Cautionary Statement Regarding Forward-Looking Statements

The information in this discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements that are not of historical fact may be deemed to be forward-looking statements. These forward-looking statements involve substantial risks and uncertainties. In some cases you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," or "continue", the negative of the terms or other comparable terminology. Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks included from time to time in other reports or registration statements filed with the United States Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statements. We disclaim any obligation to publicly update these statements, or disclose any difference between actual results and those reflected in these statements.

Unless the context otherwise requires, references in this Form 10-Q to "we," "us," "our," or the "Company" refer to Hypersolar, Inc.





Overview

At HyperSolar, Inc., our goal is to replace all forms of energy on earth with renewable energy.

We refer to our technology as the HyperSolar H2Generator which is comprised of the following components:





    1.  The Generator Housing - Novel (patent pending) device design is the first
        of its type to safely separate oxygen and hydrogen in the water splitting
        process without sacrificing efficiency. This device houses the water, the
        solar particles/cells and is designed with inlets and outlets for water
        and gasses. Utilizing a special membrane for separating the oxygen side
        from the hydrogen side, proton transport is increased which is the key to
        safely increasing solar-to-hydrogen efficiency. Our design can be scaled
        up and manufactured for commercial use.




    2.  The NanoParticle or Solar Cell - Our patented nanoparticle consists of
        thousands of tiny solar cells that are electrodeposited into one tiny
        structure to provide the charge that splits the water molecule when the
        sun excites the electron. In the process of optimizing our nanoparticles
        to be efficient and only use earth abundant materials (an ongoing
        process), we experimented with commercially available triple junction
        silicon solar cells to perform tests with our generator housing and other
        components. Through this experimentation, our discovery leads us to
        believe that we can bring a system to market utilizing these readily
        available cells while our nanoparticles are still being optimized. These
        solar cells also absorb the sunlight and produce the necessary charge for
        splitting the water molecule into hydrogen and oxygen.




    3.  Oxygen Evolution Catalyst - This proprietary catalyst developed at the
        University of Iowa lab is uniformly applied onto the solar cell or
        nanoparticle and efficiently oxidize water molecule to generate oxygen
        gas. The oxygen evolution catalyst must be robust to withstand the long
        operating hours of the hydrogen generation device to ensure long lifetime.
        It must be stable in alkaline, neutral and acidic environments.




    4.  Hydrogen Evolution Catalyst - Necessary for collecting electrons to reduce
        protons for generating hydrogen gas, we have successfully integrated a
        low-cost hydrogen catalyst into our generator system successfully coating
        a triple junction solar cell with a catalyst comprised primarily of
        ruthenium, carbon and nitrogen that can function as well as platinum, the
        current catalyst used for hydrogen production, but at one twentieth of the
        cost.




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    5.  Coating Technologies - Two major coating technologies were developed to
        protect the nanoparticles and solar cells from photocorrosion under water.
        A transparent conducive coating to protect our nanoparticles and solar
        cells from photo corrosion and efficiently transfer charges to catalysts
        for oxygen and hydrogen evolution reactions. A polymer combination that
        protects the triple junction solar cells from any corrosive water
        environments for long lifetime of the hydrogen generation device.




    6.  A concentrator equal to two suns - This inexpensive Fresnel lens
        concentrator to increase sunlight to equal two suns reduces our necessary
        footprint for a 1000 KG per day system by 40%.

Our business and commercialization plan calls for two generations of our panels or generators. The first generation utilizes readily available commercial solar cells, coated with a stability polymer and catalysts and inserted into our proprietary panels to efficiently and safely split water into hydrogen and oxygen to produce very pure and green hydrogen that can be piped off the panel, pressurized, and stored for use in a fuel cell to power anything electric.

The second generation of our panels will feature a nanoparticle based technology where billions of autonomous solar cells are electrodeposited onto porous alumina sheets and manufactured in a roll to roll process and inserted into our proprietary panels. For this generation, we have received multiple patents and it is estimated that it will produce hydrogen for less than $4 per kilogram before pressurization.

Our team at the University of Iowa, led by our CTO Dr. Joun Lee, has reached a milestone of 1000 consecutive hours of continuous hydrogen production utilizing completely immersed solar cells with no external biases achieving simulated production equal to one year. We believe this to be a record for completely immersed cells. Now ready to take our technology out of the lab, we are working with several vendors to commercialize and manufacturer our first generation of renewable hydrogen panels that use sunlight and water to generate hydrogen. We are currently working towards building a pilot plant in mid 2020 adjacent to a large company distribution or fulfillment center so they can power their fuel cell forklifts and materials handling equipment with completely renewable hydrogen vs. having to transport steam-reformed hydrogen where the production process emits tons of harmful emissions and must be transported.

We anticipate that the HyperSolar H2Generator will be a self-contained renewable hydrogen production system that requires only sunlight and any source of water. As a result, it can be installed almost anywhere to produce hydrogen fuel at or near the point of distribution, for local use. We believe this model of hydrogen production addresses one of the biggest challenges of using clean hydrogen fuel on a large scale - the transportation of hydrogen.

Each stage of the HyperSolar H2Generator can be scaled independently according to the hydrogen demands and length of storage required for a specific application. A small-scale system can be used to produce continuous renewable electricity for a small house, or a large scale system can be used to produce hydrogen to power a community.





Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Binomial valuation option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.





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Use of Estimates

In accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to useful lives and impairment of tangible and intangible assets, accruals, income taxes, stock-based compensation expense, Binomial lattice valuation model inputs, derivative liabilities and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

Fair Value of Financial Instruments

Fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2019, the amounts reported for cash, accrued interest and other expenses, notes payables, and derivative liability approximate the fair value because of their short maturities.

We adopted ASC Topic 820 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Recently Issued Accounting Pronouncements

Management reviewed currently issued pronouncements during the six months ended December 31, 2019, and does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements. Pronouncements disclosed in notes to the financials.

Results of Operations for the Three Months Ended December 31, 2019 Compared to the Three Months Ended December 31, 2018.





Operating Expenses

Operating expenses for the three months ended December 31, 2019 were $450,230 and $342,863 for the prior period ended December 31, 2018. The net increase of $107,367 in operating expenses consisted primarily of an increase in non-cash stock compensation expense and consulting fees of $156,851, an increase in research and development of $36,857, with an overall decrease in operating expenses of $86,341.





Other Income/(Expenses)

Other income and (expenses) for the three months ended December 31, 2019 were $(2,830,056) and $(3,672,942) and for the prior period ended December 31, 2018. The decrease in other expenses of $842,886 in other income and (expenses) was the result of a decrease in non-cash loss in net change in derivative of $396,288, a decrease in non-cash net change in settlement of debt of $623,594, with an increase in interest expense of $16,926, which includes non-cash amortization of debt discount of $17,664.





Net Income/(Loss)

For the three months ended December 31, 2019, our net loss was $(3,280,286) as compared to $(4,015,805) for the prior period December 31, 2018. The majority of the decrease in net loss of $735,519 was related primarily to the decrease in net change of derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements' estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material. The Company has not generated any revenues.





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Results of Operations for the Six Months Ended December 31, 2019 Compared to the Six Months Ended December 31, 2018.





Operating Expenses

Operating expenses for the six months ended December 31, 2019 were $966,120 and $558,365 for the prior period ended December 31, 2018. The net increase of $407,755 in operating expenses consisted primarily of an increase in non-cash stock compensation expense and consulting fees of $403,845, an increase in research and development of $105,665, and other operating expenses of $4,832, with an overall decrease in investor relations of $106,587.





Other Income/(Expenses)

Other income and (expenses) for the six months ended December 31, 2019 were $(3,566,896) and $(962,209) and for the prior period ended December 31, 2018. The increase in other expenses of $2,604,687 in other income and (expenses) was the result of an increase in non-cash loss in net change in derivative instruments of $2,645,988, a decrease in non-cash net change in conversion of debt of $234,834, with an increase in interest expense of $193,532, which includes non-cash amortization of debt discount of $185,237.





Net Income/(Loss)

For the six months ended December 31, 2019, our net loss was $4,533,022 as compared to $1,520,574 for the prior period ended December 31, 2018. The majority of the decrease in net income of $3,012,448, was related primarily to the increase in net change of derivative instruments estimated each period. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price, volatility, variable conversion prices based on market prices defined in the respective agreements and probabilities of certain outcomes based on managements' estimates. These inputs are subject to significant changes from period to period, therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material. The Company has not generated any revenues.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

As of December 31, 2019, we had a working capital deficit of $8,124,474 as compared to $4,829,162 as of June 30, 2019. This increase in working capital deficit of $3,295,312 was due primarily to an increase in cash, accrued expenses, derivative liability, with a decrease in prepaid expenses, accounts payable, and convertible promissory notes.

Cash used in operating activities was $323,673 for the six months ended December 31, 2019 and $448,850 for the prior period ended December 31, 2018. The decrease in cash used in operating activities was primarily due to an decrease in research and development cost and insurance, with an overall decrease in operating expenses. The Company has had no revenues.

Cash used in investing activities during the six months ended December 31, 2019 and 2018 was $781 and $13,062, respectively. The decrease in investing activities was due to less fixed assets purchased in the current period.





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Cash provided by financing activities during the six months ended December 31, 2019 and 2018 was $346,500 and $415,500, respectively. The decrease is a result of an decrease in equity financing. Our ability to continue as a going concern is dependent upon raising capital through financing transactions and future revenue. Our capital needs have primarily been met from the proceeds of private placements of our security, as we currently have not generated any revenues.

The condensed unaudited 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 unaudited condensed financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. During the six months ended December 31, 2019, we did not generate any revenues, incurred net loss of $4,533,022, which was primarily associated with the net change in derivative instruments. We had a working capital deficiency of $8,124,474 and a shareholders' deficit of $9,757,462. These factors, among others raise substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended June 30, 2018, expressed substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern ultimately is dependent on our ability to generate revenue, which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, achieve profitable operations. We have historically obtained funds from our shareholders through the sale of our securities. Management believes that we will be able to continue to raise funds through the sale of our securities to existing and new investors. Management believes that funding from existing and prospective new investors and future revenue will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business operations.

PLAN OF OPERATION AND FINANCING NEEDS

Our plan of operation within the next twelve months is to further research, develop, and protect our technology.

We believe that our current cash balances will be sufficient to support development activity, intellectual property protection, and all general and administrative expenses for the next 30 days. Management estimates that we will require additional cash resources for the remainder of 2020, based upon our current operating plan and condition. We are investigating additional financing alternatives, including continued equity and/or debt financing. There can be no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable. If we are unable to obtain sufficient funds, we may be forced to reduce the size of our operations, which could have a material adverse impact on, or cause us to curtail and/or cease the development of our products.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, result of operations, liquidity or capital expenditures.

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