NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 — ORGANIZATION AND BASIS OF PRESENTATION
Nature
of Operations
Quantum
Materials Corp., a Nevada corporation, and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred
to as the “Company”) are headquartered in San Marcos, Texas. The Company is a nanotechnology company specializing
in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high-performance variant
of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots
and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and
display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks
to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology
and technological changes, including those developed by the Company’s competitors, rendering the Company’s technology
uncompetitive or obsolete.
Going
Concern
The
Company recorded losses from continuing operations in the current period presented and has a history of losses. As of June 30,
2018, the Company had a working capital deficit of $4,387,148 and net cash used in operating activities was $(1,013,321) for the
year ended June 30, 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.
Basis
of Presentation:
The consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions
and account balances have been eliminated upon consolidation.
Use
of Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition:
The Company recognizes revenue 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.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Cash
and Cash Equivalents:
The Company considers all highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
Accounts
Receivable:
Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts
on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company
evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the
age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company
personnel and with the customers directly.
Financial
Instruments:
Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures.
The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates
that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Concentrations
of Credit Risk:
The Company maintains its cash in bank deposits with financial institutions. These deposits, at times, exceed
federally insured limits. The Company monitors the financial condition of the financial institution and has not experienced any
losses on such accounts. The Company is not party to any financial instruments which would have off-balance sheet credit or interest
rate risk.
Property
and Equipment:
Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated
useful lives of the various classes of assets as follows:
Furniture
and fixtures
|
|
|
7
years
|
|
Computers
and software
|
|
|
3
years
|
|
Machinery
and equipment
|
|
|
3
- 10 years
|
|
Licenses
and Patents:
Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated
useful life of five years.
Asset
Impairment:
In accordance with Accounting Standards Codification (ASC) 360-10-35
“Impairment or Disposal of Long-Lived
Assets”
, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that
any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with
the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect
of any impairment would be to expense the difference between the fair value of such property and the carrying value. There were
no impairment charges in the consolidated statements of operations during the years ended June 30, 2018 and 2017.
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 $145,545 and $86,555 at June 30, 2018 and 2017, respectively. Amortization expense for the years
ended June 30, 2018 and 2017 was $58,990 and $88,956 respectively.
Income
Taxes:
The Company follows ASC 740
“Income Taxes”
regarding the accounting for deferred tax assets and
liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely
than not that a portion of those assets will not be realized in a future period.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Research
and Development Costs:
Research and development (R&D) costs are expensed as incurred. These expenses include the costs
of the Company’s proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements.
Research and development expenses were $188,274 and $1,006,214 for the years ended June 30, 2018 and 2017, respectively.
Reclassifications
:
Certain amounts in the June 30, 2017 consolidated financial statements have been reclassified to conform to the classifications
in the June 30, 2018 consolidated financial statements.
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 fiscal year 2018, the Company had three triggering events related to a down
round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June
30, 2018.
In
March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based
compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when
calculating compensation expense, and classification of awards as either equity or liabilities.
The
new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income
statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash
flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy
the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an
election to account for forfeitures of stock-based compensation.
The
Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current
practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material
impact on the Company’s consolidated financial statements or related disclosures.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting.
This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement
of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material
impact on the Company’s consolidated financial statements or related disclosures.
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.
QUANTUM
MATERIALS CORP.
NOTES
TO 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
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 does not anticipate
or expect adoption of this ASU will have a material effect to the consolidated financial statements upon adoption.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 — PREPAID EXPENSES
Prepaid
expenses consist of the following:
|
|
Years
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Prepaid
consulting fees
|
|
$
|
1,896,589
|
|
|
$
|
1,225,463
|
|
Other
prepaid expenses
|
|
|
31,002
|
|
|
|
29,460
|
|
Deposits
|
|
|
3,250
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
prepaid and other current assets
|
|
|
1,930,841
|
|
|
|
1,254,923
|
|
|
|
|
|
|
|
|
|
|
Less
non-current portion
|
|
|
184,660
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Current
portion of prepaid and other current assets
|
|
$
|
1,746,181
|
|
|
$
|
1,254,923
|
|
NOTE
3 — PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June
30,
2018
|
|
|
June
30,
2017
|
|
|
|
|
|
|
|
|
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
|
|
|
346,080
|
|
|
|
246,491
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
625,524
|
|
|
$
|
723,236
|
|
Depreciation
expense for the years ended June 30, 2018 and 2017 was $99,589 and $96,349, respectively.
NOTE
4 — LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
June
30,
2018
|
|
|
June
30,
2017
|
|
|
|
|
|
|
|
|
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
|
|
|
146,852
|
|
|
|
113,804
|
|
|
|
|
|
|
|
|
|
|
Total
licenses and patents, net
|
|
$
|
45,891
|
|
|
$
|
78,939
|
|
Amortization
expense for the years ended June 30, 2018 and 2017 was $33,048 and $38,548, respectively. Amortization expense is projected to
be $33,048 and $12,843 for the twelve months ended June 30, 2019 and 2020, respectively, and $0 thereafter.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company follows Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2011-04
“Fair Value
Measurement”
as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework
for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value measurements.
