CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
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 three months ended September 30, 2020 are not necessarily indicative
of the results that may be expected for the year ended June 30, 2021. 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, 2020.
Going
Concern
The
accompanying condensed unaudited financial statements have been prepared on a going concern basis of accounting, which contemplates
continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying
condensed unaudited financial statements do not reflect any adjustments that might result if the Company is unable to continue
as a going concern. The Company does not generate revenue, and has negative cash flows from operations, which raise substantial
doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern
and appropriateness of using the going concern basis is dependent upon, among other things, raising additional capital. The Company
has historically obtained funds through private placement offerings of equity and debt. Management believes that it will be able
to continue to raise funds by sale of its securities to its existing shareholders and prospective new investors to provide the
additional cash needed to meet the Company’s obligations as they become due and will allow the development of its core business.
There is no assurance that the Company will be able to continue raising the required capital.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
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.
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.
During the three months ended
September 30, 2020, the Company purchased a business vehicle for transporting demonstration units and to serve as a mobile office.
The Company recognized depreciation
expense of $278 and $157 for the three months ended September 30, 2020 and 2019, respectively.
Intangible
Assets
The
Company has patent applications to protect the inventions and processes behind its proprietary bio-based back-sheet, a protective
covering for the back of photovoltaic solar modules traditionally made from petroleum-based film. Intangible assets that have
finite useful lives continue to be amortized over their useful lives.
The Company recognized amortization
expense of $1,758 and $2,052 for the three months ended September 30, 2020 and 2019, respectively.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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).
For
the three months ended September 30, 2020, the Company calculated the dilutive impact of the outstanding stock options of 186,000,000,
and the convertible debt of $1,797,000, which is convertible into shares of common stock. The stock options and convertible debt
were not included in the calculation of net earnings per share, because their impact was antidilutive.
For
the three months ended September 30, 2019, the Company calculated the dilutive impact of the outstanding stock options of 196,250,000,
and the convertible debt of $2,118,100, which is convertible into shares of common stock. The stock options and convertible debt
were not included in the calculation of net earnings per share, because their impact was 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 of common stock set aside and 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. 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.
As
of September 30, 2020, the Company has granted 186,000,000 equity incentive stock options leaving a reserve of 114,000,000. The
options are exercisable for common stock.
Stock
based Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to 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, the option grants immediately vest, and the total stock-based
compensation charge is recorded in the period of the measurement date.
As
of September 30, 2020, the Company has granted 10,000,000 stock-based compensation stock options, which are exercisable for common
stock.
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 September 30, 2020, 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.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Fair
Value of Financial Instruments
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:
|
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
|
|
●
|
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
|
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 at September 30, 2020 (See Note 6):
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability measured at fair value at 9/30/20
|
|
$
|
61,037,804
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
61,037,804
|
|
The
following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair
value:
Balance as of June 30, 2020
|
|
|
59,657,719
|
|
Fair value of derivative liabilities issued
|
|
|
-
|
|
Loss on change in derivative liability
|
|
|
1,380,085
|
|
Balance as of September 30, 2020
|
|
$
|
61,037,804
|
|
Research
and Development
Research
and development costs are expensed as incurred. Total research and development costs were $138,260 and $143,395 for the
three months ended September 30, 2020 and 2019, 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.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recently
Issued Accounting Pronouncements
In
June 2018, FASB issued accounting standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with
Nonemployees”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services.
Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments
granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed
on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period.
The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have
not yet been issued. The Company is currently evaluating the impact of the adoption of ASU 2018-07 on the Company’s financial
statements.
In
August 2018, the FASB issued accounting standards update ASU 2018-13, (Topic 820) - “Fair Value Measurement”, which
changes the unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level
3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the
most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date. The amendments in this update are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance. The
Company is currently evaluation the impact of the adoption of ASU 2018-13, on the Company’s financial statements.
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.
Three months ended September
30, 2020
During the three months ended
September 30, 2020, the Company issued 35,573,090 shares of common stock for cash for aggregate gross proceeds of $800,000.
