UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20172018
or
[ ] | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-52956
QUANTUM MATERIALS CORP.
(Exact name of Registrant as specified in its charter)
Nevada | 20-81955783 | |
(State of jurisdiction of
| (I.R.S. Employer Identification Number) |
3055 Hunter Road, San Marcos, Texas | 78666 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(512) 245-6646
(Former address of principal executive offices, if changed since last report) | (Zip Code) |
Securities registered pursuant to Section 12 (b) of the Act:None
Securities registered pursuant to Section 12 (g) of the Act:Common Stock, $.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ] No [X]
Check whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]
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. Yes [X]. No [ ]. No [X].
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). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act: smaller
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer [ ] | Smaller reporting company [X] | |
Emerging growth company [ ] |
If an emerging growth company, [X].indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of December 31, 2016,2017, of the 337,105,438402,772,972 outstanding shares of common stock, the number of shares held by non-affiliates was approximately 313,532,137375,069,671 shares with an aggregate market value of approximately $28,217,892$26,254,877 based upon the closing price of $0.09$0.07 of our common stock as of the close of business on December 31, 2016.29, 2017.
As of April 24,October 9, 2018, the issuer had 422,817,665456,727,981 shares of common stock, $0.001 par value per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
QUANTUM MATERIALS CORP.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 20172018
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Some of the statements set forth this Form 10-K contain forward-looking statements within the meaning of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our plans, objectives, goals, strategies, future events, capital expenditures, future results, our competitive strengths, our business strategy and the trends in our industry are forward-looking statements. The words “believe,” “may,” “could,” “will,” “estimate,” “possible”, “target”, “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “forecast,” “future,” “likely,” “probably,” “suggest” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements.
Forward-looking statements reflect only our current expectations. We may not update these forward-looking statements, even though our situation may change in the future. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements due to a number of uncertainties, many of which are unforeseen, including, without limitation:
● | we are a development stage company with no history of profitable operations; | |
● | we may need additional capital to finance our business; | |
● | our products may not gain market acceptance; | |
● | we may not be able to establish distribution relationships and channels and strategic alliances for market penetration and revenue growth; | |
● | competition within our industry; and | |
● | the availability of additional capital on terms acceptable to us. |
In addition, you should referThe foregoing list of factors is not exhaustive and new factors may emerge or changes to the “Risk Factors” section of this Form 10-K for a discussion of otherthese factors may occur that maywould impact our business and cause our actual results to differ materially from those implied byexpressed in any of our forward-lookingforward looking statements. As a result ofAdditional information regarding these and other factors we cannot assure you thatmay be contained in our filings with the Securities and Exchange Commission, including on Forms 10-Q and 8-K. All forward-looking statements in this Form 10-K willinvolve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depends on many events, some or all of which are not predictable or within our control. If one or more events related to these or other risks or uncertainties materialize, or if management’s underlying assumptions prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracyincorrect, actual results may be material.differ materially from what we anticipate. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. Accordingly, you should not place undue reliance on these forward-looking statements.
We qualify all the forward-looking statements contained in this Form 10-K by the foregoing cautionary statements. Throughout this Form 10-K, unless otherwise designated, the terms “we”, “us”, “our”, the “Company”, our “Company”, “QMC” and “Quantum” refer to Quantum Materials Corp., a Nevada corporation and its subsidiaries.
3 |
Overview
QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in diameter. Approximately 10,000 would fit across the diameter of a human hair. Their small size makes it possible for them to exhibit certain quantum mechanical properties. QDs emit either photons or electrons when excited. In the case of photons, the wavelength (color) of light emitted varies depending on the composition and size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different types and/or sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of QDs in a range of electronic and other applications, in the display and lighting industries. QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of QDs in printed photovoltaic cells.
QDs were first discovered in the early 1980s and the industry has developed to the point where QDs are now being used in an increasing range of applications, including televisions and displays, light emitting diode (“LED”) lighting (also known as solid-state lighting), and in the biomedical industry. LG, Samsung, and other companies have recently launched new televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.
QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiency than existing technologies. In traditional solar cells, a photon can only be converted into a fixed amount of energy per photon, regardless of the photon’s total energy. Excess energy is converted to heat which further lowers the efficiency of the panel. QD-based solar cells have the potential to significantly exceed this efficiency because QDs are capable of generating multiple electrons per photon strike rather than converting the extra energy of high energy photons to heat as in the case of traditional solar cells. QD solar cells can also convert the infrared portion of the spectrum that is not absorbed by traditional solar cells. These attributes make the theoretical maximum efficiency of QD solar cells substantially higher that of traditional silicon solar cells. We believe the use of QDs in solar cells will create the opportunity for a step change in efficiency and performance in printed photovoltaic cells.
A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, but we anticipate rapid growth of the QD market.
History of the Company
QMC was formed in January 2007, as a Nevada corporation under the name “Hague Corp.” and its shares began trading in the over-the-counter market in the fourth calendar quarter of 2008. The original business of Hague Corp. was the exploitation of mineral interests. Solterra, a Delaware corporation, was formed in May 2008 by Mr. Stephen Squires, our Chief Executive Officer, and other shareholders to develop quantum dot applications in the solar cell industry. Solterra was acquired by Hague Corp. in November 2008, pursuant to a merger transaction wherein the shareholders of Solterra exchanged their shares of common stock in Solterra for shares of common stock in Hague Corp., and Solterra became a wholly-owned operating subsidiary of Hague Corp. Upon the closing of the merger, Hague Corp. changed its business from the exploitation of minerals to the development of QDs, and subsequently changed its name to “Quantum Materials Corp.” in 2010.
In October 2008, Solterra also entered into a license agreement with the University of Arizona, which was later amended, (the “UA License”) pursuant to which Solterra has been granted exclusive rights to use the University of Arizona’s patented screen-printing techniques in the production and sale of organic light emitting diodes (“OLEDs”) incorporating QDs in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr. Ghassan Jabbour, a member of the Company’s Board of Directors.
In 2010, Solterra entered into an agreement with a third-party provider of industrial process equipment to develop a proprietary process for continuous flow production of QDs and TQDs under which Solterra retained all ownership and rights to the design and any related intellectual property. The development work has since been completed and the first two units have been delivered and placed into operation.
In 2013, the Company opened the Wet Lab in San Marcos, Texas at Star Park, an extension of Texas State University. In 2014, the first piece of manufacturing equipment was delivered to the Wet Lab. The capacity of the initial unit was approximately 250kg of QDs or TQDs per year and was intended to be used for internal research and development purposes although it also can be used for commercial production.
In 2014, the Company acquired a patent portfolio from Bayer AG that included patents and patent applications covering the high-volume manufacture of QDs, including heavy metal-free compositions, various methods for enhancing quantum dot performance, and a quantum dot based solar cell technology (the “Bayer Patents”).
In 2015, the Company expanded its San Marcos facility and took delivery of a second, larger unit capable of producing approximately 2,000kg of QDs and other nanoparticles per year. This second unit is intended to be used for the Company’s initial commercial production. The Company believes this equipment has positioned the Company to quickly and efficiently scale up mass production of QDs and TQDs for commercial sale, solar panel production, and other applications allowing the Company to readily meet increases in volume demand by simply adding additional equipment units.
The Bayer Patents, the UA License, organically developed technologies and our proprietary continuous flow manufacturing process comprise our fundamental asset platform. We believe that the intellectual property and proprietary technologies position the us to become a leader in the overall nanomaterials and quantum dot industry, and a preferred supplier of high performance QDs and TQDs to an expanding range of applications.
In 2016, Mr. Squires returned as President and CEO and implemented a cost reduction initiative streamlining the G&A overhead and devoting more resources to R&D and commercialization readiness. These efforts have resulted in further optimization of the chemistry and the products. Through this refinement, we have been able to double the through put of our current production equipment from 2000 Kg of QDs per year to 4,000 Kg of QDs per year. All of our discoveries are purposely developed to be compatible with our patented flow manufacturing process. Management believes that this and a number of other material performance enhancement discoveries made by us provide us with the ability to provide industry leading material performance at a very competitive price point.
Business Opportunities
The following outlines the business opportunities that the Company has pursued over the last few years:
● | Entered into a licensing agreement to establish quantum dot production and solar film production in Asia; | |
● | Expanded range of quantum dot base materials to include carbon quantum dots. | |
● | Initiated collaborations with a number of LED and Micro LED companies; | |
● | Developed stabilized cadmium free QDs and encapsulation process for remote phosphor LED applications and surpassed 8,000 hours continuous on time without measurable degradation; | |
● | Reduced QD process cost by more than 45% and doubled annual production throughput capacity using existing process equipment and expanded capability to include Pervoskite quantum dots; | |
● | Significantly improved emission color purity by narrowing the color wavelength, tuning the emission wave length and increasing the quantum yield (brightness) of our cadmium-free QD optical materials focused on display applications. These improvements have resulted in Rec. 2020 coverage in excess of 86%; | |
● | Initiated collaborations for QD enhanced display film with numerous film companies including one of the world’s largest multinational chemical company; | |
● | Developed blue cadmium-free high-performance QDs; | |
● | Develop the first 100% quantum yield cadmium-free red QDs; | |
● | Developed and began producing a range of plasmonic particles targeting specialized lighting and thermal management application in the automotive and commercial glass industry; | |
● | Obtained an intellectual property portfolio of 50+ patents and applications granted, filed, or in preparation, including issued patents acquired from third parties, including those covering high volume production of QDs, including cadmium-free quantum dots, quantum dot enhancement technologies and quantum dot solar cell technologies; | |
● | Expanded the number of display optical film companies that we are now in collaboration with and increased sample deliveries; | |
● | Continued product development with leading global optical film manufacturers; | |
● | Developed and began producing nano-materials for specialty lighting, nano-bio, energy storage, anti-counterfeiting, and other emerging applications; and | |
● | Established a nanomaterials laboratory facility for research, development and production in Texas. |
We can provide no assurances that our efforts to date will result in the grant of patents for proprietary processes or result in future sales and/or profitable operations.
A uniquely performing variant of QDs are. TQDs have a molecular configuration consisting of a center portion and four arms extending from the center that are equally spaced in three dimensions. TQDs have material advantages over standard spherical QDs where both absorption of photons and charge transport are enhanced by the legs of the tetrapod which effectively serve as trillions of antennae for light. Their unique architecture and shape also promotes more uniform distances between the dots, which helps to eliminate the problem of aggregation. TQDs are more costly and difficult to produce in quantity using known methods, with the exception of our patented flow technology.
Initially, our principal business emphasis was on the development of tetrapod quantum dots (“TQDs”) for solar cell applications through Solterra. TQDs are a variant of QDs with material advantages over standard spherical QDs, particularly in solar panel applications. The solar cell market became increasingly volatile, with prices eroding due to the influx of subsidized products from outside the United States.We believe that we are well-positioned to bring a solar cell to market with sufficiently high conversion efficiency that, when combined with our low- cost proprietary manufacturing process, will result in a product capable of producing energy at a competitive cost per watt compared to existing solar cell technology and at a scale that will meet growing market demand for distributed, sustainable energy.
How Quantum Dots are Produced
High volume production of QDs is typically accomplished through one of several methods including:
Colloidal synthesis: Growth of QDs from precursor compounds dissolved in solutions, much like traditional chemical processes. This manual batch process requires careful control of temperature, mixing and concentration levels of precursor materials. Precise control must be maintained uniformly throughout the solution otherwise non-uniform, irregular QDs are produced. Due to their very small size it is extremely difficult if not impossible to segregate the QDs by size once they have been produced and a conglomeration of varied size QDs are not capable of producing the unique features that are required in most applications.
Prefabricated seed growth: QDs are created from chemical precursors in the presence of a molecular cluster compound under conditions whereby the integrity of the molecular cluster is maintained and acts as a prefabricated seed template. This manual batch method can produce reasonable quantities of QDs but can take significant capital resources to achieve significant volume and still results in low yields.
QMC’s automated continuous process: Unlike the more labor-intensive batch processes described above, we use a continuous manufacturing process to produce QDs and TQDs. We Believe that this patented process and chemistry provides advantages to other methods such as more precise control of process variables which leads to improved quality control. We believe that by using this method yields are higher and manufacturing costs are lower as compared to other methods. We also believe that we are the only company to successfully deploy continuous flow technology in the large-scale manufacturing of highly uniform QDs of both cadmium-based, cadmium-free and a number of other elemental chemistries.
Raw materials for the commercial production of QD are purchased in bulk from chemical supply companies. Indium, a component of our cadmium-free QD is considered a rare metal. Indium is primarily found in South America, Canada, Australia, China and the Commonwealth of Independent States. There is also a mature and efficient indium recycling process. While our management does not believe that a supply disruption of the indium-containing compounds used in the manufacturing of QDs represents a significant risk, no assurances can be given in this regard.
Major Market Segments
TVs, Displays, and Other Optoelectronics.This market is comprised principally of quantum dot LCD displays (“QDLCDs”) for televisions, computers, cell phones, tablets and various other applications. In QDLCDs, QDs are used to down convert some of the blue light from the LED backlight directly to green and red light allowing for the creation of more vibrant colors and energy savings as compared to a traditional LCD TV/display. Unlike OLEDs which are extremely expensive to produce and require massive manufacturing capital expenditures, QD films are a drop-in solution for LCD manufacturers using existing infrastructure allowing for OLED-like color performance at significantly lower capital investment. LCD TVs make up the vast majority of new TV shipments, and we expect this proportion to grow. Samsung and several other OEMs are currently shipping televisions using QDs to enhance the color quality and power efficiency.
Lighting. In the lighting market, companies began to commercialize quantum dot LEDs in 2013 with significant R&D occurring among manufacturers of solid-state lighting. While companies have launched quantum dot LED lamps, the market for quantum dot LED lamps and the other lighting products is still relatively small. We believe QD-based LED lighting will be a highly competitive replacement for currently available compact florescent and LED lighting, as QD technology provides greater power efficiency and the ability to tune the light spectrum to emit light that is the most pleasing and/or appropriate for the application.
Solar Energy. QDs are capable of producing energy from a broad spectrum of solar and radiant energy, including the ultraviolet and infrared frequencies conventional silicon solar cells generally do not convert to electricity. QD solar cells have theoretical conversion potentials of approximately twice that of conventional solar cells, and applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost. Management believes that QD solar cells and panels will be the next evolutionary development in the field of solar energy. Management also believes that increased conversion efficiencies will be realized with the use of TQDs resulting from their unique shape and that our low cost proprietary continuous production process and printing technology will permit Solterra to offer solar electricity solutions that can compete on a non-subsidized basis with the price of retail electricity in key markets around the world. We believe that global energy consumption trends that include the need for distributed energy generation (non-grid and especially in developing markets) and the desire for non-fossil fuel generated energy even at increased costs will drive market demand for solar. Management believes this will be especially true if existing generation by nuclear and coal is decommissioned due to age-related, safety, or environmental concerns or global governmental policy.
Anti-counterfeiting. Piracy and counterfeiting cost businesses more than $200 billion annually and account for the loss of more than 750,000 jobs in the US alone. Counterfeit drugs cost the global pharmaceutical industry approximately $18 billion in lost profits annually and according to Interpol, result in as many as one million deaths annually. QDs and other custom nanoparticles added to ink can be used to create unclonable unique “fingerprints” for every package using current printing technology, and these “fingerprints” can be quickly verified with a handheld device or optical in-line screening in manufacturing or handling lines.
Life Sciences. The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both thein vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, andin vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues. The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators.
Other applications. Current and future applications of QDs and other nanoparticles may impact a broad range of other industrial markets. These potentially include batteries and energy storage, commercial glass, water purification, improved thermoelectric components, biohazard detection sensors, diode lasers, and others. We intend to monitor these uses as they mature from basic research and plan for specific compositions as market opportunities develop.
We anticipate that the biggest growth sectors for QDs will be in TVs, displays, sold-state lighting, and solar cells. Other current and potential applications for QD include nano-bio, commercial glass, batteries, security inks, sensors, lasers, and paints. QDs remain an expensive product. Although the high cost has slowed market growth, we believe the recent growth of mass manufacturing is quickly easing the cost constraints.
Current Position
Since January 2017, we have continued to reduce overhead costs and fine-tuned our operations. These efforts have enabled us to achieve the highest optical performance for cadmium free quantum dots in the company’s history. In addition, we have expanded the color range to now include blue in addition to red and green. While achieving extraordinary performance is important, management believes that being able to produce these materials repeatedly and at a low price point is the formula for success, and we have made these performance improvements while also doubling throughput and further reducing production. While we have been developing the infrastructure to support volume production, we have also explored the possibility of both a joint venture model and a licensing model and we believe there are merits to these models and we have begun to explore both of these options for the company to rapidly enter the revenue stage.
Widespread, rapid adoption of quantum dots by the display industry or in other markets may cause supply pressure that will need to be met with significant increases in available production capability. While we believe our current manufacturing capacity of approximately 4 metric tons per year is as big, if not bigger, than our largest competitors, we also realize that there are other challenges developing a supply chain and completing vendor qualifications that can be very time consuming. We believe a licensing model with a top tier chemical company could allow us to rapidly expand our market reach and capture substantially more market. We believe our low-cost high-volume manufacturing process is ideally positioned to meet these requirements. This is anticipated to be a key advantage to the Company to meet market demand and drive increased revenue.
The advantages and benefits of our automated production process and equipment are:
● | large scale production with a compact footprint; | |
● | less manpower and time needed for cost savings; | |
● | economies of scale leading to lower costs; | |
● | high production yield with little post-processing; | |
● | Rapid R&D and improved quality control for higher uniformity; and | |
● | assurance of backup systems for continuous supply. |
Sales and Marketing Overview
During the past year, we have made significant progress in the development of QDs for use in electronic display applications, in particular for LCD TV applications. With a focus on cadmium free QDs, we have been developing technologies aimed at meeting key customer requirements, and we have been shipping product to customers for use, testing, and film integration.
Our discussions with chemical companies, film manufacturers, and OEMs in the display industry provide strong evidence that the market opportunity is substantial and that our business plan is aligned with the customers’ product specification needs. While we are pursuing applications in several other markets as well, we believe that the display industry represents the most substantial and most immediate opportunity. We further believe that our advantages in delivery of large volumes of high quality, high performance QDs and other nanomaterials via our patented continuous production process makes us an attractive supplier. While we continue to pursue direct sales opportunities, we are also actively marketing a licensing model to top tier chemical companies
In January 2018 the Company engaged Canaccord Genuity to provide financial advisory and investment banking services as the Company may reasonably request. The Company believes such advisory services will be instrumental as we explore licensing, merger and JV opportunities.
9 |
Operational Overview
Our operations are located in San Marcos, Texas at the Star Park Technology Center, an extension of Texas State University (“TSU”). This location provides us with space for future expansion and with convenient access to TSU faculty and specialized laboratory facilities and equipment that can support joint research and development efforts with Texas State University. Located 30 miles south of Austin, Texas, the San Marcos facility is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets. The company is also exploring the possibility of relocating to a standalone facility that will better facilitate our ability to produce micro reactors to support licensing and joint venture opportunities and also allow us to reduce fixed overhead cost.
We have recently achieved commercial-scale continuous manufacturing equipment at the San Marcos facility and now have the capacity to produce more than four metric tons (4,000kg) per year of nanomaterials for supply to our customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ factories which are much larger and require significantly larger capital expenditures to build and labor expense to operate. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing know how and equipment. While we plan to work extensively with our current providers of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the manufacturing equipment in-house, if necessary. This also holds true in the event we are successful negotiating a licensing agreement with a significant chemical company, in which case we would likely be responsible for managing their scale up efforts.
We expect to commence generating revenues from licensing agreements, joint ventures and/or the production of materials at the San Marcos facility in the fourth quarter of fiscal year 2019. In the event we secure a license agreement we anticipate an upfront licensing payment to the company with ongoing royalty payments. Revenues from materials manufactured by the company are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.
Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing nanomaterials and QD market. Nanomaterials and QD technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and will focus a significant part of our efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, University of Arizona, and the numerous other research centers and departments with which we have relationships will be important aspects of the Company’s strategy. We intend to increase its development of quantum dot solar cells in 2018/19 and are currently considering re-establishing our solar cell development in closer proximity to strategically significant solar technology resources.
Our key assets include patents, proprietary high-volume process equipment technology, licenses and other intellectual property rights, our knowhow and the expertise, capabilities, and relationships brought to us by our the Company by its management team. We are implementing a comprehensive patent strategy will put additional focus on building out our intellectual property portfolio and licensing rights.
Patent licenses with University of Arizona include provisions for milestones and milestone payments. To date, such payments have been waived and/or extended by University of Arizona, illustrating the support the university has given us as we have attempted to advance our business with measured resources. Solterra plans to utilize our patented low-cost, high-volume quantum dot production combined with carbon QD and TQD technology to commercialize QD solar cells at a fraction of the cost of current silicon based solar cells.
Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. In fiscal year 2017, we applied for and received a Low Volume Exemption (“LVE”) under the Toxic Substances Control Act (“TSCA”) which allows us to manufacture QD quantities of 10,000 kilograms or less per year in the United States. We also recently gained Chemical Abstract Service (CAS) registration for QDX cadmium-free quantum dots through a division of the American Chemical Society and has also completed the requisite analysis in support of the QDX Safety Data Sheet (SDS). Both CAS and the SDS are required in order to ship high volumes of advanced materials abroad. Management believes that the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us and our products in the future. See “Risk Factors” section.
Employees
We have traditionally operated with limited resources and infrastructure. As of the date of this Form 10-K, we have 9 employees, including 4 full time employees the management team.
Competition
The commercial nanomaterials industry and more specifically, the quantum dot industry, is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments by employing one or more competitive strategies. We believe that competition among these companies is based on the following factors:
● | Product quality and performance characteristics: Manufacturers who will incorporate QDs in specific applications will carefully consider the quality, characteristics and physical properties of the QDs for efficacy in their targeted applications. This includes but is not necessarily limited to the following factors: the consistency of dots from batch to batch; resistance to degradation of performance characteristics by heat, oxygen, moisture, and luminous flux; brightness of emissions; purity of emissions; effective life spans; volume of dots necessary to produce the intended result; special characteristics such as dual emission capabilities; whether or not the QDs contain cadmium or other heavy metals or other hazardous compounds; the time needed to expand capacity; and the location of capacity relative to the manufacturer or ability to locate capacity nearby. | |
● | Volume: Before a manufacturer makes the commitment and dedicates capital and marketing resources to incorporate QDs in its end product, it must be confident that the volume of QDs it can obtain from a supplier will be sufficient to meet production needs in the short term and long term, including substantial growth following a successful new product launch. The strategies employed by a quantum dot company to scale production rapidly are critical to its attracting commercial users for its product, regardless of the quality of its QDs. | |
● | Price: The price at which QDs can be delivered for incorporation into a new product will dictate the rate at which new applications can be developed and supported. High prices have historically restricted the market for QDs to only the highest value uses such as in the life sciences, while the potential for lower prices of supply appears to be opening many new markets. | |
● | Continuing R&D and Product Improvements: Research and industry relationships are important to ensure a quantum dot company stays on the leading edge of technological development and commercialization. R&D is supported by collaboration with academic institutions or industrial companies. The Company spent $188,274 and $1,006,214 on research and development in fiscal years 2018 and 2017 respectively, a decrease of $817,940. None of these costs were borne by customers. |
We believe we are well positioned in all four areas described above. We believe our QDs, including cadmium/heavy metal-free QDs, meet or exceed our competitors’ current brightness and light purity specifications, and our patented continuous manufacturing process allows us to produce large volumes at competitive price points while also giving us the ability to quickly scale up capacity and locate it anywhere in the world it is needed. Lastly, our continuing relationships with universities such as University of Arizona, and Texas State University, private and public labs and our approach to joint development ventures should enable us to achieve and maintain a leading position in R&D and commercialization of new products.
The Company is subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than the Company.
Licenses and Intellectual Property
In 2010, we entered into an agreement with a third-party provider of industrial process equipment to develop proprietary equipment for continuous production of QDs under which we retained all ownership and rights to the design and any related intellectual property. We have, to date, received two production machines, a 250kg per year capacity unit primarily for internal research and development purposes and sample production, and a larger commercial production unit that process improvements have allowed us to increase from approximately 2,000kg per year when first delivered to 4,000kg per year today. We believe the design of this manufacturing equipment will position us to quickly and efficiently scale up mass production of QDs for commercial sale.
While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the equipment in-house, if necessary.
Bayer Patents
In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, (the “Bayer Patents”). The Bayer Patents provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for heavy metal-free QDs and nanoparticles; increasing quantum yields; heavy metal-free QDs; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high-performance solar cells and printed electronics.
Agreement with University of Arizona
Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On November 22, 2017, Solterra memorialized prior oral agreements and entered into an amended license agreement with UA. Pursuant to the UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by January 31, 2019, $125,000 by June 30, 2019 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. As of June 30, 2017, and 2018, no royalties have been accrued for this obligation.
Agreement with Texas State University
The Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month and can be terminated with 60-days written notice of either party.
Other Intellectual Property
The Company also owns additional intellectual property in the form of proprietary equipment designs, trademarks, trade names, copyrights, scientific and technical know-how, and “trade secrets” that it intends to further develop and apply in its business, seeking to protect same with appropriate governmental filings and/or secrecy agreements.
Governmental Approvals
Chemical substances manufactured in the Unites States in quantities of 10,000 kilograms or less per year are exempt from full premanufacture notice (“PMN”) review under section 5 of the Toxic Substances Control Act (“TSCA”). Low Volume Exemption (“LVE”) substances undergo a 30-day review. During fiscal year 2017, we applied for and received an LVE.
Not Applicable
Item 1B. Unresolved Staff Comments
Not applicable.
In June 2013, we opened a Wet Lab facility and principal executive office in San Marcos, Texas for research and development and the production of QDs and other nanomaterials. The facility where the Company is located is owned by Texas State University. In June 2015, the Company moved into a larger lab space in the same facility. As of June 30, 2017, our monthly rent for the San Marcos facility and office was $9,075. We recently decreased our laboratory and office space at the San Marcos facility and as of the date of this Form 10-K, our monthly rent is $4,538.
The Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears is approximately $53,000 plus interest and other charges which has been accrued at June 30, 2018. The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.
CAUSE NUMBER 17-2033; Hays County, Texas
Two lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked the Company’ transfer agent, Empire Stock Transfer, Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements the Company had entered into in late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus accrued interest of $10,170) on two of the loans. Subsequently, in November 2017, the Company also repaid $213,650 and $8,636 of accrued interest on two of the remaining loans on their due dates.
Quantum filed suit for an injunction to stop the release of the stock on September 28, 2017. The two lenders, SBI Investments LLC, 2014-1 (SBI), and L2 Capital, LLC (L2), hired the national law firm of K&L Gates to stop the injunction; problematically, this same firm had previously represented the Company. The Company filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.
SBI and L2, with new counsel, and Cleveland Terrazas PLLC, brought suit against the Company on October 10, 2017 for $1.5 million on the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed technical defaults. The court in Hays County granted the Company’s temporary injunction and set the full case for trial. The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against the Company and refiled similar actions in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three suits are related to the same transactions. The lenders claim 140% interest, attorney’s fees, 20 million shares of stock, and damages. The Company maintains all loans have been paid timely.
The Company denies all the above-mentioned allegations and will vigorously defend all claims.
CAUSE NUMBER: 17CV06093; Johnson County, Kansas
The Kansas lawsuit, instituted on October 30, 2017, is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against the Company; the second claim is for breach of contract of the first L2 promissory note against the Company; the final claim is for breach of contract regarding the second L2 promissory note against both the Company and Stephen Squires, individually.
The Company denies all the above-mentioned allegations and will vigorously defend all claims.
CAUSE NUMBER: 2017-025283-CA-01; Miami-Dade County, Florida
The Florida lawsuit, instituted on October 30, 2017, largely mirrors the suit in Kansas; defaults are alleged as follows:
On July 6, 2017, the Company filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In comparison to the unrestated financial statement previously filed by the Company, SBI alleged that the Revised Report materially and adversely affects SBI’s rights with respect to the notes, constituting a breach of each of the notes. Furthermore, because each note contains a cross-default clause, SBI alleged that each of the Company’s breaches of a specific note also constituted a breach of every other note.
On July 27, 2017, the Company’s auditor resigned, and the Company replaced its auditor without seeking or obtaining the consent of SBI. SBI alleged that this replacement of the Company’s auditor constituted a breach of the SBI notes, and because each note contains a cross-default clause, of every other note.
The Company denies all of the above-mentioned allegations and will vigorously defend all claims.
The case was reheard in late March 2018 and a 45-day continuance was decided resulting in an April 30, 2018 rehearing. After a day of litigation in San Marcos, the Company’s motion to enjoin L2 and SBI and prevent them from obtaining stock before a full trial on the merits was granted on October 27, 2017, by Judge Gary Steel. L2 and SBI objected to the injunction and appealed to the Third Court of Appeals in Austin, TX. On March 8, 2018, in a unanimous opinion, the Third Court of Appeals denied the appeal, sustained the injunction in favor of the Company and awarded costs of court.
On March 29, 2018, at a discovery hearing, wherein the Company asked the court to order L2 and SBI to produce evidence to support their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court. The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.
The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at June 30, 2018.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has traded in the over-the-counter marketplace on the OTCQB under the symbol “QTMM” since October 12, 2018. Previously, our common stock was quoted on the OTC Pink marketplace from November 2017 to October 2018 and on the OTCQB previous to November 2017.
As of October 9, 2018, the issuer had 456,727,981 shares of common stock outstanding and 239 stockholders of record according to our transfer agent.
The following table sets forth the high and low bid information for the most recent two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Quarter Ended | High | Low | ||||||
June 30, 2018 | $ | 0.06 | $ | 0.04 | ||||
March 31, 2018 | $ | 0.08 | $ | 0.05 | ||||
December 31, 2017 | $ | 0.09 | $ | 0.06 | ||||
September 30, 2017 | $ | 0.12 | $ | 0.08 | ||||
June 30, 2017 | $ | 0.14 | $ | 0.11 | ||||
March 31, 2017 | $ | 0.20 | $ | 0.07 | ||||
December 31, 2016 | $ | 0.11 | $ | 0.08 | ||||
September 30, 2016 | $ | 0.13 | $ | 0.10 |
Historically we have not paid cash dividends on our common stock, and the Board of Directors intends to retain all of our earnings, if any, to finance the development and expansion of our business. There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends. Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.
Issuer Sales of Unregistered Securities
From April 1, 2018 to June 30, 2018, we had the following sales of unregistered common stock.
Consideration Received and Description of | If Option, Warrant or | |||||||||||
Date of Sale | Title of Security | Number Sold | Underwriting or Other Discounts to Market Price or Convertible Security Afforded to Purchases | Exemption from Registration Claimed | Convertible Security, Terms of Exercise or Conversion | Security Holder | ||||||
April 2018 | Common Stock | 2,410,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Minns & Arnett Trial Lawyers | ||||||
April 2018 | Common Stock Warrants | 1,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through April 26, 2021 | Lucas Hoppel | ||||||
April 2018 | Common Stock Warrants | 200,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through April 25, 2021 | Radha Jayaram | ||||||
April 2018 | Common Stock Warrants | 1,166,660 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.15 per share through April 20, 2023 | Howieco International | ||||||
May 2018 | Common Stock | 880,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Brett Lamensky | ||||||
June 2018 | Common Stock | 17,500,000 | Shares issued for debenture extensions; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Columbus Capital QP Partners | ||||||
June 2018 | Common Stock | 1,000,000 | Shares issued with convertible promissory note | Section 4(2); and/or Rule 506 | Not applicable | Radha Jayaram | ||||||
June 2018 | Common Stock | 3,125,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Protek Financial Services | ||||||
June 2018 | Common Stock | 3,000,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Youth Theory Consultants | ||||||
June 2018 | Common Stock Warrants | 1,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through June 7, 2021 | Lucas Hoppel | ||||||
June 2018 | Common Stock Warrants | 5,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.03 per share through June 15, 2020 | Kenneth Groenveld |
Repurchase of Securities
In the year ended June 30, 2018, there were no purchases by the Company of its common stock, however, the company cancelled 5,725,000 shares of common stock during this time. These shares were held in escrow, pending a contractual deliverable, and returned to the company and cancelled during the fiscal year.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section and elsewhere in this Form 10-K, which are incorporated herein by reference.
Business Overview
We are a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots (“QDs”), tetrapod quantum dots (“TQDs”), and other nanoparticles for a range of applications in televisions, displays and other optoelectronics, photovoltaics, solid state lighting, life sciences, security ink, battery, and sensor sectors of the market. We are currently traded in the over-the-counter marketplace on the OTCQB under the ticker symbol “QTMM.” Our wholly-owned operating subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”), is focused on the next generation photovoltaic (solar cell) market, using quantum dot semiconductors.
QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in diameter. Approximately 10,000 would fit across the diameter of a human hair. Their small size makes it possible for them to exhibit certain quantum mechanical properties. QDs emit either photons or electrons when excited. In the case of photons, the wavelength (color) of light emitted varies depending on the composition and size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different types and/or sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of QDs in a range of electronic and other applications, in the display and lighting industries. QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of QDs in printed photovoltaic cells.
QDs were first discovered in the early 1980s and the industry has developed to the point where QDs are now being used in an increasing range of applications, including televisions and displays, light emitting diode (“LED”) lighting (also known as solid-state lighting), and in the biomedical industry. LG, Samsung, and other companies have recently launched new televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.
A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, however a number of recent research reports are predicting rapid growth of the QD market. For example, a March 2017 publication by Research and Markets titled“Global Quantum Dots Market, Analysis and Forecast: 2017-2022” forecasts the quantum dots market to grow over $7 billion by 2022 at a CAGR of 46.4% through 2016-2022.
History of the Company
QMC was formed in January 2007, as a Nevada corporation under the name “Hague Corporation” and its shares began trading in the over-the-counter market in the first quarter of 2008. The original business of Hague Corporation was the exploitation of mineral interests. Solterra, a Delaware corporation, was formed in May 2008 by Mr. Stephen Squires, our Chief Executive Officer, and other shareholders to develop quantum dot applications in the solar cell industry. Solterra was acquired by Hague Corporation in November 2008, pursuant to a merger transaction wherein the shareholders of Solterra exchanged their shares of common stock in Solterra for shares of common stock in Hague Corporation, and Solterra became a wholly-owned operating subsidiary of Hague Corporation. Upon the closing of the merger, Hague Corporation changed its business from the exploitation of minerals to the development of QDs, and subsequently changed its name to “Quantum Materials Corp.” in 2010.