This
guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly
related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
Level
3 – Valuations based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available
assumptions made by other market participants. These valuations require significant judgment.
As
of June 30, 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 June 30, 2018, and 2017, the Company held no investments. The Company hired an independent resource
to value its derivative liability as follows:
Fair
Value Table
|
|
Balance
at
June
30, 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
|
|
|
3,442,645
|
|
|
|
-
|
|
|
|
3,442,645
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,442,645
|
|
|
$
|
-
|
|
|
$
|
3,442,645
|
|
|
$
|
-
|
|
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
June 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018 and 2017:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Convertible
debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
27,977
|
|
|
$
|
25,050
|
|
|
$
|
24,721
|
|
Convertible
debentures issued in January 2015
|
|
|
500,000
|
|
|
|
504,342
|
|
|
|
500,000
|
|
|
|
916,667
|
|
Convertible
debentures issued in April - June 2016
|
|
|
1,075,000
|
|
|
|
1,154,831
|
|
|
|
1,330,000
|
|
|
|
1,277,403
|
|
Convertible
debenture issued in August 2016
|
|
|
200,000
|
|
|
|
226,961
|
|
|
|
200,000
|
|
|
|
197,815
|
|
Convertible
debenture issued in November 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
191,795
|
|
Convertible
debentures issued in January - March 2017
|
|
|
60,000
|
|
|
|
64,138
|
|
|
|
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
|
|
|
222,350
|
|
|
|
258,689
|
|
|
|
541,850
|
|
|
|
549,466
|
|
Convertible
promissory notes issued in May 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
233,650
|
|
|
|
215,158
|
|
Convertible
debenture issued in June 2017
|
|
|
100,000
|
|
|
|
98,919
|
|
|
|
100,000
|
|
|
|
100,827
|
|
Convertible
debenture issued in July 2017
|
|
|
100,000
|
|
|
|
98,919
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debenture issued in September 2017
|
|
|
150,000
|
|
|
|
148,378
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debenture issued in September 2017
|
|
|
495,000
|
|
|
|
490,844
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debenture issued in November 2017
|
|
|
27,000
|
|
|
|
25,547
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debenture issued in November 2017
|
|
|
247,500
|
|
|
|
245,422
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debenture issued in December 2017
|
|
|
75,000
|
|
|
|
72,489
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debenture issued in February 2018
|
|
|
45,000
|
|
|
|
44,387
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debentures issued in March 2018
|
|
|
65,000
|
|
|
|
63,205
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debentures issued in April 2018
|
|
|
150,000
|
|
|
|
131,446
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
debentures issued in June 2018
|
|
|
40,000
|
|
|
|
40,086
|
|
|
|
-
|
|
|
|
-
|
|
The
Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other
than described above.
NOTE
6 — CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
June
30,
|
|
|
June
30,
|
|
|
Debenture
|
|
|
2018
|
|
|
2017
|
|
|
Reference
|
Convertible
debentures issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
25,050
|
|
|
A
|
Convertible
debentures issued in January 2015
|
|
|
500,000
|
|
|
|
500,000
|
|
|
B
|
Convertible
debentures issued in April - June 2016
|
|
|
1,075,000
|
|
|
|
1,330,000
|
|
|
C
|
Convertible
debenture issued in August 2016
|
|
|
200,000
|
|
|
|
200,000
|
|
|
C
|
Convertible
debenture issued in November 2016
|
|
|
-
|
|
|
|
200,000
|
|
|
C
|
Convertible
debentures issued in January - March 2017
|
|
|
60,000
|
|
|
|
260,000
|
|
|
D
|
Convertible
debenture issued in February 2017
|
|
|
-
|
|
|
|
100,000
|
|
|
E
|
Convertible
debenture issued in March 2017
|
|
|
-
|
|
|
|
150,000
|
|
|
F
|
Convertible
promissory notes issued in March 2017
|
|
|
222,350
|
|
|
|
541,850
|
|
|
G
|
Convertible
promissory notes issued in May 2017
|
|
|
-
|
|
|
|
233,150
|
|
|
H
|
Convertible
debenture issued in June 2017
|
|
|
100,000
|
|
|
|
100,000
|
|
|
I
|
Convertible
debenture issued in July 2017
|
|
|
100,000
|
|
|
|
-
|
|
|
J
|
Convertible
debenture issued in September 2017
|
|
|
645,000
|
|
|
|
-
|
|
|
K
|
Convertible
debenture issued in November 2017
|
|
|
247,500
|
|
|
|
-
|
|
|
K
|
Convertible
debenture issued in November 2017
|
|
|
27,000
|
|
|
|
-
|
|
|
L
|
Convertible
debenture issued in December 2017
|
|
|
75,000
|
|
|
|
-
|
|
|
N
|
Convertible
debenture issued in February 2018
|
|
|
45,000
|
|
|
|
-
|
|
|
O
|
Convertible
debentures issued in March 2018
|
|
|
65,000
|
|
|
|
-
|
|
|
P
|
Convertible
debentures issued in April 2018
|
|
|
60,000
|
|
|
|
-
|
|
|
Q
|
Convertible
debentures issued in April 2018
|
|
|
70,000
|
|
|
|
-
|
|
|
R
|
Convertible
debentures issued in April 2018
|
|
|
20,000
|
|
|
|
-
|
|
|
S
|
Convertible
debentures issued in June 2018
|
|
|
40,000
|
|
|
|
-
|
|
|
T
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,576,900
|
|
|
|
3,640,050
|
|
|
|
Less:
unamortized discount
|
|
|
134,255
|
|
|
|
490,448
|
|
|
|
Less:
debt issuance costs
|
|
|
-
|
|
|
|
78,490
|
|
|
|
|
|
|
3,442,645
|
|
|
|
3,071,112
|
|
|
|
Less:
current portion
|
|
|
3,402,421
|
|
|
|
2,511,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
convertible debentures, net of current portion
|
|
$
|
40,224
|
|
|
$
|
559,283
|
|
|
|
Future
maturities of convertible debentures for each of the next five years and thereafter are as follows:
Year
Ending June 30,
|
|
|
|
2018
(Past due)
|
|
$
|
472,350
|
|
2019
|
|
|
2,962,500
|
|
2020
|
|
|
142,050
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
3,576,900
|
|
Of
the past due amounts disclosed above, $222,350 is, at the date of this report, involved in litigation involving L2 Capital, and
SBI (See narrative G below, and litigation disclosure, Note 17). See remaining amounts due in narrative C below.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A)
September 2014 Convertible Debenture
Between
September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050
in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”).
The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest
at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right
of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and
will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. None of the Debentures
were converted into common shares during the year ended June 30, 2018.
Interest
expense for the years ended June 30, 2018 and 2017 was $1,524 and $1,524, respectively
As
of June 30, 2018, $25,050 of principal was outstanding.
B)
January 2015 Convertible Debenture
On
January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated
parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years
maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any
time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock
at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable
at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The
Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in
the event any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity
date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total
proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018,
the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received
3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense.
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 years ended June 30, 2018 and 2017 of $0 and $92,298,
respectively. Interest expense for the years ended June 30, 2018 and 2017 was $40,000 and $40,000, respectively.
As
of June 30, 2018, $500,000 of principal was outstanding.
C)
April – June, August, October and November 2016 Convertible Debentures
During
the fourth quarter of the year ended June 30, 2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated
and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000 and sold
$50,000 in proceeds in October 2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”)
and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”)
at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued
at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible
into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including
(a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the
Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends
payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet
adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible
into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding
Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of
existing convertible securities of the Company. The conversion price was reset to $0.012 per share in June 2018 as a result of
a triggering event.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018, and 2017, of $231,702
and $323,894, respectively.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2018, and 2017, of $1,021,500 and $64,775, respectively.
Interest
expense for the years ended June 30, 2018, and 2017, of $113,570 and $144,878, respectively.
During
the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into 3,791,666 and 2,375,000 shares of
common stock respectively. As of June 30, 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, and the remaining $250,000 have
not been extended, and are past due as of the date of this report.
D)
January-March 2017 Convertible Debentures
During
the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated
parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase
4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price
of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have
a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered
and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions,
combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders
of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings
or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s
issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration
per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers,
directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.
In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether the
anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company
can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price
is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges,
mergers, and reorganizations.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $52,954 and
$15,656, respectively. The Company recognized beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and
$62,400, respectively.
During
the year ended June 30, 2018, $200,000 of these debentures converted into 1,666,667 shares of common stock.
Interest
expense for the years ended June 30, 2018 and 2017 of $11,275 and $8,529, respectively.
As
of June 30, 2018, $60,000 of principal was outstanding.
E)
February 2017 Convertible Promissory Note
In
February 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.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018 and
2017 of $9,012 and $15,721, respectively.
There
was no interest expense recorded for the year ended June 30, 2018 and $8,000 was recognized during 2017.
As
of June 30, 2018, $0 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.
F)
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, 2018 and 2017 of
$39,137 and $38,111, respectively. The Company recognized beneficial conversion expense for the years ended June 30, 2018 and
2017 of $0 and $72,752, respectively.
The
Company recognized interest expense for the years ended June 30, 2018 and 2017 of $118,000 and $12,000, respectively. 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.
G)
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.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and
is amortized using the effective interest rate method over the life of the loan, eight months.
The
Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $43,661 and $52,764, respectively.
Interest
expense for the years ended June 30, 2018 and 2017 of $421,901 and $9,418, respectively.
As
of June 30, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of
$514,969 for the year ended June 30, 2018.
As
of June 30, 2018, and 2017, $222,350 and $541,850 of principal was outstanding, respectively. During the year ended June 30, 2018,
the Company paid $319,500 of principal.
H)
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, 2018 and 2017 of $48,101 and $23,693, respectively.
