NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
General
The
accompanying consolidated financial statements include the accounts of Quantum Materials Corp. and its wholly owned subsidiary,
Solterra Renewable Technologies, Inc. (collectively referred to as the “Company”).
The
consolidated financial statements of the Company as of and for the nine months ended March 31, 2018 are unaudited and have been
prepared on the same basis as the audited consolidated financial statements as of and for the year ended June 30, 2017. The year-end
balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by
accounting principles generally accepted in the U.S. In the opinion of management, the accompanying unaudited financial information
includes all adjustments necessary for a fair presentation of the interim financial information. Operating results for the interim
periods are not necessarily indicative of the results of any subsequent periods. Certain information in the footnote disclosures
normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”) has been condensed or omitted for the interim periods presented under the United States Securities and Exchange
Commission (“SEC”) rules and regulations. As such, these interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report
on Form 10-K for the year ended June 30, 2017.
Nature
of Operations
The
Company is a nanotechnology company specializing in the design, development, production and supply of quantum dots, including
tetrapod quantum dots, a high-performance variant of quantum dots, and highly uniform nanoparticles, using its patented automated
continuous flow production process. Quantum dots and other nanoparticles are expected to be increasingly utilized in a range of
applications in the life sciences, television and display, solid state lighting, solar energy, battery, security ink, and sensor
sectors of the market. Key uncertainties and risks to the Company include, but are not limited to, if and how quickly various
industries adopt and fully embrace quantum dot technology and technological changes, including those developed by the Company’s
competitors, rendering the Company’s technology uncompetitive or obsolete.
Going
Concern
The Company recorded losses from continuing
operations in the current period presented and has a history of losses. As of March 31, 2018, the Company had a working capital
deficit of $4,413,426 and net cash used in operating activities was $(813,273) for the nine months ended March 31,
2018. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends,
obtain revenues from operations, raise additional capital, and/or obtain debt financing.
In
conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from
which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can
be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently
to continue as a going concern.
The
accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue
as a going concern.
Recent
Accounting Pronouncements
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 first quarter of fiscal year 2018, the Company had a triggering event related
to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,012,042 during the
nine months ended March 31, 2018.
QUANTUM
MATERIALS CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Pronouncements
Yet To Be Adopted
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. We will continue to evaluate this area and
expect to finalize our conclusions by the first quarter of fiscal 2019.
In
May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.
The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award
modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the
adoption of this guidance on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting.
This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement
of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption is permitted. The Company is in the process of evaluating the impact, if any, of the adoption of this
guidance on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
which updates guidance on accounting for leases. The update requires
that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to
current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction
now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments
in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with
early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for
leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when
adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated
financial statements.
QUANTUM
MATERIALS CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. 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
2 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
3,502
|
|
|
$
|
1,625
|
|
Computers
and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery
and equipment
|
|
|
956,655
|
|
|
|
956,655
|
|
|
|
|
971,604
|
|
|
|
969,727
|
|
Less:
accumulated depreciation
|
|
|
321,082
|
|
|
|
246,491
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
650,522
|
|
|
$
|
723,236
|
|
Depreciation
expense for the nine months ended March 31, 2018 and 2017 was $74,591 and $72,209, respectively.
QUANTUM
MATERIALS CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3 – LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
William
Marsh Rice University
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
University
of Arizona
|
|
|
15,000
|
|
|
|
15,000
|
|
Bayer
acquired patents
|
|
|
137,743
|
|
|
|
137,743
|
|
|
|
|
192,743
|
|
|
|
192,743
|
|
Less:
accumulated amortization
|
|
|
139,941
|
|
|
|
113,804
|
|
|
|
|
|
|
|
|
|
|
Total
licenses and patents, net
|
|
$
|
52,802
|
|
|
$
|
78,939
|
|
Amortization
expense for the nine months ended March 31, 2018 and 2017 $26,137 and $28,911, respectively.
NOTE
4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-04
“Fair Value Measurement”
as it relates to financial assets and financial liabilities, which defines fair value,
establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions
of this standard apply to other accounting pronouncements that require or permit fair value measurements.