During the three months ended
September 30, 2020, the Company issued 79,908,088 shares of common stock upon conversion of convertible notes in the amount of
$233,000 in principal, plus accrued interest of $23,335 and other fees of $900 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 three months ended
September 30, 2020, the Company issued 2,813,903 shares of common stock for services rendered at fair value prices of $0.028 -
$0.035 per share in the aggregate amount of $88,301.
Three months ended September
30, 2019
During the three months ended
September 30, 2019, the Company issued 217,641,145 shares of common stock upon conversion of convertible notes in the amount of
$388,886 in principal, plus accrued interest of $57,594 and other fees of $3,500, with an aggregate fair value loss on settlement
of $623,594 based upon conversion prices ranging from $0.0035 - $0.0069 per share.
During the three months ended
September 30, 2019, the Company issued 22,995,143 shares of common stock for services rendered at a fair value prices of $0.0035
- $0.0050 per share in the aggregate amount of $89,450.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
Stock
Option Plan
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 (5th) 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 vest
by January 23, 2022
On January 31, 2019, the Company
issued 6,000,000 stock options, of which two-third (2/3) vest 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) vest 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:
|
|
9/30/2020
|
|
|
9/30/2019
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning of period
|
|
|
196,250,000
|
|
|
$
|
0.01
|
|
|
|
186,250,000
|
|
|
$
|
0.01
|
|
Granted
|
|
|
-
|
|
|
$
|
0.01
|
|
|
|
10,000,000
|
|
|
$
|
0.01
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(250,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, end of period
|
|
|
196,000,000
|
|
|
$
|
0.01
|
|
|
|
196,250,000
|
|
|
$
|
0.01
|
|
Exercisable at the end of period
|
|
|
174,332,250
|
|
|
$
|
0.01
|
|
|
|
108,916,667
|
|
|
$
|
0.01
|
|
The
weighted average remaining contractual life of options outstanding as of September 30, 2020 and 2019 was as follows:
9/30/20
|
|
|
9/30/19
|
|
Exercisable
Price
|
|
|
Stock
Options Outstanding
|
|
|
Stock
Options Exercisable
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
|
Exercisable
Price
|
|
|
Stock
Options Outstanding
|
|
|
Stock
Options Exercisable
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.02
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
0.50
|
|
$
|
0.01
|
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
|
|
2.01
|
|
|
$
|
0.01
|
|
|
|
10,000,000
|
|
|
|
5,000,000
|
|
|
|
3.01
|
|
$
|
0.0097-0.0099
|
|
|
|
176,000,000
|
|
|
|
157,110,167
|
|
|
|
5.32
- 5.34
|
|
|
$
|
0.0097-0.0099
|
|
|
|
176,000,000
|
|
|
|
99,777,777
|
|
|
|
6.32
- 6.34
|
|
$
|
0.006
|
|
|
|
10,000,000
|
|
|
|
7,222,083
|
|
|
|
5.81
|
|
|
$
|
0.006
|
|
|
|
10,000,000
|
|
|
|
3,888,889
|
|
|
|
6.81
|
|
|
|
|
|
|
196,000,000
|
|
|
|
174,332,250
|
|
|
|
|
|
|
|
|
|
|
|
196,250,000
|
|
|
|
108,916,667
|
|
|
|
|
|
The
stock-based compensation expense recognized in the statement of operations during the three months ended September 30, 2020 and
2019, related to the granting of these options was $112,035 and $246,994, respectively.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
5.
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of September 30, 2020, the outstanding convertible promissory notes, net of debt discount of $210,050 are summarized as follows:
Convertible Promissory Notes, net of debt discount
|
|
$
|
1,586,950
|
|
Less current portion
|
|
|
126,950
|
|
Total long-term liabilities
|
|
$
|
1,460,000
|
|
Maturities
of long-term debt net of debt discount for the next five years are as follows:
Period Ended September 30,
|
|
Amount
|
|
2021
|
|
|
337,000
|
|
2022
|
|
|
695,000
|
|
2023
|
|
|
625,000
|
|
2024
|
|
|
140,000
|
|
|
|
$
|
1,797,000
|
|
At
September 30, 2020, the $1,797,000 in convertible promissory notes had a remaining debt discount of $210,050, leaving a net balance
of $1,586,950.