Interest
Expense was recorded for the years ended June 30, 2018 and 2017 of $112,900 and $2,065 respectively. As of June 30, 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.
I)
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. Interest expense was recorded for the years ended June 30, 2018 and 2017 of $10,500 and $8,000 respectively.
Beneficial conversion expense was recorded for the years ended June 30, 2018 and 2017 of $0 and $45,660 respectively. The Company
recognized accretion of debt discount expense for the year ended June 30, 2018 and 2017 of $45,434 and $8,907, respectively. As
of June 30, 2018, and 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
J)
July 2017 Convertible Debenture
In
July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and
250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six
months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory
note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture
discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense
for the year ended June 30, 2018 of $53,875. As of June 30, 2017, $100,000 of principal was outstanding. In May 2018 the maturity
date was extended to February 1, 2019.
Interest
expense for the year ended June 30, 2018 and 2017 of $18,500 and $0, respectively.
K)
September 2017 Convertible Debenture
Debenture
A)
In
September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock
and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of
six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory
note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture
discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense
for the year ended June 30, 2018 of $82,720. As of June 30, 2018, $150,000 of principal was outstanding.
Interest
expense for the year ended June 30, 2018 of $12,000 and $0, respectively.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Debenture
B)
In
September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for a convertible promissory note in the principal amount of $495,000. The Note Holder received 10,000,000 shares of common
stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note 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 January 26, 2019 in an extension agreement dated April 2018. The
promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and
is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value
of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense
of $131,663. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $318,337. As of June
30, 2018, $495,000 of principal was outstanding.
Interest
expense for the year ended June 30, 2018 of $36,000.
Debenture
C)
In
November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in
gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange
for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing
on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to January 26, 2018 in an extension agreement dated April 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
The
Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective
interest rate method over the life of the loan, six months.
Interest
expense for the year ended June 30, 2018 of $18,000.
L)
November 2017 Convertible Debenture
In
November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable
at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates
an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company
at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock
at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company
shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the
loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,007. Interest
expense for the year ended June 30, 2018 of $1,380. As of June 30, 2018, $27,000 of principal was outstanding.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is
pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted
shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration
rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion
of the note.
In
accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $18,864 recorded as debt discount and is amortized using the effective interest rate method over the life of
the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $18,864. As
of June 30, 2018, $0 of principal was outstanding, as it was converted into 833,333 shares of common stock during the year
ended June 30, 2018. (This debenture is not scheduled above, as it originated, and terminated within the same fiscal year.)
N)
December 2017 Convertible Debenture
In
December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and
250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months
maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2018 of $41,175. Interest expense for the year ended June 30, 2018 of $6,000. As of June 30,
2018, $75,000 of principal was outstanding.
O)
February 2018 Convertible Debenture
In
February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and
500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months
maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended June 30, 2018 of $24,785. Interest expense for the year ended June 30, 2018 of $3,600. As of June 30,
2018, $45,000 of principal was outstanding.
P)
March 2018 Convertible Debenture
In
March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and
500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note has a term of 6 months
maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity
date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable
by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares
of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights
and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of
the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2018 of $14,697. Interest expense for the year ended June 30, 2018 of $2,400 was recognized.
As of June 30, 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
maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory
note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2018 of $14,043. Interest expense for the year ended June 30, 2018 of $2,800. As of June 30,
2018, $35,000 of principal was outstanding.
Q)
April 2018 Convertible Debenture
In
April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and
1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately
6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory
note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2018 of $14,455. Interest expense for the year ended June 30, 2018 of $4,800 was recognized.
As of June 30, 2018, $60,000 of principal was outstanding.
R)
April 2018 Convertible Debenture
In
April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and
200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years
maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory
note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered
and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback
registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable
upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated
the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using
the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense
for the year ended June 30, 2018 of $2,616. Interest expense for the year ended June 30, 2018 of $1,027 was recognized. As of
June 30, 2018, $70,000 of principal was outstanding.
S)
April 2018 Convertible Debenture
In
April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable
at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates
an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company
at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock
at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company
shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount
expense for the year ended June 30, 2018 of $1,675. Interest expense for the year ended June 30, 2018 of $316 was recognized.
As of June 30, 2018, $20,000 of principal was outstanding.
T)
June 2018 Convertible Debenture
In
June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross
proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a
convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and
1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately
7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal.
The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into
unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes
piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares
issuable upon conversion of the note.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company
allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized
using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount
expense for the year ended June 30, 2018 of $3,431. Interest expense for the year ended June 30, 2018 of $3,200 was recognized.
As of June 30, 2018, $40,000 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 years ended June 30, 2018 and 2017 was $58,990 and $88,956 respectively.
NOTE
7 — 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, 2018 and 2017 was $5,000 and $197, respectively. As of June
30, 2018, $0 of principal was outstanding.
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 year ended
June 30, 2018 and 2017 of $0 and $26,454, respectively. As of June 30, 2018, $0 of principal was outstanding.