Shortly after formation, Solterra began to develop its solar cell business by licensing technology key to its business. In August 2008, Solterra was granted a license, which was later amended, to develop, manufacture and exploit TQDs by William Marsh Rice University (“Rice”) located in Houston, Texas (the “Solterra Rice License”). In September 2011, a new license, which was later amended, was entered into between Rice and QMC (the “QMC Rice License,” and together with the Solterra Rice License, the “Rice Licenses”). The Rice Licenses grant to QMC and Solterra the right to exploit a simplified and cost-effective synthesis process for the production of TQDs of high quality and uniformity, which was invented in the Rice laboratory of Dr. Michael Wong, a current member of the Company’s Scientific Advisory Board. Under the Rice Licenses, Solterra and QMC have been granted exclusive rights to develop, manufacture, market and exploit TQDs for photovoltaic applications (in the case of Solterra) and for electronic and medical applications (in the case of QMC).
In October 2008, Solterra also entered into a license agreement with the University of Arizona, which was later amended, (the “UA License”) pursuant to which Solterra has been granted exclusive rights to use the University of Arizona’s patented screen printing techniques in the production and sale of organic light emitting diodes (“OLEDs”) incorporating QDs in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr. Ghassan Jabbour, a member of the Company’s Scientific Advisory Board.
In 2010, Solterra entered into an agreement with a third-party provider of industrial process equipment to develop a proprietary process for continuous flow production of QDs and TQDs under which Solterra retained all ownership and rights to the design and any related intellectual property. The development work has since been completed and the first two units have been delivered and placed into operation.
In 2013, the Company opened the Wet Lab in San Marcos, Texas at Star Park, an extension of Texas State University. In 2014, the first piece of manufacturing equipment was delivered to the Wet Lab. The capacity of the initial unit is approximately 250kg of QDs or TQDs per year and is intended to be used for internal research and development purposes although it also can be used for commercial production.
In 2014, the Company acquired a patent portfolio from Bayer AG that included patents and patent applications covering the high-volume manufacture of QDs, including heavy metal free compositions, various methods for enhancing quantum dot performance, and a quantum dot based solar cell technology (the “Bayer Patents”).
In 2015, the Company expanded its San Marcos facility and took delivery of a second, larger unit capable of producing approximately 2,000kg of QDs and other nanoparticles per year. This second unit is intended to be used for the Company’s initial commercial production. The Company believes this equipment has positioned the Company to quickly and efficiently scale up mass production of QDs and TQDs for commercial sale, solar panel production, and other applications allowing the Company to readily meet increases in volume demand by simply adding additional equipment units.
The acquired Bayer Patents, the Rice Licenses, the UA License, and our proprietary continuous flow manufacturing process comprise the fundamental asset platform of the Company. The Company believes that the intellectual property and proprietary technologies position the Company to become a leader in the overall nanomaterials and quantum dot industry, and a preferred supplier of high performance QDs and TQDs to an expanding range of applications.
In 2016 the company’s founder returned as President and CEO and implemented a cost reduction initiative streamlining the G&A overhead and devoting more resources to R&D and commercialization readiness. These efforts have resulted in further optimization of the chemistry and the products. Through this refinement the company has been able to double the through put of its current production equipment from 2000 Kg of QDs per year to 4,000 Kg of QDs per year. Management believes that this and a number of other material performance enhancement discoveries made by the company provide us with the ability to provide industry leading material performance at a very competitive price point. All of the company’s discoveries are developed in a manner that they are compatible with our patented flow manufacturing process.
Business Accomplishments
The following outlines the business accomplishments of the Company over the last few years:
We can provide no assurances that its accomplishments to date will result in the grant of patents for proprietary processes or result in future sales and/or profitable operations. See “Risk Factors” section.
Previously, our principal business emphasis was on the development of TQDs for solar cell applications through Solterra. The solar cell market became increasingly volatile, with prices eroding due to the influx of subsidized products from abroad. Although we intend to complete the development of our QD solar cell technology and attempt to bring a competitive product to market, we have decided not to do so in the current market environment. Our intent is to wait until we can produce solar cells with sufficiently high conversion efficiency that, when combined with its low cost proprietary manufacturing process, will result in a product capable of producing energy at a competitive cost per watt compared to existing solar cell technology and at a scale that will meet growing market demand for distributed, sustainable energy.
In the meantime, we continue to experience increased interest from potential customers in our materials and technologies for applications such as televisions, displays, and lighting. Management believes that these markets present the best near-term opportunities for our exploitation of QDs on a commercial scale. We will continue to pursue the solar cell market along with other uses for QDs and TQDs, but as indicated above, we have implemented a more balanced approach that addresses the potential demand for high performance QDs in the other emerging markets. See “Major Market Segments” section below.
Industry Overview
The Product: Quantum Dots and Other Nanomaterials
QDs were first discovered in the early 1980s, by Alexei Ekimov and independently by Louis E. Brus. QDs are semiconductor nanoparticles, typically between 2 and 10 nanometers (a billionth of a meter) in diameter or mean dimension, small enough for the particle to exhibit quantum mechanical properties because its excitons (electrons in a bound state) are confined in all three spatial dimensions.
QDs emit light (fluorescence) or electrons when excited with energy such as light or electricity. Emission or absorption wavelength is directly related to the size of the QD; the smaller the QD, the closer it is to the blue end of the spectrum, and the larger the QD, the closer it is to the red end of the spectrum. This allows the excitation and emission of QDs to be highly tunable. These qualities are driving demand for QDs as a performance and energy efficiency enhancing next generation engineered material and have led to the use of QDs in a range of electronic and other applications including in LED/LCD televisions and displays (“LCDs”), and solid-state lighting (“SSL”) where the ability to produce a very narrow frequency of light is highly desirable.
In LCD televisions and displays, for example, before QDs, the “white” LED backlight light color quality was very poor, containing a lot of blue light but far less red and green and many frequencies of light in-between that are not needed at all. Typical LCDs only use red, green, and blue light to create an image. This means displays had to waste a lot of energy on light that gets filtered out in order to generate enough red and green light for a sufficiently bright display. With QDs, LCDs not only save energy by producing only the red and green light needed, they also produce better picture quality by providing a broader array of more vibrant colors because the red and green light is much purer.
QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity, with the potential for significantly higher efficiency than existing technologies. In traditional solar cells, a photon can only be converted into a fixed amount of energy per photon, regardless of the photon’s total energy. Excess energy is converted to heat which further lowers the efficiency of the panel. QD-based solar cells have the potential to significantly exceed this efficiency because QDs are capable of generating multiple electrons per photon strike rather than converting the extra energy of high energy photons to heat as in the case of traditional solar cells. QD solar cells can also convert the infrared portion of the spectrum that is not absorbed by traditional solar cells. These attributes make the theoretical maximum efficiency of QD solar cells 66% which is twice that of traditional silicon solar cells. We believe the use of QDs in solar cells will create the opportunity for a step change in efficiency and performance in printed photovoltaic cells.
A uniquely performing variant of QDs are tetrapod quantum dots (“TQDs”). TQDs have a molecular configuration consisting of a center portion and four arms extending from the center that are equally spaced in three dimensions. TQDs have material advantages over standard spherical QDs particularly in solar panel applications where both absorption of photons and charge transport are enhanced by the legs of the tetrapod which effectively serve as trillions of antenna for light. Their unique architecture and shape also promotes more uniform distances between the dots, which helps to eliminate the problem of aggregation. TQDs are more costly and difficult to produce in quantity using known methods, with the exception of our proprietary chemical process technology licensed exclusively to us under the Rice Licenses.
How Quantum Dots are Produced
High volume production of QDs is typically accomplished through one of several methods including:
Colloidal synthesis: Growth of QDs from precursor compounds dissolved in solutions, much like traditional chemical processes. This manual batch process requires careful control of temperature, mixing and concentration levels of precursor materials. Precise control must be maintained uniformly throughout the solution otherwise non-uniform, irregular QDs are produced. Due to their very small size it is extremely difficult if not impossible to segregate the QDs by size once they have been produced and a conglomeration of varied size QDs are not capable of producing the unique features that are required in most applications.
Prefabricated seed growth: QDs are created from chemical precursors in the presence of a molecular cluster compound under conditions whereby the integrity of the molecular cluster is maintained and acts as a prefabricated seed template. This manual batch method can produce reasonable quantities of QDs but can take significant capital resources to achieve significant volume and still results in low yields.
QMC’s automated continuous process: Unlike the more labor-intensive batch processes described above, we use a continuous manufacturing process to produce QDs and TQDs. This patented process and chemistry provides advantages to other methods such as more precise control of process variables which leads to improved quality control. We believe that by using this method yields are higher and manufacturing costs are lower as compared to other methods. We also believe that we are the only company to successfully deploy continuous flow technology in the large-scale manufacturing of highly uniform QDs of both cadmium-based and cadmium-free chemistry.
Raw materials for the commercial production of QD are purchased in bulk from chemical supply companies. Indium, a component of our cadmium-free QD is considered a rare metal. Indium is primarily found in South America, Canada, Australia, China and the Commonwealth of Independent States. There is also a mature and efficient indium recycling process. While our management does not believe that a supply disruption of the indium-containing compounds used in the manufacturing of QDs represents a significant risk, no assurances can be given in this regard.
Market for Quantum Dots
Severalrecent market research reports have forecasted rapid growth of the QD market including the following:
The biggest growth sectors are forecast to be in TVs, displays, sold-state lighting, and solar cells. Other current and potential applications for QD include nano-bio, commercial glass, batteries, security inks, sensors, lasers, and paints. QDs remain an expensive product, and the high cost has slowed market growth to this point although we believe the recent growth of mass manufacturing is quickly easing the cost constraints.
Notwithstanding the foregoing quantum dot market industry forecasts and any other quantum dot research industry reports referenced in this Form 10-K, no assurance can be given that these market industry forecasts for the utilization and sale of quantum dots will be realized or will result in profitable operations for the Company. See “Risk Factors” section.
Major Market Segments
TVs, Displays, and Other Optoelectronics.This market is comprised principally of quantum dot LCD displays (“QDLCDs”) for televisions, computers, cell phones, tablets and various other applications. In QDLCDs, QDs are used to downconvert some of the blue light from the LED backlight directly to green and red light allowing for the creation of more vibrant colors and energy savings as compared to a traditional LCD TV/display. Unlike OLEDs which are extremely expensive to produce and require massive manufacturing capital expenditures, QD films are a drop-in solution for LCD manufacturers using existing infrastructure allowing for OLED-like color performance at significantly lower capital investment. LCD TVs make up the vast majority of new TV shipments, and QDLCDs are forecasted to grow to 135 million units by 2020 according to the IHS Quarterly/Technology Q2-2015 research report. Samsung and several other OEMs are currently shipping televisions using QDs to enhance the color quality and power efficiency.
Lighting. In the lighting market, companies began to commercialize quantum dot LEDs in 2013 with significant R&D occurring among manufacturers of solid-state lighting. While companies have launched quantum dot LED lamps, the market for quantum dot LED lamps and the other lighting products is still relatively small. We believe QD-based LED lighting will be the best replacement for currently available compact florescent and LED lighting, as QD technology provides greater power efficiency and the ability to tune the light spectrum to emit light that is the most pleasing and/or appropriate for the application. A July 2017 report by the US Department of Energy titled “Adoption of Light-Emitting Diodes in Common Lighting Applications” forecasts that LED lighting will represent 86% of all lighting sales by 2035, resulting in an annual primary energy savings of 3.7 quadrillion British thermal units
Solar Energy. QDs are capable of producing energy from a broad spectrum of solar and radiant energy, including the ultraviolet and infrared frequencies conventional silicon solar cells generally do not convert to electricity. QD solar cells have theoretical conversion potentials of approximately twice that of conventional solar cells, and applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost. Management believes that QD solar cells and panels will be the next evolutionary development in the field of solar energy. Management also believes that increased conversion efficiencies will be realized with the use of TQDs resulting from their unique shape and that our low cost proprietary continuous production process and printing technology will permit Solterra to offer solar electricity solutions that can compete on a non-subsidized basis with the price of retail electricity in key markets around the world. We believe that global energy consumption trends that include the need for distributed energy generation (non-grid and especially in developing markets) and the desire for non-fossil fuel generated energy even at increased costs will drive market demand for solar. Management believes this will be especially true if existing generation by nuclear and coal is decommissioned due to age-related, safety, or environmental concerns or global governmental policy.
Anti-counterfeiting. Piracy and counterfeiting cost businesses more than $200 billion annually and account for the loss of more than 750,000 jobs in the US alone. Counterfeit drugs cost the global pharmaceutical industry approximately $18 billion in lost profits annually and according to Interpol, result in as many as one million deaths annually. QDs and other custom nanoparticles added to ink can be used to create unclonable unique “fingerprints” for every package using current printing technology, and these “fingerprints” can be quickly verified with a handheld device or optical in-line screening in manufacturing or handling lines.
Life Sciences. The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both thein vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, andin vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues.The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators.
Other applications. Current and future applications of QDs and other nanoparticles may impact a broad range of other industrial markets. These potentially include batteries and energy storage, commercial glass, water purification, improved thermoelectric components, biohazard detection sensors, diode lasers, and others. We intend to monitor these uses as they mature from basic research and plan for specific compositions as market opportunities develop.
Current Position
In January 2017, we reduced overhead costs and fine-tuned our operations. These efforts have enabled us to achieve the highest optical performance for cadmium free quantum dots in the company’s history. In addition, we have expanded the color range to now include blue in addition to red and green. While achieving extraordinary performance is important, management believes that being able to produce these materials repeatedly and at a low price point is the formula for success, and we have made these performance improvements while also doubling throughput and further reducing production. While we have been developing the infrastructure to support volume production, we have also explored the possibility of a licensing model and we believe there are merits to this model and we have begun to explore this as another, and possibly the best, option for the company to rapidly enter the revenue stage.
Widespread, rapid adoption of quantum dots by the display industry or in other markets may cause supply pressure that will need to be met with significant increases in available production capability. While we believe our current manufacturing capacity of approximately 4 metric tons per year is as big, if not bigger, than our largest competitors, we also realize that there are other challenges developing a supply chain and completing vendor qualifications that can be very time consuming. We believe a licensing model with a top tier chemical company could allow us to rapidly expand our market reach and capture substantially more market. We believe our low cost high-volume manufacturing process is ideally positioned to meet these requirements. This is anticipated to be a key advantage to the Company to meet market demand and drive increased revenue.
The advantages and benefits of our automated production process and equipment are:
Sales and Marketing Overview
During the past year, we have made significant progress in the development of QDs for use in electronic display applications, in particular for LCD TV applications. With a focus on cadmium free QDs, we have been developing technologies aimed at meeting key customer requirements, and we have been shipping samples of products to customers for evaluation, testing and film integration.
Our discussions with chemical companies, film manufacturers, and OEMs in the display industry confirm that the market opportunity is substantial and that our business plan is aligned with the customers’ product specification needs. While we are pursuing applications in several other markets as well, we believe that the display industry represents the most substantial and most immediate opportunity. We further believe that our advantages in delivery of large volumes of high quality, high performance QDs and other nanomaterials via our patented continuous production process makes us an attractive supplier. While we continue to pursue direct sales opportunities, we are also actively marketing a licensing model to top tier chemical companies. In January 2018 the Company engaged Canaccord Genuity to provide financial advisory and investment banking services as the Company may reasonably request. The Company believes such advisory services will be instrumental as we explore licensing, merger and JV opportunities.
Operational Overview
Our operations are located in San Marcos, Texas at the Star Park Technology Center, an extension of Texas State University (“TSU”). This location provides us with space for future expansion and with convenient access to TSU faculty and specialized laboratory facilities and equipment that can support joint research and development efforts with Texas State University. Located 30 miles south of Austin, Texas, the San Marcos facility is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets.
We have recently achieved commercial-scale continuous manufacturing equipment at the San Marcos facility and now have the capacity to produce more than four metric tons (4,000kg) per year of nanomaterials for supply to its customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ factories which are much larger and require significantly larger capital expenditures to build and labor expense to operate. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing know how and equipment. While we plan to work extensively with its current providers of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the manufacturing equipment in-house, if necessary. This also holds true in the event we are successful negotiating a licensing agreement with a significant chemical company, in which case we would likely be responsible for managing their scale up efforts.
We expect to commence generating revenues from licensing agreements and/or the production of materials at the San Marcos facility in early calendar year 2018. In the event we secure a license agreement we anticipate an upfront licensing payment to the company with ongoing royalty payments. Revenues from materials manufactured by the company are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.
Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing nanomaterials and QD market. Nanomaterials and QD technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and will focus a significant part of our efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, Rice, University of Arizona, and the numerous other research centers and departments with which we have relationships will be important aspects of the Company’s strategy. The company intends to increase its development of quantum dot solar cells in 2018 and is currently considering re-establishing its solar cell development in closer proximity to strategically significant solar technology resources.
Our key assets include patents, proprietary high-volume process equipment technology, licenses and other intellectual property rights, its knowhow and the expertise, capabilities, and relationships brought to the Company by its management team. We will continue to build out our intellectual property portfolio and licensing rights.
Patent licenses with Rice and University of Arizona include provisions for milestones and milestone payments. To date, such payments have been waived and/or extended by both Rice and University of Arizona, respectively, illustrating the support each university has given us as we have attempted to advance our business with measured resources. As we move forward, we expect to be able to meet all payment and other obligations under the Licenses, and the Company’s funding strategy takes account of these requirements. Solterra plans to utilize the Company’s patented low-cost, high-volume quantum dot production combined with TQD technology licensed from Rice to commercialize QD solar cells at a fraction of the cost of current silicon based solar cells.
Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. In fiscal year 2017, we applied for and received a Low Volume Exemption (“LVE”) under the Toxic Substances Control Act (“TSCA”) which allows us to manufacture QD quantities of 10,000 kilograms or less per year in the United States. We also recently gained Chemical Abstract Service (CAS) registration for QDX cadmium-free quantum dots through a division of the American Chemical Society and has also completed the requisite analysis in support of the QDX Safety Data Sheet (SDS). Both CAS and the SDS are required in order to ship high volumes of advanced materials abroad. Management believes that the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us and our products in the future. See “Risk Factors” section.
Management and Personnel
We have traditionally operated with limited resources and infrastructure. As of the date of this Form 10-K, we have 9 employees, including the management team.
Our Board of Directors, Scientific Advisory Board, and management team are comprised of individuals from a range of backgrounds with a strong representation from the business and scientific communities. Our Scientific Advisory Board includes Dr. Michael Wong, the inventor of our licensed TQD dot chemistry and Dr. Ghassan Jabbour, the inventor of our printed electronics technology, Tomio Gotoh, the inventor that led the technology efforts at NEC Japan, and Dr. Muniswamy Anandan, inventor, author and former president of the Society for Information Display (SID). Each of these individuals brings significant value to the Company through their connections and relationships with various universities, research institutions, and industry contacts.
As we move into the next stage of our business, we expect that the Board of Directors and management team will continue to be strengthened by the recruitment of additional members. With resignations of Mr. Carlson and Mr. Martin as board members and with Mr. Squires assuming the role of Chairman, President and CEO in December 2016, our Board of Directors no longer had majority of independent directors and does not as of the date of this Form 10-K; however, we intend to return to a majority of independent directors as soon as practicable and are currently in the process of determining the best way to achieve this goal. Also, our board currently does not include a member who meets the requirements of the SEC’s “financial expert” definition which we will take into account when recruiting new board members.
InSeptember 2015, our Board of Directors formed Audit, Compensation, and Nominating and Corporate Governance Committees, and while our Audit Committee currently does not have any independent directors, we continue to maintain the functions of these committees. Until committee vacancies are filled and approved by Board members, the committee roles will be assumed by the entire Board of Directors unless otherwise noted. Additionally, our Board of Directors established a separate Scientific Advisory Board comprised of individuals with strong scientific backgrounds.
Once we commence commercial manufacturing operations, we expect to add additional employees in operating management, sales/marketing, R&D, production, finance and accounting, and business administration from time to time, as necessary, as our business expands and the scale up of production accelerates. In the event a licensing agreement is determined to be the preferred route to first revenues, we will add the requisite personnel necessary to support our obligations under the licensing agreement.
Competition
The commercial nanomaterials industry and more specifically, the quantum dot industry, is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments by employing one or more competitive strategies. Competition among these companies is based on the following factors:
We believe we are well positioned in all four areas described above. We believe our QDs, including cadmium/heavy metal-free QDs, meet or exceed our competitors’ current brightness and light purity specifications, and our patented continuous manufacturing process allows us to produce large volumes at competitive price points while also giving us the ability to quickly scale up capacity and locate it anywhere in the world it is needed. Lastly, our continuing relationships with universities such as Rice, University of Arizona, and Texas State University, private and public labs and our approach to joint development ventures should enable us to achieve and maintain a leading position in R&D and commercialization of new products.
The Company is subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than the Company. See “Risk Factors” section.
Licenses and Intellectual Property
In2010, we entered into an agreement with a third-party provider of industrial process equipment to develop proprietary equipment for continuous production of QDs under which we retained all ownership and rights to the design and any related intellectual property. We have, to date, received two production machines, a 250kg per year capacity unit primarily for internal research and development purposes and sample production, and a larger commercial production unit that process improvements have allowed us to increase from approximately 2,000kg per year when first delivered to 4,000kg per year today. We believe the design of this manufacturing equipment will position us to quickly and efficiently scale up mass production of QDs for commercial sale.
While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the equipment in-house, if necessary.
Bayer Patents
In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, the global technological backbone and major innovation driver for Bayer AG of Leverkusen, Germany (the “Bayer Patents”). The Bayer Patents provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for heavy metal-free QDs and nanoparticles; increasing quantum yields; heavy metal-free QDs; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high performance solar cells and printed electronics.
Agreement with Rice University
On August 20, 2008, Solterra entered into a License Agreement with Rice University, which was amended and restated on September 26, 2011; also, on September 26, 2011, QMC entered into a new License Agreement with Rice (collectively the “Rice License Agreements”). On August 21, 2013, QMC and Solterra each entered into a second amended license agreement with Rice University. QMC and Solterra entered into third amended license agreements with Rice University on March 15 and 24, 2016, respectively.
The Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for QDs sold in electronic and medical applications.
The Company had verbal agreements with Rice University to modify the minimum royalty due dates that results in the Company being in full compliance with the agreements at March 31, 2017. On June 11, 2017, the Company executed the revised agreements. Per the revised agreements, both Quantum Materials and Solterra shall pay to Rice a non-refundable, non-creditable annual maintenance fee of $10,000 (“Maintenance Fee”) each January 1, beginning on January 1, 2018 and each year thereafter until the first Sale of a Rice Licensed Product. Licensee’s obligation to pay the Maintenance Fee shall terminate upon first Sale of a Rice Licensed Product unless otherwise specified. In addition, Quantum Materials and Solterra shall each pay to Rice an annual minimum royalty payment of $50,000 (“Annual Minimum Royalty”) on January 1 immediately following the first Sale of a Rice Licensed Product and each January 1 of every year thereafter for the term of the revised agreements, regardless of whether sales occur on an ongoing basis. The Annual Minimum Royalty shall be creditable towards royalties due in each respective royalty year, January 1 to December 31, following the due date. As of June 30, 2017, no royalties have been accrued for this obligation.
In February 2018, the Company re-evaluated the Ric Technology and the business case and determined that it was highly unlikely that the Company would be using the cadmium-based Rice technology. The Company’s substantial advancement of cadmium free dots coupled with the high volume, low cost flow technology purchased from Bayer Advanced Materials and further developed by the Company has resulted in the obsolescence of the Rice Technology. The final decision not to continue with the Rice license was driven largely by concerns that the Rice royalties could unduly burden the cost of the Company’s quantum dot products.
Agreement with University of Arizona
Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On November 22, 2017, Solterra memorialized prior oral agreements and entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by January 31, 2019, $125,000 by June 30, 2019 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. As of June 30, 2017, no royalties have been accrued for this obligation.
Agreement with Texas State University
The Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month and can be terminated with 60-days written notice of either party.
Other Intellectual Property
The Company also owns additional intellectual property in the form of proprietary equipment designs, trademarks, trade names, copyrights, scientific and technical know-how, and “trade secrets” that it intends to further develop and apply in its business, seeking to protect same with appropriate governmental filings and/or secrecy agreements. See “Risk Factors” section.
Governmental Approvals
Chemical substances manufactured in the Unites States in quantities of 10,000 kilograms or less per year are exempt from full premanufacture notice (“PMN”) review under section 5 of the Toxic Substances Control Act (“TSCA”). Low Volume Exemption (“LVE”) substances undergo a 30-day review. During fiscal year 2017, we applied for and received a LVE.
You should carefully consider the following risk factors, in addition to the other information presented in this Form 10-K, in evaluating us and our business. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline, which in turn could cause you to lose all or part of your investment.
RISKS ASSOCIATED WITH INVESTING IN OUR COMPANY
Risks Related to Our Business
Our business, operations and financial condition are subject to various risks. Some of these risks are described below and you should take these risks into account in making a decision to invest in our common stock. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned and our financial condition and operating results could be seriously harmed. In that case, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.
We need to continue as a going concern if our business is to succeed, if we do not we will go out of business.
There are a number of factors contained in our audited financial statements that raise substantial doubt about our ability to continue as a going concern. Such factors are our failure to attain profitable operations and our dependence upon financing to pay our liabilities. If we are not able to continue as a going concern, it is likely investors will lose their investments.
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
We continue to be a development stage company and face risks associated in a growth industry. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment. Even if we accomplish these objectives, we may not generate positive cash flows or the profits we anticipate in the future.
Our business plans for the sale of quantum dots (“QDs”) may not materialize.
Our business plans contemplate the sale of QDs for sale in multiple industries. We can provide no assurances that our business opportunities will have the desired end result which is most favorable or beneficial to our business, if at all, or that we will achieve profitable operations.
One of our intended businesses, to print electronic components is dependent on our patent license agreement with University of Arizona (“UA”).
Solterra entered into an exclusive patent license agreement, as amended, with UA (the “UA License”). Pursuant to the UA License, Solterra has an exclusive license to market, sell and distribute licensed products within the field of use which is defined as organic light emitting diodes in printed electronic displays and other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined therein). Pursuant to the UA License, we are obligated to pay minimum annual royalties. While UA has in the past waived certain milestone dates and extended certain payment dates, there is no assurance that we will meet the new milestones or payment requirements or that UA will agree to waive any future requirements. Termination of the UA License with UA could materially adversely affect our future opportunities.
The market for QDs is expected to grow significantly over the next several years.
The market for the sale of QDs is expected to grow significantly over the next several years. No assurances can be given that the quantum dots industry will grow as forecasted, that the potential applications described under “Item 1” will develop as discussed or that we will be able to capitalize on the growth and developments that do occur.
Our production method is expected to enable us to scale production more readily thereby reducing the production costs of QDs.
QDs remain an expensive commodity, and the price of QDs is directly affected by the high cost of producing QDs in relatively small batch quantities. As with other nanomaterials, these relatively high prices have been supported by favorable performance of the QDs at very low concentrations. Prices for QDs are expected to moderate over time as greater production efficiencies are discovered and implemented, resulting in higher volumes. This is expected to support greater adoption of QDs for use in end products and further support the growth of the quantum dot market. Under current production methods, rigorous processing has been required from batch method synthesis to produce a consistently pure and tightly size-controlled quantum dot product. To significantly grow the market, the industry will need to achieve much lower production costs for QDs, while maintaining strict control over quality and uniformity. We have developed a proprietary manufacturing technique to produce QDs that it believes has the potential to overcome the cost and performance challenges presented by other manufacturing methods, but there can be no assurances that the process will allow us to become competitive or to remain competitive against other manufacturing techniques that may be developed and applied.
We have entered into a number of non-disclosures agreements (“NDAs”) and material transfer agreements with several product manufacturers as well as others. No assurances can be given that sales, joint venture agreements and/or license agreements will result from these agreements.
In the past several years, we have entered into a number of NDAs and material transfer agreements with several product manufacturers in different industries as well as universities and independent research laboratories. In most cases, the NDAs with manufacturers are for exploring joint development of specific products or applications. No assurances can be given that the non-disclosure agreements and sample supply agreements entered into by us as described above will result in sales of our products.
Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing quantum dot market.
Quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and will focus a significant part of its efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility will be an important aspect of our strategy, as will our collaboration with Rice, UA, Texas State University and the numerous research centers and departments with which we have relationships. No assurances can be given that we will be able to successfully maintain and enhance our competitive position in the growing quantum dot market.
Our future success is dependent upon our licenses and intellectual property rights and know-how and protecting these rights.
Our key assets include our patents, licenses and intellectual property rights, know-how and the expertise, capabilities and relationships brought to us by our management team. We will continue to develop our intellectual property portfolio and licensing rights, and we currently have two patents pending related to the continuous flow production of QDs. No assurances can be given that we will be successful in building out our portfolio of owned and licenses intellectual property and in protecting these rights.
Our business is subject to environmental and other regulations.
Our business is subject to various types of government regulations, including regulation of hazardous materials used in or produced by the manufacture or use of nanomaterials, the manufacture, transportation and export of chemical substances, and the restrictions on the chemical composition of QDs used in the various applications. Our management believes that our patented and licensed chemistry and continuous manufacturing process allows us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us or our products in the future.
As we grow, we will need to obtain and retain additional qualified management and personnel.
We have traditionally operated with limited resources and infrastructure. We have a total of 9 employees, including our management team. Our Board of Directors, Scientific Advisory Board and management team are comprised of individuals from a range of backgrounds, with a strong representation from the business and scientific community. Our Scientific Advisory Board includes Dr. Michael Wong, the inventor of our TQD dot chemistry, Tomio Gotoh inventor of the NEC TK-80 microcomputer, Dr. Munisamy Anandan, former president of SID, and Dr. Ghassan Jabbour, the inventor of our printed electronics technology. Each of these individuals brings significant value to the Company through his connections and relationships with Rice, UA and various other university, research and industry contacts.
As we move into the next stage of our business, our Board of Directors and management team will seek to continue to be strengthened by the recruitment of additional members. As our finances permit, we will seek to add additional employees in operating management, sales/marketing, R&D, production and administration. Additional staffing will be added from time-to-time, as necessary, when our business expands and the scale up of production accelerates. No assurances can be given that we will be successful in hiring and retaining additional qualified board members, management and staff personnel from time-to-time as necessary.
Our future success depends upon our ability to compete in the market place.
The commercial quantum dot industry is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments employing one or more competitive strategies. Competition among these companies is based on product quality and performance characteristics, volume, price and continuing research development and product improvements. We believe that we are well positioned to compete in each of the aforementioned four areas. Nevertheless, we are subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than us.
Our future success may depend on our ability to develop our manufacturing capacity. If we are unable to achieve our capacity expansion goals, it would limit our growth potential and impair our operating results and financial condition.
In the future, we may seek to establish large scale production facilities. Our ability to complete the planning, construction and equipping of large scale manufacturing facilities is subject to significant risk and uncertainty, including:
If we are unable to develop and successfully operate manufacturing facilities, or if we encounter any of the risks described above, we may be unable to scale our business to the extent necessary to improve results of operations and achieve profitability. Moreover, there can be no assurance that if we do expand our manufacturing capacity that we will be able to generate customer demand for our quantum dot products at these production levels or that we will increase our revenues or achieve profitability.
We may be unable to effectively manage the expansion of our operations.
We expect to expand our business in order to satisfy demand for our QDs and obtain market share. To manage the development and expansion of our operations, we will be required to improve our operational and financial systems, procedures and controls and to expand, train and manage a larger employee base. Our management will also be required to maintain and expand our relationships with customers, distribution partners, suppliers and other third parties and to attract new customers, distribution partners and suppliers. In addition, our current and planned operations, personnel, systems and internal procedures and controls might be inadequate to support our future growth. If we cannot manage our growth effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures, and our business and results of operations could be harmed.
Our products may not gain market acceptance, which would prevent us from achieving increased revenues and market share.
The development of a successful market for our products may be adversely affected by a number of factors, many of which are beyond our control, including:
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If our products fail to gain market acceptance, we would be unable to increase our revenues and market share and to achieve and sustain profitability.
Technological changes in the QDs and end-user industries could render our products uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline.
The nanotechnology market is characterized by continually changing technology requiring improved features. Our failure to further refine our technology and develop and introduce new products could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline. The nanotechnology industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the industry and to effectively compete in the future. A variety of competing technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our products. Our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of products.
Our ability to develop market share and revenues depends on our ability to successfully grow our distribution relationships and distribution channels.
If we are unable to develop successfully our distribution relationships and distribution channels, our revenues and future prospects will be materially harmed. As we seek to grow our revenues by entering new markets in which we have little experience selling our products, our ability to increase market share and revenues will depend substantially on our ability to expand our distribution channels by identifying, developing and maintaining relationships with resellers. We may be unable to enter into relationships with resellers in the markets we target or on terms and conditions favorable to us, which could prevent us from entering these markets or entering these markets in accordance with our plans. Our ability to enter into and maintain relationships with resellers will be influenced by the relationships between these resellers and our competitors, market acceptance of our products and our low brand recognition as a new entrant.
We face risks associated with the marketing, distribution and sale of our products and if we are unable to effectively manage these risks, it could impair our ability to develop and expand our business.
Significant management attention and financial resources will be required to develop successfully our sales channels. In addition, the marketing, distribution and sale of our products outside the United States expose us to a number of markets in which we have limited experience. If we are unable to manage effectively these risks, it could impair our ability to grow our business abroad. These risks include:
Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share.
The duration of our product warranties could be lengthy. We believe our warranty periods are consistent with industry practice. The possibility of future product failures could cause us to incur substantial expenses to repair or replace defective products. Furthermore, widespread product failures may damage our market reputation and reduce our market share and cause sales to decline.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships could adversely affect our market penetration and revenue growth.
Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our technology and our products relative to our competitors. We can provide no assurance that we will be able to establish new strategic relationships in the future. In addition, strategic alliances that we may establish, will subject us to a number of risks, including risks associated with sharing proprietary information and loss of control of operations that are material to our business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement, require us to issue additional shares of our common stock and subject us to the risk that the third party will not perform its obligations pursuant to the arrangement, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, our business may be adversely affected by a number of factors that are outside of our control.
If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the nanotechnology market.
