UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended: December 31, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________.

Commission file number 000-55050

HYDROPHI TECHNOLOGIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Florida	27-2880472
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer I.D. No.)
Oakcliff Road, Suite C6, Doraville, GA	30340
(Address of principal executive offices)	(Zip Code)

(404) 974-9910

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yesþ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o     Accelerated filer o      Non-accelerated filer o    Smaller reporting company þ

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

As of February 9, 2015 the registrant’s outstanding stock consisted of 152,563,390 common shares at $0.0001 par value.

1

HYDROPHI TECHNOLOGIES GROUP, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements (unaudited)	3
Consolidated Balance Sheets	F-1
Consolidated Statements of Operations	F-2
Consolidated Statements of Cash Flows	F-3
Notes to Consolidated Financial Statements	F-4
Item 2.    Management Discussion & Analysis of Financial Condition and Results of Operations	4
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	7
Item 4.    Controls and Procedures	8
PART II - OTHER INFORMATION
Item 1.     Legal Proceedings	9
Item 1A.  Risk Factors	9
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds	9
Item 3.     Defaults Upon Senior Securities	9
Item 4.     Submission of Matters to a Vote of Security Holders	9
Item 5.     Other information	9
Item 6.     Exhibits	9

2

PART I - FINANCIAL INFORMATION

HYDROPHI TECHNOLOGIES GROUP, INC.

	Index
Consolidated Balance Sheets (Unaudited)	F-1
Consolidated Statements of Operations (Unaudited)	F-2
Consolidated Statements of Cash Flows (Unaudited)	F-3
Notes to Consolidated Financial Statements (Unaudited)	F-4

3

HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Balance Sheets

As of December 31, 2014 and March 31, 2014

(Unaudited)

	December 31, 2014		March 31, 2014
ASSETS
Current Assets
Cash and cash equivalents	$	166,601	$	96,446
Accounts receivable		-		1,050
Inventory		42,000		-
Prepaid expenses and other current assets		28,061		7,055
Total Current Assets		236,662		104,551
Property and equipment, net		2,741		5,435
Intangible assets, net		374,750		423,500
Other assets		7,968		-
Total Assets	$	622,121	$	533,486
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued liabilities	$	1,516,254	$	1,576,290
Accounts payable and accrued liabilities – related parties		57,318		942,847
Accrued compensation		241,752		281,752
Advance from customer		60,800		60,800
Deferred revenues		761,500		969,000
Notes payable		65,000		46,603
Note payable – related parties		4,438		515,251
Convertible note payable – related parties, net of debt discount of $539,895		912,497		-
Short-term portion of long-term note payable		42,000		-
Total Current Liabilities		3,661,559		4,392,543
Convertible note payable, net of debt discount of $951,918		533,082		-
Derivative liabilities		1,211,328		-
Note payable		21,000		-
Total Liabilities		5,426,969		4,392,543
Stockholders’ Deficit
Preferred stock, $0.0001 par value, 25,000,000 shares authorized; 0 shares issued and outstanding		-		-
Common stock, $0.0001 par value, 600,000,000 shares authorized; 129,864,445 and  102,665,126 shares issued and outstanding, respectively		12,987		10,267
Additional paid-in capital		27,264,493		26,827,544
Accumulated deficit		(32,082,328)		(30,696,868)
Total Stockholders’ Deficit		(4,804,848)		(3,859,057)
Total Liabilities and Stockholders’ Deficit	$	622,121	$	533,486

See accompanying notes to interim unaudited consolidated financial statements.

