ITEM
2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
Inspired
by the photosynthetic process that plants use to harness the power of the sun to create energy molecules, we are developing a
novel solar-powered particle system that mimics photosynthesis to separate hydrogen from water. On November 15, 2011,
we filed a patent application to protect the intellectual property rights to the production of renewable hydrogen and natural
gas using sunlight, water, and carbon dioxide.
Our
research is centered on developing a low-cost and submersible hydrogen production particle that can split water molecules under
the sun, emulating the core functions of photosynthesis. Each particle is a complete hydrogen generator that contains a novel
high voltage solar cell bonded to chemical catalysts by a proprietary encapsulation coating. On September 15, 2015,
we announced that we had surpassed the critical voltage (1.5 Volts) threshold to split water molecules for renewable hydrogen
fuel production. We believe this is an extremely important step towards commercialization, as 1.5 V is the minimum voltage needed
to produce hydrogen in real world systems.
Currently, the strategy of partnering
with both the University of Iowa and University of California, Santa Barbara (“UCSB”), has advanced our technology
significantly. In November of 2014, the University of Iowa was added to the research and development team, giving us the support
of two leading universities as we continue our pursuit of commercially viable renewable hydrogen. In December of 2015, we extended
our agreement with UCSB until June 30, 2016. As the technology progresses, the University of Iowa team will continue to focus
on increasing the voltage of the technology, while the UCSB team will focus more on the technology’s production aspects
and cost models for scaled up systems. We anticipate continuing this strategy of leveraging our existing relationships, as well
as potentially exploring relationships with other leading universities, to continue developing our technology.
Now
that we have surpassed the 1.5 V threshold required for hydrogen fuel production in real world systems, we will identify the next
steps in terms of scaling up the technology. Following this breakthrough, we will focus our efforts on increasing the hydrogen
production efficiencies of these particles by bonding the ideal fuel production catalyst to the low-cost, high-voltage solar cell.
In order to achieve this, the Company is currently exploring two parallel approaches. The first is to identify materials that
interface with well-known hydrogen production catalysts, such as the platinum on solar particles, to improve sunlight-to-hydrogen
conversion efficiency. The second is to pursue methods that further increase photo voltages of solar particles to greater than
1.7 V which allow integration of cheaper earth abundant catalysts without significant loss in hydrogen production efficiency.
We believe this will bring us closer to developing a prototype or pilot.
In December 2015, the University
of Iowa team, led by Dr. Syed Mubeen Hussaini, identified a sulfide-based photocatalyst comprised of an earth abundant, non-toxic,
cheap material that it believed would rival platinum, a well-known catalyst material. The preliminary data following a series
of laboratory tests indicates success in meeting these objectives.
The ramifications of this breakthrough are significant, particularly the solar-to-hydrogen conversion efficiency. Historically,
the key commercial barrier to renewable-produced (solar and wind) hydrogen fuel has been the expense of various system components.
Management believes that the initial successes of utilizing this earth abundant photocatalyst clearly demonstrates its potential
to compete with platinum, therefore significantly reducing overall system cost.
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 Black Scholes 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.
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 net revenue, collectability of accounts receivable,
useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation
expense, Black Scholes 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 March 31, 2016, 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
In
August 2014, FASB issued ASU 2014-15, “Presentation of Financial Statements Going Concern (Subtopic 205-40) –
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ”. Currently, there is no guidance
in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability
to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In
doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require
management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles
that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial
doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering
the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result
of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is
not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued
(or available to be issued). The amendments in this ASU are effective for public and nonpublic entities for annual periods ending
after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15
on the Company’s financial statements.
Management
reviewed currently issued pronouncements during the nine months ended March 31, 2016, and 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.
Results
of Operations for the Three Months Ended March 31, 2016 compared to Three Months Ended March 31, 2015.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2016 were $76,832 and $151,612 for the prior period ended March 31, 2015. The net
decrease of $74,780 in operating expenses consisted primarily of the decrease in research and development cost associated with
outside consulting in the amount of $67,077, with an overall decrease in general and administrative expenses of $7,703.