NOTE
8 — ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
Years
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued
interest
|
|
$
|
343,437
|
|
|
$
|
158,927
|
|
Other
accrued expenses
|
|
|
205,230
|
|
|
|
339,262
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses
|
|
$
|
548,667
|
|
|
$
|
498,189
|
|
NOTE
9 — EQUITY TRANSACTIONS
Common
Stock
During
the year ended June 30, 2018, the Company issued 34,100,060 shares of common stock for $2,405,339 in consulting services.
During
the year ended June 30, 2018, the Company issued 737,020 shares of common stock at the fair market value of $68,497 for payment
of debenture interest.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended June 30, 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 year ended June 30, 2018, the Company issued 3,650,000 shares of common stock valued at $267,917, in connection with
the issuance of the convertible debenture notes.
During
the year ended June 30, 2018, the Company issued 24,125,000 shares of common stock in connection with the extension of
convertible debenture notes with a fair market value of $1,630,800.
During
the year ended June 30, 2018, the Company issued 1,716,666 shares of common stock in exchange for cash with a value of
$153,000.
During
the year ended June 30, 2018, the Company issued 7,000,000 of restricted stock unit shares in exchange for $650,000 in
compensation expense.
Common
Stock Issuable
During
the year ended June 30, 2018, the company owed a total of 24,113,333 shares total, 23,600,000 of common stock to a lender, and
513,333 to an employee. 3,500,000 shares were in exchange for extinguishment of a $150,000 debenture with $12,000 accrued interest,
fair valued at $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. 19,500,000 shares were in relation to a new debenture borrowing of $735,000 in
aggregate, valued at $453,331. 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. 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 year
ended June 30, 2018.
During
the year ended June 30, 2018, the Company cancelled 5,725,000 shares of common stock, valued at $435,100. These shares
were held in escrow pending a contractual deliverable and were returned to the Company.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the years ended June 30, 2018 and 2017 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Contractual
|
|
|
Grant
Date
|
|
|
|
Price
|
|
|
Warrants
|
|
|
Term
in Years
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2016
|
|
$
|
0.11
|
|
|
|
39,262,305
|
|
|
|
|
|
|
$
|
0.15
|
|
Expired
|
|
|
0.18
|
|
|
|
(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
|
|
|
|
|
|
|
|
0.14
|
|
Expired
|
|
|
0.06
|
|
|
|
(12,077,778
|
)
|
|
|
|
|
|
|
0.15
|
|
Granted
|
|
|
0.07
|
|
|
|
21,087,409
|
|
|
|
|
|
|
|
0.06
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
|
0.13
|
|
|
|
(2,181,456
|
)
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2018
|
|
$
|
0.11
|
|
|
|
36,781,726
|
|
|
|
2.80
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable as of June 30, 2018
|
|
$
|
0.11
|
|
|
|
36,781,726
|
|
|
|
2.80
|
|
|
$
|
0.09
|
|
During
the years ended June 30, 2018 and 2017, 0 and 5,000,000 warrants were exercised in cashless transactions that resulted in the
issuance of 0 and 2,500,000 shares of common stock, respectively.
Outstanding
warrants at June 30, 2018 expire during the period February 2019 to April 2023 and have exercise prices ranging from $0.03 to
$0.30.
The
following assumptions were used for the years ended June 30, 2018 and 2017:
|
|
Year
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
129.46
|
%
|
|
|
136.25
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free
interest rates
|
|
|
2.62
|
%
|
|
|
1.62
|
%
|
Expected
term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Salaries
Converted to Equity
During
the year ended June 30, 2018, certain officers, employees and consultants converted accrued salaries and other amounts owed of
$249,900 into 513,333 shares of common stock and 7,816,667 warrants to purchase the Company’s common stock. The warrants
are exercisable at $0.03 per share for a period of five years. The fair value of the common stock and stock warrants at the time
of conversion was $30,800 and $498,022, respectively. The variance of $263,522 was recognized as stock-based compensation in general
and administrative expense.
There
were no salary conversions during the year ended June 30, 2017.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 — STOCK-BASED COMPENSATION
The
Company follows FASB Accounting Standards Codification (“ASC”) 718
“Compensation — Stock Compensation”
for share-based payments which requires all stock-based payments, including stock options, to be recognized as an operating
expense over the vesting period, based on their grant date fair values.
In
October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock,
which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for
the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2018, 9,200,000
options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled leaving a balance of 8,400,000
outstanding.
In
March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017, the
term of these options was extended for an additional five years. In June 2016, and 2017, 6,000,000 and 17,000,000 stock options,
with a term of ten years, were granted, respectively, outside of a stock option plan, and 3,000,000 shares were cancelled, leaving
a balance of 23,500,000 outstanding outside of a defined option plan.
In
January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock,
which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct
issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2018, 72,653,473 options have
been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 18,886,559 have been cancelled, and
50,441,914 remain outstanding.
On
February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000
shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.
As of June 30, 2018, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving
a balance outstanding of 3,275,000 options.
Incentive
Stock Options:
The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton
valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. 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 year ended June 30, 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.
The
following assumptions were used for the years ended June 30, 2018 and 2017:
|
|
Year
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
129.46
|
%
|
|
|
136.25
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free
interest rates
|
|
|
2.62
|
%
|
|
|
1.62
|
%
|
Expected
term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
The
computation of expected volatility during the years ended June 30, 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.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary of the activity of the Company’s stock options for the years ended June 30, 2018 and 2017 is presented below:
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Optioned
Shares
|
|
|
Weighted
Average
Remaining
Contractual
Term
in Years
|
|
|
Weighted
Average
Optioned
Grant
Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
$
|
0.11
|
|
|
$
|
2,073,012
|
|
Expired
|
|
|
0.05
|
|
|
|
(3,000,000
|
)
|
|
|
|
|
|
|
0.09
|
|
|
|
|
|
Granted
|
|
|
0.06
|
|
|
|
900,000
|
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2018
|
|
$
|
0.09
|
|
|
|
85,616,914
|
|
|
|
4.00
|
|
|
$
|
0.11
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable as of June 30, 2018
|
|
$
|
0.08
|
|
|
|
73,395,997
|
|
|
|
4.02
|
|
|
$
|
0.11
|
|
|
$
|
-
|
|
Outstanding
options at June 30, 2018, expire during the period February 2019 to June 2026 and have exercise prices ranging from $0.05 to $0.17.
Compensation
expense associated with stock options for the year ended June 30, 2018 and 2017 was $860,724 and $835,851 respectively and was
included in general and administrative expenses in the consolidated statements of operations.
At
June 30, 2018, the Company had 12,220,917 shares of nonvested stock option awards. The total cost of nonvested stock option awards
which the Company had not yet recognized was $1,468,118 at June 30, 2018. Such amounts are expected to be recognized over a period
of 1.25 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 year ended June 30, 2018 and 2017 is presented below:
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Number
of
|
|
|
|
|
|
|
Nonvested,
|
|
|
Weighted
|
|
|
|
Unissued
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant
Date
|
|
|
|
Share
Awards
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested,
unissued 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,
unissued restricted shares outstanding at June 30, 2017
|
|
|
1,500,000
|
|
|
|
0.21
|
|
Granted
|
|
|
5,500,000
|
|
|
|
0.06
|
|
Vested
|
|
|
(7,000,000
|
)
|
|
|
0.09
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested,
unissued restricted shares outstanding at June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Compensation
expense associated with restricted stock awards for the year ended June 30, 2018 and 2017 was $440,336 and $602,719, respectively,
and was included in general and administrative expenses in the consolidated statements of operations.
The
total cost of nonvested stock awards which the Company had not yet recognized was $0 at June 30, 2018.
NOTE
11 — LOSS PER SHARE
The
Company follows ASC 260,
“Earnings Per Share”
for share-based payments that are considered to be participating
securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights
to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings
per share (“EPS”).
The
following table sets forth the computation of basic and diluted loss per share:
|
|
Years
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,401,069
|
)
|
|
$
|
(7,659,853
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
413,738,050
|
|
|
|
342,688,527
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
For
the years ended June 30, 2018 and 2017, 37,065,053 and 29,953,551 stock warrants, respectively, were excluded from diluted earnings
per share because they are considered anti-dilutive.
For
the years ended June 30, 2018 and 2017, 85,616,914 and 87,716,914 stock options, respectively, were excluded from diluted earnings
per share because they are considered anti-dilutive.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 — REVENUE
During
the years ended June 30, 2018 and 2017, the Company recognized revenue of $20,120 and 33,250, respectively.
The
revenue recognized during the year ended June 30, 2018 was a result of the Company providing Quantum Dots to certain customers
for use and evaluation.
NOTE
13 — COMMITMENTS AND CONTINGENCIES
Agreement
with University of Arizona
Solterra
entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On March 3,
2017, Solterra entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated
to pay minimum annual royalties of $50,000 by June 30, 2017, $125,000 by September 15, 2017 and $200,000 on each June 30th
thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited
against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales
are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products
for printed electronic displays. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated
by reference herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications
have been agreed to a final amendment has not been finalized. As of June 30, 2017, and 2018, 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, 2018 and 2017 was $110,202 and $98,410, respectively.
NOTE
14 — CONCENTRATIONS
The
Company owns the design of its microreactors and currently contracts with only one supplier to manufacture this equipment. No
long-term supply contract exists. There are a limited number of manufacturers of this kind of equipment, and a change in suppliers
could result in a significant delay in the delivery time of future equipment. Unless such a delay involved replacement of current
capacity, it would not necessarily have an adverse effect on the Company’s near-term operating results.