The
Company issued a 10% convertible promissory note on January 28, 2016 (the “Jan 2016 Note”) in the aggregate principal
amount of up to $500,000. Upon execution of the convertible promissory note, the Company received a tranche of $10,000. The Company
received additional tranches in the amount of $490,000 for an aggregate sum of $500,000. The Jan 2016 Note matures twelve (12)
months from the effective dates of each respective tranche. On January 19, 2017, the investor extended the Jan 2016 Note for an
additional sixty (60) months from the effective date of each tranche, which matures on January 27, 2022. The Jan 2016 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 each respective tranche 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 Jan 2016 Note
such that 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 three months ended on September 30, 2020,
the Company issued 48,802,884 common shares upon conversion of principal in the amount of $33,000, plus interest of $13,363. The
balance of the Jan 2016 Note as of September 30, 2020 was $277,000.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
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. Upon execution of the convertible promissory note, the Company received a tranche of $60,000. The Company
received additional tranches in the amount of $440,000 for an aggregate sum of $500,000. The Feb 2017 Note matures twelve (12)
months from the effective dates of each respective tranche. The Feb 2017 Note had a maturity date of February 3, 2018, with an
automatic extension of sixty (60) months from the effective date of each tranche. The Feb 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 each respective tranche 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 Feb 2017 Note such that 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 Feb 2017 Note as of September 30, 2020 was $500,000.
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. Upon execution of the convertible promissory note, the Company received a tranche of $45,000. The Company
received additional tranches in the amount of $455,000 for an aggregate sum of $500,000. The Nov 2017 Note matures twelve (12)
months from the effective dates of each respective tranche. 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 each tranche. 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 each respective tranche 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 such that 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 Nov 2017 Note as of September 30, 2020 was $500,000.
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. Upon execution of the convertible promissory note, the Company received a tranche of $50,000. On October
9, 2018, the Company received another tranche of $40,000, for a total aggregate of $90,000 as of December 31, 2019. The Jun 2018
Note matures twelve (12) months from the effective dates of each respective tranche. The Jun 2018 Note matured on June 27, 2019,
which was automatically extended for sixty (60) months from the effective date of each tranche. 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 each respective tranche 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 such that 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 September 30, 2020 was $90,000.
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 September 30, 2020 was $100,000.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
On January 20, 2020, the Company
issued a 10% convertible promissory note (the “Jan 2020 Note”) to an investor (the “Jan 2020 Note”) in
the principal amount of $80,000. The Company received funds of $78,000, less other fees of $2,000. The Jan 2020 Note had a maturity
date of January 20, 2021. The Jan 2020 Note was convertible into shares of the Company’s common stock at a conversion price
of sixty-one (61%) percent of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to the
conversion date. The conversion feature of the Jan 2020 Note was considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the Jan 2020 Note. During the three months ended September 30, 2020, the
Company issued 23,420,128 shares of common stock upon conversion of principal in the amount of $80,000, plus accrued interest of
$3,989, and other fees of $300. The Company recorded amortization of debt discount, which was recognized as interest expense in
the amount of $42,404 during the three months ended September 30, 2020. The Jan 2020 Note was fully converted as of September 30,
2020.
On February 11, 2020, the Company
issued a convertible promissory note (the “Feb 2020 Note”) to an investor (the “Feb 2020 Note”) in the
principal amount of $80,000. The Company received funds of $78,000, less other fees of $2,000. The Feb 2020 Note had a maturity
date of February 11, 2021. The Feb 2020 Note was convertible into shares of the Company’s common stock at a conversion price
of sixty-one (61%) percent of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to the
conversion date. The conversion feature of the Feb 2020 Note was considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the Feb 2020 Note. During the three months ended September 30, 2020, the
Company issued 5,294,205 shares of common stock upon conversion of principal in the amount of $80,000, plus accrued interest of
$3,989, and other fees of $300. The Company recorded amortization of debt discount, which was recognized as interest expense in
the amount of $49,399 during the three months ended September 30, 2020. The Feb 2020 Note was fully converted as of September 30,
2020.