Other
Income/(Expenses)
Other
income and (expenses) for the three months ended March 31, 2016 were $3,383,996 and $(1,548,301) for the prior period ended March
31, 2015. The increase in income of $4,932,297 in other income and (expenses) was the result of an increase in net gain on debt
conversion and change in fair value of the derivative instruments of $4,993,664, with an increase in interest expense of $61,367,
which includes $148,510 of amortization of debt discount.
Net
Income
For
the three months ended March 31, 2016, our net income was $3,307,164 as compared to a net loss of $(1,699,913) for the prior period
March 31, 2015. The increase of $5,007,077 in net income was related primarily to other income and (expenses) due to an increase
in non-cash cost associated with the fair value of the convertible notes, and a decrease in operating expenses. The Company has
not generated any revenues.
Results
of Operations for the Nine Months Ended March 31, 2016 compared to Nine Months Ended March 31, 2015.
Operating
Expenses
Operating
expenses for the nine months ended March 31, 2016 were $350,980 and $395,315 for the prior period ended March 31, 2015. The net
decrease of $44,335 in operating expenses consisted primarily of the decrease in research and development cost associated with
outside consulting in the amount of $52,587, with an overall increase in general and administrative expenses of $8,252.
Other
Income/(Expenses)
Other
income and (expenses) for the nine months ended March 31, 2016 were $7,350,887 and $(1,540,332) for the prior period ended March
31, 2015. The increase of $8,891,219 in other income and (expenses) was the result of an increase in net gain on debt conversion
and change in fair value of the derivative instruments of $9,118,657, with an increase in interest expense of $227,438, which
includes $478,545 of amortization of debt discount.
Net
Income
For
the nine months ended March 31, 2016, our net income was $6,999,907 as compared to a net loss of $(1,935,647) for the prior period
March 31, 2015. The increase in net income of $8,935,554 in net income was related primarily to other income and (expenses) due
to an increase in non-cash cost associated with the fair value of the convertible notes, and a decrease in operating expenses.
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 March 31, 2016, we had a working capital deficit of $6,948,448 as compared to $14,072,573 as of June 30, 2015. This
decrease in working capital deficit of $7,124,125 was due primarily to an increase in cash and a decrease in non-cash
derivative liability.
Cash
flow used in operating activities was $393,669 for the nine months ended March 31, 2016 and $418,844 for the prior period ended
March 31, 2015. The decrease in cash used by operating activities was primarily due to a decrease in research and development
cost. The Company has had no revenues.
Cash
provided by financing activities during the nine months ended March 31, 2016 was $410,000 and $365,000 for the prior period ended
March 31, 2015. The increase in financing activities was due to equity financing with convertible notes through private placements
during the current period.
Our
financial statements As of March 31, 2016 have been prepared under the assumption that we will continue as a going concern for
the nine months ended March 31, 2016. Liggett & Webb P.A., in their report dated September 28, 2015, on our financial
statements, included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without
additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate
a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies
and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The
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 condensed financial statements
do not reflect any adjustments that might result if we are unable to continue as a going concern. During the nine months ended
March 31, 2016, we did not generate any revenues, incurred net income of $6,999,907, which was associated with the net change
in derivative instruments, and cash used in operations of $393,669. As of March 31, 2016, we had a working capital deficiency
of $6,948,448 and a shareholders’ deficit of $6,911,336. 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, 2015, expressed substantial doubt about our ability to continue as a going concern. Our ability to continue as a going
concern and suitability of using the going concern basis is dependent upon, among other things, additional cash infusion. We have
obtained funds from our shareholders and, in the nine months ended March 31, 2016, we also obtained funding 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 expect to
incur additional expenses in prosecuting our primary patent.
Working
with both the University of Iowa and University of California, Santa Barbara (“UCSB”), gives us the support of two
leading universities as we continue our pursuit of commercially viable renewable hydrogen. As the technology progresses, the University
of Iowa team will continue to focus on increasing the voltage of the technology, while the UCSB team will focus more on the technology’s
production aspects and cost models for scaled up systems. We anticipate continuing this strategy of leveraging our existing
relationship, as well as potentially exploring relationships with other leading universities, to continue developing our technology.
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.