The
Company has licensed certain patents from the University of Arizona. While neither is required for the Company’s immediate
business opportunities in displays and solid-state lighting, it is expected that the Company will market products utilizing these
patents or otherwise derive revenue from them in the future. It may not be possible to replace this intellectual property if the
Company loses its rights, and future business opportunities could be adversely affected if these rights are lost.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 — INCOME TAXES
The
components of income tax expense/(benefit) are as follows:
|
|
Year
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Expected
tax expense / (benefit) at U.S. statutory rate
|
|
$
|
(2,594,695
|
)
|
|
$
|
(2,604,350
|
)
|
Meals
and entertainment
|
|
|
1,325
|
|
|
|
2,804
|
|
Derivatives
|
|
|
-
|
|
|
|
-
|
|
Beneficial
conversion
|
|
|
359,649
|
|
|
|
93,537
|
|
Prior
year NOL true-up adjustment
|
|
|
256,167
|
|
|
|
-
|
|
Change
in tax rate
|
|
|
5,287,019
|
|
|
|
-
|
|
Prior
year warrant valuation adjustment
|
|
|
-
|
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
(3,309,465
|
)
|
|
|
2,508,009
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating losses - federal
|
|
$
|
7,497,834
|
|
|
$
|
10,457,753
|
|
Stock-based
compensation
|
|
|
1,826,639
|
|
|
|
2,425,447
|
|
|
|
|
|
|
|
|
|
|
Amortization
of licenses and patents
|
|
|
4,522
|
|
|
|
6,699
|
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses
|
|
|
128,254
|
|
|
|
36,774
|
|
Total
deferred tax assets
|
|
|
9,457,249
|
|
|
|
12,926,673
|
|
Deferred
tax (liabilities):
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
(51,775
|
)
|
|
|
(80,993
|
)
|
Warrant
Expense
|
|
|
(28,194
|
)
|
|
|
(158,934
|
)
|
Total
deferred tax (liabilities)
|
|
|
(79,969
|
)
|
|
|
(239,927
|
)
|
Less
valuation allowance
|
|
|
(9,377,280
|
)
|
|
|
(12,686,746
|
)
|
Net
deferred tax assets/(liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
On
December 22, 2017, the 2017 Tax Act was signed into law, making significant changes to the Internal Revenue Code. The legislation
significantly changes U.S. tax law by, among other things, lowering corporate income tax rates from a maximum of 35% to a flat
21% rate, effective for tax years beginning after December 31, 2017. As a result of the reduction in the U.S. corporate income
tax rate under the 2017 Tax Act, the Company revalues its deferred tax assets and liabilities as of December 21, 2017, resulting
in a $5,290,000 decrease in net deferred tax assets, with a corresponding reduction in the valuation allowance. The accounting
for the income tax effects of the 2017 Tax Act and related adjustments were completed and included in the financial statements
as of and for the year ended June 30, 2018.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s management has established a valuation allowance equal to the net deferred tax asset due to uncertainties
regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance
decreased by approximately $3,310,000 and increased by approximately $2,320,000 during the years ended June 30, 2018 and 2017,
respectively, primarily due to operations and the change in the tax rate due to the 2017 Tax Act.
As
of June 30, 2018, and 2017, the Company had U.S. net operating loss (“NOL”) carryforwards of approximately $36,460,00
and $30,760,000, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”),
a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards
to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate
stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules
which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more
“public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such
stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use
limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt
interest rate. The Company believes there is a 382 limitation on its NOLs so that approximately $750,000 will expire unutilized,
resulting in a remaining NOL carryforward of approximately $35,700,000 and $30,000,000 as of June 30, 2018 and 2017, respectively.
The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred
tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred.
The NOL carryforwards expire beginning in 2029, if not utilized. The net operating loss carryforwards are subject to Internal
Revenue Service adjustments until the statute closes on the year the net operating loss is utilized.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities. As of June 30, 2018, and 2017, the Company has recorded no unrecognized
tax benefits or related penalty and interest. Additionally, the Company does not expect any unrecognized tax benefits to change
significantly over the next twelve months.
During
the fiscal year ended June 30, 2018, the Company had a net decrease in deferred tax asset of $3,309,466. This change is a result
of current year activity as well as a change in the federal tax rates from 34% to 21%. The change as a result of current year
increase in deferred tax assets is $1,977,553 offset by a $5,287,019 decrease due to a remeasurement of the deferred tax asset
based on new tax rates established through the Tax Cuts and Jobs Act passed December 22, 2017. The remeasurement is a provisional
estimate under SAB 118 that could be revised based on any additional guidance issued by the U.S. Treasury Department, the U.S.
Internal Revenue Service, and other standard-setting bodies. On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act,
was enacted. This new law did not have a significant impact on the Company’s consolidated financial statements for the fiscal
year ended June 30, 2018 because the company maintains a valuation allowance on the entirety of its deferred tax assets. However,
the reduction of the U.S. federal corporate tax rate from 34% to 21% resulted in a remeasurement of the deferred tax asset reflected
in the tax rate reconciliation below as well as the deferred tax asset listed above.
Given
the significant impact of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 which
provides guidance on accounting for uncertainties of the effects of the Tax Act. Specifically, SAB 118 allows companies to record
a provisional estimate of the impact of the Tax Act during a one year “measurement period”. The company has recognized
the provisional tax impact related to the revaluation of deferred tax assets and liabilities and included these amounts in its
consolidated financial statements for the fiscal year ended June 30, 2018. The ultimate impact may differ from these provisional
amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and
additional regulatory guidance that may be issued.
As of June 30, 2018, the Company had net
operating loss carryforwards of approximately $36,460,000 and $0 for federal and state income tax purposes, respectively. These
may be used to offset future taxable income and will begin to expire in varying amounts in 2029 to 2038.
For all years through June 30, 2018, the
Company generated research and development credits but has not completed a study to document the qualified activities. This study
may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is complete,
and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been
provided against the Company’s research and development credits, and if an adjustment is required this adjustment would
be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheets or statements of operations
and comprehensive loss if an adjustment were required.
The Company is subject to taxation in the
U.S. and Texas jurisdictions. Currently, no historical years are under examination. The Company’s tax years ended June 30,
2012 to 2017 are subject to examination by the U.S. and state taxing authorities due to the carryforward of unutilized net operating
losses and research and development credits.
Utilization of the Company’s net
operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation
due to an “ownership change” that may have occurred, or that could occur in the future, as defined and required by
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These
ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards,
and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. Any limitation may
result in the expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards
before utilization. The net operating loss carryforwards and research and development credit carryforwards inherited as a result
of the merger with Telik, Inc. have been severely limited under these rules and will likely not be realized.
In general, an “ownership change”
results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50%
of the outstanding stock of a company by certain stockholders or public groups. The Company intends to complete a study in the
future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s
formation and will complete such study before the use of any of the aforementioned attributes.
The
Company files income tax returns in the United States and Texas and is subject to examination by income tax authorities for years
2008 to present. The Company is not currently under examination in any tax jurisdiction.
NOTE
16 — SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Years
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
29,023
|
|
|
$
|
20,781
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Years
Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Conversion
of debentures into shares of common stock
|
|
$
|
855,000
|
|
|
$
|
385,000
|
|
|
|
|
|
|
|
|
|
|
Allocated
value of common stock and warrants issued with convertible debentures
|
|
$
|
721,248
|
|
|
$
|
567,123
|
|
|
|
|
|
|
|
|
|
|
Conversion
of accrued interest into shares of common stock
|
|
$
|
68,497
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Subscription
receivable from warrants extension
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares
of common stock and warrants issued for conversion of accrued salaries
|
|
$
|
249,900
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares
of common stock issued for settlement of note payable and accrued interest
|
|
$
|
162,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares
of common stock issued for settlement of payable
|
|
$
|
177,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense paid in shares of common stock
|
|
$
|
1,896,588
|
|
|
$
|
1,809,262
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expense financed with debt
|
|
$
|
-
|
|
|
$
|
210,000
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares of common stock
|
|
$
|
435,100
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
|
Financing
of prepaid insurance
|
|
$
|
12,738
|
|
|
$
|
2,645
|
|
NOTE
17 — LITIGATION
The
Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled
this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears
is $53,000 plus interest and other charges which has been accrued at June 30, 2018. 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.
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.
QUANTUM
MATERIALS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The
Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability
has been recorded for this contingent liability at June 30, 2018.
NOTE
18 — TRANSACTIONS WITH AFFILIATED PARTIES
At
June 30, 2018 and 2017, the Company had accrued salaries payable to executives and members of the board of directors, in the amount
of $568,575 and $361,375, 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.
In
September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing.
This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the
loan on October 11, 2016.
NOTE
19 - SUBSEQUENT EVENTS
On July 9, 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 January 31, 2019 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 July 9, 2021. These shares were not issued at the date of this report.
On August 27, 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 seven months maturing on March 30,
2019 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 1,250,000 shares of common stock and 1,.000,000 common stock warrants
exercisable at $0.12 per share through August 27, 2021. These shares were not issued at the date of this report.
On September 17, 2018, the Company entered
into Convertible Debenture Agreements to obtain $25,000 in gross proceeds from non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”). The Debentures had an initial term of seven months maturing on April 30,
2019 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 1,000,000 common stock warrants
exercisable at $0.12 per share through September 17, 2021. These shares were not issued at the date of this report.
During the period July 1, 2018 through
the date of this report, the Company issued 344,055 shares of common stock for the payment of debenture interest.
During the period July 1, 2018 through
the date of this report, the Company issued 3,031,375 shares of common stock for the payment of legal services.
On September 9, 2018, the Company issued
a promissory note secured by the Company’s CEO for $20,000. The note has a term of six months and bears interest at 6% per
annum.
Stock Subscriptions
During the period July 1, 2018 through
the date of this report, the company subscribed 1,430,833 shares of common stock for proceeds of $73,900. These shares were not
issued at the date of this report.
During the period July 1, 2018 through
the date of this report, the company subscribed 1,083,332 shares of common stock for, or part of, consulting agreements, and these
shares were not issued at the date of this report.
During the period July 1, 2018 through
the date of this report, the company issued 5,029,886 shares, that were reported in shares issuable at fiscal year ended June
30, 2018.
(b)
Financial Statement Schedules: