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PART I - FINANCIAL INFORMATION

HYDROPHI TECHNOLOGIES GROUP, INC.

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HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Balance Sheets

As of June 30, 2015 and March 31, 2015

See accompanying notes to interim unaudited consolidated financial statements.

F-1

HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Operations

For the three months ended June 30, 2015 and 2014

(Unaudited)

See accompanying notes to interim unaudited consolidated financial statements.

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HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Cash Flows

For the three months ended June 30, 2015 and 2014

(Unaudited)

See accompanying notes to interim unaudited consolidated financial statements.

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HYDROPHI TECHNOLOGIES GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.  ORGANIZATION AND BUSINESS

Hydrophi Technologies Group, Inc. (the “Company” or “Hydrophi”) was incorporated under the laws of State of Florida on June 18, 2010.

Reverse Acquisition

On September 25, 2013, the Company consummated an amended Agreement and Plan of Merger (the “Merger Agreement”) with Hydro Phi Technologies, Inc., a Delaware corporation (“Hydro Phi”), and HPT Acquisition Corp., a Delaware corporation (“HPT”), which was a wholly-owned subsidiary of the Company and established solely to implement the merger.  Pursuant to the Merger Agreement, HPT merged with and into Hydro Phi, with Hydro Phi being the surviving company, in an exchange of all the equity securities of the Hydro Phi for common stock of the Company.  As a result of the transaction, the former shareholders of Hydro Phi became the controlling shareholders of the Company. The transaction was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein Hydro Phi is considered the acquirer for accounting and financial reporting purposes. The capital, share price, and earnings per share amount in these consolidated financial statements for the period prior to the reverse merger were restated to reflect the recapitalization. As a result of the merger, Hydro Phi became a wholly-owned subsidiary of the Company.

Hydro Phi was incorporated on April 21, 2008 under the laws of the State of Wyoming. In August 2010, with the relocation of its Research and Development Office from Maine to Georgia, the Company reincorporated under the laws of the State of Delaware and is currently a Delaware corporation.

Hydro Phi is a fuel efficiency company that has created a water-based technology to improve the fuel efficiency of internal combustion engines. Hydro Phi has been engaged in the research and development of its “green energy” solutions primarily for the transportation industry since its inception.  In 2010, Hydro Phi concluded phase one of its research and development phase and started to generate revenues. Hydro Phi’s priority market segments are: logistics, trucking, heavy equipment, marine and agriculture, where rising fuel costs and upcoming emission regulations necessitate the development of new, ground-breaking technologies.  In the future, the continual improvement process at Hydro Phi will focus on miniaturization, data collection, application-specific designs and further efficiency enhancements.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  The Company has a net working capital deficit at June 30, 2015 and has an accumulated deficit of approximately $33 million through June 30, 2015.  Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's research, development, marketing and manufacturing efforts.  While pursuing this business strategy, the Company is expected to continue operating at a loss with negative operating cash flows.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.  As a result of the aforementioned factors and the related uncertainties, there can be no assurance of the Company's ability to survive.

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2.  SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited financial statements of the Company have been prepared using the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto for the year ended March 31, 2015. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for the year ended March 31, 2015 have been omitted.

The consolidated financial statements include the Company’s accounts and those of the Company’s wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less to be cash equivalents.

Inventory

The Company utilizes a perpetual inventory system and inventory is accounted for using the first-in-first-out (FIFO) method.

Investments

Investment in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting. The Company has determined that its 20.05% investments in Hydro Phi Technologies Europe (“HTEurope”) should be accounted for using the equity method. The equity method requires that the Company accounts for the investment in HTEurope at historical price, and adjust the balance for the Company’s ownership of the net income or loss of HTEurope. The Company discontinues applying the equity method if an investment has been reduced to zero and the Company is not required to advance additional fund to an investee.

Property and Equipment

Property and equipment are recorded at cost.  Expenditures for major additions and improvements are capitalized while minor replacements and maintenance and repairs, which do not improve or extend the life of such assets, are charged to operations as incurred.  Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in the statement of operations.  Depreciation is calculated using the straight-line method which depreciates the assets over the estimated useful lives of the depreciable assets ranging from five to seven years.

