NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 — ORGANIZATION AND 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 our competitors, rendering our technology uncompetitive or obsolete.
Going
Concern
The Company recorded losses from continuing
operations in the current period presented and has a history of losses, working capital deficits and negative cash flows
from operating activities. 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.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Revenue
Recognition:
The Company recognizes revenue from the sale of products and services in accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements.”
The
Company recognizes revenue when product has been delivered and risk of loss has passed to the customer, collection of the resulting
receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment
of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after normal payment terms.
If it is determined that the fee is not fixed or determinable, the Company recognizes revenue at the time the fee becomes due,
provided that all other revenue recognition criteria have been met. Sales arrangements may contain customer-specific acceptance
requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service
and is recognized upon receipt of customer acceptance.
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 its carrying value. There were
no impairment charges in the consolidated statements of operations during the years ended June 30, 2017 and 2016.
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. Accumulated amortization was $86,555
and $15,203 at June 30, 2017 and 2016, respectively. Amortization expense for the years ended June 30, 2017 and 2016 was $88,956
and $15,203 respectively. Amortization expense is projected to be $58,990 for the twelve months ended June 30, 2018.
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.
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 of 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.
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.
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 expense was $1,006,214 and $479,908 for the years ended June 30, 2017 and 2016, respectively.
Reclassifications
: Certain
amounts in the June 30, 2016 consolidated financial statements have been reclassified to conform to the classifications in the
June 30, 2017 consolidated financial statements.
NOTE 3 — PREPAID EXPENSES
Prepaid expenses consist of the following:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid consulting fees
|
|
$
|
1,225,463
|
|
|
$
|
102,100
|
|
Other prepaid expenses
|
|
|
29,460
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses
|
|
$
|
1,254,923
|
|
|
$
|
102,100
|
|
NOTE
4 — PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
1,625
|
|
|
$
|
1,625
|
|
Computers
and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery
and equipment
|
|
|
956,655
|
|
|
|
911,744
|
|
|
|
|
969,727
|
|
|
|
924,816
|
|
Less:
accumulated depreciation
|
|
|
246,491
|
|
|
|
150,142
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
723,236
|
|
|
$
|
774,674
|
|
Depreciation
expense for the years ended June 30, 2017 and 2016 was $96,349 and $86,527, respectively.
NOTE
5 — LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
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
|
|
|
113,804
|
|
|
|
75,256
|
|
|
|
|
|
|
|
|
|
|
Total
licenses and patents, net
|
|
$
|
78,939
|
|
|
$
|
117,487
|
|
Amortization
expense for the years ended June 30, 2017 and 2016 was $38,548 and $38,549, respectively. Amortization expense is
projected to be $38,549, $35,799 and $4,591 for the twelve months ended June 30, 2018 through 2020, respectively, and $0
thereafter.
NOTE
6 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company follows Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2011-04
“Fair Value
Measurement”
as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework
for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value measurements.
This
guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly
related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
Level
3 – Inputs that are both significant to the fair value measurement and unobservable.
The
reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety
of factors and assumptions. Accordingly, certain fair values may not represent actual values of the financial instruments that
could have been realized as of June 30, 2017 and 2016 or that will be realized in the future and do not include expenses that
could be incurred in an actual sale or settlement.
The
carrying amounts of cash and cash equivalents, accounts payable and current debt approximate their fair value due to the short
maturity of those instruments.
Convertible
Debentures
The
Company measured the estimated fair value of the convertible debentures using significant other observable inputs, representative
of a Level 2 fair value measurement, including the interest and conversion rates for the instruments. The following table sets
forth the fair value of the Company’s convertible debentures as of June 30, 2017 and 2016:
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Convertible
debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
24,721
|
|
|
$
|
25,050
|
|
|
$
|
21,710
|
|
Convertible
debentures issued in January 2015
|
|
$
|
500,000
|
|
|
$
|
916,667
|
|
|
$
|
500,000
|
|
|
$
|
1,083,333
|
|
Convertible
debentures issued in April - June 2016
|
|
$
|
1,330,000
|
|
|
$
|
1,277,403
|
|
|
$
|
1,565,000
|
|
|
$
|
1,695,417
|
|
Convertible
debenture issued in August 2016
|
|
$
|
200,000
|
|
|
$
|
197,815
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in November 2016
|
|
$
|
200,000
|
|
|
$
|
191,795
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debentures issued in January - March 2017
|
|
$
|
260,000
|
|
|
$
|
240,718
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in February 2017
|
|
$
|
100,000
|
|
|
$
|
103,992
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in March 2017
|
|
$
|
150,000
|
|
|
$
|
152,352
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
promissory notes issued in March 2017
|
|
$
|
541,850
|
|
|
$
|
549,466
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
promissory notes issued in May 2017
|
|
$
|
213,650
|
|
|
$
|
215,158
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in June 2017
|
|
$
|
100,000
|
|
|
$
|
100,827
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other
than described above.
