☒
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Securities registered
pursuant to section 12(g) of the Act: common stock, par value $0.001 per share
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check
mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).. Yes ☒ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The aggregate
market value of the common stock held by non-affiliates of the registrant, based upon the last sale price of the common stock of
the Company as of the last business day of its most recently completed second fiscal quarter was approximately $9,841,445.
The number of shares of registrant’s
common stock outstanding, as of September 23, 2019 was 1,302,002,629.
PART I
ITEM 1.
BUSINESS.
Unless otherwise
stated or the context requires otherwise, references in this annual report on Form 10-K to “Hypersolar”, the “Company”,
“we”, “us”, or “our” refer to Hypersolar, Inc.
Overview
At HyperSolar, Inc., our goal is to replace
all forms of energy on earth with renewable energy.
Inspired by the
photosynthetic process that plants use to harness the power of the sun to create energy molecules, we are developing a novel solar-powered
particle system that mimics photosynthesis to separate hydrogen from water.
Hydrogen is the
lightest and most abundant chemical element, constituting roughly 75% of the universe’s chemical elemental mass (Palmer,
D. (13 September 1997). “Hydrogen in the Universe.” NASA). In its purest form, hydrogen is a non-toxic
colorless and odorless gas. However, naturally occurring elemental hydrogen is relatively rare on earth and hydrogen gas is most
often produced using fossil fuels. Industrial production is mainly from the steam reforming of natural gas and is usually employed
near its production site, with the two largest uses being crude oil processing (hydrocracking) and ammonia production, mostly for
the fertilizer market. We are developing what we believe is a cleaner and greener way to produce this high value product.
Hydrogen (when used as a fuel), like electricity,
is an energy carrier rather than an energy resource. We believe that if hydrogen was easily accessed from the earth and the world
could depend on it for fuel, eliminating our reliance on fossil fuels such as oil, coal, and natural gas, our carbon footprint
and global climate change issues would be erased.
Over 99% of hydrogen produced today is
produced using a fossil fuel, methane (natural gas) in a method called steam reforming, SMR. Although commercially optimized over
decades, the SMR process is capital intensive and will remain so due to the fundamental nature of the process which includes: (1)
three separate reactors with different catalysts operating at different temperatures, (2) large amounts of heat transfer needed
for the endothermic reforming and exothermic water gas shift, and (3) the need to remove all carbon oxides using capital and energy
intensive methods. (source: Nikolaidis, P.; Poullikkas, A., A comparative overview of hydrogen production processes. Renewable
and Sustainable Energy Reviews 2017, 67, 597-611.)
Besides being capital intensive, the SMR
method releases harmful levels of carbon dioxide into the air further contributing to our global climate crisis.
Despite the current method of production,
the benefits of hydrogen for transportation emissions are far better than other fossil fuel alternatives of oil and gas, as the
only emission of hydrogen is pure water. This fact dictates that we look for another method of making hydrogen to make it the world’s
premier fuel by producing it in a more sustainable green way.
Market Opportunity
We believe we are still in the early stages
of the hydrogen fuel market development, and yet, this market continues to grow exponentially. One of the reasons for this growth
is the adoption of hydrogen fuel technologies within an increased number of major industries and spanning many applications.
Market Growth
According
to a Global Market Insights study released in June 2019, the global hydrogen generation market size is predicted to be valued at
USD 180 billion by 2024. Strict regulatory norms to reduce sulfur content with measures to reduce the carbon footprint is expected
to drive the global hydrogen generation market size. U.S. federal and state governments have adopted various programs including
the Tier 3 program to reduce the sulfur content in gasoline, motor oil, and diesel and which aims to lower the gasoline sulfur
content up to 10 ppm in 2017.
Growing demand for
petroleum products from developing countries is anticipated to also drive the hydrogen generation market size in the coming years.
Hydrogen is used in various refining processes including hydrocracking and hydrodesulfurization to crack bigger molecules into
lighter ones and more usable products.
Strong investment
for the expansion and upgrade of refineries to fulfill emission and sulfur content regulation is expected to stimulate the growth
of the hydrogen generation market. Increasing heavy crude oil consumption demand will complement the industry landscape. Positive
outlook towards the chemical industry including ammonia and methanol will also positively influence growth.
●
|
Increasing
demand for clean fuel energy
|
|
|
●
|
Stringent
government regulation towards Desulphurization of Petroleum Products
|
|
|
●
|
Deteriorating
crude oil quality
|
|
|
|
Industry
pitfalls & challenges
|
●
|
Transportation
& Storage Issues
|
|
|
|
Hydrogen
generation market demand from the steam reformer process is predicted to witness growth at over 5% CAGR during the forecast period
owing to low prices and easy availability of natural gas. In the steam methane reforming process, methane reacts with steam in
the presence of catalyst under 3 bar to 25 bar pressure to produce H2, CO2 and CO.
|
It is within these industries that we believe
our renewable hydrogen producing technology possesses significant market opportunity, especially as innovation and infrastructure
continue to develop.
Hydrogen Fuel Cell Vehicles
One of the most recognized applications
for hydrogen fuel technologies falls within the auto manufacturing and vehicles industries. The three leading manufacturers of
hydrogen fuel cell vehicles (FCVs) are in order, Toyota, Hyundai, and Honda – three internationally recognized companies.
Industry reports cite the need for increased infrastructure, such as fueling stations, for the industry to garner even greater
market acceptance. However, the same report indicates there will be 22.2 million hydrogen fuel cell vehicles sold or leased by
2032, driving revenues upwards of $1.1 trillion. (https://www.researchandmarkets.com/reports/4200873/global-market-for-hydrogen-fuel-cell-vehicles)
Our Technology
Technology
for Making Renewable Hydrogen from Sunlight and Water
Hydrogen (H2)
is the third most abundant element on earth and the cleanest fuel in the universe, (Dresselhaus,
Mildred et al. (May 15, 2003). “Basic Research Needs for the Hydrogen Economy”). Unlike hydrocarbon fuels such
as oil, coal and natural gas where carbon dioxide and other contaminants are released into the atmosphere when used, hydrogen
fuel usage produces only pure water (H2O). Unfortunately, nearly no pure hydrogen ( exist naturally on earth and therefore
must be extracted from hydrogen containing molecules like water. Historically, the cost of manufacturing hydrogen as an alternative
fuel has been higher than the cost of the energy used to make it. This is the dilemma of the hydrogen economy, and one that we
aim to address.
For over a century,
water electrolysis, splitting water molecules into hydrogen and oxygen due to the passage of electric current, has been a well-established
technology to produce hydrogen. This technology can be used to produce an unlimited amount of pure hydrogen fuel from the abundant
water covering 70-percent of the Earth’s surface. The produced hydrogen combusts into water that can be recycled back into
nature indefinitely. However, in practice, current commercial water electrolysis technologies takes a lot of energy from coal-powered
electricity and also require ultra-pure water to prevent fouling of the system components. We believe these are the major barriers
to affordable production of hydrogen.
The Perfect
and Sustainable Energy Cycle
As it turns out,
Mother Nature has been making hydrogen using sunlight since the beginning of time by splitting water molecules ((H2O))
into its basic elements - hydrogen and oxygen. This is exactly what plant leaves do every day by way of photosynthesis. Since
the produced hydrogen is immediately consumed inside the plant, we cannot simply grow trees to make hydrogen.
If technology
can be developed to mimic photosynthesis to split water into hydrogen, we believe then a truly sustainable, low cost, and renewable
energy cycle can be created to power the earth. However, cost has been the biggest barrier to realizing this vision.
Water Splitting
In the process
of splitting a water molecule, input energy is transferred into the chemical bonds. So in essence, manufactured hydrogen is simply
a carrier or battery-like storage of the input energy. If the input energy is from fossil fuels, such as oil and gas, then carbon
fossil fuel energy is simply transferred into hydrogen. If the input energy is renewable such as solar and wind, then new and clean
energy is stored in hydrogen.
While the concept
of water splitting is very appealing, the following challenges must be addressed for renewable hydrogen to be commercially viable:
●
|
Energy Inefficiency — Since hydrogen is an energy carrier, the most energy it can store is 100% of the input energy. However, conventional systems approach to electrolysis lose so much of the input energy in system components, wires and electrodes resulting in only a small portion of electricity making it into the hydrogen molecules. This translates to high production cost and is the fundamental problem with water splitting for hydrogen production. We intend to address this problem with our low cost and energy efficient particle technology.
|
●
|
Need for Clean Water — Conventional electrolysis requires highly purified clean water to prevent fouling of system components. This prevents current technology from using large quantities of available water from oceans, rivers, industrial waste and municipal waste as feedstock. Our technology is being designed to use any natural water or waste water for the unlimited production of renewable hydrogen.
|
Technology
Water electrolysis
in its simplest form is the transfer of “input electrons” in the following chemical reactions:
●
|
Cathode (reduction): 2 H2O + 2e- -> H2 + 2 OH-
|
|
|
●
|
Anode (oxidation): 4 OH- -> O2 + 2 H2O + 4 e-
|
From these equations
it can be deduced that if every input electron (e-) is put to work and not lost, then a maximum amount of input electrons (i.e. energy)
is transferred and stored in the hydrogen molecules (H2). Additionally, if there were a very high number of cathode and anode reaction
areas within a given volume of water, then a very high number of these reactions could happen simultaneously throughout the medium
to split each water molecule into hydrogen wherever electrons are available.
HyperSolar
H2Generator™
Since our particles
are intended to mimic the natural room temperature conditions of photosynthesis, they can be housed in very low-cost reactors such
as glass vessels or clear plastic bags. To facilitate the commercial use of our self-contained particle technology we are developing
a modular system that will enable the onsite daily production and storage of hydrogen for any time use in electricity generation.
We refer to our
technology as the HyperSolar H2Generator which is comprised of the following components:
|
1.
|
The Generator Housing - Novel (patent pending) device design is the first of its type to safely separate oxygen and hydrogen in the water splitting process without sacrificing efficiency. This device houses the water, the solar particles/cells and is designed with inlets and outlets for water and gasses. Utilizing a special membrane for separating the oxygen side from the hydrogen side, proton transport is increased which is the key to safely increasing solar-to-hydrogen efficiency. Our design can be scaled up and manufactured for commercial use.
|
|
2.
|
The NanoParticle or Solar Cell - Our patented nanoparticle consists of thousands of tiny solar cells that are electrodeposited into one tiny structure to provide the charge that splits the water molecule when the sun excites the electron. In the process of optimizing our nanoparticles to be efficient and only use earth abundant materials (an ongoing process), we experimented with commercially available triple junction silicon solar cells to perform tests with our generator housing and other components. Through this experimentation, our discovery leads us to believe that we can bring a system to market utilizing these readily available cells while our nanoparticles are still being optimized. These solar cells also absorb the sunlight and produce the necessary charge for splitting the water molecule into hydrogen and oxygen.
|
|
3.
|
Oxygen Evolution Catalyst - This proprietary catalyst developed at the University of
Iowa lab is uniformly applied onto the solar cell or nanoparticle and efficiently oxidize water molecule to generate oxygen gas.
The oxygen evolution catalyst must be robust to withstand the long operating hours of the hydrogen generation device to ensure
long lifetime. It must be stable in alkaline, neutral and acidic environments.
|
|
4.
|
Hydrogen Evolution Catalyst - Necessary for collecting electrons to reduce protons for generating hydrogen gas, we have successfully integrated a low-cost hydrogen catalyst into our generator system successfully coating a triple junction solar cell with a catalyst comprised primarily of ruthenium, carbon and nitrogen that can function as well as platinum, the current catalyst used for hydrogen production, but at one twentieth of the cost.
|
|
5.
|
Coating Technologies - Two major coating technologies
were developed to protect the nanoparticles and solar cells from photocorrosion under water. A transparent conducive coating
to protect our nanoparticles and solar cells from photo corrosion and efficiently transfer charges to catalysts for oxygen
and hydrogen evolution reactions. A polymer combination that protects the triple junction solar cells from any corrosive water
environments for long lifetime of the hydrogen generation device.
|
|
6.
|
A concentrator equal to two suns - This inexpensive Fresnel lens concentrator to increase sunlight to equal two suns reduces our necessary footprint for a 1000 KG per day system by 40%.
|
Our business and
commercialization plan calls for two generations of our panels or generators. The first generation utilizes readily available
commercial solar cells, coated with a stabilizing polymer and catalysts, and inserted into our proprietary panels to efficiently
and safely split water into hydrogen and oxygen to produce very pure and green hydrogen that can be piped off the panel, pressurized,
and stored for use in a fuel cell to power anything electric.
The second
generation of our panels will feature a nanoparticle-based technology where billions of autonomous solar cells are electrodeposited
onto porous alumina sheets and manufactured in a roll to roll process and inserted into our proprietary panels. For this generation,
we have received multiple patents and we estimate that it will produce hydrogen for less than $4 per kilogram before pressurization.
Our team at the
University of Iowa led by our CTO Dr. Joun Lee, has reach a milestone of well over 1000 consecutive hours of continuous hydrogen
production utilizing completely immersed solar cells with no external biases achieving simulated production equal to one year.
We believe this to be a record for completely immersed cells. Now ready to take our technology out of the lab, we are working with
several vendors to commercialize and manufacturer our first generation of renewable hydrogen panels that use sunlight and water
to generate hydrogen.
We anticipate
that the HyperSolar H2Generator will be a self-contained renewable hydrogen production system that requires only sunlight and any
source of water. As a result, it can be installed almost anywhere to produce hydrogen fuel at or near the point of distribution,
for local use. We believe this model of hydrogen production addresses one of the biggest challenges of using clean hydrogen fuel
on a large scale which is the transportation of hydrogen.
Each stage of
the HyperSolar H2Generator can be scaled independently according to the hydrogen demands and length of storage required for a specific
application. A small-scale system can be used to produce continuous renewable electricity for a small house, or a large scale system
can be used to produce hydrogen to power a community.
Pilot Plant
Construction
We are currently
working towards building a pilot plant adjacent to a large company distribution or fulfillment center so they can power their
fuel cell forklifts and materials handling equipment with completely renewable hydrogen. This will ultimately replace the need
to transport steam reformed hydrogen where the production process emits tons of harmful emissions and must be transported.
Our goal is to have this pilot plant completed in 2020.
Intellectual
Property
On November 15, 2011, we filed a provisional
patent application with the U.S. Patent and Trademark Office to protect the intellectual property rights for “Photoelectrochemically
Active Heterostructures, methods for their manufacture, and methods and systems for producing desired products.” On March
14, 2017, the part of the patent covering the structural design of Photoelectrochemically Active Heterostructures (PAH) was granted
as the United States Patent No. 9,593,053B1. On April 3, 2018, the part of the patent covering
the method for manufacturing PAH was granted as United States Patent No. 9,593,053B2.
The patent protects the Company’s proprietary design of a self-contained solar-to-hydrogen device made up of millions of
solar-powered water-splitting nanoparticles, per square centimeter. These nanoparticles are coated with a separate patent-pending
protective coating that prevents corrosion during extended periods of hydrogen production. The aim of these nanoparticles is high
conversion efficiency and low cost.
An
important aspect of the patented technology is the integrated structures of high-density arrays of nano-sized solar cells as part
of hydrogen production nanoparticles. The technology enables manufacturing of ultra-thin sheets for solar-to-hydrogen production,
requiring substantially less material as compared to conventional solar cells used in rooftop power applications.
In March of 2015, we jointly filed a full
utility patent application with UCSB for the “Multi-junction artificial photosynthetic cell with enhanced photovoltages
.” The patent covers our semiconductor designs to enhance the photovoltages of the nano-sized solar cells in the PAH structures.
The semiconductor designs stacking multiple junctions inside the PAH structures would be an efficient and economic solution for
the photovoltaic and the photoelectrochemical industries. This patent was granted in Australia in June of 2018 and in the U.S.
in October of 2018. We also received the Chinese patent certificate in March 2019.
On December 21, 2016, we filed jointly
with the University of Iowa a patent for “Integrated Membrane Solar Fuel Production Assembly” to protect the intellectual
property for our generator housing system that safely separates oxygen and hydrogen in the water-splitting process without sacrificing
efficiency. This device houses the water, the solar particles/cells and is designed with inlets and outlets for water and gases.
Utilizing a special membrane for separating the oxygen side from the hydrogen side, proton transport is increased which is the
key to safely increasing solar-to-hydrogen efficiency. In December of 2017, we filed the utility patent for this important invention
and prosecution is ongoing.
Strategic Partners
Effective June
1, 2019, we entered into a research agreement with the University of Iowa. As consideration under the research agreement, the
University of Iowa will receive a maximum of $144,747 from the Company. The research agreement may be terminated by either party
upon 60 days prior written notice or by either party upon notice of a material breach or default which is not cured within 90
days of receipt of written notice of such breach. This term of the research agreement runs through May 31, 2020,
but may be extended upon mutual agreement of the parties.
Competition
Currently, most
hydrogen is produced by steam reforming of natural gas or methane. This production technology dominates due to easy availability
and low prices of natural gas. Partial oxidation of petroleum oil is second in production capacity after steam reforming of natural
gas. The third largest production technology in terms of production capacity is steam gasification of coal. The current industry
is heavily dominated by large players such as Air Products and Chemicals Inc. and Air Liquide.
Green or Renewable
hydrogen can be produced through electrolyzers if they are powered by solar or wind. There has been an emergence of these companies
in the past few years. ITM Power in England and Proton Onsite in Norway are two of the largest companies in this industry. If not
powered by solar panels or wind power, they require external electricity most likely created by coal, gas, or oil. We believe that
our process when fully developed will offer a competitive advantage as it is completely green and renewable and utilizes no external
power other than the sun.
Corporate Information
We were incorporated
in the State of Nevada on February 18, 2009. Our executive offices are located at 10 E. Yanonali St., Suite 36, Santa Barbara,
CA 93101.
EMPLOYEES
As of September
23, 2019 we had 1 full-time employee and several consultants. We have not experienced any work stoppages and we consider relations
with our employees and consultants to be good. Our Chief Technology Officer hired on June 1, 2016 is on a fulltime consulting basis.
ITEM 1A.
RISK FACTORS
RISKS RELATED
TO OUR BUSINESS AND INDUSTRY
OUR LIMITED
OPERATING HISTORY DOES NOT AFFORD INVESTORS A SUFFICIENT HISTORY ON WHICH TO BASE AN INVESTMENT DECISION.
We were formed
in February 2009 and are currently developing a new technology that has not yet gained market acceptance. There can be no assurance
that at this time we will operate profitably or that we will have adequate working capital to meet our obligations as they become
due.
Investors must
consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets.
Such risks include the following:
●
|
competition;
|
|
|
●
|
need for acceptance of products;
|
|
|
●
|
ability to continue to develop and extend brand identity;
|
|
|
●
|
ability to anticipate and adapt to a competitive market;
|
|
|
●
|
ability to effectively manage rapidly expanding operations;
|
|
|
●
|
amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure; and
|
|
|
●
|
dependence upon key personnel.
|
We cannot be certain
that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully
address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely
affected and we may have to curtail our business.
WE HAVE A HISTORY
OF LOSSES AND HAVE NEVER REALIZED REVENUES TO DATE. WE EXPECT TO CONTINUE TO INCUR LOSSES AND NO ASSURANCE CAN BE GIVEN THAT WE
WILL REALIZE REVENUES. ACCORDINGLY, WE MAY NEVER ACHIEVE AND SUSTAIN PROFITABILITY.
As of June 30,
2019, we have incurred an aggregate net loss, and had an accumulated deficit, of $(18,021,177). For the years ended June 30, 2019
and 2018, we incurred a net income of $3,978,337 and net loss of $(10,199,397), respectively. The net income (loss) for the years
ended June 30, 2019, and 2018, included non-cash income of $5,806,888 and non-cash loss of ($9,448,570), respectively, associated
with the Company’s derivative instruments. We expect to continue to incur net losses until we are able to realize revenues
to fund our continuing operations. We may fail to achieve any or significant revenues from sales or achieve or sustain profitability.
Accordingly, there can be no assurance of when, if ever, we will be profitable or be able to maintain profitability.
We have historically
raised funds through various capital raising transactions. Wewill require additional funds in the future to fund our business plans,
either through additional equity or debt financings or collaborative agreements or from other sources. We have no commitments to
obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at
all. In the event we are unable to obtain additional financing, we may be unable to implement our business plan. Even with such
financing, we have a history of operating losses and there can be no assurance that we will ever become profitable.
WE MAY BE UNABLE
TO MANAGE OUR GROWTH OR IMPLEMENT OUR EXPANSION STRATEGY.
We may not be able to develop our product
or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will
place a significant strain on our administrative, operational and financial resources. If we are unable to successfully manage
our future growth, establish and continue to upgrade our operating and financial control systems, recruit and hire necessary personnel
or effectively manage unexpected expansion difficulties, our financial condition and results of operations could be materially
and adversely affected.
WE MAY NOT
BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES WHICH WOULD RESULT IN CONTINUED LOSSES AND MAY REQUIRE US TO
CURTAIL OR CEASE OPERATIONS.
In May of 2012,
we completed a lab scale prototype of our technology. This prototype demonstrates hydrogen production from small scale solar devices
coated with our unique, low-cost polymer coating, and submerged in waste water from a pulp and paper mill. However, we have not
completed a large scale commercial prototype of our technology and are uncertain at this time when completion of a commercial
scale prototype will occur. Although, the lab scale prototype demonstrates the viability of our technology, there can be no assurance
that we will be able to commercialize our technology.
OUR REVENUES
ARE DEPENDENT UPON ACCEPTANCE OF OUR PRODUCTS BY THE MARKET; THE FAILURE OF WHICH WOULD CAUSE US TO CURTAIL OR CEASE OPERATIONS.
We believe that
virtually all of our revenues will come from the sale or license of our products. As a result, we will continue to incur substantial
operating losses until such time as we are able to develop our product and generate revenues from the sale or license of our products.
There can be no assurance that businesses and customers will adopt our technology and products, or that businesses and prospective
customers will agree to pay for or license our products. Our technology and product, when fully developed, may not gain market
acceptance due to various factors such as not enough cost savings between our method of producing hydrogen and other more conventional
methods. In the event that we are not able to significantly increase the number of customers that purchase or license our products,
or if we are unable to charge the necessary prices or license fees, our financial condition and results of operations will be materially
and adversely affected.
WE FACE INTENSE
COMPETITION, AND MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE DO.
We operate in
a competitive environment that is characterized by price fluctuation and technological change. We will compete with major international
and domestic companies. Some of our current and future potential competitors may have greater market recognition and customer bases,
longer operating histories and substantially greater financial, technical, marketing, distribution, purchasing, manufacturing,
personnel and other resources than we do. In addition, competitors may be developing similar technologies with a cost similar to,
or lower than, our projected costs. As a result, they may be able to respond more quickly to changing customer demands or to devote
greater resources to the development, promotion and sales of solar and solar-related products than we can.
Our business plan
relies on sales of our products based on either a demand for truly renewable clean hydrogen or economically produced clean hydrogen.
If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share. Neither the demand
for our product nor our ability to manufacture have yet been proven.
BECAUSE OUR
INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE MAY LOSE MARKET SHARE TO LARGER COMPANIES THAT ARE BETTER EQUIPPED
TO WEATHER A DETERIORATION IN MARKET CONDITIONS DUE TO INCREASED COMPETITION.
Our industry is
highly competitive and fragmented, subject to rapid change and has low barriers to entry. We may, in the future, compete for potential
customers with solar and heating companies and other providers of solar power equipment or electric power. Some of these competitors
may have significantly greater financial, technical and marketing resources and greater name recognition than we have.
We believe that
our ability to compete depends in part on a number of factors outside of our control, including:
●
|
the ability of our competitors to hire, retain and motivate qualified personnel;
|
|
|
●
|
the ownership by competitors of proprietary tools to customize systems to the needs of a particular customer;
|
|
|
●
|
the price at which others offer comparable services and equipment;
|
|
|
●
|
the extent of our competitors’ responsiveness to customer needs; and
|
|
|
●
|
installation technology.
|
Competition in
the solar power services industry may increase in the future, partly due to low barriers to entry, as well as from other alternative
energy resources now in existence or developed in the future. Increased competition could result in price reductions, reduced margins
or loss of market share and greater competition for qualified personnel. There can be no assurance that we will be able to compete
successfully against current and future competitors. If we are unable to compete effectively, or if competition results in a deterioration
of market conditions, our business and results of operations would be adversely affected.
OUR BUSINESS
DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO PROTECT AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our success will depend, in part, on our
technology’s commercial viability and on the strength of our intellectual property rights. We currently hold patents in the
US, China and Australia, but still have several patents pending in multiple countries. There is no guarantee the pending
patents will be granted. In addition, any agreements we enter into with our employees, consultants, advisors, customers and strategic
partners will contain restrictions on the disclosure and use of trade secrets, inventions and confidential information relating
to our technology may not provide meaningful protection in the event of unauthorized use or disclosure.
Third parties
may assert that our technology, or the products we, our customers or partners commercialize using our technology, infringes upon
their proprietary rights. We have yet to complete an infringement analysis and, even if such an analysis were available at the
current time, it is virtually impossible for us to be certain that no infringement exists, particularly in our case where our products
have not yet been fully developed.
We may need to
acquire licenses from third parties in order to avoid infringement. Any required license may not be available to us on acceptable
terms, or at all.
We could incur
substantial costs in defending ourselves in suits brought against us for alleged infringement of another party’s intellectual
property rights as well as in enforcing our rights against others, and if we are found to infringe, the manufacture, sale and use
of our or our customers’ or partners’ products could be enjoined. Any claims against us, with or without merit, would
likely be time-consuming, requiring our management team to dedicate substantial time to addressing the issues presented. Furthermore,
the parties bringing claims may have greater resources than we do.
WE DO NOT MAINTAIN
THEFT OR CASUALTY INSURANCE AND ONLY MAINTAIN MODEST LIABILITY AND PROPERTY INSURANCE COVERAGE AND THEREFORE, WE COULD INCUR LOSSES
AS A RESULT OF AN UNINSURED LOSS.
We do not maintain
theft, casualty insurance, or property insurance coverage. We cannot assure that we will not incur uninsured liabilities and losses
as a result of the conduct of our business. Any such uninsured or insured loss or liability could have a material adverse effect
on our results of operations.
IF WE LOSE
KEY EMPLOYEES AND CONSULTANTS OR ARE UNABLE TO ATTRACT OR RETAIN QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER.
Our success is highly dependent on our
ability to attract and retain qualified scientific, engineering and management personnel. We are highly dependent on our CEO, Timothy
Young, and our development team at the University of Iowa. The loss of this valuable resource could have a material adverse
effect on our operations. Our only officer is employed on “at will” basis. Accordingly, there can be no assurance that
they will remain associated with us. Our management’s efforts will be critical to us as we continue to develop our technology
and as we attempt to transition from a development stage company to a company with commercialized products and services. If we
were to lose Mr. Young or the services of the development team at the university or any other key employees or consultants, we
may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
THE LOSS OF
STRATEGIC ALLIANCES USED IN THE DEVELOPMENT OF OUR PRODUCTS AND TECHNOLOGY COULD IMPEDE OUR ABILITY TO COMPLETE OUR PRODUCT AND
RESULT IN A MATERIAL ADVERSE EFFECT CAUSING THE BUSINESS TO SUFFER.
We
pursue strategic alliances with other companies in areas where collaboration can produce technological and industry advancement.
We have entered into the sponsored research agreement with the University of Iowa which is set to terminate May 31, 2020.
If we are unable to extend the terms of the agreements, we could suffer delays in product development or other operational
difficulties which could have a material adverse effect on our results of operations.
THERE IS SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our independent
public accounting firm in their report dated September 27, 2019 included an explanatory
paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available.
Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over
a reasonable length of time. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit
which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately,
to achieve profitable operations. As a result, our financial statements do not reflect any adjustment which would result from our
failure to continue to operate as a going concern. Any such adjustment, if necessary, would materially affect the value of our
assets.
RISKS RELATING TO OUR COMMON STOCK
BECAUSE THERE
IS A LIMITED MARKET IN OUR COMMON STOCK, STOCKHOLDERS MAY HAVE DIFFICULTY IN SELLING OUR COMMON STOCK AND OUR COMMON STOCK MAY
BE SUBJECT TO SIGNIFICANT PRICE SWINGS.
There is a very
limited market for our common stock. Since trading commenced in May 26, 2010, there has been little activity in our common stock
and on some days there is no trading in our common stock. Because of the limited market for our common stock, the purchase or sale
of a relatively small number of shares may have an exaggerated effect on the market price for our common stock. We cannot assure
stockholders that they will be able to sell common stock or, that if they are able to sell their shares, that they will be able
to sell the shares in any significant quantity at the quoted price.
OUR COMMON
STOCK COULD BE SUBJECT TO EXTREME VOLATILITY.
The trading price
of our common stock may be affected by a number of factors, including events described in the risk factors set forth in this report,
as well as our operating results, financial condition and other events or factors. In addition to the uncertainties relating to
future operating performance and the profitability of operations, factors such as variations in interim financial results or various,
as yet unpredictable, factors, many of which are beyond our control, may have a negative effect on the market price of our common
stock. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced
substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our common stock
and wide bid-ask spreads. These fluctuations may have a negative effect on the market price of our common stock. In addition, the
securities market has, from time to time, experienced significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our
common stock.
THERE IS A
LARGE NUMBER OF AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK AVAILABLE FOR ISSUANCE, WHICH MAY RESULT IN SUBSTANTIAL DILUTION
TO EXISTING SHAREHOLDERS.
Our
Certificate of Incorporation authorizes the issuance of up to 3,000,000,000 shares of common stock, par value $0.001 and
5,000,000 shares of preferred stock, par value $0.001, of which 1,302,002,629 shares of common stock and no shares of
preferred stock are currently outstanding as of September 23, 2019. Our Board of Directors has the ability to authorize the
issuance of an additional 1,697,997,371 shares of common stock and 5,000,000 shares of preferred stock without
shareholder approval. Any such issuance will result in substantial dilution to existing shareholders. In addition, the
availability of such a large number of capital stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
WE HAVE NEVER
PAID COMMON STOCK DIVIDENDS AND HAVE NO PLANS TO PAY DIVIDENDS IN THE FUTURE, AS A RESULT OUR COMMON STOCK MAY BE LESS VALUABLE
BECAUSE A RETURN ON AN INVESTOR’S INVESTMENT WILL ONLY OCCUR IF OUR STOCK PRICE APPRECIATES.
Holders of shares
of our common stock are entitled to receive such dividends as may be declared by our Board of Directors. To date, we have paid
no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors
in our common stock will be in the form of appreciation, if any, in the market value of our shares of common stock. There can be
no assurance that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have
purchased their shares.
IF OUR COMMON
STOCK REMAINS SUBJECT TO THE SEC’S PENNY STOCK RULES, BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS
AND TRADING ACTIVITY IN OUR SECURITIES MAY BE ADVERSELY AFFECTED.
Unless our common
stock is listed on a national securities exchange, including the Nasdaq Capital Market, or we have stockholders’ equity of
$5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock will
be subject to the SEC’s “penny stock” rules. If our common stock remains subject to the “penny stock”
rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions
and trading activity in our securities may be adversely affected.
In accordance
with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document
that describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination
approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience
and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent
from the customer, and provide monthly account statements to the customer. The effect of these restrictions will probably decrease
the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction
costs for sales and purchases of our common stock as compared to other securities. Our management is aware of the abuses that have
occurred historically in the penny stock market.
As a result, if
our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find
it more difficult to sell our securities.
WE MAY NEED
ADDITIONAL CAPITAL, AND THE SALE OF ADDITIONAL SHARES OR OTHER EQUITY OR CONVERTIBLE DEBT SECURITIES COULD RESULT IN ADDITIONAL
DILUTION TO OUR STOCKHOLDERS.
If our resources
are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness
would result in increased debt service obligations and could result in operating and financing covenants that would restrict our
operations. Financing may not be available in amounts and on terms acceptable to us, or at all. In addition, the successful execution
of our business plan requires significant cash resources, including cash for investments and acquisition. Changes in business conditions
and future developments could also increase our cash requirements. To the extent we are unable to obtain external financing, we
will not be able to execute our business plan effectively, if at all. To the extent that additional capital is raised through the
sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
ITEM 2.
PROPERTIES.
Our principal
office is located at 10 E. Yanonali, Suite 36, Santa Barbara, CA, 93101. We are on a month-to-month lease. We believe that
our current premises are sufficient to handle our activities for the near future as adequate lab space and equipment is attained
through our agreement with the University of Iowa.
ITEM 3.
LEGAL PROCEEDINGS.
We are not currently
a party to, nor is any of our property currently the subject of, any pending legal proceeding that will have a material adverse
effect on our business.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not Applicable.
The accompanying notes are an integral part of these audited financial statements
The accompanying notes are an integral part of these audited financial statements
The accompanying notes are an integral part of these audited financial statements
The accompanying notes are an integral part of these audited financial statements
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
1.
|
ORGANIZATION AND LINE OF BUSINESS
|
Organization
HyperSolar, Inc. (the “Company”)
was incorporated in the state of Nevada on February 18, 2009. The Company, based in Santa Barbara, California, began operations
on February 19, 2009 to develop and market a solar concentrator technology.
Line of Business
The company is currently developing
a novel solar-powered nanoparticle system that mimics photosynthesis to separate hydrogen from water. We intend for technology
of this system to be licensed for the production of renewable hydrogen to produce renewable electricity and hydrogen for fuel cells.
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 through the sale of its securities to provide the cash needed to meet the Company’s obligations as
they become due and allow for the development of its core business. There is no assurance that the Company will be able to continue
raise capital, and that it will be able to do so on terms that are acceptable to the Company.
|
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
In
accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. These estimates and assumptions relate to useful lives and impairment of tangible and intangible assets,
accruals, income taxes, stock-based compensation expense, Binomial lattice valuation model inputs, derivative liabilities and other
factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions
could affect these estimates.
Property and Equipment
Property and equipment are stated
at cost, and are depreciated using straight line over its estimated useful lives:
Computers and peripheral equipment
|
5 Years
|
Depreciation expense for the
years ended June 30, 2019 and 2018 was $628 and $209, respectively.
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.
|
|
Useful Lives
|
|
6/30/2019
|
|
|
6/30/2018
|
|
|
|
15 years
|
|
|
|
|
|
|
Domain-gross
|
|
|
|
$
|
5,315
|
|
|
$
|
5,315
|
|
Less accumulated amortization
|
|
|
|
|
(3,868
|
)
|
|
|
(3,514
|
)
|
Domain-net
|
|
|
|
$
|
1,447
|
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents-gross
|
|
|
|
$
|
108,634
|
|
|
$
|
95,572
|
|
Less accumulated amortization
|
|
|
|
|
(10,648
|
)
|
|
|
(4,642)
|
|
Patents-net
|
|
|
|
$
|
97,986
|
|
|
$
|
90,930
|
|
The Company recognized
amortization expense of $6,360 and $4,996 for the years ended June 30, 2019 and 2018, respectively.
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Net Earnings (Loss)
per Share Calculations
Net earnings (Loss) per share
dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are
computed by dividing by the weighted average number of common shares outstanding during the year. Diluted net earnings (loss) per
share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the effect of
stock options and stock based awards (Note 4), plus the assumed conversion of convertible debt (Note 5).
For the year ended June 30, 2019, the Company calculated the dilutive impact of its outstanding stock
options of 186,250,000, and convertible debt of $2,320,486, which is convertible into shares of common stock. The stock options
and convertible debt were not included in the calculation of net earnings per share, because their impact was antidilutive.
For the year ended June 30, 2018, the Company calculated the dilutive impact of its outstanding stock
options of 10,250,000, and convertible debt of $1,924,800, which is convertible into shares of common stock. The stock options
and convertible debt were not included in the calculation of net earnings per share, because their impact was antidilutive.
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Income ( Loss) to common shareholders (Numerator)
|
|
$
|
3,978,337
|
|
|
$
|
(10,199,397
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding (Denominator)
|
|
|
924,582,860
|
|
|
|
758,786,508
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding (Denominator)
|
|
|
924,582,860
|
|
|
|
758,786,508
|
|
Equity Incentive Plan and
Stock Options
Equity Incentive Plan
On December 17, 2018, the Board
of Directors approved and adopted the 2019 Equity Incentive Plan (“the Plan”), with 300,000,000 shares set aside and
reserved for issuance pursuant to the Plan. The purpose of the Plan is to promote the success of the Corporation and to increase
stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected
employees and other eligible persons. The awards are performance-based compensation that are granted under the Plan as incentive
stock options (ISO) or nonqualified stock options. The per share exercise price for each option shall not be less than 100% of
the fair market value of a share of common stock on the date of grant of the option.
During the year ended June
30, 2019, the Company granted 176,000,000 stock options under the Plan, leaving a reserve of 124,000,000.
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.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
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 June 30, 2019, 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 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 June 30, 2019 and 2018 (See Note 6):
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability measured at fair value at 6/30/19
|
|
$
|
3,905,721
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,905,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability measured at fair value at 6/30/18
|
|
$
|
10,857,698
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,857,698
|
|
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 June 30, 2017
|
|
$
|
2,482,842
|
|
Fair value of derivative liabilities issued
|
|
|
206,795
|
|
Loss on change in derivative liability
|
|
|
8,168,061
|
|
Balance as of June 30, 2018
|
|
|
10,857,698
|
|
Fair value of derivative liabilities issued
|
|
|
743,301
|
|
Gain on change in derivative liability
|
|
|
(7,695,278
|
)
|
Balance as of June 30, 2019
|
|
$
|
3,905,721
|
|
Research and Development
Research and development costs
are expensed as incurred. Total research and development costs were $528,901 and $245,738 for the years ended June 30, 2019
and 2018, respectively
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.
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Income Taxes
Deferred income taxes are provided
using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and
tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws
and rates of the date of enactment.
When tax returns are filed,
it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more
than (50%) fifty percent likely of being realized upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Recently
Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-2, which creates
ASC Topic 842, “Leases.” This update increases transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2018. We are evaluating what impact, if any, the adoption
of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In August
2017, FASB issued accounting standards update ASU-2017-12, (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 on the Company’s financial statements.
In June 2018, FASB issued accounting
standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with Nonemployees”, which simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on
such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU
2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC
718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been issued. The Company is
currently evaluating the impact of the adoption of ASU 2018-07 on the Company’s financial statements.
In August
2018, the FASB issued to accounting standards update ASU 2018-13, (Topic 820) - “Fair Value Measurement”, which changes
the unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most
recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively
to all periods presented upon their effective date. The amendments in this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance. The Company is currently
evaluation the impact of the adoption of ASU 2018-13, on the Company’s financial statements.
Management does not believe
that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on
the accompanying condensed financial statements.
Year ended
June 30, 2019
During the year ended June 30, 2019, the Company issued 195,464,064 shares of common stock upon conversion
of convertible notes in the amount of $411,814 in principal, plus accrued interest of $75,278 with an aggregate fair value loss
on settlement of $1,053,517 based upon conversion prices ranging from $0.0055 to $0.0099
During the
year ended June 30, 2018, the Company issued 29,397,257 shares of common stock for services rendered at a fair value prices of
$0.0063 - $0.0105 per share in the amount of $249,435.
Year ended
June 30, 2018
During the year ended June 30,
2018, the Company issued 152,974,759 shares of common stock upon conversion of convertible notes in the amount of $353,200 in principal,
plus accrued interest of $106,003, with an aggregate fair value loss on settlement of $945,943, based upon conversion prices of
$0.0070 and $0.0165.
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Stock Option Plans
The Company has previously
issued an aggregate of 10,250,000 non-qualified common stock options outside of the Plan, which remain outstanding as of June
30, 2019. Each of the option expires on the date specified in the option agreement, which date is not later than the fifth (5th)
anniversary from the grant date of the options. As of March 31, 2018, 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; 10,000,000 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.
On January 23, 2019, the Company
issued an aggregate 170,000,000 stock options at an exercise price of $0.0099, one-third (1/3) of which vested immediately upon
grant, and the remainder of which shall vest monthly in one-twenty fourth (1/24) increments commencing on the first month after
the date of the Option. The portion of the options that vested immediately upon grant is exercisable for a period of seven (7)
years with the remainder becoming fully vested by January 23, 2022.
On January 31, 2019, the Company
issued 6,000,000 stock options at an exercise price of $0.0097, of which two-third (2/3) vested immediately, and the remainder of
which shall vest one-twelfth (1/12) per month from after the date of grant. The portion of the option that vested upon grant is
exercisable for a period of seven (7) years with the remainder becoming fully vested by January 31, 2020.
A summary
of the Company’s stock option activity and related information follows:
|
|
6/30/2019
|
|
|
6/30/2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning of period
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
Granted
|
|
|
176,000,000
|
|
|
$
|
0.01
|
|
|
|
-
|
|
|
$
|
0.01
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, end of period
|
|
|
186,250,000
|
|
|
$
|
0.01
|
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
Exercisable at the end of period
|
|
|
85,583,333
|
|
|
$
|
0.01
|
|
|
|
3,583,333
|
|
|
$
|
0.01
|
|
The weighted average remaining contractual life of
options outstanding as of June 30, 2019 and 2018 was as follows:
6/30/2019
|
|
|
6/30/2018
|
|
Exercisable
Price
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Exercisable Price
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
$
|
0.02
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
0.75
|
|
|
$
|
0.02
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
1.75
|
|
$
|
0.01
|
|
|
|
10,000,000
|
|
|
|
5,250,000
|
|
|
|
3.26
|
|
|
$
|
0.01
|
|
|
|
10,000,000
|
|
|
|
3,333,333
|
|
|
|
4.26
|
|
$
|
0.01
|
|
|
|
176,000,000
|
|
|
|
75,333,333
|
|
|
|
6.57 - 6.59
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
186,250,000
|
|
|
|
85,583,333
|
|
|
|
|
|
|
|
|
|
|
|
10,250,000
|
|
|
|
3,583,333
|
|
|
|
|
|
Risk free interest rate
|
|
|
1.94%
|
|
Stock volatility factor
|
|
|
146%
|
|
Weighted average expected option life
|
|
|
7 year
|
s
|
Expected dividend yield
|
|
|
None
|
|
|
|
|
|
|
The stock based compensation expense recognized in
the statement of operations during the years ended June 30, 2019 and 2018, related to the granting of these options was $735,772
and $28,713, respectively.
|
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As of June 30, 2019, the Company’s
outstanding convertible promissory notes, net of debt discount of $281,783 are summarized as follows:
Convertible Promissory Notes, net of debt discount
|
|
$
|
2,038,703
|
|
Less current portion
|
|
|
256,103
|
|
Total long-term liabilities
|
|
$
|
1,782,600
|
|
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
Maturities of long-term debt
for the next five years are as follows:
Period Ended
|
|
|
|
June 30,
|
|
Amount
|
|
2020
|
|
|
537,886
|
|
2021
|
|
|
422,600
|
|
2022
|
|
|
575,000
|
|
2023
|
|
|
745,000
|
|
2024
|
|
|
40,000
|
|
|
|
$
|
2,320,486
|
|
At June 30, 2019, the $2,320,486
in convertible promissory notes had a remaining debt discount of $281,783, leaving a net balance of $2,038,703.
On April 9, 2015, the Company
issued a 10% convertible promissory note (the “April 2015 Note”) in the aggregate principal amount of up to $500,000.
Upon execution of the convertible promissory note, 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 2015 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 maturity date of the April 2015 Note for an additional (60) months to April 9, 2020.The April 2015 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. 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 2015 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. During the year ended June 30, 2019, the Company issued 136,598,661,
upon conversion of 182,200, plus accrued interest of $63,678, with a fair value loss of $878,637. The balance of the April 2015
Note as of June 30, 2019 was $192,600.
On January 28, 2016, the
Company issued a 10% convertible promissory note (the “January 2016 Note”) in the aggregate principal amount of
up to $500,000. Upon execution of the convertible promissory note, 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 2016 Note matures twelve
(12) months from the effective dates of each respective tranche. On January 19, 2017, the investor extended the January 2016
Note for an additional sixty (60) months from the effective date of each tranche, which matures on January 27, 2022. The
January 2016 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. 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 2016 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 balance of the January 2016 Note as of June 30, 2019 was $500,000.
On February 3, 2017, the Company
issued a 10% convertible promissory note (the “February 2017 Note”) in the aggregate principal amount of up to $500,000.
Upon execution of the convertible promissory note, the Company received a tranche of $60,000. The Company received additional tranches
in the amount of $440,000 for an aggregate sum of $500,000. The February 2017 Note matures twelve (12) months from the effective
dates of each respective tranche. The February 2017 Note matures on February 3, 2018, with an automatic extension of sixty (60)
months from the effective date of each tranche. The February 2017 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. 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 2017 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 Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $5,114 during the
year ended June 30, 2019. The balance of the February 2017 Note as of June 30, 2019 was $500,000.
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
On November 9, 2017, the Company
sold and issued a 10% convertible promissory note (the “Nov 2017 Note”) in the aggregate principal amount of up to
$500,000. Upon execution of the convertible promissory note, the Company received a tranche of $45,000. The Company received additional
tranches in the amount of $455,000 for an aggregate sum of $500,000. The November 2017 Note matures twelve (12) months from the
effective dates of each respective tranche. The November 2017 Note provided for a maturity date of November 9, 2018, with an automatic
extension of sixty (60) months from the effective date of each tranche. The November 2017 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. 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 November 2017 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 Company recorded amortization of debt discount, which was recognized as interest expense in
the amount of $128,817 during the year ended June 30, 2019. The balance of the November 2017 Note as of June 30, 2019 was $500,000.
On June 27, 2018, the Company
sold and issued a 10% convertible promissory note (the “June 2018 Note”) in the aggregate principal amount of up to
$500,000. Upon execution of the convertible promissory note, the Company received a tranche of $50,000. On October 9, 2018, the
Company received another tranche of $40,000, for a total aggregate of $90,000 as of June 30, 2019. The June 2018 Note matures twelve
(12) months from the effective dates of each respective tranche. The June 2018 Note provided for a maturity date of June 27, 2019,
which was automatically extended for sixty (60) months from the effective date of each tranche. The June 2018 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. 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 June 2018 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 Company recorded amortization of debt discount, which was recognized
as interest expense in the amount of $30,123 during the year ended June 30, 2019. The balance of the June 2018 Note as of June
30, 2019 was $90,000.
On July 23, 2018, the
Company sold and issued a 10% unsecured convertible note (the “July 2018 Note”) in the aggregate principal amount
of up to $63,000. The July 2018 Note matured on July 23, 2019. The July 2018 Note may be converted into shares of the
Company’s common stock at a conversion price of sixty-one (61%) percent of the lowest average two (2) trading prices
per common stock during the fifteen (15) trading day prior to the conversion date. The conversion feature of the July 2018
Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of
the Note. During the year ended June 30 2019, the Company issued 13,042,837 upon conversion of principal of $63,000, plus
accrued interest of $3,150, with a fair value conversion of debt in the amount of $44,699. The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $62,174 during the year ended June 30,
2019. The balance of the July 2018 Note as of June 30, 2019 was $0.
On August 10, 2018, the Company
sold and issued a 10% unsecured convertible note (the “August 2018 Note”) in the aggregate principal amount of up to
$100,000. The August 2018 Note provided for a maturity date of August 10, 2019, with an extension of sixty (60) months from the
date of the note. The Aug 2018 Note may be converted into shares of the Company’s common stock at a conversion price of the
lesser of a) $0.005 per share or b) sixty-one (61%) percent of the lowest trading price per common stock recorded on any trade
day after the effective date. The conversion feature of the August 2018 Note was considered a derivative in accordance with current
accounting guidelines because of the reset conversion features of the Note. The Company recorded amortization of debt discount,
which was recognized as interest expense in the amount of $88,767 during the year ended June 30, 2019. The balance of the
August 2018 Note as of June 30, 2019 was $100,000.
During the period from October
3, 2018 through May 24, 2019, the Company issued 10% unsecured convertible notes to an investor (the “Investor Note”)
in the aggregate principal amount of up to $430,000. The Investor Notes mature on various dates from October 3, 2019 through May
24, 2020. The Notes may be converted into shares of the Company’s common stock at a conversion price of sixty-one (61%) percent
of the lowest average two (2) trading prices per common stock during the fifteen (15) trading day prior to the conversion date.
The conversion feature of the Notes was considered a derivative in accordance with current accounting guidelines because of the
reset conversion features of the Notes. During the year ended June 30, 2019, the Company issued 42,122,566 shares of common stock
upon conversion of principal in the amount of $159,000, plus accrued interest of $7,950, with a fair value loss on conversion of
$117,945.
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
The Company recorded amortization
of debt discount, which was recognized as interest expense in the amount of $159,000 during the year ended June 30, 2019. The
balance of the balance on the Investor Notes as of June 30, 2019 was $199,000.
December 14, 2018 and
January 18, 2019, the Company issued 10% unsecured convertible notes to an investor (the “December January
Notes”) in the aggregate principal amount of $86,500. The Notes each mature on December 14, 2019 and January 18, 2020,
respectively. The December-January Notes may be converted into shares of the Company’s common stock at a conversion
price of sixty-one (61%) percent of the lowest trading prices per common stock during the fifteen (15) trading day prior to
the conversion date. The conversion feature of the December –January Notes were considered a derivative in accordance
with current accounting guidelines because of the reset conversion features of the December –January Notes. During the
year ended June 30, 2019, the Company issued 3,700,000 shares of common stock upon conversion of $7,614 in principal, plus
accrued interest of $500, with a fair value loss on conversion of $12,236. The Company recorded amortization of debt
discount, which was recognized as interest expense in the amount of $43,849 during the year ended June 30, 2019. The balance
of the December –January Notes as of June 30, 2019 was $78,886.
On January 31, 2019 and
March 6, 2019, the Company issued 10% unsecured convertible notes to an investor (the “January-March Notes”) in
the aggregate principal amount of $160,000. The Notes each mature on January 31, 2020 and March 6, 2020, respectively. The
January March Notes may be converted into shares of the Company’s common stock at a conversion price of sixty-one (61%)
percent of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to the conversion
date. The conversion feature of the January-March Notes were considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the January-March Notes. The Company recorded amortization of debt
discount, which was recognized as interest expense in the amount of $58,301 during the year ended June 30, 2019. The balance
of the January-March Notes as of June 30, 2019 was $160,000.
|
6.
|
DERIVATIVE LIABILITIES
|
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.
The Company’s outstanding
convertible notes 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 year ended June 30,
2019, we determined that the fair value of the conversion feature of the Company’s outstanding convertible notes at issuance
was $743,301, 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 convertible notes.
During the year ended June 30,
2019, the Company recorded a net gain in change in derivative of $7,695,278 in the statement of operations due to the change in
fair value of the remaining outstanding convertible notes, for the year ended June 30, 2019. The Company also recognized a loss
on conversion of debt in the amount of $1,053,517 in the statement of operations at June 30, 2019. At June 30, 2019, the fair value
of the derivative liability was $3,905,721.
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
|
|
|
1.71% - 2.18%
|
|
Stock volatility factor
|
|
|
71.0% - 114.0%
|
|
Weighted average expected option life
|
|
|
3 months - 5 year
|
|
Expected dividend yield
|
|
|
None
|
|
|
|
|
|
|
HYPERSOLAR,
INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
The Company files income tax
returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2016.
Deferred income taxes have been
provided by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for
amount when the realization is uncertain. Included in the balance at June 30, 2019 and 2018, are no tax positions for which the
ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because
of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period
would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company’s policy is
to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During
the periods ended June 30, 2019 and 2018, the Company did not recognize interest or penalties.
At June 30, 2019, the Company
had net operating loss carry-forwards of approximately $6,900,400, which expires in future years. No tax benefit has been reported
in the June 30, 2019 and 2018 financial statements, since the potential tax benefit is offset by a valuation allowance of the
same amount.
The income tax provision differs
from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations
for the years ended June 30, 2019 and 2018 due to the following:
|
|
6/30/2019
|
|
|
6/30/2018
|
|
Book income (loss)
|
|
$
|
1,193,500
|
|
|
$
|
(4,079,759
|
)
|
Non deductible expenses
|
|
|
(1,520,850
|
)
|
|
|
3,791,305
|
|
Depreciation and amortization
|
|
|
45
|
|
|
|
(395
|
)
|
Related party accrual
|
|
|
(5,100
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
332,405
|
|
|
|
288,849
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
taxes are provided on a liability method, whereby deferred tax assets are recognized for deductible differences and operating loss
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Net deferred
tax liabilities consist of the following components as of June 30, 2019 and 2018:
|
|
6/30/2019
|
|
|
6/30/2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
NOL carryover
|
|
$
|
2,070,125
|
|
|
$
|
2,331,918
|
|
Research and development
|
|
|
92,490
|
|
|
|
69,449
|
|
Related party accrual
|
|
|
52,275
|
|
|
|
76,500
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(5,340
|
)
|
|
$
|
(4,352
|
)
|
|
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
$
|
(2,209,550
|
)
|
|
$
|
(2,473,515
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
HYPERSOLAR, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
7.
|
DEFERRED TAX BENEFIT (Continued)
|
Due to the change in ownership
provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject
to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future
years.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and
future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective July 1,
2018. The Company has applied the new tax law for its calculation of the deferred tax provision. There was no impact
to the Company’s financial statements. For certain deferred tax assets and deferred tax liabilities, we have recorded
a provisional decrease of $707,468, with a corresponding net adjustment to the valuation allowance of $707,468 as of July 1, 2018.
The Company’s tax returns
for the previous three years remain open for audit by the respective tax jurisdictions.
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
The Company rents office space
on a month-to-month basis with a monthly lease payment in the amount of $900, which is due by the fifteenth of each month.
On June 1, 2019, the Company entered
into a research agreement with the University of Iowa. As consideration under the research agreement, the University of Iowa will
receive a maximum of $144,747 from the Company. The research agreement may be terminated by either party upon a sixty (60) day
prior written notice or a material breach or default, which is not cured within 90 days of receipt of a written notice of such
breach. The term of the research agreement runs through May 31, 2020, but may be extended upon mutual agreement of the parties.
In the normal
course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. In the opinion
of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s
consolidated financial position or results of operations.
9.
|
RELATED PARTY
As of June 30, 2019, the Company reported an
accrual associated with the CEO’s prior years salary in the amount of $174,250.
|
Management
evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
On July 2, 2019, the Company issued
5,978,000 shares of common stock for consulting fees in the amount of $29,890.
During the
month of July 2019, the Company issued 17,700,000 shares of common stock upon conversion of principal in the amount of $37,913.
On July 22, 2019, the Company
entered into a non-statutory stock option agreement with a consultant for the grant of an option to purchase 10,000,000 shares
of common stock, at an exercise price of $0.0046 per share for consulting services. The options vest as follows: one-third (1/3)
shall vest immediately, and the remainder of the Options shall vest in one-twenty fourth (1/24) increments per month.
On August 2, 2019, the Company
issued 7,153,361 shares of common stock upon conversion of principal in the amount of $9,973, plus accrued interest of $5,350.
On August 2, 2019, the Company
issued 40,886,971 shares of common stock upon conversion of principal in the amount of $53,400, plus accrued interest of $20,197.
On August 12, 2019, the Company
received $53,000 on a 10% convertible promissory note. The Note is convertible into shares of common stock of the Company at 61%
of the market price equal to the lowest trading price during the previous fifteen (15) trading days to the date of conversion.
The Note matures on August 12, 2020.
During the month of August 2019,
the Company issued 31,553,707 shares of common stock upon conversion of principal in the amount of $80,000, plus accrued interest
of $4,132.
During
the month of August 2019, the Company issued 29,277,330 shares of common stock upon conversion of principal in the amount of $78,000,
plus accrued interest of $3,900.
On
September 12, 2019, the Company issued 17,017,143 shares of common stock for consulting fees in the amount of $59,560.
On
September 23, 2019, the Company issued 46,031,639 shares of common stock upon conversion of principal in the amount of $51,600,
plus accrued interest of $19,749.
During
the month of September 2019, the Company issued 29,085,139 shares of common stock upon conversion of principal in the amount of
$55,000.