UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

Commission File Number: 000-52956

 

QUANTUM MATERIALS CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   20-8195578

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

 

3055 Hunter Road, San Marcos, Texas   78666
(Address of principal executive offices)   (Zip Code)

 

512-245-6646
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12 (b) of the Act: None

 

Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.001 Par Value

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
  Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

[  ] Yes [  ] No

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

[  ] Yes [X] No

 

As of April 20, 2021, there were 701,569,276 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 
 

 

Table of Contents

 

  Page
   
PART I – FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Condensed Consolidated Balance Sheets 3
   
Condensed Consolidated Statements of Operations 4
   
Condensed Consolidated Statements of Cash Flows 6
   
Notes to Condensed Consolidated Financial Statements 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
   
Item 4. Controls and Procedures 44
   
PART II – OTHER INFORMATION 46
   
Item 1. Legal Proceedings 46
 
Item 1A. Risk Factors 46
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
   
Item 3. Defaults upon Senior Securities 47
   
Item 4. Mine Safety Disclosures 47
   
Item 5. Other Information 47
   
Item 6. Exhibits 47
   
Signatures 48

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     June 30,  
    2019     2019  
    (unaudited)        
ASSETS                
                 
CURRENT ASSETS                
Cash and cash equivalents   $ 8,735     $ 478  
Accounts Receivable     -       400  
Prepaid expenses and other current assets     23,525       19,191  
TOTAL CURRENT ASSETS     32,260       20,069  
                 
Property and equipment, net of accumulated depreciation of $467,354 and $446,095     499,670       525,509  
                 
Licenses and patents, net of accumulated amortization of $181,360 and $174,449     11,383       18,294  
                 
Intangibles     650,000       -  
                 
TOTAL ASSETS   $ 1,193,313     $ 563,872  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
Accounts payable   $ 1,519,106     $ 1,629,741  
Accrued expenses     3,620,181       1,573,690  
Accrued salaries     1,023,151       924,957  
Contract liabilities     1,197,973       500,000  
Notes payable, net of unamortized discount     20,000       20,000  
Short term derivative liability     21,810       45,692  
Current portion of convertible debentures, net of unamortized discount     2,388,041       2,467,106  
TOTAL CURRENT LIABILITIES     9,790,262       7,161,186  
                 
Convertible debentures, net of current portion, unamortized discount and debt issuance costs     128,725       135,342  
                 
TOTAL LIABILITIES     9,918,987       7,296,528  
                 
Commitments and contingencies (See Note 10)     -       -  
                 
STOCKHOLDERS’ DEFICIT                
                 
Common stock, $.001 par value, authorized 750,000,000 shares, 630,310,563 and 583,314,787 issued and outstanding at September 30, 2019 and June 30, 2019, respectively     630,311       583,326  
Common stock issuable     -       707,914  
Additional paid-in capital     49,414,586       47,777,681  
Accumulated deficit     (58,770,571 )     (55,801,577 )
TOTAL STOCKHOLDERS’ DEFICIT     (8,725,674 )     (6,732,656 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 1,193,313     $ 563,872  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Three Months Ended  
    September 30,  
    2019     2018  
    (unaudited)  
             
REVENUES   $ -     $ -  
                 
OPERATING EXPENSES                
General and administrative     1,043,085       1,361,732  
Research and development     27,212       23,087  
TOTAL OPERATING EXPENSES     1,070,297       1,384,819  
                 
LOSS FROM OPERATIONS     (1,070,297 )     (1,384,819 )
                 
OTHER EXPENSE (INCOME)                
Beneficial conversion expense     -       16,870  
Interest expense, net     196,915       51,085  
Change in value of derivative liability     (28,712 )     82,162  
Accretion of debt discount     2,895       90,010  
Change in value of insufficient shares liability     1,785,261       -  
Gain on settlement of convertible debentures     (57,662 )     -  
TOTAL OTHER EXPENSE     1,898,697       240,127  
                 
NET LOSS   $ (2,968,994 )   $ (1,624,946 )
                 
LOSS PER COMMON SHARE                
Basic and diluted   $ (0.00 )   $ (0.00 )
                 
WEIGHTED AVERAGE SHARES OUTSTANDING                
Basic and diluted     606,938,649       471,961,937  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

 

    Common Stock     Common Stock     Additional Paid-in     Accumulated     Total Stockholders’  
    Shares     Amount     Issuable     Capital     Deficit     Deficit  
       
Balances at June 30, 2019     583,314,787     $ 583,326     $ 707,914     $ 47,777,681     $ (55,801,577 )   $ (6,732,656 )
                                                 
Common stock issued for services    

15,068,772

     

15,069

      (128,968 )    

350,489

      -      

236,590

 
                                                 
Common stock issued for debenture interest     282,348       282       -       8,188       -       8,470  
                                                 
Common stock issued for debenture conversions    

21,926,474

     

21,916

      (578,946 )    

757,789

      -      

200,759

 
                                                 
Common stock issued for purchase of Capstan     9,718,182       9,718       -       268,221       -       277,939  
                                                 
Stock-based compensation     -       -       -       37,336       -       37,336  
                                                 
Amortization of stock paid for future services     -       -       -       214,882       -       214,882  
                                                 
Net loss     -       -       -       -       (2,968,994 )     (2,968,994 )
                                                 
Balances at September 30, 2019     630,310,563     $ 630,311     $ -     $ 49,414,586     $ (58,770,571 )   $ (8,725,674 )

 

    Common Stock     Common Stock     Additional Paid-in     Accumulated     Total Stockholders’  
    Shares     Amount     Issuable     Capital     Deficit     Deficit  
                                     
Balances at June 30, 2018     442,564,332     $ 442,564     $ 800,131     $ 42,030,181     $ (46,844,173 )   $ (3,571,297 )
                                                 
Common stock issued for cash     -       -       73,900       -       -       73,900  
                                                 
Common stock issued for services     3,031,375       3,032       43,333       118,224       -       164,589  
                                                 
Common stock issued for debenture interest     344,055       344       -       20,997       -       21,341  
                                                 
Issuance of common stock issuable     513,333       513       (30,800 )     30,287       -       -  
                                                 
Stock-based compensation     -       -       -       207,452       -       207,452  
                                                 
Beneficial conversion feature of debenture     -       -       -       16,870       -       16,870  
                                                 
Allocated value of common stock and warrants related to debenture     -       -       52,765       22,437       -       75,202  
                                                 
Common stock issued in settlement of Derivative liability     4,516,553       4,517       39,652       7,608       -       51,777  
                                                 
Other     -       -       -       (98,645 )     -       (98,645 )
                                                 
Net loss     -       -       -       -       (1,624,946 )     (1,624,946 )
                                                 
Balances at September 30, 2018     450,969,648     $ 450,970     $ 978,981     $ 42,355,411     $ (48,469,119 )   $ (4,683,757 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Three Months Ended  
    September 30,  
    2019     2018  
    (unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (2,968,994 )   $ (1,624,946 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization expense     31,745       31,870  
Amortization of debt issuance costs, stock paid for interest, and debt discount     84,526       -  
Stock-based compensation     37,336       207,452  
Stock issued for services     452,228       670,370  
Stock issued for interest     8,470       -  
Beneficial conversion feature     -       16,870  
Change in fair value of derivative liability     (28,712 )     82,162  
Change in value of insufficient shares liability     1,785,261       -  
Gain on debt extinguishment     (57,662 )     -  
Loss on disposal of fixed asset     8,064       -  
Accretion of debt discount and warrant expense     2,850       90,010  
Effects of changes in operating assets and liabilities:                
Accounts receivable     400       -  
Prepaid expenses and other current assets     (4,335 )     (6,939 )
Accounts payable and accrued expenses     (208,834 )     335,182  
Contract liabilities     697,973       -  
NET CASH USED IN OPERATING ACTIVITIES     (159,684 )     (184,090 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of property and equipment     (7,059 )     -  
NET CASH USED IN INVESTING ACTIVITIES     (7,059 )     -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of common stock     -       83,900  
Proceeds from issuance of convertible debentures / promissory note     175,000       100,000  
Proceeds from issuance of note payable     -       20,000  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES     175,000       203,900  
                 
NET DECREASE IN CASH     8,257       19,810  
                 
CASH AND CASH EQUIVALENTS, beginning of period     478       2,025  
                 
CASH AND CASH EQUIVALENTS, end of period   $ 8,735     $ 21,835  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

Nature of Operations

 

Quantum Materials Corp., a Nevada corporation, and its wholly owned subsidiaries, QMC HealthID Inc. and 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. QMC HealthID Inc is specifically focused on providing a complete point of care testing solution that leverages the Company’s distributed ledger technology utilizing the QMC HealthID application and platform which is currently being developed with a quantum dot enabled point of care lateral flow test platform. 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. This also includes achieving Federal Drug Administration approval and emergency use authorization for medical tests that diagnose Covid-19 and other diagnostic purposes.

 

Sequencing

 

The Company has adopted a sequencing policy under Accounting Standards Codification (“ASC”) 815-40-35 Derivatives and Hedging (“ASC 815”) whereby in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities convertible or exchangeable for a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees or directors are not subject to the sequencing policy.

 

Asset Purchase Agreement with Capstan Platform, Inc.