On March 9, 2020, the Company
issued a convertible promissory note (the “Mar 2020 Note”) to an investor, (the “Mar 2020 Note”) in the
principal amount of $40,000. The Company received funds of $38,000, less other fees of $2,000. The Mar 2020 Note had a maturity
date of March 9, 2021. The Mar 2020 Note was convertible into shares of the Company’s common stock at a conversion price
of sixty-one (61%) percent of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to the
conversion date. The conversion feature of the Mar 2020 Note was considered a derivative in accordance with current accounting
guidelines because of the reset conversion features of the Mar 2020 Note. During the three months ended September 30, 2020, the
Company issued 2,390,871 shares of common stock upon conversion of principal in the amount of $40,000, plus accrued interest of
$1,995, and other fees of $300. The Company recorded amortization of debt discount, which was recognized as interest expense in
the amount of $25,708 during the three months ended September 30, 2020. The Mar 2020 Note was fully converted as of September 30,
2020.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
5.
|
CONVERTIBLE
PROMISSORY NOTES (Continued)
|
On
April 14, 2020, the Company issued a convertible promissory note (the “April 2020 Note”) to an investor in the principal
amount of $80,000. The Company received funds of $78,000, less other fees of $2,000. The April 2020 Note matures on April 14,
2021. The April 2020 Note may be converted into shares of the Company’s common stock at a conversion price of sixty-one
(61%) percent of the average of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to
the conversion date. 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 April 2020 Note. The Company recorded amortization of debt discount,
which was recognized as interest expense in the amount of $20,164 during the three months ended September 30, 2020. The balance
of the April 2020 Note as of September 30, 2020 was $80,000.
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, of which the Company received $10,000 as of June 30, 2020. 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 price equal to a variable conversion price of the lesser of $0.01 per share or fifty percent (50%) of the
lowest trading price of 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 such that 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 $855 during the three months ended September
30, 2020. The balance of the Apr 2020 Note as of September 30, 2020 was $10,000.
On
May 19, 2020, the Company issued a convertible promissory note (the “May 2020 Note”) to an investor in the principal
amount of $80,000. The Company received funds of $78,000, less other fees of $2,000. The May 2020 Note matures on May 19, 2021.
The May 2020 Note may be converted into shares of the Company’s common stock at a conversion price of sixty-one (61%) percent
of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to the conversion date. The conversion
feature of the May 2020 Note was considered a derivative in accordance with current accounting guidelines because of the reset
conversion features of the May 2020 Note. The Company recorded amortization of debt discount, which was recognized as interest
expense in the amount of $20,164 during the year ended June 30, 2020. The balance of the May 2020 Note as of June 30, 2020 was
$80,000.
On
June 18, 2020, the Company issued a convertible promissory note (the “June 2020 Note”) to an investor in the principal
amount of $160,000. The Company received funds of $156,000, less other fees of $4,000. The Jun 2020 Note matures on June 19, 2021.
The Jun 2020 Note may be converted into shares of the Company’s common stock at a conversion price of sixty-one (61%) percent
of the average of the lowest two (2) trading prices per common stock during the fifteen (15) trading day prior to the conversion
date. The conversion feature of the Jun 2020 Note was considered a derivative in accordance with current accounting guidelines
because of the reset conversion features of the Jun 2020 Note. The Company recorded amortization of debt discount, which was recognized
as interest expense in the amount of $40,329 during the three months ended September 30, 2020. The balance of the Jun 2020 Note
as of September 30, 2020 was $160,000.
All
note conversions were performed per the terms of their respective agreements and therefore no gain or loss on the conversion was
recorded.
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
6.
|
DERIVATIVE
LIABILITIES
|
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 (the “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 three months ended September 30, 2020, the Company recorded a net loss in change in derivative of $1,380,085 in the statement
of operations due to the change in fair value of the remaining notes, for the three months ended September 30, 2020.