Our ability to compete effectively against competing technologies will depend, in part, on our ability to protect our current and future licensed and other proprietary technology, product designs and manufacturing processes by obtaining, maintaining, and enforcing our intellectual property rights through a combination of licenses, patents, copyrights, trademarks, and trade secrets and also through unfair competition laws. We may not be able to obtain, maintain or enforce adequately our intellectual property and may need to defend our products against infringement or misappropriation claims, either of which could result in the loss of our competitive advantage in our marketplace and materially harm our business and profitability. The risks we face in protecting our intellectual property and in developing, manufacturing, marketing and selling our products include:
Our technology and products could unknowingly infringe intellectual property rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and disrupt our business.
In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries. While we have received a freedom to operate opinion from our intellectual property counsel, there may be patents or patent applications in the United States or other countries that are pertinent to our products or business of which we are not aware. The technology that we incorporate into and use to develop and manufacture our intended products may be subject to claims that they infringe the patents or proprietary rights of others. The success of our business will also depend on our ability to develop new technologies without infringing the intellectual proprietary rights of others. Third parties may allege that we infringe patents, trademarks or copyrights, or that we misappropriated trade secrets. These allegations could result in significant costs and diversion of the attention of management.
If a successful claim were brought against us and we are found to infringe a third party’s intellectual property right, we could be required to pay substantial damages, including treble damages if it is determined that we have willfully infringed such rights, or be enjoined from using the technology deemed to be infringing such third party’s intellectual property rights or from using, making or selling products deemed to be infringing such third party’s intellectual property rights. If we have supplied infringing products or technology to third parties, we may be obligated to indemnify those third parties for damages they may be required to pay to the patent holder and for any losses they may sustain as a result of the infringement. In addition, we may need to attempt to license the intellectual property right from such third party or spend time and money to design around or avoid the intellectual property. Any such license may not be available on reasonable terms, or at all. Regardless of the outcome, litigation can be very costly and can divert management’s efforts. An adverse determination may subject us to significant liabilities and/or disrupt our business.
We may be unable to protect adequately or enforce our proprietary information, which may result in its unauthorized use, reduced revenues or otherwise reduce our ability to compete.
Our business and competitive position depend upon our ability to protect our patents, licensed and other proprietary technology, including any manufacturing processes and products that we develop. Despite our efforts to protect this information, unauthorized parties may attempt to obtain and use information that we regard as proprietary. Any patents issued to our licensor or us in connection with our efforts to develop new technology for our products may not be broad enough to protect all of the potential uses of the technology.
In addition, when we do not control the prosecution, maintenance and enforcement of certain important intellectual property, such as a technology licensed to us, the protection of the intellectual property rights may not be in our hands. If the entity that controls the intellectual property rights does not adequately protect those rights, our rights may be impaired, which may impact our ability to develop, market and commercialize our products.
Our means of protecting our proprietary rights may not be adequate, and our competitors may:
We intend to pursue a policy of having our employees, consultants and advisors execute proprietary information and invention agreements when they begin working for us. However, these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we fail to maintain trade secret and patent protection, our potential, future revenues may be decreased.
Licenses for technologies and intellectual property may not be available to us.
We have entered into license agreements for technologies and intellectual property rights, including QDs. Our Rice License, which currently permits us to grant sublicenses, is subject to other terms and conditions which may limit our ability to use the licensed intellectual property under certain circumstances. For example, our tetrapod quantum dot license may terminate if we materially breach the Rice License or if we abandon the construction of a manufacturing facility to exploit the licensed technology. We may need to enter into additional license agreements in the future for other technologies or intellectual property rights of third parties. Such licenses, however, may not be available to us on commercially reasonable terms or at all.
Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in potentially significant monetary damages and penalties and adverse publicity.
If we fail to comply with present or future environmental laws or regulations, we may be required to pay substantial civil or criminal penalties, incur significant capital expenditures, or suspend, limit or cease operations. Any failure by us to control the use of or generation of, or to restrict adequately the discharge or disposal of, hazardous substances or wastes or to otherwise comply with the complex, technical environmental regulations governing our activities could subject us to potentially significant monetary damages and penalties, criminal proceedings, third party property damage or personal injury claims, natural resource damage claims, cleanup or other costs, or restrictions or suspensions of our business operations. In addition, under some foreign, federal and state statutes and regulations governing liability for releases of hazardous substances or wastes to the environment, a governmental agency or private party may seek recovery of response costs or damages from generators of the hazardous substances or operators of property where releases of hazardous substances have occurred or are ongoing, even if such party was not responsible for the release or otherwise at fault. Also, federal, state or international environmental laws and regulations may ban or restrict the availability and use of certain hazardous or toxic raw materials that are or may be used in producing our products, and substitute materials may be more costly or unsatisfactory in performance. We believe that we either have all environmental permits necessary to conduct our business or have initiated the process to obtain additional or modified environmental permits needed to conduct our business. While we are not aware of any outstanding, material environmental claims, liabilities or obligations, future developments such as the implementation of new, more stringent laws and regulations, more aggressive enforcement policies, or the discovery of unknown environmental conditions associated with our current or past operations or properties may require expenditures that could have a material adverse effect on our business, results of operations or financial condition. Any noncompliance with or incurrence of liability under environmental laws may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.
Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties and adverse publicity.
Our intended manufacturing operations and research and development activities involve the use of mechanical equipment which involves a risk of potential injury to our employees. These operations are subject to regulation under the Occupational Safety and Health Act (“OSHA”). If we fail to comply with OSHA requirements, or if an employee injury occurs, we may be required to pay substantial penalties, incur significant capital expenditures, suspend or limit production or cease operations. Also, any such violations, employee injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
Like other retailers, distributors and manufacturers of products that are used by consumers, we face an inherent risk of exposure to product liability claims in the event that the use of our products we sell results in injury. Since some of our products may be used in electricity producing devices, it is possible that consumers could be injured or killed by our products, whether by product malfunctions, defects, improper installation or other causes. In addition, since the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. We intend to rely on our general liability insurance to cover product liability claims and currently do not expect to obtain separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and if our insurance protection is inadequate to cover these claims, such claims could require us to make significant payments. Also, any product liability claims and any adverse outcomes with respect thereto may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.
Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful.
We intend to sell our products to product manufacturers, domestic and international distributors, and other resellers. Most of our distribution partners will have a geographic or applications focus. We expect to collaborate closely with a number of manufacturers and distributors, both domestically and internationally. We are actively working to recruit our distribution partners by very careful selection of a few accounts and channel partners. We intend to selectively pursue additional strategic relationships with other companies worldwide for the joint marketing, distribution and manufacturing of our products. These resellers are expected to range from large, multinational corporations to small, development-stage companies, each chosen for their particular expertise. We believe that these relationships will enable us to leverage the marketing, manufacturing and distribution capabilities of other companies, explore opportunities for additional product development and more easily enter new geographic markets in a cost-effective manner, attract new distribution partners and develop new applications for our products. Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful. Moreover, we face risks associated with the marketing, distribution and sale of our products internationally.
Our ability to use NOL carryforwards to offset future taxable income for U.S. federal income tax purposes may be subject to limitation
Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years).
If we fail to maintain an effective system of internal controls, we may not be able to accurately and timely report our financial results, which could lead to a loss of investor confidence in our financial statements and have an adverse effect on our stock price.
Effective internal controls are necessary for us to provide reliable and accurate financial statements and to effectively prevent fraud. As further described in Part II Item 9A “Controls and Procedures,” management has concluded that, because of a material weakness, our disclosure controls and procedures were not effective as of June 30, 2017. The Company has and will continue to enhance its controls and expects to remediate the material weakness. However, we cannot be certain that these measures will be successful or that we will be able to prevent future significant deficiencies or material weaknesses. Inadequate internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on investor confidence in our financial statements, the trading price of our stock and our access to capital.
Risks Related to Our Common Stock
We are subject to the reporting requirements of the federal securities laws, which can be expensive.
We are a public reporting company in the United States and therefore, we are subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC will cause our expenses to be higher than they would be if we were a privately-held company.
The issuance or sale of equity, convertible or exchangeable securities in the market, or the perception of such future sales or issuances, could lead to a decline in the price, if any, of our common stock.
Any issuance of equity, convertible or exchangeable securities, including for the purposes of expansion of our business, may have a dilutive effect on our existing stockholders. In addition, the perceived risk associated with the possible issuance of a large number of shares or convertible securities exchangeable into a large number of shares of our common stock could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. Subsequent sales of our common stock in the open market or the private placement of our common stock or convertible securities exchangeable into our common stock could also have an adverse effect on the market price, if any, of our shares. If our stock price declines, it may be more difficult for us to or we may be unable to raise additional capital.
In addition, future sales of substantial amounts of our currently outstanding common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sales, will have on the market price of our stock.
Our operating results will be subject to quarterly fluctuations which could lead to uncertainty in the marketplace.
Our revenue and earnings may fluctuate significantly from quarter to quarter in the future due to a variety of factors, including, without limitation:
We anticipate that our operating expenses will continue to increase significantly, particularly as we begin production and develop our internal infrastructure to support our anticipated growth. If our product revenues in any quarter do not increase correspondingly, our net losses for that period will increase. Moreover, given that a significant portion of our operating expenses is largely fixed in nature and cannot be quickly reduced, if our product revenues are delayed or below expectations, our operating results are likely to be adversely and disproportionately affected. For these reasons, quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or public market analysts in any quarter, the market value of our common stock would likely decrease, and it could decrease rapidly and substantially.
THE FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INHERENT IN AN INVESTMENT IN THE COMPANY.
Item 1B. Unresolved Staff Comments
Not applicable.
In June 2013, we opened a Wet Lab facility and principal executive office in San Marcos, Texas for research and development and the production of QDs and other nanomaterials. The facility where the Company is located is owned by Texas State University. In June 2015, the Company moved into a larger lab space in the same facility. As of June 30, 2017, our monthly rent for the San Marcos facility and office was $9,075. We recently decreased our laboratory and office space at the San Marcos facility and as of the date of this Form 10-K, our monthly rent is $4,538.
The Company was served in Hays County, Texas in a compliant for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears is $95,000 plus interest and other charges and has accrued this amount on its financial statements at June 30, 2017.
CAUSE NUMBER 17-2033; Hays County, Texas
Two lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked Quantum Materials’ transfer agent, Empire Stock Transfer, Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements Quantum Materials had entered into in late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus accrued interest of $10,170) on two of the loans. Subsequently, in November, 2017, the Company also repaid $213,650 and $8,636 of accrued interest on two of the remaining loans on their due dates.
Quantum filed suit for an injunction to stop the release of the stock. The two lenders, SBI Investments LLC, 2014-1 (SBI), and L2 Capital, LLC (L2), hired the national law firm of K& L Gates to stop the injunction; problematically, this same firm had previously represented Quantum Materials. Quantum filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.
New counsel for SBI and L2, Cleveland Terrazas PLLC, brought suit against Quantum for $1.5 million on the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed technical defaults. The court in Hays County granted Quantum’s temporary injunction and set the full case for trial. The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against Quantum and refiled similar actions in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three suits are related to the same transactions. The lenders claim 140% interest, attorney’s fees, 20 million shares of stock, and damages. Quantum maintains all loans have been paid timely.
The Company denies all the abovementioned allegations and will vigorously defend all claims.
CAUSE NUMBER: 17CV06093; Johnson County, Kansas
The Kansas lawsuit is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against Quantum; the second claim is for breach of contract of the first L2 promissory note against Quantum; the final claim is for breach of contract regarding the second L2 promissory note against both Quantum and Stephen Squires, individually.
The Company denies all the abovementioned allegations and will vigorously defend all claims. The Company does not anticipate any contingency losses will have material effects on its financial statements.
CAUSE NUMBER: 2017-025283-CA-01; Miami-Dade County, Florida
The Florida lawsuit largely mirrors the suit in Kansas; defaults are alleged as follows:
On July 6, 2017, Quantum filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In comparison to the unrestated financial statement previously filed by Quantum, the Revised Report materially and adversely affects SBI’s rights with respect to the notes. This restatement of financial statements constituted a breach of each of the notes. Furthermore, because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.
On July 27, 2017, Quantum’s auditor resigned, and replaced its auditor without seeking or obtaining the consent of SBI. This replacement of Quantum’s auditor constituted an alleged breach of the SBI notes. Because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.
The Company denies all the abovementioned allegations and will vigorously defend all claims.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades in the over-the-counter marketplace on the OTCQB under the symbol “QTMM.” The OTCQB marketplace offers trading for securities of smaller reporting companies like us that are reporting to the Securities and Exchange Commission. The OTCQB marketplace has effectively replaced the FINRA operated OTC Bulletin Board (OTCBB) as the primary market for SEC reporting securities that trade off exchanges.
As of June 30, 2017, there were 368,955,585 shares of common stock outstanding and 210 stockholders of record according to our transfer agent. The foregoing number of stockholders does not include approximately 660 additional beneficial stockholders held in street name as of April 24, 2018
The following table sets forth the high and low closing prices for our common stock during the most recent two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Quarter Ended | High | Low | ||||||
September 30, 2015 | $ | 0.20 | $ | 0.15 | ||||
December 31, 2015 | $ | 0.16 | $ | 0.13 | ||||
March 31, 2016 | $ | 0.15 | $ | 0.10 | ||||
June 30, 2016 | $ | 0.17 | $ | 0.09 | ||||
September 30, 2016 | $ | 0.13 | $ | 0.10 | ||||
December 31, 2016 | $ | 0.11 | $ | 0.08 | ||||
March 31, 2017 | $ | 0.20 | $ | 0.07 | ||||
June 30, 2017 | $ | 0.14 | $ | 0.11 |
Historically we have not paid cash dividends on our common stock, and the Board of Directors intends to retain all of our earnings, if any, to finance the development and expansion of our business. There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends. Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.
Issuer Sales of Unregistered Securities
From July 1, 2016 to June 30, 2017, we had the following sales of unregistered common stock.
Date of Sale | Title of Security | Number Sold | Consideration Received and Description of Underwriting or Other Discounts to Market Price or Convertible Security Afforded to Purchases | Exemption from Registration Claimed | If Option, Warrant or Convertible Security, Terms of Exercise or Conversion | |||||
August 2016 | Common Stock | 500,000 | Shares issued as stock-based compensation; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
August 2016 | Common Stock | 250,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
August 2016 | Common Stock Warrants | 833,200 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.15 per share through August 23, 2021 | |||||
September 2016 | Common Stock | 200,000 | Shares issued with convertible promissory note | Section 4(2); and/or Rule 506 | Not applicable | |||||
September 2016 | Common Stock Options | 2,450,000 | Issuance of stock options | Section 4(2); and/or Rule 506 | Options exercisable at $0.12 per share through September 20, 2021 | |||||
September 2016 | Common Stock Warrants | 250,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through September 15, 2019 | |||||
September 2016 | Common Stock Warrants | 416,667 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.15 per share through September 29, 2021 | |||||
October 2016 | Common Stock | 6,250,000 | Shares issued for warrants exercised; $375,000 cash received; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
October 2016 | Common Stock | 2,500,000 | Shares issued for warrants in cashless exercise; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
October 2016 | Common Stock | 833,334 | Shares issued upon conversion of $100,000 of debentures; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
October 2016 | Common Stock | 17,899 | Shares issued in exchange for $2,147 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
October 2016 | Common Stock Options | 50,000 | Issuance of stock options | Section 4(2); and/or Rule 506 | Options exercisable at $0.12 per share through October 26, 2021 | |||||
October 2016 | Common Stock Warrants | 208,300 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.15 per share through October 6, 2021 | |||||
Warrants exercisable between $0.20 and $0.24 per share through | ||||||||||
October 2016 | Common Stock Warrants | 1,916,667 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | April 25, 2017 | |||||
November 2016 | Common Stock | 416,667 | Shares issued upon conversion of $50,000 of debentures; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
November 2016 | Common Stock | 17,808 | Shares issued in exchange for $2,137 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
November 2016 | Common Stock | 1,750,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
November 2016 | Common Stock Warrants | 833,200 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.15 per share through November 7, 2021 | |||||
January 2017 | Common Stock | 11,958,333 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
Warrants exercisable at $0.15 per share through January 17 - 31, | ||||||||||
January 2017 | Common Stock Warrants | 666,560 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | 2022 | |||||
February 2017 | Common Stock | 833,333 | $100,000 cash received; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
February 2017 | Common Stock | 200,000 | Shares issued with convertible promissory note | Section 4(2); and/or Rule 506 | Not applicable | |||||
February 2017 | Common Stock | 4,061,904 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
Warrants exercisable at $0.15 per share through February 14 - 28, | ||||||||||
February 2017 | Common Stock Warrants | 416,600 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | 2022 | |||||
February 2017 | Common Stock Warrants | 250,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through February 1, 2020 | |||||
February 2017 | Common Stock Warrants | 833,333 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through February 13, 2019 | |||||
March 2017 | Common Stock | 1,250,000 | Shares issued for warrants exercised; $50,000 cash received; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
March 2017 | Common Stock | 833,333 | Shares issued upon conversion of $100,000 of debentures; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
March 2017 | Common Stock | 66,667 | Shares issued in exchange for $8,000 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
March 2017 | Common Stock | 1,250,000 | Shares issued with convertible promissory note | Section 4(2); and/or Rule 506 | Not applicable | |||||
March 2017 | Common Stock Warrants | 375,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through March 27, 2020 | |||||
March 2017 | Common Stock Warrants | 1,247,572 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.13 per share through March 29, 2022 | |||||
April 2017 | Common Stock | 2,500,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
May 2017 | Common Stock | 500,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
May 2017 | Common Stock Warrants | 933,884 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.13 per share through May 3, 2022 | |||||
June 2017 | Common Stock | 4,150,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
June 2017 | Common Stock | 1,079,910 | Shares issued in exchange for $109,645 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
June 2017 | Common Stock | 41,667 | $5,000 cash received; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
June 2017 | Common Stock | 1,000,000 | Shares issued with convertible promissory note | Section 4(2); and/or Rule 506 | Not applicable | |||||
June 2017 | Common Stock | 1,125,000 | Shares issued upon conversion of $135,000 of debentures; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | |||||
June 2017 | Common Stock Options | 18,200,000 | Issuance of stock options | Section 4(2); and/or Rule 506 | Options exercisable at $0.12 per share through June 16, 2022 | |||||
June 2017 | Common Stock Warrants | 250,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through June 15, 2020 |
Repurchase of Securities
In the year ended June 30, 2017, there were no purchases by the Company of its common stock, however, the company cancelled 194,059 shares of common stock during this time. After an analysis, it was determined the Company’s records differed from the records of the transfer agent, thus requiring the shares to be cancelled in the Company’s books to agree with the transfer agent.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section and elsewhere in this Form 10-K, which are incorporated herein by reference.
Business Overview
We are a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots (“QDs”), tetrapod quantum dots (“TQDs”), and other nanoparticles for a range of applications in televisions, displays and other optoelectronics, photovoltaics, solid state lighting, life sciences, security ink, battery, and other markets. We are currently trading in the OTC markets under the ticker symbol “QTMM.” Solterra Renewable Technologies, Inc. (“Solterra”) is a wholly-owned operating subsidiary of QMC that is focused on the photovoltaic (solar cell) market.
QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in diameter. Approximately 10,000 would fit across the diameter of a human hair. Their small size makes it possible for them to exhibit certain quantum mechanical properties. QDs emit either photons or electrons when excited. In the case of photons, the wavelength (color) of light emitted varies depending on the size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of QDs in a range of electronic and other applications in the display, lighting, and biomedical industries. QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of QDs in printed photovoltaic cells.
QDs were first discovered in the early 1980s and the industry has developed to the point where QDs are now being used in an increasing range of applications, including the television and display industries, the light emitting diode (“LED”) lighting (also known as solid-state lighting) industry, and the biomedical industry. Samsung and other manufacturers are currently shipping televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.
A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, however a number of recent market research reports have forecasted rapid growth of the QD market. For example, a March 2017 publication by Research and Markets titled “Global Quantum Dots Market, Analysis and Forecast: 2017-2022” which estimates the quantum dots market togrow over $7 billion by 2022 at a CAGR of 46.4% through 2016-2022
We have developed proprietary equipment that management believes allows us to mass produce large quantities of high quality, high performance QDs and TQDs in a continuous process at lower expense and at lower capital costs than other existing processes. In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, the global technological backbone and major innovation driver for Bayer AG of Leverkusen, Germany (the “Bayer Patents”). The Bayer Patents acquired provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for cadmium-free QDs and nanoparticles; increasing quantum yields; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high performance solar cells and printed electronics.
We also have the exclusive license from the University of Arizona (“UA”) to a patented technique for printing LEDs. We believe that these intellectual properties and proprietary technologies developed internally position us to become a leader in the overall nanomaterials and quantum dot industry and a preferred supplier of high performance QDs and TQDs to an expanding range of applications.
Plan of Operation
We currently operate from a leased facility in San Marcos, Texas at the STAR Park Technology Center, an extension of Texas State University (the “San Marcos Facility”). This location provides us with convenient access to university faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University. Located approximately 30 miles south of Austin, Texas, this location is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets. We intend to relocate the operations to a larger facility capable of accommodating the manufacturing of QD processing equipment once sustained revenues are achieved.
The Company has established commercial-scale manufacturing equipment at the San Marcos facility and now through process optimizations has the capacity to produce more than four metric tons (4,000kg) per year of quantum dots and other nanomaterials for supply to its customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ operating factories which are much larger and required significantly higher capital expenditures. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing knowhow and equipment. While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development process and could contract with one or more other competent suppliers of equipment, if necessary.
We expect to commence generating revenues from the production of materials at the San Marcos facility in early calendar year 2018.2019. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.
partners and licensees.
Our marketing strategy is to engage in strategic arrangements with manufacturers, distributors, and others to jointly develop applications using its patented continuous production process. Such joint collaborations will involve us working closely with its industry counterparts to optimize the performance of our materials in each application or device and to use the results from product development and testing to further enhance product specifications. On July 15, 2015 we entered into a joint development agreement with an unnamed major display panel manufacturer and on September 11, 2015 we entered into a funded product development agreementWe continue to collaborate with a leading global optical film manufacturer, Nitto Denko Corporation. In June 2016 we entered into a development agreement with an unnamed companynumber of partners in the oil and natural gas sector to produce novel technology for use in thatdisplay industry. We entered into two joint venture agreements during the year ending June 30, 2017, neither of which were not operational at June 30, 2017 or ashave signed a licensing agreement to establish quantum dot production in Asia and we are currently awaiting receipt of the filing date of this Form 10-K.upfront license fee before commencing work. To date, we have not entered into any formal commercial supply agreements or licensing agreements.
TheseWe believe these collaborations will support our internal research and development activities which will continue to be a primary part our business. Our principal revenue streams are expected to come from (i) sales of quantum dots and other nanomaterials, (ii) royalties from manufacture and/or sales of products and components by third parties incorporating the Company’s products or technology, (iii) milestone payments under joint development arrangements with product developers and manufacturers, and (iv) fees where we engage in licensing/sublicensing arrangements for our owned and/or licensed technology.
Our ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing nanomaterials and quantum dot market. Nanomaterial and quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and intend to focus a significant part of our efforts on this, as we have done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, Rice, UA, and the numerous other research centers and departments with which we have relationships will be important aspects of our strategy.
Solterra plans to utilize QMC’s patented low-cost, high-volume quantum dot production combined with TQD technology licensed from Ricethe Bayer quantum dot solar cell patents to commercialize quantum dot solar cells at a cost that is competitive with conventional fossil fuel generation on an unsubsidized basis.
Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. Management believes the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop which could adversely affect the Company or its products in the future. See “Risk Factors” section.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determining our financial condition and operating results. Estimates are based upon information available as of the date of the consolidated financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments often as a result of the need to make estimates about the effect of matters inherently uncertain. The most critical accounting policies and estimates are described below.
Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation.
Revenue Recognition: The Company recognizes revenue from the sale of products and services in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements.”
The Company recognizes revenue when product has been delivered and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after normal payment terms. If it is determined that the fee is not fixed or determinable, the Company recognizes revenue at the time the fee becomes due, provided that all other revenue recognition criteria have been met. Sales arrangements may contain customer-specific acceptance requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service and is recognized upon receipt of customer acceptance.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable: Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company personnel and with the customers directly.
Financial Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures. The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Property and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the various classes of assets as follows:
Licenses and Patents: Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated useful life of five years.
Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35“Impairment or Disposal of Long-Lived Assets”, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and itsthe carrying value. There were no impairment charges in the consolidated statements of operations during the years ended June 30, 20172018 and 2016.2017.
Debt Issuance Costs: The costs related to the issuance of debt are presented on the consolidated balance sheets as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt.
Income Taxes: The Company follows ASC 740“Income Taxes”regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.
The Company follows ASC 740“Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital.
Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815,Accounting for Derivative Instruments and Hedging Activities,as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
Fair Value Measurements: The Company estimates fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair value measurement according to the lowest level of input that is significant to the measurement even though other significant inputs that are more readily observable may have also utilized.
Research and Development Costs: Research and development (R&D) costs are expensed as incurred. These expenses include the costs of our proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements.
Reclassifications: Certain amounts in the June 30, 2016 consolidated financial statements have been reclassified to conform to the classifications in the June 30, 2017 consolidated financial statements.
Liquidity and Capital Resources
Going Concern
The Company recorded losses from continuing operations in the current period presented and has a history of losses. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.
In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.
As of June 30, 2017,2018, we had a working capital deficit of $3,437,864,$4,387,148, with total current assets and liabilities of $1,307,534$1,758,206 and $4,745,398$6,145,354 respectively. Included in the liabilities are $361,375$682,242 owed to our officers, directors and employees for services rendered and accrued through June 30, 2017, $2,511,8292018, $3,402,421 of convertible debentures, net of unamortized discount and $62,738$134,255 of notes payable that are due within one year. As a result, we have relied on financing through the issuance of common stock and convertible debentures.
As of June 30, 2017,2018, we have cash and cash equivalent assets of $52,611.$2,025. We continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into securities of the Company. Management believes it may be necessary for the Company to rely on external financing to supplement working capital in order to meet the Company’s liquidity needs in the fiscal years ended 20182019 and 2019;2020; the success of securing such financing on terms acceptable to the Company, if at all, cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.
The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated:
Years Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Operating activities | $ | (1,090,821 | ) | $ | (2,222,107 | ) | ||
Investing activities | (1,877 | ) | (44,911 | ) | ||||
Financing activities | $ | 1,042,112 | $ | 2,052,644 |
Year Ended June 30, | ||||||||
2017 | 2016 | |||||||
Operating activities | $ | (2,264,405 | ) | $ | (2,380,022 | ) | ||
Investing activities | $ | (44,911 | ) | $ | (19,832 | ) | ||
Financing activities | $ | 2,094,942 | $ | 1,993,000 |
Operating Activities. Net cash used in operating activities was $2,264,405$1,090,821 for the year ended June 30, 20172018 compared to $2,380,022$2,222,107 for the same period of 2016, an increase2017, a decrease in cash used of $115,617.$1,131,286. The increasedecrease was primarily driven by increasesdecreased in research and development costs offset byand decreased payments on accounts payable and accrued expenses.
payable.
Investing Activities. Net cash used in investing activities was $44,911$1,877 for the year ended June 30, 20172018 compared to $19,832$44,911 for the same period of 2016, an increase2017, a decrease of $25,079.$43,034. The increasedecrease is primarily related to fewer purchases of equipment, offset by a one-time movement of restricted cash to cash that occurred during the year ended June 30, 2016. There was no such change in restricted cash during the year ended June 30, 2017.equipment.
Financing Activities. Net cash provided by financing activities was $2,094,942$1,042,112 for the year ended June 30, 20172018 compared to $1,993,000$2,052,644 for the same period of 2016, an increase2017, a decrease of $101,942.$1,010,532. The increasedecrease is primarily due to greater sales offewer common stock sales and issuances of convertible debentures, and lower proceeds from notes payable. We also had higher principal payments andon our long-term debt issuance costs during the year ended June 30, 2017.
2018.
These Ourconsolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern. As of June 30, 2017,2018, we had not yet achieved profitable operations, had a working capital deficit of $3,437,864,$4,387,148, and expect to incur further losses in the development of the business, all of which casts substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We continue to explore available financing options, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that future financing, if needed, will be obtained on terms satisfactory to us, if at all. In this respect, see Note 1 in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a going concern.
Results of Operations - Year Ended June 30, 2017 Compared to Year Ended June 30, 2016Financing Arrangements
September 2014 Convertible Debenture
Balance Sheets
CashBetween September 16, 2014 and Cash Equivalents
As of June 30, 2017, the Company’s consolidated balance sheet included cash and cash equivalents of $52,611 compared to $266,985 at June 30, 2016, a decrease of $214,374. The decrease in cash was due primarily to funds spent on research and development and related activities. The Company has been in a development stage since inception and, as a result,October 28, 2014, the Company has largely relied on financing throughentered into Convertible Debenture Agreements to obtain a total of $500,050 in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the issuance“Debenture Holders”). The Debentures have terms of common stockfive years maturing between September 16, 2019 and convertible debentures to fund operations.
Prepaid expensesOctober 30, 2019. The Debentures bear interest at the rate of 6% per annum and other current assets
Prepaid expensesare pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and other current assets were $1,254,923restricted shares of Common Stock at June 30, 2017 compared with $102,100a conversion price of $0.15 per share at June 30, 2016,any date and will receive an increaseequal number of $1,152,823. The increase was due primarily to the issuancewarrants having a strike price of stock for consulting fees which will be amortized over the useful life$0.30 per share and a term of five years. None of the services.
Property and Equipment
Net property and equipment was $723,236Debentures were converted into common shares during the year ended June 30, 2018.
Interest expense for the years ended June 30, 2018 and 2017 compared with $774,674was $1,524 and $1,524, respectively
As of June 30, 2018, $25,050 of principal was outstanding.
January 2015 Convertible Debenture
On January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in the comparable periodevent any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018, the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received 3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for years ended June 30, 2018 and 2017 of $0 and $92,298, respectively. Interest expense for the years ended June 30, 2018 and 2017 was $40,000 and $40,000, respectively.
As of June 30, 2018, $500,000 of principal was outstanding.
April – June, August, October and November 2016 a decreaseConvertible Debentures
During the fourth quarter of $51,438. During the year ended June 30, 2017, there were additions to property and equipment of $44,911, but these were offset by periodic depreciation expense which resulted in the decrease.
Licenses and Patents
Licenses and patents decreased $38,548 during the year ended June 30, 2017. The decrease is a result of periodic amortization booked during the year ended June 30, 2017.
Accrued Expenses
The balance at June 30, 2017 was $1,809,456 compared to $625,474 at June 30, 2016, an increase of $1,183,982. The balance at June 30, 2017 is comprised of accrued professional fees of $977,549 and other miscellaneous accruals of $831,907. The balance at June 30, 2016 is comprised of legal fees payable of $475,384 and accounts payable and other miscellaneous accruals of $150,090.
Due to related parties
The balance at June 30, 2017 was $361,375 compared to $230,000 at June 30, 2016, an increase of $131,375. The balance is comprised of accrued liabilities to the Company’s executives for unpaid wages.
Notes Payables
Note Payable-Insurance
During the year ended June 30, 2017, to finance an insurance premium, we issued a negotiable promissory note at an interest rate of 8 % per annum. The note was paid in full on November 11, 2017.
In June 2017, the Company also issued a negotiable promissory notesold 1,565 Units for $50,000 to a private individual due in 90 days with an interest ratetotal proceeds of 6%. The note was paid in full as of the date of this report.
Convertible Debentures
During the year ended June 30, 2017, we entered into the following convertible debenture agreement (see Note 6):
August, October$1,565,000 from three affiliated and November 2016 Convertible Debentures
fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000. In$200,000 and sold $50,000 in proceeds in October and November 2016, the Company sold 50 and 200, respectively, additional units for total proceeds of $50,000 and $200,000, respectively.2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatmentThe conversion price was reset to $0.012 per share in June 2018 as a result of this anti-dilution feature, the Company believes that is has control over whether or not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.
September 2016 Convertible Promissory Notetriggering event.
In September 2016,accounting for the convertible debentures, the Company enteredallocated the fair value of the warrants to the proceeds received in the amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018, and 2017, of $231,702 and $323,894, respectively.
The Company recognized a beneficial conversion expense for the years ended June 30, 2018, and 2017, of $1,021,500 and $64,775, respectively.
Interest expense for the years ended June 30, 2018, and 2017, of $113,570 and $144,878, respectively.
During the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into a Securities Purchase Agreement3,791,666 and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000 unregistered and restricted2,375,000 shares of common stock respectively. As of June 30, 2018, $1,275,000 of principal was outstanding. As of the Companydate of this report, maturities totaling $825,000 of principal have been extended for one year until March and a convertible promissory note in the principal amountApril of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through September 15, 2019. The promissory note has a term of eight months maturing on May 15, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights2019, and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversionremaining $250,000 have not been extended, and are past due as of the note. In March 2017, the note and accrued interest were converted into 833,333 and 66,667 sharesdate of common stock, respectively.this report.
January - MarchJanuary-March 2017 Convertible Debentures
During the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether or not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $52,954 and $15,656, respectively. The Company recognized beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and $62,400, respectively.
During the year ended June 30, 2018, $200,000 of these debentures converted into 1,666,667 shares of common stock.
Interest expense for the years ended June 30, 2018 and 2017 was $11,275 and $8,529, respectively.
As of June 30, 2018, $60,000 of principal was outstanding.
February 2017 Convertible Promissory Note
In MarchFebruary 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000 unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through February 1, 2020. The promissory note has a term of eight months maturing on October 1, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds received in the amount of $24,733, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $9,012 and $15,721, respectively.
There was no interest expense recorded for the year ended June 30, 2018 and $8,000 was recognized during 2017.
As of June 30, 2018, $0 of principal was outstanding. In August 2017, the Note Holder converted $100,000 of principal and $8,000 of accrued interest into 833,333 and 66,667 shares of common stock, respectively.
March 2017 Convertible Debenture
In March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 375,000 common stock warrants exercisable at $0.12 per share through March 28, 2020. The promissory note has a term of eight months maturing on November 28, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note. This
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $77,248, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $39,137 and $38,111, respectively. The Company recognized beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and $72,752, respectively.
The Company recognized interest expense for the years ended June 30, 2018 and 2017 of $118,000 and $12,000, respectively. In September 2017 the debenture was converted in its entirety viafull to common stock. At March 31, 2018, and June 30, 2017, the principal balance remaining on this note was $0 and $150,000, respectively. The Company recognized 3.5 million common shares issuable and $118,000 of imputed interest expense during September 2017 as a settlement agreement on September 20, 2017.result of this debt settlement.
