SUNHYDROGEN, INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

or

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER: 000-54437

SUNHYDROGEN, INC.

(Name of registrant in its charter)

Issuer’s telephone Number: (805) 966-6566

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

The number of shares of registrant’s common stock outstanding, as of May 16, 2022 was 4,271,749,146.

SUNHYDROGEN, INC.

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SUNHYDROGEN, INC.

CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these condensed unaudited financial statements

SUNHYDROGEN, INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

The accompanying notes are an integral part of these condensed unaudited financial statements

SUNHYDROGEN, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED MARCH 31, 2022 AND 2021

The accompanying notes are an integral part of these condensed unaudited financial statements

SUNHYDROGEN, INC.

CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)

The accompanying notes are an integral part of these condensed unaudited financial statements

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

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 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 nine months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ended June 30, 2022. 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, 2021.

This summary of significant accounting policies of SunHydrogen, 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.

Marketable Securities

The Company considers corporate bonds (“bonds”) as investments due to their ratings. The bonds are rated based on their default probability, health of the corporation’s debt structure, as well as the overall health of the economy. The bonds fall into the category as investments if they have a rating of AAA and BBB.

The bonds have varied due dates and were classified as current and noncurrent, based on to their maturity dates. The bonds are generally valued using quoted prices and are classified in Level 2 of the fair value hierarchy as prices are not always from active markets. We consider our investments held to maturity and we believe there are no other than temporary declines in fair value. Our investments are recorded at historical cost.

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.

Property and Equipment

Property and equipment are stated at cost and are depreciated using straight line over its estimated useful lives.

The Company recognized depreciation expense of $27,335 and $7,755 for the nine months ended March 31, 2022 and 2021, respectively. 

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

Intangible Assets

The Company has patent applications to protect the inventions and processes behind its proprietary solar-to-hydrogen based technology. Intangible assets that have finite useful lives continue to be amortized over their useful lives.

The Company recognized amortization expense of $5,275 and $5,275 for the nine months ended March 31, 2022 and 2021, 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). 

Nine Months Ended March 31, 2022

The Company calculated the dilutive impact of the 157,965,711 outstanding stock options of, 94,895,239 common stock purchase warrants of, and the convertible debt and accrued interest of $1,003,108, which is convertible into shares of common stock. The common stock purchase warrants and convertible debt were included, because their impact on income per share is dilutive.

Nine Months Ended March 31, 2021

The Company calculated the dilutive impact of the 182,853,174 outstanding stock options of, 94,895,239 common stock purchase warrants of, and the convertible debt of $1,078,300, which is convertible into shares of common stock. The stock options, warrants and convertible debt were not included, because their impact on income per share is antidilutive. 

Equity Incentive Plan and Stock Options

Equity Incentive Plan

On December 17, 2018, the Board of Directors approved and adopted the 2019 Equity Incentive Plan (“the Plan”), with 300,000,000 shares reserved for issuance pursuant to the Plan. The purpose of the Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees and other eligible persons. The awards are performance-based compensation that are granted under the Plan as incentive stock options (ISO) or nonqualified stock options. The per share exercise price for each option shall not be less than 100% of the fair market value of a share of common stock on the date of grant of the option. The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing cost. The Company accounts for stock option grants issued and vesting to employees and 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. The options are exercisable into common stock.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

Stock Based Compensation

The Company accounts for stock option grants issued and vesting to employees and 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.

Warrant Accounting 

The Company accounts for the warrants to purchase shares of common stock using the estimated fair value on the date of issuance as calculated using the Black-Scholes valuation model.

Fair Value of Financial Instruments

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized on the balance sheet, where it is practicable to estimate that value. As of March 31, 2022, the amounts reported for cash, accrued interest and other expenses, notes payables, convertible notes, 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:

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 on March 31, 2022 (See Note 6):

The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

Research and Development

Research and development costs are expensed as incurred.  Total research and development costs were $1,202,235 and $1,712,169 for the nine months ended March 31, 2022 and 2021, respectively.

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

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 as of March 31, 2022.