F-1

HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Operations

For the three and nine months ended December 31, 2014 and 2013

(Unaudited)

	For the three months ended December 31,				For the nine months ended December 31,
	2014		2013		2014		2013
Revenues	$	69,167	$	104,784	$	208,845	$	104,784
Operating expenses:
General and administrative		616,855		486,540		1,647,949		6,293,529
Research and development		13,870		55,634		52,081		184,894
Depreciation and amortization		16,977		17,233		51,444		51,991
Total operating expenses		647,702		559,407		1,751,474		6,530,414
Operating loss		(578,535)		(454,623)		(1,542,629)		(6,425,630)
Other income (expenses):
Interest expense		(1,599,131)		(25,009)		(1,871,811)		(428,296)
Change in fair value of derivative liabilities		1,600,784		-		1,912,307		-
Gain (loss) on settlement of debt		-		-		116,673		(7,662,388)
Total other income (expenses)		1,653		(25,009)		157,169		(8,090,684)
Net loss	$	(576,882)	$	(479,632)	$	(1,385,460)	$	(14,516,314)
Net loss per common share – basic and diluted	$	(0.00)	$	(0.00)	$	(0.01)	$	(0.32)
Weighted average common shares outstanding – basic and diluted		121,127,648		102,665,126		109,405,368		45,946,718

See accompanying notes to interim unaudited consolidated financial statements.

F-2

HYDROPHI TECHNOLOGIES GROUP, INC.

Consolidated Statements of Cash Flows

For the nine months ended December 31, 2014 and 2013

(Unaudited)

	2014		2013
Cash Flows From Operating Activities
Net loss	$	(1,385,460)	$	(14,516,314)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		152,883		5,012,917
Depreciation and amortization		51,444		51,991
Amortization of debt discount		1,202,468		14,718
Change in fair value of derivative liabilities		(1,912,307)		-
Fair value of derivative liabilities in excess of face value of convertible notes payable		565,203		-
Loss (gain) on settlement of debt		(116,673)		7,662,388
Changes in operating assets and liabilities:
Accounts receivable		1,050		(1,750)
Inventory		(42,000)		-
Prepaid expenses and other current assets		(6,294)		(486)
Other assets		7,320		-
Accounts payable and accrued liabilities		159,970		360,685
Accounts payable and accrued liabilities – related parties		56,051		145,487
Accrued compensation		(40,000)		27,000
Deferred revenues		(207,500)		607,666
Net Cash Used in Operating Activities		(1,513,845)		(635,698)
Cash Flows From Financing Activities
Proceeds from borrowings on notes payable		-		65,000
Payments on notes payable		(40,000)		-
Proceeds from notes payable – related parties		-		65,000
Proceeds from convertible notes payable		1,624,000		-
Proceeds from convertible notes payable – related parties		-		629,575
Net Cash Provided by Financing Activities		1,584,000		759,575
Net Increase in Cash and Cash Equivalents		70,155		123,877
Cash and Cash Equivalents – Beginning of Period		96,446		117
Cash and Cash Equivalents – End of Period	$	166,601	$	123,994
Supplemental Disclosures of Cash Flows Information:
Cash paid for income tax	$	-	$	-
Cash paid for interest	$	-	$	-
Noncash Investing and Financing Activities:
Debt converted to common stock	$	356,819	$	9,648,352
Note issued to settle accounts payable	$	219,673	$	-
Note issued to settle accrued interest – related parties	$	941,580	$	-
Warrants issued to settle accrued compensation	$	-	$	1,002,875
Debt discount on convertible debt	$	2,592,885	$	44,155
Fair value of tainted warrants reclassified from equity to liability	$	70,033	$	-

See accompanying notes to interim unaudited consolidated financial statements.

F-3

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”) between Hydro Phi 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 the Hydro Phi Del for common stock of the Company.  As a result of the transaction, the former shareholders of Hydro Phi Del 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 Del 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 Del became a wholly-owned subsidiary of the Company.

Unaudited pro forma results of operations for the nine months ended December 31, 2013, as though this acquisition had taken place at the beginning of the period, are as follows. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the entire period presented.

	Nine Months Ended December 31, 2013
Revenues	$	104,784
Net loss		14,504,427
Loss per common share – basic and diluted		(0.32)
Weighted average common shares outstanding – basic and diluted		45,946,718

Hydro Phi Del 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, Hydro Phi Del reincorporated under the laws of the State of Delaware and is currently a Delaware corporation.