NOTE
7 — CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
25,050
|
|
Convertible debentures issued in January 2015
|
|
|
500,000
|
|
|
|
500,000
|
|
Convertible debentures issued in April - June 2016
|
|
|
1,565,000
|
|
|
|
1,565,000
|
|
Convertible debenture issued in August 2016
|
|
|
200,000
|
|
|
|
-
|
|
Convertible promissory note issued in September 2016
|
|
|
100,000
|
|
|
|
-
|
|
Convertible debenture issued in October 2016
|
|
|
50,000
|
|
|
|
-
|
|
Convertible debenture issued in November 2016
|
|
|
200,000
|
|
|
|
-
|
|
Convertible debentures issued in January - March 2017
|
|
|
260,000
|
|
|
|
-
|
|
Convertible debenture issued in February 2017
|
|
|
100,000
|
|
|
|
-
|
|
Convertible debenture issued in March 2017
|
|
|
150,000
|
|
|
|
-
|
|
Convertible promissory notes issued in March 2017
|
|
|
541,850
|
|
|
|
-
|
|
Convertible promissory notes issued in May 2017
|
|
|
233,150
|
|
|
|
-
|
|
Convertible debenture issued in June 2017
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
4,025,050
|
|
|
|
2,090,050
|
|
Less: amount converted to shares
|
|
|
385,000
|
|
|
|
-
|
|
Total convertible debentures outstanding
|
|
|
3,640,050
|
|
|
|
2,090,050
|
|
Less: unamortized discount
|
|
|
490,448
|
|
|
|
527,350
|
|
Less: debt issuance costs
|
|
|
78,490
|
|
|
|
115,342
|
|
|
|
|
3,071,112
|
|
|
|
1,447,358
|
|
Less: current portion
|
|
|
2,511,829
|
|
|
|
407,702
|
|
|
|
|
|
|
|
|
|
|
Total convertible debentures, net of current portion
|
|
$
|
559,283
|
|
|
$
|
1,039,656
|
|
Future
maturities of convertible debentures for each of the next five years and thereafter are as follows:
Year
Ending June 30,
|
|
Amount
|
|
2018
|
|
$
|
2,955,000
|
|
2019
|
|
|
660,000
|
|
2020
|
|
|
25,050
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
3,640,050
|
|
September
2014 Convertible Debenture
Between
September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050
in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”).
The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest
at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right
of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date,
and will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years.
Interest
expense for the years ended June 30, 2017 and 2016 was $1,524 and $1,528, respectively.
As
of June 30, 2017, $25,050 of principal was outstanding.
January
2015 Convertible Debenture
On January 15, 2015, the Company entered into
Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of two years maturing on
January 15, 2017 and bear interest at the rate of 8% per annum. The maturity date was extended to December 15, 2018 in an extension
agreement dated January 24, 2018. The debentures are pre-payable by the Company at any time without penalty. The Debenture
Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.06 per
share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January
15, 2017. The debt is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors
to have the right to appoint one member to the Company’s Board of Directors in the event that any one of the aforementioned
debentures are converted into common stock of the Company. On October 10, 2016, the 6,250,000 warrants were converted into common
stock for total proceeds of $375,000.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $92,298 and
$173,914, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 was $40,000 and $40,110, respectively.
As of June 30,
2017, $500,000 of principal was outstanding and no payments have been made to the date of this report.
April
– June, August, October and November 2016 Convertible Debentures
During
the fourth quarter of the year ended June 30, 2016, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated
and fourteen non-affiliated parties. In August 2016, the Company sold 200 additional Units for total proceeds of $200,000. In
October and November 2016, the Company sold 50 and 200, respectively, additional units for total proceeds of $50,000 and $200,000,
respectively. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant
to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a
purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at
face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible
into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including
(a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the
Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends
payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet
adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible
into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding
Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of
existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company
believes that is has control over whether or not the anti-dilution feature will be exercised. The Company is able to decide on
which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution
strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations
or consolidations, reclassifications, exchanges, mergers, and reorganizations.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $323,894 and
$51,435, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2017 and 2016 of $64,775 and $513,941, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $144,878 and $25,849, respectively.
During
the years ended June 30, 2017, $285,000 of principal was converted into 2,375,000 shares of common stock.
As
of June 30, 2017, $1,730,000 of principal was outstanding.
September
2016 Convertible Promissory Note
In
September 2016, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for 200,000 unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal
amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through September 15,
2019. The promissory note has a term of eight months maturing on May 15, 2017 and stipulates a one-time interest charge of eight
percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any
time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a
conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall
include on the next registration statement it files with the SEC all shares issuable upon conversion of the note. In March 2017,
the note and accrued interest were converted into 833,333 and 66,667 shares of common stock, respectively.
In accounting for the convertible promissory
note, the Company allocated the fair value of the common stock and warrants to the proceeds received in the amount of $29,522,
recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The
Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $29,522 and $0, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2017 and 2016 of $29,523 and $0, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $8,000 and $0, respectively.
As
of June 30, 2017, $0 of principal was outstanding.