Series A Preferred Stock

On January 27, 2022, the Company filed a certificate of designation of Series A Preferred Stock with the Secretary of State of Nevada, designating 1,000 shares of preferred stock as Series A Preferred Stock, and issued 1,000 shares of Series A Preferred Stock to Timothy Young, the Company’s chief executive officer., . The Series A Preferred Stock does not have any dividend rights or liquidation preferences. The Series A preferred shares entitles the holder to 51% of the voting power of the Company’s stockholders. The Series A Preferred Stock were to automatically be redeemed by the Company at their par value of $0.001 per share, on the first to occur of the following events: (i) a date sixty days after the effective date of the certificate of designation, (ii) the date that Tim Young ceases to serve as officer, director or consultant of the Company, or (iii) on the date that the Company’s shares of common stock first trade on any national securities exchange and such listing is conditioned upon the elimination of the preferential voting rights of the Series A Preferred Stock. The estimated control premium for the voting control of the Series A Preferred Stock was 14.1%. The following assumptions were used: (i) control value of $22,101,999, (ii) control time period of 60 days, (iii) risk equivalent to the WACC of 26.4%. The common stock price was $0.0348, with a market capitalization based on the fully diluted common and preferred shares outstanding. The net fair value of the Series Preferred Stock was $960,700, which was recognized in the financial statements. The preferred shares expired March 27, 2022, and there were no outstanding shares as of March 31, 2022.

Series C Preferred Stock

On December 15, 2021, the Company filed a certificate of designation of Series C Preferred Stock with the Secretary of State of Nevada, designating 17,000 shares of preferred stock as Series C Preferred Stock. Each share of Series C Preferred Stock has a stated value of $100 and is convertible into shares of common stock of the Company at a conversion price equal to $0.00095. The Series C Preferred Stock holders are entitled to receive out of any funds and assets of the Company legally available prior and in preference to any declaration or payment of any dividend on the common stock of the Company, cumulative dividends, at an annual rate of 10% of the stated value, payable in cash or shares of common stock. In the event the Company declares or pays a dividend on its shares of common stock (other than dividend payable in shares of common stock), the holders of Series C Preferred Stock will also be entitled to receive payment of such dividend on an as-if-converted basis with respect to the Series C Preferred Stock. The Series C Preferred Stock confers no voting rights on holders, except with respect to matters that materially and adversely affect the voting powers, rights or preferences of the Series C Preferred Stock or as otherwise required by applicable law.

The Company entered into a securities purchase agreement on December 15, 2021, with an accredited investor for an exchange of convertible debt to equity. Under the purchase agreement, the Company and investor acknowledged there was $187,800 of principal remaining under the note issued to the investor by the Company on February 3, 2017, plus $80,365 of accrued interest, representing a total aggregate note balance of $268,165. Pursuant to the purchase agreement, the Company sold to investor 2,700 shares of the Company’s newly designated Series C Preferred Stock for a total purchase price of $268,165. As of March 31, 2022, the Company had a total of 2,700 shares of Series C Preferred Stock outstanding with a fair value of $268,165, and a stated face value of one hundred dollars ($100) (“share value’) per share, and is convertible into shares of fully paid and  non-assessable shares of common stock of the Company. Upon liquidation, dissolution and winding up of the Corporation either voluntary or involuntary, the holder of each outstanding share of Series C Preferred Stock shall be entitled to receive, out of the assets of the Corporation available for distribution to its shareholders upon such liquidation, before any payments shall be made or any assets distributed to the holders of the common stock, the stated value of the Series C Preferred Shares plus any declared but unpaid dividends. No other current or future equity holders of the Corporation shall have higher priority of liquidation preference than holders of Series C Preferred Stock. The Holder has the right, at any time, at its election, to convert shares of Series C Preferred Stock into common stock at a conversion price of $0.00095.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

The Company recognized a loss on settlement of $1,109,761 for the extinguishment of convertible debt, plus derivative liability for the nine months ended March 31, 2022.

Common Stock

Nine months ended March 31, 2022

During the nine months ended March 31, 2022, the Company issued 381,457,044 shares of common stock upon conversion of convertible notes in the amount of $255,900 of principal, plus accrued interest of $106,484 based upon a conversion price of $0.00095 per share. The notes were converted per the terms of their respective agreements and therefore no gain or loss on the conversion was recorded.

During the nine months ended March 31, 2022, the Company issued 40,983,607 shares of common stock pursuant to a purchase agreement for cash at a price of $0.02745 per share for aggregate net proceeds of $960,000.

Nine months ended March 31, 2021

During the nine months ended March 31, 2021, the Company issued 412,273,408 shares of common stock pursuant to purchase agreements for cash at prices ranging from $0.022 - $.025 per share for aggregate net proceeds of $32,523,350.

During the nine months ended March 31, 2021, the Company issued 252,000,000 shares of common stock upon exercise of warrants at an exercise price of $0.075 for gross proceeds of $18,900,000.

