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. As of March
31, 2017, the Company had a working capital deficit of $2,345,450 and net cash used in operating activities was $1,782,458 for
the nine months ended March 31, 2017. 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
|
|
|
|
|
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 ended 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
|
|
|
$
|
44,093
|
|
|
$
|
25,050
|
|
|
$
|
21,710
|
|
Convertible debentures issued in January 2015
|
|
$
|
500,000
|
|
|
$
|
1,166,667
|
|
|
$
|
500,000
|
|
|
$
|
1,083,333
|
|
Convertible debentures issued in April - June 2016
|
|
$
|
1,465,000
|
|
|
$
|
1,958,670
|
|
|
$
|
1,565,000
|
|
|
$
|
1,695,417
|
|
Convertible debenture issued in August 2016
|
|
$
|
200,000
|
|
|
$
|
253,711
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debenture issued in November 2016
|
|
$
|
200,000
|
|
|
$
|
245,990
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debentures issued in January - March 2017
|
|
$
|
260,000
|
|
|
$
|
303,334
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debenture issued in February 2017
|
|
$
|
100,000
|
|
|
$
|
116,667
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible debenture issued in March 2017
|
|
$
|
150,000
|
|
|
$
|
175,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convetible promissory notes issued in March 2017
|
|
$
|
541,850
|
|
|
$
|
632,158
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 promissory note issued in September 2016
|
|
|
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
|
|
|
260,000
|
|
|
|
-
|
|
Convertible debenture issued in February 2017
|
|
|
100,000
|
|
|
|
-
|
|
Convertible debenture issued in March 2017
|
|
|
150,000
|
|
|
|
-
|
|
Convertible promissory notes issued in March 2017
|
|
|
541,850
|
|
|
|
-
|
|
|
|
|
3,691,900
|
|
|
|
2,090,050
|
|
Less: amount converted to shares
|
|
|
250,000
|
|
|
|
-
|
|
Total convertible debentures outstanding
|
|
|
3,441,900
|
|
|
|
2,090,050
|
|
Less: unamortized discount
|
|
|
550,415
|
|
|
|
527,350
|
|
Less: debt issuance costs
|
|
|
82,873
|
|
|
|
115,342
|
|
|
|
|
2,808,612
|
|
|
|
1,447,358
|
|
Less: current portion
|
|
|
1,115,164
|
|
|
|
407,702
|
|
|
|
|
|
|
|
|
|
|
Total convertible debentures, net of current portion
|
|
$
|
1,693,448
|
|
|
$
|
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 March 31, 2017 and 2016 was $376 and $380, respectively, and $1,144 and $1,148 for the nine
months ended March 31, 2017 and 2016, respectively.
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 the 6,250,000 warrants were converted into common stock for
total proceeds of $375,000.
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 $0
and $43,903, respectively, and $92,298 and $129,127 for the nine months ended March 31, 2017 and 2016, respectively.
Interest
expense for the three months ended March 31, 2017 and 2016 was $9,863 and $9,973, respectively, and $30,027 and $30,137 for the
nine months ended March 31, 2017 and 2016, respectively.
As
of March 31, 2017, $500,000 of principal was outstanding.
April
– June, August, October and November 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. In
October and November 2016, the Company sold 50 and 200, respectively, additional units for total proceeds of $50,000 and $200,000,
respectively. 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 $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,
two years. The Company recognized accretion of debt discount expense for the three months ended March 31, 2017 and 2016 of $69,156
and $0, respectively, and $235,697 and $0 for the nine months ended 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 $64,775 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 $37,300 and $0, respectively, and $108,276 and $0 for the nine months
ended March 31, 2017 and 2016, respectively.
During
the nine months ended March 31, 2017, $150,000 of principal was converted into 1,250,000 shares of common stock.
As
of March 31, 2017, $1,865,000 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 March 2017,
the note and accrued interest were converted into 833,333 and 66,667 shares of common stock, respectively.
