The accompanying notes are an integral part
of these unaudited condensed financial statements
The accompanying notes are an integral part
of these unaudited condensed financial statements
The accompanying notes are an integral part
of these unaudited condensed financial statements
NOTES TO CONDENSED FINANCIAL STATEMENTS
- UNAUDITED
MARCH 31, 2018
The accompanying unaudited
condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of S-X Regulation Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been
included. Operating results for the nine months ended March 31, 2018 are not necessarily indicative of the results that may
be expected for the year ending June 30, 2018. For further information refer to the financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended June 30, 2017.
Going Concern
The accompanying financial statements
have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and
liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The Company does not generate revenue, and has negative
cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The
ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among
other things, additional cash infusion. The Company has historically obtained funds through private placement offerings of equity
and debt. Management believes that it will be able to continue to raise funds by sale of its securities to its existing shareholders
and prospective new investors to provide the additional cash needed to meet the Company’s obligations as they become due,
and will allow the development of its core business. There is no assurance that the Company will be able to continue raising the
required capital.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
This summary of significant
accounting policies of HyperSolar, Inc. is presented to assist in understanding the Company’s financial statements. The financial
statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently
applied in the preparation of the financial statements.
Cash and Cash Equivalent
The Company considers all highly
liquid investments with an original maturity of three months or less to be cash equivalents.
Use
of Estimates
The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements
include the estimate of useful lives of intangible assets, derivatives, and the deferred tax valuation allowance. Actual results
could differ from those estimates.
Intangible Assets
Intangible assets consist of patents that are initially
measured at the lower of cost or fair value. The patents are assessed annually for impairment, or whenever conditions indicate
the asset may be impaired, and any such impairment will be recognized in the period identified. Patents are amortized straight-line
over 15 years.
Net Earnings (Loss)
per Share Calculations
Net earnings (Loss) per share
dictates the calculation of basic earnings (loss) per share and diluted earnings 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 nine months ended March
31, 2018, the Company calculated the dilutive impact of the outstanding stock options of 10,250,000, and the convertible debt of
$1,814,500, which is convertible into shares of common stock. The stock options and the convertible debt were not included in the
calculation of net earnings per share, because their impact was antidilutive.
For the nine months ended March
31, 2017, the Company calculated the dilutive impact of the outstanding stock options of 250,000, and the convertible debt of $1,427,500,
which is convertible into shares of common stock. The stock options and the convertible debt were included in the calculation of
net loss per share, because their impact was dilutive.
HYPERSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- UNAUDITED
MARCH 31, 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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.
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 March 31, 2018, the amounts reported for cash, accrued interest and other expenses, notes payables, and derivative
liability approximate the fair value because of their short maturities.
We adopted ASC Topic 820 for
financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for
measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about
fair value measurements.
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active
markets;
|
|
●
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
|
We measure certain financial
instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows
at March 31, 2018 (See Note 6):
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
15,988,897
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,988,897
|
|
|
Total derivative liabilities measured at fair value
|
|
$
|
15,988,897
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,988,897
|
|
The following is a reconciliation
of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:
|
Balance as of July 1, 2017
|
|
$
|
2,482,842
|
|
|
Fair value of derivative liabilities issued
|
|
|
81,892
|
|
|
Loss on change in derivative liability
|
|
|
13,424,163
|
|
|
Balance as of March 31, 2018
|
|
$
|
15,988,897
|
|
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 CONDENSED FINANCIAL STATEMENTS
- UNAUDITED
MARCH 31, 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recently Issued Accounting
Pronouncements
In August
2017, FASB issued accounting standards update ASU-2017-12, “D” (Topic 815) – “Targeted Improvements to
Accounting for Hedging Activities”, to require an entity to present the earnings effect of the hedging instrument in the
same statement line item in which the earnings effect of the hedged item is reported. The amendments in this update are effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods with the fiscal years beginning
after December 15, 2020. Early adoption is permitted in any interim period after issuance of the update. The Company is currently
evaluating the impact of the adoption of ASU-2017 on the Company’s financial statements.
Management does not believe
that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on
the accompanying condensed financial statements.
During the
nine months ended March 31, 2018, the Company issued 110,955,634 shares of common stock upon conversion of convertible notes in
the amount of $208,500 in principal, plus accrued interest of $62,556, with an aggregate fair value loss on settlement of $646,654,
based upon conversion prices of $0.0070 and $0.0165.
Options
As of March 31, 2018, 10,250,000
non-qualified common stock options were outstanding. Each option expires on the date specified in the option agreement, which date
is not later than the fifth (5
th
) anniversary from the grant date of the options. As of 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, and 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.
A summary of the Company’s
stock option activity and related information follows:
|
|
|
3/31/2018
|
|
|
3/31/2017
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
|
Outstanding, beginning of period
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
$
|
0.04
|
|
|
Outstanding, end of period
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
|
|
250,000
|
|
|
$
|
0.02
|
|
|
Exercisable at the end of period
|
|
|
3,583,333
|
|
|
$
|
0.01
|
|
|
|
250,000
|
|
|
$
|
0.02
|
|
The stock based compensation expense recognized in
the statement of operations during the nine months ended March 31, 2018 and 2017, related to the granting of these options was
$28,713 and $0, respectively.
|
5.
|
CONVERTIBLE PROMISSORY NOTES
|
As of March 31, 2018, the outstanding
convertible promissory notes are summarized as follows:
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
1,749,325
|
|
|
Less current portion
|
|
|
247,583
|
|
|
Total long term liabilities
|
|
$
|
1,501,742
|
|
HYPERSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- UNAUDITED
MARCH 31, 2018
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
Maturities of long-term debt
for the next three years are as follows:
|
Year Ending
|
|
|
|
|
3/31/2018
|
|
Amount
|
|
|
2020
|
|
$
|
231,917
|
|
|
2021
|
|
|
540,000
|
|
|
2022
|
|
|
585,131
|
|
|
2023
|
|
|
144,694
|
|
|
|
|
$
|
1,501,742
|
|
At March 31, 2018, the $1,814,500
in convertible promissory notes had a remaining debt discount of $65,175, leaving a net balance of $1,749,325.
On May 23, 2014, the Company
issued a 10% convertible promissory note (the “May 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 $415,000 for an aggregate sum of $465,000. The May Note matured on May 23, 2015 and was extended to February 23,
2016. A second extension was granted to November 23, 2016. On January 19, 2017, the investor extended the May Note for an additional
sixty (60) months from the effective date of each tranche, which matures on November 23, 2021.The May Note is convertible into
shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.0048 per share or fifty
percent (50%) of the lowest trading price after the effective date to acquire common stock. If the Company fails to deliver shares
in accordance with the timeframe of three (3) business days of the receipt of a notice of conversion, the lender, at any time prior
to selling all of those shares, may rescind any portion, in whole or in part of that particular conversion attributable to the
unsold shares and have the rescinded conversion amount returned to the principal sum with the rescinded conversion shares returned
to the Company. In no event shall the lender be entitled to convert any portion of the May Note such that would result in beneficial
ownership by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company. In addition,
for each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion),
a penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion)
until the shares are delivered. The Company issued 110,955,634 shares of common stock upon conversion of $208,500 in principal,
plus accrued interest of $62,556, with an aggregate fair value loss of $646,654. The remaining balance of the May Note as of March
31, 2018 was $19,500.
On April 9, 2015, the
Company issued a 10% convertible promissory note (the “April 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 Note matured nine (9) months from
the effective dates of each respective tranche. A second extension was granted to October 9, 2016. On January 19, 2017, the
investor extended the April Note for an additional (60) months from the effective date of each tranche. The April Note
matures on October 9, 2021. The April Note is convertible into shares of common stock of the Company at a price equal to a
variable conversion price of the lesser of $0.01 per share or fifty percent (50%) of the lowest trading price since the
original effective date of each respective advance or the lowest effective price per share granted to any person or entity
after the effective date to acquire common stock. If the Company fails to deliver shares in accordance with the timeframe of
three (3) business days of the receipt of a notice of conversion, the lender, at any time prior to selling all of those
shares, may rescind any portion, in whole or in part of that particular conversion attributable to the unsold shares and have
the rescinded conversion amount returned to the principal sum with the rescinded conversion shares returned to the Company.
In no event shall the lender be entitled to convert any portion of the May Note such that would result in beneficial
ownership by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company. In
addition, for each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of
conversion), a penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of
the conversion) until the shares are delivered. The balance of the April Note as of March 31, 2018 was $500,000.
On January 28, 2016, the Company
issued a 10% convertible promissory note (the “January 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 Note matures twelve (12) months from the effective dates
of each respective tranche. On January 19, 2017, the investor extended the January Note for an additional sixty (60) months from
the effective date of each tranche, which matures on January 27, 2022.The January Note is convertible into shares of common stock
of the Company at a price equal to a variable conversion price of the lesser of $0.01 per share or fifty percent (50%) of the lowest
trading price since the original effective date of each respective tranche or the lowest effective price per share granted to any
person or entity after the effective date to acquire common stock. If the Company fails to deliver shares in accordance with the
timeframe of three (3) business days of the receipt of a notice of conversion, the lender, at any time prior to selling all of
those shares, may rescind any portion, in whole or in part of that particular conversion attributable to the unsold shares and
have the rescinded conversion amount returned to the principal sum with the rescinded conversion shares returned to the Company.
In no event shall the lender be entitled to convert any portion of the May Note such that would result in beneficial ownership
by the lender and its affiliates of more than 4.99% of the outstanding shares of common stock of the Company. In addition, for
each conversion, in the event that shares are not delivered by the fourth business day (inclusive of the day of conversion), a
penalty of $1,500 per day shall be assessed for each day after the third business day (inclusive of the day of the conversion)
until the shares are delivered. The Company recorded amortization of debt discount, which was recognized as interest expense in
the amount of $38,514 during the nine months ended March 31, 2018. The balance of the January Note as of March 31, 2018 was $500,000.
HYPERSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- UNAUDITED
MARCH 31, 2018
|
5.
|
CONVERTIBLE PROMISSORY NOTES (Continued)
|
On February 3, 2017, the Company
issued a 10% convertible promissory note (the “February 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 an additional
tranches in the amount of $440,000 for an aggregate sum of $500,000. The February Note matures twelve (12) months from the effective
dates of each respective tranche. The February Note matures on February 3, 2018, with an automatic extension of sixty (60) months
from the effective date of each tranche. The February Note is convertible into shares of common stock of the Company at a price
equal to a variable conversion price of the lesser of $0.01 per share or fifty percent (50%) of the lowest trading price since
the original effective date of each respective tranche or the lowest effective price per share granted to any person or entity
after the effective date to acquire common stock. If the Company fails to deliver shares in accordance with the timeframe of three
(3) business days of the receipt of a notice of conversion, the lender, at any time prior to selling all of those shares, may rescind
any portion, in whole or in part of that particular conversion attributable to the unsold shares and have the rescinded conversion
amount returned to the principal sum with the rescinded conversion shares returned to the Company. In no event shall the lender
be entitled to convert any portion of the May Note such that would result in beneficial ownership by the lender and its affiliates
of more than 4.99% of the outstanding shares of common stock of the Company. In addition, for each conversion, in the event that
shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $1,500 per day shall be
assessed for each day after the third business day (inclusive of the day of the conversion) until the shares are delivered. The
Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $80,226 during the nine
months ended March 31, 2018. The balance of the February Note as of March 31, 2018 was $500,000.
On November 10, 2017, for the
sale of a 10% convertible promissory note (the “November 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 an additional
tranches in the amount of $250,000 for an aggregate sum of $295,000. The November Note matures twelve (12) months from the effective
dates of each respective tranche. The November Note matures on November 9, 2018, with an automatic extension of sixty (60) months
from the effective date of each tranche. The November Note is convertible into shares of common stock of the Company at a price
equal to a variable conversion price of the lesser of $0.01 per share or fifty percent (50%) of the lowest trading price since
the original effective date of each respective tranche or the lowest effective price per share granted to any person or entity
after the effective date to acquire common stock. If the Company fails to deliver shares in accordance with the timeframe of three
(3) business days of the receipt of a notice of conversion, the lender, at any time prior to selling all of those shares, may rescind
any portion, in whole or in part of that particular conversion attributable to the unsold shares and have the rescinded conversion
amount returned to the principal sum with the rescinded conversion shares returned to the Company. In no event shall the lender
be entitled to convert any portion of the May Note such that would result in beneficial ownership by the lender and its affiliates
of more than 4.99% of the outstanding shares of common stock of the Company. In addition, for each conversion, in the event that
shares are not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $1,500 per day shall be
assessed for each day after the third business day (inclusive of the day of the conversion) until the shares are delivered. The
Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $2,826 during the nine
months ended March 31, 2018. The balance of the November Note as of March 31, 2018 was $295,000.
ASC Topic 815 provides guidance
applicable to convertible debt issued by the Company in instances where the number into which the debt can be converted is not
fixed. For example, when a convertible debt converts at a discount to market based on the stock price on the date of conversion,
ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from the host contract and recorded
at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability representing the
estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount
representing the imputed interest associated with the embedded derivative. The discount is amortized over the life of the convertible
debt, and the derivative liability is adjusted periodically according to stock price fluctuations.
|
6.
|
DERIVATIVE LIABILITIES
|
The convertible notes (the “Notes”)
issued and described in Note 5 do not have fixed settlement provisions because their conversion prices are not fixed. The conversion
features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
During the nine months ended
March 31, 2018, as a result of the Notes issued that were accounted for as derivative liabilities, we determined that the fair
value of the conversion feature of the convertible notes at issuance was $81,892, based upon the Binomial lattice formula. We recorded
the full value of the derivative as a liability at issuance with an offset to valuation discount, which will be amortized over
the life of the Notes.
During the nine months ended
March 31, 2018, the Company recorded a net loss in change in derivative of $13,424,163, plus the loss on settlement of debt in
the amount of $646,654 for an aggregate of $14,070,817 in the statement of operations due to the change in fair value of the remaining
Notes. At March 31, 2018, the fair value of the derivative liability was $15,988,897.
HYPERSOLAR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- UNAUDITED
MARCH 31, 2018
|
6.
|
DERIVATIVE LIABILITIES (Continued)
|
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
|
1.79% - 2.59%
|
|
Stock volatility factor
|
46.0% - 146.0%
|
|
Weighted average expected option life
|
1 year - 5 year
|
|
Expected dividend yield
|
None
|
Management
evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
On
April 16, 2018, the Company issued 4,782,256 shares of common stock upon conversion of principal in the amount of $19,500, plus
interest of $6,085.
On
April 23, 2018, the Company issued 27,691,481 shares of common stock upon conversion of principal in the amount of $112,000, plus
interest of $33,380.