Certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below, and elsewhere in this annual report, are not related to historical results, and are forward-looking statements.

Forward-looking statements present our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements frequently are accompanied by such words such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," or the negative of such terms or other words and terms of similar meaning. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or timeliness of such results. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this annual report. Subsequent written and oral forward looking statements attributable to us or to persons acting in our behalf are expressly qualified in their entirety by the cautionary statements and risk factors set forth below and elsewhere in this annual report, and in other reports filed by us with the SEC.

You should read the following description of our financial condition and results of operations in conjunction with the financial statements and accompanying notes included in this Annual Report beginning on page F-1.





Overview

At SunHydrogen, Inc., our goal is to replace most forms of energy on earth with clean renewable hydrogen.

Our patented low-cost technology is intended to produce renewable hydrogen using sunlight and any source of water, including seawater and wastewater. Unlike non-renewable hydrocarbon fuels, such as oil, coal and natural gas, where carbon dioxide and other contaminants are released into the atmosphere when used, hydrogen fuel usage produces pure water as the only byproduct. By optimizing the science of water electrolysis at the nano-level, our low-cost nanoparticles mimic photosynthesis to efficiently use sunlight to split water molecules into environmentally friendly renewable hydrogen. Using our low-cost method to produce renewable hydrogen, we intend to enable a world of distributed hydrogen production for renewable electricity and hydrogen fuel cell vehicles.

Our technology is primarily developed at the University of Iowa, through a sponsored research agreement. Over the past several years, our team has been focused on developing the technology to a point at which it can be commercialized. After years of dedication, we are now ready to move from the lab into commercial production with the first generation of our technology.

Our innovative technology is packaged into a self-contained hydrogen production panel that requires only sunlight and any source of water. Just like solar panels convert sunlight into electricity, our hydrogen panels will convert sunlight and water into hydrogen. As a result of this form factor, the panels can be installed almost anywhere to produce hydrogen fuel at or near the point of use. We believe that this distributed model of hydrogen production addresses one of the biggest challenges of the hydrogen economy, which is the prohibitive high infrastructure cost of transporting hydrogen to the points of use.

Results of Operations for the Year Ended June 30, 2020 compared to the Year Ended June 30, 2019.

Operating Expenses

For the year ended June 30, 2020 operating expenses were $1,681,427 compared to $1,828,551 for the prior year ended June 30, 2019. Operating expenses consist primarily of research and development expenses and general and administrative expenses incurred in connection with the operation of our business. The net decrease of $147,124 in operating expenses was a result of a decrease in general and administrative expense of $235,375, which consist of $261,919 in non-cash stock compensation expense, with an increase of $26,544 in other general and administrative expense and an increase in research and development cost of $86,820, and an increase in depreciation and amortization expense of $1,431.





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Other Income/(Expenses)

Other income and (expenses) for the year ended June 30, 2020 were $(55,847,911) compared to $5,806,888 for the prior year ended June 30, 2019. The net increase of $(61,654,799) in other income and (expenses) was the result of the net change in derivative liability.





Net Income (Loss)

For the year ended June 30, 2020 our net loss of was $(57,529,338), compared to net income of $3,978,337 for the year ended June 30, 2019. The majority of the increase in net loss of $61,507,675, was related primarily to the net change in derivative estimates each year. 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 June 30, 2020, we had a working capital deficit of $60,459,862, compared to a working capital deficit of $4,829,162 as of June 30, 2019. This increase in working capital deficit of $55,630,700 was primarily due to the increase in net change in derivative liability, cash, accounts payable, accrued expenses, accrued interest on convertible notes, with a decrease in prepaid expenses, and convertible notes.

During the year ended June 30, 2020, we raised an aggregate of $856,500 in a private placement of convertible notes. During the prior year ended June 30, 2019, we raised an aggregate of $804,500 in a private placement of convertible notes. Our ability to continue as a going concern is dependent upon our ability to raise capital and future revenue generated from operations.

Cash flow used in operating activities was $695,784 for the year ended June 30, 2020, compared to $853,693 for the year ended June 30, 2019. The decrease in cash used by operating activities was primarily due to the decrease in insurance expense. The Company has had no revenues.

Cash used in investing activities for the year ended June 30, 2020 and 2019 was $780 and $13,059, respectively. The decrease in investing activities was as a result of a decrease in intangible assets purchased during the current year.

Cash provided by financing activities during the year ended June 30, 2020 was $856,500 compared to $804,500 for the prior year ended June 30, 2019. The increase in cash from financing activities was due to the increase in issuance of convertible notes through private placement offerings during the current period.

During the year ended June 30, 2020, we did not generate any revenue but incurred net loss of $57,529,338 and used cash in the amount of $695,784 in our operations. As of June 30, 2020, we had a working capital deficiency of $60,459,862 and a shareholders' deficit of $61,832,448. These factors, among others raise substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report dated September 23, 2020, on our audited financial statements for the year ended June 30, 2020 expressed substantial doubt about our ability to continue as a going concern. Our ability s to continue as a going concern and appropriateness of using the going concern basis is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, advance our technology and, ultimately, to achieve profitable operations.

We have historically obtained funding from our shareholders, through private placement offerings of equity and debt securities. Management believes that it will be able to continue to raise funds through the sale of its securities to its existing shareholders and prospective new investors which will provide the additional cash needed to meet the Company's obligations as they become due, and will allow the Company to continue to develop its core business. There can be no assurance that we will be able to continue raising the required capital for our operations and if available, on terms and conditions that are acceptable. If we are unable to obtain sufficient funds, we may be forced to curtail and/or cease the development of our technology.





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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.





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 lattice valuation 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.





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 recording, useful lives and impairment of tangible and intangible assets, derivatives, accruals, income taxes, stock-based compensation expense, binomial model inputs 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 June 30, 2020, the amounts reported for cash, accrued interest and other expenses, notes payables, and derivative liability approximate the fair value because of their short maturities.

Recently Adopted Accounting Pronouncements

Management adopted recently issued accounting pronouncements during the year ended June 30, 2020, as disclosed in the Notes to the financial statements included in this report.

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