In
accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds
received in the amount of $29,522, recorded as debt discount and is amortized using the effective interest rate method over the
life of the loan, eight months. The Company recognized accretion of debt discount expense for the three months ended March 31,
2017 and 2016 of $14,957 and $0, respectively, and $29,522 and $0 for the nine months ended 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 ended March 31, 2017 and 2016, respectively.
Interest
expense for the three months ended March 31, 2017 and 2016 of $2,622 and $0, respectively, and $8,000 and $0 for the nine months
ended March 31, 2017 and 2016, respectively.
As
of March 31, 2017, $0 of principal was outstanding.
January-March,
2017 Convertible Debentures
During
the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated
parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase
4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price
of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have
a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered
and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions,
combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders
of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings
or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s
issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration
per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers,
directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.
In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether or
not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus
the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise
price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges,
mergers, and reorganizations.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,
two years. The Company recognized accretion of debt discount expense for the three and nine months ended March 31, 2017 and 2016
of $6,985 and $0, respectively.
The
Company recognized a beneficial conversion expense for the three and nine months ended March 31, 2017 and 2016 of $62,400 and
$0, respectively.
Interest
expense for the three and nine months ended March 31, 2017 and 2016 of $3,343 and $0, respectively.
As
of March 31, 2017, $260,000 of principal was outstanding.
February
2017 Convertible Promissory Note
In
March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000
unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal amount of
$100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through February 1, 2020. The
promissory note has a term of eight months maturing on October 1, 2017 and stipulates a one-time interest charge of eight percent
(8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without
penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price
of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the
next registration statement it files with the SEC all shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds
received in the amount of $24,733, recorded as debt discount and is amortized using the effective interest rate method over the
life of the loan, eight months. The Company recognized accretion of debt discount expense for the three and nine months ended
March 31, 2017 and 2016 of $6,060 and $0, respectively.
Interest
expense for the three and nine months ended March 31, 2017 and 2016 of $8,000 and $0, respectively.
As
of March 31, 2017, $100,000 of principal was outstanding.
March
2017 Convertible Debenture
In
March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $150,000. The Note Holder received 375,000 common stock warrants exercisable
at $0.12 per share through March 28, 2020. The promissory note has a term of eight months maturing on November 28, 2017 and stipulates
a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $27,897, 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 and nine months ended March 31,
2017 and 2016 of $3,407 and $0, respectively.
The
Company recognized a beneficial conversion expense for the three and nine months ended March 31, 2017 and 2016 of $40,397 and
$0, respectively.
Interest
expense for the three and nine months ended March 31, 2017 and 2016 of $12,000 and $0, respectively.
As
of March 31, 2017, $150,000 of principal was outstanding.
March
2017 Convertible Promissory Notes
In
March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital,
LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2
received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each
subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the
total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid
of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective
tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum.
The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered
and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and
is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion
of debt discount expense for the three and nine months ended March 31, 2017 and 2016 of $0 and $0, respectively.
In
March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them
to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed
to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form
of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory
notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined
in the notes.
Interest
expense for the three and nine months ended March 31, 2017 and 2016 of $138 and $0, respectively.
As
of March 31, 2017, $541,850 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 $16,139 and $0, respectively, and $47,469 and $0 for the nine months ended
March 31, 2017 and 2016, respectively. As of March 31, 2017, the balance of debt issuance costs was $82,873.
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, and $26,454 and $0 for the nine months ended March 31, 2017 and 2016, respectively.
As
of March 31, 2017, $0 of principal was outstanding. See Note 13 for additional information.
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 May 5, 2017. The balance outstanding at March 31, 2017 was $0.
In
March, 2017, to finance an insurance premium, 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 issued 833,333 shares of common stock for cash proceeds of $100,000. Additionally,
investors exercised options and warrants to purchase 10,000,000 shares of common stock for cash proceeds of $425,000. Included
were cashless exercises of 5,000,000 warrants that resulted in the issuance of 2,500,000 shares of common stock.
During
the nine months ended March 31, 2017, the Company granted 3,250,000 shares of common stock to consultants at the fair market value
of $262,500. 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 3,216,666 shares to lenders as commitment fees at the fair market value
of $316,000, of which $175,000 was recognized as general and administrative expense and $141,000 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, holders of convertible notes elected to convert debt of $250,000 into 2,083,334 shares of
common stock.
During
the nine months ended March 31, 2017, the Company issued 102,374 shares of common stock to a lender, in exchange for interest
due, in the amount of $12,285.
During
the nine months ended March 31, 2017, the Company issued 400,000 shares in connection with the issuance of the September 2016
promissory note and the February 2017 convertible debenture.
During
the nine months ended March 31, 2017, the Company cancelled 194,059 common shares.
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
|
|
|
0.18
|
|
|
|
(555,555
|
)
|
|
|
|
|
|
|
0.14
|
|
Granted
|
|
|
0.16
|
|
|
|
8,013,628
|
|
|
|
|
|
|
|
0.11
|
|
Exercised
|
|
|
0.06
|
|
|
|
(12,500,000
|
)
|
|
|
|
|
|
|
0.15
|
|
Cancelled
|
|
|
0.13
|
|
|
|
(2,104,637
|
)
|
|
|
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
0.13
|
|
|
|
32,115,741
|
|
|
|
3.12
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of March 31, 2017
|
|
$
|
0.13
|
|
|
|
32,115,741
|
|
|
|
3.12
|
|
|
$
|
0.14
|
|
Outstanding
warrants at March 31, 2017 expire during the period April 2017 to March 2022 and have exercise prices ranging from $0.06 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. The balance outstanding
at March 31, 2017 was 8,400,000.
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, 72,653,473 options
have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 15,886,559 have been cancelled.
The balance outstanding at March 31, 2017 was 53,441,914.
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, 2,800,000 options have been granted with a term of five years, and 1,625,000 have been cancelled. The balance
outstanding at March 31, 2017 was 1,175,000.
In
June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan. During the nine months
ended March 31, 2017, 3,000,000 options were cancelled.
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)
|
|
|
3.0 to 5.0
|
|
|
|
3.0 to 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
|
|
|
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
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
0.10
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
0.12
|
|
|
|
(8,358,334
|
)
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
0.08
|
|
|
|
69,516,914
|
|
|
|
5.15
|
|
|
$
|
0.11
|
|
|
$
|
4,340,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of March 31, 2017
|
|
$
|
0.07
|
|
|
|
64,608,580
|
|
|
|
4.64
|
|
|
$
|
0.11
|
|
|
$
|
4,309,020
|
|
Outstanding
options at March 31, 2017, expire during the period January 2018 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 $(76,259) and $98,316, respectively,
and $664,530 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 4,908,334 shares of nonvested stock option awards. The total cost of nonvested stock option awards
which the Company had not yet recognized was $403,944 at March 31, 2017. Such amounts are expected to be recognized over a period
of 2.5 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
|
|
|
|
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 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 56,087,599
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 56,087,599 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)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,164,684
|
)
|
|
$
|
(752,360
|
)
|
|
$
|
(4,948,833
|
)
|
|
$
|
(4,138,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
339,943,771
|
|
|
|
322,675,999
|
|
|
|
333,385,603
|
|
|
|
316,418,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
For
the three and nine months ended March 31, 2017 and 2016, 32,115,741 and 35,466,779 stock warrants, respectively, were excluded
from diluted earnings per share because they are considered anti-dilutive.
For
the three and nine months ended March 31, 2017 and 2016, 69,516,914 and 64,625,248 stock options, respectively, were excluded
from diluted earnings per share because they are considered anti-dilutive.
NOTE
10- REVENUE
During
the three months ended March 31, 2017, the Company recognized revenues of $2,500 compared with revenues of $225,000 recognized
during the three months 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.
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.
The
Company had verbal agreements with Rice University to modify the minimum royalty due dates that results in the Company being in
full compliance with the agreements at March 31, 2017. On June 11, 2017 , the Company executed the revised agreements. Per the
revised agreements, both Quantum Materials and Solterra shall pay to Rice a non-refundable, non-creditable annual maintenance
fee of $10,000 (“Maintenance Fee”) each January 1, beginning on January 1, 2018 and each year thereafter until the
first Sale of a Rice Licensed Product. Licensee’s obligation to pay the Maintenance Fee shall terminate upon first Sale
of a Rice Licensed Product unless otherwise specified. In addition, Quantum Materials and Solterra shall pay to Rice an annual
minimum royalty payment of $50,000 (“Annual Minimum Royalty”) on January 1 immediately following the first Sale of
a Rice Licensed Product and each January 1 of every year thereafter for the term of the revised agreements, regardless of whether
sales occur on an ongoing basis. The Annual Minimum Royalty shall be creditable towards royalties due in each respective royalty
year, January 1 to December 31, following the due date.
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,
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, 2017, $125,000 by September 15, 2017 and $200,000 on each June 30th thereafter,
subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties
due in each respective royalty year, July 1 to June 30, 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
12 – INCOME TAX
The
Company follows ASC 740
“Income Taxes”
regarding the accounting for deferred tax assets and liabilities. Under
the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax
asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a
portion of those assets will not be realized in a future period.
The
Company assesses the likelihood that deferred tax assets will be recovered from the existing deferred tax liabilities or future
taxable income. To the extent the Company believes that recovery will not meet the more likely than not threshold, it establishes
a valuation allowance. The Company has recorded valuation allowances in the U.S. for its net deferred tax assets since management
believes it is more likely than not that these assets will not be realized because future taxable income necessary to utilize
these losses cannot be established or projected.
The
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 $29,079,000 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 $28,329,000. 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 2016 was 0%.
NOTE
13 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
20,584
|
|
|
$
|
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)
|
|
|
|
|
|
|
|
|
Conversion of debentures into shares of common stock
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Allocated value of common stock and warrants issued with convertible debentures
|
|
$
|
391,237
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Stock warrants issued for conversion of accrued salaries
|
|
$
|
-
|
|
|
$
|
409,667
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense paid in shares of common stock
|
|
$
|
292,387
|
|
|
$
|
131,655
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense financed with debt
|
|
$
|
210,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares
|
|
$
|
194
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing of prepaid insurance
|
|
$
|
7,281
|
|
|
$
|
20,024
|
|
NOTE
14 – 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, October and
November 2016 Convertible Debentures.
In
September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing.
This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the
loan on October 11, 2016.
NOTE
15 – RECENTLY ISSUED ACCOUNTING STANDARDS
In
May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.
The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award
modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the
adoption of this guidance on its consolidated financial statements.
In
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
16 – 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.
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
17 - SUBSEQUENT EVENTS
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.
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 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
May 4, 2017, the Company received $200,000 from L2 Capital and SBI in conjunction with their equity purchase agreement.
On
May 5, 2017, the Company issued a total of 6,125,000 common shares for consulting services. The cost of these issuances were recognized
as a prepaid asset and will be amortized to expense over the life of the agreements.
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
June 2017, the Company issued 771,211 shares for the conversion of $85,000 of convertible debentures plus accrued interest.
In
June 2017, the Company issued 3,500,000 shares for consulting services. The cost of this issuance will be expensed during the
three months ended June 30, 2017.
In
June 2017, the Company issued a total of 5,333,333 shares for consulting services. The cost of these issuances was recognized
as a prepaid asset and will be amortized to expense over the life of the agreement.
In
June 2017, the Company issued a total of 717,945 common shares to various noteholders in payment of interest on convertible debentures.