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

F-4

The accompanying interim unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern.  The Company has recently commenced its planned operations, had a net working capital deficit of $3,424,897 at December 31, 2014, and had an accumulated deficit of approximately $32.1 million as of December 31, 2014.  The Company also had negative cash flows from operations for the nine months ended December 31, 2014. 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.

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, 2014. 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, 2014 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.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at the amount the Company expects to collect. Accounts receivable represents receivables, net of allowances for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on its historical experience and other currently available information. When a specific account is deemed uncollectible, the account is written off against the allowance. As of December 31, 2014 and March 31, 2014, the allowance for doubtful accounts was $0. For the nine months ended December 31, 2014 and 2013, the Company did not record any bad debt expense.

Inventory

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

F-5

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.

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 December 31, 2014 and March 31, 2014, 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.

F-6

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.

The following tables set forth assets and liabilities measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as of December 31, 2014 and March 31, 2014. 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.

	Level 1		Level 2		Level 3		Total
Derivative liabilities:
At December 31, 2014	$	-	$	-	$	1,211,328	$	1,211,328
At March 31, 2014		-		-		-		-

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 nine month periods ended December 31, 2014 and 2013, the Company recorded research and development expense of $115,581 and $184,894, 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.  For the nine months ended December 31, 2014, there were notes payable that are convertible into a potential of 469,753,747 shares of the Company’s common stock based on the then applicable conversion price and warrants/options to purchase 14,660,395 shares of the Company’s common stock, all of which have been excluded from the calculation.

Subsequent Events

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

F-7

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.

3.  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2014 and March 31, 2014:

	December 31, 2014		March 31, 2014
Machinery and equipment	$	8,387	$	8,387
Computer equipment		5,840		5,840
Computer software		12,820		12,820
Office furniture and equipment		850		850
Subtotal		27,897		27,897
Less:  accumulated depreciation		(25,156)		(22,462)
Total property and equipment, net	$	2,741	$	5,435

Depreciation expense for the nine month periods ended December 31, 2014 and 2013 was $2,694 and $3,241, respectively.

4.  INTANGIBLE ASSETS

Intangible assets consisted of the following at December 31, 2014 and March 31, 2014:

	December 31, 2014		March 31, 2014
Hydrogen On Demand Intellectual Property	$	650,000	$	650,000
Other		1,000		1,000
Subtotal		651,000		651,000
Less: accumulated amortization		(276,250)		(227,500)
Total intangible assets, net	$	374,750	$	423,500

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 nine months ended December 31, 2014 and 2013, amortization expense recorded by the Company on the intangible assets was $48,750.

F-8

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 nine months ended December 31, 2014, $207,500 in revenue related to the license and consulting/advisory fees was recorded. As of December 31, 2014, $581,500 of cash received was deferred.

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 December 31, 2014 and March 31, 2014, notes payable consisted of the following:

	December 31, 2014		March 31, 2014
Notes payable to shareholders, unsecured, payable at August 31, 2015, and accrues interest at 8% annually.	$	65,000	$	46,603
Total notes payable	$	65,000	$	46,603

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. During the nine months ended December 31, 2014, the maturity date was extended for one year from August 31, 2014 to August 31, 2015. The notes accrue interest at 8% and are unsecured. The Company recorded initial debt discount of $44,155 related to the warrants based on the related fair value of these warrants.

7.  NOTE PAYABLE AND CONVERTIBLE NOTE PAYABLE – RELATED PARTY

On September 24, 2010, the Company issued a $2,867,500 promissory note to a related party. The principal amount due under this promissory note was loaned to the Company in a series of advances during fiscal years ended March 31, 2010 and 2009. The note accrued interest at 6% from the funding date. The note matured on the earlier of: 1) a change of control transaction as defined in the note; 2) the written consent of the Board of Directors of the Company. The Company agreed not to make any payment with respect to this note until the entire outstanding principal and accrued interest due under the 7.5% Angel Notes and 15% Angel Notes was paid in full.  On September 25, 2013, the entire principal of $2,867,500 on note payable to related party was converted into 14,993,464 shares of the Company’s common stock.  On November 12, 2014, the accrued and unpaid interest of $811,267 were exchanged for part of a convertible note.

