HYPERSOLAR, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
The accompanying unaudited 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 Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2014. 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, 2013.
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 obtained funds from its shareholders since its inception through the period ended December 31, 2013. The Company also obtained funding from new investors. Management believes the existing shareholders and the prospective new investors will 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 for its operations.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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.
Development Stage Activities and Operations
The Company has been in its initial stages of formation and for the period ended December 31, 2013, had no revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.
Revenue Recognition
The Company recognizes revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, the Company has had no revenues and is in the development stage.
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.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2013, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.
ASC Topic 820 measures financial instruments at fair value on a recurring basis in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
HYPERSOLAR, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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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:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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·
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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
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·
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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.
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We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2013:
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Total
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(Level 1)
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(Level 2)
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(Level 3)
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Assets
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$ |
- |
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$ |
- |
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$ |
- |
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$ |
- |
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Total assets measured at fair value
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$ |
- |
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$ |
- |
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$ |
- |
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$ |
- |
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Liabilities
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Derivative liability
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1,130,002 |
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- |
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- |
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1,130,002 |
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Convertible notes, net of discount
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324,927 |
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- |
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- |
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324,927 |
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Total liabilities measured at fair value
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$ |
1,454,929 |
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$ |
- |
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$ |
- |
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$ |
1,454,929 |
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Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the period ended December 31, 2013, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss. The Company has excluded 20,716,670 warrants for the six months ended December 31, 2013.
Stock based Compensation
Share-based Payment applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. The Company will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option.
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Recently issued pronouncements
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Management reviewed accounting pronouncements issued during the six months ended December 31, 2013, and no pronouncements were adopted. That would have a material impact on the Company's Financial Statements.
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During the six months ended December 31, 2013, the Company issued 38,216,803 shares of common stock through a cashless exercise of 49,122,092 purchase warrants at fair value; issued 42,935,118 shares of common stock for $112,450 in principal for conversion of various convertible notes, plus $4,402 in accrued interest.
HYPERSOLAR, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
The Board of Directors of the Company granted 250,000 non-qualified stock options common stock to a contractor, which are outstanding as of December 31, 2013. Each option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective agreements may provide. Notwithstanding any other provisions of the Option agreement, each Option expires on the date specified in the Option agreement, which date shall not be later than the fifth (5th) anniversary from the grant date of the options. The stock options are fully vested and are exercisable for a period of five years from the date of grant at an exercise price $0.04 per share.
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12/31/2013
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Risk free interest rate
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0.12% |
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Stock volatility factor
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132% |
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Weighted average expected option life
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5 years
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Expected dividend yield
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None
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A summary of the Company’s stock option activity and related information follows:
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12/31/2013
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Weighted
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Number
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average
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of
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exercise
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Options
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price
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Outstanding, beginning of year
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250,000 |
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$ |
0.04 |
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Granted
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- |
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- |
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Exercised
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- |
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- |
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Forfeited/Expired
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- |
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- |
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Outstanding, end of period
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250,000 |
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$ |
0.04 |
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Exercisable at the end of period
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250,000 |
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$ |
0.04 |
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Weighted average fair value of options granted during the period
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$ |
- |
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Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the period ended December 31, 2013, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of December 31, 2013 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to December 31, 2013, based on the grant date fair value estimated. We account for forfeitures as they occur, and no options were forfeited during the six months ended December 31, 2013. There was no stock-based compensation expense recognized in the statement of income during the six months ended December 31, 2013.
Warrants
During the six months ended December 31, 2013, the Company issued 38,216,803 shares of common stock through a cashless exercise of 49,122,092 purchase warrants. The outstanding purchase warrants as of December 31, 2013 was 20,716,670.
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5.
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CONVERTIBLE PROMISSORY NOTES
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On October 19, 2012, the Company received funds of $12,500 pursuant to the terms of a securities purchase agreement which provided for the sale by the Company of 10% convertible promissory notes in the principal amount of up to $75,000. The convertible promissory note was convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.0035 per share or fifty percent (50%) of the lowest trade price of the previous 25 trading days after the effective date. On October 1, 2013, the principal of $12,500, including interest of $1,188 was converted into 6,844,180 shares of common stock. The Company recorded debt discount of $12,500 related to the conversion feature of the notes, along with derivative liabilities at inception. As of the December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $12,500, with a remaining net debt discount of $0 at December 31, 2013.