This
guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly
related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
Level
3 – 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 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
As
of March 31, 2018, and June 30, 2017, 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 March 31, 2018, and June 30, 2017, the Company held no investments. The Company hired an independent
resource to value its derivative liability as follows:
Fair
Value Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2018
|
|
|
Quoted
Prices in Active Markets for Identical Liabilities
(Level 1)
|
|
|
Significant
Other Observable
Inputs (Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debentures
|
|
|
3,227,679
|
|
|
|
-
|
|
|
|
3,227,679
|
|
|
|
-
|
|
|
|
$
|
3,227,679
|
|
|
$
|
-
|
|
|
$
|
3,227,679
|
|
|
$
|
-
|
|
Level
Three Roll-forward
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
Balance June
30, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair
value of derivative liability reclassified from equity
|
|
|
514,969
|
|
|
|
514,969
|
|
Change
in fair value
|
|
|
(514,969
|
)
|
|
|
(514,969
|
)
|
Balance
March 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
Debentures
The
Company measured the estimated fair value of the convertible debentures using significant other observable inputs, representative
of a Level 2 fair value measurement, including the interest and conversion rates for the instruments. The following table sets
forth the fair value of the Company’s convertible debentures as of March 31, 2018, and June 30, 2017:
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Convertible
debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
26,961
|
|
|
$
|
25,050
|
|
|
$
|
24,721
|
|
Convertible
debentures issued in January 2015
|
|
$
|
500,000
|
|
|
$
|
486,021
|
|
|
$
|
500,000
|
|
|
$
|
916,667
|
|
Convertible
debentures issued in April - June 2016
|
|
$
|
1,075,000
|
|
|
$
|
1,112,879
|
|
|
$
|
1,330,000
|
|
|
$
|
1,277,403
|
|
Convertible
debenture issued in August 2016
|
|
$
|
200,000
|
|
|
$
|
218,716
|
|
|
$
|
200,000
|
|
|
$
|
197,815
|
|
Convertible
debenture issued in November 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
200,000
|
|
|
$
|
191,795
|
|
Convertible
debentures issued in January - March 2017
|
|
$
|
60,000
|
|
|
$
|
61,808
|
|
|
$
|
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
|
|
$
|
210,000
|
|
|
$
|
235,445
|
|
|
$
|
541,850
|
|
|
$
|
549,466
|
|
Convertible
promissory notes issued in May 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
213,650
|
|
|
$
|
215,158
|
|
Convertible
debenture issued in June 2017
|
|
$
|
100,000
|
|
|
$
|
106,647
|
|
|
$
|
100,000
|
|
|
$
|
100,827
|
|
Convertible
debenture issued in July 2017
|
|
$
|
100,000
|
|
|
$
|
106,647
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in September 2017
|
|
$
|
150,000
|
|
|
$
|
159,971
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in September 2017
|
|
$
|
450,000
|
|
|
$
|
480,889
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in November 2017
|
|
$
|
27,000
|
|
|
$
|
24,619
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in November 2017
|
|
$
|
225,000
|
|
|
$
|
240,444
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in December 2017
|
|
$
|
75,000
|
|
|
$
|
78,058
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debenture issued in February 2018
|
|
$
|
45,000
|
|
|
$
|
46,098
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible
debentures issued in March 2018
|
|
$
|
65,000
|
|
|
$
|
65,560
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company is not a party to any hedge arrangements or commodity swap agreement.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
NOTE
5 – CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
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
|
|
|
1,075,000
|
|
|
|
1,330,000
|
|
Convertible
debenture issued in August 2016
|
|
|
200,000
|
|
|
|
200,000
|
|
Convertible
debenture issued in November 2016
|
|
|
-
|
|
|
|
200,000
|
|
Convertible
debentures issued in January - March 2017
|
|
|
60,000
|
|
|
|
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
|
|
|
222,350
|
|
|
|
541,850
|
|
Convertible
promissory notes issued in May 2017
|
|
|
-
|
|
|
|
233,150
|
|
Convertible
debenture issued in June 2017
|
|
|
100,000
|
|
|
|
100,000
|
|
Convertible
debenture issued in July 2017
|
|
|
100,000
|
|
|
|
-
|
|
Convertible
debenture issued in September 2017
|
|
|
645,000
|
|
|
|
-
|
|
Convertible
debenture issued in November 2017
|
|
|
247,500
|
|
|
|
-
|
|
Convertible
debenture issued in November 2017
|
|
|
27,000
|
|
|
|
-
|
|
Convertible
debenture issued in December 2017
|
|
|
75,000
|
|
|
|
-
|
|
Convertible
debenture issued in February 2018
|
|
|
45,000
|
|
|
|
-
|
|
Convertible
debentures issued in March 2018
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
3,386,900
|
|
|
|
3,640,050
|
|
Less:
unamortized discount
|
|
|
159,221
|
|
|
|
490,448
|
|
Less:
debt issuance costs
|
|
|
-
|
|
|
|
78,490
|
|
|
|
|
3,227,679
|
|
|
|
3,071,112
|
|
Less:
current portion
|
|
|
3,180,742
|
|
|
|
2,511,829
|
|
|
|
|
|
|
|
|
|
|
Total
convertible debentures, net of current portion
|
|
$
|
46,937
|
|
|
$
|
559,283
|
|
September 2014 Convertible Debenture
Between
September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050
in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”).