March 2017 Convertible Promissory Notes
In March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2 received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes. The principal and interest for this note has been paid in full as of November 3, 2017.
In March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months.
The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $43,661 and $52,764, respectively.
Interest expense for the years ended June 30, 2018 and 2017 of $421,901 and $9,418, respectively.
As of June 30, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of $514,969 for the year ended June 30, 2018.
As of June 30, 2018, and 2017, $222,350 and $541,850 of principal was outstanding, respectively. During the year ended June 30, 2018, the Company paid $319,500 of principal.
May 2017 Convertible Promissory Notes
In May 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $213,650 in gross proceeds. In connection with the second funding tranche, SBI and L2 received 280,165 and 653,719 common stock warrants, respectively, exercisable at $0.13 per share through May 2, 2022. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $71,795, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company also recorded original issue discount (“OID”) of $13,650 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $48,101 and $23,693, respectively.
Interest Expense was recorded for the years ended June 30, 2018 and 2017 of $112,900 and $2,065 respectively. As of June 30, 2018, and June 30, 2017, $0 and $233,150 of principal and interest forwas outstanding, respectively. In October 2017 the Company paid the principal of this note has been paid in full as of November 3, 2017.note.
June 2017 Convertible Debenture
In June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The Maturity date of the Note was extended to May 1, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In Aprilaccounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. Interest expense was recorded for the years ended June 30, 2018 and 2017 of $10,500 and $8,000 respectively. Beneficial conversion expense was recorded for the years ended June 30, 2018 and 2017 of $0 and $45,660 respectively. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 and 2017 of $45,434 and $8,907, respectively. As of June 30, 2018, and 2017, $100,000 of principal was outstanding. In May 2018 the debenture’s maturity date was extended to MayFebruary 1, 2018.2019.
July 2017 Convertible Debenture Conversions
In October 2016, holders ofJuly 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 principal associated within gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible debentures issuedpromissory note in April – June, August, October and November 2016 converted the principal into 833,334amount of $100,000. The Note Holder received 1,000,000 shares of the Company’s common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share.share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In November 2016, holders of $50,000 principal associated withaccounting for the convertible debenturespromissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $53,875. As of June 30, 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.
Interest expense was recorded for the years ended June 30, 2018 and 2017 of $18,500 and $0, respectively.
September 2017 Convertible Debenture
Debenture A)
In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in April – June, August, October and November 2016 convertedgross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal into 416,667amount of $150,000. The Note Holder received 1,650,000 shares of the Company’s common stock and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share.share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In March 2017, holders of $100,000 principal associated withaccounting for the convertible debenturespromissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $82,720. As of June 30, 2018, $150,000 of principal was outstanding.
Interest expense was recorded for the years ended June 30, 2018 of $12,000 and $0, respectively.
Debenture B)
In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in September 2016 convertedgross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal into 833,333amount of $495,000. The Note Holder received 10,000,000 shares of the Company’s common stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share.share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In June 2017, holders of $135,000 principal associated withaccounting for the convertible debenturespromissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense of $131,663. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $318,337. As of June 30, 2018, $450,000 of principal was outstanding.
Interest expense for the year ended June 30, 2018 of $36,000.
Debenture C)
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in April – June, August, October and November 2016 convertedgross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2018 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into 1,125,000unregistered and restricted shares of the Company’s common stockCommon Stock at thea conversion price of $0.12 per share.share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
The Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months.
Interest expense was recorded for the year ended June 30, 2018 of $18,000.
November 2017 Convertible Debenture
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,007. Interest expense was recorded for the year ended June 30, 2018 of $1,380. As of June 30, 2018, $27,000 of principal was outstanding.
November 2017 Convertible Debenture
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 112,482 common stock warrants exercisable at $0.15 per share through November 13, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $18,864 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $18,864. As of June 30, 2018, $0 of principal was outstanding, as it was converted into 833,333 shares of common stock. (This debenture is not scheduled above, as it originated, and terminated within the same fiscal year.)
December 2017 Convertible Debenture
In December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $41,175. Interest expense was recorded for the year ended June 30, 2018 of $6,000. As of June 30, 2018, $75,000 of principal was outstanding.
February 2018 Convertible Debenture
In February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $24,785. Interest expense was recorded for the year ended June 30, 2018 of $3,600. As of June 30, 2018, $45,000 of principal was outstanding.
March 2018 Convertible Debenture
In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,697. Interest expense was recorded for the year ended June 30, 2018 of $2,400 was recognized. As of June 30, 2018, $30,000 of principal was outstanding.
In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $35,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $35,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 23, 2021. The promissory note has a term of six months maturing on September 23, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,043. Interest expense was recorded for the year ended June 30, 2018 of $2,800. As of June 30, 2018, $35,000 of principal was outstanding.
April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately 6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,455. Interest expense was recorded for the year ended June 30, 2018 of $4,800 was recognized. As of June 30, 2018, $60,000 of principal was outstanding.
April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and 200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,616. Interest expense for the year ended June 30, 2018 of $1,027 was recognized. As of June 30, 2018, $70,000 of principal was outstanding.
April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $1,675. Interest expense was recorded for the year ended June 30, 2018 of $316 was recognized. As of June 30, 2018, $20,000 of principal was outstanding.
June 2018 Convertible Debenture
In June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately 7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $3,431. Interest expense was recorded for the year ended June 30, 2018 of $3,200 was recognized. As of June 30, 2018, $40,000 of principal was outstanding.
Results of Operations - Year Ended June 30, 2018 Compared to Year Ended June 30, 2017
The following table sets forth our consolidated results of operations for the periods indicated:
Years Ended | ||||||||||||||||
June 30, | Increase/ | |||||||||||||||
2018 | 2017 | (Decrease) | % | |||||||||||||
Statement of Operations Information: | ||||||||||||||||
Revenues | $ | 20,120 | $ | 33,250 | $ | (13,130 | ) | -39.5 | % | |||||||
General and administrative | 6,093,075 | 5,447,576 | 645,499 | 11.8 | % | |||||||||||
Research and development | 188,274 | 1,006,214 | (817,940 | ) | -81.3 | % | ||||||||||
Beneficial conversion expense | 1,303,078 | 275,110 | 1,027,968 | 373.7 | % | |||||||||||
Interest expense, net | 1,023,989 | 314,679 | 709,310 | 225.4 | % | |||||||||||
Change in value of derivative liability | (514,969 | ) | - | (514,969 | ) | N/A | ||||||||||
Accretion of debt discount | 1,327,742 | 649,524 | 678,218 | 104.4 | % |
Revenues
StatementsDuring the year ended June 30, 2018 we recognized revenue of Operations
$20,120 compared to $33,250 for the year ended June 30, 2017, a decrease of $13,130, or 65.3%. At the Company’s stage of product development, our revenues are derived from funded product development agreements, and product testing agreements, and are not significant for fiscal years 2018 or 2017 as the Company has focused on product development.
RevenuesGeneral and Administrative Expenses
During the year ended June 30, 2017 we recognized revenue of $33,250 compared to $240,835 for the year ended June 30, 2016, a decrease of $207,585. Of the 2016 revenues, $225,000 resulted from the Company entering into a one-time funded product development agreement with a leading global film manufacturer. No similar funding agreement occurred in the year ended June 30, 2017.
General and Administrative Expenses
During the year ended June 30, 20172018 the Company incurred $5,447,576$6,093,075 of general and administrative expenses, an increase of $229,185$645,499, or 11.8%, from the $5,218,391$5,447,576 recorded for the year ended June 30, 2016.2017. The increase in general and administrative expenses breaks down as follows:
Year Ended June 30, | Increase / | |||||||||||
2017 | 2016 | (Decrease) | ||||||||||
Compensation and severance expense | $ | 1,096,401 | $ | 967,492 | $ | 128,909 | ||||||
Stock-based compensation | 1,438,570 | 2,326,024 | (887,454 | ) | ||||||||
Legal and audit expenses | 852,058 | 634,778 | 217,280 | |||||||||
Travel expense | 45,863 | 124,119 | (78,256 | ) | ||||||||
Corporate expenses | 597,298 | 468,995 | 128,303 | |||||||||
Other professional fees | 1,282,489 | 571,907 | 710,582 | |||||||||
Depreciation | 96,349 | 86,527 | 9,822 | |||||||||
Amortization | 38,548 | 38,549 | (1 | ) | ||||||||
Total General and Administrative Expenses | $ | 5,447,576 | $ | 5,218,391 | $ | 229,185 |
Years Ended | ||||||||||||||||
June 30, | Increase/ | |||||||||||||||
2018 | 2017 | (Decrease) | % | |||||||||||||
Compensation and severance related expenses | $ | 864,345 | $ | 1,096,401 | $ | (232,056 | ) | -21.2 | % | |||||||
Stock-based compensation | 1,580,012 | 1,438,570 | 141,442 | 9.8 | % | |||||||||||
Legal and audit expenses | 597,004 | 852,058 | (255,054 | ) | -29.9 | % | ||||||||||
Travel expenses | 10,334 | 45,863 | (35,529 | ) | -77.5 | % | ||||||||||
Corporate expenses | 529,479 | 597,298 | (67,819 | ) | -11.4 | % | ||||||||||
Other professional fees | 2,379,264 | 1,282,489 | 1,096,775 | 85.5 | % | |||||||||||
Depreciation | 99,589 | 96,349 | 3,240 | 3.4 | % | |||||||||||
Amortization | 33,048 | 38,548 | (5,500 | ) | -14.3 | % | ||||||||||
Total General and Administrative Expenses | $ | 6,093,075 | $ | 5,447,576 | $ | 645,499 | 11.8 | % |
The increase in Otherother professional fees was due primarily to various consultants that provided services throughout the year ended June 30, 2017. This2018. A portion of the increased professional fees was offset by having a decreaselower headcount, and thus compensation being reduced. Stock-based compensation increased in stock-based compensation. In the year ended June 30, 2016 the Company’s former CFO became fully vested2018 due to some employees electing to be paid in certain stock or options, that resulted in the Company recognizing a large amountlieu of stock-based compensation. There was no such vesting in the year ended June 30, 2017.cash.
Research and Development Expenses
During the year ended June 30, 20172018 the Company incurred $1,006,214$188,274 of research and development expenses an increase(“R&D”), a decrease of $526,306$817,940, or 81.3%, from the $479,908$1,006,214 recorded for the year ended June 30, 2016.2017. The primary reasons for the increasedecrease are, in fiscal year 2017, the Company incurred i) costs associated with a sponsored research agreement the Company has in place with Texas State University, ii) expenditures for lab equipment, supplies, and other consumables and iii) costs associated with the development of new products.
Gain on Settlement
During the year ended June 30, 2017, there These costs were no gains on settlement.
During the year ended June 30, 2016, the Company’s former Chief Financial Officer, surrendered 638,300 sharesreduced, awaiting financing of common stock as well as options to purchase an additional 987,500 shares in exchange for the cancellation of indebtedness to the Company aggregating $79,000. As a result of this surrender, the Company recorded a gain on settlement of $174,568.further R&D expenditures.
Beneficial Conversion Feature on Convertible Debenture
The beneficial conversion expense for the year ended June 30, 20172018 was $275,110$1,303,078 compared to $513,941$275,110 during the year ended June 30, 2016, a decrease2017, an increase of $238,831. During$1,027,968, or 373.7%. The increase was due primarily to issuance of new convertible debentures, and two triggering events creating down-round features in certain debentures to be recognized during the yearsyear ended June 30, 2017 and 2016, the Company entered into convertible debenture agreements that contained beneficial conversion features.March 31, 2018. See Note 6.6 to the Consolidated Financial Statements.
Interest Expense
Interest expense for the year ended June 30, 20172018 was $314,679$1,023,989 compared to $83,764$314,679 during the year ended June 30, 2016,2017, an increase of $230,915.$709,310, or 225.4%. The increased interest expense recorded in the fiscal year 2018 was primarily related to the 8% interest rate on additional debentures of outstanding convertible debentures, recognition of additional debt discount related to certain debt, and interest recorded due to debenture extensions.
Change in value of derivative liability
Interest expense recorded during
During the yearsyear ended June 30, 2017 and 20162018 the Company recorded a benefit of $514,969 related to the change in value of derivative liability. The benefit is related to the variouschange in value of the convertible debentures feature issued in March and May of 2017 during the yearsyear ended June 30, 2017 and 2016.
According to the provisions of the Convertible Debenture agreements, the Company may elect to issue shares of the Company’s common stock to pay accrued interest on the debentures. In the years ended June 30, 2017 and 2016, the Company issued 1,182,284 and zero shares of common stock, respectively, to pay $121,929 and $0 of accrued interest payable, respectively.2018.
Accretion of Debt Discount
During the year ended June 30, 20172018 the Company recorded $649,527$1,327,742 of accretion of debt discount expense, an increase of $424,175$678,218, or 104.4% from the $225,349$649,524 recorded for the year ended June 30, 2016.2017. The increase in accretion of debt discount expense is primarily related to the accretionissuance of debt discounts related to the various convertible debentures issued during the years ended June 30, 2017 and 2016.
Results of Operations
The following table sets forth our consolidated results of operations for the periods indicated:
Year Ended June 30, | ||||||||
2017 | 2016 | |||||||
Statement of Operations Information: | ||||||||
Revenues | $ | 33,250 | $ | 240,835 | ||||
General and administrative | 5,447,576 | 5,218,391 | ||||||
Research and development | 1,006,214 | 479,908 | ||||||
Gain on settlement | - | (174,568 | ) | |||||
Beneficial conversion expense | 275,110 | 513,941 | ||||||
Interest expense, net | 314,679 | 83,764 | ||||||
Accretion of debt discount | 649,524 | 225,349 |
fiscal year.
Off-balance sheet arrangements
We have no off-balance sheet arrangements including arrangements that would affecthave or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources, market risk support and credit risk supportexpenditures or other benefits.capital resources.
Recent Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June 30, 2018.
In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.
The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation.
The Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. We will continue to evaluate this area and expect to finalize our conclusions by the first quarter of fiscal 2019.
In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In February 2016, the FASB issued ASU 2016-02,Leases,which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers: Deferral of the Effective Date,which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10,Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements, when adopted.
Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
Item 8. Financial Statements and Supplementary Data
Our Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the reports of our independent registered public accounting firms, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear beginning on page F-1 of this document and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
(2) New Independent Accountants:
None
Item 9A. Controls and Procedures
ScopeEvaluation of the EvaluationDisclosure Controls and Procedures
The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) conducted an evaluation of the Company’s disclosure controls and internal controls as of June 30, 2017. The evaluation included a review of the controls’ (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the evaluation, the CEO and CFO sought to identify data errors, control problems, and acts of fraud, and they sought to ensure that appropriate corrective action, including process improvements, was being undertaken.
Among other matters, the evaluation was to determine whether there were any significant deficiencies or material weaknesses in our internal controls which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether the evaluators identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our internal controls. This information is important both generally and because Rule 13a-14(a)/15d-14(a) Certifications require that the CEO and CFO disclose that information to our Board (audit committee), and our independent auditors, and to report on related matters in this section of the annual report.
Conclusions
Based upon the evaluation as of June 30, 2017, the CEO and CFO concluded that (i) our disclosureDisclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e)15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are not effective in giving us reasonable assurancecontrols and other procedures that theare designed to ensure that information we are required to disclosebe disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities Exchange Commission’s (“SEC”) rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to the our management including our CEOchief executive officer and CFO,our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and (ii)procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the Company hasdesired control objectives. Due to the inherent limitation of controls systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
As of June 30, 2018, an evaluation was carried out under the supervision and with the participation of our management, including our interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) under the Securities Exchange Act of 1934). Based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2018, because of material weaknessweaknesses in our internal control over financial reporting described below in Management’s Report On Internal Controls Over Financial Reporting.below.
Notwithstanding the identified material weakness, the CEO and CFO believe the consolidated financial statements included in this annual report on Form 10-K fairly represent in all material respects our financial condition, results of operations, and cash flows at and for the periods presented in accordance with US GAAP.
Management’s Report of Management on Internal ControlsControl Over Financial Reporting
The management of Quantum Materials Corp.Management is responsible for establishing and maintaining adequate internal control over financial reporting, for the Company as such term is defined in Exchange Act RuleRules 13a-15(f). Internal control over financial reporting is a process designed by, or and 15d-15(f) under the Exchange Act. Under the supervision of,and with the CEO and CFO, and effected by the Company’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizationsparticipation of management, including our interim Chief Executive Officer and the Company’s Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material adverse effect on the Company’s financial statements.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance thatChief Financial Officer, we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
The CEO and CFO conducted an evaluation of the effectiveness, as of the Company’sJune 30, 2018, of our internal control over financial reporting as of June 30, 2017 based on criteria for effective internal control over financial reporting describedthe framework in “Internal Control—2013 Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of theBased on our evaluation under this framework, our management concluded that a material weakness exists as described below. A material weakness is “a deficiency or a combination of deficiencies, inour internal control over financial reporting such that there is a reasonable possibility that a material misstatementwas not effective as of June 30, 2018 due as described below.
Management did not maintain effective procedures in the areas of review of the registrant’s annual or interim financial statement will not be prevented or detected in a10K, review of third-party valuation reports and income taxes. These material weaknesses resulted from the lack of timely basis.” The CEO and CFO reviewed the results of its evaluation with our Board of Directors.
During the fiscal year ended June 30, 2017, management identified certain accounting errors related to entries made in calendar year 2017. Also, partly becauseeffective review of the complete change in the Company’s financeperiod-end closing process and accounting staff, including the CFO in January 2017, the Company currently does not have sufficient in-house expertise in US GAAPadequate personnel and financial reporting and instead, the Company had to rely heavily on the expertise and knowledge of external advisors in matters related to US GAAP and financial reporting. External advisors have also helped prepare and review these consolidated financial statements and Form 10-K which the Company was unable to file within the time periods specified in the SEC rules. As a result, management concluded that the Company did not design and maintain effective controls over its accounting processes and financial statement preparation function.resources. Specifically, (i) certain control activities over the completeness and accuracy of our accounting were not performed on a timely basis or at the appropriate level of precision, (ii) there is a lack of segregation of duties, and (iii) the company did not have sufficient internal resources to prepare and review these financial statements in a timely manner.
To immediately address the material weaknesses identified in our evaluation, we engaged external advisors to apply additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with US GAAP. As a result, management believes the consolidated financial statements included in this annual report on Form 10-K fairly represent in all material respects our financial condition, results of operations, and cash flows at and for the periods presented in accordance with US GAAP
● | The Company’s Form 10-K and other filings need to be reviewed thoroughly by management on a timely basis. Management’s responsibility is to oversee that the Company is capable of developing accurate and timely financial information. The Company must reinforce procedures to ensure that Form 10-K as well as other required filings are done on a timely and accurate basis. | |
● | The Company is small, and does not have sufficient staff to maintain satisfactory separation of duties. | |
● | Management reviewed all information available to them from the outside consultant’s valuation reports, which included all external models, however, all inputs of the consultants’ model were not available to management and were not verified by the management. A more thorough review which includes all inputs of the models used by the consultants will ensure no additional journal entries need to be recorded. |
Material Weakness Remediation EffortsPlan
Management is committed to remediating each of the material weaknesses identified above. We are currently seeking to recruit anhave recruited experienced US GAAP/financial reporting professional to augment and upgrade our finance and accounting staff to address issues of accuracy, completeness, adequate segregation of duties, and timeliness in financial statement preparation and reporting. However, the Company may be unable to remediate this weakness until it has received additional funding that may be necessary to hire additional personnel. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to review and monitor our accounting procedures, perform internal audit procedures, and to prepare our consolidated financial statements and reports. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to document the existing financial processes, risk assessment, and internal controls systematically.
We believe our recently hired personnel, or through professional engagement of consultants, will improve our documentation and internal control processes and procedures.
Changes in Internal Controls over Financial Reporting
Subsequent to December 31, 2016 and prior to the filingOther than was described above, there were no material changes in our system of this Form 10-K, there has been a complete change in the Company’s finance and accounting staff, including the CFO, also reductions in accounting staff have necessitated the elimination and/or reduction of certain, non-critical control processes and procedures.
In addition, the Company had previouslyformed a majority-independent board including a board member who meets the requirements of the SEC’s “financial expert” definition. However, from the time Sri Peruvemba assumed the role of President and CEO in June 2016, our Board of Directors has not been comprised of a majority of independent directors and is not as of the filing date of this Form 10-K; notwithstanding, the Company intends to return the Board of Directors to a majority of independent directors, and we are currently in the process of determining the best way to achieve this goal.
Also, in September 2015, the Company formed an Audit Committee of the Board of Directors, however it currently has one independent director, and with the resignation of Mr. Carlson and later Mr. Benjamin, we no longer have a director that qualifies as a “financial expert.”
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as such attestation(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the year ended June 30, 2018 that has materially affected, or is not required by smaller reporting companies.reasonably likely to materially affect, our internal control over financial reporting.
Christopher Benjamin resigned from the Board of Directors immediately prior to the filing of this Form 10-K.None.
37 |
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth as of the date of this prospectus, the name, age, position of each person who serves as an executive officer, director and significant employee of our Company. There are no family relationships among any ofcertain information regarding our executive officers and directors and significant employees.as of October 15, 2018.
Name | Age | Position with the Company | ||||
Stephen Squires | 58 | Chief Executive Officer, President, Director | ||||
Chief Financial Officer | ||||||
David Doderer | ||||||
Dr. Ghassan Jabbour | Director | |||||
Shane Squires | Director |
(1) | |
(2) |
|
Stephen Squires is the father of Shane Squires. |
The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board of Directors and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time.
Officer and Director Backgrounds
The following is a brief summary of the background of each director and executive officer of our Company:
Stephen Squires, President and Chief Executive Officer, Director.Mr. Squires has over 25 years of experience in turnarounds, startups, business development, mergers and acquisitions and strategic planning. Mr. Squires is skilled at identifying emerging technologies and driving commercialization/global market introduction to position companies for growth. He has served as the Company’s President, CEO and Chairman from 2008 to June 30, 2016 and he is servinghas served as CEO and President since December 2016. Prior to QMC, from 2001 to 2008, Mr. Squires’ principal occupation was consulting and advising in the areas of advanced materials, nanotechnology, applications engineering, strategic international marketing with emphasis on middle east and commercialization of emerging technologies for Orasi LLC. From 1983 to 2001, Mr. Squires, as founder, served as President and Chief Executive Officer of Aviation Composite Technologies, Inc., a company whose principal business was the engineering, design, manufacture and refurbishment of advanced composite aero structures (“Aviation Composite”). Under Mr. Squires’ leadership, Aviation Composite grew from zero to over 200 employees and operated a 100,000 square foot state of the art facility. Aviation Composite was merged with USDR Aerospace in 2001. From 1977 to 1983, he worked at McDonnell Douglas Corporation, a company engaged in the business of building advanced tactical fighter aircraft and space vehicles, developing and adapting advanced materials for combat aircraft applications. Management believes that Mr. Squires’ background with the Company and its subsidiaries, his business experience in leading and managing businesses, and his extensive experience in the advanced materials, nanotechnology and engineering industries makes him a suitable personqualified to serve as a director.
E. Jamie Schloss,Robert Phillips, Chief Financial Officer:. Mr. Schloss joined Quantum Materials, Inc.Phillips has extensive experience in accounting, finance, Security and Exchange Commission (“SEC”) financial reporting, Sarbanes Oxley compliance (“SOX”) and strategic planning in diverse industries including software, hardware manufacturing, medical technology and global communication services. Less than two years after completing his MBA at Texas A&M, he became CFO of a publicly traded company going through a difficult turnaround. A few years later he again became CFO and Chief Strategy Officer at publicly traded SecureCare Technologies, a medical technology spin-out and negotiated private equity investments. His early CFO experience has led me to positions and consulting engagements ranging from CFO of iStream Technologies, a startup business process management company specializing in regulatory compliance, to world-class Apple where he was a managing consultant of a high transaction volume stock operations team and managed accounting and related Form 10-Q and Form 10-K financial equity disclosure and technical accounting assessments as Chief Financial Officer on January 20, 2017.well as transitioned the departments operational site from Cupertino to Austin. He was also VP of Venture Development at a certified public accountant for more than 30 years before joining the Board of Directors of Surge Global Energy, Inc. from October 2004 to July, 2006 and was reappointed to the Surge Boardventure backed e-commerce startup incubator in February, 2008. Mr. Schloss served as Chief Financial Officer of Surge Global from December 2005 to June 2006 andAustin, Texas. He has served as its Chief Executive OfficerController of Rocket Gaming Systems as well as Financial Reporting and ChiefPlanning Director at Multimedia Games and at Rignet during an IPO. As financial consultant at Bridgepoint Consulting Group, he has held CFO services, Interim Controller and SEC Financial Officer from February, 2008 until October, 2012,Reporting positions at which time he resigned as Chief Executive Officer but remained the Chief Financial Officer until December 31, 2015. Prior to his positions with Surge, Mr. Schloss’ company, Castle Rock Resources, Inc., raised fundsPhunware, Crossroads Systems, ActivePower, Harden Healthcare, ArthroCare, Boardbooks.com, Rainmaker Technologies and participated in the drilling of more than 20 deep oil & gas wells in Texas, New Mexico,Fallbrook Technologies. Also, financial consulting and Louisiana from 1990 to 1995 through joint venture partnerships. In June 1995, Castle RockCFO services engagements at multinational companies including BMC Software, Natco Group, Respironics and partners sold seven wells in the Townsend (Sublime) Field in south Texas to Weeks Exploration Company for an aggregate of $16,000,000. Castle Rock continues to own and manage a well in south Texas which has been producing oil and gas for more than 18 years. Mr. Schloss has a Juris Doctorate (JD) degree, a B.A. from the University of Pennsylvania, and an MBA equivalent from Pace College in New York City. Mr. Schloss worked as a Certified Public Accountant in California and New Jersey from 1966-1970. Prior to his experience in the oil & gas drilling and exploration business, Mr. Schloss was an executive and officer of several entertainment industry firms including MCA-Universal., Warner Bros. Television Distribution, Western-World Television, and Hal Roach Studios.FIC Group
David Doderer, Vice President - Research and Development.Director. Mr. Doderer has over 20 years of research and development experience in emerging technologies including aerospace, biotech, and nano and quantum materials. He joinedMr. Doderer was the Company in 2008.Vice President of R&D for the company from 2008 through 2017. From 2006 to 2008, he managed Hudler Titan LLC, a technology consulting company, specializing in advanced nanofiber filtration for gaseous streams; experimental design and predictive modeling; and a clean energy/ clean air/ clean water initiative through aggregation of retail level contributions in alternative energy-based carbon offset programs. From 2002 to 2005, he served as principal investigator for USGN, a company engaged in the business of defense, safety and security solutions, where he contributed to numerous patents/patents pending and proprietary processes. Mr. Doderer’s experience in engineering, research and development in emerging technologies, his contributions to the filings of numerous patents and proprietary processes, and commercial planning provides invaluablesignificant experience to, and makes him qualified to be a member of, our Board.Board of Directors.
Dr. Ghassan Jabbour.Dr. Jabbour ishas served as Chief Science Officer and a director of the Company since December 2016 and he previously served on the Board of Directors. Dr. Jabbour also served as Chief Science Officer from 2008, until Junetaking a brief 6-month sabbatical in 2016. Dr. Jabbour is a Fellow SPIE and Fellow EOS and chairs our Advisory Board. Dr. Jabbour is the Canada Research Chair Tier 1-Professor of Electrical Engineering at the Univeristy of Ottawa. From 2013 to 2016 Dr. Jabbour was also the Center Director and Lead Professor of Advanced Manufacturing, Renewable Energy Center, University of Nevada Reno. Prior to that, he served as Founding Director of the Solar and Alternative Energy Science and Engineering Research Center and also AlRawabi Endowed Research Chair at KAUST (King Abdullah University of Science and Technology) in Saudi Arabia from December 2009 to January 2013. Dr. Jabbour was the Director of Flexible and Organic Electronics Development at the Flexible Display Center (FDC) during 2006-2010, and a Professor of Chemical and Materials Engineering at Arizona State University. He was also the Technical Advisory Board Leader on Optoelectronic Materials, Devices and Encapsulation at FDC. He has been selected to the Asahi Shimbun 100 New Leaders of the USA and received the Presidential Award for Excellence from the Hariri Foundation in 1997. Dr. Jabbour’s research experience encompasses flexible-roll-to-roll-electronics and displays, smart textile, moisture and oxygen barrier technology, transparent conductors, organic light emitting devices, organic and hybrid photovoltaics, organic memory storage, organic thin film transistors, combinatorial discovery of materials, nano and macro printed devices, micro and nanofabrication, biosensors, and quantum simulations of electronic materials. Dr. Jabbour attended Northern Arizona University, the Massachusetts Institute of Technology (MIT), and the University of Arizona. Prof. Jabbour has authored and co-authored over 700 publications, invited talks, and conference proceedings. He is the editor of several books and symposia proceedings involving organic photonics and electronics, and nanotechnology. Professor Jabbour is guest editor of the MRS Bulletin issue on “Organic Photovoltaics”. He is the Chair and/or Co-Chair of over 50 conferences related to photonic and electronic properties of materials and their applications in displays and lighting, hybrid photosensitive materials, and hybrid integration of semiconducting and nanotechnology. We believe Dr. Jabbour hasis qualified to sit on the Board of Directors due to his extensive scientific and technical experience with the Company’s technology and proposed products.
Shane Squires. Mr. Squires has served as a director of the Company since 2016. Mr. Squires is currently a research analyst with Howard Hughes Corp. engaged in the business of managing global investments in direct real estate, real estate securities, infrastructure securities and master limited partnerships (MLPs) From 2016 through 2017 he served as a research analyst at Invesco Real Estate (a subsidiary of Invesco Ltd.), engaged in the business of managing global investments in direct real estate, real estate securities, infrastructure securities and master limited partnerships (MLPs). Mr. Squires has held this position with Invesco Real Estate specializing in business intelligence and data strategy since March 2016. Prior to this, Mr. Squires held the position of Senior Economist at Realpage Inc. from 2014 until 2016. Mr. Squires has a Masters in Applied Economic Analysis and a Bachelor of Science in Economics from the University of Texas at Arlington. We believe Mr. Squires is the son of Stephen Squires, the founderqualified to serve as a member of our subsidiary, Solterra.Board of Directors due to his extensive experience in business and investing.
Corporate Governance
Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Nevada Revised Statutes and our bylaws. Members of the Board of Directors are kept informed of our business through discussions with the Chief Executive Officer and other key members of management and by reviewing materials provided to them by management.
In the past, there have been no arrangements or understandings pursuant to which a director or executive officer was selected to be a director or executive officer other than employment contracts with our executive officers. Prior to, September 22, 2015, we have had no nominating committee of the Board. Executive officers serve at the pleasure of the Board, subject to their rights under any employment contracts.
We review our corporate governance policies and practices by comparing our policies and practices with those suggested by various groups or authorities active in evaluating or setting best practices for corporate governance of public companies. Based on this review, we have adopted, and will continue to adopt, changes that the Board believes are the appropriate corporate governance policies and practices for our Company. We intend to comply with the Sarbanes-Oxley Act of 2002 and subsequent rule changes made by the SEC and any applicable securities exchange.
Director Qualifications and Diversity
Our Board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The Board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the renewable energy, finance and capital market industries. In evaluating nominations to the Board, our Board also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the willingness to assume and carry out fiduciary responsibilities. Qualified candidates for membership on the Board will be considered without regard to race, color, religion, sex, ancestry, national origin or disability. See “Nominating and Corporate Governance Committee” section.
Risk Oversight
The full Board has oversight of and will prioritize the following risks:
● | Risks and exposures associated with corporate governance, and management and director succession planning, strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation. | |
● | Risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters. | |
● | Risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans. |
Board Leadership Structure
The Chairman of the Board presides at all meetings of the Board according to our bylaws. The Chairman is required to be appointed on an annual basis by at least a majority vote of the remaining directors. Currently, the office of Chairman of the Board and Chief Executive Officer, are held by Mr. Stephen Squires. The Company has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer.
Scientific Advisory Board
In July 2014, the Company announced the formation of the Scientific Advisory Board chaired by Dr. Ghassan Jabbour who is also a member of the Company’s Board of Directors. Other members of the Scientific Advisory Board were Dr. Michael Wong of Rice University and former member of our Board of Directors, and Mr. Tomio Gotoh, a pioneer of the personal computer in Japan, and Dr. Munisamy Anandan.
Dr. Ghassan Jabbour.See biography under “Officers and Directors Backgrounds.”
Dr. Michael S. Wong is a Principal Investigator, Associate Professor in Chemical and Biomolecular Engineering, and Associate Professor in Chemistry (Joint Appointment) at Rice University. Dr. Wong heads the Catalysis and Nanomaterials Laboratory and is the inventor of the patented synthesis for tetrapod quantum dots licensed exclusively worldwide by the Company. His research interests lie in the areas of nanostructured materials, heterogeneous catalysis, bioengineering applications, and developing new approaches to assembling nanoparticles into functional macrostructures.
His accomplishments include:
● | Smithsonian Magazine “37 Under 36” Young Innovator Award (2007) | |
● | 3M Non-tenured Faculty Award (2006, 2007) | |
● | GOLD 2006 Conference Best Presentation Award, for “best new idea in gold catalysis” (2006) | |
● | AIChE South Texas Section Best Applied Paper Award (2006) | |
● | AIChE Nanoscale Science and Engineering Forum Young Investigator Award (2006) | |
● | MIT Technology Review’s TR35 Young Innovator Award (2006) | |
● | Hershel M. Rich Invention Award (2006) | |
● | National Academy of Engineering Indo-America Frontiers of Engineering Symposium, Invited Speaker (2006) | |
● | Smalley/Curl Innovation Award (2005) | |
● | National Academies Keck Futures Initiative (NAKFI) Symposium, Invited Participant (2004) | |
● | Oak Ridge Associated Universities Ralph E. Powe Junior Faculty Enhancement Award (2003) | |
● | National Academy of Engineering Japan-America Frontiers of Engineering (JAFOE) | |
● | Symposium, Invited Participant (2002) | |
● | Rice Quantum Institute (RQI), Fellow (2002) | |
● | Robert P. Goldberg Grand Prize, MIT $50K Entrepreneurship Competition (2001) | |
● | Union Carbide Innovation Recognition Award (2000) | |
● | MIT Chemical Engineering Edward W. Merrill Outstanding Teaching Assistant Award (1997) | |
● | Faculty advisor for Phi Lambda Upsilon, chemical sciences honorary society (2003 - present) |
Dr. Michael S. Wong joined the Department of Chemical Engineering of Rice University in 2001 and received a joint appointment in the Department of Chemistry in 2002. Before coming to Rice University, he did post-doctoral research with Dr. Galen D. Stucky of the Department of Chemistry and Biochemistry at University of California, Santa Barbara. Mr. Wong’s educational background includes a B.S. in Chemical Engineering from Caltech, an M.S. in Chemical Engineering Practice (“Practice School”) from MIT, and a Ph.D. in Chemical Engineering from MIT (under the supervision of Dr. Jackie Y. Ying, he is co-author of “Supramolecular Templating of Mesoporous Zirconia-Based Nanocomposite Catalysts”). With the underlying theme of designing and engineering novel materials for catalytic and encapsulation applications, his research interests lie in the areas of nanostructured materials (e.g. nanoporous materials, nanoparticle-based hollow spheres, and quantum dots), heterogeneous catalysis, and bioengineering applications. He is particularly interested in developing new chemical approaches to assembling nanoparticles into functional macrostructures. Dr. Wong, as a Professor at William Marsh Rice University, the licensor of our quantum dots technology, is 100% familiar with our licensing rights with Rice and the capabilities of this technology. His scientific experience was invaluableparticularly valuable as a member of the Company’s Board of Directors from 2008 through 2014, at which time he elected to resign from the Board and to join the Company’s Scientific Advisory Board.