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Intangible Assets

Intangible assets include patent applications.  Intangible assets with definite useful lives are recorded on the basis of cost and are amortized on a straight-line basis over their estimated useful lives.  The Company uses a useful life of 10 years for patents.  The Company evaluates the remaining useful life of intangible assets annually to determine whether events and circumstances warrant a revision to the remaining amortization period. If the estimate of the intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over that revised remaining useful life.  At June 30, 2015 and March 31, 2015, no revision to the remaining amortization period of the intangible assets was made.

Impairment of Long-lived Assets

The Company reviews the carrying value of the long-lived assets periodically to determine if facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Among the factors the Company considers in making the evaluation are changes in market position and profitability. If facts and circumstances exist which may indicate impairment, the Company will prepare a projection of the undiscounted cash flows of the asset group and determine if the long-lived assets are recoverable based on these undiscounted cash flows. If impairment is indicated, an adjustment will be made to reduce the carrying amount of these assets to their fair value.

Derivatives

All derivatives are recorded at fair value on the balance sheet. Fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

Fair Value of Financial Instruments

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. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current financial assets and current financial liabilities approximates their carrying value because of the short-term maturity of these financial instruments.

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The following tables set forth assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2015 and March 31, 2015. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

Research and Development

Research and development costs are expensed as incurred. For the three-month periods ended June 30, 2015 and 2014, the Company recorded research and development expense of $84,214 and $31,045, respectively.

Income Taxes

An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards (“NOLs”). If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common stockholders for the period by the weighted average shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period.  The calculation of diluted earnings (loss) per common share assumes the dilutive effect of stock options, warrants and any other potentially dilutive securities outstanding.  During a loss period, the potentially dilutive securities have an anti-dilutive effect and are not included in the calculation of dilutive net loss per common share.  

Subsequent Events

The Company’s management reviewed all material events through the issuance date of this report for disclosure purposes.

Recent Accounting Pronouncements

The Company does not expect that any recently issued accounting pronouncements will have a significant impact on the results of operations, financial position, or cash flows of the Company.

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3.  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30, 2015 and March 31, 2015:

Depreciation expense for the three-month periods ended June 30, 2015 and 2014 was $683 and $983, respectively.

4.  INTANGIBLE ASSETS

Intangible assets consisted of the following at June 30, 2015 and March 31, 2015:

In January 2009 and April 2011, the Company entered into agreements and obtained Hydrogen On Demand Technology. This intellectual property was valued at $650,000, based on the par value of the shares of common stock issued of $20,000 and $630,000 cash paid by the Company. The Company amortizes the cost over the estimated useful life of 10 years.

For the three months ended June 30, 2015 and 2014, amortization expense recorded by the Company on the intangible assets was $16,250.

5.  DEFERRED REVENUES

On August 22, 2013, the Company entered into a regional distribution and service provider agreement with Energia Vehicular Limpia S.A. de C.V. (“Energia”). Pursuant to the agreement, Energia has the exclusive rights to market the Company’s products in Mexico for five years. For the exclusive distribution rights, Energia paid a $500,000 license fee to the Company. On January 16, 2014, the Company and Energia further amended the regional distribution and service provider agreement to include the exclusive right to market the Company’s products in Brazil for a license fee of $160,000 during the same period of the original agreement. On April 9, 2014, the Company and Energia further amended the regional distribution agreement and service provider agreement to add consulting/advisory services to be provided by the Company to Energia for an 18-month period beginning April 1, 2014.  Energia paid the Company $217,000 for these services.  License fee and consulting/advisory service fees are recognized ratably over the term of each agreement. During the three months ended June 30, 2015, $69,167 in revenue related to the license and consulting/advisory fees was recorded. As of June 30, 2015, $443,167 of cash received was deferred.

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During the year ended March 31, 2014, the Company also received from Energia, a deposit in the amount of $180,000 for Hydroplant units to be shipped in the future.