January
– March 2017 Convertible Debentures
During
the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated
parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase
4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price
of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have
a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered
and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions,
combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders
of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings
or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s
issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration
per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers,
directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.
In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether or
not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus
the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise
price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges,
mergers, and reorganizations.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $15,656 and
$0, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2017 and 2016 of $62,400 and $0, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $8,529 and $0, respectively.
As
of June 30, 2017, $260,000 of principal was outstanding.
February
2017 Convertible Promissory Note
In
March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000
unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal amount of
$100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through February 1, 2020. The
promissory note has a term of eight months maturing on October 1, 2017 and stipulates a one-time interest charge of eight percent
(8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without
penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price
of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the
next registration statement it files with the SEC all shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds
received in the amount of $24,733, recorded as debt discount and is amortized using the effective interest rate method over the
life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and
2016 of $15,721 and $0, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $8,000 and $0, respectively.
As of June 30, 2017, $100,000 of principal was outstanding. In August 2017, the Note
Holder converted $100,000 of principal and $8,000 of accrued interest into 833,333 and 66,667 shares of common stock, respectively
.
March
2017 Convertible Debenture
In
March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $150,000. The Note Holder received 375,000 common stock warrants exercisable
at $0.12 per share through March 28, 2020. The promissory note has a term of eight months maturing on November 28, 2017 and stipulates
a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $77,248, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of
$38,111 and $0, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2017 and 2016 of $72,752 and $0, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $12,000 and $0, respectively.
In September
2017 the debenture was converted in full.
March
2017 Convertible Promissory Notes
In
March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital,
LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2
received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each
subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the
total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid
of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective
tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum.
The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered
and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. The Company also recorded original issue discount (“OID”) of $51,350 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, 2017 and 2016 of $52,764 and $0, respectively.
Interest
expense on the promissory notes for the years ended June 30, 2017 and 2016 of $5,171 and $0, respectively.
In
March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them
to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed
to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form
of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory
notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined
in the notes.
Interest
expense on the commitment fees for the years ended June 30, 2017 and 2016 of $4,247 and $0, respectively.
As of June 30,
2017, $541,850 of principal was outstanding. On October 2, 2017 the Company paid $339,000 and the balance was paid on November
3, 2017.
May
2017 Convertible Promissory Notes
In
May 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital,
LLC (“L2 Capital”) to obtain $213,650 in gross proceeds. In connection with the second funding tranche, SBI and L2
received 280,165 and 653,719 common stock warrants, respectively, exercisable at $0.13 per share through May 2, 2022. The promissory
notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are
not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of
Common Stock only if there is an Event of Default as defined in the notes.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $71,795, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. The Company also recorded original issue discount (“OID”) of $13,650 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, 2017 and 2016 of $23,693 and $0, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $2,065 and $0, respectively.
As of June 30,
2017, $213,650 of principal was outstanding. In October 2017 the Company paid a total of $213,650 leaving a $0 balance on these
loans as of the date of this report.
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 Maturity date of the
Note was extended to May 1, 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 $54,340, 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, 2017 and 2016 of
$8,907 and $0, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2017 and 2016 of $45,660 and $0, respectively.
Interest
expense for the years ended June 30, 2017 and 2016 of $8,000 and $0, respectively.
As of June 30,
2017, $100,000 of principal was outstanding. In April 2018 the maturity date was extended to May 1, 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. Amortization expense for the years ended June 30, 2017 and 2016
was $88,956 and $15,203 respectively.
NOTE
8 — NOTES PAYABLE
Promissory
Note
In June 2017, the Company issued a promissory
note secured by the Company’s CEO for $50,000 with interest of $5,000 due on repayment of the loan. Interest expense for
the years ended June 30, 2017 and 2016 was $197 and $0, respectively. As of June 30, 2017, $50,000 of principal was outstanding.
As of the date of this report, the balance was paid in full.
In
September 2016, the Company issued an unsecured promissory note for proceeds of $100,000. The note bears 0% interest and the Company
issued 416,667 common stock warrants exercisable at $0.15 per share through September 29, 2021. The note was due October 13, 2016
and was repaid on October 11, 2016.
In
accounting for the promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount
of $26,454, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, fourteen
days. The Company recognized accretion of debt discount expense for the years ended June 30, 2017 and 2016 of $26,454 and $0,
respectively.
As
of June 30, 2017, $0 of principal was outstanding. See Note 17 for additional information.
In
February 2016, the Company issued an unsecured promissory note for $150,000 to a private individual at an interest rate of 0.5%
per annum. The note was due May 5, 2016. Interest expense for the years ended June 30, 2017 and 2016 was $0 and $172, respectively.
On May 6, 2016, the note was paid in full.
Note
Payable – Insurance
In May 2017,
to finance an insurance premium, the Company issued a negotiable promissory note for $17,374 at an interest rate of 6.89% per
annum. The note is due in November 2017 and the outstanding balance was $12,738 at June 30, 2017. Interest expense for the years
ended June 30, 2017 and 2016 was $726 and $0, respectively. The Note was paid in full in November 2017
.
In
March 2016, to finance an insurance premium, the Company issued a negotiable promissory note for $20,024 at an interest rate of
4.87% per annum. Interest expense for the years ended June 30, 2017 and 2016 was $0 and $265, respectively. The note was due November
11, 2016 and was paid in full.
NOTE 9 — ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued professional fees
|
|
$
|
1,225,463
|
|
|
$
|
102,100
|
|
Other accrued expenses
|
|
|
29,460
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
1,254,923
|
|
|
$
|
102,100
|
|
NOTE
10 — EQUITY TRANSACTIONS
Common
Stock
During
the year ended June 30, 2017, the Company issued 875,000 shares of common stock for cash proceeds of $105,000. Additionally, investors
exercised options and warrants to purchase 10,000,000 shares of common stock for cash proceeds of $425,000. Included were cashless
exercises of 5,000,000 warrants that resulted in the issuance of 2,500,000 shares of common stock.
During the year ended June 30, 2017, the Company
granted 19,270,237 shares of common stock to consultants at the fair market value of $1,804,262. This was recognized
as a prepaid asset and will be amortized to expense over the life of the agreement.
During the year ended June 30, 2017, the Company
issued 2,400,000 shares to lenders as commitment fees at the fair market value of $235,500, of which $157,500
was recognized as general and administrative expense and $78,000 was recognized as a prepaid asset and will be amortized
to expense over the life of the agreement.
During
the year ended June 30, 2017, holders of convertible notes elected to convert debt of $385,000 into 3,208,334 shares of common
stock.
During
the year ended June 30, 2017, the Company issued 1,182,284 shares of common stock to certain lenders, in exchange for interest
due, in the amount of $121,929.
During the year ended June 30, 2017, the Company
issued 2,650,000 shares in connection with the issuance of the certain promissory notes and convertible debentures in the amount
of $567,123.
During the year ended June 30, 2017, the Company
issued 4,000,000 common shares as stock based compensation in amount of $1,438,570.
During
the year ended June 30, 2017, the Company cancelled 194,059 common shares.
During
the year ended June 30, 2016, the Company issued 1,000,000 shares of common stock for cash proceeds of $100,000. Additionally,
investors exercised options and warrants to purchase 13,454,669 shares of common stock for cash proceeds of $385,500 and forgiveness
of a liability of the Company of $39,178. Included were cashless exercises of 3,325,000 options and 8,217,634 warrants that resulted
in the issuance of 2,146,629 and 4,056,612 shares of common stock, respectively.
During
the year ended June 30, 2016, the Company granted 2,800,000 shares of common stock to consultants at the fair market value of
$280,000. This was recognized as a prepaid asset and will be amortized to expense over the life of the agreement. Additionally,
the Company granted 100,000 shares of common stock to consultants at the fair market value of $10,000 and was recognized as general
and administrative expense.
During
the year ended June 30, 2016, the Company cancelled 638,300 shares of common stock. See Note 17.
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the years ended June 30, 2017 and 2016 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Contractual
|
|
|
Grant
Date
|
|
|
|
Price
|
|
|
Warrants
|
|
|
Term
in Years
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2015
|
|
$
|
0.09
|
|
|
|
48,284,833
|
|
|
|
|
|
|
$
|
0.13
|
|
Expired
|
|
|
0.08
|
|
|
|
(10,706,642
|
)
|
|
|
|
|
|
|
0.09
|
|
Granted
|
|
|
0.10
|
|
|
|
17,572,843
|
|
|
|
|
|
|
|
0.13
|
|
Exercised
|
|
|
0.06
|
|
|
|
(15,469,062
|
)
|
|
|
|
|
|
|
0.10
|
|
Cancelled
|
|
|
0.24
|
|
|
|
(416,667
|
)
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2016
|
|
$
|
0.11
|
|
|
|
39,262,305
|
|
|
|
|
|
|
$
|
0.15
|
|
Expired
|
|
|
0.18
|
|
|
|
(4,135,100
|
)
|
|
|
|
|
|
|
0.11
|
|
Granted
|
|
|
0.15
|
|
|
|
9,430,983
|
|
|
|
|
|
|
|
0.11
|
|
Exercised
|
|
|
0.06
|
|
|
|
(12,500,000
|
)
|
|
|
|
|
|
|
0.15
|
|
Cancelled
|
|
|
0.13
|
|
|
|
(2,104,637
|
)
|
|
|
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2017
|
|
$
|
0.13
|
|
|
|
29,953,551
|
|
|
|
3.30
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable as of June 30, 2017
|
|
$
|
0.13
|
|
|
|
29,953,551
|
|
|
|
3.30
|
|
|
$
|
0.14
|
|
During
the years ended June 30, 2017 and 2016, 5,000,000 and 8,217,634 warrants were exercised in cashless transactions that resulted
in the issuance of 2,500,000 and 4,056,612 shares of common stock, respectively.
