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 nine months ended March 31, 2017 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:
|
|
March
31, 2017
|
|
|
June
30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
1,625
|
|
|
$
|
1,625
|
|
Computers and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery and
equipment
|
|
|
944,615
|
|
|
|
911,744
|
|
Total furniture, fixtures, computers,
and equipment
|
|
|
957,687
|
|
|
|
924,816
|
|
Less: accumulated
depreciation
|
|
|
222,351
|
|
|
|
150,142
|
|
|
|
|
|
|
|
|
|
|
Total property
and equipment, net
|
|
$
|
735,336
|
|
|
$
|
774,674
|
|
Depreciation
expense for the three months ended March 31, 2017 and 2016 was $25,257 and $21,853, respectively, and $72,209 and $63,853 for
the nine months ended March 31, 2017 and 2016, respectively.
NOTE
3 – LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
March
31, 2017
|
|
|
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
|
|
|
104,167
|
|
|
|
75,256
|
|
|
|
|
|
|
|
|
|
|
Total licenses
and patents, net
|
|
$
|
88,576
|
|
|
$
|
117,487
|
|
Amortization
expense for the three months ended March 31, 2017 and 2016 was $9,637 and $9,637, respectively, and $28,911 and $28,911 for the
nine months ending March 31, 2017 and 2016, 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 March 31,
2017 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 March 31, 2017, and June 30, 2016:
|
|
March
31, 2017
|
|
|
June
30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Convertible debentures issued
in September 2014
|
|
$
|
25,050
|
|
|
$
|
24,255
|
|
|
$
|
25,050
|
|
|
$
|
21,710
|
|
Convertible debentures issued in January
2015
|
|
$
|
500,000
|
|
|
$
|
539,801
|
|
|
$
|
500,000
|
|
|
$
|
1,083,333
|
|
Convertible debentures issued in April
- June 2016
|
|
$
|
1,465,000
|
|
|
$
|
1,471,673
|
|
|
$
|
1,565,000
|
|
|
$
|
1,695,417
|
|
Convertible debenture issued in August
2016
|
|
$
|
200,000
|
|
|
$
|
190,629
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debenture issued in November
2017
|
|
$
|
200,000
|
|
|
$
|
190,629
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debentures issued in January-March
2017
|
|
$
|
360,000
|
|
|
$
|
364,519
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debenture issued in March
2017
|
|
$
|
162,000
|
|
|
$
|
154,792
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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:
|
|
March 31, 2017
|
|
|
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 debenture issued in September 2017
|
|
|
100,000
|
|
|
|
-
|
|
Convertible debenture issued in October 2016
|
|
|
50,000
|
|
|
|
-
|
|
Convertible debenture issued in November 2016
|
|
|
200,000
|
|
|
|
-
|
|
Convertible debentures issued in January-March 2017
|
|
|
360,000
|
|
|
|
-
|
|
Convertible debenture issued in March 2017
|
|
|
162,000
|
|
|
|
-
|
|
Promissory notes issued in March 2017
|
|
|
549,000
|
|
|
|
|
|
Sub-total
|
|
|
3,711,050
|
|
|
|
2,090,050
|
|
Less: amount converted to shares
|
|
|
(250,000
|
)
|
|
|
-
|
|
Total convertible debentures outstanding
|
|
|
3,461,050
|
|
|
|
2,090,050
|
|
Less: unamortized discount
|
|
|
529,225
|
|
|
|
527,350
|
|
Less: debt issuance costs
|
|
|
119,005
|
|
|
|
115,342
|
|
Total convertible debentures
|
|
|
|
|
|
|
1,447,358
|
|
Less: current portion
|
|
|
2,812,820
|
|
|
|
407,702
|
|
|
|
|
|
|
|
|
|
|
Total convertible debentures, net of current portion
|
|
$
|
1,874,248
|
|
|
$
|
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. A total of $475,000
of the Debentures were converted into common shares in 2016.
Interest
expense for the three months ended March 31, 2017 and 2016 was $376 and $380, respectively. Interest expense for the nine months
ended March 31, 2017 was $1,144 and $1,148 in the comparable period in 2016.
As
of March 31, 2017, $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. On October 10 2016, the
maturity date of the debentures was extended to January 15, 2018 and were reclassified as current on the consolidated balance
sheet. The 6,250,000 warrants were converted into common stock for total proceeds of $375,000 in October 2016.
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, 2017 and 2016 of $46,609 and $43,903,
respectively, and for the nine months ended March 31, 2017 and 2016, the accretion expense was $147,352 and $129,107,
respectively.
Interest
expense for the three months ended March 31, 2017 and 2016 was $9,863 and $9,973, respectively, and for the nine months ended
March 31, 2017 and 2016 was $30,017 and $30,137, respectively.
As
of March 31, 2017, $500,000 of principal was outstanding.
April
– June, August and October 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, and
sold $50,000 in proceeds in October 2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”)
and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”)
at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued
at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible
into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including
(a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the
Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends
payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet
adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible
into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding
Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of
existing convertible securities of the Company.
In
evaluating the accounting 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 $566,778, 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, 2017, and 2016, of $55,054
and $0, respectively and $155,403 and $0 for the nine months ending March 31, 2017, and 2016, respectively. The Company
recognized a beneficial conversion expense for the three months ended March 31, 2017, and 2016, of $4,897 and $0, respectively,
and $45,291 and $0 for the nine months ended March 31, 2017, and 2016, respectively.
Interest
expense for the three months ended March 31, 2017, and 2016, of $35,105 and $0, respectively, and $68,789 and $0 for the nine
months ending March 31, 2017, and 2016, respectively.
As
of March 31, 2017, $1,465,000 of principal was outstanding after conversion of $250,000 of debentures into common stock.
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. The note was
converted into 900,000 common shares in February, 2017.
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 $29,523, 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 March 31,
2017 and 2016 of $10,959 and $0, respectively, and $14,564 and $0 for the nine months ending March 31, 2017, and 2016, respectively.
The Company recognized a beneficial conversion expense for the three months ended March 31, 2017, and 2016, of $0 and $0, respectively,
and $29,523 and $0 for the nine months ending March 31, 2017, and 2016, respectively. Interest expense for the three months ended
March 31, 2017, and 2016, were $3,653 and $0, respectively. Interest expense for the nine months ended March 31, 2017, was $7,258
and $0 respectively.
As
of March 31, 2017, $0 of principal was outstanding.
November
2016 Convertible Promissory Notes
In
November 2016, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $200,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in the principal
amount of $200,000. The promissory note has a term of twenty-four months maturing on November 7, 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.
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 $52,817, recorded as debt discount and is amortized using the effective interest rate method over the
life of the loan, twenty-four months. The Company recognized accretion of debt discount expense for the three months and nine
months ended March, 2017, and 2016, of $4,807 and $0, respectively. The Company recognized a beneficial conversion expense for
the three months and nine months ended March 31, 2017, and 2016, of $19,484 and $0, respectively.
The
Company recognized interest expense for the three months ended and nine months ending March 31, 2017, and 2016, of $4,000 and
$6,400, respectively.
As
of March 31, 2017, $200,000 of principal was outstanding.
January-March,
2017 Convertible Promissory Notes
In
the quarter ended March 31, 2017. the Company entered into six Securities Purchase Agreements and Convertible Promissory Notes
to obtain $360,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”)
in the principal amount of $360,000. The promissory notes have a term of twenty-four months maturing on about February 1, 2019.
The promissory notes are 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.
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 $16,575, recorded as debt discount and is amortized using the effective interest rate method over the
life of the loan, twenty-four months. The Company recognized accretion of debt discount expense for the three months and nine
months ended March, 2017, and 2016, of $4,807 and $0, respectively. The Company recognized a beneficial conversion expense for
the three months and nine months ended March 31, 2017, and 2016, of $16,575 and $0, respectively.
The
Company recognized interest expense for the three months ended March and nine months ending March 31, 2017, and 2016, of $3,343
and $0, respectively.
March
2017 Convertible Promissory Notes
In
March 2017, Company entered into a Securities Purchase Agreement and Convertible Promissory Notes and warrants to obtain $150,000
in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in the principal
amount of $150,000. The promissory note has a term of six maturing on September 29 and stipulates a one-time interest charge of
eight percent (8%) shall be applied on the issuance date to the principal. 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.
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 $52,817, recorded as debt discount and is amortized using the effective interest rate method over the
life of the loan, twenty-four months. The Company recognized accretion of debt discount expense for the three months and nine
months ended March, 2017, and 2016, of $45,825 and $0, respectively. The Company recognized a beneficial conversion expense for
the three months and nine months ended March 31, 2017, and 2016, of $45,825 and $0, respectively.
The
Company recognized interest expense for the three months ended and nine months ending March 31, 2017, and 2016, of $1,426 and
$0, respectively.
As
of March 31, 2017, $150,000 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 March 31, 2017 and 2016 was $35,900 and $0, respectively, and $69,280 and $0 for the nine months ending
March 31, respectively.
NOTE
6 – NOTES PAYABLE
Promissory
Notes
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 March 31, 2017 and 2016 of $0 and $0,
respectively. For the nine months ended March 31, 2017, and 2016, the accretion of debt discount was $26,454 and $0 respectively.
As
of March 31, 2017, $0 of principal was outstanding. See Note 13 for additional information.
On March 29, 2017, Quantum Materials Corp. agreed to issue promissory notes to SBI Investment LLC, 2014-1
(“SBI”) and L2 Capital, LLC (“L2 Capital”). The maturity date of these notes is six months from the funding
date of each tranche and $339,000 were outstanding at March 31, 2017. The Company received an aggregate of $300,000 of loan proceeds,
before deduction of legal fees of $15,000 from the first tranche. In May, 2017, the Company received an additional $200,000 from
the second tranche after stockholders approved an increase in the authorized number of shares of common stock to 750,000,000 shares
at its stockholder meeting on May 1, 2017. These loans bear guaranteed interest at 6% per annum and may not be prepaid, except
by paying a prepayment penalty on principal and accrued interest. The notes are not convertible unless there is an Event of Default
as defined in the notes.
On
March 29, 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital to purchase
from them up to $5,000,000 of the Company’s common stock. As further consideration for SBI and L2 Capital entering into
the Eloc, the Company agreed to pay SBI and L2 Capital $63,000 and $147,000, respectively, in promissory notes. These promissory
notes bear interest at 8% per annum and have a maturity date of nine months from the date of issuance. These notes are not convertible
unless there is an Event of Default as defined in the notes. See Note 15.
As
of March 31, 2017, the Company had a total of $549,000 notes outstanding, less $47,050 of debt issuance costs.
Note
Payable – Insurance
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 in November, 2017. The balance outstanding at March 31, 2017 was
$1,557.
In March, 2017, to finance directors and officer’s
insurance premiums, the Company issued a negotiable promissory note for $17,434 at an interest rate of 6.89% per annum. The note
is due November 11, 2017. The balance outstanding at March 31, 2017 was $17,434.
NOTE
7 – EQUITY TRANSACTIONS
Common
Stock
During
the nine months ended March 31, 2017, 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.
During
the nine months ended March 31, 2017, the Company issued 1,750,000 shares for consulting services.
During
the nine months ended March 31, 2017, the Company issued 35,708 shares of common stock at the fair market value of $4,285 for
payment of debenture interest.
During
the nine months ended March 31, 2017, the Company issued 1,250,000 shares of common stock at the fair market value of $150,000
as a result of debenture conversions.
During
the nine months ended March 31, 2017, the Company issued 200,000 shares in connection with the issuance of the September 2016
promissory note.
During
the nine months ending March 31, 2017, the Company issued 8,750,000 shares of common stock for warrants exercised, including 2,500,000
shares issued in connection with cashless exercises.
During
the nine months ending March 31, 2017, the Company cancelled 194,059 common shares.
In
the three months ending March 2017, the Company issued 1,000,000 shares for consulting services. The cost of this issuance was
recognized as a prepaid asset and will be amortized to expense over the life of the agreement.
In
the three months March, 2017, the Company issued 2,000,000 shares for consulting services. The cost of this issuance was recognized
as a prepaid asset and will be amortized to expense over the life of the agreement.
In the three months ending March, 2017, the
Company issued a total of 900,000 shares for the conversion of a debenture and accrued interest thereon.
In
the three months ending March, 2017, the Company issued 2,000,000 shares for consulting services. The cost of this issuance was
recognized as a prepaid asset and will be amortized to expense over the life of the agreement.
In the three months ending March, 2017, the Company issued 1,250,000 common shares for the conversion of a
convertible debenture.
In
the three months ending March, 2017, the Company issued 833,333 common shares in conjunction with the issuance of a debenture.
In
the three months ending March, 2017, the Company issued 1,666,666 shares for consulting services.
In
the three months ending March, 2017, the Company issued 1,250,000 common shares for consulting services.
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the nine months ended March 31, 2017 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
|
|
|
0.13
|
|
|
|
(2,660,192
|
)
|
|
|
|
|
|
|
0.13
|
|
Granted
|
|
|
0.12
|
|
|
|
8,221,928
|
|
|
|
|
|
|
|
0.12
|
|
Exercised
|
|
|
0.06
|
|
|
|
(12,500,000
|
)
|
|
|
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
0.13
|
|
|
|
32,324,041
|
|
|
|
2.59
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of March
31, 2017
|
|
$
|
0.13
|
|
|
|
32,324,041
|
|
|
|
2.59
|
|
|
$
|
0.10
|
|
Outstanding
warrants at March 31, 2017 expire during the period April 2017 to November 2021 and have exercise prices ranging from $0.10
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 March 31, 2017, 9,200,000
options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled leaving a balance of 8,400,000
outstanding.
In
March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March, 2017, the
term of these options was extended for an additional five years.
In
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, 2017, 60,150,248 options
have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 3,283,334 have been cancelled,
and 53,641,914 remain outstanding.
On
February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000
shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.
As of March 31, 2017, 2,500,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving
a balance outstanding of 875,000 options.
In
June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan, and 3,000,000
shares were cancelled.
In
the quarter ended March 31, 2017 a total of 5,258,336 options were canceled or expired.
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 17% during the nine months ended March 31, 2017.
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:
|
|
Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
140.73
|
%
|
|
|
142.05
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rates
|
|
|
1.25
|
%
|
|
|
1.19
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
The
computation of expected volatility during the nine months ended March 31, 2017 and 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, 2017 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Contractual
|
|
|
Optioned
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Optioned
|
|
|
Term in
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
|
|
Price
|
|
|
Shares
|
|
|
Years
|
|
|
Fair
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
$
|
0.08
|
|
|
|
75,375,248
|
|
|
|
|
|
|
$
|
0.11
|
|
|
$
|
3,771,601
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.12
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
0.10
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
0.06
|
|
|
|
(8,358,334
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
0.10
|
|
|
|
69,516,914
|
|
|
|
5.15
|
|
|
$
|
0.11
|
|
|
$
|
4,340,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of March
31, 2017.
|
|
$
|
0.10
|
|
|
|
56,087,599
|
|
|
|
5.15
|
|
|
$
|
0.11
|
|
|
$
|
4,340,520
|
|
Outstanding
options at March 31, 2017, expire during the period April 2017 to June 2026 and have exercise prices ranging from $0.05
to $0.17.
Compensation
expense associated with stock options for the three months ended March 31, 2017 and 2016 was $(24,478) and $98,316, respectively,
and $664,806 and $1,439,221 for the nine months ended March 31, 2017 and 2016, respectively, and was included in
general
and administrative expenses in the consolidated statements of operations.
At
March 31, 2017, the Company had 5,158,334 shares of nonvested stock option awards. The total cost of nonvested stock option
awards which the Company had not yet recognized was $378,402 at March 31, 2017. Such amounts are expected to be recognized
over a period of 1.75 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, 2017 is presented below:
|
|
Number of
|
|
|
|
|
|
|
Nonvested,
|
|
|
Weighted
|
|
|
|
Non-issued
|
|
|
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 March 31, 2017
|
|
|
500,000
|
|
|
$
|
0.42
|
|
Compensation
expense associated with restricted stock for the three months ended March 31, 2017, and 2016, was $51,781 and $52,356,
respectively, and $157,644 and $193,219 for the nine months ended March 31, 2017, and 2016, 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 $60,411 at March 31, 2017. This amount is expected to be recognized over a period of 0.5
years.
Agreements
with Officers and Employees:
In June 2016, the Company’s officers and certain employees owning options to purchase 57,670,933
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. On May
1, 2017, the Company’s shareholders approved an increase in the number of authorized common shares to 750,000,000. As a
result of this increase all 57,670,933 options will be exercisable as of May 1, 2017.
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,631,939
|
)
|
|
$
|
(752,360
|
)
|
|
$
|
(5,416,088
|
)
|
|
$
|
(4,138,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
339,633,586
|
|
|
|
322,675,999
|
|
|
|
333,006,003
|
|
|
|
316,418,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
NOTE
10- REVENUE
During
the three months ending March 31, 2017, the Company recognized revenues of $2,500 compared with revenues of $225,000 recognized
during the quarter ended March 31, 2016. For the nine months ended March 31, 2017, the Company recognized revenues of $27,000
from merchandise samples compared with revenues of $225,000 from a development assistance contract recognized in the comparable
period of 2016.
The
Company has expended $413,004 during the nine months ending March 31, 2017 to complete the development of its patented quantum
dots. In future quarters, it is expected that revenues will be earned as product is shipped.
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 a second amended license agreements with Rice University. QMC and Solterra
entered into third amended license agreements with Rice University on March 15 and 24, 2016, respectively.
The
Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain
milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during
the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5%
of adjusted gross sales for QDs sold in electronic and medical applications.
We
have a verbal agreement with Rice University to modify the minimum royalty due dates that will result in Quantum Materials Corp
being in full compliance with the agreements at March 31, 2017 and we anticipate this will be memorialized in writing by June
1, 2017. The modification to the license agreements for both Quantum Materials and Solterra specifically adjusts dates for annual
minimum royalty obligations to coincide in timing with expected commercial sales of tetrapod quantum dots. The Annual Minimum
Royalties will commence in 2019 but we expect a clause for a yearly maintenance fee (approximately $20,000 per year starting in
January 2018) that would delay the annual royalties until commercial sales occur.
Minimum
royalties payable under the Solterra Rice License Agreement are expected to be due March 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. Pursuant to the Solterra
Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty of 2-4% of adjusted gross sales for
QDs sold in solar applications. Minimum royalties payable under the Solterra Rice License Agreement include $100,000 due March
1, 2019, $356,250 due January 1, 2020, $1,453,500 due January 1, 2021 and $3,153,600 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.
Minimum royalties payable under the QMC Rice License Agreement include $175,000 due March 1, 2019, $292,500 due January 1, 2020,
$585,000 due January 1, 2021 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing
index.
Agreement
with University of Arizona
Solterra
entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On March 3
rd
2017, 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 June 30 2107, $125,000 by September 15, 2017 and $200,000 on each June
30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited
against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales
are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products
for printed electronic displays. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated
by reference herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications
have been agreed to a final amendment has not been finalized. As of March 31, 2017, no royalties have been accrued for
this obligation.
Agreement
with Texas State University
The
Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain
office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month
and can be terminated with 60-days written notice of either party.
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.
The
Company had approximately $25,560,000 in U.S. net operating loss (“NOL”) carryforwards that expire beginning in 2029
as of its fiscal year ending June 30, 2016, and $29,450.000 in NOL’s available as of March 31, 2017 prior to any reductions
under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”). Section 382 provides that
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 completed an evaluation study whether an “ownership change” had occurred and determined that the limitation
would be approximately $750,000, thereby reducing the net operating loss at March 31, 2017 to approximately $28,800,000.
The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that all of 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 and nine months ended March 31, 2017 and March 31, 2016 was 0%.
NOTE
12 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
529
|
|
|
$
|
20,055
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
Allocated
value of common stock and warrants issued with convertible debentures and promissory notes
|
|
$
|
238,201
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense
paid in shares of common stock
|
|
$
|
27,536
|
|
|
$
|
131,655
|
|
|
|
|
|
|
|
|
|
|
Financing of
prepaid insurance
|
|
$
|
17,374
|
|
|
$
|
20,024
|
|
|
|
|
|
|
|
|
|
|
Stock warrants
issued for conversion of accrued salaries
|
|
$
|
-
|
|
|
$
|
409,667
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares
|
|
$
|
195
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Stock issued
for interest payments
|
|
$
|
12,284
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Conversion of
debentures into common stock
|
|
$
|
250,000
|
|
|
$
|
-
|
|
NOTE
13 – TRANSACTIONS WITH AFFILIATED PARTIES
During
the nine months ended March 31, 2017, 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, August and October 2016
Convertible Debentures.
In
September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing.
This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the
loan on October 11, 2016.
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 – EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS
Equity
Purchase Agreement
On
March 29, 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital to purchase
from them up to $5,000,000 of the Company’s common stock. Pursuant to the terms of the equity agreement, for a period of
up to four years, SBI and L2 Capital are committed to purchase at the election of the Company, assuming an effective registration
statement, and upon delivery by the Company of a put notice to Put Shares (as defined in the Eloc) (i) in a minimum amount of
not less than $25,000 and (ii) in a maximum amount up to the lesser of (a) $250,000 or (b) 150% of the average daily trading value;
provided such minimum amount of Put Shares may be decreased and such maximum amount of Put Shares may be increased, subject to
the Company’s approval. Unless otherwise agreed to in writing by SBI and L2 Capital, the amount in the Put Notice shall
be allocated pro rata among the participating investors based upon the Maximum Commitment Amount as defined in the Eloc. The purchase
price of the Put Shares shall mean 80% of the market price (i.e. the lowest closing bid price for any trading day during the Valuation
Period as defined in the Eloc). If 80% of the lowest closing bid price on the OTCQB for any trading day during the respective
Valuation Period (as defined in Eloc) is less than the Company minimum price of $.12 per share, then SBI and/or L2 Capital may
elect to purchase all or none of the Put Shares at the Company minimum price.
As
further consideration for SBI and L2 Capital entering into the Eloc, the Company agreed to pay SBI and L2 Capital $63,000 and
$147,000, respectively, in promissory notes. These promissory notes bear interest at 8% per annum and have a maturity date of
nine months from the date of issuance. These notes are not convertible unless there is an Event of Default as defined in the notes.
Common
Stock Purchase Warrants
In
connection with the loan transactions, the Company is issued warrants to each lender. In connection with the first tranche, the
Company issued to SBI warrants to purchase 253,525 shares and the Company issued to L2 Capital warrants to purchase 760,576 shares.
At each closing after the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the
total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid
of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective
tranche. In connection with the second tranche of $200,000 received on May 4, 2017 the Company will issue to SBI and L2 Capital
additional warrants to purchase common shares on the same terms as the initial funding.
Registration
Rights Agreement
On
March 29, 2016, the Company entered into a registration rights agreement with SBI and L2 Capital. Pursuant to said agreement,
the Company is required to file a registration statement with the Securities and Exchange Commission to register the shares of
common stock under the Eloc and all shares of common stock underlying the notes and warrants issued to SBI and L2 Capital in connection
with the Eloc and loan transactions described above.
NOTE
16 - SUBSEQUENT EVENTS
On
May 1, 2017, a Special Meeting of Stockholders was held by Quantum Materials Corp. At the Stockholder Meeting a quorum of 215,995,100
shares of common stock were present in person or by proxy. At the Special Meeting, the stockholders approved the filing of an
amendment to the Corporation’s Articles of Incorporation to increase the number of authorized shares of $.001 par value
common stock from 400,000,000 shares to 750,000,000 shares. Of the 215,995,100 shares of common stock that were
present at the meeting in person or by proxy, 199,175,046 shares of common stock were voting in favor of the proposal, 15,870,085
shares against and 949,969 shares abstained from voting.
On
or about April 27, 2017 the Company executed a funded collaboration agreement by which Quantum will work with Freschfield
to integrate Quantum Materials Corp advanced Nanomaterials including quantum dot-based solar photovoltaics into Freschfield’s
SmartSkinz. Freschfield has synthesized solar and hydrogen fuel cell technologies into an outer layer building skin – SmartSkinz
– which creates a perpetual carbon-free energy source, under any weather condition, time of day and location. Quantum Materials’
development will focus on developing and deploying advanced nanomaterials to optimize system performance on several levels including
the building-integrated photovoltaics (BIPV) component of SmartSkinz. Under terms of the agreement, Freschfield will fund development
by providing $1 million over four quarters to Quantum Materials beginning June 2017.
On May 4, 2017, the Company received $200,000
from L2 Capital and SBI in conjunction with their equity purchase agreement.
On May 19, 2017, the Company entered into two waiver and consent agreements with
Lincoln Park Capital Fund, LLC (“Lincoln Park”) whereby the parties agreed that the prior equity line of credit agreement
entered into on November 8, 2016 is canceled and various covenants made with respect to a $200,000 loan were waived in connection
with certain loan transactions and in consideration thereof, the Company agreed to issue 1,000,000 shares of common stock to Lincoln
Park in settlement of all claims.
In
April, 2017, the Company issued 2,500,000 common shares for consulting services. The
cost of this issuance was recognized as a prepaid asset and will be amortized to expense
over the life of the agreement.
In
April, 2017, the Company issued 595,238 common shares for consulting services. The cost of this issuance was recognized as a prepaid
asset and will be amortized to expense over the life of the agreement.