Attached files
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| EX-31.A - QUANTUM MATERIALS CORP. | ex31-a.htm |
| EX-32.B - QUANTUM MATERIALS CORP. | ex32-b.htm |
| EX-32.A - QUANTUM MATERIALS CORP. | ex32-a.htm |
| EX-31.B - QUANTUM MATERIALS CORP. | ex31-b.htm |
| EX-23.1 - QUANTUM MATERIALS CORP. | ex23-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2019
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-52956
QUANTUM MATERIALS CORP.
(Exact name of Registrant as specified in its charter)
| Nevada | 20-8195578 | |
(State of jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
| 3055 Hunter Road, San Marcos, Texas | 78666 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (512) 245-6646
(Former address of principal executive offices, if changed since last report) |
(Zip 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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ] No [X]
Check whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [X]. No [ ].
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 for such shorter period that the registrant was required to submit and post such files). 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.:
| 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. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 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]
As of December 31, 2018, of the 492,346,589 outstanding shares of common stock, the number of shares held by non-affiliates was approximately 464,643,288 shares with an aggregate market value of approximately $13,939,300 based upon the closing price of $0.03 of our common stock as of the close of business on December 28, 2018.
As of March 19, 2021, the issuer had 699,339,396 shares of common stock, $0.001 par value per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
QUANTUM MATERIALS CORP.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2019
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Some of the statements set forth this Form 10-K contain forward-looking statements within the meaning of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our plans, objectives, goals, strategies, future events, capital expenditures, future results, our competitive strengths, our business strategy and the trends in our industry are forward-looking statements. The words “believe,” “may,” “could,” “will,” “estimate,” “possible”, “target”, “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “forecast,” “future,” “likely,” “probably,” “suggest” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements.
Forward-looking statements reflect only our current expectations. We may not update these forward-looking statements, even though our situation may change in the future. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements due to a number of uncertainties, many of which are unforeseen, including, without limitation:
| ● | we are a development stage company with no history of profitable operations; | |
| ● | we may need additional capital to finance our business; | |
| ● | our products may not gain market acceptance; | |
| ● | the technology we are developing to implement our blockchain-based QDX Ledger relies on software and programming that is complex, and if it contains undetected errors, it could be adversely affected and may not function effectively or correctly; | |
| ● | there are uncertainties related to the regulatory regimes governing blockchain technologies, cryptocurrencies, digital assets and the QDX Ledger, and new regulations, interpretations or policies may materially adversely affect the QDX Ledger, including its development and our ability to provide and sell related products or services; | |
| ● | we may not be able to establish distribution relationships and channels and strategic alliances for market penetration and revenue growth; | |
| ● | competition within our industry; and | |
| ● | the availability of additional capital on terms acceptable to us. |
The foregoing list of factors is not exhaustive and new factors may emerge or changes to these factors may occur that would impact our business and cause actual results to differ materially from those expressed in any of our forward-looking statements. Additional information regarding these and other factors may be contained in our filings with the Securities and Exchange Commission, including on Forms 10-Q and 8-K. All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depends on many events, some or all of which are not predictable or within our control. If one or more events related to these or other risks or uncertainties materialize, or if management’s underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. Accordingly, you should not place undue reliance on these forward-looking statements.
We qualify all the forward-looking statements contained in this Form 10-K by the foregoing cautionary statements. Throughout this Form 10-K, unless otherwise designated, the terms “we”, “us”, “our”, the “Company”, our “Company”, “QMC” and “Quantum” refer to Quantum Materials Corp., a Nevada corporation and its subsidiaries.
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.
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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.
Current Position
Since January 2017, we have continued to fine-tune our operations. These efforts have enabled us to achieve the highest optical performance for cadmium free quantum dots in the company’s history. In addition, we have expanded the color range to now include the blue spectrum in addition to red and green spectrum. While achieving extraordinary performance is important, management believes that being able to produce these materials repeatedly and at a low price point is the formula for success, and we have made these performance improvements while also doubling throughput and further reducing production. We are now developing the infrastructure to support volume production.
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Widespread, rapid adoption of quantum dots by various industries but specifically by the Life Science market may cause supply pressure that will need to be met with significant increases in available production capability. We are now in the process of building addition production capability in order to be better positioned to react to such demand. This production is anticipated to come online in the fourth quarter of 2021. We believe our low-cost high-volume manufacturing process is ideally positioned to meet these requirements. This is anticipated to be a key advantage to the Company to meet market demand and drive increased revenue.
The advantages and benefits of our automated production process and equipment are:
| ● | large scale and narrow nano bandwidth precision production with a compact footprint; | |
| ● | less manpower and rapid production time utilizing advanced technologies allowing for cost savings; | |
| ● | economies of scale leading to lower costs; | |
| ● | high production yield with mimimal post-processing; | |
| ● | Rapid R&D and improved quality control for higher uniformity; and | |
| ● | assurance of backup reactor systems for continuous supply. |
Sales and Marketing Overview
During the past year, we have made significant progress in the development of QDs for use in anti-counterfeiting and Life Science applications. We are engaged with a leading nicotine delivery company developing a proof of concept for a unique authentication technology based on our food grade QDs. This is a funded POC that is scheduled to be complete by the third quarter of 2021. The company has also been developing Quantum Dot enabled lateral flow test kits using our proprietary Quantum Dot technologies. The initial focus is to use our technologies to enhance the sensitivity of the Covid 19 antigen test and to produce antibody test kit technologies that provide quantitative results. We have also developed a proof-of-concept Quantum Dot enabled Covid 19 test cassette with a photonic reader device that communicates directly with our QMC HealthID app in order to deliver an at home testing solution that will provide the highest possible test result and test reporting integrity without the presence of a third-party care giver. The technologies that we are developing for lateral flow test kits will also be applicable to a wide range of lateral flow test kits beyond Covid 19 and we are already exploring those opportunities.
Prior to the covid pandemic the Company entered into an agreement with QMVT in which QMVT would have access to technologies developed by the company that were mutually agreed to be ready for market and in which QMVT would develop that market and distribute the product. The initial focus was to be on a grow film for in door farming. With the advent of the pandemic the company shifted its primary focus to provide solution that would help address a number of challenges related to covid testing management and enhanced covid test kit technologies. The company and QMVT have agreed to dissolve the QMVT relationship and are currently in the process of negotiating the terms to do so.
Our discussions with Life Science companies provide strong evidence that the market opportunity is substantial and that our business plan is aligned with the customers’ product specification needs. While we are pursuing applications in several other markets as well, we believe that the Life Sciences and anti-counterfeiting represents the most substantial and most immediate opportunities. We further believe that our advantages in delivery of large volumes of high quality, narrow spectra, high performance QDs and other nanomaterials via our patented continuous production process makes us an attractive supplier. While we continue to pursue direct sales opportunities, we are also pursuing license agreements with strategic partners that can accelerate adoption in key verticals.
We believe that our recent move into the anti-counterfeiting market utilizing the QDX Quantum Ledger Blockchain Anti-counterfeiting platform is among the first in the quantum dot industry. Piracy and counterfeiting cost businesses more than $200 billion annually and account for the loss of more than 750,000 jobs in the US alone. Counterfeit drugs cost the global pharmaceutical industry approximately $18 billion in lost profits annually and according to Interpol, result in as many as one million deaths annually. QDs and other custom nanoparticles added to ink can be used to create unclonable unique “quantum fingerprints” for every package using current printing technology, and these “fingerprints” can be quickly verified utilizing a tokenized blockchain distributed ledger technology with a handheld device or optical in-line screening in manufacturing track and trace systems. Our plan is to be the industry innovative leader in this market space.
Although the development and launch of our QMC HealthID was part of our intended business trajectory, we were encouraged by the founder of the World Nano-foundation very early in the Covid pandemic to contribute our blockchain know how to provide a solution for a secure means to authenticate the entire testing process. We have now developed a complete solution that continues to evolve to meet specific customer workflows and now has an eco-system of test kit suppliers. While we remain very excited about the prospects for this product and see a number of uses beyond Covid we also recognize the need to rapidly gain broad adoption as the field of apps continues to grow and we believe this will lead to consolidation. We believe licensing this technology to a large Tech or Life Science company that has the reach and resources to achieve broad and rapid adoption is a desirable outcome and would enable Quantum Materials Corp. to re-invest into our core technologies and further expand our I.P. portfolio into the Life Science area.
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Operational Overview
Our operations are located in San Marcos, Texas at the Star Park Technology Center, an extension of Texas State University (“TSU”). This location provides us with space for future expansion and with convenient access to TSU faculty and specialized laboratory facilities and equipment that can support joint research and development efforts with Texas State University. Located 30 miles south of Austin, Texas, the San Marcos facility is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets. The company is also exploring the possibility of relocating to a standalone facility that will better facilitate our ability to expand our Quantum Dot production, produce micro reactors and expand our R&D staff activities.
We are in the process of building 4 additional reactors in order to increase Quantum Dot production volumes and expand the range of Quantum Dot types we can produce at any one time.
We expect to commence generating revenues from licensing agreements, joint ventures and/or the production of materials at the San Marcos facility in the fourth quarter of fiscal year 2021. In the event we secure a license agreement we anticipate an upfront licensing payment to the company with ongoing royalty payments. Revenues from materials manufactured by the company are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.
Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing nanomaterials and QD market. Nanomaterials and QD technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and will focus a significant part of our efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Universities, and the numerous other research centers and departments with which we have relationships will be important aspects of the Company’s strategy. We are planning to increase our R&D efforts focused on Quantum Dot solar cell optimization and commercialization. Our license in India has indicated that the flooding and then the Covid 19 pandemic resulted in extraordinary delays in constructing the facilities in India. It was our intent to direct revenues from that project to accelerate our solar cell development. We are now better positioned to increase our investment in those technologies without relying solely on funds coming from India.
Our key assets include patents, proprietary high-volume process equipment technology, licenses and other intellectual property rights, our knowhow and the expertise, capabilities, and relationships brought to us by the Company by its management team. We are implementing a comprehensive patent strategy will put additional focus on building out our intellectual property portfolio and licensing rights.
The company has developed its own unique process for producing Quantum Dot solar cells and has determine that it will not be using the University of Arizona developed process. We believe our approach is less costly and helps us reduce any royalty stacking on our end product.
Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs.
In fiscal year 2017, we applied for and received a Low Volume Exemption (“LVE”) under the Toxic Substances Control Act (“TSCA”) which allows us to manufacture QD quantities of 10,000 kilograms or less per year in the United States. We also recently gained Chemical Abstract Service (CAS) registration for QDX cadmium-free quantum dots through a division of the American Chemical Society and has also completed the requisite analysis in support of the QDX Safety Data Sheet (SDS). Both CAS and the SDS are required in order to ship high volumes of advanced materials abroad. Management believes that the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us and our products in the future. See “Risk Factors” section.
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Employees
We have traditionally operated with limited resources and infrastructure. As of the date of this Form 10-K, we have 31 employees, 8 contractors, and 27 full time employees and the management team.
Competition
The commercial nanomaterials industry and more specifically, the quantum dot industry, is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments by employing one or more competitive strategies. We believe that competition among these companies is based on the following factors:
| ● | Product quality and performance characteristics: Manufacturers who will incorporate QDs in specific applications will carefully consider the quality, characteristics and physical properties of the QDs for efficacy in their targeted applications. This includes but is not necessarily limited to the following factors: the consistency of dots from batch to batch; resistance to degradation of performance characteristics by heat, oxygen, moisture, and luminous flux; brightness of emissions; purity of emissions; effective life spans; volume of dots necessary to produce the intended result; special characteristics such as dual emission capabilities; whether or not the QDs contain cadmium or other heavy metals or other hazardous compounds; the time needed to expand capacity; and the location of capacity relative to the manufacturer or ability to locate capacity nearby. | |
| ● | Volume: Before a manufacturer makes the commitment and dedicates capital and marketing resources to incorporate QDs in its end product, it must be confident that the volume of QDs it can obtain from a supplier will be sufficient to meet production needs in the short term and long term, including substantial growth following a successful new product launch. The strategies employed by a quantum dot company to scale production rapidly are critical to its attracting commercial users for its product, regardless of the quality of its QDs. | |
| ● | Price: The price at which QDs can be delivered for incorporation into a new product will dictate the rate at which new applications can be developed and supported. High prices have historically restricted the market for QDs to only the highest value uses such as in the life sciences, while the potential for lower prices of supply appears to be opening many new markets. | |
| ● | Continuing R&D and Product Improvements: Research and industry relationships are important to ensure a quantum dot company stays on the leading edge of technological development and commercialization. R&D is supported by collaboration with academic institutions or industrial companies. The Company spent $92,991 and $188,274 on research and development in fiscal years 2019 and 2018 respectively, a decrease of $95,283. None of these costs were borne by customers. |
We believe we are well positioned in all four areas described above. We believe our wide range of QDs, including food grade, IR emitting and cadmium free QDs, meet or exceed our competitors’ offerings, and our patented continuous manufacturing process allows us to produce large volumes of precise nano wavelength QDs at competitive price points while also giving us the ability to quickly scale up capacity and locate it anywhere in the world it is needed. Lastly, our continuing relationships with universities private and public labs and our approach to joint development ventures should enable us to achieve and maintain a leading position in R&D and commercialization of new products.
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The Company is subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than the Company.
Licenses and Intellectual Property
In 2010, we entered into an agreement with a third-party provider of industrial process equipment to develop proprietary equipment for continuous production of QDs under which we retained all ownership and rights to the design and any related intellectual property. We have made significant improvements to those designs and have now designed our own from proprietary micro-reactors with an increased range of capability, automation, scalability, and modularization. We believe the design of this new process equipment will position us to quickly and efficiently scale up mass production of a wider range of QDs for commercial sale. While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the equipment in-house, if necessary.
Bayer Patents
In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, (the “Bayer Patents”). The Bayer Patents provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for heavy metal-free QDs and nanoparticles; increasing quantum yields; heavy metal-free QDs; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high-performance solar cells and printed electronics.
Agreement with University of Arizona
Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On November 22, 2017, Solterra memorialized prior oral agreements and entered into an amended license agreement with UA. The company has since determined that it will not use the subject I.P. and will be using a process technology developed entirely inhouse.
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.
Other Intellectual Property
The Company also owns additional intellectual property in the form of proprietary equipment designs, trademarks, trade names, copyrights, scientific and technical know-how, and “trade secrets” that it intends to further develop and apply in its business, seeking to protect same with appropriate governmental filings and/or secrecy agreements.
Governmental Approvals
Chemical substances manufactured in the Unites States in quantities of 10,000 kilograms or less per year are exempt from full premanufacture notice (“PMN”) review under section 5 of the Toxic Substances Control Act (“TSCA”). Low Volume Exemption (“LVE”) substances undergo a 30-day review. During fiscal year 2017, we applied for and received an LVE.
You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us or on our behalf.
Risks Related to Our Business
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the notes. A portion of this indebtedness is past due.
We currently have a substantial amount of outstanding indebtedness. As of the date covered by this report, June 30, 2019 and 2018, we had a working capital deficit of $7,141,117 and $6,099,077, respectively, with total current assets and liabilities of $20,069 and $7,161,186 respectively for fiscal year 2019. Included in the liabilities are $757,569 owed to our officers, directors and employees for services rendered and accrued through June 30, 2019, $2,605,042, of convertible debentures, net of unamortized discount, and $25,130, of notes payable that are due within one year. In addition to disputed amounts already in litigation, an aggregate principal amount of $2,287,350 of our outstanding convertible debentures is past due as of the date of this report. There can be no assurance that the holders of these debentures will not declare an event of default and demand immediate payment of the amounts owed.
We have relied on financing through the issuance of common stock and convertible debentures. As of June 30, 2020, we have cash and cash equivalent assets of $248,905. If we are unable to generate sufficient cash flow in the future to service our debt, we may be required to refinance all or a portion of our existing debt or to obtain additional financing. There can be no assurance that any refinancings will be possible or that any additional financing could be obtained on terms acceptable to us. The inability to obtain additional financing could have a material adverse effect on our financial position, liquidity and results of operations. Our substantial indebtedness subjects us to various risks, including:
| ● | we may be unable to satisfy our obligations under our outstanding indebtedness; | |
| ● | we may be more vulnerable to adverse general economic and industry conditions; | |
| ● | we may find it more difficult to fund future working capital, capital expenditures, acquisitions, general corporate purposes or other purposes; and | |
| ● | we may have to dedicate a substantial portion of our cash resources to the payments on our outstanding indebtedness, thereby reducing the funds available for operations and future business opportunities. |
Our auditors have expressed substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. As discussed in Note 1 to the consolidated financial statements included in this report, we have recorded losses from continuing operations in the current period presented and have a history of losses. Our ability of to continue as a going concern is dependent upon our ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing. There can be no assurance that we will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern, if at all.
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We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.
We continue to be a development stage company and face risks associated with introducing new products based on new technologies. We continue to incur losses in operations. We expect our costs will increase substantially in the foreseeable future and our losses will continue as we expect to invest significant additional funds towards growing our business and as we continue to invest in commercializing our product offerings, expanding our marketing channels and operations, hiring additional employees, and developing new solutions. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Further, we expect these efforts to be negatively impacted by the current Covid 19 pandemic and the resulting economic uncertainty. To date, we have financed our operations principally from the sale of our equity and the incurrence of indebtedness. Our cash flow from operations was negative for the years ended June 30, 2020 and 2019. We may not generate positive cash flow from operations or profitability in any given period, and our limited operating history may make it difficult for you to evaluate our current business and our future prospects.
We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increasing expenses as we continue to grow our business. We expect our operating expenses to increase significantly over the next several years as we continue to hire additional personnel, expand our operations and infrastructure, and continue to develop and expand our solutions. These investments may be more costly than we expect, and if we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, they may not result in increased revenue or growth in our business. If our growth rate were to decline significantly or become negative, it could adversely affect our business, financial condition and results of operations. If we are not able to achieve or maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at all and/or which could be dilutive to our stockholders. If we are unable to successfully address these risks and challenges as we encounter them, our business, results of operations, and financial condition would be adversely affected. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
None of our products has commenced commercial production, and if we continue to experience significant operating losses, we may need additional financing to fund our operations, which may not be available to us.
None of our properties has commenced commercial production, and we have a limited history of earnings or cash flow from our operations. We believe that additional financing will be required in the future to fund our operations. While we may attempt to generate additional working capital through the operation, development, sale or possible joint venture development of our assets, there is no assurance that any such activity will generate funds that will be available for operations. We do not know whether additional financing will be available when needed or on acceptable terms, if at all. If we are unable to raise additional financing when necessary, we may have to delay our development and sales efforts or be forced to cease operations.
The recent Covid 19 pandemic has had, and similar health epidemics could in the future have, an adverse impact on our business, operations, and the markets and communities in which we and our customers and strategic alliances operate.
Our business and operations have been adversely affected by the recent Covid 19 pandemic, which has impacted the markets and communities in which we and our customers and other business partners operate. Since December 2019, when Covid 19 was first reported, the virus has spread to countries worldwide, including the United States.
The ongoing Covid 19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. As certain of our potential customers and strategic relationships experience downturns or uncertainty in their own business operations and revenue because of the economic effects resulting from the spread of Covid 19, they have and may continue to decrease their spending on new technologies and delay or cancel assessment and implementation of new technology solutions, such as our offerings.
The Covid 19 pandemic has been declared a national emergency. In response to the Covid 19 pandemic, many state, local, and foreign governments have put in place, and continue to enforce in whole or in part, and may at any time choose to fully reinstate, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur or reoccur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations and those of our customers and strategic alliances.
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Many of our employees and consultants continue to work remotely. We may take further actions that alter our operations as may be required by U.S. federal, state, or local, and foreign, authorities, or which we determine are in the best interests of our business, our employees and the communities we serve. There is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees and consultants may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and be unable to work. Decreased effectiveness of our team could adversely affect our results due to our inability to meet in person with potential customers and other business relationships, longer time periods to complete sales and implementation of our products, longer time to respond to inquiries, extended timelines for a variety of business matters and a corresponding reduction in growth, or other decreases in productivity that could seriously harm our business. In addition, working remotely could increase our cybersecurity risk and make us more susceptible to communication disruptions, which could adversely impact our business operations or delay necessary interactions with our customers and other business relationships. Furthermore, we may decide to postpone or cancel planned investments in our business in response to changes in our business as a result of the spread of Covid 19, which may impact our product development, sales efforts and rate of growth, any of which could seriously harm our business.
In addition, while the potential impact and duration of the Covid 19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity in the future. Moreover, to the extent the Covid 19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
The global impact of Covid 19 continues to rapidly evolve, and we will continue to monitor the situation closely. The ultimate impact of the Covid 19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of Covid 19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.
If the market for QDs develops slower than we expect or declines, it could have a material adverse effect on our business, financial condition, and results of operations.
The QD market is not as mature as the commercial applications of the technology are still being developed. It is uncertain whether QDs will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption of QDs. Many enterprises have invested substantial personnel and financial resources to traditional electronic components in their businesses and therefore may be reluctant or unwilling to migrate to QDs. It is difficult to predict customer adoption rates and demand for our products, the future growth rate and size of the QD market, or the entry of competitive technologies. The development and expansion of the QD market depends on a number of factors, including the cost, performance, and perceived value associated with QDs. If we or other QD manufacturers experience disruptions in delivery or technical performance problems, the market for QDs as a whole, including our products, may be negatively affected. If QDs do not achieve widespread adoption or there is a reduction in demand for QDs caused by a lack of customer acceptance, technological challenges, weakening economic conditions, competing technologies and products, reductions in corporate spending, or otherwise, it could have a material adverse effect on our business, financial condition, and results of operations.
Our future success depends upon our ability to compete in the marketplace.
The commercial QD industry is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments employing one or more competitive strategies. Competition among these companies is based on product quality and performance characteristics, volume, price and continuing research development and product improvements. We are subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than us.
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We have entered into a number of non-disclosures agreements (“NDAs”) and material transfer agreements with several product manufacturers as well as others. No assurances can be given that sales, joint venture agreements and/or license agreements will result from these agreements.
In the past several years, we have entered into a number of NDAs and material transfer agreements with several product manufacturers in different industries, as well as universities and independent research laboratories. In most cases, the NDAs with manufacturers are for exploring joint development of specific products or applications. No assurances can be given that the non-disclosure agreements and sample supply agreements entered into by us as described above will result in sales of our products.
Our ongoing research and development functions present significant challenges.
Quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We have concentrated our research and development efforts on the design, development, production and supply of nanomaterials, including QDs, TQDs and other nanoparticles. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, we may not be able to produce or sell our products, which would have a material adverse effect on our business, prospects, financial condition and operating results.
The QDX Ledger relies on software and programming that is complex, and if it contains undetected errors, the QDX Ledger could be adversely affected.
The QDX Ledger relies on software and computer programming that is highly complex. In addition, the QDX Ledger and internal systems depend on the ability of this software to store, retrieve, process and manage immense amounts of data and digital media content. Errors or other bugs or defects within the software on which QDX Ledger depends may result in delay introductions of new features or enhancements, result in errors or compromise our ability to perform the functions for which it was developed. Any errors, bugs or defects discovered in the software on which the QDX Ledger depends could therefore result in harm to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect the QDX Ledger, subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products and have a material adverse effect on our business, prospects, liquidity and results of operations.
Misconduct and errors by our employees and third-party service providers, or by users and developers on the QDX Ledger, could harm our network and reputation.
The QDX Ledger may be exposed to many types of operational risk, including the risk of misconduct and errors by our employees, consultants, former employees and consultants, and other third-party service providers, third party validators or by users on the QDX Ledger. Participants on the QDX Ledger who we do not control could be in a position to handle large amounts of sensitive and potentially proprietary data, whose exposure could result in significant liability. It is not always possible to identify and deter misconduct or errors by employees, consultants or third-party service providers, and we cannot control third-party users on the QDX Ledger. The precautions we intend to take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. Any of these occurrences could result in our diminished ability to operate our business and develop the QDX Ledger, potential liability to our company, inability to attract future users, reputational damage to the QDX Ledger and our company, regulatory intervention and financial harm, which could negatively impact the QDX Ledger, the growth of the QDX Ledger and have a material adverse effect on our business, prospects, liquidity and results of operations.
