NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
General
The
accompanying consolidated financial statements include the accounts of Quantum Materials Corp. and its wholly owned subsidiary,
Solterra Renewable Technologies, Inc. (collectively referred to as the “Company”).
The
consolidated financial statements of the Company as of and for the three and nine months ended March 31, 2016 are unaudited and
have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended June 30, 2015.
The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the U.S. In the opinion of management, the accompanying unaudited financial
information includes all adjustments necessary for a fair presentation of the interim financial information. Operating results
for the interim periods are not necessarily indicative of the results of any subsequent periods. Certain information in the footnote
disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) has been condensed or omitted for the interim periods presented under the United States
Securities and Exchange Commission (“SEC”) rules and regulations. As such, these interim consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the year ended June 30, 2015. Certain amounts in the prior year consolidated financial statements
have been reclassified to conform to the classifications of the current year consolidated financial statements.
Nature
of Operations
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 our competitors,
rendering our technology uncompetitive or obsolete.
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 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.
Restatement
of Unaudited Quarterly Financial Data
The
Company identified certain errors in the Company’s previously released financial information for the quarters ended December
31, 2014 and March 31, 2015. As a result of the identification of the issues, various accounting corrections to the previously
reported financial information were recorded and reported on Form 10-K/A filed with the Securities and Exchange Commission on
February 2, 2016 and are incorporated by reference herein.
NOTE
2 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
Furniture and fixtures
|
|
$
|
1,625
|
|
|
$
|
1,625
|
|
Computers and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery and equipment
|
|
|
874,041
|
|
|
|
826,582
|
|
|
|
|
887,113
|
|
|
|
839,654
|
|
Less: accumulated depreciation
|
|
|
127,468
|
|
|
|
63,615
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
759,645
|
|
|
$
|
776,039
|
|
Depreciation
expense for the three months ended March 31, 2016 and 2015 was $21,853 and $8,354, respectively, and $63,853 and $24,048 for the
nine months ended March 31, 2016 and 2015, respectively.
NOTE
3 – LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
William Marsh Rice University
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
University of Arizona
|
|
|
15,000
|
|
|
|
15,000
|
|
Bayer acquired patents
|
|
|
137,743
|
|
|
|
137,743
|
|
|
|
|
192,743
|
|
|
|
192,743
|
|
Less: accumulated amortization
|
|
|
65,618
|
|
|
|
36,707
|
|
|
|
|
|
|
|
|
|
|
Total licenses and patents, net
|
|
$
|
127,125
|
|
|
$
|
156,036
|
|
Amortization
expense for the three months ended March 31, 2016 and 2015 was $9,637 and $9,637, respectively, and $28,911 and $24,320 for the
nine months ended March 31, 2016 and 2015, respectively.
NOTE
4 – 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 both significant to the fair value measurement and unobservable.
The
reported fair values for 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 March 31, 2016 and June 30, 2015 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 of cash and cash equivalents, accounts payable and current debt approximate their fair value due to the short
maturity of those instruments.
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 March 31, 2016 and June 30, 2015:
|
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
|
Amount
|
|
|
|
Value
|
|
|
|
Amount
|
|
|
|
Value
|
|
Convertible
debentures issued September 18, 2014
|
|
|
$
|
25,050
|
|
|
$
|
18,370
|
|
|
$
|
25,050
|
|
|
$
|
31,730
|
|
Convertible debentures
issued January 15, 2015
|
|
|
$
|
500,000
|
|
|
$
|
916,667
|
|
|
$
|
500,000
|
|
|
$
|
1,583,333
|
|
Derivative
Liabilities
The
Company has evaluated the application of ASC 815, “
Derivatives and Hedging”,
to the Convertible Debenture issued
November 4, 2008. Based on the guidance in ASC 815, the Company concluded these instruments were required to be accounted for
as derivatives as of July 1, 2009 due to the down round protection feature on the conversion price and the exercise price. The
Company records the fair value of these derivatives on its consolidated balance sheets at fair value with changes in the values
of these derivatives reflected in the consolidated statements of operations as “Change in fair value of derivative liabilities.”