Tomio Gotoh is a consultant for Diverse Technologies in Japan. Mr. Gotoh is a principal inventor of the NEC TK-80, the first Japanese microcomputer in 1976. He led numerous product launches that made Nippon Electric Company (“NEC”) the Japanese personal computer industry leader. As NEC’s visionary pioneer, Mr. Gotoh contributed significantly during the dawn of the personal computer era.
Dr. Munisamy Anandan is a Managing Member of Organic Lighting Technologies LLC, Austin, Texas. He has 40 years of experience in various flat panel display technologies namely, LCD, plasma, OLED, FED and LCD backlight. He held senior level positions in various companies including Bell Communications Research, Matsushita Electric works and eMagin Corporation. Dr. Anandan is the past president of the Society for Information Display. For the past 12 years he has specialized in LED backlight, for LCDs for various applications including TV, and LED/OLED lighting. He has delivered several keynote addresses, seminars and invited talks at various international conferences around the world, on LED backlight, LED lighting and OLED lighting. He has issued patents on quantum dot and quantum rod based novel pixelated backlight for LCDs, employed in multiplicity of applications and has received several awards that include R&D 100 Award, in recognition of his work. He is a Senior Member of IEEE and SID. Dr. Anandan has recently completed writing one part of a book on ‘Quantum dots and rods and their application to LED backlight for LCD’.
Committees/Independent Directors
On December 22, 2016, three of our four directors at the time, namely Sriram Peruvemba, Daniel Carlson and Ray Martin, resigned from theOur Board of Directors and were replaced by Stephen Squires, who is now serving as Chairman, Chief Executive Officer, and President, his son, Shane Squires,has determined that David Doderer and Dr. Ghassan Jabbour who is also a member of our Scientific Advisory Board. These resignations have led to vacancies onare considered “independent directors.” Under the committee boards described herein which have not been filled aslisting requirements of the date of this Form 10-K. Dr. Jabbour may be considered an “independent director” but not a “financial expert.” Mr. Shane Squires does not qualify as either a “independent director” or a “financial expert.” Until newly committee vacancies are filled and approved by Board members, the committee roles will be assumed by the entire Board of Directors unless otherwise noted.
Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition,NASDAQ Stock Market an “independent director” means a person other than an executive officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’s boardcompany’s Board of directors,Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $120,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of such company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of the company’s outside auditor.
On September 22, 2015, the Board of Directors formed an Audit Committee, a Nominating and Corporate GovernanceCommittee, and ana Compensation Committee. Charters for each of these three committees were adopted as of that date and are available on our website at www.qmcdots.com. However, since certain resignations from our Board of Directors in December 2016, our full Board of Directors has performed the functions of our Audit, Compensation, and Nominating and Corporate Governance Committees. Other than David Doderer and Dr. Jabbour, neither Stephen Squires nor Shane Squires, meet the criteria for “independent director” under NASDAQ Stock Market listing requirements. In making these determinations, our Board of Directors considered the relationships that each director has with our company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each director.
The Board of Directors adopted charters for an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee in September 2015, copies of which is posted on our website, www.qmcdots.com. However, as each of the charters requires that the applicable committee consist of independent members of each committee consisted of our two former independent directors, Ray Martin and Daniel F. Carlson, until they resigned from the Board in December 2016. Mr. Sriram Peruvemba was a member of the Audit Committee until he became the Company’s Chief Executive Officer on June 30, 2016. After their resignations, Sean Squires and Christopher Benjamin become members of the Audit Committee. Mr. Benjamin subsequently resigned from the Board of Directors immediately beforeand given our size and the filingdevelopment of this Form 10-K. Shane Squires is not an independent director and is regarded as a temporary memberour business to date, we believe that the Board of Directors can presently perform all of the Audit Committee until the Audit Committee canduties and responsibilities that might be staffed solely with independent directors.
Management believes Daniel Carlson, a director until his resignation in December 2016, was a financial expert, and Christopher Benjamin, who was Chairman of the Audit Committee after Mr. Carlson and prior to his resignation, was considered a “financial expert.” The term “financial expert” is defined as a person who has the following attributes: an understanding of generally accepted accounting principles and financial statements; has the ability to assess the general application of such principals in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raisedcontemplated by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of auditcommittees. The Company intends to appoint committee functions. Currently, none of the Company’s directors qualifymembers as a “financial expert.”
Audit Committee
From September 22, 2015 through December 22, 2016, former directors, namely, Daniel Carlson and Ray Martin, served on the Audit Committee, which was chaired by Mr. Carlson. After his appointment to the board, Shane Squires joined the audit committee as an ex officio member. Christopher Benjamin subsequently joined the Audit Committee in February 2017, serving as its Chairperson. Mr. Benjamin resigned from the board and his committee post immediately before the filing of this Form 10-K. Shane Squires is not an independent director and is regarded as a temporary member of the Audit Committee until the Audit Committee can be staffed solely with independent directors.
The Audit Committee’s responsibilities include:
Compensation Committee
From September 22, 2015 through December 22, 2016, former directors, namely, Daniel Carlson and Ray Martin, served on the Compensation Committee which was chaired by Mr. Martin. Since the aforementioned director’s resignations fromit expands the Board no replacement directors have been named for this committee. The Compensation Committee’s responsibilities include:
Nominating and Corporate Governance Committee
From September 22, 2015 through December 22, 2016, former directors, namely, Daniel Carlsonappoints individuals with applicable experience and Ray Martin, served on the Nominating and Corporate Governance committee which was chaired by Mr. Martin. Since the aforementioned directors resignations from the Board, no replacement directors have been named for this committee. The Nominating and Corporate Governance committee’s responsibilities include:expertise.
Our Board of Directors may establish other committees from time to time.
Limitation of Directors’ Liability and Indemnification
We incorporated under the laws of the State of Nevada, which laws provide for indemnification of officers and directors under certain circumstances. Our bylaws provide for the indemnification of our directors to the fullest extent permitted under the General Corporation Law of the State of Nevada from time to time against all expenses, liability and loss (including attorneys’ fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered in connection with acting as directors of our Company.
Our articles of incorporation provide that no director or officer of the corporation shall be personally liable to the corporation or any of its stockholders for damages for breach of fiduciary duty as a director or officer involving any act or omission of any such director or officer; provided, however, that: the foregoing provision shall not eliminate or limit the liability of a director or officer (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of the law, or (ii) the payment of dividends in violation of Section 78.300 of the Nevada Revised Statutes. Any repeal or modification of this article by the stockholders of the corporation shall be prospective only and shall not adversely affect any limitations on the personal liability of a director or officer of the corporation for acts or omissions prior to such repeal or modification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company under Nevada law or otherwise, we have been advised the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by us for expenses incurred or paid by a director, officer or controlling person of our company in successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
Code of Ethics
Our Board has adopted a Code of Business Conduct and Ethics that applies not only todirectors, officers and employees, which includes our employees, but also to the directors and theprincipal executive officers, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Corporate Controller, and any other seniorofficer, principal financial officersofficer, principal accounting officer or controller or persons performing similar functions, as defined infunctions. A current copy of the Code of Ethics. Our Board intends to renew the Code of Business Conduct and Ethics in the future and will consider appropriate amendments and revisions thereto.code is posted on our website, www.qmcdots.com.
Our Board of Directors also approved Insider Trading, Whistleblower, and Foreign Corrupt Practices Act (FCPA) Policies. These policies along with the Code of Business Conduct and Ethics can be found at our website:www.qmcdots.com.
Section 16(a) Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders (the “Reporting Persons”) are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.
Based solely on our review of the copies of such forms received by us, or written representations from the Reporting Persons, we believe all required filings have been made timelyfiled during the fiscal year ended June 30, 2017.2018, other than the failure to file a Form 4 for Stephen Squires relating to a single transaction and a Form 3 for Robert Phillips relating to his becoming an executive officer.
Item 11. Compensation of Directors and Executive Officers
The following table sets forth the overall compensation earned over the fiscal years ended June 30, 20172018 and 2016 by (1) each person who served as the chief executive officer or chief financial officer of the Company or its subsidiary during fiscal year 2017; and (2) up to three of our most highly compensated executive officers as of June 30, 2017 with compensation during fiscal year ended 2017 of $100,000 or more.2017.
Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Warrants Or Options Awards ($)(1)(8) | Non- Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) (2)(3) | Total ($) (3) | ||||||||||||||||||||||||||||
Stephen Squires | 2017 | $ | 150,000 | $ | 0 | $ | 0 | $ | 28,848 | $ | 0 | $ | 0 | $ | 0 | $ | 178,848 | |||||||||||||||||||
Chief Executive Officer (4) (6) | 2016 | $ | 285,000 | $ | 0 | $ | 0 | $ | 92,449 | $ | 0 | $ | 0 | $ | 36,000 | $ | 413,449 | |||||||||||||||||||
E. Jamie Schloss | 2017 | |||||||||||||||||||||||||||||||||||
Chief Financial Officer | 2016 | |||||||||||||||||||||||||||||||||||
Craig Lindberg | 2017 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||||
Former Chief Financial Officer (7) | 2016 | $ | 120,000 | $ | 0 | $ | 0 | $ | 99,531 | $ | 0 | $ | 0 | $ | 13,419 | $ | 232,950 | |||||||||||||||||||
David Doderer | 2017 | $ | 150,000 | $ | 0 | $ | 0 | $ | 23,584 | $ | 0 | $ | 0 | $ | 0 | $ | 173,584 | |||||||||||||||||||
Vice President (4)(7)(5) | 2016 | $ | 150,000 | $ | 0 | $ | 0 | $ | 293,105 | $ | 0 | $ | 0 | $ | 0 | $ | 443,105 | |||||||||||||||||||
Sriram Peruvemba | 2017 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||||
Former Chief Executive Officer (5) | 2016 | $ | 492 | $ | 0 | $ | 0 | $ | 673,464 | $ | 0 | $ | 0 | $ | 0 | $ | 673,956 |
Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Warrants or Option Awards (2) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||
Officers | ||||||||||||||||||||||||||||||||||||
Stephen Squires (1) | 2018 | 300,000 | - | - | - | - | - | - | 300,000 | |||||||||||||||||||||||||||
Chief Execurive Officer, Chairman of the Board of Directors | 2017 | 150,000 | - | - | 28,848 | - | - | - | 178,848 | |||||||||||||||||||||||||||
Robert Phillips (3) | 2018 | - | - | - | - | - | - | 55,000 | 55,000 | |||||||||||||||||||||||||||
Chief Financial Officer | 2017 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
E. Jamie Schloss (4) | 2018 | 30,800 | - | - | - | - | - | - | 30,800 | |||||||||||||||||||||||||||
Former Chief Financial Officer | 2017 | 30,800 | - | - | - | - | - | - | 30,800 | |||||||||||||||||||||||||||
David Doderer (5) | 2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Former Vice President, Director | 2017 | 150,000 | - | - | 23,584 | - | - | - | 173,584 |
(1) | Mr. Squires resigned as CEO and director of the Company, effective June 30, 2016. He became CEO again in December 2016. Fiscal year 2017 only contains 6 months of compensation for Mr. Squires. | |
(2) | The options and restricted stock awards presented in this table for | |
Mr. Phillips became the |
(4) | ||
Mr. | ||
For a description of the material terms of each named executive officers’ employment agreement or arrangement, including the terms of any contract, agreement, plan or other arrangement that provides for any payment to a named executive officer in connection with his or her resignation, retirement or other termination, or a change in control of the company see section below entitled “Employment Agreements.”
No outstanding common share purchase option or other equity-based award granted to or held by any named executive officer in 2017 or 2016 were re-priced or otherwise materially modified, including extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined, nor was there any waiver or modification of any specified performance target, goal or condition to payout.
Outstanding Equity Awards at Fiscal Year-End
The following table provides certain information concerning any common share purchase options granted for employment compensation, stock awards, or equity incentive plan awards held by each of our named executive officers and directors employed at any point during the fiscal year covered in this Form 10-K that were outstanding, exercisable and/or vested as of June 30, 2017:
Option Awards (1) | Stock Awards (1) | |||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable (3) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)(5) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested | |||||||||||||||||||||
Stephen Squires (Chairman, CEO) (1)(2)(4) | 1,000,000 | 0 | 0 | $ | 0.05 | 10/19/2019 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
(6)(7) | 5,000,000 | 0 | 0 | $ | 0.05 | 01/20/2020 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
1,000,000 | 0 | 0 | $ | 0.12 | 04/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
3,500,000 | 0 | 0 | $ | 0.05 | 03/02/2022 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
5,000,000 | 0 | 0 | $ | 0.05 | 03/29/2023 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
2,968,750 | 0 | 0 | $ | 0.06 | 2/10/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
1,562,500 | 0 | 0 | $ | 0.08 | 06/6/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
600,000 | 0 | 0 | $ | 0.05 | 10/19/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
937,500 | 0 | 0 | $ | 0.08 | 06/6/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
0 | 0 | 2,000,000 | $ | 0.30 | 4/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
5,000,000 | 10,000,000 | 10,000,000 | $ | 0.12 | 06/26/2022 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
E, Jamie Schloss (CFO) | 0 | 0 | 0 | $ | N/A | N/A | 0 | 0 | N/A | N/A | ||||||||||||||||||||
Craig Lindberg (former CFO) (2) | 10,000,000 | 0 | 0 | $ | 0.10 | 04/2/2025 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
500,000 | 0 | 0 | $ | 0.06 | 10/30/2018 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
750,000 | 0 | 0 | $ | 0.12 | 04/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
David Doderer (Officer, Director) (1)(2) | 500,000 | 0 | 0 | $ | 0.05 | 10/19/2019 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
750,000 | 0 | 0 | $ | 0.12 | 04/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
5,000,000 | 0 | 0 | $ | 0.05 | 03/29/2023 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
3,000,000 | 0 | 0 | $ | 0.05 | 01/11/2018 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
781,250 | 0 | 0 | $ | 0.06 | 02/10/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
3,104,167 | 0 | 0 | $ | 0.06 | 10/30/2018 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
0 | 0 | 1,250,000 | $ | 0.30 | 04/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
300,000 | 0 | 0 | $ | 0.12 | 06/26/2022 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
Sriram Peruvemba (former CEO, Director) | 500,000 | 0 | 0 | $ | 0.17 | 10/14/2025 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
150,000 | 0 | 0 | $ | 0.12 | 04/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
3,000,000 | 0 | 0 | $ | 0.13 | 06/30/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
Ghassan Jabbour (Director) | 300,000 | 0 | 0 | $ | 0.05 | 10/19/2019 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
3,750,000 | 0 | 0 | $ | 0.06 | 02/10/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
1,500,000 | 0 | 0 | $ | 0.08 | 06/06/2019 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
300,000 | 0 | 0 | $ | 0.12 | 06/26/2022 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
Daniel Carlson (Former Director) | 500,000 | 0 | 0 | $ | 0.17 | 9/22/2025 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
500,000 | 0 | 0 | $ | 0.12 | 4/26/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
150,000 | 0 | 0 | $ | 0.12 | 4/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
Ray Martin (Former Director) | 500,000 | 0 | 0 | $ | 0.17 | 9/22/2025 | 0 | 0 | N/A | N/A | ||||||||||||||||||||
150,000 | 0 | 0 | $ | 0.12 | 4/13/2026 | 0 | 0 | N/A | N/A | |||||||||||||||||||||
Sean Squires (Director) | 300,000 | 0 | 0 | $ | 0.12 | 06/26/2022 | 0 | 0 | N/A | N/A |
2018:
Number of Securities Underlying Unexercised Options or Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options or Warrants (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | |||||||||||||
Officers/Directors | ||||||||||||||||
Stephen Squires | 1,000,000 | (1) | - | $ | 0.05 | 10/19/2019 | ||||||||||
Chief Execurive Officer, Chairman of the Board of Directors | 5,000,000 | (2) | - | 0.05 | 1/20/2020 | |||||||||||
660,000 | (3) | 340,000 | 0.12 | 4/13/2026 | ||||||||||||
3,500,000 | (4) | - | 0.05 | 3/2/2022 | ||||||||||||
5,000,000 | (5) | - | 0.05 | 3/29/2023 | ||||||||||||
2,968,750 | (6) | - | 0.06 | 2/10/2019 | ||||||||||||
1,562,500 | (7) | - | 0.08 | 6/6/2019 | ||||||||||||
600,000 | (8) | - | 0.05 | 10/19/2019 | ||||||||||||
937,500 | (9) | - | 0.08 | 6/6/2019 | ||||||||||||
- | (10) | 2,000,000 | 0.30 | 4/13/2026 | ||||||||||||
4,950,000 | (11) | 10,050,000 | 0.12 | 6/26/2022 | ||||||||||||
- | (12) | 10,000,000 | 0.12 | 6/26/2022 | ||||||||||||
5,000,000 | (13) | - | 0.03 | 1/2/2023 | ||||||||||||
Robert Phillips | ||||||||||||||||
Chief Financial Officer | - | - | - | |||||||||||||
E. Jamie Schloss | ||||||||||||||||
Former Chief Financial Officer | - | - | - |
45 |
(1) | These grants became fully vested October 20, 2011. | |
(2) | These grants became fully vested January 20, 2012. | |
(3) | On | |
These grants became fully vested March 3, 2014. | ||
| These grants became | |
These grants became fully vested February 10, 2016. | ||
(7) | These grants became fully vested June 6, 2016. | |
(8) | These grants became fully vested October 20, 2011. These options | |
(9) | These grants became fully vested June 6, 2016. These options are held by Robin Squires, wife of the CEO, and deemed controlled by the CEO. | |
(10) | In February 2016, the Board of Directors authorized certain | |
(11) | On June 26, 2017, Mr. Squires was | |
(12) | On June 26, 2017, Mr. Squires was granted options to purchase 10,000,000 shares of common stock at $0.12/share. The options vest in the event that the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control of the Company is sold based upon a purchase price paid to the Company or its shareholders of at least $90 million. | |
(13) | On January 2, 2018, Mr. Squires was awarded 5,000,000 warrants. This award vests immediately, with an exercise price of $0.03, and expire on January 2, 2023, as a conversion of salary. |
Compensation of Directors
Cash Fees
As of the filing date of this Form 10-K, no cash fees have been paid to any directors of the Company, although the Board reserves the right to pay such cash fees in the future.
Restricted Stock and Options
In December 2016, Mr. Shane Squires was granted 100,000 shares of restricted stock for his services as a director in the Company’s fiscal year 2017.
In June 2017, Mr. Shane Squires and Mr. Jabbour each received 300,000 options to purchase shares of the Company’s common stock. The options have a 5-year term, an exercise price of $0.12.
No restricted stock, option, or other equity compensation were received by Directors during fiscal year 2018.
Travel Expenses
All directors shall beare reimbursed for their reasonable out of pocket expenses associated with attending the board meeting.
meetings.
For the fiscal year ended June 30, 2017,2018, compensation paid to directors (other than those listed in the Summary Table above) was as follows:
DIRECTOR COMPENSATION | ||||||||||||||||||||||||||||
Name and Principal Position | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Warrant/ Option Awards ($) (1) | Non-Equity Incentive Plan Compensation ($) (2) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) (3) | Total ($) | |||||||||||||||||||||
Ray Martin, Former Director | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||
Daniel Carlson, Former Director | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||
Shane Squires | $ | 0 | $ | 0 | $ | 23,584 | $ | 0 | $ | 0 | $ | 0 | $ | 23,584 | ||||||||||||||
Ghassan Jabbour | $ | 0 | $ | 0 | $ | 23,584 | $ | 0 | $ | 0 | $ | 0 | $ | 23,584 | ||||||||||||||
Christopher Benjamin Former Director | $ | 0 | $ | 0 | $ | 23,585 | $ | 0 | $ | 0 | $ | 0 | $ | 23.585 |
Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Warrants or Option Awards | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||
Directors | ||||||||||||||||||||||||||||||||||||
Dr. Ghassan Jabbour | 2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Director | ||||||||||||||||||||||||||||||||||||
Shane Squires | 2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Director | ||||||||||||||||||||||||||||||||||||
David Doderer (1) | 2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Director, former Vice President |
(1) | ||
Compensation Policies and Practices as They Relate to Our Risk Management
No risks arise from our Company’s compensation policies and practices for our employees that are reasonably likely to have a material adverse effect on our Company.
Salary or Consulting Accruals
In October 2015,January 2018, certain officers, employees, and consultants of the Company listed below converted accrued salaries (and/or consulting fees) into common stock warrants as follows:
Name | $ Amount Converted | # Warrants Received | ||||||
Craig Lindberg | $ | 30,000 | 500,000 | |||||
David Doderer | 186,250 | 3,104,167 | ||||||
Toshi Ando | 82,000 | 1,366,667 | ||||||
Brett Lamensky | 20,000 | 333,333 | ||||||
Art Lamstein | 91,417 | 1,523,611 | ||||||
Total | $ | 409,667 | 6,827,778 |
Name | $ Amount Converted | # Warrants Received | # Shares Received | |||||||||
Stephen Squires | $ | 150,000 | 5,000,000 | - | ||||||||
Toshi Ando | 66,500 | 2,216,667 | - | |||||||||
E. Jamie Schloss | 15,400 | - | 513,333 | (1) | ||||||||
Andy Robinson | 18,000 | 600,000 | - | |||||||||
Total | $ | 304,900 | 7,816,667 | 513,333 |
As of June 30, 2016, the Company had accrued salaries (and/or consulting fees) and expense reimbursements to our executive officers in the amounts set forth below.
(1) | These shares are recorded in shares issuable on the consolidated balance sheet. |
Name | Salary Accrued | Expense Reimbursements Accrued | ||||||
Craig Lindberg | $ | 0 | 13,419 | |||||
David Doderer | 100,000 | 0 | ||||||
Dr. Ghassan Jabbour | 130,000 | 0 | ||||||
Total | $ | 230,000 | $ | 13,419 |
As of June 30, 2017, the Company had accrued salaries (and/or consulting fees) and expense reimbursements to our current and former executive officers in the amounts set forth below.
Name | Salary Accrued | Expense Reimbursements | ||||||
Stephen Squires | $ | 31,375 | $ | 3,210 | ||||
Sriram Peruvemba | 122,060 | 11,730 | ||||||
Craig Lindberg | 30,000 | 13,419 | ||||||
David Doderer | 250,000 | 0 | ||||||
Total | $ | 433,435 | 28,359 |
As of June 30, 2018, the Company had accrued salaries (and/or consulting fees) and expense reimbursements to our current and former executive officers in the amounts set forth below.
Salary | Expense Reimbursement | |||||||
Name | Accrued | Accrued | ||||||
Stephen Squires | $ | 163,575 | $ | 12,722 | ||||
David Doderer | 275,000 | - | ||||||
Ghassan Jabour | 130,000 | - | ||||||
Robert Phillips | 55,000 | - | (1) | |||||
Toshi Ando | 58,600 | 18,471 | ||||||
E. Jamie Schloss | 26,400 | - | ||||||
He Huang | 28,667 | - | ||||||
Total | $ | 737,242 | $ | 31,193 |
(1) | Accrued in Accounts Payable as a portion of Mr. Phillips consulting agreement |
Employment Agreements
Our executive officers, David Doderer and our CEO, Stephen Squires, are each a party to an employment agreement with the Company.
Name | Position | Annual Salary | Bonus | Position | Annual Salary | Bonus | ||||||||||||||||
David Doderer | VP Research & Development | $ | 150,000 | (1 | ) | VP Research & Development | $ | 150,000 | (1) | |||||||||||||
Stephen Squires | CEO | $ | 300,000 | (2) | (1 | ) | CEO | $ | 300,000 | (2) | (1) |
(1) | Discretionary bonus as determined by the Compensation Committee based upon company and individual performance. Mr. Doderer’s employment agreement expires on December 31, 2017. |
(2) | In June 2017, Mr. Squires’ salary has been increased to $300,000 per annum. |
Employment Agreement – Stephen Squires
Stephen Squires, Chief Executive Officer, entered into an employment agreement dated October 26, 2012 to retain his services for the period January 1, 2013 through January 1, 2018. On December 10, 2015, the Company entered into an amended and restated employment agreement with Mr. Squires. On June 13, 2016, Mr. Squires, then our Chief Executive Officer and a member of our Board of Directors, agreed to step down from these positions effective June 30, 2016 and to become Managing Director of our wholly-owned subsidiary, Solterra. Mr. Squires would again become the Company’s Chief Executive Officer and President on December 22, 2016. In June 2016, the Company entered into an Amended and Restated Employment Agreement (the “Squires Agreement”) with Mr. Squires which provides that, until such time as the Company records its first $10,000,000 in revenue (the “Revenue Trigger”), the Company shall pay Mr. Squires an annual base salary of no less than $225,000 and after the occurrence of the Revenue Trigger, the Company shall pay Mr. Squires an annual base salary of no less than $247,500. Mr. Squires shall also be eligible for certain annual bonuses and equity awards pursuant to the Squires Agreement. The term of the Squires Agreement is for two years and provides for severance payments in the event of termination or a change in control of the Company equal to the sum of Mr. Squires’ base salary for the remainder of his employment agreement.
In June 2017, the Company entered into an amendment to Mr. Squires’ employment agreement pursuant to which we agreed as follows:
(1) | Mr. Squires will serve as CEO and receive an increase in annual salary to $300,000 effective June 1, 2017. | |
(2) | Mr. Squires term of his agreement was extended three years to June 30, 2020. | |
(3) | Mr. Squires received 25 million options to purchase common stock,exercisable at $0.12 per share, outside of any stock option plan with 15 million of the options vesting annually over three years beginning July 1, 2017 and the remaining 10 million options vesting in accordance with the terms of the revised and amended employment agreement but only in the event that the outstanding shares of the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control of the Company is sold during the term of the options based upon a purchase price paid to the Company and/or its shareholders of at least $90 million. |
Employment Agreement — David Doderer
On
Pursuant to an employment agreement dated October 26, 2012, the Company entered into a five-year employment contract to retain the services of David Doderer ouras Vice President of Research and Development entered into an employment agreement to retain his servicesof the Company for the period of January 1, 2013 through January 1, 2018. For a descriptionThe agreement is subject to automatic successive renewal terms of his employment agreement, reference is madeone year, unless either party provides written notice to Item 11the other party terminating the initial term of any extension thereof at least 60 days prior to the scheduled termination date of the Form 10K/A of the Company filed with the Securities and Exchange Commission on October 27, 2015. On December 10, 2015, the Company entered into an amended and restated employment agreement with Mr. Doderer. Pursuant to the amended and restated employment agreement,contract. Mr. Doderer is currently receivingto receive an annual base salary of $150,000, and upon the Company achieving the “revenue trigger” of our first $10 millionpaid in revenue, his base salary will increase to no less than $165,000.
Other Compensation Arrangements
Pursuant to a consulting agreement, Chris Benjamin, former CFO and former director, received cash compensation of $5,000 per month through February 2016 and $1,000 per month through May 2016 after which the Company terminated his consulting agreement. Mr. Benjamin received additional stock compensation unrelated to this consulting agreement of $23,585 in the fiscal year ended June 30, 2017 as described above.
Robin Squires, the wife of Stephen Squires and a former executive officer of the Company, previously received compensation of $5,000 per month, and Dr. Ghassan Jabbour, formerly our Chief Science Officer and currently a director, previously received compensation of $2,500 per month. Both arrangements ended as of June 30, 2016.
Participation in Private Placement
In the last six months of fiscal year 2016, the Company raised approximately $1,565,000 from the sale of its unsecured convertible promissory notes that have a maturity date of two years from the date of issuance and bear interestmonthly installments at the rate of 8%$12,500 per annum and are convertible at $0.12 per share. For every $1,000 invested, the investormonth. Mr. Doderer also received warrants to purchase 4,166a signing bonus of 5,000,000 restricted shares of the Company’s commonCommon Stock and 5,000,000 stock at $0.15options with an amended exercise price of $0.05 per share, overfully vested, expiring on March 29, 2023. In the event Mr. Doderer’s services as a director are terminated for any reason, including, termination by his own choice, within six months of a change in control event as defined in said agreement, he shall receive one year’s fees of $120,000 payable in one lump sum no later than 30 days after the termination of his services as a director and, in such event, any options that are not fully vested shall become immediately vested and the options shall be extended for an additional one year following the final exercise date of said option agreement. Mr. Doderer’s employment agreement may be terminated for cause as defined in the agreement. In such event, he shall receive his unpaid portion of his base salary computed up to the date of termination, plus certain other benefits. In the event of death, his estate shall receive compensation of the unpaid portion of his base salary up to the date of his death, plus certain benefits. The agreement contains certain prohibitions against soliciting employees and clients of the Company for his own personal benefit during the term of the agreement and for a period of five years. The conversion price ofone year thereafter. Mr. Doderer’s employment agreement does not reflect the notes is subject to full ratchet adjustment infollowing approved by the event of issuance of common stock or derivative securities at a price less than $0.12 per share. Our former directors and/or officers, namely, Sriram Peruvemba, Craig Lindberg and Ray Martin purchased $25,000, $15,000 and $10,000, respectively of this private placement.
Repayment Agreement – Christopher Benjamin
In September 2015, Christopher Benjamin, a former Chief Financial Officer and a former director, entered into a Repayment Agreement to retire a book value liability of the Company of approximately $79,000 by redeeming 638,300 shares of common stock to Quantum’s treasury at a price of $0.13 per share and canceling options to purchase 500,000 shares, exercisable at $0.05 per share and canceling options to purchase 487,500 shares of common stock at $0.08 per share. The Company recorded a gain of $174,568 on this settlement.Company’s Board:
● | Mr.Doderer received in October 2009 options to purchase 500,000 shares of the Company, issued under the 2009 Plan, at $0.05 per share through October 2019; | |
● | The November 2010 issuance of five-year warrants to purchase 833,333 shares exercisable at $0.075 per share in exchange for the cancellation of $62,500 of accrued salary; | |
● | The May 2011 issuance of five-year warrants to purchase 738,636 shares exercisable at $0.11 per share in exchange for the cancellation of $81,250 of accrued salary; and | |
● | Mr. Doderer received in January 2013 options to purchase a total of 3,000,000 shares of the Company, issued under the 2013 Plan, at $0.05 per share through January 2018. |
2009 Stock Option Plan
On December 2, 2009, the Company established a 2009 Employee Benefit and Consulting Services Compensation Plan (the “2009 Plan”) covering 10,000,000 shares. The material features of the 2009 Plan are described below:
Administration
Our Board of Directors, Compensation Committee or both, in the sole discretion of our Board, administers the 2009 Plan, which was approved by the Company’s Board of Directors on December 2, 2009 and by stockholders as of January 25, 2010. The Board, subject to the provisions of the 2009 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of Options and Stock Awards issued to our officers or directors.
Types of Awards
The 2009 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2009 Plan contained provisions for granting incentive and non-statutory stock options and common stock Awards.
Stock Options. A “stock option” is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. The option price per share of common stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the common stock on the date of grant. The option price must be paid in cash, money order, check or common stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board, certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. “Common Stock Award” is shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse, and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board, the restricted stock award will be terminated.
Eligibility
The officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and Common Stock Awards. Eligibility shall be determined by the Board; however, all Options and Stock Awards granted to officers and directors must be approved by the Board.
Termination or Amendment of the 2009 Plan
The Board may at any time amend, discontinue, or terminate all or any part of the 2009 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.
Awards
As of June 30, 2017,2018, options to purchase 8,400,000 shares were outstanding under the 2009 Plan. These include the following persons:
Amount of Shares | Exercise Price | Net Realizable Value (1) | ||||||||||
Stephen Squires (2) | 6,600,000 | $ | 0.05 | $ | 396,000 | |||||||
David Doderer | 500,000 | 0.05 | 30,000 | |||||||||
Ghassan Jabbour | 300,000 | 0.05 | 18,000 | |||||||||
Non-Officers/Directors (3) | 1,000,000 | 0.04 - 0.05 | 55,000 | |||||||||
Total | 8,400,000 | $ | 0.04 - 0.05 | $ | 499,000 |
Amount of Shares | Exercise Price | Net Realizable Value (1) | ||||||||||
Stephen Squires (2) | 6,600,000 | $ | 0.05 | $ | - | |||||||
David Doderer | 500,000 | 0.05 | - | |||||||||
Ghassan Jabbour | 300,000 | 0.05 | - | |||||||||
Non-Officers/Directors (3) | 1,000,000 | 0.04 - 0.05 | 55,000 | |||||||||
Total | 8,400,000 | $ | 0.04 - 0.05 | $ | 55,000 |
(1) | Based upon the closing last sale of |
(2) | Includes 600,000 options held pursuant to the 2009 plan held by Mr. Squires’ wife. |
(3) | Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing. |
It is not possible to predict the individuals who will receive future awards under the 2009 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2009 Plan.
Shares Subject to the 2009 Plan
The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2009 Plan is 10,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2009 Plan does not limit the number of shares of common stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the 2009 Plan and the number of shares subject to options and awards to be granted under the 2009 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2009 Plan.
