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 months ended September 30, 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, 2016. 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, 2016.
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 the Company’s
competitors, rendering the 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. 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 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
1,625
|
|
|
$
|
1,625
|
|
Computers and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery and equipment
|
|
|
930,840
|
|
|
|
911,744
|
|
|
|
|
943,912
|
|
|
|
924,816
|
|
Less: accumulated depreciation
|
|
|
173,157
|
|
|
|
150,142
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
770,755
|
|
|
$
|
774,674
|
|
Depreciation
expense for the three months ended September 30, 2016 and 2015 was $23,015 and $20,409, respectively.
NOTE
3 – LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
(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
|
|
|
84,893
|
|
|
|
75,256
|
|
|
|
|
|
|
|
|
|
|
Total licenses and patents, net
|
|
$
|
107,850
|
|
|
$
|
117,487
|
|
Amortization
expense for the three months ended September 30, 2016 and 2015 was $9,637 and $9,637, respectively.
NOTE
4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company follows Financial Accounting Standards Board (“FASB”) 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 September 30, 2016 and June 30, 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 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 September 30, 2016 and June 30, 2016:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Convertible debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
22,525
|
|
|
$
|
25,050
|
|
|
$
|
21,710
|
|
Convertible debentures issued in January 2015
|
|
$
|
500,000
|
|
|
$
|
833,333
|
|
|
$
|
500,000
|
|
|
$
|
1,083,333
|
|
Convertible debentures issued in April - June 2016
|
|
$
|
1,565,000
|
|
|
$
|
1,459,503
|
|
|
$
|
1,565,000
|
|
|
$
|
1,695,417
|
|
Convertible debenture issued in August 2016
|
|
$
|
200,000
|
|
|
$
|
177,031
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible promissory note issued in September 2016
|
|
$
|
100,000
|
|
|
$
|
96,019
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company is not a party to any hedge arrangements or commodity swap agreements.
NOTE
5 – CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
25,050
|
|
Convertible debentures issued in January 2015
|
|
|
500,000
|
|
|
|
500,000
|
|
Convertible debentures issued in April - June 2016
|
|
|
1,565,000
|
|
|
|
1,565,000
|
|
Convertible debenture issued in August 2016
|
|
|
200,000
|
|
|
|
-
|
|
Convertible promissory note issued in September 2016
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
2,390,050
|
|
|
|
2,090,050
|
|
Less: amount converted to shares
|
|
|
-
|
|
|
|
-
|
|
Total convertible debentures outstanding
|
|
|
2,390,050
|
|
|
|
2,090,050
|
|
Less: unamortized discount
|
|
|
502,535
|
|
|
|
527,350
|
|
Less: debt issuance costs
|
|
|
99,833
|
|
|
|
115,342
|
|
|
|
|
1,787,682
|
|
|
|
1,447,358
|
|
Less: current portion
|
|
|
74,083
|
|
|
|
407,702
|
|
|
|
|
|
|
|
|
|
|
Total convertible debentures, net of current portion
|
|
$
|
1,713,599
|
|
|
$
|
1,039,656
|
|
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.
Interest
expense for the three months ended September 30, 2016 and 2015 was $384 and $384, respectively.
As
of September 30, 2016, $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 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 September 30, 2016 and 2015 of
$45,689 and $42,187, respectively. Interest expense for the three months ended September 30, 2016 and 2015 was $10,082 and $10,082,
respectively.
As
of September 30, 2016, $500,000 of principal was outstanding. On October 10, 2016 the maturity date of the debentures was extended
to January 15, 2018 and were reclassified as non-current on the consolidated balance sheet.
April
– June and August 2016 Convertible Debentures
During
the fourth quarter of the year ended June 30, 2016, 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. 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 $543,548, 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 September 30, 2016 and 2015 of
$62,104 and $0, respectively. The Company recognized a beneficial conversion expense for the three months ended September 30,
2016 and 2015 of $40,394 and $0, respectively. Interest expense for the three months ended September 30, 2016 and 2015 of $33,685
and $0, respectively.
As
of September 30, 2016, $1,765,000 of principal was outstanding.
September
2016 Convertible Promissory Note
In
September 2016 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 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
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 three months ended September
30, 2016 and 2015 of $3,605 and $0, respectively. The Company recognized a beneficial conversion expense for the three months
ended September 30, 2016 and 2015 of $29,523 and $0, respectively. Interest expense for the three months ended September 30, 2016
and 2015 of $5,378 and $0, respectively.
As
of September 30, 2016, $100,000 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 three months ended September 30, 2016 and 2015 was $15,509 and $0, respectively.
NOTE
6 – NOTES PAYABLE
Promissory
Note
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 three months ended September 30, 2016 and 2015 of $1,890
and $0, respectively.
As
of September 30, 2016, $100,000 of principal was outstanding. See Note 13 for additional information.
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 September 30, 2016 was $5,067.
In
August 2016, to finance an insurance premium, the Company issued a negotiable promissory note for $13,959 at an interest rate
of 4.87% per annum. The note is due May 5, 2017. The balance outstanding at September 30, 2016 was $12,433.
NOTE
7 – EQUITY TRANSACTIONS
Common
Stock
During
the three months ended September 30, 2016, the Company granted 250,000 shares of common stock to consultants at the fair market
value of $25,000. This was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the three months ended September 30, 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, 2016
|
|
$
|
0.11
|
|
|
|
39,262,305
|
|
|
|
|
|
|
$
|
0.15
|
|
Expired
|
|
|
0.18
|
|
|
|
(555,555
|
)
|
|
|
|
|
|
|
0.14
|
|
Granted
|
|
|
0.14
|
|
|
|
1,499,867
|
|
|
|
|
|
|
|
0.11
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
$
|
0.11
|
|
|
|
40,206,617
|
|
|
|
2.79
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of September 30, 2016
|
|
$
|
0.11
|
|
|
|
40,206,617
|
|
|
|
2.79
|
|
|
$
|
0.15
|
|
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 FASB 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 September 30, 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 September 30, 2016, 72,653,473 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 September 30, 2016, 2,750,000 options have been granted with terms ranging from five to ten years.
In
June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option 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, which were between 14% and 16% during the three months ended September 30, 2016.
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 periods indicated:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
141.15
|
%
|
|
|
148.50
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rates
|
|
|
1.20
|
%
|
|
|
1.44
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
The
computation of expected volatility during the three months ended September 30, 2016 and 2015 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 three months ended September 30, 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, 2016
|
|
$
|
0.08
|
|
|
|
75,375,248
|
|
|
|
|
|
|
$
|
0.11
|
|
|
$
|
3,771,601
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.12
|
|
|
|
2,450,000
|
|
|
|
|
|
|
|
0.10
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
$
|
0.08
|
|
|
|
77,825,248
|
|
|
|
5.43
|
|
|
$
|
0.11
|
|
|
$
|
1,461,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of September 30, 2016
|
|
$
|
0.06
|
|
|
|
58,625,246
|
|
|
|
3.74
|
|
|
$
|
0.10
|
|
|
$
|
2,077,010
|
|
Outstanding
options at September 30, 2016 expire during the period March 2017 to June 2026 and have exercise prices ranging from $0.03 to
$0.17.
Compensation
expense associated with stock options for the three months ended September 30, 2016 and 2015 was $172,190 and $178,474, respectively,
and was included in general and administrative expenses in the consolidated statements of operations. At September 30, 2016, the
Company had 19,200,002 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company
had not yet recognized was $1,610,427 at September 30, 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 three months ended September 30, 2016 is presented below:
|
|
Number of
|
|
|
|
|
|
|
Nonvested,
|
|
|
Weighted
|
|
|
|
Nonissued
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Share Awards
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Nonvested,
nonissued restricted shares outstanding at June 30, 2016
|
|
|
1,000,000
|
|
|
$
|
0.42
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(500,000
|
)
|
|
|
0.42
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested,
nonissued restricted shares outstanding at September 30, 2016
|
|
|
500,000
|
|
|
$
|
0.42
|
|
Compensation
expense associated with restricted stock for the three months ended September 30, 2016 and 2015 was $52,932 and $52,931, 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 $165,123 at September 30, 2016. This amount is expected to be recognized
over a period of 1 year.
Agreements
with Officers and Employees:
In June 2016, the Company’s officers and certain employees owning options to purchase 60,670,933
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 June 30, 2017 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.
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
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,576,630
|
)
|
|
$
|
(866,949
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
325,030,637
|
|
|
|
307,812,314
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
For
the three months ended September 30, 2016 and 2015, 40,206,617 and 46,091,776 stock warrants, respectively, were excluded from
diluted earnings per share because they are considered anti-dilutive.
For
the three months ended September 30, 2016 and 2015, 77,825,248 and 64,425,248 stock options, respectively, were excluded from
diluted earnings per share because they are considered anti-dilutive.
NOTE
10 - 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. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, January
1 to December 31, following the due date. 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. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, January 1 to December
31, following the due date. 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. On June 8,
2016, Solterra 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 December 31, 2016, $125,000 by June 30, 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, 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.
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
11 – 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.
As
of September 30, 2016, the Company had approximately $27,000,000 in U.S. net operating loss (“NOL”) carryforwards
that expire beginning in 2029. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”),
a corporation that undergoes an “ownership change”, as defined therein, is subject to limitations on its use of pre-change
NOL carryforwards to offset future taxable income. The Company believes there is a 382 limitation on its NOLs that will substantially
limit the use of its NOLs in the future, including disallowing the use of a material portion of its NOLs. However, the Company
is currently evaluating whether an “ownership change” has occurred and, if so, what the annual limitation on NOL will
be in future periods. The Company anticipates this evaluation to be complete by the end of the second quarter of this fiscal year.
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.
When
a company operates in a jurisdiction that generates ordinary losses but does not expect to realize them, ASC 740-270-30-36(a)
requires the exclusion of the respective jurisdiction from the overall annual effective tax rate (“AETR”) calculation
and instead, a separate AETR should be computed. The Company operates in one jurisdiction and has determined that its deferred
tax assets are not realizable on a more likely than not basis and has recorded a full valuation allowance.The effective income
tax rate for the three months ended September 30, 2016 and 2015 was 0%.
NOTE
12 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
128
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
Allocated value of common stock and warrants issued with convertible debentures
|
|
$
|
86,383
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense paid in shares of common stock
|
|
$
|
19,536
|
|
|
$
|
231,257
|
|
|
|
|
|
|
|
|
|
|
Financing of prepaid insurance
|
|
$
|
7,407
|
|
|
$
|
-
|
|
NOTE
13 – TRANSACTIONS WITH AFFILIATED PARTY
During
the three months ended September 30, 2016, the Company issued a convertible debenture to a family member of a key executive for
proceeds of $200,000. This transaction is described in more detail in Note 5 under the heading “April – June and August
2016 Convertible Debenture”.
In
September 2016, the Company’s Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing.
This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the
loan on October 11, 2016.
During
the three months ended September 30, 2015, 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.
NOTE
14 – RECENTLY ISSUED ACCOUNTING STANDARDS
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 adopted this guidance effective for the year ended June 30, 2016.
In
August 2014, the FASB issued ASU No. 2014-15
Preparation 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 does not expect the adoption
of this guidance to have a material impact on its consolidated financial statements.
NOTE
15 - SUBSEQUENT EVENTS
On
October 10, 2016, the Company and holders of the January 2015 Convertible Debentures and warrants entered
into an agreement to (i) amend the convertible debentures to extend the maturity date to January 15, 2018, (ii) amend certain
warrants to permit the cashless exercise by the holders into 2,500,000 shares and to terminate the warrants upon the cashless
exercise, and (iii) exercise certain warrants by the holders with cash settlement into 6,250,000 shares. For additional
information, please refer to the Form 8-K filed with the Securities and Exchange Commission on October 14, 2016.
On
November 8, 2016, the Company signed a $9.75 million purchase agreement (the “Purchase Agreement”) with Lincoln
Park Capital Fund, LLC (“Lincoln Park”). The Company also entered into a registration rights agreement (the
“RRA”) with Lincoln Park whereby the Company agreed to file a registration statement related to the transaction
with the U.S. Securities and Exchange Commission (“SEC”) covering the shares of the Company’s common stock
that may be issued to Lincoln Park under the Purchase Agreement. In consideration for entering into the Purchase Agreement,
the Company issued to Lincoln Park 1,750,000 shares of common stock as a commitment fee. The Purchase Agreement may be
terminated by the Company at any time and without any cost to the Company. The proceeds received by the Company under the
Purchase Agreement are expected to be used for any corporate purpose at the sole discretion of the Company. For more
information, please see the Form 8-K filed with the SEC on November 10, 2016 and incorporated herein by
reference.