During the nine months ended March 31, 2021, the Company issued 599,449,820 shares of common stock upon conversion of convertible notes in the amount of $887,250 of principal, plus accrued interest of $176,987 and other fees of $1,800 based upon conversion prices ranging from $0.00095 - $0.017995 per share. All note conversions were performed per the terms of their respective agreements and therefore no gain or loss on the conversion was recorded.

During the nine months ended March 31, 2021, the Company issued 3,806,290 shares of common stock for services rendered at fair value prices of $0.028 - $0.035 per share in the aggregate amount of $118,023.

OPTIONS

On January 27, 2022, the holder of the majority of the voting power of the shareholders of the Company, and the Company’s chief executive officer, approved by written consent (i) an amendment to the Company’s articles of incorporation to increase the Company’s authorized shares of common stock from 5,000,000,000 to 10,000,000,000, (ii) an amendment to the Company’s articles of incorporation to effect a reverse stock split of the Company’s common stock by a ratio of not less than 1-for-100 and not more than 1-for-500 at any time prior to the one year anniversary of filing the definitive information statement with respect to the reverse split, with the board of directors having the discretion as to whether or not the reverse split is to be effected, and with the exact ratio of any reverse split to be set at a whole number within the above range as determined by the board in its discretion, and (iii) the adoption of the Company’s 2022 Equity Incentive Plan. Such shareholder approval for such actions became effective 20 days after the definitive information statement relating to such actions was mailed to shareholders.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

As of September 30, 2020, 10,000,000 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. Of the 10,000,000 non-qualified common stock options, one-third vest immediately, and one-third vest the second and third year, such that 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.

On January 23, 2019, the Company issued 170,000,000 stock options. One-third of the options vested immediately, and the remainder vest 1/24 per month over the first twenty-four months following the option grant. The options expire 10 years from the initial grant date. The options fully vested by January 23, 2022.

On January 31, 2019, the Company issued 6,000,000 stock options, of which two-third (2/3) vested immediately, and the remaining amount shall vest one-twelfth (1/12) per month from after the date of the option grant. The options expire 10 years from the initial grant date. The options fully vested on January 31, 2020.

On July 22, 2019, the Company issued 10,000,000 stock options, of which one-third (1/3) vested immediately, and the remaining shall vest one-twenty fourth (1/24) per month from after the date of the option grant. The options expire 10 years from the initial grant date. The options fully vested on July 22, 2020.

A summary of the Company’s stock option activity and related information follows:

During the nine months ended March 31, 2022, the Company granted no options.

During the nine months ended March 31, 2021, the Company bought back a total of 13,146,826 of the Company’s stock options for a total of $1,250,000.

The weighted average remaining contractual life of options outstanding as of March 31, 2022 and 2021 was as follows: 

The stock-based compensation expense recognized in the statement of operations during the nine months ended March 31, 2022 and 2021, related to the granting of these options was $0 and $259,955, respectively.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

WARRANTS

As of March 31, 2022, the Company had an aggregate of 94,895,239 common stock purchase warrants outstanding, with exercise prices ranging from $0.0938 - $0.13125 per share. The warrants were estimated at fair value on the date of issuance as calculated using the Black-Scholes valuation model. The warrants can be exercised over periods of three (3) to five (5) years.

A summary of the Company’s warrant activity and related information follows for the nine months ended March 31, 2022. 

At March 31, 2022, the aggregate intrinsic value of the warrants outstanding was $0.

As of March 31, 2022, the outstanding convertible promissory notes net of debt discount are summarized as follows:

Maturities of long-term debt for the next three years are as follows:

At March 31, 2022, the $827,500 in convertible promissory notes had a remaining debt discount of $104,795, leaving a net balance of $722,705.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

The Company issued a 10% convertible promissory note on February 3, 2017 (the “Feb 2017 Note”) in the aggregate principal amount of up to $500,000. The Company received tranches for an aggregate principal total of $500,000. The Feb 2017 Note had a maturity date of February 3, 2018, which the investor extended for an additional sixty (60) months from the effective date of the note, to February 3, 2022. The Feb 2017 Note was convertible into shares of common stock of the Company at 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 the note or the lowest effective price per share granted to any person or entity after the effective date to acquire common stock. If the Company failed 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, could 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 was the lender be entitled to convert any portion of the Feb 2017 Note to the extent such conversion 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 were not delivered by the fourth business day (inclusive of the day of conversion), a penalty of $1,500 per day would 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 on December 31, 2021, the Company issued 180,480,692 shares of common stock upon conversion of principal in the amount of $120,400, plus accrued interest of $51,057. Also, during the nine months ended March 31, 2022, the Company exchanged the balance of the convertible note in the amount of $187,800, plus accrued interest of $80,365 for an aggregate total of $268,165, for 2,700 Series C preferred shares with a stated value of $100 per share and a 10% annual dividend. The preferred shares are convertible into common stock at a fixed conversion price of $0.00095. The balance of the Feb 2017 Note as of March 31, 2022 was $0.