The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest
at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right
of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and
will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. A total of $475,000
of the Debentures were converted into common shares in 2016 and $0 additional converted during the nine months ended March 31,
2018.
Interest
expense for the nine months ended March 31, 2018 and 2017 was $1,144 and $1,144, respectively
As
of March 31, 2018, $25,025 of principal was outstanding.
January 2015 Convertible Debenture
On
January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated
parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years
maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any
time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock
at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable
at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The
Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in
the event 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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 nine months ended March 31, 2018 and 2017 of $0 and
$92,298, respectively. Interest expense for the nine months ended March 31, 2018 and 2017 was $30,027 and $30,027, respectively.
As
of March 31, 2017, $500,000 of principal was outstanding.
April – June, August, October and November 2016 Convertible Debentures
During
the fourth quarter of the year ended June 30, 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 $0.013 per share in September 2017 as
a result of a triggering event.
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 nine months ended March 31, 2018, and 2017, of $220,602
and $235,697, respectively.
The Company recognized a beneficial conversion
expense for the nine months ended March 31, 2018, and 2017, of $1,012,042 and $64,775, respectively.
Interest
expense for the nine months ended March 31, 2018, and 2017, of $87,787 and $108,276, respectively.
During
the year ended June 30, 2017, $385,000 of principal was converted into 2,375,000 shares of common stock. An additional $300,000
was converted into 2,500,000 shares during the first quarter of 2018. As of March 31, 2018, $1,275,000 of principal was outstanding.
As of the date of this report, maturities totaling $825,000 of principal have been extended for one year until March and April
of 2019.
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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 nine months ended March 31, 2018 and 2017 of $52,954
and $6,985, respectively.
Interest
expense for the three months ended March 31, 2018 and 2017 of $10,078 and $3,343, respectively.
As
of March 31, 2018, $60,000 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 nine months ended March 31,
2018 and 2017 of $9,012 and $6,060, respectively.
There
was no interest expense recorded for the nine months ended March 31, 2018 was $8,000 and no interest expense was recognized during
2017.
As
of March 31, 2018, and June 30, 2017, $0 and $100,000 of principal was outstanding, respectively. 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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 nine months ended March 31, 2018 and
2017 of $39,137 and $3,407, respectively.
The
Company did not recognize an interest expense or a beneficial conversion expense for the nine months ended March 31, 2018 and
2016. In September 2017 the debenture was converted in full to common stock. At March 31, 2018, and June 30, 2017, the principal
balance remaining on this note was $0 and $150,000, respectively. The Company recognized 3.5 million common shares issuable and
$118,000 of imputed interest expense during September 2017 as a result of this debt settlement.
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 three months ended September 31, 2018 and 2017 of $43,661 and $0, respectively.
Interest
expense on the promissory notes for the nine months ended March 31, 2018 and 2017 of $8,364 and $138, respectively. As of March
31, 2018, the Company no longer had a derivative liability, unamortized discount of $0, and recognized interest expense of $418,786,
and a change in derivative liability benefit of $514,969 for the nine months ended March 31, 2018.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Interest
expense on the commitment fees for nine months ended March 31, 2018 and 2017 of $8,353 and $0, respectively. As of March 31, 2018,
and June 30, 2017, $222,350 and $541,850 of principal was outstanding, respectively. During the nine months ended March 31, 2018,
the Company paid $319,500 of principal.
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 nine months ended March 31, 2018 and 2017 of $48,101 and $0, respectively.
