NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 — ORGANIZATION AND BASIS OF PRESENTATION
Nature
of Operations
Quantum
Materials Corp., a Nevada corporation, and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred
to as the “Company”) are headquartered in San Marcos, Texas. The Company is a nanotechnology company specializing
in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high-performance variant
of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots
and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and
display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks
to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology
and technological changes, including those developed by 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 June 30,
2019, the Company had a working capital deficit of $7,141,117 and net cash used in operating activities was $515,233 for
the year ended June 30, 2019. The ability of the Company to continue as a going concern is dependent upon its ability to reverse
negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.
In
conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from
which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can
be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently
to continue as a going concern.
The
accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue
as a going concern.
Basis
of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions
and account balances have been eliminated upon consolidation.
Use
of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition: The Company recognizes revenue when its customer obtains control of promised goods or services, in
an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue
recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps:
(i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or
as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect
the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception,
once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract
and determine those that are performance obligations and assess whether each promised good or service is distinct. We then
recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as)
the performance obligation is satisfied.
Title
and risk of loss generally pass to our customers upon shipment. In limited circumstances where either title or risk of loss pass
upon destination, we defer revenue recognition until such events occur. The transaction price is allocated to the separate performance
obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable
transactions when these services are sold on a standalone basis. For the years ended June 30, 2019 and 2018 our revenue was immaterial.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash
and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
Accounts
Receivable: Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts
on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company
evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the
age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company
personnel and with the customers directly.
Financial
Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures.
The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates
that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Concentrations
of Credit Risk: The Company maintains its cash in bank deposits with financial institutions. These deposits, at times, exceed
federally insured limits. The Company monitors the financial condition of the financial institution and has not experienced any
losses on such accounts. The Company is not party to any financial instruments which would have off-balance sheet credit or interest
rate risk.
Property
and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated
useful lives of the various classes of assets as follows:
Furniture and fixtures
|
|
|
7 years
|
|
Computers and software
|
|
|
3 years
|
|
Machinery and equipment
|
|
|
3 - 10 years
|
|
Licenses
and Patents: Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated
useful life of five years.
Asset
Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35 “Impairment or Disposal of Long-Lived
Assets”, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that
any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with
the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect
of any impairment would be to expense the difference between the fair value of such property and the carrying value. There were
no impairment charges in the consolidated statements of operations during the years ended June 30, 2019 and 2018.
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.
Unamortized debt discount was $27,724 and $134,255 at June 30, 2019 and 2018, respectively. Amortization expense for the years
ended June 30, 2019 and 2018 was $318,070 and $1,327,742, respectively.
Income
Taxes: The Company follows ASC 740 “Income Taxes” regarding the accounting for deferred tax assets and
liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely
than not that a portion of those assets will not be realized in a future period.
The
Company follows ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance
clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required
to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position
is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax
position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position
is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the
largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes
income tax related penalties and interest in the provision for income taxes.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings
per Share: The Company accounts for earnings per share in accordance with ASC 260 “Earnings Per Share”.
Basic earnings per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares
outstanding during each period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding for the periods, including the dilutive effect of stock options and warrants granted. Dilutive
stock options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the
computations for the time they were outstanding during the periods being reported.
Beneficial
Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to
the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference
between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited
to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional
paid-in-capital.
Derivative
Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid
instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815,
“Accounting for Derivative Instruments and Hedging Activities”, as well as related interpretation of this standard.
In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance
sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly
and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized
as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based
on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The
Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are
considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers,
among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For
less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted
for the effect of dilution, because it embodies all the requisite assumptions (including trading volatility, estimated terms,
dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments
requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes
model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative
financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility
in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in
fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in
the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result
in the application of non-cash derivative income.
Convertible Securities: Based upon
ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities. We will evaluate
our contracts based upon the earliest issuance date. In the event partial reclassification of contracts subject to ASC 815-40-25
is necessary, due to our inability to demonstrate we have sufficient shares authorized and unissued, shares will be allocated
on the basis of issuance date, with the earliest issuance date receiving first allocation of shares. If a reclassification of
an instrument were required, it would result in the instrument issued latest being reclassified first. As of December 31, 2019,
we have recorded an expense of $712,695 for an authorized share shortfall of approximately 23,756,000 shares.
Fair
value measurements: The Company estimates fair value at a price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation
techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs,
as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active
markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar
assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and
(3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market
data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair
value measurement according to the lowest level of input that is significant to the measurement even though other significant
inputs that are more readily observable may have also utilized.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research
and Development Costs: Research and development (R&D) costs are expensed as incurred. These expenses include the costs
of the Company’s proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements.
Research and development expenses were $92,991 and $188,274 for the years ended June 30, 2019 and 2018, respectively.
Reclassifications:
Certain amounts in the June 30, 2018 consolidated financial statements have been reclassified to conform to the classifications
in the June 30, 2019 consolidated financial statements.
Recent
Accounting Pronouncements
Changes to accounting principles generally
accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the
form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification. The Company considers
the applicability and impact of all new or revised ASU’s.
In May 2014, the FASB issued ASU 2014-09
Revenue from Contracts with Customers (Topic 606), which amends the existing revenue recognition requirements and guidance. The
core principle of the new standard is to recognize revenue that reflects the consideration the Company expects to receive for
goods or services when or as the promised goods or services are transferred to customers. Topic 606 requires more judgment than
current guidance, as management will now be required to: (i) identify each performance obligation in contracts with customers,
(ii) estimate any variable consideration included in the transaction price and (iii) allocate the transaction price to each performance
obligation. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the
cumulative effect recognized as of the date of adoption. We adopted this standard effective July 1, 2018 and it did not have a
material impact on our consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480),
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes
equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked
financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of
a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement
retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not
have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down
round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June
30, 2018. No triggering events occurred in the year ended June 30, 2019.
In
March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based
compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when
calculating compensation expense, and classification of awards as either equity or liabilities.
The
new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income
statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash
flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy
the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an
election to account for forfeitures of stock-based compensation.
The
Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current
practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material
impact on the Company’s consolidated financial statements or related disclosures.
In
March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement
of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material
impact on the Company’s consolidated financial statements or related disclosures.
In
March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”)
and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date.
This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition
tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The Company adopted the guidance effective
July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements
or related disclosures.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company adopted the guidance effective July 1, 2018. The adoption of this standard
did not have a material impact on the Company’s consolidated financial statements or related disclosures.
Pronouncements
Yet To Be Adopted
In
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 will adopt ASU 2016-02 on July 1, 2019. The Company is in the process of evaluating the impact, if any, of
the adoption of this guidance on its consolidated financial statements.
NOTE
2 — PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
3,502
|
|
|
$
|
3,502
|
|
Computers and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery and equipment
|
|
|
956,655
|
|
|
|
956,655
|
|
|
|
|
971,604
|
|
|
|
971,604
|
|
Less: accumulated depreciation
|
|
|
446,095
|
|
|
|
346,080
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
525,509
|
|
|
$
|
625,524
|
|
Depreciation
expense for the years ended June 30, 2019 and 2018 was $100,015 and $99,589, respectively.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 — LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
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
|
|
|
174,449
|
|
|
|
146,852
|
|
|
|
|
|
|
|
|
|
|
Total licenses and patents, net
|
|
$
|
18,294
|
|
|
$
|
45,891
|
|
Amortization
expense for the years ended June 30, 2019 and 2018 was $27,597 and $33,048, respectively. Amortization expense is projected to
be $18,294 for the twelve months ended June 30, 2020, and $0 thereafter.