The Company issued a 10% convertible promissory note on November 9, 2017 (the “Nov 2017 Note”) in the aggregate principal amount of up to $500,000. The Company received tranches for an aggregate principal total of 500,000. The Nov 2017 Note had a maturity date of November 9, 2018, with an automatic extension of sixty (60) months from the effective date of the note. The Nov 2017 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 the note 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 Nov 2017 Note to the extent such conversion 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 March 31, 2022, the Company issued 200,976,352 shares of common stock upon the conversion of principal of $135,500, plus the accrued interest of $55,427. The balance of the Nov 2017 Note as of March 31, 2022 was $177,500.

The Company issued a 10% convertible promissory note on June 27, 2018 (the “Jun 2018 Note”) in the aggregate principal amount of up to $500,000. The Company received tranches for an aggregate principal total of $500,000. The Jun 2018 Note matured on June 27, 2019, which was automatically extended for sixty (60) months from the effective date of the note. The Jun 2018 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 the note 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 Jun 2018 Note to the extent such conversion 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 $307,781 during the nine months ended March 31, 2022.The balance of the Jun 2018 Note as of March 31, 2022 was $500,000.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

The Company issued a 10% convertible promissory note on August 10, 2018 (the “Aug 2018 Note”) in the aggregate principal amount of up to $100,000. The Aug 2018 Note had a maturity date of August 10, 2019, with an extension of sixty (60) months from the date of the note. The Aug 2018 Note matures on August 10, 2023. The Aug 2018 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 Aug 2018 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Note. The balance of the Aug 2018 Note as of March 31, 2022 was $100,000.

On April 15, 2020, the Company issued a convertible promissory note (the “Apr 2020 Note”) to an investor in the aggregate principal amount of $50,000. The Company received tranches for an aggregate principal total of $50,000. The Apr 2020 Note matures twelve (12) months from the effective dates of each respective tranche, such that the Apr 2020 Note matures on April 15, 2021, with an automatic extension of sixty (60) months from the effective date of each tranche. The Apr Note is convertible into shares of common stock of the Company at a variable conversion price of the lesser of $0.01 per share or 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. If the Company fails to deliver shares in accordance with the timeframe of four (4) 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 Apr 2020 Note to the extent such conversion 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 $2,000 per day shall be assessed for each day after the fourth business day (inclusive of the day of the conversion) until the shares are delivered. The conversion feature of the April 2020 Note was considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the Apr 2020 Note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $30,027 during the nine months ended March 31, 2022. The balance of the Apr 2020 Note as of March 31, 2022 was $50,000.

All note conversions were performed per the terms of their respective agreements. At March 31, 2022, the Company recognized a loss of $1,109,761 on conversion of a convertible note in exchange for Series C preferred stock.

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.

The convertible notes issued 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 nine months ended March 31, 2022, the Company recorded a net gain in change in derivative of $83,572,095 in the statement of operations due to the change in fair value of the remaining notes, for the nine months ended March 31, 2022.

At March 31, 2022, the fair value of the derivative liability was $38,444,200.

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:

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

During the period ended March 31, 2022, the Company invested in corporate bonds, which have been recognized in the financial statements at fair value.

The Company considers corporate bonds (“bonds”) as investments due to their ratings. The bonds are rated based on their default probability, health of the corporation’s debt structure, as well as the overall health of the economy. The bonds fall into the category as investments if they have a rating between AAA and BBB.

As of March 31, 2022, the components of the Company’s short and long-term investments are summarized as follows:

The Company has invested in bonds maturing from June 30, 2022 through August 16, 2023 that are held to maturity. The current trading prices or fair market value of the bonds vary, and we believe any decline in fair value is temporary. All bonds are current and not in default.

The following table summarizes the amortized cost of the held-to-maturity bonds at March 31, 2022, aggregated by credit quality indicator.

The amortized cost of our corporate bonds and the related gross unrealized gains and losses, were as follows at March 31, 2022:

During the nine months ended March 31, 2022, the Company recognized interest income of $172,566 in the financial statements, which is recorded as part of other income to the statement of operations.

On September 15, 2020, the Company entered into a marketing agreement. The fees are to be paid in cash and registered unrestricted stock. As of March 31, 2022, the Company has paid a $34,250 deposit, with the balance of the payments and the stock issuances due upon completion of a deliverable.

Effective September 1, 2021, the Company entered into a new research agreement with the University of Iowa. As consideration under the research agreement, the University of Iowa will receive a maximum of $350,000 from the Company. The contract period is from September 1, 2021 through August 31, 2022. The research agreement may be terminated by either party upon sixty (60) day prior written notice or a material breach or default, which is not cured within 90 days of receipt of a written notice of such breach. This agreement was signed by the Company on September 13, 2021. As of March 31, 2022, the Company has accrued the amount due of $204,166, which is recorded as part of accounts payable.

SUNHYDROGEN, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS – UNAUDITED

MARCH 31, 2022 AND 2021

Effective October 1, 2021, the Company entered into a research agreement with the University of Michigan. As consideration under the research agreement, the University of Michigan will receive a maximum of $296,448, from the Company. The research agreement may be terminated by either party upon ninety (90) day prior written notice or a material breach or default, which is not cured within 90 days of receipt of a written notice of such breach. This agreement was signed by the Company on September 23, 2021.

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operation.

As of March 31, 2022, the Company reported an accrual associated with the CEO’s prior years’ salary in the amount of $214,820, and $211,750 for the current year, which is recorded in related party accrued expenses. The Company began accruing the salary in 2011 and used the funds for operating expenses. The CEO will be paid during the fiscal year.

During the nine months ended March 31, 2022, the Company redeemed 24,887,463 of the Company’s stock options from related parties for a total of $1,450,000.

Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and there were no subsequent events to report.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

The information in this report may contain forward-looking statements. 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 our reports filed with the Securities and Exchange Commission, or the SEC. 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, except as may be required under applicable law.

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

Overview

At SunHydrogen, our goal is to replace fossil fuels with clean, renewable hydrogen.

Hydrogen is the most abundant chemical element in the universe. When hydrogen fuel is used to power transportation and industry, the only byproduct left behind is pure water, unlike hydrocarbon fuels such as oil, coal and natural gas that release carbon dioxide and other contaminants into the atmosphere when used. However, naturally occurring elemental hydrogen is rare. As a result, nearly all the world’s hydrogen is procured through steam methane reforming (SMR), a capital-intensive process that emits carbon dioxide and other harmful pollutants. Hydrogen is green, but currently the most common process for producing it is brown.

We believe the SunHydrogen solution potentially offers an efficient and cost-effective way to produce truly green hydrogen using sunlight and any source of water. Our core technology is a self-contained, nanoparticle-based hydrogen generator that mimics photosynthesis to split water molecules, resulting in hydrogen. By optimizing the science of water electrolysis at the nano-level, we believe we have developed a low-cost method to potentially produce environmentally friendly renewable hydrogen. We believe renewable hydrogen will play a pivotal role in helping the world meet climate change targets, and we believe our technology potentially offers solutions to the challenges that the hydrogen future presents, including cost of production and transportation.

We believe our solution is unique because it directly uses the electrical charges created by sunlight to generate hydrogen, eliminating the need for the power electronics that traditional electrolyzers rely on altogether. SunHydrogen’s expected scalable system configuration of many individual hydrogen-generating panels provides a high degree of redundancy, security and stability. And while electrolyzers require high-purity water for operation, SunHydrogen’s technology can utilize water of varying purities.

Additionally, because our process only requires sunlight and water, our technology can be installed near the point of hydrogen use. This eliminates the need for pipelines and trucks that result in high carbon emissions and high capital investment. With a target cost of $2.50/kg., we aspire for our technology to be cost-competitive with brown hydrogen and below the cost of clean hydrogen competitors. We believe our solution has the potential to clear a path for green hydrogen to compete with natural gas hydrogen and gain mass market acceptance as a true replacement for fossil fuels.

Our technology is primarily developed in Coralville, Iowa, where we have a sponsored research agreement with the University of Iowa as well as a dedicated laboratory space at the BioVentures Center at the University of Iowa Research Park. Our Iowa team has worked diligently over the past several years to lead and optimize the scale-up of our nanoparticle technology.

Outside of our internal team, we’ve made strides toward commercialization by forming relationships with industrial partners who possess specialized expertise in individual components of our technology.