 

On August 6, 2019, the Company completed the asset purchase under an agreement (the “Capstan Purchase Agreement”) of the distributed ledger technology assets of Capstan Platform, Inc. (“Capstan”) for a purchase price of $650,000 which is payable in common shares or cash. The company issued 9,718,182 common shares during the three months ended September 30, 2019 and an additional 3,527,337 common shares were issued during March 2021 in connection with this asset purchase and 6,095,535 remain issuable at the date of this filing. As a part of the Capstan Purchase Agreement the Company paid $67,000 to settle existing debt to certain creditors held by Capstan. In addition, the Company recorded $650,000 of intangible software assets acquired in the purchase. At the date of this filing the software platform is still under construction and no amortization of such assets has been recorded.

 

Contract Liabilities

 

The Company issued advanced billings to Amtronics India LLC related to its exclusive license and development agreement related to the production of quantum dots in Assam, India (“License Agreement”), which have been recorded as contract liabilities on the condensed consolidated balance sheets and will be recognized as revenue in accordance with ASU 2014-09 Revenue from Contracts with Customers (Topic 606) once the performance obligations are satisfied. As of September 30, 2019, and 2018 contract liabilities were $1,197,973 and $500,000, respectively. The current liability represents the next twelve months’ portion of the license fees revenue. For each of the period ended September 30, 2019 and 2018, no revenue was recorded related to the License Agreement.

 

In November 2018, the Company entered into a license and development agreement with Amtronics India LLC related to the volume production of quantum dots in Assam, India. The agreement is part of a larger project for the design, training, research and development of a quantum dot manufacturing facility in Assam. This project has been under discussion for nearly three years. A ground-breaking ceremony took place in Assam on January 16, 2019, and the Company anticipated operations being established and operational prior to year-end 2019. In addition to an upfront fee and royalty, the agreement provides for the Company to sell equipment and training services, which the Company expects will provide additional revenues. The project was delayed due to historic flooding in the region during 2019 and 2020. The project was and continues to be delayed due to the severe Covid-19 outbreak and subsequent quarantine occurring throughout India. Construction on the project has resumed and planning for a new timeline has begun.

 

The Company believes that the terms of the licensing agreement will enable the Company to begin to leverage its intellectual property portfolio and to begin generating revenues without overburdening the Company’s scientific staff in a manner that would disrupt new discovery. The other participants in the Assam project have the responsibility of, among other things, developing the site, constructing the facilities and hiring staff. The Company has agreed to construct and supply the proprietary equipment, assisting in the development and scale up of the 3rd generation solar, display and SSL products, training and providing a broad range of consulting services at additional cost, representing a potential ongoing revenue opportunity for the Company.

 

7
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Going Concern

 

The Company recorded losses from continuing operations in the current period presented and has a history of losses. As of September 30, 2019, the Company had a working capital deficit of $9,758,002 and net cash used in operating activities was $159,684 for the three months ended September 30, 2019. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.

 

In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. We are continuing our plan to further grow and expand operations and seek sources of capital to pay our contractual obligations as they come due. Management believes that its current operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing; however, there is no assurance this will occur. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable 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 accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of September 30, 2019 and its results of operations and its cash flows for the periods presented. The condensed consolidated balance sheet at June 30, 2019 has been derived from the Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. Operating results for the interim periods presented are not necessarily indicative of the results that may be experienced for the fiscal year ending June 30, 2020.

 

Use of Estimates: The preparation of the condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition: The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Title and risk of loss generally pass to our customers upon shipment. In limited circumstances where either title or risk of loss pass upon destination, we defer revenue recognition until such events occur. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis. For the three months ended September 30, 2019 and 2018 our revenue was immaterial.

 

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.

 

Cash and Cash Equivalents: Cash and cash equivalents consist of cash in bank. The Company considers any highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents.

 

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  

 

8
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

Debt Issuance Costs: The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Unamortized debt discount was $30,350.81 and $27,724 on September 30, 2019 and June 30, 2019, respectively. Amortization expense for the three months ended June 30, 2019 and 2018 was $2,895 and $90,010, respectively.

 

Earnings per Share: The Company utilizes ASC 260, “Earnings per Share” for calculating the basic and diluted loss per share. In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted loss per share if their effect would be anti-dilutive. As such, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share for the three months ended September 30, 2019 and 2018. There are 750,000,000 shares authorized resulting in approximately 23,756,489 of insufficient shares as of September 30, 2019.

 

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.

 

9
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recent Accounting Pronouncements

 

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. We adopted this standard effective July 1, 2019 and it did not have a material impact on our condensed consolidated financial statements.

 

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The Company adopted the guidance effective July 1, 2018. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The Company adopted the guidance effective July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated condensed financial statements or related disclosures.

 

Pronouncements Yet To Be Adopted

 

In December 2019, the FASB issued ASU No. 2019-12: Simplifying the Accounting for Income Taxes (Topic 740). The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC 740 and clarifying existing guidance to facilitate consistent application. The standard will become effective for the Company beginning on June 1, 2021. The Company is currently evaluating the new standard to determine the potential impact on its financial condition, results of operations, cash flows, and financial statement disclosures.

 

In November 2019, the FASB issued ASU 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-based Consideration Payable to a Customer.  The objective of the standard is to clarify that an entity must measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. ASU 2019-08 is effective for fiscal years beginning after December 15, 2019, including interim reporting periods within those fiscal years. The Company will adopt ASU 2019-08 effective July 1, 2020 and its adoption is not expected to have a material impact on the Company’s financial condition or its results of operations.

 

In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which simplifies and clarifies certain calculation and presentation matters related to convertible and equity and debt instruments. Specifically, ASU-2020-06 removes requirements to separately account for conversion features as a derivative under ASC Topic 815 and removing the requirement to account for beneficial conversion features on such instruments. Accounting Standards Update 2020-06 also provides clearer guidance surrounding disclosure of such instruments and provides specific guidance for how such instruments are to be incorporated in the calculation of Diluted EPS. The guidance under ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company will adopt this standard using a modified retrospective approach effective January 1, 2021. The Company is currently evaluation the effects of adoption on its consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update 2016-13 “Financial Instruments-Credit Losses” (“ASC Topic 326”), which amends the guidance on the impairment of financial instruments. The standard adds an impairment model, referred to as current expected credit loss, which is based on expected losses rather than incurred losses. The standard applies to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantees and loan commitments. Under the guidance, companies are required to disclose credit quality indicators disaggregated by year of origination for a five-year period. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. We do not anticipate that this will have a material impact to our consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.

 

10
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    September 30,     June 30,  
    2019     2019  
    (unaudited)        
Furniture and fixtures   $ 3,502     $ 3,502  
Computers and software     17,007       11,447  
Machinery and equipment     946,515       956,655  
      967,024       971,604  
Less: accumulated depreciation     467,354       446,095  
                 
Total property and equipment, net   $ 499,670     $ 525,509  

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $24,834 and $25,006, respectively.

 

NOTE 3 – INTANGIBLES

 

Internally Developed Software

 

In July 2019, the Company acquired certain intellectual property consisting of in-process research and development software and recorded $650,000 to Intangibles on the condensed consolidated balance sheets as of September 30, 2019. The aggregate purchase price paid in connection with the asset purchase was $650,000. At closing, the Company issued 9,718,182 of shares of our common stock with a fair market value of $277,940, and a note payable of $372,060 to the sellers. The note payable is payable in cash or shares of the Company’s common stock. Subsequent to the closing, the Company issued 3,527,337 common shares in March 2021 and 6,095,535 remain issuable at the date of this filing. The software consists of costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation, and testing. No software amortization was recorded during the three months ended September 30, 2019 and amortization will commence when the software module is functional and ready for intended use.

 

Licenses and Patents

 

The Company maintains certain patents and licenses which are key to maintaining and enhancing our competitive position in the growing nanomaterials market. Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated useful life of five years. Amortization expense for the three months ended September 30, 2019 and 2018 $6,911 and $6,864, respectively. The table below sets forth our license and patents as of September 30, 2019 and June 30, 2019.

 

    September 30, 2019     June 30, 2019  
    (unaudited)        
William Marsh Rice University   $ 40,000     $ 40,000  
University of Arizona     15,000       15,000  
Bayer acquired patents     137,743       137,743  
      192,743       192,743  
Less: accumulated amortization     181,360       174,449  
                 
Total licenses and patents, net   $ 11,383     $ 18,294  

 

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-04 “Fair Value Measurement” as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements.