Interest
Expense was recorded for the nine months ended March 31, 2018 and 2017 of $116,015 and $0 respectively. As of March 31, 2018,
and June 30, 2017, $0 and $233,150 of principal was outstanding, respectively. In October 2017 the Company paid the principal
of this note.
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 nine months ended March 31, 2018 and 2017
of $45,434 and $0, respectively. As of March 31, 2018, and June 30, 2017, $100,000 of principal was outstanding. In April 2018
the maturity date was extended to May 24, 2018.
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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 $45,543. The Company recognized accretion of debt discount expense
for the nine months ended March 31, 2018 and 2017 of $53,875 and $0, respectively. As of March 31, 2017, $100,000 of principal
was outstanding. In April 2018 the maturity date was extended to May 24, 2018.
The
Company recognized a beneficial conversion expense for the nine months ended March 31, 2018 and 2017 of $45,544 and $0, respectively.
Interest expense for the nine months ended March 31, 2018 and 2017 of $8,000 and $0, respectively.
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 a interest charge of eight percent (8%) shall be applied to the principal.
The Maturity date of the Note was extended to May 24, 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 $19,420 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 nine months ended March 31, 2018 and 2017 of $82,720 and $0, respectively. As of March 31, 2018, $150,000 of principal
was outstanding. In April 2018 the maturity date was extended to May 24, 2018.
The
Company recognized a beneficial conversion expense for the three months ended March 31, 2018 and 2017 of $45,219 and $0, respectively.
Interest expense for the three months ended March 31, 2018 and 2017
of
$12,000 and $0, 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 $880,000. 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 has 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 May 24, 2018 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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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, of which $5,430 was unamortized
at March 31, 2018. 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 nine months ended March 31, 2018 and 2017 of $279,680 and $0, respectively. As of March 31, 2018, $450,000 of principal
was outstanding. In April 2018 the maturity date was extended to May 24, 2018.
The
Company recognized a beneficial conversion expense for the nine months ended March 31, 2018 and 2017 of $131,633 and $0, respectively.
Interest expense for the nine months ended March 31, 20178 and 2017 of $36,000 and $0, respectively.
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
a 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 nine months ended March 31, 2018 and 2017 of
$1,242 and $0, respectively. Interest expense for the nine months ended March 31, 2018 and 2017 of $834 and $0, respectively.
As of December 31, 2017, $27,000 of principal was outstanding.
November
2017 Convertible Debenture
In
November 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 112,482 common stock warrants
exercisable at $0.15 per share through November 13, 2022. The promissory note has a term of 24 months maturing on November 7,
2017 and stipulates a 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 $23,250 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, 24 months. The Company recorded a debenture discount of $18,864. The Company recognized accretion of debt discount expense
for the nine months ended March 31, 2018 and 2017 of $18,864 and $0, respectively. As of March 31, 2018, $0 of principal was outstanding.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
December 2017 Convertible Debenture QTMM-8
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 a 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 $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 nine months ended March 31, 2018 and 2017 of $21,530 and $0, respectively. Interest expense for the nine months
ended March 31, 2018 and 2017 of $6,000 and $0, respectively. Beneficial conversion expense for the nine months ended March 31,
2018 and 2017 of $16,176 and $0, respectively. As of March 31, 2018, $75,000 of principal was outstanding.
February 2018 Convertible Debenture QTMM-9
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 a 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 $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 nine months ended March 31, 2018 and 2017 of $8,988 and $0, respectively. Interest expense for the nine months
ended March 31, 2018 and 2017 of $3,600 and $0, respectively. Beneficial conversion expense for the nine months ended March 31,
2018 and 2017 of $9,046 and $0, respectively. As of March 31, 2018, $45,000 of principal was outstanding.
March
2018 Convertible Debenture QTMM-10, 11
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 has a term of 6 months
maturing on August 8, 2018 and stipulates a 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 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 nine months ended March 31, 2018 of $3,065. Interest expense for the nine months ended March 31, 2018 of $2,400
was recognized. Beneficial conversion expense for the nine months ended March 31, 2018 of $6,625. As of March 31, 2018, $30,000
of principal was outstanding.
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
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 nine months ended March 31, 2018 and 2017 of $1.005 and $0, respectively. Interest expense for the nine months
ended March 31, 2018 of $2,800. Beneficial conversion expense for the nine months ended March 31, 2018 of $8,702. As of March
31, 2018, $35,000 of principal was outstanding.
Debt
Issuance Costs
The
costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized
to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for
the three months ended March 31, 2017 and 2016 was $17,134 and $15,821 respectively. Amortization expense was $41,511 and $31,329
for the nine months ending March 31, 2018 in 2017, respectively.
NOTE
6 – 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 three months ended September 30, 2017 and 2016 was $5,000 and $0, respectively.
As of March 31, 2017, $10,000 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. As of March 31, 2017, $0 of principal was outstanding.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 was due in November 2017 and the outstanding balance was $0 at March 31, 2017. Interest expense for
the three months ended March 31, 2017 and 2016 was $415 and $115, respectively. The Note was paid in full in November 2017.
NOTE
7 – EQUITY TRANSACTIONS
Common
Stock
During
the nine months ended March 31, 2018, the Company issued 29,690,060 shares for $2,243,835 in consulting services.
During
the nine months ended March 31, 2018, the Company issued 737,020 shares of common stock at the fair market value of $68,497 for
payment of debenture interest.
During
the nine months ended March 31, 2018, the Company issued 7,125,001 shares of common stock at the fair market value of $855,000
as a result of debenture conversions.
During the nine months ended March 31, 2018,
the Company issued 2,650,000 shares of common stock valued at $204,719, in connection with the issuance of the convertible
debenture notes.
During the nine months ended March 31, 2018,
the Company issued 3,500,000 shares in connection with the extension of convertible debenture notes with a fair market value of
$210,000.
During the nine months ended March 31, 2018,
the Company issued 1,716,666 shares in exchange for cash with a value of $153,000.
During the nine months ended March 31,
2018, the Company issued 5,500,000 of restricted stock unit shares in exchange for $330,000 in compensation expense.
Common
Stock Issuable
During the nine months ended March 31, 2018,
the company owed a total of 20,113,333 shares of common stock to a lender. 3,500,000 shares were in exchange for extinguishment
of a $150,000 debenture, with a fair value of $280,000. $118,000 deemed interest on extinguishment of debt has been recorded.
600,000 were in relation to the extension of debt, with a fair value of $36,000. 513,333 were for $15,400 of salaries
converted to shares of common stock, with a fair value of $30,800, $15,400 has been recorded as additional compensation. 15,500,000
shares were in relation to a new debenture borrowing of $635,000 in aggregate, valued at $397,825. The shares will be issued after
fiscal year end June 30, 2018. The shares are included in the weighted average shares outstanding for purposes of calculation
earning per share for the three and nine months ended March 31, 2018.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the nine months ended March 31, 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
|
|
|
|
(7,077,778
|
)
|
|
|
|
|
|
|
0.15
|
|
Granted
|
|
|
0.07
|
|
|
|
12,720,749
|
|
|
|
|
|
|
|
0.07
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2018
|
|
$
|
0.12
|
|
|
|
35,596,522
|
|
|
|
3.05
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable as of March 31, 2018
|
|
$
|
0.12
|
|
|
|
35,596,522
|
|
|
|
3.05
|
|
|
$
|
0.11
|
|
Outstanding warrants at March 31, 2018 expire
during the period July 2018 to January 2023 and have exercise prices ranging from $0.03 to $0.30, valued at $4,028,053. These
warrants are issued for salary conversions of employees and consultants, and the origination warrants related to debentures.
NOTE
8 – STOCK-BASED COMPENSATION
The
Company follows FASB Accounting Standards Codification (“ASC”) 718
“Compensation — Stock Compensation”
for share-based payments which requires all stock-based payments, including stock options, to be recognized as an operating
expense over the vesting period, based on their grant date fair values.
In
October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock,
which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for
the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of March 31, 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
January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock,
which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct
issuance of common stock and the grant of incentive and non-incentive stock options. As of March 31, 2018, 60,150,248 options
have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 3,283,334 have been cancelled,
and 53,641,914 remain outstanding.
On
February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000
shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.
As of March 31, 2017, 2,500,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving
a balance outstanding of 875,000 options.
In
June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan, and 3,000,000 shares
were cancelled.
In
the three quarters ended March 31, 2018 no options were canceled or expired.
Incentive
Stock Options:
The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton
valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation
cost is recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated
forfeitures based on historical forfeiture rates, which were between 14% and 17% during the nine months ended March 31, 2018.
