CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 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 three months ended September 30, 2018 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2019. 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, 2018.
Going
Concern
The
accompanying condensed financial statements have been prepared on a going concern basis of accounting, which contemplates continuity
of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial
statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company
does not generate revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using
the going concern basis is dependent upon, among other things, additional cash infusion. The Company has historically obtained
funds through private placement offerings of equity and debt. Management believes that it will be able to continue to raise funds
by sale of its securities to its existing shareholders and prospective new investors to provide the additional cash needed to
meet the Company’s obligations as they become due, and will allow the development of its core business. There is no assurance
that the Company will be able to continue raising the required capital.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
This
summary of significant accounting policies of HyperSolar, Inc. is presented to assist in understanding the Company’s financial
statements. The financial statements and notes are representations of the Company’s management, which is responsible for
their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States
of America and have been consistently applied in the preparation of the financial statements.
Cash
and Cash Equivalent
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing
these financial statements include the estimate of useful lives of intangible assets, and the deferred tax valuation allowance.
Actual results could differ from those estimates.
Intangible
Assets
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. During the three months ended
September 30, 2018, the Company reviewed the capitalized patents for impairment in accordance with ASC 350, and determined there
was no impairment. Intangible assets that have finite useful lives continue to be amortized over their useful lives.
The Company
recognized amortization expense of $1,069 and $1,914 for the three months ended September 30, 2018 and 2017, respectively.
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 three months ended September 30, 2018, the Company calculated the dilutive impact of the outstanding stock options of 10,250,000,
and the convertible debt of $2,043,300, 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 three months ended September 30, 2017, the Company calculated the dilutive impact of the outstanding stock options of 250,000,
and the convertible debt of $1,653,000, 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.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 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 September 30, 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 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 September 30, 2018 (See Note 6):
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
7,948,478
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,948,478
|
|
|
Total derivative liabilities measured at fair value
|
|
$
|
7,948,478
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,948,478
|
|
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, 2018
|
|
$
|
10,857,698
|
|
|
Fair value of derivative liabilities issued
|
|
|
162,174
|
|
|
(Gain) on change in derivative liability
|
|
|
(3,071,394
|
)
|
|
Balance as of September 30, 2018
|
|
$
|
7,948,478
|
|
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 2018
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Accounting
for Derivatives
The
Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average
series Binomial lattice formula pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
Recently
Issued Accounting Pronouncements
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.
During
the three months ended September 30, 2018, the Company issued 32,615,769 shares of common stock upon conversion of convertible
notes in the amount of $44,500 in principal, plus accrued interest of $14,208, with an aggregate fair value loss on settlement
of $234,834, based upon a conversion price of $0.009.
Options
As of September 30, 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 September 30, 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.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 2018
|
4.
|
STOCK
OPTIONS (Continued)
|
A
summary of the Company’s stock option activity and related information follows:
|
|
|
9/30/2018
|
|
|
9/30/2017
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
|
Outstanding, beginning of period
|
|
|
10,250,000
|
|
|
$
|
0.01
|
|
|
|
250,000
|
|
|
$
|
0.02
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
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 three months ended September 30, 2018 and
2017, related to the granting of these options was $0, respectively.
|
5.
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of September 30, 2018, the outstanding convertible promissory notes are summarized as follows:
|
Convertible Promissory Notes, net of debt discount
|
|
$
|
1,806,545
|
|
|
Less current portion
|
|
|
476,412
|
|
|
Total long term liabilities
|
|
$
|
1,330,133
|
|
Maturities
of long-term net of debt discount are as follows:
|
9/30
|
|
Amount
|
|
|
2020
|
|
|
230,000
|
|
|
2021
|
|
|
905,300
|
|
|
2022
|
|
|
194,833
|
|
|
|
|
$
|
1,330,133
|
|
At
September 30, 2018, the $2,043,300 in convertible promissory notes had a remaining debt discount of $236,755, leaving a net balance
of $1,806,545.
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, which matures on April
9, 2020.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 April 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 period ended September
30, 2018, the Company issued 32,615,769, upon conversion of 44,500, plus accrued interest of $14,208, with a fair value loss of
$234,834. The balance of the April Note as of September 30, 2018 was $330,300.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 2018
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
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 January 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 Note as of September 30, 2018 was
$500,000.
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 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 February 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 $4,947 during the three months ended September 30, 2018. The balance of the February Note as of September 30, 2018
was $500,000.
On
November 9, 2017, for the sale of a 10% convertible promissory note (the “November Note”) in the aggregate
principal amount of up to $500,000. 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
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 November 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
$38,366 during the three months ended September 30, 2018. The balance of the November Note as of September 30, 2018 was
$500,000.
On
June 27, 2018, for the sale of a 10% convertible promissory note (the “June 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
June Note matures twelve (12) months from the effective dates of each respective tranche. The June Note matures on June 27,
2019, with an automatic extension of sixty (60) months from the effective date of each tranche. The June 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 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 $5,780 during the three
months ended September 30, 2018. The balance of the June Note as of September 30, 2018 was $50,000.
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 2018
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
On
July 23, 2018, the Company entered into a convertible promissory note with an investor, providing for the sale by the Company
of a 10% unsecured convertible note (the “July Note”) in the aggregate principal amount of up to $63,000. The July
Note matures on July 23, 2019. The July 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 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 $11,753 during the three months ended September 30, 2018.
On
August 10, 2018, the Company entered into a convertible promissory note with an investor, providing for the sale by the Company
of a 10% unsecured convertible note (the “August Note”) in the aggregate principal amount of up to $100,000. The August
Note matures on August 10, 2019, with an extension of sixty (60) months from the date of the note. The August 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 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 $13,973 during the three months ended September 30, 2018.
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 three months ended September 30, 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 $162,174, 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 three months ended September 30, 2018, the Company recorded a net gain in change in derivative of $3,071,394 in the statement
of operations due to the change in fair value of the remaining notes, for the three months ended September 30, 2018. The Company
also recognized a loss on conversion of debt in the amount of $234,834 in the statement of operations at September 30, 2018. At
September 30, 2018, the fair value of the derivative liability was $7,948,478.
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
|
2.19% - 2.94%
|
|
Stock volatility factor
|
43.0% - 138.0%
|
|
Weighted average expected option life
|
1 year - 5 year
|
|
Expected dividend yield
|
None
|
HYPERSOLAR, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
- UNAUDITED
SEPTEMBER 30, 2018
Management
evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
On
October 3, 2018, the Company received $53,000 on the 10% unsecured convertible note (“October Note”) in the aggregate
principal amount of up to $53,000, with a maturity date of October 3, 2019. The October Note is convertible into shares of common
stock of the Company at a price equal to sixty one percent (61%) per share of the lowest average two (2) trading prices per common
stock during the fifteen (15) trading day prior to the conversion date.
On
October 9, 2018, the Company received $40,000 on the 10% unsecured convertible note (“June Note”) in the aggregate
principal amount of up to $500,000. The June Note is convertible into shares of common stock of the Company at a price equal to
a) $0.01 per share or fifty percent (50%) of the lowest trading prices per common stock since the original effective date.
On October
12, 2018, the lender extended the November Note for sixty (60) months from the effective date. The other terms and conditions remained
unchanged.