At
September 30, 2020, the fair value of the derivative liability was $61,037,804.
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:
Risk free interest rate
|
|
0.12% - 0.28%
|
Stock volatility factor
|
|
150.0% - 274.0%
|
Weighted average expected option life
|
|
3 months - 5 year
|
Expected dividend yield
|
|
None
|
7.
|
COMMON STOCK PURCHASE AGREEMENTS
On July 27, 2020, the Company entered into
a purchase agreement with an investor. Pursuant to the purchase agreement, subject to certain conditions set forth in the purchase
agreement, the investor was obligated to purchase up to $2.1 million of the Company’s common stock from time to time through
September 30, 2020. The purchase price per share under the purchase agreement was 85% of the lowest closing price during the five
(5) business days prior to closing, not to exceed the valuation cap set forth in the purchase agreement. During the three months
ended September 30, 2020, the Company issued 20,000,000 shares of common stock at a purchase price of $0.025 per share under the
purchase agreement. The Company received net proceeds of $460,350 after legal fees and commissions.
On September 21, 2020, the Company
entered into a purchase agreement with an investor. Under the purchase agreement, the Company may sell, in its discretion
(subject to the terms and conditions of the purchase agreement) up to an aggregate of $4,000,000 of common stock to the
investor. The Company has the right, in its sole discretion, subject to the conditions and limitations in the purchase
agreement, to direct the investor, by delivery of a purchase notice from time to time to purchase over the 6-month term
of the purchase agreement, a minimum of $10,000 and up to a maximum of $400,000 of shares of common stock for each purchase
notice (provided that, the purchase amount for any purchase will not exceed two times the average of the daily trading
dollar volume of the common stock during the 10 business days preceding the purchase date). The number of purchase shares
the Company will issue under each purchase will be equal to 112.5% of the purchase amount sold under such Purchase, divided
by the purchase price per share (as defined under the purchase agreement). The “purchase price” is defined
as 90% of the lowest end-of-day volume weighted average price of the common stock for the five consecutive business days
immediately preceding the purchase date, including the purchase date. The Company may not deliver more than one purchase
notice to the investor every ten business days, except as the parties may otherwise agree.
. During the three months ended
September 30, 2020, the Company received $300,000 for the sale of 15,573,090 shares of common stock under the purchase
agreement.
|
SUNHYDROGEN,
INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER
30, 2020 AND 2019
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
On September 15, 2020, the
Company entered into a marketing agreement to position its brand in the market. The fees are to be paid in cash and registered
unrestricted stock. As of September 30, 2020, the Company has paid a $26,250 deposit, with the balance of the payments and the
stock issuances due and payable through December 2020.
On September 1, 2020, the Company
entered into a research agreement with the University of Iowa. As consideration under the research agreement, the University of
Iowa will receive a maximum of $299,966 from the Company. The research agreement may be terminated by either party upon a 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. The term of the research agreement is from September 1, 2020 through August 31, 2020. As of September 30, 2020,
the Company has accrued the amount due of $24, 997.
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 September 30, 2020, the Company reported an
accrual associated with the CEO’s prior year salary in the amount of $211,750.
Management evaluated subsequent
events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
On October 5, 2020, the Company
issued 992,387 shares of common stock for services in the amount of $29,722.
On October 7, 2020, the Company
received gross proceeds of $300,000 for the sale of 13,489,209 shares of commons stock.
On October 16, 2020, the Company
issued 5,315,949 shares of common stock upon conversion of principal in the amount of 80,000, plus accrued interest of $4,011,
and other fees of $300.
On October 27, 2020, the Company
received gross proceeds of $400,000 for the sale of 19,685,040 shares of common stock.
On November 10, 2020, the Company
issued 53,615,458 shares of common stock upon conversion of principal in the amount of $35,700 in principal, plus accrued interest
of $15,235,
On November 12, 2020, the Company
received $300,000 for the sale of 15,237,709 shares of common stock.