These derivative instruments are not designated as hedging instruments under ASC 815. At June 30, 2014, all of the Company’s
derivative liabilities were categorized as Level 3 fair value assets. During the three and nine months ended March 31, 2015, the
Company recognized a gain of $0 and $1,871,337, respectively, and is included in the statements of operations as change in fair
value of derivative liabilities. Due to the conversion of the notes, at June 30, 2015 all of the Company’s derivative liabilities
have been realized and there are no other derivative liabilities on outstanding convertible debentures as of March 31, 2016.
Level
3 Valuation Techniques
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist
of the derivative liabilities for which there is no current market for these securities such that the determination of fair value
requires significant judgment or estimation. At the date of the original transaction, the Company valued the convertible debenture
that contains down round provisions using a lattice model, with the assistance of a valuation consultant, for which management
understands the methodologies. This model incorporated transaction details such as the Company’s stock price, contractual
terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Using assumptions,
consistent with the original valuation, the Company has subsequently used the Black-Scholes model for calculating the fair value.
The
Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other
than described above.
NOTE
5 – CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures issued November 4, 2008
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Convertible debentures issued February 6, 2014
|
|
|
-
|
|
|
|
400,000
|
|
Convertible debentures issued September 18, 2014
|
|
|
25,050
|
|
|
|
500,050
|
|
Convertible debentures issued November 25, 2014
|
|
|
-
|
|
|
|
350,000
|
|
Convertible debentures issued January 15, 2015
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
525,050
|
|
|
|
2,250,050
|
|
Less: amount converted to shares
|
|
|
-
|
|
|
|
1,725,000
|
|
Total convertible debentures outstanding
|
|
|
525,050
|
|
|
|
525,050
|
|
Less: unamortized discount
|
|
|
137,085
|
|
|
|
266,212
|
|
|
|
|
387,965
|
|
|
|
258,838
|
|
Less: current portion
|
|
|
362,915
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible debentures, net of current portion
|
|
$
|
25,050
|
|
|
$
|
258,838
|
|
November
2008 Convertible Debenture
On
November 4, 2008, the Company entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee
Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents (the
“Transaction Documents”) to obtain $1,500,000 in gross proceeds from three non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”) in exchange for 3,525,000 restricted shares of common stock of the Company
(the “Restricted Shares”) and Debentures in the principal amount aggregating $1,500,000. Each Debenture originally
had a term of three years maturing on November 4, 2011 bearing interest at the rate of 8% per annum and is pre-payable by the
Company at any time without penalty, subject to the Debenture Holders’ conversion rights. Starting in 2011, the Company
obtained one year extensions of the maturity date of the Debentures through November 4, 2014. In partial consideration of such
a loan extension, the Company agreed to issue to the Debenture Holders warrants to purchase an aggregate of 2,000,000 shares of
common stock exercisable at $0.10 per share. These warrants contain cashless exercise provisions in the event that there is no
current registration statement filed. When the maturity date was extended in June 2013 to November 4, 2014, the conversion price
per share was lowered to $0.06 per share.
On
June 30, 2014, $1,000,000 of the Debentures were converted into 16,666,667 common shares. The remaining $500,000 was converted
at $0.06 per share into 8,333,333 of common shares at the due date November 4, 2014. The Company recorded the conversion at the
fair market value of the shares at the date of conversion, off-set by the reduction of the derivative liability.
Interest
expense for the three months ended March 31, 2016 and 2015 was $0 and $0, respectively, and $0 and $21,805 for the nine months
ended March 31, 2016 and 2015, respectively.
As
of March 31, 2016 and June 30, 2015, $0 of principal was outstanding.
February
2014 Convertible Debenture
On
February 6, 2014, the Company entered into a Securities Purchase Agreement, Debenture and Escrow Agreement to obtain $400,000
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 31, 2016 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 at a conversion
price of $0.04 per share at any date. The Debenture Holders received 5,000,000 common stock warrants exercisable at $0.06 per
share through December 31, 2016. The debt is secured by a security interest in certain microreactor equipment. Pursuant to the
Securities Purchase Agreement, the investor has certain preferential rights to fund a second microreactor at a cost of up to $650,000.
Such rights were exercised as described under the January 2015 Convertible Debenture below.
In
accounting for the above convertible debentures, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $95,603, recorded as debt discount. The debt discount 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 three months ended March 31,
2016 and 2015 of $0 and $51,785, respectively, and $0 and $51,785 for the nine months ended March 31, 2016 and 2015, respectively.
Interest expense for the three months ended March 31, 2016 and 2015 was $0 and $18,762, respectively, and $0 and $18,762 for the
nine months ended March 31, 2016 and 2015, respectively.
In
January 2015, the holders of the $400,000 convertible debenture converted into 10,000,000 shares of common stock. As of March
31, 2016 and June 30, 2015, $0 of principal was outstanding.
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 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.
In
accounting for the above convertible debentures, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $203,074, recorded as debt discount. The debt discount is amortized using the effective interest rate method
over the life of the loan, five years. The Company recognized accretion of debt discount expense for the three months ended March
31, 2016 and 2015 of $0 and $0, respectively, and $0 and $203,074 for the nine months ended March 31, 2016 and 2015, respectively.
The Company recognized a beneficial conversion expense for the three months ended March 31, 2016 and 2015 of $0 and $0, respectively,
and $0 and $230,309 for the nine months ended March 31, 2016 and 2015, respectively. Interest expense for the three months ended
March 31, 2016 and 2015 was $380 and $0, respectively, and $1,148 and $4,073 for the nine months ended March 31, 2016 and 2015,
respectively.
In
October 2014, $350,000 of the Debentures were converted into 2,333,333 shares of common stock and an equal number of warrants
and in December 2014, $125,000 of the Debentures were converted into 833,334 shares of common stock and an equal number of warrants.
As of March 31, 2016 and June 30, 2015, $25,050 of principal was outstanding.
November
2014 Convertible Debenture
On
November 25, 2014, the Company entered into a Convertible Debenture Agreement which would allow the Company to borrow up to a
total of $500,000 in gross proceeds from a non-affiliated party. The Debenture has a term of five years maturing on November 25,
2019 and bears interest at the rate of 6% per annum and is pre-payable by the Company at any time without penalty. The debenture
holder funded five times between December 2014 and April 2015 for total proceeds to the Company of $350,000. The first three fundings
of $50,000 each converted at $0.15 per share, and received an equal number of warrants having a strike price of $0.30 per share
and a term of two years. The fourth funding of $50,000 and the fifth funding of $150,000 converted at $0.12 and $0.10 per share,
respectively. In January 2015 $100,000 was converted into 666,667 of common stock and in April 2015 $250,000 was converted into
2,250,000 of common stock.
The
Company recognized a beneficial conversion expense for the three months ended March 31, 2016 and 2015 of $0 and $45,833, respectively,
and $0 and $45,833 for the nine months ended March 31, 2016 and 2015, respectively.
As
of March 31, 2016 and June 30, 2015, $0 of principal was outstanding and on September 18, 2015, the Company notified the debenture
holder that per the terms of the debenture, the debenture was deemed cancelled.
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 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.
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 three months ended March 31, 2016 and 2015 of $43,903
and $40,538, respectively, and $129,127 and $40,538 for the nine months ended March 31, 2016 and 2015, respectively. The Company
recognized a beneficial conversion expense for the three months ended March 31, 2016 and 2015 of $0 and $151,895, respectively,
and $0 and $151,895 for the nine months ended March 31, 2016 and 2015, respectively. Interest expense for the three months ended
March 31, 2016 and 2015 was $9,973 and $0, respectively, and $30,137 and $0 for the nine months ended March 31, 2016 and 2015,
respectively.
NOTE
6 – NOTES PAYABLE
Promissory
Note
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 is due May 5, 2016. Interest expense for the three months ended March 31, 2016 and 2015 was $100 and $0, respectively,
and $100 and $0 for the nine months ended March 31, 2016 and 2015, respectively. On May 5, 2016, the note was paid in full.
Note
Payable – Insurance
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. The note is due November 11, 2016. The balance outstanding at March 31, 2016 was $20,024.
NOTE
7 – EQUITY TRANSACTIONS
Common
Stock
During
the nine months ended March 31, 2016, the Company issued 1,000,000 shares of common stock for cash proceeds of $100,000. Additionally,
investors exercised options and warrants to purchase 12,279,211 shares of common stock for cash proceeds of $360,500 and forgiveness
of a liability of the Company of $39,177. Included were cashless exercises of 3,325,000 options and 6,802,634 warrants that resulted
in the issuance of 2,146,629 and 3,381,154 shares of common stock, respectively.
During
the nine months ended March 31, 2016, the Company granted 2,800,000 shares of common stock to consultants at the fair market 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 employees and consultants at the fair market value of $10,000 and was recognized
as general and administrative expense.
During
the nine months ended March 31, 2016, the Company cancelled 638,300 shares of common stock. See Note 14.
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the nine months ended March 31, 2016 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Number of
|
|
|
Contractual
|
|
|
Grant Date
|
|
|
|
Price
|
|
|
Warrants
|
|
|
Term in Years
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
$
|
0.09
|
|
|
|
48,284,833
|
|
|
|
|
|
|
$
|
0.13
|
|
Expired
|
|
|
0.07
|
|
|
|
(7,895,833
|
)
|
|
|
|
|
|
|
0.08
|
|
Granted
|
|
|
0.06
|
|
|
|
9,048,508
|
|
|
|
|
|
|
|
0.13
|
|
Exercised
|
|
|
0.07
|
|
|
|
(13,554,062
|
)
|
|
|
|
|
|
|
0.09
|
|
Cancelled
|
|
|
0.24
|
|
|
|
(416,667
|
)
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
0.09
|
|
|
|
35,466,779
|
|
|
|
1.32
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of March 31, 2016
|
|
$
|
0.09
|
|
|
|
35,466,779
|
|
|
|
1.32
|
|
|
$
|
0.15
|
|
During
the nine months ended March 31, 2016, 6,802,634 warrants were exercised in cashless transactions that resulted in the issuance
of 3,381,154 shares of common stock.
In
November 2015, certain officers and employees converted accrued salaries of $409,667 into 6,827,778 warrants to purchase the Company’s
common stock. The warrants are exercisable at $0.06 per share for a period of two years. The fair value of the stock warrants
at the time of conversion was $821,979. The variance of $412,312 was recognized as stock-based compensation in general and administrative
expense.
Outstanding
warrants at March 31, 2016 expire during the period May 2016 to November 2019 and have exercise prices ranging from $0.04 to $0.30.
NOTE
8 – STOCK-BASED COMPENSATION
The
Company follows 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 March 31, 2016, 9,200,000
options have been granted, with terms ranging from five to ten years, and 250,000 have been cancelled.
In
March 2012 3,500,000 stock options, with a term of five years, were granted outside of a stock 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 March 31, 2016, 68,203,473 options
have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 12,703,225 have been cancelled.
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 March 31, 2016, no shares or options had been granted under the 2015 plan.
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. 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
Company did not grant any stock options during the nine months ended March 31, 2015. The following assumptions were used for the
nine months ended March 31, 2016:
|
|
Nine Months Ended
|
|
|
|
March 31, 2016
|
|
Expected volatility
|
|
|
142.05
|
%
|
Expected dividend yield
|
|
|
-
|
|
Risk-free interest rates
|
|
|
1.19
|
%
|
Expected term (in years)
|
|
|
3.0
to 5.0
|
|
The
computation of expected volatility during the nine months ended March 31, 2016 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.
A
summary of the activity of the Company’s stock options for the nine months ended March 31, 2016 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
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
|
|
|
0.16
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
Exercised
|
|
|
0.06
|
|
|
|
(3,325,000
|
)
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Cancelled
|
|
|
0.09
|
|
|
|
(5,287,500
|
)
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
0.07
|
|
|
|
64,625,248
|
|
|
|
4.56
|
|
|
$
|
0.11
|
|
|
$
|
2,431,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of March 31, 2016
|
|
$
|
0.06
|
|
|
|
57,375,248
|
|
|
|
3.76
|
|
|
$
|
0.10
|
|
|
$
|
2,686,596
|
|
Outstanding
options at March 31, 2016 expire during the period March 2017 to November 2025 and have exercise prices ranging from $0.03 to
$0.17.
Compensation
expense associated with stock options for the three months ended March 31, 2016 and 2015 was $98,316 and $0, respectively, and
$1,439,221 and $0 for the nine months ended March 31, 2016 and 2015, respectively, and was included in general and administrative
expenses in the consolidated statements of operations. At March 31, 2016, the Company had 7,250,000 shares of nonvested stock
option awards. The total cost of nonvested stock option awards which the Company had not yet recognized was $690,982 at March
31, 2016. Such amounts are expected to be recognized over a period of 2.75 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 nine months ended March 31, 2016 is presented below:
|
|
Number of
|
|
|
Weighted
|
|
|
|
Nonvested
|
|
|
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 restricted shares outstanding at March 31, 2016
|
|
|
1,000,000
|
|
|
$
|
0.42
|
|
Compensation
expense associated with restricted stock for the three months ended March 31, 2016 and 2015 was $52,356 and $51,781, respectively,
and $193,219 and $149,014 for the nine months ended March 31, 2016 and 2015, 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 $270,411 at March 31, 2016. This amount is expected to be recognized over a period of 1.5 years.
Agreements
with Officers and Employees:
In September 2015, the Company’s officers and certain employees owning options to purchase
57,979,414 shares of the Company’s common stock entered into an agreement with the Company that such persons cannot exercise
their options and the Company does not have to reserve for the issuance of shares of common stock underlying their options until
the earlier of August 1, 2016 or the Company having unreserved shares sufficient for all outstanding options to be exercised.
This could happen through an increase in authorized common shares, the cancellation of outstanding convertible notes or warrants,
or a shareholder approved reverse stock split. Subsequent to this agreement, one of the Company’s officers returned 4,300,000
options to the Company making a total of 53,679,414 options currently subject to the agreement.
NOTE
9 – 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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
(Restated)
|
|
|
2016
|
|
|
(Restated)
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net loss
|
|
$
|
(752,360
|
)
|
|
$
|
(1,132,669
|
)
|
|
$
|
(4,138,967
|
)
|
|
$
|
(980,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
322,675,999
|
|
|
|
281,526,245
|
|
|
|
316,418,240
|
|
|
|
269,903,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
For
the three and nine months ended March 31, 2016 and 2015, 35,466,779 and 46,931,832 stock warrants, respectively, were excluded
from diluted earnings per share because they are considered anti-dilutive.
For
the three and nine months ended March 31, 2016 and 2015, 64,625,248 and 51,437,748 stock options, respectively, were excluded
from diluted earnings per share because they are considered anti-dilutive.
NOTE
10 – REVENUE
During
the three months ended March 31, 2016, the Company recognized $225,000 revenue. The revenue is a result of the Company entering
into a funded product development agreement (the “Agreement”) with leading global film manufacturer, Nitto Denko Corporation,
in September 2015. The $225,000 represents full payment pursuant to the Agreement and was initially classified as deferred revenue.
The Company worked with Nitto Denko Corporation to develop quantum dot material, however the Agreement did not require specific
deliverables by the Company. The Agreement did place certain restrictions on the Company’s ability to communicate with a
limited number of specifically named businesses during the four month term of the agreement. Management does not believe the restrictions
had a material negative affect on the Company’s business prospects.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
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 amended license agreements with Rice University. QMC and Solterra entered
into second 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. Additionally, minimum royalties payable under the
Solterra Rice License Agreement include $100,000 due January 1, 2017, $356,250 due January 1, 2018, $1,453,500 due January 1,
2019, $3,153,600 due January 1, 2020 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer
pricing index. Pursuant to the QMC Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty
of 7.5% of adjusted gross sales for QDs sold in electronic and medical applications. Additionally, minimum royalties payable under
the QMC Rice License Agreement include $117,000 due January 1, 2017, $292,500 due January 1, 2018, $585,000 due January 1, 2019
and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. The Rice License
Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein.
Agreement
with University of Arizona
Solterra
entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. Pursuant to
UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by December 31, 2015, $125,000
by June 30, 2016 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index.
As of the date of this Form 10-Q, the Company is working with UA to amend the license agreement to extend the due date of the
$50,000 minimum royalty payment that was due December 31, 2015. 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.
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-days written notice of either party.
NOTE
12 – INCOME TAX
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 assesses the likelihood that deferred tax assets will be recovered from the existing deferred tax liabilities or future
taxable income. To the extent the Company believes that recovery will not meet the more likely than not threshold, it establishes
a valuation allowance. The Company has recorded valuation allowances in the U.S. for its net deferred tax assets since management
believes it is more likely than not that these assets will not be realized because future taxable income necessary to utilize
these losses cannot be established or projected.
The
effective income tax rate for the three and nine months ended March 31, 2016 and 2015 was 0%. The Company’s effective income
tax rate differs from the federal statutory rate primarily due to non-deductible expenses and valuation allowances. As a result
of stock compensation expense incurred during the nine months ended March 31, 2016, the Company has increased deferred tax assets
by approximately $660,000 with a corresponding increase to the valuation allowance.
NOTE
13 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
(Restated)
|
|
|
|
(unaudited)
|
|
Cash paid for interest
|
|
$
|
20,055
|
|
|
$
|
7,149
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
(Restated)
|
|
|
|
(unaudited)
|
|
Conversion of debentures into shares of common stock
|
|
$
|
—
|
|
|
$
|
1,475,000
|
|
|
|
|
|
|
|
|
|
|
Allocated value of warrants issued with convertible debentures
|
|
$
|
—
|
|
|
$
|
551,179
|
|
|
|
|
|
|
|
|
|
|
Stock warrants issued for conversion of accrued salaries
|
|
$
|
409,667
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense paid in shares of common stock
|
|
$
|
131,655
|
|
|
$
|
282,500
|
|
|
|
|
|
|
|
|
|
|
Financing of prepaid insurance
|
|
$
|
20,024
|
|
|
$
|
—
|
|
NOTE
14 – TRANSACTIONS WITH AFFILIATED PARTY
During
the nine months ended March 31, 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 three months ended March 31, 2016, The Company’s current CFO and two of the Company’s directors invested $15,000,
$10,000, and $25,000 respectively in the private placement described below in Note 16.
NOTE
15 – RECENTLY ISSUED ACCOUNTING STANDARDS
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. 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 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.
NOTE
16 - SUBSEQUENT EVENTS
The
Company’s previously announced private placement of up to 2,000 Units raised approximately $1.5 million in net proceeds.
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 (the interest rate was previously reported
as 6% on the Form 8-K filed on March 31, 2016) and are convertible into 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. The number of Warrants
and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications,
exchanges, mergers, and reorganizations.
On
April 8, 2016, the Company announced that current Director Daniel Carlson has assumed the role of Chairman, taking over from the
Company’s CEO, Stephen A. Squires who remains a Director.
On
April 13, 2016, the Company issued 4,250,000 stock options to employees. The stock options have an exercise price of $0.12 and
vest annually over three years.