On September 4, 2013, the Company issued $65,000 promissory notes to related parties.  The principal and interest amount were originally due on August 31, 2014, however, noteholders agreed to extend the original maturity date by one year to August 31, 2015.  The notes accrue interest at 8% and are unsecured. As of December 31, 2014, accrued interest related to these notes was $6,944. On November 12, 2014, $65,000 principal and $6,944 accrued and unpaid interest were exchanged for part of a convertible note.

F-9

During the fiscal year ended March 31, 2014, $450,251 in convertible notes was exchanged for non-convertible notes earning interest at 8% per annum with a maturity date of August 31, 2014. The notes were not secured. As of December 31, 2014, these notes were still outstanding and the note holders had agreed to extend the maturity date to August 31, 2015.  On November 12, 2014, $445,813 principal and $46,260 accrued and unpaid interest were exchanged for part of a convertible note.

During the nine months ended December 31, 2014, the Company issued a $75,716 note to a related party for unpaid accrued interest. The note bears interest at 8% and is due on August 31, 2015. On November 12, 2014, $75,716 principal and $1,392 accrued and unpaid interest were exchanged for part of a convertible note.

As discussed above, on November 12, 2014, the Company and the related parties executed loan conversion agreements. Pursuant to the agreement, the related parties exchange certain non-convertible notes and related accrued interest for convertible notes with total principal of $1,452,392. 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 (See Note 10). 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 discount will be amortized by the Company through interest expense over the life of the note. As of December 31, 2014, unamortized debt discount related to the convertible notes to related parties was $539,895.

8.  CONVERTIBLE NOTE PAYABLE

Pursuant to a Securities Purchase Agreement, dated April 25, 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 and the third note in principal amount of $624,000 was issued on August 5, 2014.  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 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.

F-10

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 will be issued upon the fulfillment of certain other conditions that are outside of 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 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 endingand 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.  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.

The Company analyzed the convertible notes issued on April 28, July 29, August 5, and December 4, 2014 for derivative accounting consideration under FASB ASC 470 and determined that the embedded conversion feature, with grant date fair values of $1,056,729 qualified for accounting treatment as a financial derivative (See Note 10). The discount will be amortized by the Company through interest expense over the life of the note. The warrants, with a grant date fair value of $83,762, issued with the convertible notes were also determined to be a financial derivative (See Note 10). Together with the original issuance discount of $117,000, the Company recognized a discount of $1,223,491 as result of the embedded conversion feature and warrants issued being financial derivatives.

A summary of value changes to the convertible notes issued on April 28, July 29, August 4, and December 4, 2014 for the nine months ended December 31, 2014 is as follows:

Principal amount	$	1,737,000
Less: original issuance discount		(117,000)
Less: discount related to fair value of the derivative warrants		(83,762)
Less: discount related to fair value of the embedded conversion feature		(1,022,729)
Less: conversions of note to equity		(252,000)
Add: amortization of discount		271,573
Carrying value at December 31, 2014	$	533,082

During the nine months ended December 31, 2014, the Company recorded $1,202,468 amortization of the debt discount.

9.  LONG-TERM 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 December 31, 2014, $63,000 was still outstanding.

F-11

10.  DERIVATIVE LIABILITIES

The Company has determined that the variable conversion price for its convertible notes with 31 Group, LLC 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.

Changes of derivative liabilities during the nine months ended December 31, 2014 were as follows:

	December 31, 2014
Balance, March 31, 2014	$	-
Initial valuation of derivatives		3,167,594
Tainted warrants reclassed to liabilities		60,527
Transfer from liabilities classification to equity classification		(104,486)
Change in fair value		(1,912,307)
Balance, December 31, 2014	$	1,211,328

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 December 31, 2014:

	Initial Valuation Dates	December 31, 2014
Market value of common stock on measurement date (1)	$0.03~$0.17	$0.007
Adjusted conversion price (2)	$0.019~$0.108	$0.004
Risk free interest rate (3)	0.10%~0.58%	0.13%~0.58%
Life of the note in years (weighted average)	1.75~2 years	1.33~1.66 years
Expected volatility (4)	72%~143%	152 - 210%
Expected dividend yield (5)	-	-

(1)  

The market value of common stock is based on closing market price as of initial valuation dates and December 31, 2014.

(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.

11.  INCOME TAXES

The Company had federal net operating loss (“NOL”) carry forwards of approximately $14 million as of December 31, 2014. 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 December 31, 2014, 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.

F-12

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.

12.  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, with a maximum limit of 5,000,000 shares of common stock allocated to the Plan. 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.

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.

Common Stock

During the nine months ended December 31, 2014, the Company issued 23,599,319 shares to 31 Group, LLC for conversion of convertible notes payable in the principal amount of $252,000 and accrued interest of $333. As a result of the conversion, $104,486 of derivative liabilities was reclassified to equity.

In November 2014, the Company issued 3,600,000 common shares to its employee and officer for their services. These shares were valued at $75,240 based on the stock price on the grant date.

Options

The following is a summary of option activities for the nine months ended December 31, 2014:

	Number of Units	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, March 31, 2014	-	$	-	-	$	-
Issued	2,000,000		0.12	4.33		-
Exercised	-		-	-		-
Outstanding, December 31, 2014	2,000,000		0.12	4.33		-
Exercisable, December 31, 2014	-		-	-		-

During the nine months ended December 31, 2014, the Company granted employees and board members 2,000,000 non-qualified options to purchase the Company’s common stock with an exercise price of $0.12, a term of 5 years and a 2-year vesting period. The options had a fair value of $204,412 at the grant date that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 1.74% (2) expected life of 5 years, (3) expected volatility of 129.78%, and (4) zero expected dividends.

All options issued and outstanding are being amortized over their respective vesting periods. The unrecognized compensation expense at December 31, 2014 was $136,275. During the nine months ended December 31, 2014, the Company recorded option expense of $68,137.

F-13

Warrants

Following is a summary of warrant activities for the nine months ended December 31, 2014:

	Number of Units	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, March 31, 2014	4,013,336	$	0.55	2.19		139,920
Granted	8,647,059		0.12	3.79		-
Exercised	-		-	-		-
Outstanding, December 31, 2014	12,660,395		0.26	3.04		-
Exercisable, December 31, 2014	12,660,395		0.26	3.04		-

During the nine months ended December 31, 2014, the Company granted warrants to purchase 2,647,059 shares of the Company’s common stock to 31 Group, LLC in connection with the issuance of the convertible notes under the Securities Purchase Agreement dated April 25, 2014. These warrants have an exercise price of $0.17 per share and a term of 2 years. Initial fair values of the warrants issued to 31 Group, LLC in the amount of $83,762 were calculated using a modified binomial valuation model and recorded by the Company in derivative liabilities.  The Company also granted 6,000,000 warrants to current and former employees with an exercise price of $0.10, a term of 5 years with immediate vesting.  The warrants have a fair value of $9,506 using a modified binomial valuation model.

For the nine months ended December 31, 2014, the Company reclassified $60,527 from equity to liability for the fair value of tainted derivative warrants (See Note 10).

13.  RELATED PARTY TRANSACTIONS

From time to time, the Company receives advances from its officers and stockholders for its operations. As of December 31, 2014 and March 31, 2014, the Company owed $21,247 and $3,425 respectively to its related parties for such advances.

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 December 31, 2014 and March 31, 2014 was $241,752 and $281,752, respectively.  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 December 31, 2014 and March 31, 2014, the outstanding balance of the notes payable and convertible notes payable to the related parties was $916,935 and $515,251, respectively.  Accrued interest related to these notes was $36,071 and $939,422 at December 31, 2014 and March 31, 2014, 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.

14.  COMMITMENTS AND CONTINGENCIES

Operating Lease

The Company leases its executive and research & development offices in Doraville, Georgia. The Company is currently renting its executive and research & development offices on a month to month basis.

F-14

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 December 31, 2014 and March 31, 2014 and the results of operations or cash flows for the nine months ended December 31, 2014 and the year ended March 31, 2014.

Royalty Payments

As part of the note agreement dated December 4, 2014, the Company agreed to give the note holder a 3% royalty payment on the net cash revenue from the sales of the Company’s HydroPlant units for a period of twenty-four months. See Note 8.

15.  CONCENTRATION

A substantial portion of the Company’s revenues was related to one customer (99%) for the nine months ended December 31, 2014, totaling $207,500.   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.

16.  SUBSEQUENT EVENTS

During January 2015, the Company issued 15,621,186 common shares for conversions of notes issued to 31 Group, LLC with principal of $53,500.

During February 2015, the Company issued 7,077,759 common shares for conversions of notes issued to 31 Group, LLC with principal of $36,500.

On January 9, 2015, the Company amended its articles of incorporation with the state of Florida, in which the Company increased the number of authorized shares to 625,000,000 consisting of 600,000,000 shares of common stock, par value $0.0001 per share, and 25,000,000 shares of preferred stock, par value $0.0001 per share.

On December 4, 2014, the Company entered into a securities purchase agreement with 31 Group, LLC.  Pursuant to the Purchase Agreement, the 31 Group purchased a convertible promissory note in the principal amount of $385,000 and was committed to purchase a second convertible promissory note in the principal amount of $275,000.  Under its commitment, the 31 Group LLC purchased the Second Note for a cash amount of $250,000 on February 5, 2015.

F-15

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.

4

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 December 31, 2014, we had cash and cash equivalents of $166,601 and a working capital deficit of $3,424,897.  As of December 31, 2014, our accumulated deficit was $32,082,328.  For the nine months ended December 31, 2014, our net loss was $1,385,460, compared to net loss of $14,516,314 during the same period in 2013.  The decrease in net loss was mainly due to the Company incurring significant expenses in 2013 related to the conversion from a private entity into a publicly traded company. These expenses were associated with the debt conversions and stock based compensation.  $7,764,755 more in loss on debt conversion and $4,860,034 more in stock compensation were recorded for the nine month ended December 31, 2013 as compared to the same period in 2014.    In addition, the reduction of spending on research and development activities helped to reduce the 2014 net loss as compared to 2013.  These reductions were partially offset by an increase in spending on professional fees, consulting fees, and insurance products.

Cash used in operating activities was $1,513,845 for the nine months ended December 31, 2014 compared to $635,698 cash used in operating activities for the same period in 2013. The increase was mainly due to payments made for employee salaries and professional fees.  We did not use any cash in investing activities for the nine months ended December 31, 2014 and 2013.  We received net cash of $1,584,000 from financing activities for the nine months ended December 31, 2014, compared to receiving net cash of $759,575 from financing activities for the same period in 2013. Cash received from financing activities for the period ended December 31, 2014 is from convertible notes issued to a third party.

Pursuant to a Securities Purchase Agreement, dated April 25, 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 endingand 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.

5

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 December 31, 2014 compared to the three months ended December 31, 2013.

Revenues

Revenues were $69,167 for the three months ended December 31, 2014 compared to $104,784 for the three months ended December 31, 2013. The decrease in revenue for the period ending December 2014 is due to the Company not booking orders for its HydroPlant units for the period ending December 31, 2014 as compared to the same period 2013. Unit sales in the 2013 period were largely for testing purposes by potential customers and scientific organizations to establish unit efficacy.

General and Administrative Expenses

General and administrative expenses increased by $130,315 to $616,855 for the three months ended December 31, 2014 compared to $486,540 for the three months ended December 31, 2013.  The increase was mainly due to the Company incurring additional legal, professional, and insurance expenses associated with operating a public company as compared to minimal exposure during the three-month period ending December 31, 2013.  

Other income (expenses)

Other income (expenses) changed by $26,662 to income of $1,653 for the three months ended December 31, 2014 compared to expenses of $25,009 for the three months ended December 31, 2013.  The net change in fair value of derivatives was the primary reason increase in other income for the three-month period ending December 31, 2014 as compared to the same period in 2013. The impact of the change in fair value of derivative was partially offset by the increase of interest expense from $25,009 for the 3 months ended December 31, 2013 to $1,599,131 for the 3 months ended December 31, 2014.  Interest expense increased because of the amortization of debt discount related to the conversion feature of the convertible notes payable.

Net Loss

Net loss increased by $97,250 to $576,882 for the three months ended December 31, 2014 compared to $479,632 for the three months ended December 31, 2013. The increase was mainly due to all of the factors cited above, namely the increased spending on legal, professional, and insurance.

Results of Operations for the nine months ended December 31, 2014 compared to the nine months ended December 31, 2013.

Revenues

Revenues were $208,845 for the nine months ended December 31, 2014 compared to $104,784 for the nine months ended December 31, 2013. The increase in revenue for the period ending December 2014 is due to the Company generating revenue from our distribution and consulting agreements whereas this was not the case for the entire period in 2013.

6

General and Administrative Expenses

General and administrative expenses decreased by $4,645,580 to $1,647,949 for the nine months ended December 31, 2014 compared to $6,293,529 for the nine months ended December 31, 2013.  The decrease was mainly due the Company not incurring in 2014 significant expenses related to stock-based compensation as was the case during the nine month period ending December 31, 2013.  For the nine months ended December 31, 2013, the Company recorded stock-based compensation expenses of $5,012,917 compared to $152,883 in 2014.

Research and Development Expense

Research and development expense decreased by $132,813 to $52,081 for the nine months ended December 31, 2014 compared to $184,894 for the nine months ended December 31, 2013. The decrease was mainly due to completion and finalization of initiatives underway during 2013.

Other income (expenses)

Other income (expenses) changed by $8,247,853 to income of $157,169 for nine months ended December 31, 2014 compared to expenses of $8,090,684 for the nine months ended December 31, 2013.  The change was primarily due to the Company not incurring in 2014 significant expenses related to the settlement of debt as was the case during the nine-month period ending December 31, 2013.  During 2013, the Company recorded a loss on settlement of debt totaling $7,662,388.  In addition, a gain on the fair value of derivatives of $1,912,307, and a gain on settlement of a previously recorded liability of $116,673 was recorded for the nine-month period ended December 31, 2014.  In addition interest expense increased because of the amortization of debt discount related to the conversion feature of the convertible notes payable

Net Loss

Net loss decreased by $13,130,854 to $1,385,460 for the nine months ended December 31, 2014 compared to $14,516,314 for the nine months ended December 31, 2013. The decrease was mainly due to all of the factors cited above, namely the reduction in stock-based compensation, losses on the settlement of debt, and reduction in spending on research and development activities.

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 December 31, 2014, 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.

7

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 December 31, 2014 (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 December 31, 2014 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

As of February 9, 2015, 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 23, 2014.  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 User of Proceeds Securities

After the fiscal quarter covered by this report, during January and February 2015, we issued an accredited investor an aggregate of 22,698,945 shares of common stock for the conversion of $ 90,000 of our outstanding convertible notes.  The shares were issued under section 4(2) of the Securities Act of 1933, as amended.  See Item 2, Liquidity and Capital Resources for the terms of conversions. The obligation to issue these shares was previously reported in a Current Report dated April 29, 2014.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosure.

Not Applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibit Number	Exhibit Description
31.1	Certification of the Chief Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-101.INS	XBRL Instance Document
EX-101.SCH	XBRL Taxonomy Extension Schema
EX-101.CAL	XBRL Taxonomy Extension Calculation Linkbase
EX-101.LAB	XBRL Taxonomy Extension Label Linkbase
EX-101.PRE	XBRL Taxonomy Extension Presentation Linkbase
EX-101.DEF	XBRL Taxonomy Extension Definition Linkbase

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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.

	HYDROPHI TECHNOLOGIES GROUP, INC.
Date:  February 9, 2015	/s/ Roger M. Slotkin
	Roger M. Slotkin
	President, Chief Executive Officer and Director (Principal Financial Officer)

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