NOTE
4 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company follows Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2011-04 “Fair Value
Measurement” as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework
for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value measurements.
This
guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly
related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
Level
3 – Valuations based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available
assumptions made by other market participants. These valuations require significant judgment.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As
of June 30, 2019, and 2018, the fair value of the Company’s financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, approximates book value due to the short maturity of these instruments.
Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations
approximates fair value. As of June 30, 2019, and 2018, the Company held no investments. The Company hired an independent resource
to value its derivative liability as follows:
Fair
Value Table
|
|
Balance at June 30, 2019
|
|
|
Quoted Prices in Active Markets for Identical Liabilities (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
45,692
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,692
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,692
|
|
Level Three Roll-forward
|
|
Derivative Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
Balance June 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value of derivative liability reclassified from equity
|
|
|
98,645
|
|
|
|
98,645
|
|
Settlement of derivative liabilities
|
|
|
(201,672
|
)
|
|
|
(201,672
|
)
|
Change in fair value
|
|
|
148,719
|
|
|
|
148,719
|
|
Balance June 30, 2019
|
|
$
|
45,692
|
|
|
$
|
45,692
|
|
The
Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other
than described above.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 — CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
Debenture Reference
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
25,050
|
|
|
|
A
|
|
Convertible debentures issued in January 2015
|
|
|
-
|
|
|
|
500,000
|
|
|
|
B
|
|
Convertible debentures issued in April - June 2016
|
|
|
1,218,772
|
|
|
|
1,075,000
|
|
|
|
C
|
|
Convertible debenture issued in August 2016
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
C
|
|
Convertible debentures issued in January - March 2017
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
D
|
|
Convertible promissory notes issued in March 2017
|
|
|
222,350
|
|
|
|
222,350
|
|
|
|
E
|
|
Convertible debenture issued in June 2017
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
F
|
|
Convertible debenture issued in July 2017
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
G
|
|
Convertible debenture issued in September 2017
|
|
|
150,000
|
|
|
|
645,000
|
|
|
|
H
|
|
Convertible debenture issued in November 2017
|
|
|
-
|
|
|
|
247,500
|
|
|
|
H
|
|
Convertible debenture issued in November 2017
|
|
|
27,000
|
|
|
|
27,000
|
|
|
|
I
|
|
Convertible debenture issued in December 2017
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
J
|
|
Convertible debenture issued in February 2018
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
K
|
|
Convertible debentures issued in March 2018
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
L
|
|
Convertible debentures issued in April 2018
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
M
|
|
Convertible debentures issued in April 2018
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
N
|
|
Convertible debentures issued in April 2018
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
O
|
|
Convertible debentures issued in June 2018
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
P
|
|
Convertible debentures issued in July 2018
|
|
|
45,000
|
|
|
|
-
|
|
|
|
Q
|
|
Convertible debentures issued in August 2018
|
|
|
30,000
|
|
|
|
-
|
|
|
|
R
|
|
Convertible debentures issued in September 2018
|
|
|
25,000
|
|
|
|
-
|
|
|
|
S
|
|
Convertible debentures issued in December 2018
|
|
|
52,000
|
|
|
|
-
|
|
|
|
T
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,630,172
|
|
|
|
3,576,900
|
|
|
|
|
|
Less: unamortized discount
|
|
|
27,724
|
|
|
|
134,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,602,448
|
|
|
|
3,442,645
|
|
|
|
|
|
Less: current portion
|
|
|
2,467,106
|
|
|
|
3,402,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible debentures, net of current portion
|
|
$
|
135,342
|
|
|
$
|
40,224
|
|
|
|
|
|
Future
maturities of convertible debentures for each of the next five years and thereafter are as follows:
Year Ending June 30,
|
|
|
|
2019 (Past due)
|
|
$
|
1,496,954
|
|
2020
|
|
|
1,101,218
|
|
2021
|
|
|
52,000
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
2,650,172
|
|
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Of
the past due amounts disclosed above, $222,350 is, at the date of this report, involved in litigation involving L2 Capital, and
SBI (See narrative E below, and litigation disclosure, Note 15). See remaining amounts due in narrative C below. The past due
amounts also include a note payable of $20,000, disclosed in Note 6.
A)
September 2014 Convertible Debenture
Between
September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050
in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”).
The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest
at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right
of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and
will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. None of the Debentures
were converted into common shares during the years ended June 30, 2019 and 2018.
Interest
expense for the years ended June 30, 2019 and 2018 was $1,524 and $1,524, respectively.
As
of June 30, 2019, and 2018, $25,050 of principal was outstanding.
B)
January 2015 Convertible Debenture
On
January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated
parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures 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 any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity
date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total
proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018,
the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received
3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense.
On January 14, 2019, partial payment was made of $150,000, and the debentures were extended to March 15, 2019.
On
March 22, 2019, the remainder of the outstanding balance was converted to shares of common stock. 11,147,726 shares of common
stock were issued, for the outstanding balance of $165,877, plus accrued interest of $29,205.
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. Interest expense for the years ended June 30, 2019 and 2018 was $49,370 and $40,000, respectively.
As
of June 30, 2019, and June 30, 2018, $0 and $500,000 of principal was outstanding, respectively.
C)
April – June, August, October and November 2016 Convertible Debentures
During
the fourth quarter of the year ended June 30, 2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated
and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000 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. The conversion price was reset to $0.012 per share in June 2018 as a result of
a triggering event.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2019, and 2018, of $2,594 and
$231,702, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2019, and 2018, of $0 and $1,021,500, respectively.
Interest
expense for the years ended June 30, 2019, and 2018, of $113,417 and $113,570, respectively.
During
the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into 3,791,666 and 2,375,000 shares of
common stock, respectively. As of June 30, 2019, and 2018, $1,275,000 of principal was outstanding. As of the date of this report,
maturities totaling $825,000 of principal have been extended until July and August of 2019, and the extensions of these maturity
extensions created an effective extinguishment pursuant to the Debt Modification guidance, ASC 470-50. The Company recorded a
loss on extinguishment of $438,589 in connection with these extensions.
The
remaining $450,000 have not been extended and are past due as of the date of this report. No payments have been made on these
debentures as of the date of this report, as a result they are all past due.
D)
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 the
anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company
can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price
is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges,
mergers, and reorganizations.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $3,125 and
$52,954, respectively.
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended June 30, 2018, debentures for an aggregate principal amount of $200,000 were converted into 1,666,667 shares of
common stock.
Interest
expense for the years ended June 30, 2019 and 2018 of $4,800 and $11,275, respectively.
As
of June 30, 2019, and 2018, $60,000 of principal was outstanding. This debenture was past due as of the date of this report.
E)
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
March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them
to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed
to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form
of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory
notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined
in the notes.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and
is amortized using the effective interest rate method over the life of the loan, eight months.