Outstanding
warrants at June 30, 2017 expire during the period October 2017 to May 2022 and have exercise prices ranging from
$0.06 to $0.30.
The following assumptions were used for
the years ended June 30, 2017 and 2016:
|
|
Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
136.25
|
%
|
|
|
138.52
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rates
|
|
|
1.62
|
%
|
|
|
1.10
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
1.0 to 5.0
|
|
Salaries
Converted to Equity
During
the year ended June 30, 2016, certain officers and employees converted accrued salaries of $409,667 into 6,827,778 warrants to
purchase the Company’s common stock. The warrants are exercisable at $0.06 per share for a period of two years. The fair
value of the stock warrants at the time of conversion was $821,979. The variance of $412,312 was recognized as stock-based compensation
in general and administrative expense.
There
were no salary conversions during the year ended June 30, 2017.
NOTE
11 — STOCK-BASED COMPENSATION
The
Company follows ASC 718
“Compensation — Stock Compensation”
for share-based payments which requires all
stock-based payments, including stock options, to be recognized as an operating expense over the vesting period, based on their
grant date fair values.
In
October 2009, the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock,
which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for
the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2017, 9,200,000
options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled. The balance outstanding
at June 30, 2017 was 8,400,000.
In
March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017,
the term of these options was extended for an additional five years.
In
January 2013, the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock,
which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013.
The
Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30,
2017, 72,653,473 options have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised
and 15,886,559 have been cancelled. The balance outstanding at June 30, 2017 was 53,441,914.
On
February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000
shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.
As of June 30, 2017, 4,000,000 options have been granted with a term of five years, and 1,625,000 have been cancelled. The balance
outstanding at June 30, 2017 was 2,375,000.
In
June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan. During the year
ended June 30, 2017, 3,000,000 options were cancelled.
During
the fourth quarter of the year ended June 30, 2017, 17,000,000 stock options, with a term of five years,
were granted outside of a stock option plan.
Incentive
Stock Options:
The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton
valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation
cost is recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated
forfeitures based on historical forfeiture rates, which were between 14% and 19% during the year ended June 30, 2017. As
the Company has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized,
if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There
is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.
The
following assumptions were used for the years ended June 30, 2017 and 2016:
|
|
Year
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
132.39
|
%
|
|
|
143.92
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free
interest rates
|
|
|
1.74
|
%
|
|
|
1.28
|
%
|
Expected
term (in years)
|
|
|
5.0
|
|
|
|
3.0
to 5.0
|
|
The
computation of expected volatility during the year ended June 30, 2017 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, 2017 and 2016 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Number
of
|
|
|
Remaining
|
|
|
Optioned
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Optioned
|
|
|
Contractual
|
|
|
Grant
Date
|
|
|
Intrinsic
|
|
|
|
Price
|
|
|
Shares
|
|
|
Term
in Years
|
|
|
Fair
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2015
|
|
$
|
0.07
|
|
|
|
67,737,748
|
|
|
|
|
|
|
$
|
0.10
|
|
|
$
|
8,357,574
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.14
|
|
|
|
16,250,000
|
|
|
|
|
|
|
|
0.13
|
|
|
|
|
|
Exercised
|
|
|
0.06
|
|
|
|
(3,325,000
|
)
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Cancelled
|
|
|
0.09
|
|
|
|
(5,287,500
|
)
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2016
|
|
$
|
0.08
|
|
|
|
75,375,248
|
|
|
|
|
|
|
$
|
0.11
|
|
|
$
|
3,771,601
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.12
|
|
|
|
20,700,000
|
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
0.12
|
|
|
|
(8,358,334
|
)
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2017
|
|
$
|
0.09
|
|
|
|
87,716,914
|
|
|
|
4.91
|
|
|
$
|
0.11
|
|
|
$
|
2,073,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable as of June 30, 2017
|
|
$
|
0.08
|
|
|
|
68,620,080
|
|
|
|
4.97
|
|
|
$
|
0.11
|
|
|
$
|
2,330,647
|
|
Outstanding
options at June 30, 2017 expire during the period January 2018 to June 2026 and have exercise prices ranging from $0.05
to $0.17.
Compensation
expense associated with stock options of $835,851 and $1,566,630 for the years ended June 30, 2017 and 2016, respectively,
was included in general and administrative expenses in the consolidated statements of operations. At June 30, 2017, the Company
had 19,096,834 shares of non-vested stock option awards. The total cost of non-vested stock option awards which the Company had
not yet recognized was $1,622,606 at June 30, 2017. Such amounts are expected to be recognized over a period of 2 years.
Restricted
Stock:
To encourage retention and performance, the Company granted certain employees restricted shares of common stock with
a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s
length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization,
as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock
awards for the years ended June 30, 2017 and 2016 is presented below:
|
|
Number
of
|
|
|
|
|
|
|
Nonvested,
|
|
|
Weighted
|
|
|
|
Nonissued
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant
Date
|
|
|
|
Share
Awards
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested
restricted shares outstanding at June 30, 2015
|
|
|
1,500,000
|
|
|
$
|
0.42
|
|
Granted
|
|
|
250,000
|
|
|
|
0.14
|
|
Vested
|
|
|
(750,000
|
)
|
|
|
0.33
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested,
nonissued restricted shares outstanding at June 30, 2016
|
|
|
1,000,000
|
|
|
|
0.42
|
|
Granted
|
|
|
4,500,000
|
|
|
|
0.10
|
|
Vested
|
|
|
(4,000,000
|
)
|
|
|
0.14
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested,
nonissued restricted shares outstanding at June 30, 2017
|
|
|
1,500,000
|
|
|
$
|
0.21
|
|
Compensation
expense associated with restricted stock of $602,719 and $245,575 for the years ended June 30, 2017 and 2016, respectively,
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 $105,222 at June 30, 2017. This amount is expected to be recognized
over a period of 0.75 years.
NOTE
12 — 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:
|
|
Year
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net
loss
|
|
$
|
(7,659,853
|
)
|
|
$
|
(6,105,950
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
342,688,527
|
|
|
|
318,325,221
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
For
the years ended June 30, 2017 and 2016, 29,953,551 and 39,262,305 stock warrants, respectively, were excluded from diluted
earnings per share because they are considered anti-dilutive.
For
the years ended June 30, 2017 and 2016, 87,716,914 and 75,375,248 stock options, respectively, were excluded from diluted
earnings per share because they are considered anti-dilutive.
NOTE
13 — REVENUE
During
the years ended June 30, 2017 and 2016, the Company recognized revenue of $33,250 and 240,835, respectively.
The
revenue recognized during the year ended June 30, 2017 was a result of the Company providing Quantum Dot samples to certain customers
for testing and evaluation.
During
the year ended June 30, 2016, the Company recognized revenue of $240,835. Of this amount, $225,000 is a result of the Company
entering into a funded product development agreement (the “Agreement”) with leading global film manufacturer, Nitto
Denko Corporation. The $225,000 represents full payment pursuant to the Agreement. The Company worked with Nitto Denko Corporation
to develop quantum dot material, however the Agreement did not require specific deliverables by the Company.
NOTE
14 — COMMITMENTS AND CONTINGENCIES
Agreement
with Rice University
On August 20, 2008, Solterra entered into
a License Agreement with Rice University, which was amended and restated on September 26, 2011; also, on September 26,
2011, Solterra and QMC entered into several revised License Agreement with Rice (collectively the “Rice License Agreements”).
On August 21, 2013, QMC and Solterra each entered into amended license agreements with Rice University. QMC and Solterra entered
into amended license agreements with Rice University on March 15 and 22, 2017 and October 2017.
Prior
to June 30, 2017, the Company and Rice agreed to amend the prior licensing agreement to provide that Solterra will pay a non-refundable
minimum annual royalty of $10,000 beginning on January 1, 2019 and each year thereafter until the first sale of Rice Licensed
Product, at which time Solterra shall pay to Rice a minimum annual royalty payment of $50,000,00 following the first sale of the
licensed product.
Agreement
with University of Arizona
The
Company entered into a licensing agreement with the University of Arizona in July, 2009 and paid license fees of 5,000 and $25,000
in 2012 and 2013. Subsequently, the initial license agreement was amended several times to reflect revised terms. After several
oral agreements extending the term of the license, the Company memorialized all of the prior license amendments into a revised
license agreement in November, 2017 which provides for a minimum annual royalty payment of $50,000 on January 31, 2019, $125,000
on June 30, 2019, and $200,000 each June 30 every year thereafter.
Agreement
with Texas State University
The
Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain
office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month
and can be terminated with 30-days written notice of either party.
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, 2017 and 2016 was $98,410 and $50,088, respectively.
NOTE
15 — 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 Rice University and 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
16 — INCOME TAXES
The
components of income tax expense/(benefit) were as follows:
|
|
Year
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Income
Tax Expense/(Benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation of the expected U.S. tax expense/(benefit) to income taxes is as follows:
|
|
Year
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected
tax expense / (benefit) at U.S. statutory rate
|
|
$
|
(2,604,350
|
)
|
|
$
|
(2,076,023
|
)
|
Meals
and entertainment
|
|
|
2,804
|
|
|
|
3,316
|
|
Derivatives
|
|
|
-
|
|
|
|
-
|
|
Beneficial
conversion
|
|
|
93,537
|
|
|
|
174,740
|
|
Prior
year NOL true-up adjustment
|
|
|
-
|
|
|
|
(353,215
|
)
|
Stock
option shortfall
|
|
|
-
|
|
|
|
8,900
|
|
Prior
year warrant valuation adjustment
|
|
|
-
|
|
|
|
255,918
|
|
Change
in valuation allowance
|
|
|
2,508,009
|
|
|
|
1,986,364
|
|
Total
Income Tax Expense/(Benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Net
operating losses - federal
|
|
$
|
10,457,753
|
|
|
$
|
8,688,918
|
|
Stock-based
compensation
|
|
|
2,425,447
|
|
|
|
1,882,874
|
|
Depreciation
of property, plant and equipment
|
|
|
(80,993
|
)
|
|
|
(54,320
|
)
|
Amortization
of licenses and patents
|
|
|
6,699
|
|
|
|
4,206
|
|
Warrant
Expense
|
|
|
(158,934
|
)
|
|
|
(179,299
|
)
|
Accrued
Expenses
|
|
|
36,774
|
|
|
|
29,180
|
|
Valuation
allowance
|
|
|
(12,686,746
|
)
|
|
|
(10,371,559
|
)
|
Net
deferred tax assets/(liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
As of June 30, 2017, the Company had approximately
$30,758,097 in U.S. net operating loss (“NOL”) carryforwards that expire beginning in 2029. Under Section
382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership
change” 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 of $750,000 that will limit the use of its NOLs in the future. 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
Company files income tax returns in the United States and is subject to examination by income tax authorities for years 2008 to
present.
NOTE
17 — SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Year
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
20,781
|
|
|
$
|
40,447
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Year
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Conversion
of debentures into shares of common stock
|
|
$
|
385,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Allocated
value of common stock and warrants issued with convertible debentures
|
|
$
|
567,123
|
|
|
$
|
486,487
|
|
|
|
|
|
|
|
|
|
|
Stock
warrants issued for conversion of accrued salaries
|
|
$
|
-
|
|
|
$
|
409,667
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense paid in shares of common stock
|
|
$
|
1,809,262
|
|
|
$
|
61,682
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense financed with debt
|
|
$
|
210,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares
|
|
$
|
194
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing
of prepaid insurance
|
|
$
|
2,645
|
|
|
$
|
10,093
|
|
|
|
|
|
|
|
|
|
|
Stock
warrants issued as debt issuance costs
|
|
$
|
-
|
|
|
$
|
73,044
|
|
NOTE
18 — LITIGATION
The
Company was served in Hays County, Texas in a compliant 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 $95,000 plus interest and other charges which has been accrued at June 30, 2017. The case was reheard in late March 2018
and a 45 day continuance was decided resulting in an April 30, 2018 rehearing.
CAUSE
NUMBER 17-2033; Hays County, Texas
Two
lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked Quantum Materials’ transfer agent, Empire Stock Transfer,
Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements Quantum Materials 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. 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 Quantum Materials. Quantum filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.
New
counsel for SBI and L2, Cleveland Terrazas PLLC, brought suit against Quantum 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 Quantum’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 Quantum 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 claim 140% interest, attorney’s fees, 20 million shares of stock, and damages. Quantum maintains
all loans have been paid timely.
The
Company denies all the above mentioned allegations and will vigorously defend all claims.
CAUSE
NUMBER: 17CV06093; Johnson County, Kansas
The
Kansas lawsuit 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 Quantum; the second claim is for breach of contract of the first L2 promissory note against Quantum; the final claim is
for breach of contract regarding the second L2 promissory note against both Quantum and Squires, individually.
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 largely mirrors the suit in Kansas; defaults are alleged as follows:
On
July 6, 2017, Quantum 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 Quantum, the Revised Report materially and adversely affects SBI’s
rights with respect to the notes. This restatement of financial statements constituted a breach of each of the notes. Furthermore,
because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach
of every other note.
On
July 27, 2017, Quantum’s auditor resigned, and replaced its auditor without seeking or obtaining the consent of SBI. This
replacement of Quantum’s auditor constituted an alleged breach of the SBI notes. Because each note contains a cross-default
clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.
The
Company denies all of the above mentioned allegations and will vigorously defend all claims.
NOTE
19 — TRANSACTIONS WITH AFFILIATED PARTIES
At June 30, 2017 and 2016, the Company
had accrued salaries payable to executives in the amount of $361,375 and $230,000, respectively.
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 6 under the heading April – June, August,
October and November 2016 Convertible Debentures.
In
September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing.
This transaction is described in more detail in Note 7 under the heading “Promissory Note”. The Company repaid
the loan on October 11, 2016.
During
the year ended June 30, 2016, the Company’s former CFO surrendered 638,300 shares of common stock and options to purchase
an additional 987,500 shares in exchange for the cancellation of indebtedness to the Company aggregating $79,000. As a result
of this surrender, the Company recorded a gain of $174,568 which is presented in the consolidated statements of operations as
Gain on Settlement.
During
the year ended June 30, 2016, the Company’s prior CFO and two of the Company’s directors invested $15,000, $10,000,
and $25,000 respectively in the convertible debentures issued under the heading April – June, August, October
and November 2016 Convertible Debentures as described in Note 6.
NOTE
20 — RECENTLY ISSUED ACCOUNTING STANDARDS
In
May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.
The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award
modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the
adoption of this guidance on its consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers
. The revenue recognition standard affects all entities that have contracts with customers, except
for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance
under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining
revenue recognition. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective
Date,
which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to
adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.
Early adoption of
this updated guidance is permitted as of the original effective date of December 31, 2016. The Company is in the process of evaluating
the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting.
This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement
of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption is permitted. The Company is in the process of evaluating the impact, if any, of the adoption of this
guidance on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
which updates guidance on accounting for leases. The update requires
that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to
current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction
now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments
in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with
early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for
leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when
adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated
financial statements.
In
November 2015, the FASB issued ASU 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes.
This ASU requires
entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. It thus simplifies
the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current
and noncurrent. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption is permitted. The Company has adopted this guidance effective for the year ended June 30, 2016.
In
August 2014, the FASB issued ASU No. 2014-15
Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
Under GAAP, continuation of a reporting entity
as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation
becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis
of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation
basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting.
Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about
the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared
under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose
information about the relevant conditions and events. The amendments in this update are effective for the annual period ending
after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company will
continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard.
The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers
. The revenue recognition standard affects all entities that have contracts with customers, except
for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance
under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining
revenue recognition. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective
Date,
which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to
adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.
Early adoption of
this updated guidance is permitted as of the original effective date of December 31, 2016. The Company is in the process of evaluating
the impact, if any, of the adoption of this guidance on its consolidated financial statements.
NOTE
21 - SUBSEQUENT EVENTS
Between July1, 2017 and April 12, 2018,
the Company entered into Convertible Debenture Agreements to obtain a total of $1,237,000 in gross proceeds from three non-affiliated
parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have various terms maturing
between May 1, 2018 and November 30, 2019. The Debentures bear interest at the rate of 8% 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 $0.12 per share at any date and will receive an equal number of warrants having a strike
price of $0.15 per share and a term of five years. Details of each debenture are below:
On July 20, 2017, the Company entered into
Convertible Debenture Agreements to obtain $100,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred
to as the “Debenture Holders”). The Debentures had an initial term of one year maturing on January 19, 2018 and bear
interest at the rate of 8% per annum. This note was converted under the terms of a settlement agreement dated 20 September 2017.The
maturity date was extended to May 1, 2018 in an extension agreement dated April 6, 2018. 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 $0.12 per share at any date. The Debenture Holders received 250,000 common stock warrants
exercisable at $0.15 per share through July 20, 2019.
On September 11, 2017, the Company entered
into Convertible Debenture Agreements to obtain $150,000 in gross proceeds from non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on March 11, 2018
and bear interest at the rate of 8% per annum. The maturity date was extended to May 1, 2018 in an extension agreement dated April
6, 2018. 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 $0.12 per share at any date. The Debenture Holders
received 250,000 common stock warrants exercisable at $0.15 per share through September 11,2019.
On September 26, 2017, the Company entered
into Convertible Promissory Note in the principal amount of $880,000 from non-affiliated parties (collectively hereinafter referred
to as the “Debenture Holders”). $450,000 was paid at closing. The Debentures has a maturity date of on April 26, 2018
and bear interest at the rate of 8% per annum. The Debenture Holders have 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 Debenture Holders received 250,000 common stock
warrants exercisable at $0.15 per share through September 11,2019. On November 2, 2017 an additional $225,000 was advanced
under this note.
On November 13, 2017, the Company entered
into Convertible Debenture Agreements to obtain $27,000 in gross proceeds from non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of two years maturing on November 13,
2019 and bear interest at the rate of 8% per annum. The Debenture Holders have 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 Debenture Holders received 112,482 common stock
warrants exercisable at $0.15 per share through November 13, 2022.
On November 7, 2017, the Company entered
into Convertible Debenture Agreements to obtain 100,000 in gross proceeds from non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of two years maturing on November 7, 2019
and bear interest at the rate of 8% per annum. The Debenture Holders have 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 Debenture Holders received 416,600 common stock
warrants exercisable at $0.15 per share through November 7, 2022.
On December 27, 2017, the Company entered
into Convertible Debenture Agreements to obtain $75,000 in gross proceeds from non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on June 30, 2018
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
$0.12 per share at any date. The Debenture Holders received 250,000 common stock warrants exercisable at $0.15 per share through
December 27,2019.
On February 8,2018, the Company entered
into Convertible Debenture Agreements to obtain $45,000 in gross proceeds from non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on August 8, 2018
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
$0.12 per share at any date. The Debenture Holders received 500,000 common stock warrants exercisable at $0.15 per share through
February 8, 2020.
On March 6,2018, the Company entered into
Convertible Debenture Agreements to obtain $30,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred
to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on September 6, 2018 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 $0.12 per
share at any date. The Debenture Holders received 500,000 common stock warrants exercisable at $0.15 per share through March 6,
2020.
On March 23,2018, the Company entered into Convertible Debenture Agreements to obtain $35,000 in gross
proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures
had an initial term of six months maturing on September 23, 2018 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 $0.12 per share at any date. The Debenture Holders received 500,000
common stock warrants exercisable at $0.15 per share through March 23, 2020.
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.
See
“Note 18” regarding pending litigation.
(b)
Financial Statement Schedules: