HYSR 10-Q Quarter ended Dec. 31, 2022

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 six months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the six months ended December 31, 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, 2022.

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.

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 Stockholders 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. 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 the investor 2,700 shares of the Company’s newly designated Series C Preferred Stock for a total purchase price of $268,165, and a loss on settlement of debt of $1,835. As of December 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, convertible into shares of common stock of the Company. The stock was presented as mezzanine equity because it is redeemable at a fixed or determinable amount upon an event that is outside of the issuer’s control. Upon liquidation, dissolution and winding up of the Company, the holder of each outstanding share of Series C Preferred Stock shall be entitled to receive, out of the assets of the Company 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 Company 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.

Common Stock

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.

Six Months ended December 31, 2022

During the period ended December 31, 2022, the Company issued 120,000,000 shares of common stock upon conversion of convertible notes in the amount of $ 78,153 of principal, plus accrued interest of $ 35,847 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.

On November 11, 2022, the Company entered into a Purchase Agreement with an investor for a total of $ 45,000,000 to purchase shares of common stock. During the period ended December 31, 2022, the Company issued 56,314,806 shares of common stock for $ 1,450,000 under a purchase agreement at prices of $ 0.02504 - $ 0.02608 , pursuant to the purchase notices received from the investor. The finance cost of $ 31,900 was deducted from the gross proceeds converted.

During the period ended December 31, 2022, a consultant exercised 3,071,412 shares of nonqualified stock options with an exercise price of $ 0.01 and a market price of $ 0.027 per share. Upon exercise of the stock options, the Company issued 1,933,852 shares of common stock through a cashless exercise at the price of $ 0.017 per share for compensation expense of $ 32,875 .

Under the 2022 Equity Incentive Plan, one employee and one consultant were granted 40,000,000 restricted stock awards for services, of which 20,000,000 shares vested January 1, 2023 and 20,000,000 shares will vest January 1, 2024.

Six Months ended December 31, 2021

During the period ended September 30, 2021, the Company issued 180,480,692 shares of common stock upon conversion of convertible notes in the amount of $ 120,400 of principal, plus accrued interest of $ 51,057 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.

OPTIONS

On October 2, 2017, the Company granted non-qualified options to purchase 10,000,000 shares of common stock . 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 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. During the period the 3,071, 412 options remaining were fully exercised. As of December 31, 2022, there are no remaining options outstanding.

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 six months ended December 31, 2022, a consultant exercised 3,071,412 nonqualified stock options through a cashless exercise for 1,933,852 shares, leaving a balance of 154,894,499 options outstanding. The options were fully vested and previously expensed accordingly.

During the six months ended December 31, 2021, the Company redeemed a total of 24,887,463 of the Company’s stock options from related parties for a total of $ 1,450,000 . The options were bought back for the market price at the date of the buy-back less the exercise price of the grant. All options that were bought back were fully vested and previously expensed accordingly.

The company’s reasons for the option redemption action for CEO, Director, and consultant included:

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

WARRANTS

As of December 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 derivative calculated on all warrants outstanding are include in the derivative liability (See Note 6). 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 period ended December 31, 2022.

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

As of December 31, 2022, the outstanding convertible promissory notes are summarized as follows:

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

At December 31, 2022, the outstanding balance of the convertible promissory notes was $ 749,347 .

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 December 31, 2022, the Company issued 120,000,000 shares of common stock upon the conversion of principal in the amount of $78,153, plus accrued interest of $35,847. As of December 31, 2022, the balance remaining was $99,347.

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 balance of the Jun 2018 Note as of December 31, 2022 was $ 500,000 .

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 December 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 balance of the Apr 2020 Note as of December 31, 2022 was $ 50,000 .

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 period ended December 31, 2022, the Company recorded a net gain in change in derivative of $ 941,837 in the statement of operations due to the change in fair value of the remaining notes, for the period ended December 31, 2022.

For the six months ended December 31, 2022 and the year ended June 30, 2022, the fair value of the derivative liabilities are as follows;

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:

As of December 31, 2022, the Company invested in corporate bonds and government bonds, which have been recognized in the financial statements at cost.

The Company considers corporate bonds and government 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 December 31, 2022, the components of the Company’s cash, cash equivalents, short -term investments are summarized as follows:

The Company has invested in bonds maturing from December 6, 2022 through August 16, 2023 that are held to maturity. The current trading prices or fair market value of the securities vary, and we believe any decline in fair value is temporary. All securities are current and not in default.

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

During the period ended December 31, 2022, the Company recognized interest income of $ 397,727 in the financial statements, which is recorded as part of investment income in the statement of operations.

On November 11, 2022, the Company entered into a subscription agreement with TECO2030 ASA, (TECO) a public limited company incorporated in Norway. Pursuant to the subscription agreement, the Company purchased 13,443,875 shares of TECO stock for an aggregate consideration of $ 7 million in USD, at an exchange rate of NOK 10.4094 , and a convertible note of TECO for a subscription amount of $ 3 million in USD. The issuance of the convertible notes receivable is through a Tap Issue Addendum to TECO’s secured convertible notes agreement dated June 1, 2022, pursuant to which Nordic Trustee AS is acting as the security agent on behalf of the note holders. The convertible notes mature on June 1, 2025 , and bears interest at the rate of 8 % per annum paid quarterly in arrears and are convertible into shares of TECO at a rate of NOK 5.0868 per share.

The Company’s CEO is a director of TECO, as such TECO is considered an affiliate of the Company.

During the period ended December 31, 2022, the Company recognized an unrealized gain of $ 8,120,635 in the financial statements.

Effective October 1, 2022, the Company extended its research agreement with the University of Iowa through September 30, 2023. As consideration under the research agreement, the University of Iowa will receive a maximum of $ 343,984 from the Company in four equal installments of $ 85,996 . The agreement can be terminated by either party upon sixty (60) days prior written notice to the other.

Effective October 1, 2022, the Company extended its research agreement with the University of Michigan through September 30, 2023. As consideration under the research agreement, the University of Michigan will receive a maximum of $ 298,194 , from the Company in four equal installments of $ 74,549 . In the event of early termination by the Sponsor, the Sponsor will pay all costs accrued by the University as of the date of termination, including non-cancellable obligations.

Effective December 2021, the Company entered into a marketing media campaign in the amount of $ 350,000 , during the year ended June 30, 2022. The Company paid $ 262,500 , and the remaining balance of $ 87,500 was paid on July 11, 2022 leaving a zero balance as of December 31, 2022.

The Company rented lab space with the University of Iowa as of February 2022. The monthly rent is a base of $ 1,468 , plus an additional $ 500 for the rental of a lab on a month-to-month basis and is cancellable with a thirty (30) day notice. Due to the rental being month-to-month, ASC 842 lease accounting is not applicable.

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.

Six Months ended December 31, 2022

As of December 31, 2022, the Company reported an accrual associated with the CEO’s prior years’ salary in the amount of $ 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. During the period ended December 31, 2022, the accrued salary was reclassified as a loan from the CEO, with an interest rate of five percent ( 5 %). The loan will be repaid with monthly payments of $ 9,290 , including interest and principal over a two-year period. As of December 31, 2022, the balance remaining on the loan was $ 194,859 .

Under the 2022 Equity Incentive Plan, two employees were granted 150,000,000 restricted stock awards for services, which vested immediately. The Company withheld 62,400,000 shares at a price of $ 0.027 to pay for the taxes owed by the employees in the amount of $ 1,684,800 , and the remaining 87,600,000 shares priced at $ 0.027 per share in the amount of $ 2,365,200 in stock compensation reported in the financial statements.

During the six months ended December 31, 2022, a consultant exercised 3,071,412 nonqualified stock options through a cashless exercise for $ 32,875 in stock compensation expense reported in the financial statements.

Six Months ended December 31, 2021

During the six months ended December 31, 2021, the Company redeemed 24,887,463 of the Company’s stock options to 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 had the following subsequent events to report.

On January 24, 2023, the Company issued 12,112,404 shares of common stock for $ 250,000 under a purchase agreement at a purchase price of $ 0.02064 .

On January 23, 2023, under the 2022 Equity Incentive Plan, the Company granted a Director 3,000,000 restricted stock awards for services, which vested immediately. These shares have not yet been issued.

On February 3, 2023, the Company issued 12,703,253 shares of common stock for $ 250,000 under a purchase agreement at a purchase price of $ 0.01968 .