 

This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:

 

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

11
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 September 30, 2019, and June 30, 2019, 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 September 30, 2019, and June 30, 2019, the Company held no investments. The Company hired an independent resource to value its derivative liability as follows (unaudited):

 

Fair Value Table

 

    Balance at September 30, 2019     Quoted Prices in Active Markets for Identical Liabilities (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  
                         
Derivative liability   $ 21,810     $       -     $ -     $ 21,810  
Liability for insufficient shares     -       2,497,955       -       2,497,955  
                                 
    $ 21,810     $ 2,497,955     $         -     $ 2,519,765  

 

Level Three Roll-forward

 

    Derivative Liability     Total  
             
Balance June 30, 2019   $ 45,692     $ 45,692  

Addition of derivative liabilities

    50,522       50,522  
Settlement of derivative liabilities     (45,692 )     (45,692 )
Change in fair value     (28,712 )     (28,712 )
Balance September 30, 2019   $ 21,810     $ 21,810  

 

12
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – DEBENTURES

 

The following table sets forth activity associated with the convertible and non-convertible debentures:

 

    September 30,     June 30,     Debenture
    2019     2019     Reference
    (unaudited)            
                 
Convertible debentures issued in September 2014   $ 25,050     $ 25,050     A
Convertible debentures issued in April - June 2016     1,060,716       1,218,772     B
Convertible debenture issued in August 2016     200,000       200,000     B
Convertible debentures issued in January - March 2017     60,000       60,000     C
Convertible promissory notes issued in March 2017     222,350       222,350     D
Convertible debenture issued in June 2017     -       100,000     E
Convertible debenture issued in July 2017     100,000       100,000     F
Convertible debenture issued in September 2017     150,000       150,000     G
Convertible debenture issued in November 2017     27,000       27,000     H
Convertible debenture issued in December 2017     75,000       75,000     I
Convertible debenture issued in February 2018     45,000       45,000     J
Convertible debentures issued in March 2018     65,000       65,000     K
Convertible debentures issued in April 2018     100,000       60,000     L
Convertible debentures issued in April 2018     70,000       70,000     M
Convertible debentures issued in April 2018     20,000       20,000     N
Convertible debentures issued in June 2018     -       40,000     O
Convertible debentures issued in July 2018     45,000       45,000     P
Convertible debentures issued in August 2018     30,000       30,000     Q
Convertible debentures issued in September 2018     25,000       25,000     R
Convertible debentures issued in December 2018     52,000       52,000     S
Non-convertible debentures issued in July 2019     175,000       -     T
                     
      2,547,116       2,630,172      
Less: unamortized discount     30,351       27,724      
                     
      2,516,765       2,602,448      
Less: current portion     2,388,041       2,467,106      
                     
Total convertible debentures, net of current portion   $ 128,725     $ 135,342      

 

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 three months ended September 30, 2019. As of the date of this filing the notes are past due.

 

Interest expense for the three months ended September 30, 2019 and 2018 was $384 and $384, respectively.

 

As of September 30, 2019 and June 30, 2018, $25,050 of principal was outstanding.

 

13
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

B) 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.

 

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 three months ended September 30, 2019, and 2018, of $2,564 and $2,564, respectively.

 

Interest expense for the three months ended September 30, 2019, and 2018, of $24,881 and $26,067, 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 September 30, 2019 and June 30, 2019, $1,260,716 and $1,418,772 of principal was outstanding, respectively. Maturities totaling $825,000 of principal have been extended for one year until March and April of 2019. As of the date of this filing the notes are past due.

 

14
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

C) 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 three months ended September 30, 2019 and 2018 of $2,595 and $1,547, 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 three months ended September 30, 2019 and 2018 of $2,085 and $1,210, respectively.

 

As of September 30, 2019 and June 30, 2019, $60,000 of principal was outstanding. As of the date of this filing the notes are past due.

 

D) 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.

 

15
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months.

 

The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and June 30, 2019 of $0.

 

Interest expense for the three months ended September 30, 2019 and 2018 of $3,811 and $0, respectively.

 

As of September 30, 2019, and June 30, 2019, $222,350 of principal was outstanding, respectively. During the year ended June 30, 2018, the Company paid $319,500 of principal. As of the date of this filing the notes are past due.

 

E) 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 three months ended September 30, 2019 and 2018 of $0. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0. In July 2019, the debenture and interest payable were converted to 6,136,363 shares of common stock.

 

F) 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.

 

16
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0. As of September 30, 2019, and June 30, 2019, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019. As of the date of this filing the note is past due.

 

Interest expense for the three months ended September 30, 2019 and 2018 was $17,066 and $0, respectively.

 

G) September 2017 Convertible Debenture

 

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 three months ended September 30, 2019 and 2018 of $0. As of September 30, 2019, and June 30, 2019, $150,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019. As of the date of this filing the note is past due.

 

Interest expense for the three months ended September 30, 2019 and 2018 was $21,100 and $0.

 

H) 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 13, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company 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 three months ended September 30, 2019 and 2018 of $845 and $780, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $552 and $552, respectively. As of September 30, 2019 and June 30, 2019, $27,000 of principal was outstanding. As of the date of this filing the note is past due.

 

17
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

I) 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 three months ended September 30, 2019 and 2018 of $0. Interest expense for the three months ended September 30, 2019 and 2018 of $16,924 and $0, respectively. As of September 30, 2019 and June 30, 2019, $75,000 of principal was outstanding. As of the date of this filing the note is past due.

 

J) February 2018 Convertible Debenture

 

In February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0 and $6,761, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $12,738 and $0, respectively. As of September 30, 2019 and June 30, 2019, $45,000 of principal was outstanding. As of the date of this filing the note is past due.

 

K) 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.

 

18
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $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 three months ended September 30, 2019 and 2018 of $0 and $8,677, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $11,804 and $0, respectively was recognized. As of September 30, 2019 and June 30, 2018, $30,000 of principal was outstanding. As of the date of this filing the note is past due.

 

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 three months ended September 30, 2019 and 2018 of $0 and $12,254, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $12,562 and $0. As of September 30, 2019 and June 30, 2018, $35,000 of principal was outstanding. As of the date of this filing the note is past due.

 

L) 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 $100,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately 6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0 and $20,673, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $16,673 and $0, respectively was recognized. As of September 30, 2019 and June 30, 2019, $100,000 and $60,000, respectively, of principal was outstanding. As of the date of this filing the note is past due.

 

M) 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.

 

19
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $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 three months ended September 30, 2019 and 2018 of $3,991 and $3.685, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $1,431 and $2,458 was recognized, respectively. As of September 30, 2019 and June 30, 2019, $70,000 of principal was outstanding. In July of 2020, the Company entered into an extension agreement with the Note Holder to extend the maturity date of the note to April 2022.

 

N) 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 three months ended September 30, 2019 and 2018 of $1,851 and $1,709, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $409 and $724 was recognized, respectively. As of September 30, 2019 and June 30, 2019, $20,000 of principal was outstanding. As of the date of this filing the note is past due.

 

O) June 2018 Convertible Debenture

 

In June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately 7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0 and $13,583, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $0 was recognized. In July 2019, the debenture and interest payable were converted into 3,287,458 of common shares.

 

20
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

P) July 2018 Convertible Debenture

 

In July 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through July 9, 2021. The promissory note has a term of approximately 7 months maturing on January 31, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $7,235 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $33,485 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2019 of $0 and $12,260, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $12,615 and $3,600, respectively was recognized. As of September 30, 2019 and June 30, 2018 $45,000 of principal was outstanding. As of the date of this filing the note is past due.

 

Q) August 2018 Convertible Debenture

 

In August 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,250,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through August 27, 2021. The promissory note has a term of approximately 7 months maturing on March 30, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $5,160 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $22,659 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0 and $4,450. Interest expense for the three months ended September 30, 2019 and 2018 of $12,170 and $2,400, respectively was recognized. As of September 30, 2019 and June 30, 2018, $30,000 of principal was outstanding. As of the date of this filing the note is past due.

 

R) September 2018 Convertible Debenture

 

In September 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $25,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $25,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through September 17, 2021. The promissory note has a term of approximately 7 months maturing on April 30, 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.

 

21
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,475 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,058 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018 of $0 and $1,067, respectively. Interest expense for the three months ended September 30, 2019 and 2018 of $12,176 and $2,000, respectively was recognized. As of September 30, 2019 and June 30, 2019, $25,000 of principal was outstanding. As of the date of this filing the note is past due.

 

S) December 2018 Convertible Debenture

During the second quarter of the year ended June 30, 2019, the Company sold 52 Units for total proceeds of $52,000 from three affiliated and fourteen non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. An additional 45,826 warrants with identical terms, were granted with this debenture. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.08 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $6,835, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 and 2018, of $834 and $264, respectively.

Interest expense for the three months ended September 30, 2019 and 2018, was $1,063 and $300, respectively. As of September 30, 2019 and June 30, 2019, $52,000 of principal was outstanding. As of the date of this filing the notes are past due.

 

T) July 2019 Non-Convertible Debentures

 

In July 2019, the Company entered into Non- Convertible Promissory Notes to obtain $175,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Note Holders”) in exchange for the non-convertible promissory notes in the principal amount of $175,000. The Note Holders received warrants to purchase 700,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.025 per share (each, a “Warrant”) over a period of three years. The promissory note has a term of approximately 12 months maturing in July 2020 and stipulates an interest charge of ten percent (10%) shall be paid quarterly. The promissory note is pre-payable by the Company at any time without penalty.

 

In accounting for the non-convertible promissory note, the company allocated the fair value of the warrants to the proceeds received in the amount of $15,530 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 12 months. The Company recognized accretion of debt discount expense for the three months ended September 30, 2019 of $3,883. Interest expense for the three months ended September 30, 2019 of $2,700 was recognized. As of September 30, 2019 $175,000 of principal was outstanding. In July of 2020, the Company entered into an extension agreement with the Note Holders to extend the maturity date of the notes to July 2021.

 

22
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Warrant Liability

 

The Company issued warrants to purchase 700,000 shares of its common stock in connection with the non-convertible debentures in note T above during the three months ended September 30, 2019 and recorded these outstanding warrants as a liability at fair value utilizing a Black-Scholes-Merton model. This liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s condensed consolidated statements of operations. The assumptions utilized in this model for warrants issued during the three months ended September 30, 2019 are presented below (unaudited).

 

    September 30, 2019
Expected volatility     126.70 %
Expected dividend yield     0.0 %
Risk-free interest rates     1.63 %
Expected term (in years)     2.78 - 2.79  

 

Debt Issuance Costs

 

The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for the three months ended September 30, 2019 and 2018 was $2,895 and $90,010 respectively.