In our partnership with SCHMID Group of Freudenstadt, Germany, they lead the engineering of our panel housing, a crucial system element that ensures safe and efficient hydrogen collection. We also have ongoing partnerships with InRedox of Longmont, Colorado and MSC Co. LTD of Korea which are focused on substrate manufacturing and electroplating chemistries, respectively. We also have a sponsored research agreement with the University of Michigan focused on catalyst optimization and membrane integration.

Most recently, we have entered into a new partnership with Geomatec, a high-performance thin film manufacturer based in Japan who will work alongside InRedox to facilitate our transition to large-scale substrate manufacturing.

We will continue working diligently with our existing partners, and engaging new partners, to drive our technology to commercialization. As we prepare for mass production, we will also continue seeking out potential manufacturing partners for production facility, equipment design and engineering.

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.

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 March 31, 2022, 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 three months ended March 31, 2022, 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 are disclosed in notes to the financial statements.

Results of Operations for the Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021

Operating Expenses

Operating expenses for the three months ended March 31, 2022 were $2,131,707 compared to $1,824,481 for the three months ended March 31, 2021. The net increase of $307,226 in operating expenses consisted primarily of an increase in non-cash stock compensation of $924,816, with a decrease in professional fees of $216,191, research and development cost of $361,402, officer salaries of $38,433, marketing of $25,103 and an overall decrease in operating expenses of $283,687.

Other Income/(Expenses)

Other income and (expenses) for the three months ended March 31, 2022 were $7,810,011, compared to $(18,632,063) for the three months ended March 31, 2021. The decrease in other expenses of $26,442,074 was the result of a decrease in non-cash accounts associated with the net change in derivative of $26,687,880, with an overall decrease in other expenses of $245,806.

Net Income/(Loss)

For the three months ended March 31, 2022, our net income was $5,678,304, compared to a net loss of $(20,456,544) for the three months ended March 31, 2021. The majority of the decrease in net loss of $26,134,848 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 management’s 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.

Results of Operations for the nine months ended March 31, 2022 compared to nine months March 31, 2021

Operating Expenses

Operating expenses for the nine months ended March 31, 2022 were $3,469,084 compared to $5,134,615 for the nine months ended March 31, 2021. The net decrease of $1,665,531 in operating expenses consisted primarily of a decrease in general and administrative expenses.

Other Income/(Expenses)

Other income and (expenses) for the nine months ended March 31, 2022 were $82,203,995 compared to $(142,647,640) for the nine months ended March 31, 2021. The decrease in other expenses of $224,851,635 was the result of the decrease in net change in derivative of $225,694,241, and the overall increase in other expenses of $842,606.

Net Income/(Loss)

For the nine months ended March 31, 2022, our net income was $78,734,911, compared to a net loss of $(147,782,255) for the nine months ended March 31, 2021. The majority of the decrease in net loss of $226,517,166, 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 management’s 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 March 31, 2022, we had working capital of $10,547,932, compared to a working capital deficit of $80,099,103 as of June 30, 2021. This decrease in working capital deficit of $69,551,171 was primarily due to a decrease in net change in derivative liability, with an increase in cash and cash equivalents.

Cash used in operating activities was $2,211,559 for the nine months ended March 31, 2022, compared to $4,742,243 for the nine months ended March 31, 2021. The decrease in cash used in operating activities was due to a decrease in  research and development expense. The Company has had no revenues.

Cash used in investing activities during the nine months ended March 31, 2022 and March 31, 2021 was $10,648,389 and $213,866, respectively. The increase in cash used in investing activities was due to an increase in securities investment.

Cash provided by financing activities during the nine months ended March 31, 2022 and 2021 was $(490,000), and $50,108,900 net of commission fees, respectively. The decrease in cash provided in financing activities was due to a decrease in net proceeds from common stock purchase agreements.

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 and registered offerings of our securities, as we have not generated any revenues to date.

We have historically obtained funding from investors, through private placements and registered offerings of equity and debt securities. Management believes that the Company 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 on terms and conditions that are acceptable to us, or at all. If we are unable to obtain sufficient funds, we may be forced to curtail and/or cease our operation.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change to our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to, nor is any of our property currently the subject of, any material legal proceeding.

Item 1A. Risk Factors.

There are no material changes from the risk factors previously disclosed in our annual report on Form 10-K filed with the SEC on October 8, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended March 31, 2022, the Company issued 200,976,352 shares of common stock upon conversion of convertible notes in the amount of $135,500 of principal, plus accrued interest of $55,428 based upon a conversion price of $0.00095 per share.

In connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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