Option activity in the 2009 Plan was as follows for the years ended June 30, 20172018 and June 30, 2016:2017:
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Weighted-Average | Weighted- Average | Weighted- Average | Weighted- Average | |||||||||||||||||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | |||||||||||||||||||||||||
Shares reserved | 10,000,000 | 10,000,000 | 10,000,000 | 10,000,000 | ||||||||||||||||||||||||||||
Outstanding at beginning of year | 8,950,000 | $ | 0.050 | 8,950,000 | $ | 0.050 | 8,950,000 | $ | 0.050 | 8,950,000 | $ | 0.050 | ||||||||||||||||||||
Granted | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Exercised | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Forfeited/cancelled | 550,000 | 0.045 | - | - | - | 0.045 | 550,000 | 0.045 | ||||||||||||||||||||||||
Outstanding at end of year | 8,400,000 | $ | 0.051 | 8,950,000 | $ | 0.050 | 8,400,000 | $ | 0.051 | 8,400,000 | $ | 0.051 | ||||||||||||||||||||
Remaining options available to be issued | 1,600,000 | 1,050,000 | 1,600,000 | 1,600,000 |
2013 Stock Option Plan
In January 2013, the Company approved the 2013 Employee Benefit and Consulting Services Compensation Plan (the “2013 Plan”) covering 20,000,000 shares, which automatically increased to 60,000,000 shares on March 29, 2013. The 2013 Plan is otherwise identical to the terms of the 2009 Plan.
Awards
As of June 30, 2017, options to purchase 53,441,91450,441,914 shares were outstanding under the 2013 Plan. These include the following persons:
Amount of Shares | Exercise Price | Net Realizable Value (1) | ||||||||||
Stephen Squires (2) | 11,468,750 | $ | 0.05 - 0.12 | $ | 523,438 | |||||||
David Doderer | 9,531,250 | 0.05 - 0.12 | 519,063 | |||||||||
Ghassan Jabbour | 5,250,000 | 0.06 - 0.08 | 232,500 | |||||||||
Non Officers/Directors (3) | 27,191,914 | 0.05 - 0.17 | 613,762 | |||||||||
Total | 53,441,914 | $ | 0.05 - 0.17 | $ | 1,888,763 |
Amount of Shares | Exercise Price | Net Realizable | ||||||||||
Stephen Squires (2) | 11,468,750 | $ | 0.05 - 0.12 | $ | - | |||||||
David Doderer | 6,531,250 | 0.05 - 0.12 | - | |||||||||
Ghassan Jabbour | 5,250,000 | 0.06 - 0.08 | - | |||||||||
Non-Officers/Directors (3) | 27,191,914 | 0.05 - 0.17 | - | |||||||||
Total | 50,441,914 | $ | 0.05 - 0.17 | $ | - |
(1) | Based upon the closing last sale of |
(2) | Includes 937,500 options held pursuant to the 2013 plan held by Mr. Squires’ wife. |
(3) | Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing. |
It is not possible to predict the individuals who will receive future awards under the 2013 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2013 Plan.
Shares Subject to the 2013 Plan
The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2013 Plan is 60,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2013 Plan does not limit the number of shares of common stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the 2013 Plan and the number of shares subject to options and awards to be granted under the 2013 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2013 Plan.
Option activity in the 2013 Plan was as follows for the years ended June 30, 20172018 and June 30, 2016:2017:
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Weighted-Average | Weighted-Average | Weighted- Average | Weighted- Average | |||||||||||||||||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | |||||||||||||||||||||||||
Shares reserved | 60,000,000 | 60,000,000 | 60,000,000 | 60,000,000 | ||||||||||||||||||||||||||||
Outstanding at beginning of year | 56,625,248 | $ | 0.082 | 53,287,748 | $ | 0.070 | 53,441,914 | $ | 0.080 | 56,625,248 | $ | 0.082 | ||||||||||||||||||||
Granted | - | - | 11,950,000 | 0.136 | - | - | - | - | ||||||||||||||||||||||||
Exercised | - | - | 3,325,000 | 0.063 | - | - | - | - | ||||||||||||||||||||||||
Forfeited/cancelled | 3,183,334 | 0.124 | 5,287,500 | 0.093 | 3,000,000 | 0.050 | 3,183,334 | 0.124 | ||||||||||||||||||||||||
Outstanding at end of year | 53,441,914 | $ | 0.080 | 56,625,248 | $ | 0.082 | 50,441,914 | $ | 0.082 | 53,441,914 | $ | 0.080 | ||||||||||||||||||||
Remaining options available to be issued | 3,233,086 | 49,752 | 6,233,086 | 3,233,086 |
(1) Includes 2,000,000 options granted in 2015 outside of 2013 plan and moved under the 2013 plan in 2016.
2015 Stock Option Plan
In December 2015, the Company approved the 2015 Employee Benefit and Consulting Services Compensation Plan (the “2015 Plan”) covering 15,000,000 shares. The 2015 Plan received stockholder approval in 2016. The 2015 Plan became effective upon the date that stockholders approved the plan. The material features of the 2015 Plan are summarized below:
Purpose
The 2015 Incentive Plan is intended to promote the interests of the Company and its stockholders by providing the employees and consultants of Quantum with incentives and rewards to encourage them to continue in the service of Quantum and with a proprietary interest in pursuing the long-term growth, profitability and financial success of Quantum.
Administration
The Board of Directors, the Compensation Committee or both, in the sole discretion of the Board of Directors, shall administer the 2015 Incentive Plan in accordance with its terms. The Board, subject to the provisions of the 2015 Plan, has the authority to determine and designate officers, employees, director and consultants to which awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of stock options and common stock awards issued to our officers or directors.
Eligibility
The Company’s officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and common stock awards. Eligibility shall be determined by the Board; however, all stock options and common stock awards granted to officers and directors must be approved by the Board.
Shares Subject to the Plan
The maximum number of shares of Common Stock that may be covered by stock options and common stock awards granted under the 2015 Plan shall not exceed 15,000,000 shares of common stock in the aggregate. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The aggregate number of shares subject to awards granted under this Plan during any fiscal year to any one employee or non-executive director shall not exceed 2,500,000 and 1,000,000 respectively.
Award Types
The 2015 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2015 Plan contained provisions for granting incentive and non-statutory stock options and common stock awards.
Stock Options. A “stock option” is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. The option price per share of Common Stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the common stock on the date of grant. The option price must be paid in cash, money order, check or Common Stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board of Directors, certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions determined by the Board of Directors at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. A “common stock award” is shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board of Directors if he or she continues to be an employee, director or consultant of the Company. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse, and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of the Company for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board of Directors, the restricted stock award will be terminated.
Awards
As of June 30, 2017,2018, options to purchase 7,175,0008,075,000 shares were outstanding under the 2015 Plan. These include the following persons:
Amount of Shares | Exercise Price | Net Realizable Value (1) | Amount of Shares | Exercise Price | Net Realizable Value (1) | |||||||||||||||||||
Stephen Squires (2) | 2,000,000 | $ | N/A | $ | 0 | 2,000,000 | $ | 0.30 | (2) | $ | - | |||||||||||||
David Doderer (3) | 1,550,000 | 0.12 - N/A | 0 | 1,550,000 | 0.12 – 0.30 | (2) | - | |||||||||||||||||
Ghassan Jabbour | 300,000 | 0.12 | 0 | 300,000 | 0.12 | - | ||||||||||||||||||
Shane Squires | 300,000 | 0.12 | 0 | 300,000 | 0.12 | - | ||||||||||||||||||
Non-Officers/Directors (4) (5) | 3,025,000 | 0.12 - N/A | 0 | 3,925,000 | 0.06 – 0.30 | (2) | - | |||||||||||||||||
Total | 7,175,000 | $ | 0.12 - N/A | $ | 0 | 8,075,000 | $ | 0.12 – 0.30 | (2) | $ | - |
(1) | Based upon the closing last sale of |
(2) | All options are currently unearned as of the filing date of this Form 10-K. These options will be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The unearned options will have an exercise price of the greater of (i) $0.30 per share and (ii) the market price when earned. |
(3) | 1,250,000 of the options are unearned as of the filing date of this Form 10-K as described in (2) above. |
(4) | Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing unless otherwise noted. |
(5) | 1,550,000 of the options held by non-officers/directors are unearned as of the filing date of this Form 10-K as described in (2) above. |
It is not possible to predict the individuals who will receive future awards under the 2015 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2015 Plan.
Amendment and Termination
The Board may at any time amend, discontinue, or terminate all or any part of the 2015 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.
Adjustments Upon Certain Changes
The aggregate number of shares issuable under the 2015 Plan and the number of shares subject to stock options and common stock awards to be granted under the 2015 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2015 Plan.
Shares Subject to the 2015 Plan
The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2015 Plan is 15,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2015 Plan limits the number of shares of common stock with respect to which options or stock awards may be granted to any individual during any calendar year to a maximum of 2,500,000. Option or stock awards granted to any non-employee director during any fiscal year are limited to a maximum of 1,000,000. The aggregate number of shares issuable under the 2015 Plan and the number of shares subject to options and awards to be granted under the 2015 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2015 Plan.
Option activity in the 2015 Plan was as follows for the year ended June 30, 2016:2018:
2017 | 2016 | |||||||||||||||||||||||||||||||
Weighted-Average | Weighted-Average | |||||||||||||||||||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | 2018 | 2017 | |||||||||||||||||||||||||||
Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | |||||||||||||||||||||||||||||
Shares reserved | 15,000,000 | 15,000,000 | 15,000,000 | 15,000,000 | ||||||||||||||||||||||||||||
Outstanding at beginning of year | 8,900,000 | $ | 0.294 | - | $ | - | 7,175,000 | $ | 0.294 | 8,900,000 | $ | 0.294 | ||||||||||||||||||||
Granted-Earned | 3,700,000 | 0.120 | 300,000 | 0.120 | 900,000 | 0.060 | 3,700,000 | 0.120 | ||||||||||||||||||||||||
Granted-Unearned (1) | - | - | 8,600,000 | 0.300 | - | - | - | - | ||||||||||||||||||||||||
Exercised | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Forfeited/cancelled | 5,425,000 | 0.246 | - | - | - | - | 5,425,000 | 0.246 | ||||||||||||||||||||||||
Outstanding at end of year (2) | 7,175,000 | $ | 0.240 | 8,900,000 | $ | 0.294 | 8,075,000 | $ | 0.220 | 7,175,000 | $ | 0.240 | ||||||||||||||||||||
Remaining options available to be issued | 7,825,000 | 6,100,000 | 6,925,000 | 7,825,000 |
(1) These options will be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The unearned options will have an exercise price of the greater of (i) $0.30 per share and (ii) the market price when earned. As such, the weighted average exercise price of the options may be higher, but not lower, than shown in the table when the exercise price is established.
(2) The weighted average exercise price at the end of the year includes the granted-unearned options at an exercise price of $0.30. The granted-unearned options will have an exercise price of the greater of (i) $0.30 per share and (ii) the market price when earned, therefore the actual weighted average exercise price of the options outstanding at the end of the year may be higher, but not lower, than shown in this table when the exercise price is established.
Options outside the 2009 Plan, 2013 Plan, and 2015 Plan
In March 2012, 3,500,000 stock options with a term of five years, were granted to Mr. Stephen Squires outside of the 2009 and 2013 Plans.
In May 2015, 2,000,000 stock options with a term of 10 years, were granted outside of the 2009 and 2013 Plans. These options were subsequently moved under the 2013 Plan during the year ended June 30, 2016.
In June 2016, 6,000,000 stock options with a term of ten years were granted to Mr. Peruvemba outside of the 2009, 2013, and 2015 Plans in connection with his assuming the position of President and CEO. 3,000,000 of the options were surrendered to the Company upon Mr. Peruvemba’s resignation from the Company.
In June 2017, 2,000,000 stock options with a term of 5 years and an exercise price of $0.12 were granted outside of the 2009, 2013, and 2015 Plans.
In June 2017, 25,000,000 stock options with a term of five years were granted to Mr. Stephen Squires outside of the 2009, 2013, and 2015 Plans.Plans, 10,000,000 of which are unearned as of the date of the filing of this report.
In fiscal year 2018, no options or warrants were granted outside the 2009 Plan, 2013 Plan, and 2015 Plan.
Prior to fiscal year 2017, 6,500,000 options outside the 2009 Plan, 2013 Plan, and 2015 Plan were granted and outstanding.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of January 22,October 9, 2018 certain information regarding beneficial ownership of our common stock by:
● | Each person known to us to beneficially own 5% or more of our common stock; | |
● | Each executive officer who in this proxy statement are collectively referred to as the “Named Executive Officers;” | |
● | Each of our directors; and | |
● | All of our executive officers (as that term is defined under the rules and regulations of the SEC) and directors as a group. |
We have determined beneficial ownership in accordance with Rule 13d-3 under the Exchange Act. Beneficial ownership generally means having sole or shared voting or investment power with respect to securities. Unless otherwise indicated in the footnotes to the table, each shareholder named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite the shareholder’s name.
Name of Beneficial Owner (9) | Common Stock Beneficially Owned (1)(2) | Percent of Class (3) | ||||||
Stephen Squires (4) | 61,702,051 | 13.6 | % | |||||
David Doderer (5) | 20,105,417 | 4.8 | % | |||||
Ghassan Jabbour (6) | 11,650,000 | 2.8 | % | |||||
Shane Squires (7) | 400,000 | * | ||||||
E. Jamie Schloss | 0 | * | ||||||
Directors and Executive Officers as a group of 5 persons | 93,857,468 | 19.9 | % | |||||
Carson Group (8) | 28,171,920 | 6.8 | % |
Name of Beneficial Owner | Common Stock Beneficially Owned (1)(2) | Percent of Class (3) | ||||||
Stephen Squires (4) | 61,702,051 | 12.3 | % | |||||
David Doderer (5) | 20,105,417 | 4.3 | % | |||||
Ghassan Jabbour (6) | 11,650,000 | 2.5 | % | |||||
Shane Squires (7) | 400,000 | * | ||||||
Robert Phillips (8) | 2,010,466 | * | ||||||
Directors and Executive Officers as a group of 5 persons | 93,857,468 | 18.0 | % | |||||
Lucas Hoppel (9) | 44,791,667 | 9.0 | % | |||||
Carson Group (10) | 28,171,920 | 6.8 | % |
* Represents less than 1%
(1) | Unless otherwise indicated, ownership represents sole voting and investment power. |
(2) | The address for each officer and director named above is c/o the Company at 3055 Hunter Road, San Marcos, TX 78666. |
(3) | Based upon 406,105,391common shares outstanding as of |
(4) | Includes 14,903,301 shares of common stock owned by Mr. Squires and 230,000 shares of common stock owned by Mr. Squires wife and options to purchase 45,031,250 shares owned by Mr. Squires and options to purchase 1,537,500 shares owned by Mr. Squires wife. Excludes 12,000,000 options owned by Mr. Squires which are unearned as of the date of the filing of this Form 10-k. |
(5) | Includes 6,670,000 shares of common stock and warrants to purchase 13,435,417 shares. Excludes 1,250,000 options which are unearned as of the date of the filing date of this Form 10-K. |
(6) | Includes 5,800,000 shares of common stock and warrants to purchase 5,850,000 shares. |
(7) | Includes 100,000 shares of common stock and warrants to purchase 300,000 shares. |
(8) | 2,010,466 shares are payable in accordance with Robert Phillips consulting contract, if 100% equity payment is elected. |
(9) | Includes |
(10) | According to Schedule 13D dated October 4, 2016 and an email received by Company counsel on December 6, 2017. |
Securities Authorized for Issuance under Equity Incentive Plans
The table set forth below provides information as of June 30, 2018 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:
Plan Category | Number of securities to be issed upon exercise of outstanding warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
Equity compensation plans approved by security holders | 58,841,914 | $ | 0.078 | 7,833,086 | ||||||||
Equity compensation plans not approved by security holders | 8,075,000 | $ | 0.220 | 6,925,000 |
Item 13. Certain Relationships and Transactions
Policies and Procedures for Related-Party Transactions
Our Company does not have any formal written policies or procedures for related party transactions, however in practice, our board of directorsdirectors’ reviews and approves all related party transactions and other matters pertaining to the integrity of management, including potential conflicts of interest, trading in our securities, or adherence to standards of business conduct.
For a description of certain transactions betweenAt June 30, 2018 and 2017, the Company had accrued salaries payable to executives and its affiliated parties, referencemembers of the board of directors, in the amount of $568,575 and $361,375, respectively.
During the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds of $200,000. This transaction is madedescribed in more detail in Note 5 under the heading April – June, August, October and November 2016 Convertible Debentures.
In September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing. This transaction is described in more detail in Note 17 herein, which information is incorporated herein by reference.6 under the heading “Promissory Note”. The Company repaid the loan on October 11, 2016.
For a description of transactions during fiscal years 20162018 and 20162017 between the Company and its executive officers and directors, reference is made to Items 7 herein.
Director Independence
Our Board has determined that Dr. Ghassan Jabbour is considered an “independent director.” Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition, an “independent director” means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The Board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $120,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of the company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of the company’s outside auditor.
Item 14.Principal Accountant Fees and Services
On June 15, 2015,In May, 2018, the Company’s Board of Directors dismissed Messineo & Co., CPA’s LLC (“Messineo”) as the Company’s independent accountants and approved engaging Weaver & Tidwell, LLP. (“Weaver”) of Houston, Texas,Company engaged RBSM, LLP 0f Larkspur, CA as the Company’s new registered independent public accountant.
The following table presents the aggregate audit fees billed by WeaverKCCW Accountancy Group for services rendered for the fiscal years ended June 30, 20162017 and 2017:by RBSM, LLP for fiscal year 2018:
Services Billed for the Year Ended June 30, | Services Billed for the Year Ended June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Audit Fees (1) | $ | 59,500 | $ | 59,059 | $ | 30,000 | $ | 59,500 | ||||||||
Audit-Related Fees | 0 | 0 | - | 0 | ||||||||||||
Tax Fees | 38,500 | 0 | - | 38,500 | ||||||||||||
All Other Fees | 12,000 | 0 | - | 12,000 | ||||||||||||
Total | $ | 110,000 | $ | 59,059 | $ | 30,000 | $ | 110,000 |
(1) | The Audit fees for the years ended June 30, |
In July 2017, the Company engaged KCCW Accountancy Corp. as the Company’s new registered independent public accountant. KCCW did not receive any compensation in the years ended June 30, 2017 or June 30, 2016.
Pre-Approval Policies and Procedures
The Board of Directors pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.
Item 15. Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this Report
(1) | Consolidated Financial Statements: See index to Consolidated Financial Statements on page F-1 | |
(2) | Financial Statement Schedules |
(b) Exhibits
The information required by this Item is set forth on the Exhibit Index that follows the signature page of this Report
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
QUANTUM MATERIALS CORP. | ||
Date: | By: | /s/ Stephen Squires |
Name: | Stephen Squires | |
Title: | Principal Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature | Title | Date | ||
/s/ Stephen Squires | Title: Principal Executive Officer, | Date: | ||
Stephen Squires | Director | |||
/s/ | Title: Principal Financial Officer | Date: | ||
/s/ Ghassan Jabbour | Title: Director | Date: | ||
Ghassan Jabbour | ||||
/s/ David Doderer | Title: | Date: | ||
David Doderer | ||||
/s/ Shane Squires | Title: Director | Date: | ||
Shane Squires |
(b) | Exhibits(items indicated by an (*) are filed herewith) |
10.28 | Form of September 2016 Warrant |
QUANTUM MATERIALS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Quantum Materials Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Quantum Materials Corp. (the Company) as of June 30, 2018, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended June 30, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018, and the results of its operations and its cash flows for the year ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RBSM LLP | |
We have served as the Company’s auditor since 2018. | |
Larkspur, CA | |
October 15, 2018 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Quantum Materials Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Quantum Materials Corp. as of June 30, 2017, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the fiscal year ended June 30, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2017, and the results of its operations and its cash flows for the fiscal year ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
Going concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 of the consolidated financial statements, the Company has sustained continuing operating losses and has a history of losses, working capital deficits and negative cash flows from operating activities. The Company’s viability is dependent upon its ability to obtain future financing and the success of its future operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KCCW Accountancy Corp. | |
We have served as the Company’s auditor since 2017. | |
April 12, 2018 | |
Los Angeles, California |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Quantum Materials Corp. as of June 30, 2016 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended June 30, 2016. The consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quantum Materials Corp. as of June 30, 2016, and the results of their operations and their cash flows for year ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the entity has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
QUANTUM MATERIALS CORP.
June 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
June 30, 2018 | June 30, 2017 | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 52,611 | $ | 266,985 | $ | 2,025 | $ | 52,611 | ||||||||
Accounts receivable | - | 8,835 | ||||||||||||||
Prepaid expenses | 1,254,923 | 102,100 | ||||||||||||||
Subscription receivable | 10,000 | - | ||||||||||||||
Prepaid expenses and other current assets | 1,746,181 | 1,254,923 | ||||||||||||||
TOTAL CURRENT ASSETS | 1,307,534 | 377,920 | 1,758,206 | 1,307,534 | ||||||||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $246,491 and $150,142 | 723,236 | 774,674 | ||||||||||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $346,080 and $246,491 | 625,524 | 723,236 | ||||||||||||||
LICENSES AND PATENTS, net of accumulated amortization of $113,804 and $75,256 | 78,939 | 117,487 | ||||||||||||||
LICENSES AND PATENTS, net of accumulated amortization of $146,852 and $113,804 | 45,891 | 78,939 | ||||||||||||||
LONG TERM PORTION OF PREPAID EXPENSES | 184,660 | - | ||||||||||||||
TOTAL ASSETS | $ | 2,109,709 | $ | 1,270,081 | $ | 2,614,281 | $ | 2,109,709 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable | $ | 1,511,691 | $ | 1,311,267 | ||||||||||||
Accrued expenses | $ | 1,809,456 | $ | 625,474 | 548,667 | $ | 498,189 | |||||||||
Due to related parties | 361,375 | 230,000 | ||||||||||||||
Accrued salaries | 682,575 | 361,375 | ||||||||||||||
Notes payable, net of unamortized discount | 62,738 | 10,093 | - | 62,738 | ||||||||||||
Current portion of convertible debentures, net of unamortized discount | 2,511,829 | 407,702 | 3,402,421 | 2,511,829 | ||||||||||||
TOTAL CURRENT LIABILITIES | 4,745,398 | 1,273,269 | 6,145,354 | 4,745,398 | ||||||||||||
CONVERTIBLE DEBENTURES, net of current portion, unamortized discount and debt issuance costs | 559,283 | 1,039,656 | 40,224 | 559,283 | ||||||||||||
TOTAL LIABILITIES | 5,304,681 | 2,312,925 | 6,185,578 | 5,304,681 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 14) | ||||||||||||||||
COMMITMENTS AND CONTINGENCIES (See Note 13) | - | - | ||||||||||||||
STOCKHOLDERS’ DEFICIT | ||||||||||||||||
Common stock, $.001 par value, authorized 750,000,000 shares, 367,955,585 and 324,563,789 issued and outstanding at June 30, 2017 and 2016, respectively | 367,955 | 324,564 | ||||||||||||||
Common stock, $.001 par value, authorized 750,000,000 shares, 442,564,332 and 367,955,585 issued and outstanding at June 30, 2018 and June 30, 2017, respectively | 442,564 | 367,955 | ||||||||||||||
Common stock issuable | 800,131 | - | ||||||||||||||
Additional paid-in capital | 33,880,177 | 28,415,843 | 42,030,181 | 33,880,177 | ||||||||||||
Accumulated deficit | (37,443,104 | ) | (29,783,251 | ) | (46,844,173 | ) | (37,443,104 | ) | ||||||||
TOTAL STOCKHOLDERS’ DEFICIT | (3,194,972 | ) | (1,042,844 | ) | (3,571,297 | ) | (3,194,972 | ) | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 2,109,709 | $ | 1,270,081 | $ | 2,614,281 | $ | 2,109,709 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4 |
QUANTUM MATERIALS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, | ||||||||
2017 | 2016 | |||||||
REVENUES | $ | 33,250 | $ | 240,835 | ||||
OPERATING EXPENSES | ||||||||
General and administrative | 5,447,576 | 5,218,391 | ||||||
Research and development | 1,006,214 | 479,908 | ||||||
TOTAL OPERATING EXPENSES | 6,453,790 | 5,698,299 | ||||||
LOSS FROM OPERATIONS | (6,420,540 | ) | (5,457,464 | ) | ||||
OTHER EXPENSE (INCOME) | ||||||||
Gain on settlement | - | (174,568 | ) | |||||
Beneficial conversion expense | 275,110 | 513,941 | ||||||
Interest expense, net | 314,679 | 83,764 | ||||||
Accretion of debt discount | 649,524 | 225,349 | ||||||
TOTAL OTHER EXPENSE | 1,239,313 | 648,486 | ||||||
NET LOSS | $ | (7,659,853 | ) | $ | (6,105,950 | ) | ||
LOSS PER COMMON SHARE | ||||||||
Basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
Basic and diluted | 342,688,527 | 318,325,221 |
Years Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
REVENUES | $ | 20,120 | $ | 33,250 | ||||
OPERATING EXPENSES | ||||||||
General and administrative | 6,093,075 | 5,447,576 | ||||||
Research and development | 188,274 | 1,006,214 | ||||||
TOTAL OPERATING EXPENSES | 6,281,349 | 6,453,790 | ||||||
LOSS FROM OPERATIONS | (6,261,229 | ) | (6,420,540 | ) | ||||
OTHER EXPENSE (INCOME) | ||||||||
Beneficial conversion expense | 1,303,078 | 275,110 | ||||||
Interest expense, net | 1,023,989 | 314,679 | ||||||
Change in value of derivative liability | (514,969 | ) | - | |||||
Accretion of debt discount | 1,327,742 | 649,524 | ||||||
TOTAL OTHER EXPENSE | 3,139,840 | 1,239,313 | ||||||
NET LOSS | $ | (9,401,069 | ) | $ | (7,659,853 | ) | ||
LOSS PER COMMON SHARE | ||||||||
Basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
Basic and diluted | 413,738,050 | 342,688,527 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5 |
QUANTUM MATERIALS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | Common Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Deficit | Shares | Amount | Issuable | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
Balances at June 30, 2015 | 307,097,420 | $ | 307,097 | $ | 24,099,177 | $ | (23,677,301 | ) | $ | 728,973 | ||||||||||||||||||||||||||||||||||
Common stock issued for cash | 1,000,000 | 1,000 | 99,000 | - | 100,000 | |||||||||||||||||||||||||||||||||||||||
Common stock issued for warrant and option exercises | 13,454,669 | 13,455 | 411,223 | - | 424,678 | |||||||||||||||||||||||||||||||||||||||
Common stock issued for services | 2,900,000 | 2,900 | 287,100 | - | 290,000 | |||||||||||||||||||||||||||||||||||||||
Cancellation of shares | (638,300 | ) | (638 | ) | (252,930 | ) | - | (253,568 | ) | |||||||||||||||||||||||||||||||||||
Stock warrants issued in exchange for accrued salaries | - | - | 821,979 | - | 821,979 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 750,000 | 750 | 1,876,822 | - | 1,877,572 | |||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature of debenture | - | - | 513,941 | - | 513,941 | |||||||||||||||||||||||||||||||||||||||
Allocated value of warrants related to debenture | - | - | 486,487 | - | 486,487 | |||||||||||||||||||||||||||||||||||||||
Stock warrants issued for services | - | - | 73,044 | - | 73,044 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (6,105,950 | ) | (6,105,950 | ) | |||||||||||||||||||||||||||||||||||||
Balances at June 30, 2016 | 324,563,789 | 324,564 | 28,415,843 | (29,783,251 | ) | (1,042,844 | ) | 324,563,789 | $ | 324,564 | $ | - | $ | 28,415,843 | $ | (29,783,251 | ) | $ | (1,042,844 | ) | ||||||||||||||||||||||||
Common stock issued for cash | 875,000 | 875 | 104,125 | - | 105,000 | 875,000 | 875 | - | 104,125 | - | 105,000 | |||||||||||||||||||||||||||||||||
Common stock issued for warrant and option exercises | 10,000,000 | 10,000 | 415,000 | - | 425,000 | 10,000,000 | 10,000 | - | 415,000 | - | 425,000 | |||||||||||||||||||||||||||||||||
Common stock issued for services | 21,670,237 | 21,670 | 2,011,091 | - | 2,032,761 | 21,670,237 | 21,670 | - | 2,011,091 | - | 2,032,761 | |||||||||||||||||||||||||||||||||
Common stock issued for debenture interest | 1,182,284 | 1,182 | 120,747 | - | 121,929 | 1,182,284 | 1,182 | - | 120,747 | - | 121,929 | |||||||||||||||||||||||||||||||||
Common stock issued for debenture conversions | 3,208,334 | 3,208 | 381,792 | - | 385,000 | 3,208,334 | 3,208 | - | 381,792 | - | 385,000 | |||||||||||||||||||||||||||||||||
Cancellation of shares | (194,059 | ) | (194 | ) | 194 | - | - | (194,059 | ) | (194 | ) | - | 194 | - | - | |||||||||||||||||||||||||||||
Stock-based compensation | 4,000,000 | 4,000 | 1,434,570 | - | 1,438,570 | 4,000,000 | 4,000 | - | 1,434,570 | - | 1,438,570 | |||||||||||||||||||||||||||||||||
Beneficial conversion feature of debenture | - | - | 275,110 | - | 275,110 | - | - | - | 275,110 | - | 275,110 | |||||||||||||||||||||||||||||||||
Allocated value of common stock and warrants related to debenture | 2,650,000 | 2,650 | 564,473 | - | 567,123 | 2,650,000 | 2,650 | - | 564,473 | - | 567,123 | |||||||||||||||||||||||||||||||||
Stock options issued for services | - | - | 157,232 | - | 157,232 | - | - | - | 157,232 | - | 157,232 | |||||||||||||||||||||||||||||||||
Net loss | - | - | - | (7,659,853 | ) | (7,659,853 | ) | - | - | - | - | (7,659,853 | ) | (7,659,853 | ) | |||||||||||||||||||||||||||||
Balances at June 30, 2017 | 367,955,585 | $ | 367,955 | $ | 33,880,177 | $ | (37,443,104 | ) | $ | (3,194,972 | ) | 367,955,585 | $ | 367,955 | $ | - | $ | 33,880,177 | $ | (37,443,104 | ) | $ | (3,194,972 | ) | ||||||||||||||||||||
Common stock issued for cash | 1,716,666 | 1,717 | - | 151,283 | - | 153,000 | ||||||||||||||||||||||||||||||||||||||
Common stock issued for services | 34,100,060 | 34,100 | - | 2,371,239 | - | 2,405,339 | ||||||||||||||||||||||||||||||||||||||
Common stock issued for debenture interest | 737,020 | 737 | - | 67,760 | - | 68,497 | ||||||||||||||||||||||||||||||||||||||
Common stock issued for debenture conversions | 7,125,001 | 7,125 | - | 847,875 | - | 855,000 | ||||||||||||||||||||||||||||||||||||||
Common stock issued for debenture and warrant extensions | 24,125,000 | 24,125 | 36,000 | 1,606,675 | - | 1,666,800 | ||||||||||||||||||||||||||||||||||||||
Common stock and stock warrants issued in exchange for accrued salaries | - | - | 30,800 | 498,022 | - | 528,822 | ||||||||||||||||||||||||||||||||||||||
Common stock and stock warrants issued in exchange for accounts payable | 1,880,000 | 1,880 | - | 175,120 | - | 177,000 | ||||||||||||||||||||||||||||||||||||||
Cancellation of shares | (5,725,000 | ) | (5,725 | ) | - | (429,375 | ) | - | (435,100 | ) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 7,000,000 | 7,000 | - | 1,294,060 | - | 1,301,060 | ||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature of debenture | - | - | - | 1,303,078 | - | 1,303,078 | ||||||||||||||||||||||||||||||||||||||
Allocated value of common stock and warrants related to debenture | 3,650,000 | 3,650 | 453,331 | 264,267 | - | 721,248 | ||||||||||||||||||||||||||||||||||||||
Common stock issued in exchange for debt extinguishment | - | - | 280,000 | - | - | 280,000 | ||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | (9,401,069 | ) | (9,401,069 | ) | ||||||||||||||||||||||||||||||||||||
Balances at June 30, 2018 | 442,564,332 | $ | 442,564 | $ | 800,131 | $ | 42,030,181 | $ | (46,844,173 | ) | $ | (3,571,297 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-6 |
QUANTUM MATERIALS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended | ||||||||||||||||
Year Ended June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net loss | $ | (7,659,853 | ) | $ | (6,105,950 | ) | $ | (9,401,069 | ) | $ | (7,659,853 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization expense | 134,897 | 125,076 | 132,637 | 134,897 | ||||||||||||
Amortization of debt issuance costs | 71,353 | 15,203 | 650,128 | 71,353 | ||||||||||||
Stock-based compensation | 1,438,570 | 2,326,024 | 1,580,012 | 1,438,570 | ||||||||||||
Stock issued for services | 2,032,762 | 228,318 | 1,318,274 | 2,032,762 | ||||||||||||
Stock options issued for services | 157,232 | - | - | 157,232 | ||||||||||||
Stock issued for debenture extensions | 1,646,800 | - | ||||||||||||||
Stock issued for interest | 121,929 | - | - | 121,929 | ||||||||||||
Stock options issued for debenture conversion | 385,000 | - | - | 385,000 | ||||||||||||
Gain on settlement | - | (174,568 | ) | |||||||||||||
Beneficial conversion feature | 275,110 | 513,941 | 1,303,078 | 275,110 | ||||||||||||
Deemed interest on extinguishment of debenture | 118,000 | - | ||||||||||||||
Change in fair value of derivative liability | (514,969 | ) | - | |||||||||||||
Accrued salaries due to related parties | - | 131,375 | ||||||||||||||
Accretion of debt discount | 649,524 | 225,349 | 1,020,772 | 649,524 | ||||||||||||
Accrued salaries due to related parties | 131,375 | - | ||||||||||||||
Effects of changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 8,835 | (8,835 | ) | - | 8,835 | |||||||||||
Prepaid expenses | (1,152,823 | ) | 228,066 | |||||||||||||
Accrued expenses | 1,183,982 | 247,354 | ||||||||||||||
Prepaid expenses and other current assets | (23,983 | ) | (1,152,823 | ) | ||||||||||||
Accounts payable and accrued expenses | 1,079,499 | 1,183,982 | ||||||||||||||
NET CASH USED IN OPERATING ACTIVITIES | (2,222,107 | ) | (2,380,022 | ) | (1,090,821 | ) | (2,222,107 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Purchase of property and equipment | (44,911 | ) | (85,162 | ) | (1,877 | ) | (44,911 | ) | ||||||||
Change in restricted cash investments | - | 65,330 | ||||||||||||||
NET CASH USED IN INVESTING ACTIVITIES | (44,911 | ) | (19,832 | ) | (1,877 | ) | (44,911 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from issuance of common stock | 105,000 | 485,500 | ||||||||||||||
Proceeds from warrant exercises and issuance of common stock | 163,000 | 530,000 | ||||||||||||||
Proceeds from issuance of convertible debentures / promissory note | 1,470,000 | 1,565,000 | 1,494,500 | 1,470,000 | ||||||||||||
Proceeds from issuance of note payable | 152,644 | 150,000 | - | 152,644 | ||||||||||||
Proceeds from exercise of warrants and options | 425,000 | - | ||||||||||||||
Principal payments on long-term debt | (552,650 | ) | - | |||||||||||||
Principal payments on note payable | (100,000 | ) | (150,000 | ) | (62,738 | ) | (100,000 | ) | ||||||||
Debt issuance costs | - | (57,500 | ) | |||||||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 2,052,644 | 1,993,000 | 1,042,112 | 2,052,644 | ||||||||||||
NET DECREASE IN CASH | (214,374 | ) | (406,854 | ) | (50,586 | ) | (214,374 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 266,985 | 673,839 | 52,611 | 266,985 | ||||||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 52,611 | $ | 266,985 | $ | 2,025 | $ | 52,611 |
The accompanying notes are an integral part of these consolidated financial statements.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND NATUREBASIS OF OPERATIONSPRESENTATION
Nature of Operations
Quantum Materials Corp., a Nevada corporation, and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred to as the “Company”) are headquartered in San Marcos, Texas. The Company is a nanotechnology company specializing in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high-performance variant of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology and technological changes, including those developed by ourthe Company’s competitors, rendering ourthe Company’s technology uncompetitive or obsolete.
Going Concern
The Company recorded losses from continuing operations in the current period presented and has a history of losses,losses. As of June 30, 2018, the Company had a working capital deficitsdeficit of $4,387,148 and negativenet cash flows fromused in operating activities.activities was $(1,013,321) for the year ended June 30, 2018. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.
In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
The accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: The Company recognizes revenue from the sale of products and services in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements.”
The Company recognizes revenue when product has been delivered and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after normal payment terms. If it is determined that the fee is not fixed or determinable, the Company recognizes revenue at the time the fee becomes due, provided that all other revenue recognition criteria have been met. Sales arrangements may contain customer-specific acceptance requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service and is recognized upon receipt of customer acceptance.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable: Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company personnel and with the customers directly.
Financial Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures. The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Concentrations of Credit Risk: The Company maintains its cash in bank deposits with financial institutions. These deposits, at times, exceed federally insured limits. The Company monitors the financial condition of the financial institution and has not experienced any losses on such accounts. The Company is not party to any financial instruments which would have off-balance sheet credit or interest rate risk.
Property and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the various classes of assets as follows:
Furniture and fixtures | 7 years | |||
Computers and software | 3 years | |||
Machinery and equipment | 3 - 10 years |
Licenses and Patents: Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated useful life of five years.
Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35“Impairment or Disposal of Long-Lived Assets”, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and itsthe carrying value. There were no impairment charges in the consolidated statements of operations during the years ended June 30, 20172018 and 2016.2017.
Debt Issuance Costs: The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Accumulated amortization was $86,555$145,545 and $15,203$86,555 at June 30, 20172018 and 2016,2017, respectively. Amortization expense for the years ended June 30, 2018 and 2017 was $58,990 and 2016 was $88,956 and $15,203 respectively. Amortization expense is projected to be $58,990 for the twelve months ended June 30, 2018.
Income Taxes:The Company follows ASC 740“Income Taxes”regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company follows ASC 740“Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes.
Earnings per Share: The Company accounts for earnings per share in accordance with ASC 260“Earnings Per Share”. Basic earnings per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the periods, including the dilutive effect of stock options and warrants granted. Dilutive stock options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported.
Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital.
Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities”, as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
Fair value measurements: The Company estimates fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair value measurement according to the lowest level of input that is significant to the measurement even though other significant inputs that are more readily observable may have also utilized.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Costs: Research and development (R&D) costs are expensed as incurred. These expenses include the costs of the Company’s proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements. Research and development expense wasexpenses were $188,274 and $1,006,214 and $479,908 for the years ended June 30, 20172018 and 2016,2017, respectively.
Reclassifications: Certain amounts in the June 30, 20162017 consolidated financial statements have been reclassified to conform to the classifications in the June 30, 20172018 consolidated financial statements.
Recent Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June 30, 2018.
In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.
The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation.
The Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
Pronouncements Yet To Be Adopted
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. We will continue to evaluate this area and expect to finalize our conclusions by the first quarter of fiscal 2019.
In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU 2016-02,Leases,which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers: Deferral of the Effective Date,which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10,Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements upon adoption.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 32 — PREPAID EXPENSES
Prepaid expenses consist of the following:
June 30, | ||||||||
2017 | 2016 | |||||||
Prepaid consulting fees | $ | 1,225,463 | $ | 102,100 | ||||
Other prepaid expenses | 29,460 | - | ||||||
Total prepaid expenses | $ | 1,254,923 | $ | 102,100 |
Years Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Prepaid consulting fees | $ | 1,896,589 | $ | 1,225,463 | ||||
Other prepaid expenses | 31,002 | 29,460 | ||||||
Deposits | 3,250 | - | ||||||
Total prepaid and other current assets | 1,930,841 | 1,254,923 | ||||||
Less non-current portion | 184,660 | - | ||||||
Current portion of prepaid and other current assets | $ | 1,746,181 | $ | 1,254,923 |
NOTE 43 — PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30, | ||||||||||||||||
2017 | 2016 | June 30, 2018 | June 30, 2017 | |||||||||||||
Furniture and fixtures | $ | 1,625 | $ | 1,625 | $ | 3,502 | $ | 1,625 | ||||||||
Computers and software | 11,447 | 11,447 | 11,447 | 11,447 | ||||||||||||
Machinery and equipment | 956,655 | 911,744 | 956,655 | 956,655 | ||||||||||||
969,727 | 924,816 | 971,604 | 969,727 | |||||||||||||
Less: accumulated depreciation | 246,491 | 150,142 | 346,080 | 246,491 | ||||||||||||
Total property and equipment, net | $ | 723,236 | $ | 774,674 | $ | 625,524 | $ | 723,236 |
Depreciation expense for the years ended June 30, 2018 and 2017 was $99,589 and 2016 was $96,349, and $86,527, respectively.
NOTE 54 — LICENSES AND PATENTS
Licenses and patents consisted of the following:
June 30, | ||||||||||||||||
2017 | 2016 | June 30, 2018 | June 30, 2017 | |||||||||||||
William Marsh Rice University | $ | 40,000 | $ | 40,000 | $ | 40,000 | $ | 40,000 | ||||||||
University of Arizona | 15,000 | 15,000 | 15,000 | 15,000 | ||||||||||||
Bayer acquired patents | 137,743 | 137,743 | 137,743 | 137,743 | ||||||||||||
192,743 | 192,743 | 192,743 | 192,743 | |||||||||||||
Less: accumulated amortization | 113,804 | 75,256 | 146,852 | 113,804 | ||||||||||||
Total licenses and patents, net | $ | 78,939 | $ | 117,487 | $ | 45,891 | $ | 78,939 |
Amortization expense for the years ended June 30, 2018 and 2017 was $33,048 and 2016 was $38,548, and $38,549, respectively. Amortization expense is projected to be $38,549, $35,799$33,048 and $4,591$12,843 for the twelve months ended June 30, 2018 through2019 and 2020, respectively, and $0 thereafter.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 65 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2011-04“Fair Value Measurement”as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements.
This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including 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 (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Inputs that are bothValuations based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant tojudgment.
As of June 30, 2018, and June 30, 2017, the fair value measurement and unobservable.
The reported fair values forof the Company’s financial instruments, that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions. Accordingly, certain fair values may not represent actual values of the financial instruments that could have been realized as of June 30, 2017 and 2016 or that will be realized in the future and do not include expenses that could be incurred in an actual sale or settlement.
The carrying amounts ofincluding cash and cash equivalents, accounts receivable, accounts payable and current debt approximate their fairaccrued expenses, approximates book value due to the short maturity of thosethese instruments. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value. As of June 30, 2018, and 2017, the Company held no investments. The Company hired an independent resource to value its derivative liability as follows:
Fair Value Table
Balance at June 30, 2018 | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Derivative Liability | $ | - | $ | - | $ | - | $ | - | ||||||||
Convertible debentures | 3,442,645 | - | 3,442,645 | - | ||||||||||||
$ | 3,442,645 | $ | - | $ | 3,442,645 | $ | - |
Level Three Roll-forward
Derivative Liability | Total | |||||||
Balance June 30, 2017 | $ | - | $ | - | ||||
Fair value of derivative liability reclassified from equity | 514,969 | 514,969 | ||||||
Change in fair value | (514,969 | ) | (514,969 | ) | ||||
Balance June 30, 2018 | $ | - | $ | - |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Debentures
The Company measured the estimated fair value of the convertible debentures using significant other observable inputs, representative of a Level 2 fair value measurement, including the interest and conversion rates for the instruments. The following table sets forth the fair value of the Company’s convertible debentures as of June 30, 20172018 and 2016:2017:
June 30, | ||||||||||||||||||||||||||||||||
2017 | 2016 | June 30, 2018 | June 30, 2017 | |||||||||||||||||||||||||||||
Carrying | Fair | Carrying | Fair | Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||
Amount | Value | Amount | Value | Amount | Value | Amount | Value | |||||||||||||||||||||||||
Convertible debentures issued in September 2014 | $ | 25,050 | $ | 24,721 | $ | 25,050 | $ | 21,710 | $ | 25,050 | $ | 27,977 | $ | 25,050 | $ | 24,721 | ||||||||||||||||
Convertible debentures issued in January 2015 | $ | 500,000 | $ | 916,667 | $ | 500,000 | $ | 1,083,333 | 500,000 | 504,342 | 500,000 | 916,667 | ||||||||||||||||||||
Convertible debentures issued in April - June 2016 | $ | 1,330,000 | $ | 1,277,403 | $ | 1,565,000 | $ | 1,695,417 | 1,075,000 | 1,154,831 | 1,330,000 | 1,277,403 | ||||||||||||||||||||
Convertible debenture issued in August 2016 | $ | 200,000 | $ | 197,815 | $ | - | $ | - | 200,000 | 226,961 | 200,000 | 197,815 | ||||||||||||||||||||
Convertible debenture issued in November 2016 | $ | 200,000 | $ | 191,795 | $ | - | $ | - | - | - | 200,000 | 191,795 | ||||||||||||||||||||
Convertible debentures issued in January - March 2017 | $ | 260,000 | $ | 240,718 | $ | - | $ | - | 60,000 | 64,138 | 260,000 | 240,718 | ||||||||||||||||||||
Convertible debenture issued in February 2017 | $ | 100,000 | $ | 103,992 | $ | - | $ | - | - | - | 100,000 | 103,992 | ||||||||||||||||||||
Convertible debenture issued in March 2017 | $ | 150,000 | $ | 152,352 | $ | - | $ | - | - | - | 150,000 | 152,352 | ||||||||||||||||||||
Convertible promissory notes issued in March 2017 | $ | 541,850 | $ | 549,466 | $ | - | $ | - | 222,350 | 258,689 | 541,850 | 549,466 | ||||||||||||||||||||
Convertible promissory notes issued in May 2017 | $ | 213,650 | $ | 215,158 | $ | - | $ | - | - | - | 233,650 | 215,158 | ||||||||||||||||||||
Convertible debenture issued in June 2017 | $ | 100,000 | $ | 100,827 | $ | - | $ | - | 100,000 | 98,919 | 100,000 | 100,827 | ||||||||||||||||||||
Convertible debenture issued in July 2017 | 100,000 | 98,919 | - | - | ||||||||||||||||||||||||||||
Convertible debenture issued in September 2017 | 150,000 | 148,378 | - | - | ||||||||||||||||||||||||||||
Convertible debenture issued in September 2017 | 495,000 | 490,844 | - | - | ||||||||||||||||||||||||||||
Convertible debenture issued in November 2017 | 27,000 | 25,547 | - | - | ||||||||||||||||||||||||||||
Convertible debenture issued in November 2017 | 247,500 | 245,422 | - | - | ||||||||||||||||||||||||||||
Convertible debenture issued in December 2017 | 75,000 | 72,489 | - | - | ||||||||||||||||||||||||||||
Convertible debenture issued in February 2018 | 45,000 | 44,387 | - | - | ||||||||||||||||||||||||||||
Convertible debentures issued in March 2018 | 65,000 | 63,205 | - | - | ||||||||||||||||||||||||||||
Convertible debentures issued in April 2018 | 150,000 | 131,446 | - | - | ||||||||||||||||||||||||||||
Convertible debentures issued in June 2018 | 40,000 | 40,086 | - | - |
The Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other than described above.
NOTE 76 — CONVERTIBLE DEBENTURES
The following table sets forth activity associated with the convertible debentures:
June 30, | ||||||||||||||||||
2017 | 2016 | June 30, | June 30, | Debenture | ||||||||||||||
2018 | 2017 | Reference | ||||||||||||||||
Convertible debentures issued in September 2014 | $ | 25,050 | $ | 25,050 | $ | 25,050 | $ | 25,050 | A | |||||||||
Convertible debentures issued in January 2015 | 500,000 | 500,000 | 500,000 | 500,000 | B | |||||||||||||
Convertible debentures issued in April - June 2016 | 1,565,000 | 1,565,000 | 1,075,000 | 1,330,000 | C | |||||||||||||
Convertible debenture issued in August 2016 | 200,000 | - | 200,000 | 200,000 | C | |||||||||||||
Convertible promissory note issued in September 2016 | 100,000 | - | ||||||||||||||||
Convertible debenture issued in October 2016 | 50,000 | - | ||||||||||||||||
Convertible debenture issued in November 2016 | 200,000 | - | - | 200,000 | C | |||||||||||||
Convertible debentures issued in January - March 2017 | 260,000 | - | 60,000 | 260,000 | D | |||||||||||||
Convertible debenture issued in February 2017 | 100,000 | - | - | 100,000 | E | |||||||||||||
Convertible debenture issued in March 2017 | 150,000 | - | - | 150,000 | F | |||||||||||||
Convertible promissory notes issued in March 2017 | 541,850 | - | 222,350 | 541,850 | G | |||||||||||||
Convertible promissory notes issued in May 2017 | 233,150 | - | - | 233,150 | H | |||||||||||||
Convertible debenture issued in June 2017 | 100,000 | - | 100,000 | 100,000 | I | |||||||||||||
Convertible debenture issued in July 2017 | 100,000 | - | J | |||||||||||||||
Convertible debenture issued in September 2017 | 645,000 | - | K | |||||||||||||||
Convertible debenture issued in November 2017 | 247,500 | - | K | |||||||||||||||
Convertible debenture issued in November 2017 | 27,000 | - | L | |||||||||||||||
Convertible debenture issued in December 2017 | 75,000 | - | N | |||||||||||||||
Convertible debenture issued in February 2018 | 45,000 | - | O | |||||||||||||||
Convertible debentures issued in March 2018 | 65,000 | - | P | |||||||||||||||
Convertible debentures issued in April 2018 | 60,000 | - | Q | |||||||||||||||
Convertible debentures issued in April 2018 | 70,000 | - | R | |||||||||||||||
Convertible debentures issued in April 2018 | 20,000 | - | S | |||||||||||||||
Convertible debentures issued in June 2018 | 40,000 | - | T | |||||||||||||||
4,025,050 | 2,090,050 | |||||||||||||||||
Less: amount converted to shares | 385,000 | - | ||||||||||||||||
Total convertible debentures outstanding | 3,640,050 | 2,090,050 | ||||||||||||||||
3,576,900 | 3,640,050 | |||||||||||||||||
Less: unamortized discount | 490,448 | 527,350 | 134,255 | 490,448 | ||||||||||||||
Less: debt issuance costs | 78,490 | 115,342 | - | 78,490 | ||||||||||||||
3,071,112 | 1,447,358 | 3,442,645 | 3,071,112 | |||||||||||||||
Less: current portion | 2,511,829 | 407,702 | 3,402,421 | 2,511,829 | ||||||||||||||
Total convertible debentures, net of current portion | $ | 559,283 | $ | 1,039,656 | $ | 40,224 | $ | 559,283 |
Future maturities of convertible debentures for each of the next five years and thereafter are as follows:
Year Ending June 30, | Amount | |||||||
2018 | $ | 2,955,000 | ||||||
2018 (Past due) | $ | 472,350 | ||||||
2019 | 660,000 | 2,962,500 | ||||||
2020 | 25,050 | 142,050 | ||||||
2021 | - | - | ||||||
2022 | - | - | ||||||
Thereafter | - | - | ||||||
$ | 3,640,050 | $ | 3,576,900 |
Of the past due amounts disclosed above, $222,350 is, at the date of this report, involved in litigation involving L2 Capital, and SBI (See narrative G below, and litigation disclosure, Note 17). See remaining amounts due in narrative C below.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) September 2014 Convertible Debenture
Between September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050 in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. None of the Debentures were converted into common shares during the year ended June 30, 2018.
Interest expense for the years ended June 30, 20172018 and 20162017 was $1,524 and $1,528, respectively.$1,524, respectively
As of June 30, 2017,2018, $25,050 of principal was outstanding.
B) January 2015 Convertible Debenture
On January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initialhave a term of two years maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The maturity date was extended to December 15, 2018 in an extension agreement dated January 24, 2018. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in the event that any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018, the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received 3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $0 and 2016 of $92,298, and $173,914, respectively.
Interest expense for the years ended June 30, 20172018 and 20162017 was $40,000 and $40,110,$40,000, respectively.
As of June 30, 2017,2018, $500,000 of principal was outstanding and no payments have been made to the date of this report.outstanding.
C) April – June, August, October and November 2016 Convertible Debentures
During the fourth quarter of the year ended June 30, 2016,2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000. In$200,000 and sold $50,000 in proceeds in October and November 2016, the Company sold 50 and 200, respectively, additional units for total proceeds of $50,000 and $200,000, respectively.2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatmentThe conversion price was reset to $0.012 per share in June 2018 as a result of this anti-dilution feature, the Company believes that is has control over whether or not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.triggering event.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,loan, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018, and 2017, of $231,702 and 2016 of $323,894, and $51,435, respectively.
The Company recognized a beneficial conversion expense for the years ended June 30, 2018, and 2017, of $1,021,500 and 2016 of $64,775, and $513,941, respectively.
Interest expense for the years ended June 30, 2018, and 2017, of $113,570 and 2016 of $144,878, and $25,849, respectively.
During the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into 2,375,000 shares of common stock.
As of June 30, 2017, $1,730,000 of principal was outstanding.
September 2016 Convertible Promissory Note
In September 2016, the Company entered into a Securities Purchase Agreement3,791,666 and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000 unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through September 15, 2019. The promissory note has a term of eight months maturing on May 15, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note. In March 2017, the note and accrued interest were converted into 833,333 and 66,6672,375,000 shares of common stock respectively.
In accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds received in the amount of $29,522, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $29,522 and $0, respectively.
The Company recognized a beneficial conversion expense for the years ended June 30, 2017 and 2016 of $29,523 and $0, respectively.
Interest expense for the years ended June 30, 2017 and 2016 of $8,000 and $0, respectively.
As of June 30, 2017, $02018, $1,275,000 of principal was outstanding. As of the date of this report, maturities totaling $825,000 of principal have been extended for one year until March and April of 2019, and the remaining $250,000 have not been extended, and are past due as of the date of this report.
January – MarchD) January-March 2017 Convertible Debentures
During the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether or not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $52,954 and 2016 of $15,656, and $0, respectively.
The Company recognized a beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and 2016$62,400, respectively.
During the year ended June 30, 2018, $200,000 of $62,400 and $0, respectively.these debentures converted into 1,666,667 shares of common stock.
Interest expense for the years ended June 30, 2018 and 2017 of $11,275 and 2016 of $8,529, and $0, respectively.
As of June 30, 2017, $260,0002018, $60,000 of principal was outstanding.
E) February 2017 Convertible Promissory Note
In MarchFebruary 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000 unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through February 1, 2020. The promissory note has a term of eight months maturing on October 1, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds received in the amount of $24,733, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $9,012 and 2016 of $15,721, and $0, respectively.
Interest
There was no interest expense recorded for the yearsyear ended June 30, 20172018 and 2016 of $8,000 and $0, respectively.was recognized during 2017.
As of June 30, 2017, $100,0002018, $0 of principal was outstanding. In August 2017, the Note Holder converted $100,000 of principal and $8,000 of accrued interest into 833,333 and 66,667 shares of common stock, respectively.
respectively.
F) March 2017 Convertible Debenture
In March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 375,000 common stock warrants exercisable at $0.12 per share through March 28, 2020. The promissory note has a term of eight months maturing on November 28, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $77,248, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $39,137 and 2016 of $38,111, and $0, respectively.
The Company recognized a beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and 2016 of $72,752, and $0, respectively.
InterestThe Company recognized interest expense for the years ended June 30, 2018 and 2017 of $118,000 and 2016 of $12,000, and $0, respectively.
In September 2017 the debenture was converted in full.
full to common stock. At March 31, 2018, and June 30, 2017, the principal balance remaining on this note was $0 and $150,000, respectively. The Company recognized 3.5 million common shares issuable and $118,000 of imputed interest expense during September 2017 as a result of this debt settlement.
G) March 2017 Convertible Promissory Notes
In March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2 received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company also recorded original issue discount (“OID”) of $51,350 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $52,764 and $0, respectively.
Interest expense on the promissory notes for the years ended June 30, 2017 and 2016 of $5,171 and $0, respectively.
In March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
InterestQUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months.
The Company recognized accretion of debt discount expense on the commitment fees for the years ended June 30, 2018 and 2017 of $43,661 and 2016 of $4,247 and $0,$52,764, respectively.
Interest expense for the years ended June 30, 2018 and 2017 of $421,901 and $9,418, respectively.
As of June 30, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of $514,969 for the year ended June 30, 2018.
As of June 30, 2018, and 2017, $222,350 and $541,850 of principal was outstanding. On October 2, 2017outstanding, respectively. During the year ended June 30, 2018, the Company paid $339,000 and the balance was paid on November 3, 2017.
$319,500 of principal.
H) May 2017 Convertible Promissory Notes
In May 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $213,650 in gross proceeds. In connection with the second funding tranche, SBI and L2 received 280,165 and 653,719 common stock warrants, respectively, exercisable at $0.13 per share through May 2, 2022. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $71,795, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company also recorded original issue discount (“OID”) of $13,650 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $48,101 and 2016 of $23,693, and $0, respectively.
Interest expenseExpense was recorded for the years ended June 30, 2018 and 2017 of $112,900 and 2016 of $2,065 and $0, respectively.
As of June 30, 2018, and June 30, 2017, $213,650$0 and $233,150 of principal was outstanding.outstanding, respectively. In October 2017 the Company paid a total of $213,650 leaving a $0 balance on these loans as of the dateprincipal of this report.
note.
I) June 2017 Convertible Debenture
In June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The Maturitymaturity date of the Note was extended to May 1, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. Interest expense was recorded for the years ended June 30, 2018 and 2017 of $10,500 and $8,000 respectively. Beneficial conversion expense was recorded for the years ended June 30, 2018 and 2017 of $0 and $45,660 respectively. The Company recognized accretion of debt discount expense for the yearsyear ended June 30, 2018 and 2017 of $45,434 and 2016$8,907, respectively. As of $8,907June 30, 2018, and $0, respectively.2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J) July 2017 Convertible Debenture
In July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the yearsyear ended June 30, 2017 and 20162018 of $45,660 and $0, respectively.
Interest expense for the years ended June 30, 2017 and 2016 of $8,000 and $0, respectively.
$53,875. As of June 30, 2017, $100,000 of principal was outstanding. In AprilMay 2018 the maturity date was extended to February 1, 2019.
Interest expense for the year ended June 30, 2018 and 2017 of $18,500 and $0, respectively.
K) September 2017 Convertible Debenture
Debenture A)
In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $82,720. As of June 30, 2018, $150,000 of principal was outstanding.
Interest expense for the year ended June 30, 2018 of $12,000 and $0, respectively.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debenture B)
In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $495,000. The Note Holder received 10,000,000 shares of common stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense of $131,663. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $318,337. As of June 30, 2018, $495,000 of principal was outstanding.
Interest expense for the year ended June 30, 2018 of $36,000.
Debenture C)
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2018 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
The Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months.
Interest expense for the year ended June 30, 2018 of $18,000.
L) November 2017 Convertible Debenture
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,007. Interest expense for the year ended June 30, 2018 of $1,380. As of June 30, 2018, $27,000 of principal was outstanding.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 2017 Convertible Debenture
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 112,482 common stock warrants exercisable at $0.15 per share through November 13, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $18,864 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $18,864. As of June 30, 2018, $0 of principal was outstanding, as it was converted into 833,333 shares of common stock during the year ended June 30, 2018. (This debenture is not scheduled above, as it originated, and terminated within the same fiscal year.)
N) December 2017 Convertible Debenture
In December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $41,175. Interest expense for the year ended June 30, 2018 of $6,000. As of June 30, 2018, $75,000 of principal was outstanding.
O) February 2018 Convertible Debenture
In February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $24,785. Interest expense for the year ended June 30, 2018 of $3,600. As of June 30, 2018, $45,000 of principal was outstanding.
P) March 2018 Convertible Debenture
In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,697. Interest expense for the year ended June 30, 2018 of $2,400 was recognized. As of June 30, 2018, $30,000 of principal was outstanding.
In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $35,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $35,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 23, 2021. The promissory note has a term of six months maturing on September 23, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,043. Interest expense for the year ended June 30, 2018 of $2,800. As of June 30, 2018, $35,000 of principal was outstanding.
Q) April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately 6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,455. Interest expense for the year ended June 30, 2018 of $4,800 was recognized. As of June 30, 2018, $60,000 of principal was outstanding.
R) April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and 200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,616. Interest expense for the year ended June 30, 2018 of $1,027 was recognized. As of June 30, 2018, $70,000 of principal was outstanding.
S) April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $1,675. Interest expense for the year ended June 30, 2018 of $316 was recognized. As of June 30, 2018, $20,000 of principal was outstanding.
T) June 2018 Convertible Debenture
In June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately 7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $3,431. Interest expense for the year ended June 30, 2018 of $3,200 was recognized. As of June 30, 2018, $40,000 of principal was outstanding.
Debt Issuance Costs
The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for the years ended June 30, 2018 and 2017 was $58,990 and 2016 was $88,956 and $15,203 respectively.
NOTE 87 — NOTES PAYABLE
Promissory Note
In June 2017, the Company issued a promissory note secured by the Company’s CEO for $50,000 with interest of $5,000 due on repayment of the loan. Interest expense for the years ended June 30, 2018 and 2017 was $5,000 and 2016 was $197, and $0, respectively. As of June 30, 2017, $50,0002018, $0 of principal was outstanding. As of the date of this report, the balance was paid in full.
In September 2016, the Company issued an unsecured promissory note for proceeds of $100,000. The note bears 0% interest and the Company issued 416,667 common stock warrants exercisable at $0.15 per share through September 29, 2021. The note was due October 13, 2016 and was repaid on October 11, 2016.
In accounting for the promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,454, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, fourteen days. The Company recognized accretion of debt discount expense for the yearsyear ended June 30, 2018 and 2017 of $0 and 2016 of $26,454, and $0, respectively.
As of June 30, 2017,2018, $0 of principal was outstanding. See Note 17 for additional information.
In February 2016, the Company issued an unsecured promissory note for $150,000 to a private individual at an interest rate of 0.5% per annum. The note was due May 5, 2016. Interest expense for the years ended June 30, 2017 and 2016 was $0 and $172, respectively. On May 6, 2016, the note was paid in full.
Note Payable – Insurance
In May 2017, to finance an insurance premium, the Company issued a negotiable promissory note for $17,374 at an interest rate of 6.89% per annum. The note is due in November 2017 and the outstanding balance was $12,738 at June 30, 2017. Interest expense for the years ended June 30, 2017 and 2016 was $726 and $0, respectively. The Note was paid in full in November 2017.
In March 2016, to finance an insurance premium, the Company issued a negotiable promissory note for $20,024 at an interest rate of 4.87% per annum. Interest expense for the years ended June 30, 2017 and 2016 was $0 and $265, respectively. The note was due November 11, 2016 and was paid in full.
NOTE 98 — ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, | ||||||||
2017 | 2016 | |||||||
Accrued professional fees | $ | 1,225,463 | $ | 102,100 | ||||
Other accrued expenses | 29,460 | - | ||||||
Total accrued expenses | $ | 1,254,923 | $ | 102,100 |
Years Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Accrued interest | $ | 343,437 | $ | 158,927 | ||||
Other accrued expenses | 205,230 | 339,262 | ||||||
Total accrued expenses | $ | 548,667 | $ | 498,189 |
NOTE 109 — EQUITY TRANSACTIONS
Common Stock
During the year ended June 30, 2017,2018, the Company issued 875,00034,100,060 shares of common stock for cash proceeds of $105,000. Additionally, investors exercised options and warrants to purchase 10,000,000 shares of common stock for cash proceeds of $425,000. Included were cashless exercises of 5,000,000 warrants that resulted$2,405,339 in the issuance of 2,500,000 shares of common stock.
During the year ended June 30, 2017, the Company granted 19,270,237 shares of common stock to consultants at the fair market value of $1,804,262. This was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.
During the year ended June 30, 2017, the Company issued 2,400,000 shares to lenders as commitment fees at the fair market value of $235,500, of which $157,500 was recognized as general and administrative expense and $78,000 was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.consulting services.
During the year ended June 30, 2017, holders of convertible notes elected to convert debt of $385,000 into 3,208,3342018, the Company issued 737,020 shares of common stock.stock at the fair market value of $68,497 for payment of debenture interest.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 2017,2018, the Company issued 1,182,2847,125,001 shares of common stock to certain lenders, in exchange for interest due, inat the amountfair market value of $121,929.
During the year ended June 30, 2017, the Company issued 2,650,000 shares in connection with the issuance$855,000 as a result of the certain promissory notes and convertible debentures in the amount of $567,123.debenture conversions.
During the year ended June 30, 2017,2018, the Company issued 4,000,0003,650,000 shares of common shares as stock based compensationvalued at $267,917, in amountconnection with the issuance of $1,438,570.
During the year ended June 30, 2017, the Company cancelled 194,059 common shares.convertible debenture notes.
During the year ended June 30, 2016,2018, the Company issued 1,000,00024,125,000 shares of common stock for cash proceedsin connection with the extension of $100,000. Additionally, investors exercised options and warrants to purchase 13,454,669 sharesconvertible debenture notes with a fair market value of common stock for cash proceeds of $385,500 and forgiveness of a liability of the Company of $39,178. Included were cashless exercises of 3,325,000 options and 8,217,634 warrants that resulted in the issuance of 2,146,629 and 4,056,612 shares of common stock, respectively.$1,630,800.
During the year ended June 30, 2016,2018, the Company granted 2,800,000issued 1,716,666 shares of common stock to consultants at the fair marketin exchange for cash with a value of $280,000. This was recognized as a prepaid asset and will be amortized to expense over the life of the agreement. Additionally, the Company granted 100,000 shares of common stock to consultants at the fair market value of $10,000 and was recognized as general and administrative expense.$153,000.
During the year ended June 30, 2016,2018, the Company issued 7,000,000 of restricted stock unit shares in exchange for $650,000 in compensation expense.
Common Stock Issuable
During the year ended June 30, 2018, the company owed a total of 24,113,333 shares total, 23,600,000 of common stock to a lender, and 513,333 to an employee. 3,500,000 shares were in exchange for extinguishment of a $150,000 debenture with $12,000 accrued interest, fair valued at $280,000. $118,000 deemed interest on extinguishment of debt has been recorded. 600,000 were in relation to the extension of debt, with a fair value of $36,000. 19,500,000 shares were in relation to a new debenture borrowing of $735,000 in aggregate, valued at $453,331. 513,333 were for $15,400 of salaries converted to shares of common stock, with a fair value of $30,800, $15,400 has been recorded as additional compensation. The shares will be issued after fiscal year end June 30, 2018. The shares are included in the weighted average shares outstanding for purposes of calculation earning per share for the year ended June 30, 2018.
During the year ended June 30, 2018, the Company cancelled 638,3005,725,000 shares of common stock. See Note 17.stock, valued at $435,100. These shares were held in escrow pending a contractual deliverable and were returned to the Company.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Warrants
A summary of activity of the Company’s stock warrants for the years ended June 30, 20172018 and 20162017 is presented below:
Weighted | Weighted | |||||||||||||||||||||||||||||||
Weighted | Average | Weighted | Weighted | Average | Weighted | |||||||||||||||||||||||||||
Average | Remaining | Average | Average | Remaining | Average | |||||||||||||||||||||||||||
Exercise | Number of | Contractual | Grant Date | Exercise | Number of | Contractual | Grant Date | |||||||||||||||||||||||||
Price | Warrants | Term in Years | Fair Value | Price | Warrants | Term in Years | Fair Value | |||||||||||||||||||||||||
Balance as of June 30, 2015 | $ | 0.09 | 48,284,833 | $ | 0.13 | |||||||||||||||||||||||||||
Expired | 0.08 | (10,706,642 | ) | 0.09 | ||||||||||||||||||||||||||||
Granted | 0.10 | 17,572,843 | 0.13 | |||||||||||||||||||||||||||||
Exercised | 0.06 | (15,469,062 | ) | 0.10 | ||||||||||||||||||||||||||||
Cancelled | 0.24 | (416,667 | ) | 0.14 | ||||||||||||||||||||||||||||
Balance as of June 30, 2016 | $ | 0.11 | 39,262,305 | $ | 0.15 | $ | 0.11 | 39,262,305 | $ | 0.15 | ||||||||||||||||||||||
Expired | 0.18 | (4,135,100 | ) | 0.11 | 0.18 | (4,135,100 | ) | 0.11 | ||||||||||||||||||||||||
Granted | 0.15 | 9,430,983 | 0.11 | 0.15 | 9,430,983 | 0.11 | ||||||||||||||||||||||||||
Exercised | 0.06 | (12,500,000 | ) | 0.15 | 0.06 | (12,500,000 | ) | 0.15 | ||||||||||||||||||||||||
Cancelled | 0.13 | (2,104,637 | ) | 0.15 | 0.13 | (2,104,637 | ) | 0.15 | ||||||||||||||||||||||||
Balance as of June 30, 2017 | $ | 0.13 | 29,953,551 | 3.30 | $ | 0.14 | 0.13 | 29,953,551 | 0.14 | |||||||||||||||||||||||
Expired | 0.06 | (12,077,778 | ) | 0.15 | ||||||||||||||||||||||||||||
Granted | 0.07 | 21,087,409 | 0.06 | |||||||||||||||||||||||||||||
Exercised | - | - | - | |||||||||||||||||||||||||||||
Cancelled | 0.13 | (2,181,456 | ) | 0.12 | ||||||||||||||||||||||||||||
Vested and exercisable as of June 30, 2017 | $ | 0.13 | 29,953,551 | 3.30 | $ | 0.14 | ||||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | 0.11 | 36,781,726 | 2.80 | $ | 0.09 | ||||||||||||||||||||||||||
Vested and exercisable as of June 30, 2018 | $ | 0.11 | 36,781,726 | 2.80 | $ | 0.09 |
During the years ended June 30, 2018 and 2017, 0 and 2016, 5,000,000 and 8,217,634 warrants were exercised in cashless transactions that resulted in the issuance of 2,500,0000 and 4,056,6122,500,000 shares of common stock, respectively.
Outstanding warrants at June 30, 20172018 expire during the period October 2017February 2019 to May 2022April 2023 and have exercise prices ranging from $0.06$0.03 to $0.30.
The following assumptions were used for the years ended June 30, 20172018 and 2016:
2017:
Year Ended June 30, | ||||||||
2017 | 2016 | |||||||
Expected volatility | 136.25 | % | 138.52 | % | ||||
Expected dividend yield | - | - | ||||||
Risk-free interest rates | 1.62 | % | 1.10 | % | ||||
Expected term (in years) | 5.0 | 1.0 to 5.0 |
Year Ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Expected volatility | 129.46 | % | 136.25 | % | ||||
Expected dividend yield | - | - | ||||||
Risk-free interest rates | 2.62 | % | 1.62 | % | ||||
Expected term (in years) | 5.0 | 5.0 |
Salaries Converted to Equity
During the year ended June 30, 2016,2018, certain officers, employees and employeesconsultants converted accrued salaries and other amounts owed of $409,667$249,900 into 6,827,778513,333 shares of common stock and 7,816,667 warrants to purchase the Company’s common stock. The warrants are exercisable at $0.06$0.03 per share for a period of twofive years. The fair value of the common stock and stock warrants at the time of conversion was $821,979.$30,800 and $498,022, respectively. The variance of $412,312$263,522 was recognized as stock-based compensation in general and administrative expense.
There were no salary conversions during the year ended June 30, 2017.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1110 — STOCK-BASED COMPENSATION
The Company follows ASCFASB Accounting Standards Codification (“ASC”) 718“Compensation — Stock Compensation”for share-based payments which requires all stock-based payments, including stock options, to be recognized as an operating expense over the vesting period, based on their grant date fair values.
In October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2017,2018, 9,200,000 options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled. Thecancelled leaving a balance outstanding at June 30, 2017 was 8,400,000.of 8,400,000 outstanding.
In March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017, the term of these options was extended for an additional five years. In June 2016, and 2017, 6,000,000 and 17,000,000 stock options, with a term of ten years, were granted, respectively, outside of a stock option plan, and 3,000,000 shares were cancelled, leaving a balance of 23,500,000 outstanding outside of a defined option plan.
In January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock, which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013.
The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2017,2018, 72,653,473 options have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 15,886,55918,886,559 have been cancelled. The balance outstanding at June 30, 2017 was 53,441,914.cancelled, and 50,441,914 remain outstanding.
On February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000 shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2017, 4,000,0002018, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled. Thecancelled leaving a balance outstanding at June 30, 2017 was 2,375,000.
In June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan. During the year ended June 30, 2017, 3,000,000 options were cancelled.
During the fourth quarter of the year ended June 30, 2017, 17,000,000 stock options, with a term of five years, were granted outside of a stock option plan.3,275,000 options.
Incentive Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation cost is recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated forfeitures based on historical forfeiture rates, which were between 14% and 19%17% during the year ended June 30, 2017.2018. As the Company has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.
The following assumptions were used for the years ended June 30, 20172018 and 2016:2017:
Year Ended | ||||||||||||||||
Year Ended June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Expected volatility | 132.39 | % | 143.92 | % | 129.46 | % | 136.25 | % | ||||||||
Expected dividend yield | - | - | - | - | ||||||||||||
Risk-free interest rates | 1.74 | % | 1.28 | % | 2.62 | % | 1.62 | % | ||||||||
Expected term (in years) | 5.0 | 3.0 to 5.0 | 5.0 | 5.0 |
The computation of expected volatility during the yearyears ended June 30, 2018 and 2017 was based on the historical volatility. Historical volatility was calculated from historical data for the time approximately equal to the expected term of the option award starting from the grant date. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for the period corresponding with the expected life of the option.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the activity of the Company’s stock options for the years ended June 30, 20172018 and 20162017 is presented below:
Weighted | Weighted | Weighted Average Exercise Price | Number of Optioned Shares | Weighted Average Remaining Contractual Term in Years | Weighted Average Optioned Grant Date Fair Value | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||||||||
Weighted | Average | Average | ||||||||||||||||||||||||||||||||||||||
Average | Number of | Remaining | Optioned | Aggregate | ||||||||||||||||||||||||||||||||||||
Exercise | Optioned | Contractual | Grant Date | Intrinsic | ||||||||||||||||||||||||||||||||||||
Price | Shares | Term in Years | Fair Value | Value | ||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2015 | $ | 0.07 | 67,737,748 | $ | 0.10 | $ | 8,357,574 | |||||||||||||||||||||||||||||||||
Expired | - | - | - | |||||||||||||||||||||||||||||||||||||
Granted | 0.14 | 16,250,000 | 0.13 | |||||||||||||||||||||||||||||||||||||
Exercised | 0.06 | (3,325,000 | ) | 0.06 | ||||||||||||||||||||||||||||||||||||
Cancelled | 0.09 | (5,287,500 | ) | 0.16 | ||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2016 | $ | 0.08 | 75,375,248 | $ | 0.11 | $ | 3,771,601 | $ | 0.08 | 75,375,248 | $ | 0.11 | $ | 3,771,601 | ||||||||||||||||||||||||||
Expired | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
Granted | 0.12 | 20,700,000 | 0.12 | 0.12 | 20,700,000 | 0.12 | ||||||||||||||||||||||||||||||||||
Exercised | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
Cancelled | 0.12 | (8,358,334 | ) | 0.12 | 0.12 | (8,358,334 | ) | 0.12 | ||||||||||||||||||||||||||||||||
Balance as of June 30, 2017 | $ | 0.09 | 87,716,914 | 4.91 | $ | 0.11 | $ | 2,073,012 | $ | 0.09 | 87,716,914 | $ | 0.11 | $ | 2,073,012 | |||||||||||||||||||||||||
Expired | 0.05 | (3,000,000 | ) | 0.09 | ||||||||||||||||||||||||||||||||||||
Granted | 0.06 | 900,000 | 0.06 | |||||||||||||||||||||||||||||||||||||
Exercised | - | - | - | |||||||||||||||||||||||||||||||||||||
Cancelled | - | - | - | |||||||||||||||||||||||||||||||||||||
Vested and exercisable as of June 30, 2017 | $ | 0.08 | 68,620,080 | 4.97 | $ | 0.11 | $ | 2,330,647 | ||||||||||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | 0.09 | 85,616,914 | 4.00 | $ | 0.11 | $ | - | ||||||||||||||||||||||||||||||||
Vested and exercisable as of June 30, 2018 | $ | 0.08 | 73,395,997 | 4.02 | $ | 0.11 | $ | - |
Outstanding options at June 30, 20172018, expire during the period January 2018February 2019 to June 2026 and have exercise prices ranging from $0.05 to $0.17.
Compensation expense associated with stock options of $835,851 and $1,566,630 for the yearsyear ended June 30, 2018 and 2017 was $860,724 and 2016,$835,851 respectively and was included in general and administrative expenses in the consolidated statements of operations.
At June 30, 2017,2018, the Company had 19,096,83412,220,917 shares of non-vestednonvested stock option awards. The total cost of non-vestednonvested stock option awards which the Company had not yet recognized was $1,622,606$1,468,118 at June 30, 2017.2018. Such amounts are expected to be recognized over a period of 21.25 years.
Restricted Stock: To encourage retention and performance, the Company granted certain employees restricted shares of common stock with a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization, as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock awards for the yearsyear ended June 30, 20172018 and 20162017 is presented below:
QUANTUM MATERIALS CORP.
Number of | ||||||||
Nonvested, | Weighted | |||||||
Nonissued | Average | |||||||
Restricted | Grant Date | |||||||
Share Awards | Fair Value | |||||||
Nonvested restricted shares outstanding at June 30, 2015 | 1,500,000 | $ | 0.42 | |||||
Granted | 250,000 | 0.14 | ||||||
Vested | (750,000 | ) | 0.33 | |||||
Forfeited | - | - | ||||||
Nonvested, nonissued restricted shares outstanding at June 30, 2016 | 1,000,000 | 0.42 | ||||||
Granted | 4,500,000 | 0.10 | ||||||
Vested | (4,000,000 | ) | 0.14 | |||||
Forfeited | - | - | ||||||
Nonvested, nonissued restricted shares outstanding at June 30, 2017 | 1,500,000 | $ | 0.21 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of | ||||||||
Nonvested, | Weighted | |||||||
Unissued | Average | |||||||
Restricted | Grant Date | |||||||
Share Awards | Fair Value | |||||||
Nonvested, unissued restricted shares outstanding at June 30, 2016 | 1,000,000 | 0.42 | ||||||
Granted | 4,500,000 | 0.10 | ||||||
Vested | (4,000,000 | ) | 0.14 | |||||
Forfeited | - | - | ||||||
Nonvested, unissued restricted shares outstanding at June 30, 2017 | 1,500,000 | 0.21 | ||||||
Granted | 5,500,000 | 0.06 | ||||||
Vested | (7,000,000 | ) | 0.09 | |||||
Forfeited | - | - | ||||||
Nonvested, unissued restricted shares outstanding at June 30, 2018 | - | $ | - |
Compensation expense associated with restricted stock of $602,719 and $245,575awards for the yearsyear ended June 30, 2018 and 2017 was $440,336 and 2016,$602,719, respectively, and was included in general and administrative expenses in the consolidated statements of operations.
The total cost of nonvested stock awards which the Company had not yet recognized was $105,222$0 at June 30, 2017. This amount is expected to be recognized over a period of 0.75 years.
2018.
NOTE 1211 — LOSS PER SHARE
The Company follows ASC 260,“Earnings Per Share” for share-based payments that are considered to be participating securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings per share (“EPS”).
The following table sets forth the computation of basic and diluted loss per share:
Years Ended | ||||||||||||||||
June 30, | ||||||||||||||||
Year Ended June 30, | 2018 | 2017 | ||||||||||||||
2017 | 2016 | |||||||||||||||
Net loss | $ | (7,659,853 | ) | $ | (6,105,950 | ) | $ | (9,401,069 | ) | $ | (7,659,853 | ) | ||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic and diluted | 342,688,527 | 318,325,221 | 413,738,050 | 342,688,527 | ||||||||||||
Basic and diluted loss per share | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
For the years ended June 30, 2018 and 2017, 37,065,053 and 2016, 29,953,551 and 39,262,305 stock warrants, respectively, were excluded from diluted earnings per share because they are considered anti-dilutive.
For the years ended June 30, 2018 and 2017, 85,616,914 and 2016, 87,716,914 and 75,375,248 stock options, respectively, were excluded from diluted earnings per share because they are considered anti-dilutive.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1312 — REVENUE
During the years ended June 30, 20172018 and 2016,2017, the Company recognized revenue of $33,250$20,120 and 240,835,33,250, respectively.
The revenue recognized during the year ended June 30, 20172018 was a result of the Company providing Quantum Dot samplesDots to certain customers for testinguse and evaluation.
During the year ended June 30, 2016, the Company recognized revenue of $240,835. Of this amount, $225,000 is a result of the Company entering into a funded product development agreement (the “Agreement”) with leading global film manufacturer, Nitto Denko Corporation. The $225,000 represents full payment pursuant to the Agreement. The Company worked with Nitto Denko Corporation to develop quantum dot material, however the Agreement did not require specific deliverables by the Company.
NOTE 1413 — COMMITMENTS AND CONTINGENCIES
Agreement with Rice University of Arizona
On August 20, 2008, Solterra entered into aan exclusive Patent License Agreement with Rice University, which was amended and restated on September 26, 2011; also, on September 26, 2011, Solterra and QMC entered into several revised License Agreement with Rice (collectively the “Rice License Agreements”). On August 21, 2013, QMC and Solterra each entered into amended license agreements with Rice University. QMC and Solterra entered into amended license agreements with Rice University on March 15 and 22, 2017 and October 2017.
Prior to June 30, 2017, the Company and Rice agreed to amend the prior licensing agreement to provide that Solterra will pay a non-refundable minimum annual royalty of $10,000 beginning on January 1, 2019 and each year thereafter until the first sale of Rice Licensed Product, at which time Solterra shall pay to Rice a minimum annual royalty payment of $50,000,00 following the first sale of the licensed product.
Agreement with University of Arizona
The Company entered into a licensing agreement with the University of Arizona (“UA”) in July 2009 and paid license fees of 5,000 and $25,000 in 2012 and 2013. Subsequently, the initial2009. On March 3, 2017, Solterra entered into an amended license agreement waswith UA. Pursuant to UA License Agreement, as amended, several timesSolterra is obligated to reflect revised terms. After several oral agreements extending the term of the license, the Company memorialized all of the prior license amendments into a revised license agreement in November, 2017 which provides for apay minimum annual royalty paymentroyalties of $50,000 on January 31, 2019, $125,000 onby June 30, 2019,2017, $125,000 by September 15, 2017 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, July 1 to June 30, every year thereafter.following the due date. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications have been agreed to a final amendment has not been finalized. As of June 30, 2017, and 2018, no royalties have been accrued for this obligation.
Agreement with Texas State University
The Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month and can be terminated with 30-days60-days written notice of either party.
Operating Leases
The Company leases certain office and lab space under a month-to-month operating lease agreement.
Rental expense for the operating lease for the years ended June 30, 2018 and 2017 was $110,202 and 2016 was $98,410, and $50,088, respectively.
NOTE 1514 — CONCENTRATIONS
The Company owns the design of its microreactors and currently contracts with only one supplier to manufacture this equipment. No long-term supply contract exists. There are a limited number of manufacturers of this kind of equipment, and a change in suppliers could result in a significant delay in the delivery time of future equipment. Unless such a delay involved replacement of current capacity, it would not necessarily have an adverse effect on the Company’s near-term operating results.
The Company has licensed certain patents from Rice University and the University of Arizona. While neither is required for the Company’s immediate business opportunities in displays and solid-state lighting, it is expected that the Company will market products utilizing these patents or otherwise derive revenue from them in the future. It may not be possible to replace this intellectual property if the Company loses its rights, and future business opportunities could be adversely affected if these rights are lost.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1615 — INCOME TAXES
The components of income tax expense/(benefit) wereare as follows:
Year Ended June 30, | Year Ended June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Current | ||||||||||||||||
Federal | $ | - | $ | - | $ | - | $ | - | ||||||||
State | - | - | - | - | ||||||||||||
- | - | - | - | |||||||||||||
Deferred | ||||||||||||||||
Federal | $ | - | $ | - | $ | - | $ | - | ||||||||
State | - | - | - | - | ||||||||||||
- | - | - | - | |||||||||||||
Income Tax Expense/(Benefit) | $ | - | $ | - | $ | - | $ | - |
A reconciliation of the expected U.S. tax expense/(benefit) to income taxes is as follows:
Year Ended June 30, | ||||||||
2018 | 2017 | |||||||
Expected tax expense / (benefit) at U.S. statutory rate | $ | (2,594,695 | ) | $ | (2,604,350 | ) | ||
Meals and entertainment | 1,325 | 2,804 | ||||||
Derivatives | - | - | ||||||
Beneficial conversion | 359,649 | 93,537 | ||||||
Prior year NOL true-up adjustment | 256,167 | - | ||||||
Change in tax rate | 5,287,019 | - | ||||||
Prior year warrant valuation adjustment | - | - | ||||||
Change in valuation allowance | (3,309,465 | ) | 2,508,009 | |||||
Total Income Tax Expense/(Benefit) | $ | - | $ | - |
Year Ended June 30, | ||||||||
2017 | 2016 | |||||||
Expected tax expense / (benefit) at U.S. statutory rate | $ | (2,604,350 | ) | $ | (2,076,023 | ) | ||
Meals and entertainment | 2,804 | 3,316 | ||||||
Derivatives | - | - | ||||||
Beneficial conversion | 93,537 | 174,740 | ||||||
Prior year NOL true-up adjustment | - | (353,215 | ) | |||||
Stock option shortfall | - | 8,900 | ||||||
Prior year warrant valuation adjustment | - | 255,918 | ||||||
Change in valuation allowance | 2,508,009 | 1,986,364 | ||||||
Total Income Tax Expense/(Benefit) | $ | - | $ | - |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes at the enacted tax rates in effect when the differences are anticipated to reverse. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.
Components of deferred income taxes are as follows:
June 30, | June 30, | |||||||||||||||
2017 | 2016 | |||||||||||||||
�� | 2018 | 2017 | ||||||||||||||
Deferred tax assets: | ||||||||||||||||
Net operating losses - federal | $ | 10,457,753 | $ | 8,688,918 | $ | 7,497,834 | $ | 10,457,753 | ||||||||
Stock-based compensation | 2,425,447 | 1,882,874 | 1,826,639 | 2,425,447 | ||||||||||||
Amortization of licenses and patents | 4,522 | 6,699 | ||||||||||||||
Accrued Expenses | 128,254 | 36,774 | ||||||||||||||
Total deferred tax assets | 9,457,249 | 12,926,673 | ||||||||||||||
Deferred tax (liabilities): | ||||||||||||||||
Depreciation of property, plant and equipment | (80,993 | ) | (54,320 | ) | (51,775 | ) | (80,993 | ) | ||||||||
Amortization of licenses and patents | 6,699 | 4,206 | ||||||||||||||
Warrant Expense | (158,934 | ) | (179,299 | ) | (28,194 | ) | (158,934 | ) | ||||||||
Accrued Expenses | 36,774 | 29,180 | ||||||||||||||
Valuation allowance | (12,686,746 | ) | (10,371,559 | ) | ||||||||||||
Total deferred tax (liabilities) | (79,969 | ) | (239,927 | ) | ||||||||||||
Less valuation allowance | (9,377,280 | ) | (12,686,746 | ) | ||||||||||||
Net deferred tax assets/(liabilities) | $ | - | $ | - | $ | - | $ | - |
On December 22, 2017, the 2017 Tax Act was signed into law, making significant changes to the Internal Revenue Code. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates from a maximum of 35% to a flat 21% rate, effective for tax years beginning after December 31, 2017. As a result of the reduction in the U.S. corporate income tax rate under the 2017 Tax Act, the Company revalues its deferred tax assets and liabilities as of December 21, 2017, resulting in a $5,290,000 decrease in net deferred tax assets, with a corresponding reduction in the valuation allowance. The accounting for the income tax effects of the 2017 Tax Act and related adjustments were completed and included in the financial statements as of and for the year ended June 30, 2018.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s management has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance decreased by approximately $3,310,000 and increased by approximately $2,320,000 during the years ended June 30, 2018 and 2017, respectively, primarily due to operations and the change in the tax rate due to the 2017 Tax Act.
As of June 30, 2018, and 2017, the Company had approximately $30,758,097 in U.S. net operating loss (“NOL”) carryforwards that expire beginning in 2029.of approximately $36,460,00 and $30,760,000, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more “public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The Company believes there is a 382 limitation on its NOLs so that approximately $750,000 will expire unutilized, resulting in a remaining NOL carryforward of $750,000 that will limit the useapproximately $35,700,000 and $30,000,000 as of its NOLs in the future.June 30, 2018 and 2017, respectively. The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred. The NOL carryforwards expire beginning in 2029, if not utilized. The net operating loss carryforwards are subject to Internal Revenue Service adjustments until the statute closes on the year the net operating loss is utilized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of June 30, 2018, and 2017, the Company has recorded no unrecognized tax benefits or related penalty and interest. Additionally, the Company does not expect any unrecognized tax benefits to change significantly over the next twelve months.
During the fiscal year ended June 30, 2018, the Company had a net decrease in deferred tax asset of $3,309,466. This change is a result of current year activity as well as a change in the federal tax rates from 34% to 21%. The change as a result of current year increase in deferred tax assets is $1,977,553 offset by a $5,287,019 decrease due to a remeasurement of the deferred tax asset based on new tax rates established through the Tax Cuts and Jobs Act passed December 22, 2017. The remeasurement is a provisional estimate under SAB 118 that could be revised based on any additional guidance issued by the U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies. On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act, was enacted. This new law did not have a significant impact on the Company’s consolidated financial statements for the fiscal year ended June 30, 2018 because the company maintains a valuation allowance on the entirety of its deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 34% to 21% resulted in a remeasurement of the deferred tax asset reflected in the tax rate reconciliation below as well as the deferred tax asset listed above.
Given the significant impact of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for uncertainties of the effects of the Tax Act. Specifically, SAB 118 allows companies to record a provisional estimate of the impact of the Tax Act during a one year “measurement period”. The company has recognized the provisional tax impact related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the fiscal year ended June 30, 2018. The ultimate impact may differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued.
As of June 30, 2018, the Company had net operating loss carryforwards of approximately $36,460,000 and $0 for federal and state income tax purposes, respectively. These may be used to offset future taxable income and will begin to expire in varying amounts in 2029 to 2038.
For all years through June 30, 2018, the Company generated research and development credits but has not completed a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is complete, and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits, and if an adjustment is required this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheets or statements of operations and comprehensive loss if an adjustment were required.
The Company is subject to taxation in the U.S. and Texas jurisdictions. Currently, no historical years are under examination. The Company’s tax years ended June 30, 2012 to 2017 are subject to examination by the U.S. and state taxing authorities due to the carryforward of unutilized net operating losses and research and development credits.
Utilization of the Company’s net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to an “ownership change” that may have occurred, or that could occur in the future, as defined and required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards, and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. Any limitation may result in the expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards before utilization. The net operating loss carryforwards and research and development credit carryforwards inherited as a result of the merger with Telik, Inc. have been severely limited under these rules and will likely not be realized.
In general, an “ownership change” results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. The Company intends to complete a study in the future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation and will complete such study before the use of any of the aforementioned attributes.
The Company files income tax returns in the United States and Texas and is subject to examination by income tax authorities for years 2008 to present. The Company is not currently under examination in any tax jurisdiction.
NOTE 1716 — SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information:
Years Ended | ||||||||||||||||
Year Ended June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash paid for interest | $ | 20,781 | $ | 40,447 | $ | 29,023 | $ | 20,781 | ||||||||
Cash paid for income taxes | $ | - | $ | - | $ | - | $ | - |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is supplemental disclosure of non-cash investing and financing activities:
Years Ended | ||||||||||||||||
Year Ended June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Conversion of debentures into shares of common stock | $ | 385,000 | $ | - | $ | 855,000 | $ | 385,000 | ||||||||
Allocated value of common stock and warrants issued with convertible debentures | $ | 567,123 | $ | 486,487 | $ | 721,248 | $ | 567,123 | ||||||||
Stock warrants issued for conversion of accrued salaries | $ | - | $ | 409,667 | ||||||||||||
Conversion of accrued interest into shares of common stock | $ | 68,497 | $ | - | ||||||||||||
Subscription receivable from warrants extension | $ | 10,000 | $ | - | ||||||||||||
Shares of common stock and warrants issued for conversion of accrued salaries | $ | 249,900 | $ | - | ||||||||||||
Shares of common stock issued for settlement of note payable and accrued interest | $ | 162,000 | $ | - | ||||||||||||
Shares of common stock issued for settlement of payable | $ | 177,000 | $ | - | ||||||||||||
Prepaid expense paid in shares of common stock | $ | 1,809,262 | $ | 61,682 | $ | 1,896,588 | $ | 1,809,262 | ||||||||
Prepaid expense financed with debt | $ | 210,000 | $ | - | $ | - | $ | 210,000 | ||||||||
Cancellation of shares | $ | 194 | $ | - | ||||||||||||
Cancellation of shares of common stock | $ | 435,100 | $ | 194 | ||||||||||||
Financing of prepaid insurance | $ | 2,645 | $ | 10,093 | $ | 12,738 | $ | 2,645 | ||||||||
Stock warrants issued as debt issuance costs | $ | - | $ | 73,044 |
NOTE 1817 — LITIGATION
The Company was served in Hays County, Texas in a compliantcomplaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears is $95,000$53,000 plus interest and other charges which has been accrued at June 30, 2017.2018. The case was reheardCompany repaid $237,300 in late March 2018principal plus interest to L2 Capital LLC and a 45 day continuance was decided resulting in an April$101,700 plus interest to SBI Investments LLC on September 30, 2018 rehearing.2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.
CAUSE NUMBER 17-2033; Hays County, Texas
Two lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked Quantum Materials’ transfer agent, Empire Stock Transfer, Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements Quantum Materials had entered into in late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus accrued interest of $10,170) on two of the loans. Subsequently, in November 2017, the Company also repaid $213,650 and $8,636 of accrued interest on two of the remaining loans on their due dates.
Quantum filed suit for an injunction to stop the release of the stock. The two lenders, SBI Investments LLC, 2014-1 (SBI), and L2 Capital, LLC (L2), hired the national law firm of K& L&L Gates to stop the injunction; problematically, this same firm had previously represented Quantum Materials. Quantum filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.
New counsel for SBI and L2, Cleveland Terrazas PLLC, brought suit against Quantum for $1.5 million on the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed technical defaults. The court in Hays County granted Quantum’s temporary injunction and set the full case for trial. The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against Quantum and refiled similar actions in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three suits are related to the same transactions. The lenders claim 140% interest, attorney’s fees, 20 million shares of stock, and damages. Quantum maintains all loans have been paid timely.
The Company denies all the above mentionedabove-mentioned allegations and will vigorously defend all claims.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAUSE NUMBER: 17CV06093; Johnson County, Kansas
The Kansas lawsuit is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against Quantum; the second claim is for breach of contract of the first L2 promissory note against Quantum; the final claim is for breach of contract regarding the second L2 promissory note against both Quantum and Squires, individually.
The Company denies all the above mentionedabove-mentioned allegations and will vigorously defend all claims.
CAUSE NUMBER: 2017-025283-CA-01; Miami-Dade County, Florida
The Florida lawsuit largely mirrors the suit in Kansas; defaults are alleged as follows:
On July 6, 2017, Quantum filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In comparison to the unrestated financial statement previously filed by Quantum, the Revised Report materially and adversely affects SBI’s rights with respect to the notes. This restatement of financial statements constituted a breach of each of the notes. Furthermore, because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.
On July 27, 2017, Quantum’s auditor resigned, and replaced its auditor without seeking or obtaining the consent of SBI. This replacement of Quantum’s auditor constituted an alleged breach of the SBI notes. Because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.
The Company denies all of the above mentionedabove-mentioned allegations and will vigorously defend all claims.
The case was reheard in late March 2018 and a 45-day continuance was decided resulting in an April 30, 2018 rehearing. After a day of litigation in San Marcos, QTMM’s motion to enjoin L2 and SBI and prevent them from obtaining stock before a full trial on the merits was granted on October 27, 2017, by Judge Gary Steel. L2 and SBI objected to the injunction and appealed to the Third Court of Appeals in Austin, TX. On March 8, 2018, in a unanimous opinion, the Third Court of Appeals denied the appeal, sustained the injunction in favor of QTMM and awarded costs of court.
On March 29, 2018, at a discovery hearing, wherein QTMM asked the court to order L2 and SBI to produce evidence to support their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court. The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.
The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at June 30, 2018.
NOTE 1918 — TRANSACTIONS WITH AFFILIATED PARTIES
At June 30, 20172018 and 2016,2017, the Company had accrued salaries payable to executives and members of the board of directors, in the amount of $361,375$568,575 and $230,000,$361,375, respectively.
During the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds of $200,000. This transaction is described in more detail in Note 65 under the heading April – June, August, October and November 2016 Convertible Debentures.
In September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing. This transaction is described in more detail in Note 76 under the heading “Promissory Note”. The Company repaid the loan on October 11, 2016.
During the year ended June 30, 2016, the Company’s former CFO surrendered 638,300 shares of common stock and options to purchase an additional 987,500 shares in exchange for the cancellation of indebtedness to the Company aggregating $79,000. As a result of this surrender, the Company recorded a gain of $174,568 which is presented in the consolidated statements of operations as Gain on Settlement.
During the year ended June 30, 2016, the Company’s prior CFO and two of the Company’s directors invested $15,000, $10,000, and $25,000 respectively in the convertible debentures issued under the heading April – June, August, October and November 2016 Convertible Debentures as described in Note 6.
NOTE 20 — RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers: Deferral of the Effective Date,which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10,Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,Leases,which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,Income Taxes: Balance Sheet Classification of Deferred Taxes.This ASU requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. It thus simplifies the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and noncurrent. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company has adopted this guidance effective for the year ended June 30, 2016.
In August 2014, the FASB issued ASU No. 2014-15Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers: Deferral of the Effective Date,which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10,Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
NOTE 2119 - SUBSEQUENT EVENTS
Between July1, 2017 and April 12,On July 9, 2018, the Company entered into Convertible Debenture Agreements to obtain a total of $1,237,000 in gross proceeds from three non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have various terms maturing between May 1, 2018 and November 30, 2019. The Debentures bear interest at the rate of 8% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date and will receive an equal number of warrants having a strike price of $0.15 per share and a term of five years. Details of each debenture are below:
On July 20, 2017, the Company entered into Convertible Debenture Agreements to obtain $100,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of one year maturing on January 19, 2018 and bear interest at the rate of 8% per annum. This note was converted under the terms of a settlement agreement dated 20 September 2017.The maturity date was extended to May 1, 2018 in an extension agreement dated April 6, 2018. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 250,000 common stock warrants exercisable at $0.15 per share through July 20, 2019.
On September 11, 2017, the Company entered into Convertible Debenture Agreements to obtain $150,000$45,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on March 11, 2018 and bear interest at the rate of 8% per annum. The maturity date was extended to May 1, 2018 in an extension agreement dated April 6, 2018. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 250,000 common stock warrants exercisable at $0.15 per share through September 11,2019.
On September 26, 2017, the Company entered into Convertible Promissory Note in the principal amount of $880,000 from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). $450,000 was paid at closing. The Debentures has a maturity date of on April 26, 2018 and bear interest at the rate of 8% per annum. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 250,000 common stock warrants exercisable at $0.15 per share through September 11,2019. On November 2, 2017 an additional $225,000 was advanced under this note.
On November 13, 2017, the Company entered into Convertible Debenture Agreements to obtain $27,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of two years maturing on November 13,January 31, 2019 and bear interest at the rate of 8% per annum. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 112,482 common stock warrants exercisable at $0.15 per share through November 13, 2022.
On November 7, 2017, the Company entered into Convertible Debenture Agreements to obtain 100,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of two years maturing on November 7, 2019 and bear interest at the rate of 8% per annum. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022.
On December 27, 2017, the Company entered into Convertible Debenture Agreements to obtain $75,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on June 30, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 250,0002,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.15$0.12 per share through December 27,2019. July 9, 2021. These shares were not issued at the date of this report.
On February 8,2018,August 27, 2018, the Company entered into Convertible Debenture Agreements to obtain $45,000$30,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of sixseven months maturing on August 8, 2018March 30, 2019 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 500,0001,250,000 shares of common stock and 1,.000,000 common stock warrants exercisable at $0.15$0.12 per share through February 8, 2020. August 27, 2021. These shares were not issued at the date of this report.
On March 6,2018,September 17, 2018, the Company entered into Convertible Debenture Agreements to obtain $30,000$25,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of sixseven months maturing on September 6, 2018April 30, 2019 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 500,0001,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.15$0.12 per share through March 6, 2020.September 17, 2021. These shares were not issued at the date of this report.
During the period July 1, 2018 through the date of this report, the Company issued 344,055 shares of common stock for the payment of debenture interest.
During the period July 1, 2018 through the date of this report, the Company issued 3,031,375 shares of common stock for the payment of legal services.
On March 23,2018,September 9, 2018, the Company entered into Convertible Debenture Agreements to obtain $35,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to asissued a promissory note secured by the “Debenture Holders”).Company’s CEO for $20,000. The Debentures had an initialnote has a term of six months maturing on September 23, 2018 and bearbears interest at the rate of 8%6% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 500,000 common stock warrants exercisable at $0.15 per share through March 23, 2020.
The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.Stock Subscriptions
See “Note 18” regarding pending litigation.During the period July 1, 2018 through the date of this report, the company subscribed 1,430,833 shares of common stock for proceeds of $73,900. These shares were not issued at the date of this report.
During the period July 1, 2018 through the date of this report, the company subscribed 1,083,332 shares of common stock for, or part of, consulting agreements, and these shares were not issued at the date of this report.
During the period July 1, 2018 through the date of this report, the company issued 5,029,886 shares, that were reported in shares issuable at fiscal year ended June 30, 2018.
F-36 |
(b) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Additions | ||||||||||||||||||||||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||||||||||||||||||||||
beginning | costs and | other | end | Balance at beginning | Charged to costs and | Charged to | Balance at end | |||||||||||||||||||||||||||||||||
For the year ended | of period | expenses | accounts | Deductions | of period | of period | expenses | other accounts | Deductions | of period | ||||||||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||||||||||
June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
Valuation allowance on deferred tax assets | $ | 8,385,195 | $ | 1,897,967 | $ | 88,397 | $ | - | $ | 10,371,559 | $ | 10,371,559 | $ | 2,315,187 | $ | - | $ | - | $ | 12,686,746 | ||||||||||||||||||||
June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Valuation allowance on deferred tax assets | $ | 10,371,559 | $ | 2,276,375 | $ | - | $ | - | $ | 12,647,934 | $ | 12,686,746 | $ | (3,309,466 | ) | $ | - | $ | - | $ | 9,377,280 |
All other financial schedules are not required under the related instructions or are inapplicable and therefore have been omitted.