The
Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $43,661, respectively.
Interest
expense for the years ended June 30, 2019 and 2018 of $0 and $421,901, respectively.
As
of June 30, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of
$514,969 for the year ended June 30, 2018.
As
of June 30, 2019, and 2018, $222,350 of principal was outstanding. During the year ended June 30, 2018, the Company paid $319,500
of principal.
F)
June 2017 Convertible Debenture
In
June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable
at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates
a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. Interest expense was recorded for the years ended June 30, 2019 and 2018 of $0 and $10,500, respectively.
Beneficial conversion expense was recorded for the years ended June 30, 2019 and 2018 of $0. The Company recognized accretion
of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $45,434, respectively. As of June 30, 2019, and
2018, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019. This debenture was
past due as of the date of this report, and $36,500 in default interest has been accrued.
G)
July 2017 Convertible Debenture
In
July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and
250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six
months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture
discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense
for the years ended June 30, 2019 and 2018 of $0 and $53,875, respectively. As of June 30, 2019, and 2018, $100,000 of principal
was outstanding. In May 2018 the maturity date was extended to February 1, 2019. This debenture was past due as of the date of
this report and $36,500 in default interest has been accrued.
Interest
expense for the year ended June 30, 2019 and 2018 of $36,500 and $18,500, respectively.
H)
September 2017 Convertible Debenture
Debenture
A)
In
September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock
and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of
six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture
discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense
for the year ended June 30, 2019, and 2018 of $0 and $82,720, respectively. As of June 30, 2019, $150,000 of principal was outstanding.
In May 2018 the maturity date was extended to February 1, 2019. This debenture was past due as of the date of this report.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The
value of this derivative at September 30, 2018 was $22,666, and a change in derivative liability expense of $14,483 for the three
months then ended. This derivative liability was settled for 1,781,690 shares during the second quarter of 2018, resulting in
additional interest expense of $53,234 during the year ended June 30, 2019.
Interest
expense for the year ended June 30, 2019, and 2018 of $0 and $12,000, respectively.
Debenture
B)
In
September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for a convertible promissory note in the principal amount of $495,000. The Note Holder received 10,000,000 shares of common stock
and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note had a term
of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note
is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and
is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value
of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense
of $131,663. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $318,337,
respectively.
As
part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The
value of this derivative at September 30, 2018 was $43,998, and a change in derivative liability expense of $28,864 for the three
months then ended. This derivative liability was settled for 7,432,432 shares during the second quarter of 2018, resulting in
additional interest expense of $283,029 during the year ended June 30, 2019.
On
April 5, 2019 this note was converted to 11,333,333 shares of common stock. This was an effective conversion rate of $0.04 a share.
This conversion resulted in an additional interest expense of $35,667.
Interest
expense for the years ended June 30, 2019 and 2018 of $35,667 and $36,000, respectively.
Debenture
C)
In
November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing on
April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of
the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the
Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common
Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the
Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
The
Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective
interest rate method over the life of the loan, six months.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
April 5, 2019 this note was converted to 5,666,667 shares of common stock. This was an effective conversion rate of $0.04 a share.
This conversion resulted in an additional interest expense of $17,833.
Interest
expense for the years ended June 30, 2019 and 2018 of $17,833 and $18,000, respectively.
These
non-converted debentures were past due as of the date of this report and $47,300 in default interest has been accrued.
I)
November 2017 Convertible Debenture
In
November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable
at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates
an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company
at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock
at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company
shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the
loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2019 and 2018 of $3,217,
and $2,007, respectively. Interest expense for the year ended June 30, 2019 and 2018 of $2,190 and $1,380, respectively. As of
June 30, 2019, and 2018 $27,000 of principal was outstanding.
J)
December 2017 Convertible Debenture
In
December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and
250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months
maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $0 and $41,175, respectively. Interest expense for the years ended June
30, 2019 and 2018 of $0 and $6,000, respectively. As of June 30, 2019, and June 30, 2018, $75,000 of principal was outstanding.
This debenture was past due as of the date of this report and $25,400 in default interest has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at September 30, 2018 was $10,380, and a change in derivative liability expense of $8,061 for the three months then
ended. This derivative liability was settled for 809,160 shares during the second quarter of fiscal year 2019, resulting in additional
interest expense of $21,420 during the year ended June 30, 2019.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
K)
February 2018 Convertible Debenture
In
February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and
500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months
maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $6,761 and $24,785, respectively. Interest expense for the years ended June
30, 2019 and 2018 of $0 and $3,600. As of June 30, 2019, and June 30, 2018, $45,000 of principal was outstanding. This debenture
was past due as of the date of this report. This debenture was past due as of the date of this report and $23,920 in default interest
has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at September 30, 2018 was $64, and a change in derivative liability expense of $64 for the three months then ended.
This derivative liability was settled for 582,955 shares during the second quarter of fiscal year 2019, resulting in additional
interest expense of $25,650 during the years ended June 30, 2019.
L)
March 2018 Convertible Debenture
In
March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and
500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note had a term of 6 months
maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $8,677 and $14,697, respectively. Interest expense for the years ended June
30, 2019 and 2018 of $0 and $2,400 was recognized, respectively. As of June 30, 2019, and June 30, 2018, $30,000 of principal
was outstanding. This debenture was past due as of the date of this report, and $18,080 in default interest has been accrued.
In
March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $35,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $35,000. The Note Holder received 1,500,000 shares of common stock and
500,000 common stock warrants exercisable at $0.12 per share through March 23, 2021. The promissory note has a term of six months
maturing on September 23, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The
maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $12,254 and $14,043, respectively. Interest expense for the years ended
June 30, 2019 and 2018 of $0 and $2,800, respectively. As of June 30, 2019, and June 30, 2018, $35,000 of principal was outstanding.
This debenture was past due as of the date of this report, and $17,460 in default interest has been accrued.
The
debenture agreements above include a “make-whole” provision, creating a potential derivative liability. The value
of this derivative at December 31, 2018 was $20,823, and a change in derivative liability expense of $18,751 for the six months
then ended. This derivative liability was settled for 3,950,920 shares during the third quarter of fiscal year 2019, resulting
in additional interest expense of $74,844 during the year ended June 30, 2019.
M)
April 2018 Convertible Debenture
In
April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and
1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately
6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note
is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $26,720 and $14,455, respectively. Interest expense for the years ended
June 30, 2019 and 2018 of $4,800 was recognized. As of June 30, 2019, and 2018, $60,000 of principal was outstanding. This debenture
was past due as of the date of this report, and $18,960 in default interest has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at December 31, 2018 was $2,230, and a change in derivative liability expense of $2,182 for the six months then ended.
This derivative liability was settled for 2,484,305 shares during the third quarter of fiscal year 2019, resulting in additional
interest expense of $97,142 during the year ended June 30, 2019.
N)
April 2018 Convertible Debenture
In
April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and
200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years
maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory
note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated
the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using
the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense
for the years ended June 30, 2019 and 2018 of $15,190 and $2,616, respectively. Interest expense for the years ended June 30,
2019 and 2018 of $5,678 and $1,027 was recognized, respectively. As of June 30, 2019, and 2018, $70,000 of principal was outstanding.