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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The
following assumptions were used for the periods indicated:
|
|
Nine
Months Ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
129.46
|
%
|
|
|
140.73
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free
interest rates
|
|
|
2.62
|
%
|
|
|
1.25
|
%
|
Expected
term (in years)
|
|
|
5.0
|
|
|
|
3.0
to 5.0
|
|
The
computation of expected volatility during the nine months ended March 31, 2018 and 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 nine months ended March 31, 2018 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, 2017
|
|
$
|
0.09
|
|
|
|
87,716,914
|
|
|
|
|
|
|
$
|
0.11
|
|
|
$
|
2,073,012
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.06
|
|
|
|
900,000
|
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2018
|
|
$
|
0.09
|
|
|
|
88,616,914
|
|
|
|
4.17
|
|
|
$
|
0.11
|
|
|
$
|
(3,199,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable as of March 31, 2018
|
|
$
|
0.08
|
|
|
|
75,425,497
|
|
|
|
4.20
|
|
|
$
|
0.11
|
|
|
$
|
(2,242,270
|
)
|
Outstanding
options at March 31, 2018, expire during the period October 2019 to June 2026 and have exercise prices ranging from $0.05 to $0.17.
Compensation
expense associated with stock options for the three months ended March 31, 2018 and 2017 was $240,627 and $(76,259) respectively,
and $655,528 and $664,530 for the nine months ended March 31, 2018 and 2017, respectively and was included in general and administrative
expenses in the consolidated statements of operations.
At
March 31, 2018, the Company had 13,191,417 shares of nonvested stock option awards. The total cost of nonvested stock option awards
which the Company had not yet recognized was $944,862 at March 31, 2018. Such amounts are expected to be recognized over a period
of 1.25 years.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Restricted
Stock:
To encourage retention and performance, the Company granted certain employees restricted shares of common stock with
a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s
length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization,
as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock
awards for the three months ended March 31, 2017 is presented below:
|
|
Number
of
|
|
|
|
|
|
|
Nonvested,
|
|
|
Weighted
|
|
|
|
Unissued
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant
Date
|
|
|
|
Share
Awards
|
|
|
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 March 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Compensation
expense associated with restricted stock awards for the three months ended March 31, 2018 and 2017 was $343,509 and $(76,529),
respectively, and $440,336 and $664,530 for the nine months ended March 31, 2018 and 2017, 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 March 31, 2018.
Agreements
with Officers and Employees:
In June 2016, the Company’s officers and certain employees owning options to purchase 57,670,933
shares of the Company’s common stock entered into an agreement with the Company that such persons cannot exercise their
options and the Company does not have to reserve for the issuance of shares of common stock underlying their options until the
earlier of June 30, 2017 or the Company having unreserved shares sufficient for all outstanding options to be exercised. On May
1, 2017, the Company’s shareholders approved an increase in the number of authorized common shares to 750,000,000. As a
result of this increase all 57,670,933 options were exercisable as of May 1, 2017.
NOTE
9 – LOSS PER SHARE
The
Company follows ASC 260,
“Earnings Per Share”,
for share-based payments that are considered to be participating
securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights
to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings
per share (“EPS”).
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The
following table sets forth the computation of basic and diluted loss per share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,736,682
|
)
|
|
$
|
(1,164,684
|
)
|
|
$
|
(7,584,340
|
)
|
|
$
|
(4,948,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
428,394,955
|
|
|
|
339,943,771
|
|
|
|
401,191,882
|
|
|
|
333,385,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
NOTE
10- REVENUE
During
the three months ending March 31, 2018, the Company recognized $1,000 revenues of compared with revenues of $2,500 recognized
during the quarter ended March 31, 2017. For the nine months ended March 31, 2018, the Company recognized revenues of $12,870
from merchandise samples compared with revenues of $27,000 from recognized in the comparable period of 2017.
The
Company has expended $28,823 during the three months ended March 31, 2018 and $160,329 during the nine months ended March 31,
2018 to complete the development of its patented quantum dots. In future quarters, it is expected that revenues will be earned
as product is shipped.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Agreement
with Rice University
On
August 20, 2008, Solterra entered into a License Agreement with Rice University, which was amended and restated on September 26,
2011; also, on September 26, 2011, QMC entered into a new License Agreement with Rice (collectively the “Rice License Agreements”).
On August 21, 2013, QMC and Solterra each entered into a second amended license agreements with Rice University. QMC and Solterra
entered into third amended license agreements with Rice University on March 15 and 24, 2016, respectively.
The
Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain
milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during
the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5%
of adjusted gross sales for QDs sold in electronic and medical applications.
We
have a verbal agreement with Rice University to modify the minimum royalty due dates that will result in Quantum Materials Corp
being in full compliance with the agreements at December 3X, 2017 and we anticipate this will be memorialized in writing by June
1, 2017. The modification to the license agreements for both Quantum Materials and Solterra specifically adjusts dates for annual
minimum royalty obligations to coincide in timing with expected commercial sales of tetrapod quantum dots. The Annual Minimum
Royalties will commence in 2019 but we expect a clause for a yearly maintenance fee (approximately $20,000 per year starting in
January 2018) that would delay the annual royalties until commercial sales occur.
Minimum
royalties payable under the Solterra Rice License Agreement are expected to be due March 1, 2019, and each January 1 of every
year thereafter, subject to adjustments for changes in the consumer pricing index. Such minimum royalty payments shall be credited
against royalties due in each respective royalty year, January 1 to March 31, following the due date. Pursuant to the Solterra
Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty of 2-4% of adjusted gross sales for
QDs sold in solar applications. Minimum royalties payable under the Solterra Rice License Agreement include $100,000 due March
1, 2019, $356,250 due January 1, 2020, $1,453,500 due January 1, 2021 and $3,153,600 each January 1 of every year thereafter,
subject to adjustments for changes in the consumer pricing index. Pursuant to the QMC Rice License Agreement, as amended, Rice
is entitled to receive, during the term, a royalty of 7.5% of adjusted gross sales for QDs sold in electronic and medical applications.
Minimum royalties payable under the QMC Rice License Agreement include $175,000 due March 1, 2019, $292,500 due January 1, 2020,
$585,000 due January 1, 2021 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing
index.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 2107, $125,000 by September 15, 2017 and $200,000 on each June 30th thereafter,
subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties
due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales are 2% of net sales
of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed
electronic displays. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference
herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications have been
agreed to a final amendment has not been finalized. As of March 31, 2017, no royalties have been accrued for this obligation.
Agreement
with Texas State University
The
Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain
office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month
and can be terminated with 60-days written notice of either party.
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
12 — 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-Q, the balance in arrears
is $95,000 plus interest and other charges which has been accrued at June 30, 2017. 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.
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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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.
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, QTMM’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 QTMM and awarded costs of court.
On
March 29, 2018, at a discovery hearing, wherein QTMM 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.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 March 31, 2018.
NOTE
13 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Nine
Months Ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
29,023
|
|
|
$
|
20,584
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Nine
Months Ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Conversion
of debentures into shares of common stock
|
|
$
|
855,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Allocated
value of common stock and warrants issued with convertible debentures
|
|
$
|
602,544
|
|
|
$
|
391,237
|
|
|
|
|
|
|
|
|
|
|
Debenture
extension paid in shares of common stock
|
|
$
|
167,354
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Stock
and stock warrants issued for conversion of accrued salaries
|
|
$
|
249
,900
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense paid in shares of common stock
|
|
$
|
1,242,232
|
|
|
$
|
292,387
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense financed with debt
|
|
$
|
-
|
|
|
$
|
210,000
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares
|
|
$
|
-
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
|
Financing
of prepaid insurance
|
|
$
|
12,738
|
|
|
$
|
7,281
|
|
NOTE
14 – TRANSACTIONS WITH AFFILIATED PARTIES
At March 31, 2018 and 2017,
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 5 under the heading April – June, August, October and
November 2016 Convertible Debentures.
QUANTUM MATERIALS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
In
September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing.
This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the
loan on October 11, 2016.
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 5.
NOTE
15 - SUBSEQUENT EVENTS
On
April 25, 2018, the Company entered into Convertible Debenture Agreements to obtain $70,000 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 1,000,000 shares of common stock, and
200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021.
On
April 26, 2018, the Company entered into Convertible Debenture Agreements to obtain $60,000 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 October 26, 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 2,000,000 shares of common stock, and
1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021.
On
June 7, 2018, the Company entered into Convertible Debenture Agreements to obtain $40,000 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 December 7, 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 2,000,000 shares of common stock and
1.000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021.