6.  NOTES PAYABLE

At June 30, 2015 and March 31, 2015, notes payable consisted of the following:

On September 4, 2013, the Company issued $65,000 promissory notes with warrants to purchase 260,000 shares of the Company’s common stock to third parties. The principal and interest amount are due on August 31, 2015. The notes accrue interest at 8% and are unsecured. In connection with the issuance of the notes, the Company recorded initial debt discount of $44,155 related to the warrants based on the relative fair value of these warrants. As of June 30, 2015, the entire debt discount was fully amortized by the Company.

7.  NOTE PAYABLE– RELATED PARTY

On February 28, 2013, the Company issued convertible notes to a principal owner of the Company and other associated or related parties. The principal amount due under these convertible notes has been advanced to the Company since September 14, 2009. The notes are due on demand, secured by all assets of the Company and convertible to the Company’s common shares.

During fiscal year 2014, these convertible notes were exchanged for non-convertible notes earning interest at 8% per annum with a maturity date of August 31, 2015. The notes were not secured. In November 2014, $445,813 of these non-convertible notes was exchanged for part of two convertible notes, leaving a note with principal of $4,438 remaining outstanding immediately after the exchange.

As of June 30, 2015 and March 31, 2015, the Company had notes payable to related party in the amount of $4,438.

8.  CONVERTIBLE NOTES PAYABLE – RELATED PARTY

In the fiscal year 2015, the Company and related parties executed loan conversion agreements. Pursuant to the agreements, the related parties exchange certain non-convertible notes and related accrued interest for convertible notes with total principal of $1,452,393. The convertible notes are convertible to the Company’s common stock at a conversion rate of $0.0065217 per share.  Of this amount, $811,268 has a maturity date at the discretion of the Company’s board of directors and $641,125 has a maturity date of August 31, 2015.

The Company analyzed the loan conversion agreement executed on November 12, 2014 for derivative accounting consideration under FASB ASC 470 and determined that the embedded conversion feature, with issuance date fair values of $2,017,595 qualified for accounting treatment as a financial derivative. As a result, these notes were fully discounted and the fair value of the conversion feature in excess of the principal amount of the notes of $565,203 was expensed immediately as additional interest expense. The remaining discount will be amortized by the Company through interest expense over the life of these related party convertible notes. As of June 30, 2015, unamortized debt discount related to the convertible notes to related parties was $134,974 and the principal balance on these convertible notes was $1,452,392.

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9.  CONVERTIBLE NOTES PAYABLE

Pursuant to a Securities Purchase Agreement, dated April 25, 2014, as amended on July 29, 2014, by and between the Company and 31 Group, LLC (the “Purchase Agreement”), the Company sold convertible notes with a principal amount of $1,352,000, for a total purchase price of $1,270,000, to 31 Group, LLC. The first note in principal amount of $624,000 was issued on April 28, 2014. The second note in principal amount of $104,000 was issued on July 29, 2014. The third note in principal amount of $624,000 was issued on August 5, 2014. The Company incurred $30,000 financing costs on these notes. The notes mature 24 months after issuance and accrue interest at an annual rate of 8%.

The notes are convertible at any time after issuance, in whole or in part, at the investor’s option, into shares of common stock, at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three volume weighted average prices of the common stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.35 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Company has the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the convertible notes at a price equal to 135% of the remaining outstanding amount. The Company is also required to reserve 150% of the number of shares of common stock that may be issued in conversion of the remaining outstanding amount.

Pursuant to a Securities Purchase Agreement, dated December 4, 2014, by and between the Company and 31 Group, LLC, the 31 Group is committed to purchase from the Company two convertible notes of the Company in the principal amounts of $385,000 and $275,000 for the cash purchase amounts of $350,000 and $250,000, respectively. The $385,000 note was issued on December 4, 2014 and will mature on May 17, 2016. The $275,000 note was issued on February 5, 2015 and will mature on July 30, 2016. The notes are convertible 179 days after issuance, in whole or in part, at 31 Group’s option, into shares of the Company’s common stock, at a conversion price equal to $0.15 per share. If after 179 days from the execution date of the notes, the price of the Company’s common stock is less than $0.15, the Company will have an additional 30 days to repay the 31 Group LLC. If the notes are not repaid, 31 Group LLC may convert the notes at a conversion rate of the product of (x) the arithmetic average of the lowest three volume weighted average prices of the common stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 80%. The Company has the right at any time to redeem some or all, of the total outstanding amount then remaining under the convertible notes at a price equal to: (i) 100% of the outstanding principal and accrued interest if within 60 days of issuance (ii) 115% of the outstanding principal and accrued interest if between 61 and 149 days of issuance (iii) 120% of the outstanding principal and accrued interest if 150 days or more after issuance. The Company is also required to reserve 150% of the number of shares of common stock that may be issued in conversion of the remaining outstanding amount. As part of the note agreement the Company also agreed to give the note holder a 3% royalty payment on the net cash revenue from the sales of the Company’s HydroPlant units. The royalty is only payable when the Company has received $500,000 cash revenue and is for a period of twenty-four months starting from the date 31 Group receives an initial royalty payment.

On April 15, 2015, the Company entered into securities purchase agreements dated as of April 9, 2015, with Magna Equities II, LLC and Riverside Merchant Partners, LLC.  Pursuant to the agreements, Magna Equities II, LLC and Riverside Merchant Partners, LLC each purchased separately from the Company a convertible note of the Company in the principal amount of $100,833, for $91,667 cash.  Each note matures on October 9, 2016 and bears interest at 8% per annum.

On May 27, 2015, the Company entered into securities purchase agreements with Magna Equities II, LLC and Riverside Merchant Partners, LLC.  Pursuant to the agreements, Magna Equities II, LLC and Riverside Merchant Partners, LLC each purchased separately from the Company a convertible note of the Company in the principal amount of $55,000 for $50,000 cash.  Each note matures on May 27, 2016 and bears interest at 8% per annum.

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On June 17, 2015, the Company entered into securities purchase agreements with Magna Equities II, LLC and Riverside Merchant Partners, LLC.  Pursuant to the agreements, Magna Equities II, LLC and Riverside Merchant Partners, LLC each purchased separately from the Company a convertible note of the Company in the principle amount of $35,000, for $32,500 cash.  Each note matures on June 17, 2016 and bears interest at 8% per annum.

The Company analyzed these convertible notes for derivative accounting consideration under FASB ASC 470 and determined that the embedded conversion feature qualified for accounting treatment as a financial derivative. Derivative value of $220,322 was recorded as debt discount on the note issuance dates. The discount is amortized by the Company through interest expense over the life of the notes.

The notes issued during the three months ended June 30, 2015 are convertible at any time during the period after 179 days after the issuance date at a price of $0.15 per share. If, 180 days after the issuance of the notes, market price of the Company’s common stock is below $0.15 per share, the Company will have 30 days to repay the notes. After 30 days, the note is convertible at 80% of the lowest trading price in 10 trading days prior to the conversion date.

A summary of value changes to the convertible notes during the three months ended June 30, 2015 is as follows:

10.   NOTE PAYABLE

On July 7, 2014, the Company issued a $103,000 note to a service provider to settle $219,673 accrued expenses previously recorded. $116,673 was recorded as gain on settlement of debt in the consolidated statements of operations. The note bears no interest. Principal of $4,000 was due on the date of the note; $15,000 was due on the date of receipt by the Company of the proceeds of the note issued to 31 Group, LLC on July 29, 2014; $3,500 each due on the first day of each calendar month commencing August 1, 2014 and any remaining unpaid balance is due on July 1, 2016. As of June 30, 2015, $45,500 was still outstanding of which $42,000 is due and payable in the next twelve months.

11.  DERIVATIVE LIABILITIES

The Company has determined that the variable conversion price for its convertible notes causes the embedded conversion feature to be a financial derivative. The Company may not have enough authorized common shares to settle its obligation if the note holder elects to convert the note to common shares when the trading price is lower than a certain threshold.

Because the Company may not have enough authorized common shares to settle its obligation for its convertible notes and equity instruments, such as warrants and convertible notes payable-related parties, the Company concluded that the warrants issued with the 31 Group, LLC convertible notes and all of the existing warrants should be treated as financial derivatives. The Company reclassified the fair value of the tainted warrants from equity to liability on the same date it obtained the first convertible note from the 31 Group, LLC.

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Changes of derivative liabilities during the three months ended June 30, 2015 were as follows:

Fair values of the Company’s financial derivatives are measured at fair value at each reporting period. The fair values of the financial derivative were calculated using a modified binomial valuation model with the following assumptions at their initial valuation dates and June 30, 2015:

(1)  

The market value of common stock is based on closing market price as of initial valuation dates and June 30, 2015.

(2)  

The adjusted conversion price is calculated based on conversion terms described in the note agreement.

(3)  

The risk-free interest rate was determined by management using the 2-year Treasury Bill as of the respective Offering or measurement date.

(4)  

The volatility factor was estimated by management using the historical volatilities of the Company’s stock.

(5)  

Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.

12.  INCOME TAXES

The Company had federal net operating loss (“NOL”) carry forwards of approximately $13 million as of June 30, 2015. The NOL is available to offset future taxable income and begins to expire in 2028. Under Section 382 of the Internal Revenue Code, the NOL may be limited as a result of a change in control. The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As of June 30, 2015, the Company established a valuation allowance equal to the full amount of the net deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

No amount has been recognized for uncertain tax positions and no amounts have been recognized related to interest or penalties related to uncertain tax positions. The Company has determined that it is not reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

13.  EQUITY TRANSACTIONS

Equity Compensation Plan

On April 29, 2014, the Company adopted the 2014 Non-Qualified Performance Equity Award Plan (the “Plan”). The Plan provides for awards of non-qualified stock options, restricted stock and other equity based awards. Award shares that are not used will be available for re-grant. The maximum award is limited to 1,250,000 shares.  The Plan provides for a term of 20 years, but awards may not be granted after the 10th anniversary of the effective date of the Plan.  To the extent required, for example for stock options, the exercise price or other award price will be the fair market value of a share of stock on the date of grant.

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On November 7, 2014, the Board of Directors of the Company authorized to increase the number of shares under the Plan by 5,000,000 shares to 10,000,000 shares.

Common Stock

During the three months ended June 30, 2015, the Company issued 45,742,602 shares of common stock to 31 Group for the conversion of convertible notes of $150,000. Derivative liabilities on note conversion feature of $50,239 was reclassified to additional paid-in capital upon conversions.

Options

A summary of activities in options and the related information is as follows:

Fair value of all options issued and outstanding are being amortized over their respective vesting periods. The unrecognized compensation expense at June 30, 2015 was $85,172. During the three months ended June 30, 2015, the Company recorded option expense of $25,551.

Warrants

Following is a summary of warrant activities for the three months ended June 30, 2015:  

Because the Company may not have enough authorized common shares to settle its obligation for its warrants, the Company concluded that the warrants issued with the 31 Group, LLC convertible notes and all of the existing warrants should be treated as financial derivatives.

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14. Earnings (Loss) Per Common Share

The following table illustrates the computation of basic and diluted earnings (loss) per common share for the three months ended June 30, 2015 and 2014.

The number of dilutive weighted-average common shares outstanding for the three months ended June 30, 2015 exclude 544,188,451 shares related to convertible notes payable and convertible notes payable – related parties due to the Company having only 600,000,000 shares of common stock authorized. If these shares were included in the calculation of the loss per common share, the dilutive loss per common share for the period would have been $(0.00).  In addition, warrants and options to purchase 14,660,395 shares of the Company’s common stock have been excluded from this calculation.

For the three months ended June 30, 2014, potentially issuable shares, for notes payable convertible into 10,867,925 shares of the Company’s common stock and warrants to purchase 6,660,395 shares of the Company’s common stock have been excluded from the calculation.

15.  RELATED PARTY TRANSACTIONS

From time to time, the Company receives advances from its officers and stockholders for its operations. As of June 30, 2015 and March 31, 2015, the Company owed $27,187 and $24,217, respectively, to its related parties for advances and lease of equipment.

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In order to attract competent and talented employees and officers, the Company has entered into formal employment agreements with its key employees and officers.  The Company has provided for accrued compensation with employees and officers who have participated in active management roles and worked without pay or limited pay.  The accrued compensation as of June 30, 2015 and March 31, 2015 was $226,752.  There is no set date for payment of this accrued expense. Payment of the accrued compensation is conditional upon the success of the Company and the approval of the Board of Directors of the Company.

As of June 30, 2015 and March 31, 2015, the outstanding balance of the notes payable and convertible notes payable to the related parties was $1,321,856 and $1,119,396 respectively.

Historically, the Company’s research, development, marketing and capital raising program relied on the continued support of related parties, their families and friends.  Absent a significant capital raise from outside of the current shareholders, if these related parties, families and friends ceased providing these services on the current terms offered, the Company’s ability to continue in existence could be in jeopardy.

16.  COMMITMENTS AND CONTINGENCIES

Operating Lease

The Company leases its executive and research & development offices in Doraville, Georgia.  This lease was amended on March 31, 2015 and was extended through March 31, 2016 at a monthly rental of $6,319.

Legal Issues

The Company, from time to time, may be a party to claims and legal proceedings generally incidental to its business.  In the opinion of the management, after consultation with the Company’s legal counsel, there were no legal matters that are likely to have a material adverse effect on the Company’s financial position as of June 30, 2015 and the results of operations or cash flows for the period ended June 30, 2015.

17.  CONCENTRATION

All of the Company’s revenues were related to one customer for the three months ended June 30, 2015, totaling $69,167.   The loss of the customer or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.

18.  SUBSEQUENT EVENTS

On July 9, 2015, the Company entered into a securities purchase agreement with Magna Equities Group II, LLC.  Pursuant to the purchase agreement, Magna Equities Group II, LLC purchased a convertible promissory note in the principal amount of $93,500 for a cash amount of $85,000 on July 10, 2015.

On July 9, 2015, the Company entered into a securities purchase agreement with Riverside Merchant Partners, LLC.  Pursuant to the purchase agreement, Riverside Merchant Partners, LLC purchased a convertible promissory note in the principal amount of $93,500 for a cash amount of $85,000 on July 13, 2015.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement

This report on Form 10-Q contains certain forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: product development and testing, our ability to promote, market and sell our products, our ability to manufacture and supply customers with our products, competition, promotional costs, and risk of declining revenues.  Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors.  These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements.  The following discusses our financial condition and results of operations based upon our financial statements which have been prepared in conformity with accounting principles generally accepted in the United States.  It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.

The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q.  The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.

Overview

As used herein the terms “we,” “us,” “our,” the “Registrant,” and the “Company” means, Hydrophi Technologies Group, Inc., a Florida corporation, and its consolidated subsidiary and affiliates.

We were incorporated in the State of Florida on June 18, 2010 as Big Clix Corp.  On September 25, 2013, we consummated an amended Agreement and Plan of Merger (the “Merger Agreement”) between Hydrophi Technologies, Inc., a Delaware Corporation (“Hydro Phi Del”), and HPT Acquisition Corp., a Delaware Corporation (“HPT”), which was a wholly-owned subsidiary of the Company and established solely to implement the merger.  Pursuant to the Merger Agreement, HPT merged with and into Hydro Phi Del, with Hydro Phi Del being the surviving company, in an exchange of all the equity securities of Hydro Phi Del for common stock of the Company.  After the merger, Hydro Phi Del continues to operate as before, but as a wholly-owned subsidiary of the Company.  On October 2, 2013, the Company changed its name from Big Clix Corp. to Hydrophi Technologies Group, Inc.

Our operating subsidiary, Hydro Phi Del, was founded in 2008 to develop new clean energy technologies.  The Company makes and sells a system using water-based clean energy technologies that is engineered and functionally designed to provide fuel savings and reduced greenhouse gas emissions for the internal combustion engine.  The primary market for the Hydrophi products initially will be the transportation industry, with a primary focus on the trucking/logistics and buses and a secondary focus on heavy equipment, marine and agriculture segments, where rising fuel costs and emission regulations are driving the development of new technologies to control operating expenses. Transportation logistics are those companies providing long and short haul trucking of goods, usually employing diesel engine trucks, and often additional services such as warehousing, freight forwarding, and multimodal transporting. We believe that our proprietary HydroPlant ™ technology will have additional applications in the future, such as in off-grid power generation, where there is reliance on diesel and similar types of internal combustion engines for the generation of electricity.

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The Company is marketing its products in large part through licensing agreements.  To date, it has a distribution and licensing agreement with each of Energia Vehicular Limpia S.A. de C.V. for Mexico and Brazil and with Hydrophi Technologies Europe, S.A. for Europe

Liquidity and Capital Resources

As of June 30, 2015, we had cash and cash equivalents of $7,956 and a working capital deficit of $5,847,736.  As of June 30, 2015, our accumulated deficit was $33,341,491.  For the three months ended June 30, 2015, our net income was $71,854, compared to net loss of $418,024 during the same period in 2014.  The change was mainly due to the Company’s increase in other income related to the change in fair value of derivative liabilities and the reduction in general and administrative expenses for the three months ended June 30, 2015 as compared to the same period in 2014.

Cash used in operating activities was $393,288 for the three months ended June 30, 2015 compared to $554,714 for the same period in 2014. The decrease was mainly due to the decrease of cash payments made to consultants and professionals.  We did not use any cash in investing activities for the three months ended June 30, 2015 and 2014.  We received net cash of $337,832 from financing activities for the three months ended June 30, 2015, compared to receiving net cash of $570,000 from financing activities for the same period in 2014. Cash received from financing activities for the periods ended June 30, 2015 and 2014 are from convertible notes issued to third parties.

Pursuant to a Securities Purchase Agreement, dated April 25, 2014, as amended on July 29, 2014, by and between the Company and 31 Group, LLC (the “Purchase Agreement”), the Company sold convertible notes with a principal amount of $1,352,000, for a total purchase price of $1,270,000, to 31 Group, LLC.  The notes mature 24 months after issuance and accrue interest at an annual rate of 8.0%.  The notes are convertible at any time after issuance, in whole or in part, at the investor’s option, into shares of common stock, at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three volume weighted average prices of the common stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.35 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Company has the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the convertible notes (the “Remaining Amount”) at a price equal to 135% of the Remaining Amount.  The Company is also required to reserve 150% of the number of shares of common stock that may be used in conversion of the Remaining Amount.

Pursuant to a Securities Purchase Agreement, dated December 4, 2014 by and between the Company and 31 Group, LLC, the 31 Group is committed to purchase from the Company two convertible notes of the Company in the principal amounts of $385,000 and $275,000, for the cash purchase amounts of $350,000 and $250,000, respectively.  The $385,000 note was issued on December 4, 2014 and will mature on May 17, 2016.  The Company received the funding for the $385,000 note on December 8, 2014.  The $275,000 note will be issued upon the fulfillment of certain other conditions that are outside of the 31 Group’s control or that the 31 Group cannot cause not to be satisfied. The notes are convertible 179 days after issuance, in whole or in part, at the investor’s option, into shares of common stock, at a conversion price equal to $0.15 per share.  If after 179 days from the execution date of the note, the price of the stock is less than $0.15, the Company will have an additional 30 days to repay the 31 Group LLC.  If the notes are not repaid,  31 Group LLC may convert the notes at a conversion rate of  the product of (x) the arithmetic average of the lowest three volume weighted average prices of the common stock during the ten consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 80%.  The Company has the right at any time to redeem some or all, of the total outstanding amount then remaining under the convertible notes at a price equal to: (i) 100%  if  within 60 days of issuance (ii) 115% if between 61 and 149 days of issuance (iii)  120% if 150 days or more after issuance.  The Company is also required to reserve 150% of the number of shares of common stock that may be issued in conversion of the remaining outstanding amount commencing with the date that the note becomes convertible.

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On April 15, 2015, the Company entered into securities purchase agreements dated as of April 9, 2015, with Magna Equities II, LLC and Riverside Merchant Partners, LLC.  Pursuant to the agreements, Magna Equities II, LLC and Riverside Merchant Partners, LLC each purchased separately from the Company a convertible note of the Company in the principal amount of $100,833, for $91,667 cash.  Each note matures on October 9, 2016 and bears interest at 8% per annum.

On May 27, 2015, the Company entered into securities purchase agreements with Magna Equities II, LLC and Riverside Merchant Partners, LLC.  Pursuant to the agreements, Magna Equities II, LLC and Riverside Merchant Partners, LLC each purchased separately from the Company a convertible note of the Company in the principal amount of $55,000 for $50,000 cash.  Each note matures on May 27, 2016 and bears interest at 8% per annum.

On June 17, 2015, the Company entered into securities purchase agreements with Magna Equities II, LLC and Riverside Merchant Partners, LLC.  Pursuant to the agreements, Magna Equities II, LLC and Riverside Merchant Partners, LLC each purchased separately from the Company a convertible note of the Company in the principle amount of $35,000, for $32,500 cash.  Each note matures on June 17, 2016 and bears interest at 8% per annum.

In the opinion of our management, funds currently available will not satisfy our working capital requirements for the next twelve months.  The Company will need a substantial amount of capital to fund its operations and SEC reporting obligations.  It has no contracts or arrangements for any such funding. There can be no assurance that the Company will be able to raise any funding.  If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.  As a result of the fact that the Company financial resources are inadequate for it business operations at this time, there is a substantial doubt as to its ability to continue as a going concern.

Results of Operations for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

Revenues

Revenues were $69,167 for the three months ended June 30, 2015 compared to $70,512 for the three months ended June 30, 2014 resulting in a negligible decline.

General and Administrative Expenses

General and administrative expenses decreased by $191,171 to $313,743 for the three months ended June 30, 2015 compared to $504,914 for the three months ended June 30, 2014.  The decrease was mainly due to the Company incurring approximately $108,000 less on professional and consulting fees, $26,000 less on legal fees and $10,000 less on travel for the three months ended June 30, 2015 compared to June 30, 2014.

Other income (expenses)

Other income increased by $352,923 to $417,579 for the three months ended June 30, 2015 compared to $64,656 for the three months ended June 30, 2014.  The increase in the net change in fair value of derivative liabilities of $722,515 was the primary reason for the increase in other income for the three-month period ended June 30, 2015 as compared to the same period in 2014. This was partially offset by an increase in interest expense of $369,592 from $76,778 for the three months ended June 30, 2014 to $446,370 for the three months ended June 30, 2015.  Interest expense increased because of the amortization of debt discount related to the conversion feature of the convertible notes payable.

Net Loss

Net income for the three months ended June 30, 2015 was $71,854 as compared to a net loss of $418,024, for the three months ended June 30, 2014 resulting in a change of $489,878.  The change was mainly due to all of the factors cited above, namely the net changes in fair value of derivative liabilities and interest expense.

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Inflation

We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.

Off-Balance Sheet Arrangements

As of June 30, 2015, we do not have any off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.  We do not engage in trading activities involving non-exchange traded contracts.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and functioning Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015 (the “Evaluation Date”). Based upon the evaluation of our disclosure controls and procedures as of the Evaluation Date, the Chief Executive Officer and Principal Chief Financial Officer concluded that our disclosure controls and procedures were not effective because of the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures.

Management’s assessment identified several material weaknesses in our internal control over financial reporting. These material weaknesses include overall lack of review and reconciliation in many areas of the accounting functions, lack of segregation of duties and lack of an audit committee to oversee the financial reporting and disclosure process.

To address these weaknesses, management has hired a full time controller. Due to the Company’s small number of employees the lack of segregation of duties and lack of an audit committee continues to exist.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

There are no material pending legal proceedings, to which we or any of our subsidiaries are a party or of which any of our properties is the subject.  Also, our management is not aware of any legal proceedings contemplated by any governmental authority against us.

Item 1A.  Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on June 26, 2015.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

After the fiscal quarter covered by this report, during July 2015, we issued an accredited investor an aggregate of 120,483,292 shares of common stock for the conversion of $130,000 of our outstanding convertible notes.  The shares were issued under section 4(2) of the Securities Act of 1933, as amended.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosure.

Not Applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

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SIGNATURES

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

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