 

NOTE 6 – NOTES PAYABLE

 

Promissory Note

 

In September 2018, the Company issued a promissory note secured by the Company’s CEO for $20,000 with interest rate of 6%, maturing on March 9, 2019. The note is convertible into the Company’s common stock, at the lenders discretion, at a rate of $.04 per share, with warrants to purchase an equal amount of stock. Interest expense for the three months ended September 30, 2019 and 2018 was $0 and $69, respectively. As of September 30, 2019 and June 30, 2019, $20,000 of principal was outstanding.

 

NOTE 7 – EQUITY TRANSACTIONS

 

Common Stock

 

On August 6, 2019, the Company purchased the distributed ledger technology assets of Capstan Platform, Inc. for $650,000 payable in common shares or cash. The company issued 9,718,182 and 3,527,337 common shares during August 2019 and March 2021, respectively, and 6,095,535 remain issuable at the date of this filing. The number of shares issued is determined by using a five-day average, prior to the date of issuance, of our common stock closing price. During the three months ending September 30, 2019 the aggregate fair value of the 9,718,182 issued in such period was $277,940. The remaining amount due to the seller as of September 30, 2019 of $372,060 has been recorded in accrued expenses. See Note 1 – “Basis of Presentation” for additional information.

 

During the three months ended September 30, 2019, the Company issued 15,068,772 shares for $365,558 in consulting services, $128,968 of which was accrued at June 30, 2019.

 

During the three months ended September 30, 2019, the Company issued 282,348 shares of common stock at the fair market value of $8,470 for payment of debenture interest.

 

During the three months ended September 30, 2019, the Company issued 21,926,474 shares of common stock at the fair market value of $779,705 for payment of debenture conversions of which $578,946 was accrued at June 30, 2019.

 

During the three months ended September 30, 2019, the Company amortized a market value of $214,882 of stock paid for future services.

 

In total, the Company has recorded a fair market value of $457,792 for common stock payable to accrued expenses as of September 30, 2019.

 

23
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Stock Warrants

 

A summary of activity of the Company’s stock warrants for the three months ended September 30, 2019 is presented below (unaudited):

 

            Weighted        
    Weighted       Average   Weighted    
    Average       Remaining   Average   Aggregate
    Exercise   Number of   Contractual   Grant Date   Intrinsic
    Price   Warrants   Term in Years   Fair Value   Value
                     
Balance as of June 30, 2019     0.10       44,913,101       1.83       0.08     $       -  
Expired     -       -       -       -       -  
Granted     0.030       700,000       2.79       0.030       -  
Exercised     -       -       -       -       -  
Cancelled     0.12       (250,000.00 )     -       0.12       -  
                                         
Vested and exercisable as of September 30, 2019   $ 0.10       45,363,101       1.64     $ 0.08     $ -  

 

Outstanding warrants at September 30, 2019 expire during the period October 2019 to December 2023 and have exercise prices ranging from $0.03 to $0.30, valued at $4,696,468. These warrants are issued for salary conversions of employees and consultants, and the origination warrants related to debentures.

 

NOTE 8 – STOCK-BASED COMPENSATION

 

The Company follows FASB Accounting Standards Codification (“ASC”) 718 “Compensation — Stock Compensation” for share-based payments which requires all stock-based payments, including stock options, to be recognized as an operating expense over the vesting period, based on their grant date fair values.

 

In October 2009, the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of September 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 of options outstanding. During the three months ended September 30, 2019, we issued 1,500,000 shares of restricted stock out of the plan, leaving 100,000 options or grants available for grant under the plan.

 

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 September 30, 2019, 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 September 30, 2019, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving a balance outstanding of 3,275,000 options.

 

Incentive Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. As the Company has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.

 

24
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of the activity of the Company’s stock options for the three months ended September 30, 2019 is presented below (unaudited):

 

                Weighted     Weighted        
    Weighted           Average     Average        
    Average     Number of     Remaining     Optioned     Aggregate  
    Exercise     Optioned     Contractual     Grant Date     Intrinsic  
    Price     Shares     Term in Years     Fair Value     Value  
                               
Balance as of June 30, 2019   $ 0.07       109,908,433       3.93     $ 0.09     $            -  
Expired     -       -       -       -       -  
Granted     -      

-

      -       -       -  
Exercised     -      

-

      -       -       -  
Cancelled     -      

-

      -       -       -  
                                         
Balance as of September 30, 2019   $ 0.07       109,908,433       3.37     $ 0.09     $ -  
                                         
Vested and exercisable as of September 30, 2019   $ 0.07       106,158,433       3.37     $ 0.09     $ -  

 

Outstanding options at September 30, 2019, expire during the period October 2019 to June 2026 and have exercise prices ranging from $0.02 to $0.17.

 

Compensation expense associated with stock options for the three months ended September 30, 2019 and 2018 was $37,366 and $207,452 respectively and was included in general and administrative expenses in the condensed consolidated statements of operations.

 

At September 30, 2019, the Company had 3,750,000 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company had not yet recognized was $32,387. Such amounts are expected to be recognized in the current year.

 

25
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 9 – LOSS PER SHARE

 

The Company follows ASC 260, “Earnings Per Share”, for share-based payments that are considered to be participating securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings per share (“EPS”).

 

The following table sets forth the computation of basic and diluted loss per share (unaudited):

 

    Three Months Ended  
    September 30,  
    2019     2018  
             
Net loss   $ (2,968,994 )   $ (1,624,946 )
                 
Weighted average common shares outstanding:                
Basic and diluted     606,938,649       471,961,937  
                 
Basic and diluted loss per share   $ (0.00 )   $ (0.00 )

 

26
 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 - 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 September 30, 2019, no royalties have been accrued for this obligation.

 

Agreement with Texas State University

 

The Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month and can be terminated with 60-days written notice of either party.

 

Operating Leases

 

The Company leases certain office and lab space under a month-to-month operating lease agreement.

 

Rental expense for the operating lease for the three months ended September 30, 2019 and 2018 was $24,407 and $18,864, respectively.

 

NOTE 11 — LITIGATION

 

The Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears is approximately $53,000 plus interest and other charges which has been accrued at June 30, 2019. The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.

 

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QUANTUM MATERIALS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CAUSE NUMBER 17-2033; Hays County, Texas

 

Two lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked the Company’ transfer agent, Empire Stock Transfer, Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements the Company had entered into in late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus accrued interest of $10,170) on two of the loans. Subsequently, in November 2017, the Company also repaid $213,650 and $8,636 of accrued interest on two of the remaining loans on their due dates.

 

Quantum filed suit for an injunction to stop the release of the stock on September 28, 2017. The two lenders, SBI Investments LLC, 2014-1 (SBI), and L2 Capital, LLC (L2), hired the national law firm of K&L Gates to stop the injunction; problematically, this same firm had previously represented the Company. The Company filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.

 

SBI and L2, with new counsel, and Cleveland Terrazas PLLC, brought suit against the Company on October 10, 2017 for $1.5 million on the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed technical defaults. The court in Hays County granted the Company’s temporary injunction and set the full case for trial. The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against the Company and refiled similar actions in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three suits are related to the same transactions. The lenders claimed 140% interest, attorney’s fees, 20 million shares of stock, and damages.

 

The case has been dismissed as of the date of this report.

 

CAUSE NUMBER: 17CV06093; Johnson County, Kansas

 

The Kansas lawsuit, instituted on October 30, 2017, is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against the Company; the second claim is for breach of contract of the first L2 promissory note against the Company; the final claim is for breach of contract regarding the second L2 promissory note against both the Company and Stephen Squires, individually. The claims against Squires individually were abandoned. Trial was conducted October 13th, 2020. Final arguments were submitted in writing to the court February 2021. The court has not yet ruled.

 

The Company denies all the above-mentioned allegations and will vigorously defend all claims.

 

CAUSE NUMBER: 2017-025283-CA-01; Miami-Dade County, Florida

 

The Florida lawsuit, instituted on October 30, 2017, largely mirrors the suit in Kansas; defaults are alleged as follows:

 

On July 6, 2017, the Company filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In comparison to the unrestated financial statement previously filed by the Company, SBI alleged that the Revised Report materially and adversely affects SBI’s rights with respect to the notes, constituting a breach of each of the notes. Furthermore, because each note contains a cross-default clause, SBI alleged that each of the Company’s breaches of a specific note also constituted a breach of every other note.

 

On July 27, 2017, the Company’s auditor resigned, and the Company replaced its auditor without seeking or obtaining the consent of SBI. SBI alleged that this replacement of the Company’s auditor constituted a breach of the SBI notes, and because each note contains a cross-default clause, of every other note.

 

The Company denies all of the above-mentioned allegations and will vigorously defend all claims.

 

The case was reheard in late March 2018 and a 45-day continuance was decided resulting in an April 30, 2018 rehearing. After a day of litigation in San Marcos, the Company’s motion to enjoin L2 and SBI and prevent them from obtaining stock before a full trial on the merits was granted on October 27, 2017, by Judge Gary Steel. L2 and SBI objected to the injunction and appealed to the Third Court of Appeals in Austin, TX. On March 8, 2018, in a unanimous opinion, the Third Court of Appeals denied the appeal, sustained the injunction in favor of the Company and awarded costs of court.

 

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QUANTUM MATERIALS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On March 29, 2018, at a discovery hearing, wherein the Company asked the court to order L2 and SBI to produce evidence to support their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court. The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.

 

The Company expects to be 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 September 30, 2019.

 

CAUSE NUMBER: PSC190273; Riverside California

 

Edward James Schloss file a complaint against Quantum Materials Corp and Solterra alleging financial elder abuse, fraud, breach of written contract, breach of oral contract, constructive termination, retaliation, failure to pay wages, waiting time penalties, failure to permit inspection of employee records, unfair competition, intentional infliction of emotional distress and failure to indemnify employee expenses. Mr. Schloss was a former officer and later a contractor to the company after his dismissal and is owed fees. The Company expects to be successful in the litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at September 30, 2019.

 

CAUSE NUMBER: 19-2774; Hays County Texas

 

This litigation filed November 12, 2019 in Hays County (San Marcos) alleged misappropriation of trade secrets and related claims based on Quantum Material Corp’s (“QMC” or “Company”) hiring of a previous employee of the Plaintiff (Practice Interactive, Inc. d/b/a Intiva Health “Intiva”). Intiva initiated the case by securing a no-notice temporary restraining order against the Company and the employee (“Hartigan”).

 

At a temporary injunction trial in December 2019, the court granted a limited injunction against Hartigan and found no basis to enjoin the Company. The court set the bond at $50,000: Intiva never took action to post the bond; thus the injunction never went into effect. The order also set the case for trial in July 2021. Although the plaintiff only recently proposed a discovery and trial schedule, no discovery has occurred. The parties filed a Rule 11 Agreement on December 15, 2020.

 

CAUSE NUMBER: 18-2393; Hays County, Texas

 

The current litigation with K&L Gates was pending before the Texas Supreme Court. It was awaiting a ruling to determine if the strong opinion at the 3rd Court of Appeals in Austin in favor of Quantum Materials will be reversed. The state Supreme Court on Oct 15, 2020 declined to take the interlocutory appeal. The case has now been sent back to Hays County for a jury trial.

 

Quantum Materials retained K&L Gates (“Gates”) on a myriad of issues. As part of that representation, a lawyer from Gates sat in on confidential board meetings and participated in the company’s most important negotiations, including but not limited to a new contract with the founder and former CEO, Steve Squires, to become CEO again. Gates billed a very substantial fee in a very short period of time. Over $300,000. Before negotiations occurred on what Squires believed to be an excessive bill, SBI Investments and L2, creditors of Quantum Materials, demanded that the transfer agent, Empire Stock Transfer, transfer huge amounts of stock as collateral for loans.

 

Quantum Materials sued Empire to prevent this transfer, first winning a Temporary Restraining Order, then a Temporary Injunction, and finally, after an appeal to the 3rd Court of Appeals in Austin, an appellate victory.

 

Before that appellate victory and before the Injunction trial, K&L Gates entered an appearance for SBI Investments and L2, even though they were still under contract with Quantum Materials as intervenors. Quantum Materials objected and raised objections to their firm, entering an appearance against them. K&L Gates forced substantial research, and briefs to be filed before withdrawing before the Temporary Injunction trial. (see TRO, TI order, appellate opinion.)

 

Either K&L Gates shared all information with their “new” client, to the disadvantage of their “old” client, a duty under full disclosure, or they didn’t share. Gates claimed that the contract with Quantum Materials waived all conflicts.

 

Following up on the actions begun by Gates on behalf of SBI Investments and L2, the suit by Gates against Quantum Materials was dismissed in Texas, and another law firm sued Quantum Materials in both Florida and Kansas. In Florida, the case was ultimately dismissed, and legal fees were ordered to be paid to Quantum Materials. Much of the Kansas case has been dismissed, but the balance is set to be tried in Kansas in October. (see the report on Kansas case.)

 

Ultimately, Quantum Materials sued K&L Gates for fiduciary violations and Deceptive Trade Practices and other claims (see suit), and Gates filed a counterclaim for its $300,000 in alleged fees. Gates filed an action to dismiss the case, called a “SLAPP” action, and after a hearing on the merits in Hays County, lost. Gates then appealed to the 3rd court of appeals in Austin, and after briefing and oral argument, again lost. Gates has now appealed its most recent defeat to the Texas Supreme Court.

 

29
 

 

NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION

 

The following is supplemental cash flow information:

 

The following is supplemental disclosure of non-cash investing and financing activities (unaudited):

 

    Three Months Ended  
    September 30,  
    2019     2018  
             
Cash paid for interest   $ 179,109     $  -  
                 
Cash paid for income taxes   $ -     $ -  

 

    Three Months Ended  
    September 30,  
    2019     2018  
             
Conversion of debentures, and accrued interest into shares of common stock   $ 285,564     $ 21,342  
                 
Allocated value of common stock and warrants issued with convertible debentures   $ -     $ 75,202  
                 
Derivative liability issued with convertible debentures   $ 15,530     $ -  
                 
Stock issued for purchase of intangible assets   $ 277,940     $ -  
                 
Accruedexpenses for intangible assets   $ 372,060          
                 
Stock issued for amounts in accounts payable   $ -     $ 61,255  
                 
Prepaid expense paid in shares of common stock   $ -     $ 164,588  

 

NOTE 13 – TRANSACTIONS WITH AFFILIATED PARTIES

 

At September 30, 2019 and 2018, the Company had accrued salaries payable to executives in the amount of $793,151 and $593,075, respectively.

 

30
 

 

NOTE 14 - SUBSEQUENT EVENTS

 

Debentures Issuances

 

During November 2019, the company issued five convertible debentures for $175,000 with a one-year term at 8% annual interest accompanied by warrants to purchase 1,309,665 common shares at fair market value with a five-year term.

 

During the three months ended March 31, 2020, the company issued five convertible debentures for $ 2,145,000 with a one-year to two-year term at 8% annual interest accompanied by warrants to purchase 1,838,964 common shares at fair market value with a five-year term.

 

During the three months ended June 30, 2020, under the Small Business Administration (“SBA”), the Company received proceeds the Paycheck Protection Program (“PPP”) loan. These loans are forgiven if used for payroll, payroll benefits, including health insurance and retirement plans, as well as certain rent payments, leases, and utility payments, which are limited to 40% of the loan proceeds, all of which if paid within either 8 weeks or 24 weeks of the receipt of the loan proceeds. At the time of this filing, we have been funded for $147,300 in loans. At the time of this filing, we anticipate having a significant amount of this loan forgiven, however the forgiveness application process is not yet complete. If a portion of these loans are not forgiven, the unqualified portion is to be repaid over 5 years, accruing interest at 1% per annum.

 

During the three months ended June 30, 2020, the company issued five convertible debentures for $ 150,000 with a one-year term at 8% annual interest accompanied by warrants to purchase 3,750,000 common shares at fair market value with a five-year term.

 

During the three months ended September 30, 2020, the company issued seven convertible debentures for $525,000 with a one-year term at 8% annual interest accompanied by warrants to purchase 8,035,725 common shares at fair market value with a five-year term.

 

During the three months ended December 31, 2020, the company issued three convertible debentures for $ 3,000,000 with a one-year term at 8% annual interest which were subsequently converted into a two convertible notes payable in March 2021 for a total of $7,500,000 as part of the Pasaca Capital investment transactions.

 

During February 2020, the company entered into a marketing consulting and distribution agreement with QMVT Vertical Markets, LLC to assist in building a marketing and sales force to operate in parallel with Research and development at Quantum Materials Corp. To move forward along with this effort, QMVT invested a total of $2 million in two convertible notes with a 2-year term at 8% interest and convertible into 66 million shares of common stock.

 

On January 26, 2021, Quantum Materials Corp. (the “Company”) and Pasaca Capital Inc. (“Pasaca”) entered into a Securities Purchase and Financing Agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, at the first closing, Pasaca will convert three previously issued promissory notes made by the Company payable to Pasaca and loan to the Company an additional $1,500,000 pursuant to a certain Secured Convertible Promissory Note (the “Convertible Note”) made by the Company payable to Pasaca in the principal amount of $4,500,000 (the “Senior Note”). The Senior Note is convertible into 154,228,625 shares of the Company’s common stock (the “Note Shares”). At the second closing, Pasaca will purchase common stock of the Company (“Common Stock”) in an amount such that, after such purchase and the conversion of the Senior Note into the Note Shares, Pasaca will own fifty-one percent (51.0%) of the fully diluted common stock of the Company. The purchase price for the Common Stock to be sold in the second closing is $10,500,000. Pasaca will also have the right to appoint three members to the Company’s Board of Directors. Both the first and second closing are subject to numerous contingencies, as set forth in the Purchase Agreement. In March 2021, the Purchase Agreement was amended and the original notes were revised into two notes. The first Convertible Note dated March 8, 2021 made by the Company payable to Pasaca in the principal amount of $3,450,000. The note is convertible into 118,241,945 shares of the Company’s common stock with a conditional maturity date of June 8, 2021. The second Convertible Note dated March 9, 2021 made by the Company payable to Pasaca in the principal amount of $2,750,000 The note is convertible into 94,250,826 shares of the Company’s common stock with a conditional maturity date of June 9, 2021.

 

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Also as set forth on January 26, 2021, the Company and Pasaca entered into a Registration Rights Agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, holders of twenty percent of the total shares of Note Shares and Common Stock issued pursuant to the Purchase Agreement (the “Registrable Shares”) shall have the right to require the Company to register at least thirty percent of such shares for sale on Form S-1 of Form S-3 under the Securities Act of 1933, as amended (the “33 Act”). In addition, holders of ten percent of the Registrable Securities shall have the right to require the Company to register such shares for sale on Form S-3 under the 33 Act. The Registration Rights Agreement also provides for piggy-back registration rights. Pursuant to the Registration Rights Agreement, should the Company determine to issue new equity securities of the Company, or securities convertible into equity securities of the Company, it must offer such new securities to Pasaca and/or its assigns.

 

Also, on January 26, 2021, the Company and Pasaca entered into a Distribution Agreement (the “Distribution Agreement”). Pursuant to the terms of the Distribution Agreement, the Company appointed Pasaca to act as an independent distributor to resell and distribute the Company’s Quantum Dots and QMC HealthID products. Under the Distribution Agreement, Pasaca guaranteed that the Company would receive cumulative gross royalties and/or gross sales, licensing or other revenues under the Distribution Agreement of no less than $15,000,000, over the period including 2020 and continuing until twelve months after the Company has completed development of a functioning product integrating the QMC HealthID IP and Innova Medical Group’s products. Pasaca has the right to extend the revenue period by up to twenty-four months upon payment of advance royalties. At the date of this report, we have drawn $7,250,000 in advance draws, and these accrued interest at 8% until the date of conversion.

 

Common Share Issuances

 

During the first three months of calendar year 2021, the company issued 3,333,333 shares due from a subscription agreement entered into during 2019, 2,133,333 in exchange for legal fees payable, 3,527,337 shares in exchange for asset purchase and 2,081,017 shares in exchange for exercise of warrants.

 

Also, subsequent to September 30, 2019, the company issued 59,728,063 shares related to the conversion of eleven outstanding debentures totaling $680,000 in principal and $320,000 interest common shares. In addition, the Company issued 422,297 shares in exchange for exercise of warrants.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Form 10-Q contains “forward-looking statements” relating to us which represent our current expectations or beliefs, including statements concerning our operations, performance, financial condition and growth. For this purpose, any statements contained in this report that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements.

 

Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and those actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.

 

The following discussion should be read in conjunction with the Company’s risk factors, condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Form 10-K filed March 23, 2021 for the fiscal year ended June 30, 2019. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear herein. The Company’s actual results could differ materially from those discussed here.

 

33
 

 

The financial information furnished herein has not been audited by an independent accountant; however, in the opinion of management, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the three-month period ended September 30, 2019 and 2018 have been included.

 

Business Overview

 

QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in diameter. Approximately 10,000 would fit across the diameter of a human hair. Their small size makes it possible for them to exhibit certain quantum mechanical properties. QDs emit either photons or electrons when excited. In the case of photons, the wavelength (color) of light emitted varies depending on the composition and size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different types and/or sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of QDs in a range of electronic and other applications, in the display and lighting industries. QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of QDs in printed photovoltaic cells.

 

QDs were first discovered in the early 1980s and the industry has developed to the point where QDs are now being used in an increasing range of applications, including televisions and displays, light emitting diode (“LED”) lighting (also known as solid-state lighting), and in the biomedical industry. LG, Samsung, and other companies have recently launched new televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.

 

QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiency than existing technologies. In traditional solar cells, a photon can only be converted into a fixed amount of energy per photon, regardless of the photon’s total energy. Excess energy is converted to heat which further lowers the efficiency of the panel. QD-based solar cells have the potential to significantly exceed this efficiency because QDs are capable of generating multiple electrons per photon strike rather than converting the extra energy of high energy photons to heat as in the case of traditional solar cells. QD solar cells can also convert the infrared portion of the spectrum that is not absorbed by traditional solar cells. These attributes make the theoretical maximum efficiency of QD solar cells substantially higher that of traditional silicon solar cells. We believe the use of QDs in solar cells will create the opportunity for a step change in efficiency and performance in printed photovoltaic cells.

 

A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, but we anticipate rapid growth of the QD market.

 

History of the Company

 

QMC was formed in January 2007, as a Nevada corporation under the name “Hague Corp.” and its shares began trading in the over-the-counter market in the fourth calendar quarter of 2008. The original business of Hague Corp. was the exploitation of mineral interests. Solterra, a Delaware corporation, was formed in May 2008 by Mr. Stephen Squires, our Chief Executive Officer, and other shareholders to develop quantum dot applications in the solar cell industry. Solterra was acquired by Hague Corp. in November 2008, pursuant to a merger transaction wherein the shareholders of Solterra exchanged their shares of common stock in Solterra for shares of common stock in Hague Corp., and Solterra became a wholly-owned operating subsidiary of Hague Corp. Upon the closing of the merger, Hague Corp. changed its business from the exploitation of minerals to the development of QDs, and subsequently changed its name to “Quantum Materials Corp.” in 2010.

 

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In October 2008, Solterra also entered into a license agreement with the University of Arizona, which was later amended, (the “UA License”) pursuant to which Solterra has been granted exclusive rights to use the University of Arizona’s patented screen-printing techniques in the production and sale of organic light emitting diodes (“OLEDs”) incorporating QDs in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr. Ghassan Jabbour, a member of the Company’s Board of Directors. In 2020, the Company determined that the U of A patented technology was not optimal for its printed solar cell product and developed its own solution.

 

In 2010, Solterra entered into an agreement with a third-party provider of industrial process equipment to develop a proprietary process for continuous flow production of QDs and TQDs under which Solterra retained all ownership and rights to the design and any related intellectual property. The development work has since been completed and the first two units have been delivered and placed into operation.

 

In 2013, the Company opened the Wet Lab in San Marcos, Texas at Star Park, an extension of Texas State University. In 2014, the first piece of manufacturing equipment was delivered to the Wet Lab. The capacity of the initial unit was approximately 250kg of QDs or TQDs per year and was intended to be used for internal research and development purposes although it also can be used for commercial production.

 

In 2014, the Company acquired a patent portfolio from Bayer AG that included patents and patent applications covering the high-volume manufacture of QDs, including heavy metal-free compositions, various methods for enhancing quantum dot performance, and a quantum dot based solar cell technology (the “Bayer Patents”).

 

The Bayer Patents, the UA License, organically developed technologies and our proprietary continuous flow manufacturing process comprise our fundamental asset platform. We believe that the intellectual property and proprietary technologies position the Company to become a leader in the overall nanomaterials and quantum dot industry, and a preferred supplier of high performance QDs and TQDs to an expanding range of applications.

 

In 2016, Mr. Squires returned as President and CEO and implemented a cost reduction initiative streamlining the G&A overhead and devoting more resources to R&D and commercialization readiness. These efforts have resulted in further optimization of the chemistry and the products. Through this refinement, we have been able to double the through put of our current production equipment from 2000 Kg of QDs per year to 4,000 Kg of QDs per year. All of our discoveries are purposely developed to be compatible with our patented flow manufacturing process. Management believes that this and a number of other material performance enhancement discoveries made by us provide us with the ability to provide industry leading material performance at a very competitive price point.

 

In 2019 the Company developed the QDX Ledger, which is based on technology acquired the blockchain-based technology assets of Capstan Platform, Inc. to provide an immutable, scalable and shared data store for consistent tracking and visibility among participants in a product supply chain. The identity and access credentials of participants, be they individuals, corporations or machines is also secured on the platform, providing mechanisms to control and restrict the supply of products as might be required by regulatory mandates and socially conscious business practices.

 

QDX Quantum Dots can be incorporated into almost any physical product so that its authenticity can be verified and tracked from point of manufacture through to sale to an end customer. Unlike existing approaches to establishing product identity, including QR code stickers and RFID tags, we believe that QDX Quantum Dots are more tamper proof, resistant to environmental extremes and low cost. We believe that they may be incorporated into products as diverse as auto parts, consumer electronics, apparel and luxury fashion accessories, industrial IoT devices, bank notes and even liquids, such as gasoline and lubricants.

 

In early 2020 and in the advent of the Covid 19 pandemic, the company recognized a need for a secure method for the validation and reporting of the Covid 19 testing process. The Company leveraged its existing QDX Ledger platform technology to launch the QDX HealthID later rebranded the QMC HealthID and is operated as a wholly owned subsidiary of Quantum Materials Corp.

 

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Business Opportunities

 

The following outlines the business opportunities that the Company has pursued over the last few years:

 

  Expanded range of quantum dot base materials to include carbon quantum dots, water soluble quantum dots, food grade quantum dots and IR emitting quantum dots.
     
  Initiated collaborations with a number of LED and Micro LED companies, and have MTA’s in place to provide samples to collaborate in commercially viable solutions;
     
  Developed stabilized cadmium free QDs and encapsulation process for remote phosphor LED applications and surpassed 8,000 hours continuous on time without measurable degradation;
     
  Reduced QD process cost by more than 45% and doubled annual production throughput capacity using existing process equipment and expanded capability to include Pervoskite quantum dots;
     
  Significantly improved emission color purity by narrowing the color wavelength, tuning the emission wavelength and increasing the quantum yield (brightness) of our cadmium-free QD optical materials focused on display applications. These improvements have resulted in Rec. 2020 coverage in excess of 90%;
     
  Developed blue cadmium-free high-performance QDs;
     
  Develop the first 100% quantum yield cadmium-free red QDs;
     
  Obtained an intellectual property portfolio of 50+ patents and applications granted, filed, or in preparation, including issued patents acquired from third parties, including those covering high volume production of QDs, including cadmium-free quantum dots, quantum dot enhancement technologies and quantum dot solar cell technologies;
     
  Expanded the number of display optical film companies that we are now in collaboration with and increased sample deliveries;
     
  Continued product development with leading global optical film manufacturers;
     
  Established a nanomaterials laboratory facility for research, development and production in Texas.

 

The Company can provide no assurances that its efforts to date will result in the grant of patents for proprietary processes or result in future sales and/or profitable operations.

 

A uniquely performing variant of QDs are TQDs, which have a molecular configuration consisting of a center portion and four arms extending from the center that are equally spaced in three dimensions. TQDs have material advantages over standard spherical QDs where both absorption of photons and charge transport are enhanced by the legs of the tetrapod which effectively serve as trillions of antennae for light. Their unique architecture and shape also promotes more uniform distances between the dots, which helps to eliminate the problem of aggregation. TQDs are more costly and difficult to produce in quantity using known methods, with the exception of our patented flow technology.

 

Initially, our principal business emphasis was on the development of tetrapod quantum dots (“TQDs”) for solar cell applications through Solterra. TQDs are a variant of QDs with material advantages over standard spherical QDs, particularly in solar panel applications. The solar cell market became increasingly volatile, with prices eroding due to the influx of subsidized products from outside the United States. We believe that we are well-positioned to bring a solar cell to market with sufficiently high conversion efficiency that, when combined with our low- cost proprietary manufacturing process, will result in a product capable of producing energy at a competitive cost per watt compared to existing solar cell technology and at a scale that will meet growing market demand for distributed, sustainable energy.

 

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How Quantum Dots are Produced

 

High volume production of QDs is typically accomplished through one of several methods including:

 

Colloidal synthesis: Growth of QDs from precursor compounds dissolved in solutions, much like traditional chemical processes. This manual batch process requires careful control of temperature, mixing and concentration levels of precursor materials. Precise control must be maintained uniformly throughout the solution otherwise non-uniform, irregular QDs are produced. Due to their very small size it is extremely difficult if not impossible to segregate the QDs by size once they have been produced and a conglomeration of varied size QDs are not capable of producing the unique features that are required in most applications.

 

Prefabricated seed growth: QDs are created from chemical precursors in the presence of a molecular cluster compound under conditions whereby the integrity of the molecular cluster is maintained and acts as a prefabricated seed template. This manual batch method can produce reasonable quantities of QDs but can take significant capital resources to achieve significant volume and still results in low yields.

 

QMC’s automated continuous process: Unlike the more labor-intensive batch processes described above, we use a continuous manufacturing process to produce QDs and TQDs. We Believe that this patented process and chemistry provides advantages to other methods such as more precise control of process variables which leads to improved quality control. We believe that by using this method yields are higher and manufacturing costs are lower as compared to other methods. We also believe that we are the only company to successfully deploy continuous flow technology in the large-scale manufacturing of highly uniform QDs of both cadmium-based, cadmium-free and a number of other elemental chemistries.

 

Raw materials for the commercial production of QD are purchased in bulk from chemical supply companies. Indium, a component of our cadmium-free QD is considered a rare metal. Indium is primarily found in South America, Canada, Australia, China and the Commonwealth of Independent States. There is also a mature and efficient indium recycling process. While our management does not believe that a supply disruption of the indium-containing compounds used in the manufacturing of QDs represents a significant risk, no assurances can be given in this regard.

 

Major Market Segments

 

Life Sciences. The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both the in vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, and in vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues. The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators. QD technology is also being used in place of colloidal gold nanoparticles in lateral flow test kits such as those used in the rapid Covid 19 antigen test. QDs have been reported in literature to exponential improve the sensitivity of these test enabling earlier detection.

 

The Federal Drug Administration (“FDA”) has issued emergency use authorization (“EUA”) for medical tests that diagnose Covid-19. The FDA is responsible for protecting the public health by ensuring safety, efficacy, and security of all human and veterinary drugs, biological products, and medical devices. With regards to medical tests, the FDA usually does this by making manufacturers meet rigorous guidelines in an approval process that can take many months. During an emergency, such as a pandemic, it may not be possible to have all the evidence that the FDA would usually have before approving a medical test. If there’s evidence that strongly suggests that patients have benefited from a test, the agency can issue an EUA to make it available. One of the minimum requirements for granting EUA is that the known and potential benefits of the test outweigh the known potential risks. However, this is a minimum requirement and not the standard. The minimum standard can be met and EUA is still not given; there may be additional requirements, such as the test meeting reasonable thresholds for safety and effectiveness and/or people in urgent need of care based on a diagnosis. EUAs are only given during a declared emergency; outside of this, an EUA is never given.

 

Once the pandemic is over and should FDA EUA of Covid-19 tests be revoked. The 510K approval process which requires validation and submission of the test for FDA 510(k) clearance, which is one of the normally used medical device regulatory pathways for FDA approval would be required to continue to sell the test kits in the USA.

 

It is important to note that QMC is collaborating with a leading university in the medical field and intends to initially pursue the FDA EUA while also pursuing the FDA 510(k) clearance of its test platform for non-covid related testing. QMC also intends to pursue regulatory approvals in one or more foreign jurisdictions.

 

The time required to complete either the FDA EUA or the FDA 510(k) approval process can vary widely, and approval is not guaranteed the same holds true for regulatory approvals outside the USA.

 

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TVs, Displays, and Other Optoelectronics. This market is comprised principally of quantum dot LCD displays (“QDLCDs”) for televisions, computers, cell phones, tablets and various other applications. In QDLCDs, QDs are used to down convert some of the blue light from the LED backlight directly to green and red light allowing for the creation of more vibrant colors and energy savings as compared to a traditional LCD TV/display. Unlike OLEDs which are extremely expensive to produce and require massive manufacturing capital expenditures, QD films are a drop-in solution for LCD manufacturers using existing infrastructure allowing for OLED-like color performance at significantly lower capital investment. LCD TVs make up the vast majority of new TV shipments, and we expect this proportion to grow. Samsung and several other OEMs are currently shipping televisions using QDs to enhance the color quality and power efficiency.

 

Lighting. In the lighting market, companies began to commercialize quantum dot LEDs in 2013 with significant R&D occurring among manufacturers of solid-state lighting. While companies have launched quantum dot LED lamps, the market for quantum dot LED lamps and the other lighting products is still relatively small. We believe QD-based LED lighting will be a highly competitive replacement for currently available compact florescent and LED lighting, as QD technology provides greater power efficiency and the ability to tune the light spectrum to emit light that is the most pleasing and/or appropriate for the application.

 

Solar Energy. QDs are capable of producing energy from a broad spectrum of solar and radiant energy, including the ultraviolet and infrared frequencies conventional silicon solar cells generally do not convert to electricity. QD solar cells have theoretical conversion potentials of approximately twice that of conventional solar cells, and applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost. Management believes that QD solar cells and panels will be the next evolutionary development in the field of solar energy. Management also believes that increased conversion efficiencies will be realized with the use of TQDs resulting from their unique shape and that our low-cost proprietary continuous production process and printing technology will permit Solterra to offer solar electricity solutions that can compete on a non-subsidized basis with the price of retail electricity in key markets around the world. We believe that global energy consumption trends that include the need for distributed energy generation (non-grid and especially in developing markets) and the desire for non-fossil fuel generated energy even at increased costs will drive market demand for solar. Management believes this will be especially true if existing generation by nuclear and coal is decommissioned due to age-related, safety, or environmental concerns or global governmental policy.

 

Other applications. Current and future applications of QDs and other nanoparticles may impact a broad range of other industrial markets. These potentially include batteries and energy storage, commercial glass, water purification, improved thermoelectric components, biohazard detection sensors, diode lasers, and others. We intend to monitor these uses as they mature from basic research and plan for specific compositions as market opportunities develop.

 

We anticipate that the biggest growth sectors for QDs will be in Life Science, anti-counterfeiting, and photovoltaics. Other current and potential applications for QD include nano-bio, commercial glass, batteries, sensors, lasers, and paints. QDs remain an expensive product. Although the high cost has slowed market growth, we believe the recent growth of mass manufacturing is quickly easing the cost constraints.

 

License Agreement

 

In November 2018, the Company entered into a license and development agreement with Amtronics India LLC related to the volume production of quantum dots in Assam, India. The agreement is part of a larger project for the design, training, research and development of a quantum dot manufacturing facility in Assam. This project has been under discussion for nearly three years. A ground-breaking ceremony took place in Assam on January 16, 2019, and the Company anticipated operations being established and operational prior to year-end 2019. In addition to an upfront fee and royalty, the agreement provides for the Company to sell equipment and training services, which the Company expects will provide additional revenues. The project was delayed due to historic flooding in the region during 2019 and 2020. The project was and continues to be delayed due to the severe Covid-19 outbreak and subsequent quarantine occurring throughout India. Construction on the project has resumed and planning for a new timeline has begun.

 

The Company believes that the terms of the licensing agreement will enable the Company to begin to leverage its intellectual property portfolio and to begin generating revenues without overburdening the Company’s scientific staff in a manner that would disrupt new discovery. The other participants in the Assam project have the responsibility of, among other things, developing the site, constructing the facilities and hiring staff. The Company has agreed to construct and supply the proprietary equipment, assisting in the development and scale up of the 3rd generation solar, display and SSL products, training and providing a broad range of consulting services at additional cost, representing a potential ongoing revenue opportunity for the Company.

 

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The Company received advanced payments from Amtronics India LLC related to its exclusive license and development agreement related to the production of quantum dots in Assam, India (“License Agreement”), which have been recorded as contract liabilities and will be recognized as revenue in accordance with ASC Topic 606 once the performance obligations are met. As of September 30, 2019, and 2018 contract liabilities were $1,197,973 and $500,000, respectively. The current liability represents the next twelve months’ portion of the license fees revenue. For each of the period ended September 30, 2019 and 2019, no revenue was recorded related to the License Agreement.

 

In addition to Company’s efforts to commercialize its QD-LED remote phosphor technology for displays, the Company plans for its core focus in the first half of 2019 to be research and development for the optimization of its 3rd generation perovskite QD based solar technology in preparation of scaling up to commercial production levels in Assam, India.

 

We have continued to maintain aggressive cost control measures, never forgetting this is a marathon and not a sprint. We are continuing to focus more resources on developing our continuous flow technology. We also have utilized investment funds to further develop our QDX Ledger anti-counterfeiting technology as well as related HeathID platform for pandemic and other diagnostic testing analysis, tracking and reporting. To further streamline our operations, we have continued to analyze our operating costs and make reductions whenever and wherever possible.

 

Recent Developments – COVID-19 pandemic

 

The recent COVID-19 pandemic and the measures being taken to address and limit the spread of the virus have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that has negatively impacted, and may continue to negatively impact, global demand for our products and services. See part Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 filed with the SEC on March 23, 2021, for further discussion.

 

Cybersecurity

 

Cybersecurity refers to a set of practices and techniques used to protect the integrity of networks, applications and data from attack, damage, loss or unauthorized access. The use of cybersecurity measures can help prevent cyber-attacks, data breaches, and identity theft and can aid in risk management.

 

Confidentiality, integrity and availability, also known as the CIA triad, is a model designed to guide policies for information security within an organization.

 

Confidentiality: Protecting confidentiality is dependent on being able to define and enforce certain access levels for information.

Integrity: Integrity is defined as protecting data from deletion or modification from any unauthorized party, and it ensures that when an authorized person makes a change that should not have been made the damage can be reversed.

Availability: Authentication systems, access vectors and systems functionality are all paramount for the information they protect and ensure it’s available when it is needed.

The following is a brief representation of QMC HealthID™ and QDX Platform Cybersecurity measures currently in place.

 

  Penetration testing: simulates a malicious attack in order to perform in-depth business logic testing and determine the feasibility and impact of an attack. The testing is performed internally and externally to the system.

 

  Tested development, testing and production environments when typically, only production environments are tested.
  Cold test results were very good with only one critical and one high vulnerability very few medium and low vulnerabilities.

 

  Application security testing:

 

  Currently, a relatively manual process of assuring our applications are more resistant to security threats, by identifying security weaknesses and vulnerabilities in source code.

 

  Code static analysis

 

  Sonarqube is an open-source platform developed by SonarSource for continuous inspection of code quality to perform automatic reviews with static analysis of code to detect bugs, code smells, and security vulnerabilities on 20+ programming languages.

 

  Library vulnerability reporting

 

  Partially automated process of researching and scanning third-party software components in use.

 

  Container vulnerability scanning (ECR)

 

  Amazon Elastic Container Registry (ECR) is a fully managed container registry that makes it easy to store, manage, share, and deploy verified container images and artifacts anywhere.

 

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  Virtual machine vulnerability scanning (AlertLogic)

 

  Alert Logic service is MDR (Managed Detection & Response), which is an always-on always-aware breach detection/response system

 

  Containers always get security updates when they are built

 

  All Kubernetes containers automatically notify the team when there are new security updates to be completed.

 

  Encryption

 

  All data is encrypted at rest and in transit.
  No PII or PHI data is stored on any end-user device.

 

  Segregation/Isolation

 

  Production environment is logically and physically isolated from dev/test
  Each element is contained within a separate VPC (virtual private cloud)
  Each separate VPC requires a VPN (virtual private network) connection in order to access.

 

  Access

 

  Complex password policies are enforced
  Role based access control within dev/text/production environments
  Multi-Factor Authentication is enforced within systems requiring higher levels of access control

 

  Healthcare data security and availability standards in use within appropriate deployed platforms

 

  FHIR

 

  Rapidly exchange data in the HL7 FHIR standard format with a single, simplified data management solution for protected health information (PHI). Azure API for FHIR lets you quickly connect existing data sources, such as electronic health record systems and research database

 

  HITRUST

 

  The Health Information Trust Alliance Common Security Framework (HITRUST CSF) leverages nationally and internationally accepted standards and regulations such as GDPR, ISO, NIST, PCI, and HIPAA to create a comprehensive set of baseline security and privacy controls

 

Liquidity and Capital Resources

 

Going Concern

 

The Company recorded losses from continuing operations in the period presented and has a history of losses. 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.

 

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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, if at all.

 

The Company has continued to maintain aggressive cost control measures, although we plan on increasingly to focus more resources on research and development as we did during the last half of fiscal year 2019 and fiscal year 2020. To further streamline operations, the Company has continued to analyze its operating costs and to make reductions where management believes prudent. To that end, we changed transfer agents during June 2019 in order to further reduce overhead cost and has made additional cost cutting measures.

 

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.

 

As of September 30, 2019, we had a working capital deficit of $9,758,002, with total current assets and liabilities of $32,260 and $9,790,262 respectively. Included in the liabilities are $793,151 owed to our officers, directors and employees for services rendered and accrued through September 30, 2019, $2,516,766 of debentures, net of unamortized discount and $20,000 of notes payable that are due within one year. As a result, we have relied on financing through the issuance of common stock and convertible debentures.

 

As of September 30, 2019, we had cash and cash equivalent assets of $8,735. We continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into securities of the Company. Management believes it may be necessary for the Company to rely on external financing to supplement working capital to meet the Company’s liquidity needs in the fiscal years ended 2020 and 2021; the success of securing such financing on terms acceptable to the Company, if at all, cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.

 

The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated:

 

    Three Months Ended  
    September 30,  
    2019     2018  
             
Operating activities   $ (159,684 )   $ (184,090 )
Investing activities     (7,059 )     -  
Financing activities   $ 175,000     $ 203,900  

 

Operating Activities. Net cash used in operating activities was $159,684 for the three months ended September 30, 2019 compared to $184,090 for the same period of 2018, a decrease in cash used of $24,406. The decrease was primarily attributable to an increase in the cash provided by working capital accounts of $156,961 offset in part by an increase in cash used of $135,278 from an increase in net loss and non-cash reconciling items.

 

Investing Activities. Net cash used in investing activities was primarily related to purchases of equipment. Purchases of capital equipment were $7,059 and $0, respectively in the three months ended September 30, 2019 or 2018. During the three months ended September 30, 2019, purchases primarily relate to computers and lab equipment whereas there were no purchases of capital equipment during the three months ended September 30, 2018.

 

Financing Activities. Net cash provided by financing activities was $175,000 for the three months ended September 30, 2019 compared to $203,900 for the same period of 2018, a decrease of $28,900. The decrease is primarily due to a decrease in proceeds from the issuance of stock and notes payable of $109,900 offset in part by an increase in proceeds from convertible debentures of $75,000.

 

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these condensed consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern.

 

Our primary sources of liquidity have historically been the issuance of common stock and debentures. The Company may raise additional capital through future equity raises or debt. Until the Company generates positive cash flow from operations, the Company anticipates that its primary sources of liquidity will continue be cash on hand and the issuance of additional debentures. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock. The Company believes that it has sufficient cash and capital resources to operate its business for at least the next twelve months.

 

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Financing Arrangements

 

Over the course of meeting our capital needs, we have entered into various debentures and debt instruments, which generally have short maturity terms, typically 6 to 24 months. Many of these instruments were accompanied by shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock. The outstanding principal amount of these instruments at September 30, 2019 was $2,547,116. The terms of the instruments are set forth in the following table.

 

Issuance Date   Outstanding Principal
Amount ($) (1)
    Interest Rate     Conversion Price ($)     Maturity Term (2)   No. of
Shares
Exercisable
Under
Related Warrants
    Warrants Strike
Price ($)
    Warrant Exercise Period
September 2014     25,050       6 %     0.15     September 2019 - October 2019     3,333,667       0.30     September 2019
April - June 2016     1,060,716       8 %     0.012     March 2018 - April 2019     2,686,590       0.15     August 2021
August 2016     200,000       8 %     0.012     August 2018     833,200       0.15     August 2021
January - March 2017     60,000       8 %     0.12     January - March 2019     10,831,600       0.15     January 2022 – March 2022
July 2017     100,000       8 %     0.12     February 2019     250,000       0.12     July 2020
September 2017     150,000       8 %     0.12     February 2019     375,000       0.12     September 2020
November 2017     27,000       8 %     0.12     November 2019     416,600       0.15     November 2022
December 2017     75,000       8 %     0.12     March 2019     250,000       0.12     December 2020
February 2018     45,000       8 %     0.12     February 2019     500,000       0.12     December 2020
March 2018     65,000       8 %     0.12     March 2019     500,000       0.12     March 2021
April 2018     100,000       8 %     0.12     March 2019     500,000       0.12     March 2021
April 2018(3)     70,000       8 %     0.12     April 2021