O)
April 2018 Convertible Debenture
In
April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable
at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates
an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company
at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock
at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company
shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $7,044 and $1,675, respectively. Interest expense for the years ended June
30, 2019 and 2018 of $1,622 and $316 was recognized, respectively. As of June 30, 2019, and June 30, 2018, $20,000 of principal
was outstanding.
P)
June 2018 Convertible Debenture
In
June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and
1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately
7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into
unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes
piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares
issuable upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount
expense for the years ended June 30, 2019 and 2018 of $28,526 and $3,431, respectively. Interest expense for the years ended June
30, 2019 and 2018 of $0 and $3,200 was recognized, respectively. As of June 30, 2019, and 2018, $40,000 of principal was outstanding.
This debenture was past due as of the date of this report and $26,740 in default interest has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at June 30, 2019 was $10,700, and a change in derivative liability expense of $10,700 for the year ended June 30, 2019.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Q)
July 2018 Convertible Debenture
In
July 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $45,000. The Note Holder received 2,000,000 shares of common stock and
1,000,000 common stock warrants exercisable at $0.12 per share through July 9, 2021. The promissory note has a term of approximately
7 months maturing on January 31, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into
unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes
piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares
issuable upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $7,235 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $33,485 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2019 of $33,485. Interest expense for the year ended June 30, 2019 of $3,600 was recognized.
As of June 30, 2019, $45,000 of principal was outstanding. This debenture was past due as of the date of this report and $24,720
in default interest has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at June 30, 2019 was $19,467, and a change in derivative liability expense of $19,467 for the year ended June 30, 2019.
R)
August 2018 Convertible Debenture
In
August 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $30,000. The Note Holder received 1,250,000 shares of common stock and
1,000,000 common stock warrants exercisable at $0.12 per share through August 27, 2021. The promissory note has a term of approximately
7 months maturing on March 30, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into
unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes
piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares
issuable upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $5,160 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $22,659 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2019 of $22,659. Interest expense for the year ended June 30, 2019 of $2,400 was recognized.
As of June 30, 2019, $30,000 of principal was outstanding. This debenture was past due as of the date of this report and $15,680
in default interest has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at June 30, 2019 was $8,625, and a change in derivative liability expense of $8,625 for the year ended June 30, 2019.
S)
September 2018 Convertible Debenture
In
September 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $25,000 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 $25,000. The Note Holder received 2,000,000 shares of common stock
and 1,000,000 common stock warrants exercisable at $0.12 per share through September 17, 2021. The promissory note has a term
of approximately 7 months maturing on April 30, 2019 and stipulates an interest charge of eight percent (8%) shall be applied
to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right
of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The
promissory note includes piggyback registration rights, and the Company shall include on the next registration statement
it files with the SEC all shares issuable upon conversion of the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,475 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $19,058 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2019 of $19,058. Interest expense for the year ended June 30, 2019 of $2,000 was recognized.
As of June 30, 2019, $25,000 of principal was outstanding. This debenture was past due as of the date of this report and $11,500
in default interest has been accrued.
The
debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this
derivative at June 30, 2019 was $6,900, and a change in derivative liability expense of $6,900 for the year ended June 30, 2019.
T)
December 2018 Convertible Debenture
During
the second quarter of the year ended June 30, 2019, the Company sold 52 Units for total proceeds of $52,000 from three affiliated
and fourteen 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. An additional 45,826 warrants
with identical terms, were granted with this debenture. 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 $0.08 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
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $6,835, 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 year ended June 30, 2019 of $1,882.
Interest
expense for the year ended June 30, 2019 of $2,392.
December
2018 Convertible Promissory Note
In
December 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $350,000 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 $350,000. The Note Holder received 3,000,000 shares of common stock
and 5,000,000 common stock warrants exercisable at $0.04 per share through December 26, 2021. The promissory note has a term of
20 months maturing on August 14, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into
unregistered and restricted shares of Common Stock at a conversion price of $0.03 per share at any date. The promissory note includes
piggyback registration rights, and the Company shall include on the next registration statement it files with the SEC all
shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $126,908 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $126,908 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 20 months.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
March 22, 2019, the remainder of the outstanding balance was converted to shares of common stock. 11,666,667 shares of common
stock were issued, for the outstanding balance of $350,000.
The
Company recognized accretion of debt discount expense for the year ended June 30, 2019 of $126,908. Interest expense for the year
ended June 30, 2019 of $6,615 was recognized. As of June 30, 2019, $0 of principal was outstanding. This convertible promissory
note is not in the table above, as the debt was entered into and paid off in the same fiscal year.
Debt
Issuance Costs
The
costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized
to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for
the years ended June 30, 2019 and 2018 was $318,070 and $58,990 respectively.
NOTE
6 — NOTES PAYABLE
Promissory
Note
In
September 2018, the Company issued a promissory note secured by the Company’s CEO for $20,000 with an interest rate of 6%,
maturing on March 9, 2019. The note is convertible into the Company’s common stock, at the lenders discretion, at a rate
of $0.04 per share, with warrants to purchase an equal amount of stock. Interest expense for the year ended June 30, 2019 was
$967. As of June 30, 2019, $20,000 of principal was outstanding, and is past due as of the date of this report.
NOTE
7 — ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
$
|
581,821
|
|
|
$
|
343,437
|
|
Other accrued expenses
|
|
|
981,869
|
|
|
|
205,230
|
|
Total accrued expenses
|
|
$
|
1,563,690
|
|
|
$
|
548,667
|
|
NOTE
8 — EQUITY TRANSACTIONS
Common
Stock
During
the year ended June 30, 2019, the Company issued 37,124,904 shares for $2,594,785 in consulting services, $61,255
of which was accrued at June 30, 2018.
During
the year ended June 30, 2019, the Company issued 729,877 shares of common stock at the fair market value of $42,841
for payment of debenture interest.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Common
Stock Issuable
As
of June 30, 2019, the company owed a total of 19,442,619 shares of common stock. 1,872,208 shares were in relation to a
new debenture borrowing of $405,000 in aggregate, valued at $22,553. 2,000,000 shares were in relation to the extinguishment of
debt, valued at $80,000. 6,039,161 shares were in relation to amounts owed for salaries and consulting fees, valued at
$130,609. 9,531,250 were in relation to debt extensions, valued at $476,563. These subscribed shares also included 702,250 warrants
to purchase shares of common stock at $0.04 per share. The shares are included in the weighted average shares outstanding for
purposes of calculation earning per share for the year ended June 30, 2019.
During
the year ended June 30, 2019, 33,488,609 shares with a fair value of $1,065,112, were issued, reducing shares issuable.
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the years ended June 30, 2019 and 2018 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, 2017
|
|
|
0.13
|
|
|
|
29,953,551
|
|
|
|
|
|
|
|
0.14
|
|
Expired
|
|
|
0.06
|
|
|
|
(12,077,778
|
)
|
|
|
|
|
|
|
0.15
|
|
Granted
|
|
|
0.07
|
|
|
|
21,087,409
|
|
|
|
|
|
|
|
0.06
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
|
0.13
|
|
|
|
(2,181,456
|
)
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
0.11
|
|
|
|
36,781,726
|
|
|
|
2.80
|
|
|
$
|
0.09
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Granted
|
|
|
0.07
|
|
|
|
8,964,708
|
|
|
|
|
|
|
|
0.04
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
|
0.12
|
|
|
|
(833,333
|
)
|
|
|
|
|
|
|
0.15
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
|
$
|
0.10
|
|
|
|
44,913,101
|
|
|
|
1.83
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of June 30, 2019
|
|
$
|
0.10
|
|
|
|
44,913,101
|
|
|
|
1.83
|
|
|
$
|
0.08
|
|
During
the years ended June 30, 2019 and 2018, 0 warrants were exercised.
Outstanding
warrants at June 30, 2019 expire during the period September 2019 to December 2023 and have exercise prices ranging from $0.03
to $0.30.
The
following assumptions were used for the years ended June 30, 2019 and 2018:
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
122.52% - 126.99
|
%
|
|
|
129.46
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Risk-free interest rates
|
|
|
2.46%
- 2.95
|
%
|
|
|
2.62
|
%
|
Expected term (in years)
|
|
|
2-3
|
|
|
|
5.0
|
|
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Salaries
Converted to Equity
There
were no salary conversions during the year ended June 30, 2019.
During
the year ended June 30, 2018, certain officers, employees and consultants converted accrued salaries and other amounts owed of
$249,900 into 513,333 shares of common stock and 7,816,667 warrants to purchase the Company’s common stock. The warrants
are exercisable at $0.03 per share for a period of five years. The fair value of the common stock and stock warrants at the time
of conversion was $30,800 and $498,022, respectively. The variance of $263,522 was recognized as stock-based compensation in general
and administrative expense.
NOTE
9 — 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 June 30, 2018, 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 June 2016, and 2017, 6,000,000 and 17,000,000 stock options,
with a term of ten years, were granted, respectively, outside of a stock option plan, and 3,000,000 shares were cancelled, leaving
a balance of 23,500,000 outstanding outside of a defined option plan.
In
January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock,
which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct
issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2018, 72,653,473 options have
been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 18,886,559 have been cancelled, and
50,441,914 remain outstanding.
On
February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000
shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.
As of June 30, 2018, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving
a balance outstanding of 3,275,000 options.
Incentive
Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton
valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. As the Company
has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized, if any, is
dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance
the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.
The
following assumptions were used for the years ended June 30, 2019 and 2018:
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
122.52% - 126.99
|
%
|
|
|
129.46
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Risk-free interest rates
|
|
|
2.46% - 2.95
|
%
|
|
|
2.62
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
computation of expected volatility during the years ended June 30, 2019 and 2018 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 years ended June 30, 2019 and 2018 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, 2017
|
|
$
|
0.09
|
|
|
|
87,716,914
|
|
|
|
|
|
|
$
|
0.11
|
|
|
$
|
2,073,012
|
|
Expired
|
|
|
0.05
|
|
|
|
(3,000,000
|
)
|
|
|
|
|
|
|
0.09
|
|
|
|
|
|
Granted
|
|
|
0.06
|
|
|
|
900,000
|
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
0.09
|
|
|
|
85,616,914
|
|
|
|
4.00
|
|
|
$
|
0.11
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.03
|
|
|
|
28,500,000
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
0.07
|
|
|
|
(4,208,481
|
)
|
|
|
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
|
$
|
0.07
|
|
|
|
109,908,433
|
|
|
|
3.93
|
|
|
$
|
0.09
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of June 30, 2019
|
|
$
|
0.07
|
|
|
|
100,760,933
|
|
|
|
3.62
|
|
|
$
|
0.09
|
|
|
$
|
-
|
|
Outstanding
options at June 30, 2019, expire during the period October 2019 to June 2026 and have exercise prices ranging from $0.02 to $0.17.
Compensation
expense associated with stock options for the year ended June 30, 2019 and 2018 was $1,347,349 and $860,724 respectively and was
included in general and administrative expenses in the consolidated statements of operations. Included in expense associated with
stock options for the year ended June 30, 2019 is a charge for $111,746 for stock option modification, as the Company extended
the expiration date on certain stock option grants.
At
June 30, 2019, the Company had 9,147,500 shares of nonvested stock option awards. The total cost of nonvested stock option awards
which the Company had not yet recognized was $69,723 at June 30, 2019. Such amounts are expected to be recognized over a period
of 0.5 years.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended June 30, 2019 and 2018 is presented below:
|
|
Number of Nonvested, Unissued Restricted Share
Awards
|
|
|
Weighted Average Grant Date Fair Value
|
|
Nonvested, unissued restricted shares outstanding at June 30, 2017
|
|
|
1,500,000
|
|
|
|
0.21
|
|
Granted
|
|
|
5,500,000
|
|
|
|
0.06
|
|
Vested
|
|
|
(7,000,000
|
)
|
|
|
0.09
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested, unissued restricted shares outstanding at June 30, 2018
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested, unissued restricted shares outstanding at June 30, 2019
|
|
|
-
|
|
|
|
-
|
|
Compensation
expense associated with restricted stock awards for the year ended June 30, 2019 and 2018 was $0 and $440,336, 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 $0 at June 30, 2019.
NOTE
10 — LOSS PER SHARE
The
Company follows ASC 260, “Earnings Per Share” for share-based payments that are considered to be participating
securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights
to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings
per share (“EPS”).
The
following table sets forth the computation of basic and diluted loss per share:
|
|
Years Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
-
|
|
|
|
|
|
Net loss
|
|
$
|
(8,957,399
|
)
|
|
$
|
(9,401,069
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
519,503,594
|
|
|
|
413,738,050
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
For
the years ended June 30, 2019 and 2018, 44,913,101 and 37,065,053 stock warrants, respectively, were excluded from diluted earnings
per share because they are considered anti-dilutive.
For
the years ended June 30, 2019 and 2018, 109,908,433 and 85,616,914 stock options, respectively, were excluded from diluted earnings
per share because they are considered anti-dilutive.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 — COMMITMENTS AND CONTINGENCIES
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 June 30, 2018, and 2019, 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.
Operating
Leases
The
Company leases certain office and lab space under a month-to-month operating lease agreement.
Rental
expense for the operating lease for the years ended June 30, 2019 and 2018 was $71,519 and $110,202, respectively.
NOTE
12 — CONCENTRATIONS
The
Company owns the design of its microreactors and currently contracts with only one supplier to manufacture this equipment. No
long-term supply contract exists. There are a limited number of manufacturers of this kind of equipment, and a change in suppliers
could result in a significant delay in the delivery time of future equipment. Unless such a delay involved replacement of current
capacity, it would not necessarily have an adverse effect on the Company’s near-term operating results.
The
Company has licensed certain patents from the University of Arizona. While neither is required for the Company’s immediate
business opportunities in displays and solid-state lighting, it is expected that the Company will market products utilizing these
patents or otherwise derive revenue from them in the future. It may not be possible to replace this intellectual property if the
Company loses its rights, and future business opportunities could be adversely affected if these rights are lost.
NOTE
13 — INCOME TAXES
The
components of income tax expense/(benefit) are as follows:
|
|
|
Year Ended June 30,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Income Tax Expense/(Benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the expected U.S. tax expense/(benefit) to income taxes is as follows:
|
|
Year Ended June 30,
|
|
|
|
2019
|
|
|
Rate
|
|
|
2018
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax expense / (benefit) at U.S. statutory rate
|
|
$
|
(1,881,054
|
)
|
|
|
21.0
|
%
|
|
$
|
(2,594,695
|
)
|
|
|
27.6
|
%
|
Meals and entertainment
|
|
|
326
|
|
|
|
0.0
|
%
|
|
|
1,325
|
|
|
|
0.0
|
%
|
Derivatives
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Beneficial conversion
|
|
|
30,193
|
|
|
|
-0.3
|
%
|
|
|
359,649
|
|
|
|
-3
.8
|
%
|
Prior year NOL true-up adjustment
|
|
|
-
|
|
|
|
|
|
|
|
256,167
|
|
|
|
-2
.7
|
%
|
Change in tax rate
|
|
|
-
|
|
|
|
|
|
|
|
5,287,019
|
|
|
|
-56.2
|
%
|
Prior year warrant valuation adjustment
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Change in valuation allowance
|
|
|
1,850,535
|
|
|
|
-20.7
|
%
|
|
|
(3,309,465
|
)
|
|
|
35.2
|
%
|
Total Income Tax Expense/(Benefit)
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
-
|
|
|
|
0.0
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes at the enacted tax rates in effect when the differences are
anticipated to reverse. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates,
it is more likely than not that a portion of those assets will not be realized in a future period.
Components
of deferred income taxes are as follows:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses - federal
|
|
$
|
8,739,159
|
|
|
$
|
7,497,834
|
|
Stock-based compensation
|
|
|
2,109,735
|
|
|
|
1,826,639
|
|
|
|
|
|
|
|
|
|
|
Amortization of licenses and patents
|
|
|
3,762
|
|
|
|
4,522
|
|
|
|
|
|
|
|
|
|
|
Disallowed Interest
|
|
|
128,031
|
|
|
|
|
|
Expense to cover authorized shortfall
|
|
|
149,666
|
|
|
|
|
|
Accrued Expenses
|
|
|
106,747
|
|
|
|
128,254
|
|
Total deferred tax assets
|
|
|
11,237,100
|
|
|
|
9,457,249
|
|
Deferred tax (liabilities):
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
(47,886
|
)
|
|
|
(51,775
|
)
|
Warrant Expense
|
|
|
(5,277
|
)
|
|
|
(28,194
|
)
|
Total deferred tax (liabilities)
|
|
|
(53,163
|
)
|
|
|
(79,969
|
)
|
Less valuation allowance
|
|
|
(11,183,937
|
)
|
|
|
(9,377,280
|
)
|
Net deferred tax assets/(liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company’s management has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding
the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance increased
by approximately $1,850,000 and decreased by approximately $3,310,000 during the years ended June 30, 2019 and 2018, respectively,
primarily due to operations and the change in the tax rate due to the 2017 Tax Act.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of June 30, 2019, and 2018, the Company had U.S. net operating loss (“NOL”) carryforwards of approximately $42,368,000
and $36,460,000, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”),
a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards
to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate
stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules
which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more
“public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such
stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use
limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt
interest rate. The Company believes there is a 382 limitation on its NOLs so that approximately $750,000 will expire unutilized,
resulting in a remaining NOL carryforward of approximately $41,615,000 and $35,700,000 as of June 30, 2019 and 2018, respectively.
The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred
tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred.
The NOL carryforwards expire beginning in 2029, if not utilized. The net operating loss carryforwards are subject to Internal
Revenue Service adjustments until the statute closes on the year the net operating loss is utilized.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities. As of June 30, 2019, and 2018, the Company has recorded no unrecognized
tax benefits or related penalty and interest. Additionally, the Company does not expect any unrecognized tax benefits to change
significantly over the next twelve months.
During
the fiscal year ended June 30, 2019, the Company had a net increase in deferred tax asset of $1,850,000. This change is a result
of current year activity.
Given
the significant impact of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 which
provides guidance on accounting for uncertainties of the effects of the Tax Act. Specifically, SAB 118 allows companies to record
a provisional estimate of the impact of the Tax Act during a one year “measurement period”. The company has recognized
the provisional tax impact related to the revaluation of deferred tax assets and liabilities and included these amounts in its
consolidated financial statements for the fiscal year ended June 30, 2018. During the year ended June 30, 2019, the Company finalized
its calculations of the impact of the Tax Act and recorded no material adjustments to the provisional amounts recorded as December
31, 2017.
As
of June 30, 2019, the Company had net operating loss carryforwards of approximately $42,368,000 and $0 for federal and state income
tax purposes, respectively. These may be used to offset future taxable income and will begin to expire in varying amounts in 2029.
Utilization
of the Company’s net operating loss carryforwards and research and development credit carryforwards may be subject to a
substantial annual limitation due to an “ownership change” that may have occurred, or that could occur in the future,
as defined and required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar
state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development
credit carryforwards, and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively.
Any limitation may result in the expiration of a portion of the net operating loss carryforwards or research and development credit
carryforwards before utilization. The net operating loss carryforwards and research and development credit carryforwards inherited
as a result of the merger with Telik, Inc. have been severely limited under these rules and will likely not be realized.
In
general, an “ownership change” results from a transaction or series of transactions over a three-year period resulting
in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. The Company
intends to complete a study in the future to assess whether an ownership change has occurred or whether there have been multiple
ownership changes since the Company’s formation and will complete such study before the use of any of the aforementioned
attributes.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company files income tax returns in the United States and Texas and is subject to examination by income tax authorities for years
2008 to present. The Company is not currently under examination in any tax jurisdiction.
NOTE
14 — SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
9,716
|
|
|
$
|
29,023
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Conversion of debentures, and accrued interest into shares of common stock
|
|
$
|
1,390,041
|
|
|
$
|
923,497
|
|
|
|
|
|
|
|
|
|
|
Allocated value of common stock and warrants issued with convertible debentures
|
|
$
|
208,945
|
|
|
$
|
721,248
|
|
|
|
|
|
|
|
|
|
|
Stock issued for amounts in accounts payable
|
|
$
|
81,602
|
|
|
$
|
177,000
|
|
|
|
|
|
|
|
|
|
|
Stock and stock warrants issued for conversion of accrued salaries
|
|
$
|
-
|
|
|
$
|
249,900
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense paid in shares of common stock
|
|
$
|
2,265,709
|
|
|
$
|
1,896,588
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares of common stock
|
|
$
|
-
|
|
|
$
|
435,100
|
|
|
|
|
|
|
|
|
|
|
Financing of prepaid insurance
|
|
$
|
-
|
|
|
$
|
12,738
|
|
|
|
|
|
|
|
|
|
|
Subscription receivable from warrants extension
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued for settlement of note payable and accrued interest
|
|
$
|
-
|
|
|
$
|
162,000
|
|
NOTE
15 — LITIGATION
The
Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled
this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears
is approximately $53,000 plus interest and other charges which has been accrued at June 30, 2019. The Company repaid $237,300
in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555
plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
CAUSE
NUMBER 17-2033; Hays County, Texas
Two
lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked the Company’ transfer agent, Empire Stock Transfer, Inc.,
to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements the Company had entered into in
late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus
accrued interest of $10,170) on two of the loans. Subsequently, in November 2017, the Company also repaid $213,650 and $8,636
of accrued interest on two of the remaining loans on their due dates.
Quantum
filed suit for an injunction to stop the release of the stock on September 28, 2017. The two lenders, SBI Investments LLC, 2014-1
(SBI), and L2 Capital, LLC (L2), hired the national law firm of K&L Gates to stop the injunction; problematically, this same
firm had previously represented the Company. The Company filed a motion to disqualify the law firm for that conflict, and they
subsequently withdrew.
SBI
and L2, with new counsel, and Cleveland Terrazas PLLC, brought suit against the Company on October 10, 2017 for $1.5 million on
the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed
technical defaults. The court in Hays County granted the Company’s temporary injunction and set the full case for trial.
The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against the Company and refiled similar actions
in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment
in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three
suits are related to the same transactions. The lenders claimed 140% interest, attorney’s fees, 20 million shares
of stock, and damages.
The
case has been dismissed as of the date of this report.
CAUSE
NUMBER: 17CV06093; Johnson County, Kansas
The
Kansas lawsuit, instituted on October 30, 2017, is based on the same nucleus of facts. The putative default is the failure to
properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding
the Registration Rights Agreement against the Company; the second claim is for breach of contract of the first L2 promissory note
against the Company; the final claim is for breach of contract regarding the second L2 promissory note against both the Company
and Stephen Squires, individually. The claims against Squires individually were abandoned. Trial was conducted October
13th, 2020. Final arguments were submitted in writing to the court February 2021. The court has not yet
ruled.
The
Company denies all the above-mentioned allegations and will vigorously defend all claims.
CAUSE
NUMBER: 2017-025283-CA-01; Miami-Dade County, Florida
The
Florida lawsuit, instituted on October 30, 2017, largely mirrors the suit in Kansas; defaults are alleged as follows:
On
July 6, 2017, the Company filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In
comparison to the unrestated financial statement previously filed by the Company, SBI alleged that the Revised Report materially
and adversely affects SBI’s rights with respect to the notes, constituting a breach of each of the notes. Furthermore, because
each note contains a cross-default clause, SBI alleged that each of the Company’s breaches of a specific note also constituted
a breach of every other note.
On
July 27, 2017, the Company’s auditor resigned, and the Company replaced its auditor without seeking or obtaining the consent
of SBI. SBI alleged that this replacement of the Company’s auditor constituted a breach of the SBI notes, and because each
note contains a cross-default clause, of every other note.
The
Company denies all of the above-mentioned allegations and will vigorously defend all claims.
The
case was reheard in late March 2018 and a 45-day continuance was decided resulting in an April 30, 2018 rehearing. After a day
of litigation in San Marcos, the Company’s motion to enjoin L2 and SBI and prevent them from obtaining stock before a full
trial on the merits was granted on October 27, 2017, by Judge Gary Steel. L2 and SBI objected to the injunction and appealed to
the Third Court of Appeals in Austin, TX. On March 8, 2018, in a unanimous opinion, the Third Court of Appeals denied the appeal,
sustained the injunction in favor of the Company and awarded costs of court.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
March 29, 2018, at a discovery hearing, wherein the Company asked the court to order L2 and SBI to produce evidence to support
their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had
previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court.
The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the
Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.
The
Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability
has been recorded for this contingent liability at June 30, 2019.
CAUSE NUMBER: PSC190273; Riverside California
Edward James Schloss file a complaint against
Quantum Materials Corp and Solterra alleging financial elder abuse, fraud, breach of written contract, breach of oral contract,
constructive termination, retaliation, failure to pay wages, waiting time penalties, failure to permit inspection of employee
records, unfair competition, intentional infliction of emotional distress and failure to indemnify employee expenses. Mr. Schloss
was a former officer and later a contractor to the company after his dismissal and is owed fees. The Company expects to successful
in the litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability
at June 30, 2019.
CAUSE NUMBER:
19-2774; Hays County Texas
This litigation filed
November 12, 2019 in Hays County (San Marcos) alleged misappropriation of trade secrets and related claims based on Quantum Material
Corp’s (“QMC” or “Company”) hiring of a previous employee of the Plaintiff (Practice Interactive,
Inc. d/b/a Intiva Health “Intiva”). Intiva initiated the case by securing a no-notice temporary restraining order
against the Company and the employee (“Hartigan”).
At a temporary injunction
trial in December 2019, the court granted a limited injunction against Hartigan and found no basis to enjoin the Company. The
court set the bond at $50,000: Intiva never took action to post the bond; thus the injunction never went into effect. The order
also set the case for trial in July 2021. Although the plaintiff only recently proposed a discovery and trial schedule, no discovery
has occurred. The parties filed a Rule 11 Agreement on December 15, 2020.
CAUSE NUMBER:
18-2393; Hays County, Texas
The current
litigation with K&L Gates was pending before the Texas Supreme Court. It was awaiting a ruling to determine if the strong
opinion at the 3rd Court of Appeals in Austin in favor of Quantum Materials will be reversed. The state Supreme Court on Oct 15,
2020 declined to take the interlocutory appeal. The case has now been sent back to Hays County for a jury trial.
Quantum Materials
retained K&L Gates (“Gates”) on a myriad of issues. As part of that representation, a lawyer
from Gates sat in on confidential board meetings and participated in the company’s most important negotiations,
including but not limited to a new contract with the founder and former CEO, Steve Squires, to become CEO again. Gates billed
a very substantial fee in a very short period of time. Over $300,000. Before negotiations occurred on what Squires believed
to be an excessive bill, SBI Investments and L2, creditors of Quantum Materials, demanded that the transfer agent, Empire
Stock Transfer, transfer huge amounts of stock as collateral for loans.
Quantum Materials
sued Empire to prevent this transfer, first winning a Temporary Restraining Order, then a Temporary Injunction, and finally, after
an appeal to the 3rd Court of Appeals in Austin, an appellate victory.
Before that appellate
victory and before the Injunction trial, K&L Gates entered an appearance for SBI Investments and L2, even
though they were still under contract with Quantum Materials as intervenors. Quantum Materials objected and raised objections
to their firm, entering an appearance against them. K&L Gates forced substantial research, and briefs
to be filed before withdrawing before the Temporary Injunction trial. (see TRO, TI order, appellate opinion.)
Either K&L Gates shared
all information with their “new” client, to the disadvantage of their “old” client, a duty under full disclosure,
or they didn’t share. Gates claimed that the contract with Quantum Materials waived all conflicts.
Following up on
the actions begun by Gates on behalf of SBI Investments and L2, the suit by Gates against Quantum Materials
was dismissed in Texas, and another law firm sued Quantum Materials in both Florida and Kansas. In Florida, the case
was ultimately dismissed, and legal fees were ordered to be paid to Quantum Materials. Much of the Kansas case
has been dismissed, but the balance is set to be tried in Kansas in October. (see the report on Kansas case.)
Ultimately, Quantum
Materials sued K&L Gates for fiduciary violations and Deceptive Trade Practices and other claims (see suit),
and Gates filed a counterclaim for its $300,000 in alleged fees. Gates filed an action to dismiss the case,
called a “SLAPP” action, and after a hearing on the merits in Hays county, lost. Gates then appealed
to the 3rd court of appeals in Austin, and after briefing and oral argument, again lost. Gates has now appealed
its most recent defeat to the Texas Supreme Court.
NOTE
16 — TRANSACTIONS WITH AFFILIATED PARTIES
At
June 30, 2019 and 2018, the Company had accrued salaries payable to executives and members of the board of directors, in the amount
of $738,219 and $568,575, respectively.
During
the year ended June 30, 2019, 11,000,000 shares of common stock were granted to the CEO, with a total value of $400,000. At June
30, 2019, 5,000,000 of these shares, valued at $100,000, were issuable, and not paid.
During
the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds
of $200,000. This transaction is described in more detail in Note 5 under the heading C) April – June, August, October and
November 2016 Convertible Debentures.
NOTE
17 - SUBSEQUENT EVENTS
Debentures
Issues
During
July 2019, the company issued two convertible debentures for $175,000 with a one-year term at 10% annual interest accompanied
by warrants to purchase 700,000 common shares at fair market value with a five-year term.
During
November 2019, the company issued five convertible debentures for $175,000 with a one-year term at 8% annual interest accompanied
by warrants to purchase 1,309,665 common shares at fair market value with a five-year term.
During
the three months ended March 31, 2020, the company issued five convertible debentures for $ 2,145,000 with a one-year to
two-year term at 8% annual interest accompanied by warrants to purchase 1,838,964 common shares at fair market value with a
five-year term.
During the three months ended June 30,
2020, under the Small Business Administration (“SBA”), the Company received proceeds the Paycheck Protection Program
(“PPP”) loan. These loans are forgiven if used for payroll, payroll benefits, including health insurance and retirement
plans, as well as certain rent payments, leases, and utility payments, which are limited to 40% of the loan proceeds, all of which
if paid within either 8 weeks or 24 weeks of the receipt of the loan proceeds. At the time of this filing, we have been funded
for $147,300 in loans. At the time of this filing, we anticipate having a significant amount of this loan forgiven, however the
forgiveness application process is not yet complete. If a portion of these loans are not forgiven, the unqualified portion is
to be repaid over 5 years, accruing interest at 1% per annum.
During
the three months ended June 30, 2020, the company issued five convertible debentures for $ 150,000 with a one-year term at 8%
annual interest accompanied by warrants to purchase 3,750,000 common shares at fair market value with a five-year
term
During
the three months ended September 30, 2020, the company issued seven convertible debentures for $525,000 with a one-year term at
8% annual interest accompanied by warrants to purchase 8,035,725 common shares at fair market value with a five-year term.
During
the three months ended December 31, 2020, the company issued three convertible debentures for $ 3,000,000 with a one-year
term at 8% annual interest which were subsequently converted into a single convertible note payable in January 2021 as part
of the Pasaca Capital investment transaction.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
February 2020, the company entered into a marketing consulting and distribution agreement with QMVT Vertical Markets, LLC to assist
in building a marketing and sales force to operate in parallel with Research and development at Quantum Materials Corp. To move
forward along with this effort, QMVT invested a total of $2 million in two convertible notes with a 2-year term at 8% interest
and convertible into 66 million shares of common stock.
On
January 26, 2021, Quantum Materials Corp. (the “Company”) and Pasaca Capital Inc. (“Pasaca”) entered into
a Securities Purchase and Financing Agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement,
at the first closing, Pasaca will convert three previously issued promissory notes made by the Company payable to Pasaca and loan
to the Company an additional $1,500,000 pursuant to a certain Secured Convertible Promissory Note (the “Convertible Note”)
made by the Company payable to Pasaca in the principal amount of $4,500,000 (the “Senior Note”). The Senior Note is
convertible into 154,228,625 shares of the Company’s common stock (the “Note Shares”). At the second closing,
Pasaca will purchase common stock of the Company (“Common Stock”) in an amount such that, after such purchase and
the conversion of the Senior Note into the Note Shares, Pasaca will own fifty-one percent (51.0%) of the fully diluted common
stock of the Company. The purchase price for the Common Stock to be sold in the second closing is $10,500,000. Pasaca will also
have the right to appoint three members to the Company’s Board of Directors. Both the first and second closing are subject
to numerous contingencies, as set forth in the Purchase Agreement.
Also
as set forth on January 26, 2021, the Company and Pasaca entered into a Registration Rights Agreement (the “Registration
Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, holders of twenty percent of the total shares
of Note Shares and Common Stock issued pursuant to the Purchase Agreement (the “Registrable Shares”) shall have the
right to require the Company to register at least thirty percent of such shares for sale on Form S-1 of Form S-3 under the Securities
Act of 1933, as amended (the “33 Act”). In addition, holders of ten percent of the Registrable Securities shall have
the right to require the Company to register such shares for sale on Form S-3 under the 33 Act. The Registration Rights Agreement
also provides for piggy-back registration rights. Pursuant to the Registration Rights Agreement, should the Company determine
to issue new equity securities of the Company, or securities convertible into equity securities of the Company, it must offer
such new securities to Pasaca and/or its assigns.
Also,
on January 26, 2021, the Company and Pasaca entered into a Distribution
Agreement (the “Distribution Agreement”). Pursuant to the terms of the Distribution Agreement, the Company appointed
Pasaca to act as an independent distributor to resell and distribute the Company’s Quantum Dots and QMC HealthID products.
Under the Distribution Agreement, Pasaca guaranteed that the Company would receive cumulative gross royalties and/or gross sales,
licensing or other revenues under the Distribution Agreement of no less than $15,000,000, over the period including 2020 and continuing
until twelve months after the Company has completed development of a functioning product integrating the QMC HealthID IP and Innova
Medical Group’s products. Pasaca has the right to extend the revenue period by up to twenty-four months upon payment of
advance royalties. At the date of this report, we have drawn $7,250,000 in advance draws, and these accrued interest at 8%
until the date of conversion.
Common
Share issuances
On
August 6, 2019, the Company purchased the distributed ledger technology assets of Capstan Platform, Inc. for $650,000 payable
in common shares. The asset purchase is considered a purchase of intangible assets under development. The company issued 9,718,182
common shares during August 2019 and an additional 3,527,337 common shares were issued during March 2021 in connection with this
asset purchase and 6,095,535 remain issuable at the date of this filing.
In
August 2019, the company converted a past due $100,000 debenture plus $25,778 of interest into 1,253,751 shares of common stock.
The Company also issued 11,531,250 common shares on four debentures in exchange for term extensions and interest. Also, subsequent
to June 30, 2019, the company issued 68,233,517 shares related to the conversion of ten outstanding debentures totaling $630,000
in principal and $320,000 interest common shares.
During
the first three month of the 2020 fiscal year the company issued 1,119,856 common shares for legal fees, 8,948,916 in exchange
for accounting and technology consulting services and 5,000,000 shares were awarded to the CEO as a performance bonus by the Board
of Directors.
During
the first three months of calendar year 2021, the company issued 3,333,333 shares in due from a subscription agreement entered
into during 2019, as well as 2,133,333 in exchange for legal fees payable and 2,081,017 shares in exchange for exercise of warrants.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(b)
Financial Statement Schedules: