000,500 of
the convertible debt were excluded, because their impact was antidilutive. The remaining $250,000 in convertible debt was included
in the calculation of net earnings per share, because their impact 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
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.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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, 2016, 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, 2016 (See Note 6):
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
|
5,225,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,225,177
|
|
|
Total
liabilities measured at fair value
|
|
$
|
5,225,177
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,225,177
|
|
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, 2016
|
|
$
|
6,230,102
|
|
|
Fair
value of derivative liabilities issued
|
|
|
118,456
|
|
|
(Gain)
on change in derivative liability
|
|
|
(1,123,381
|
)
|
|
Balance
as of December 31, 2016
|
|
$
|
5,225,177
|
|
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.
Recently
Issued Accounting Pronouncements
On
August 27, 2014, the Company adopted the amendment to ASU 2014-15 on
Presentation of Financial Statements Going Concern (Subtopic
205-40).
The amendment provides for guidance to reduce diversity in the timing 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
principles 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 to assess managements
plan for a period of one year after the financial statements are issued (or available to be issued). The amendment is effective
for annual periods ending after December 15, 2016. Early adoption is permitted. The Company does not believe the accounting standards
currently adopted will have a material effect on the accompanying condensed financial statements.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2016
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recently
Issued Accounting Pronouncements
(Continued)
In
March 2016, FASB issued accounting standards update ASU-2016-09, “Compensation –Stock Compensation (Topic 718) –
Improvements to Employee Share-Based Payment Accounting”. The amendments are intended to improve the accounting for employee
share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of
the accounting for share-based payments award transactions are simplified, including: (a) income tax consequences; (b) classification
of awards as either equity or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments
are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption
is permitted for any organization in any interim or annual period. The Company is currently evaluating the impact of the adoption
of ASU 2016-9 on the Company’s financial statements.
In
March 2016, FASB issued accounting standards update ASU-2016-06, “Derivatives and Hedging (Topic 815) – Contingent
Put and Call Options in Debt Instruments”. The amendments apply to all entities that are issuers of or investors in debt
instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. U.S. GAAP
provides specific guidance for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument
meet the clearly and closely related criterion. The guidance states that for contingent call (put) options to be considered clearly
and closely related, they can be indexed only to interest rates or credit risk. Public companies must apply the new requirements
for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company is currently evaluation
the impact of the adoption of ASU 2016-06 on the Company’s financial statements.
In
August 2016, FASB issued accounting standards update ASU-2016-15, “Statement of Cash Flows” (Topic 230) – Classification
of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The amendments in this ASU are effective for public and nonpublic entities for
fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early
adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption
of ASU 2016-15 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 financial statements.
During
the six months ended December 31, 2016, the Company issued 49,358,356 shares of common stock upon the conversion of $190,500 in
principal, plus accrued interest of $51,777.
Options
As
of December 31, 2016, 500,000 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, 2016, 375,000 options are fully vested with maturity dates of January 2, 2017 and March 31, 2020, and are exercisable
at exercise prices of $0.04 and $0.02245 per share. The remaining 125,000 stock options will vest on March 31, 2017, with an exercise
price of $0.02245.
A
summary of the Company’s stock option activity and related information follows:
|
|
|
12/31/2016
|
|
|
|
|
Number of Options
|
|
|
Weighted average exercise
price
|
|
|
Outstanding, beginning of period
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding, end of period
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
Exercisable at the end of period
|
|
|
375,000
|
|
|
$
|
0.02
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2016
5.
|
CONVERTIBLE
PROMISSORY NOTES
|
On December 16, 2013, the
Company entered into a securities purchase agreement for the sale of a 10% convertible promissory note (the “December Note”)
in the aggregate principal amount of up to $100,000. The December 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 $26,000.The Company received additional tranches in the amount of $74,000 for an aggregate sum of $100,000. The December
Note matured on May 16, 2015, and the maturity date was extended to February 16, 2016. Subsequently, a third extension was granted
to November 16, 2016. During the year ended June 30, 2016, the Company issued 42,163,679 shares of common stock upon conversion
of $59,500, plus accrued interest of $14,286. On October 1, 2016, the Company issued 11,515,068 shares of common stock upon conversion
of $40,500, plus accrued interest of $11,318. As of December 31, 2016, the December Note and interest were fully converted.
On March 5, 2014, the Company
entered into a securities purchase agreement into for the sale of a 10% convertible promissory note (the “March Note”)
in the aggregate principal amount of up to $100,000. The March 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 $30,000. On April 15, 2014, the lender and borrower agreed to amend the Note to increase the principle sum to $150,000. The
Company received additional tranches in the amount of $120,000 for an aggregate sum of $150,000. During the period ended December
31, 2016, the Company issued 37,843,288 shares of common stock upon conversion of $150,000 in principal, plus accrued interest
of $40,459. The March Note matured on September 5, 2015 and was extended to June 5, 2016. Subsequently, a second extension was
granted to March 5, 2017. As of December 31, 2016, the March Note was fully converted.
On May 23, 2014, the Company
entered into a securities purchase agreement 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 atranche
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 November 23, 2016,
the investor extended the Note for an additional sixty (60) months. The Note matures on November 22, 2021.
On April 9, 2015, the Company
entered into a securities purchase agreement into 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 an
advance of $50,000. The Company received additional advances 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 advance. A second extension was granted to October 9,
2016. On October 9, 2016, the investor extended the April Note for an additional (60) months. The April Note matures on October
8, 2021. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $42,288
during the six months ended December 31, 2016.
On January 28, 2016, the Company
entered into a securities purchase agreement into 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 28, 2017, the investor extended the
tranche funded on January 28, 2016, for an additional sixty (60) months. The Company recorded amortization of debt discount, which
was recognized as interest expense in the amount of $57,145 during the six months ended December 31, 2016.
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.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2016
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, 2016, 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 convertible notes at issuance was $118,456, 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, 2016, the Company recorded a net gain in change in derivative of $1,123,381 in the statement
of operations due to the change in fair value of the remaining Notes, for the six months ended December 31, 2016. At December
31, 2016, the fair value of the derivative liability was $5,225,177.
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
|
0.29%
- 1.93%
|
|
Stock
volatility factor
|
41.35%
- 142.29%
|
|
Weighted
average expected option life
|
2
months - 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:
Effective
January 28, 2017, one of the tranches’ related to the securities dated January 28, 2016 (the “Tranche”), was
amended to extend the maturity date for an additional sixty (60) months. The Tranche matures on January 28, 2022. The Tranche bears
interest at a rate of 10% per annum and is convertible into shares of common stock of the Company at a price of the lesser of (a)
the conversion price per the Notes, (b) Fifty Percent (50%) of the lowest trading price of the Company’s common stock recorded
on any trading day after the date of funding, or (c) the lowest effective price per share granted to any person or entity, including
the investor but excluding officers and directors of the Company, after the date of funding to acquire common stock of the Company,
or adjust, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating
conversion or otherwise, any outstanding warrant, option or other right to acquire common stock of the Company or outstanding common
stock equivalents.
Effective February 3, 2017
(the “February Effective Date”), the Company issued a convertible promissory note (the “Note”) in the aggregate
principal amount of $500,000 to an accredited investor, of which $60,000 was advanced upon issuance of the Note. The principal
and interest under the Note is due and payable twelve (12) months from the funding of each tranche. The Note bears interest at
a rate of 10% per annum and is convertible into shares of common stock of the Company at a price of the lesser of (a) $0.01 per
share of the Company’s common stock , (b) Fifty Percent (50%) of the lowest trading price of the Company’s common stock
recorded on any trading day after the date of funding, or (c) the lowest effective price per share granted to any person or entity,
including the investor but excluding officers and directors of the Company, after the date of funding to acquire common stock of
the Company, or adjust, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision,
floating conversion or otherwise, any outstanding warrant, option or other right to acquire common stock of the Company or outstanding
common stock equivalents.