On October 29, 2012, the Company received funds of $40,000 pursuant to the terms of a securities purchase agreement which provided for the sale of 10% convertible promissory notes in the aggregate principal amount of up to $100,000. The Company received additional advances in the amount of $50,000 on various dates in 2013 for a total aggregate principal sum of $90,000. On August 23, 2013, principal in the amount of $500, plus interest of $41 was converted into 270,616 shares of common stock at a fair of $0.007 per share. As of December 31, 2013, there is a principal sum of $89,500. The convertible promissory notes are convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of a)$0.01 per share b)fifty percent (50%) of the lowest trading price of the previous 25 trading days or c)lowest price offered. The notes mature one (1) year from the effective dates of each respective advance. The Company recorded debt discount of $90,000 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $72,644, with a remaining net debt discount of $17,356 at December 31, 2013.
HYPERSOLAR, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
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5.
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CONVERTIBLE PROMISSORY NOTES (Continued)
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On March 7, 2013, the Company received funds in the amount of $10,000 pursuant to the terms of a securities purchase agreement which provided for the sale of 10% convertible promissory notes in the principal amount of up to $100,000. On October 1, 2013, $10,000 was advanced to the Company on the note for an aggregate principal amount of $20,000, of which $14,450 in principal and $573 in interest was converted into 7,511,300 shares of common stock of the Company, and recognized a loss on conversion of $57,837. As of December 31, 2013, $5,550 in principle remains on the convertible note. The remaining note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.0035 per share or fifty percent (50%) of the lowest trade price recorded on any trade day after the effective date. The note matures one (1) year from the effective date of each respective advance. The Company recorded debt discount of $20,000 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $15,813, with a remaining net debt discount of $4,187 at December 31, 2013.
On March 7, 2013, the Company received funds in the amount of $10,000 pursuant to the terms of a securities purchase agreement entered into for the sale of 10% convertible promissory notes in the principal amount of up to $100,000. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.0035 per share or fifty percent (50%) of the lowest trade price recorded on any trade day after the effective date. The note matures one (1) year from the effective date of each respective advance. The Company recorded debt discount of $10,000 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $8,192, with a remaining net debt discount of $1,808 at December 31, 2013.
On April 23, 2013, the Company entered into a securities purchase agreement for the sale of an 8% convertible promissory note in the aggregate principal amount of up to $32,500, for consideration of $32,500. The note matures on January 17, 2014. During the month of October and November 2013, the principal amount of the note of $32,500, plus interest of $1,300 was converted into 8,022,257 shares of common stock of the Company and recognized a loss on conversion of $24,227. The Company recorded a debt discount of $32,500 related to the conversion feature of the note, along with a derivative liability at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $32,500, with a remaining net debt discount of $0 at December 31, 2013.
On May 9, 2013, the Company entered into a securities purchase agreement for the sale of a 10% convertible promissory note entered into for the extinguishment of a previous note in the aggregate principal amount of $127,841. The note is convertible into shares of common stock of the Company at a price equal to the lesser of $0.009 or 50% of the lowest trade price after the effective date. The note matured on November 5, 2013, and was extended for six months. As of December 31, 2013, the debt discount amortized, and recorded as interest expense is $22,155, with a remaining net debt discount of $0 at December 31, 2013.
On May 21, 2013, the Company entered into a securities purchase agreement for the sale of an 8% convertible promissory note in the aggregate principal amount of $32,500, for consideration of $32,500. The note matures on February 17, 2014. During the month of November 2013, the principal amount of the note in the amount of $32,500, plus interest of $1,300 was converted into 10,286,765 shares of the Company’s common stock, and recognized a loss on conversion of $24,544. The Company recorded a debt discount of $32,477 related to the conversion feature of the note, along with a derivative liability at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $32,477, with a remaining net debt discount of $0 at December 31, 2013.
On June 3, 2013, the Company issued a 10% convertible promissory note in the aggregate principal amount of $55,000, for payment of a accounts payable. On June 4, 2013, the note was assigned to another lender. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of a) $0.0085 per share, b) fifty percent (50%) of the lowest trading price of the common stock recorded on any trade day after the effective date or c) the lowest effective price per share granted to any person or entity after the effective date to acquire common stock, or adjustments. During the month of December 2013, the Company issued 10,000,000 shares of common stock upon conversion of $20,000 in principal leaving a remaining balance of $35,000. The Company recognized a loss on conversion of $33,000. The note matures one (1) year from the effective date. The Company recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $40,137, with a remaining net debt discount of $14,863 at December 31, 2013.
On July 29, 2013, the Company received funds of $42,500 pursuant to the terms of a securities purchase agreement providing for the sale of an 8% convertible promissory note in the aggregate principal amount of up to $42,500. The note is convertible into shares of common stock of the Company at a price equal to 58% times the average of the lowest three trading prices for the common stock during the ten days prior to the conversion. The note matures on April 11, 2014. The Company recorded debt discount of $42,500 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $25,732, with a remaining net debt discount of $16,768 at December 31, 2013.
HYPERSOLAR, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
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5.
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CONVERTIBLE PROMISSORY NOTES (Continued)
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On August 9, 2013, the Company received funds of $15,000 pursuant to the terms of a securities purchase agreement entered into for the sale of 10% convertible promissory notes in the aggregate principal amount of up to $100,000. The Company received additional advances in the aggregate amount of $85,000 during the six months ended December 31, 2013 for a total aggregate principal sum of $100,000. The notes are convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of a) $0.0048 per share; b) fifty percent (50%) of the lowest trading price after the effective date of each respective advance or c) the lowest conversion price offered by the Company with respect to any financing occurring before or after the date of each respective advance. The notes mature six (6) months from the effective dates of each respective advance. The Company recorded debt discount of $100,000 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $47,939, with a remaining net debt discount of $52,061 at December 31, 2013.
On October 2, 2013, the Company received funds of $32,500 pursuant to the terms of a securities purchase agreement providing for the sale of an 8% convertible promissory note in the aggregate principal amount of up to $32,500. The note is convertible into shares of common stock of the Company at a price equal to 58% times the average of the lowest three trading prices for the common stock during the ten days prior to the conversion. The note matures on June 17,, 2014. The Company recorded debt discount of $25,086 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $8,751, with a remaining net debt discount of $16,335 at December 31, 2013.
On December 5, 2013, the Company received funds of $32,500 pursuant to the terms of a securities purchase agreement providing for the sale of an 8% convertible promissory note in the aggregate principal amount of up to $32,500. The note is convertible into shares of common stock of the Company at a price equal to 58% times the average of the lowest three trading prices for the common stock during the ten days prior to the conversion. The note matures on August 22, 2014. The Company recorded debt discount of $32,497 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $3,250, with a remaining net debt discount of $29,247 at December 31, 2013.
On December 16, 2013, the Company received funds of $26,000 pursuant to the terms of a securities purchase agreement entered into for the sale of 10% convertible promissory notes in the aggregate principal amount of up to $100,000. The 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 of each respective advance. The notes mature six (6) months from the effective dates of each respective advance. The Company recorded debt discount of $26,000 related to the conversion feature of the notes, along with derivative liabilities at inception. As of December 31, 2013, the cumulative debt discount amortized, and recorded as interest expense is $2,167, with a remaining net debt discount of $23,833 at December 31, 2013.
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.
At the time of conversion, the Company recognized losses on extinguishment of debt at fair value of $195,715, and recorded a gain as the extinguishment of the associated derivative liability of $203,253, which resulted in a net gain on extinguishment of debt of $7,438 for the six months ended December 31, 2013.
For purpose of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
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Stock price on the valuation dates
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$ |
0.0048 - $0.02 |
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Conversion price for the debt
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$ |
0.002 - $0.0116 |
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Dividend yield
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0.00 |
% |
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Years to Maturity
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6 months - 1 year
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Risk free rate
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.03% - .18 |
% |
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Expected volatility
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51.13% - 283.73 |
% |
The value of the derivative liability at December 31, 2013 was $1,130,002.
HYPERSOLAR, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
Management evaluated subsequent events as of the date of the financial statements pursuant to ASC Topic 855 and noted the following items:
On January 3, 2014, the Company issued 5,630,772 shares of common stock upon conversion of 8,133,336 purchase warrants through a cashless exercise.
On January 13, 2014, the Company issued 2,307,692 shares of common stock upon conversion of 3,333,334 purchase warrants through a cashless exercise.
On January 13, 2014, the Company issued 10,000,000 shares of common stock upon conversion of a convertible note for the principal amount of $20,000 at a fair value of $0.002 per share.
On January 13, 2014, the Company received an additional advance in the amount of $15,000 pursuant to the terms of a securities purchase agreement entered into on December 16, 2013, which provided for the sale of a of a 10% convertible promissory note in the aggregate principal amount of up to $100,000. The 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 of each respective advance. The note matures six (6) months from the effective dates of each respective advance.
On January 15, 2014, the Company issued 4,205,137 shares of common stock upon conversion of a convertible note for the principal amount of $7,500, plus interest of $910 at a fair value of $0.002 per share.
On January 23, 2014, the Company issued 5,898,699 shares of common stock upon conversion of a convertible note for the principal amount of $10,500, plus interest of $1,297 at a fair value of $0.002 per share.
On January 28, 2014, the Company received an additional advance in the amount of $25,000 pursuant to the terms of a securities purchase agreement entered into on December 16, 2013, for the sale of a of a 10% convertible promissory note in the aggregate principal amount of up to $100,000. The 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 of each respective advance. The note matures six (6) months from the effective dates of each respective advance.