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The QDX Ledger may face the risk that one or more of its competitors, or other third parties, may obtain patents or other protections covering technology critical to the operation of the QDX Ledger.
We believe that a number of organizations are or may be working to develop decentralized application systems for anti-counterfeiting and other novel technologies that may be competitive with our own technology. Some or all of these organizations, including organizations that may have technology similar to us, may have substantially greater technological expertise, experience with blockchain technologies and/or financial resources than our company has, and many of them may be attempting to patent technologies that may be competitive with or similar to our technology, or attempting to reverse engineer our technology, which may be possible as a substantial portion of the software underlying the QDX Ledger is open source software that is generally available to the public and described in publicly available whitepapers. We do not have access to detailed information about the technologies these organizations may be attempting to patent. The QDX Ledger may ultimately compete with these alternative networks, which could negatively impact the QDX Ledger and may prevent the further development of QDX Ledger. Further, occasionally, we may be targeted with patent infringement lawsuits.
If one or more other persons, companies or organizations obtains a valid patent covering technology critical to the QDX Ledger, we might be unwilling or unable on commercially reasonable terms to license the technology and it could become impossible for the QDX Ledger to operate, which could have a material adverse effect on our business and the QDX Ledger.
The QDX Ledger may be vulnerable to risks, both foreseen and unforeseen, arising from the new and untested nature of blockchain technology.
Blockchain technology, which is sometimes referred to as “distributed ledger technology,” is a relatively new, untested and evolving technology. Accordingly, the further development and future viability of blockchain technology is generally uncertain, and practical and ideological challenges, both known and unknown, may prevent its further development.
The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets would have an adverse material effect on the successful adoption of the QDX Ledger.
The growth of the blockchain industry in general is subject to a high degree of uncertainty regarding customer adoption and long-term development. The factors affecting the further development of the blockchain industry, as well as blockchain networks, include, without limitation:
| ● | worldwide growth in the adoption and use of blockchain technologies; | |
| ● | government and quasi-government regulation of digital assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems; | |
| ● | the maintenance and development of the open-source software protocol of blockchain networks; | |
| ● | the availability and popularity of other forms or methods of anti-counterfeiting technologies; and | |
| ● | the regulatory environment relating to blockchain. |
The blockchain industry as a whole has been characterized by rapid changes and innovations and is constantly evolving. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks may deter or delay the acceptance and adoption of the QDX Ledger.
The QDX Ledger has been developed by key technology employees of Capstan Platform, Inc. and its affiliates, and their operation and further development depend on the continued availability of those key employees.
We acquired the blockchain-based assets of Capstan Platform, Inc. in August 2019. Capstan’s Co-Founder and CTO, Jay M. Williams, has joined our leadership team as CTO, and other Capstan employees have been engaged as consultants for us to continue our blockchain development. The QDX Ledger and any related protocol used that may be developed in the future, including technology and intellectual property involved in their creation and operation, has been or will be, as applicable, developed primarily by a small number of key technology employees and consultants of our company. The loss of the services of any of those key persons could have a material adverse effect on our ability to develop, operate or maintain the QDX Ledger because the skillset required to successfully develop blockchain is rare. If we were to lose the services of any these key persons, it could be difficult or impossible to replace them, and the loss of any of them could have a material adverse effect on our operations and financial conditions.
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Our proprietary rights may be difficult to enforce.
We generally rely on patents, copyrights, trademarks, and trade secret laws to establish and maintain proprietary rights in our technology and products. Although we hold several patents and other patent applications are currently pending, there can be no assurance that any of these patents or other proprietary rights will not be challenged, invalidated, or circumvented or that our rights will, in fact, provide competitive advantages to us. In addition, there can be no assurance that patents will be issued from pending applications or that claims allowed on any patents will be sufficiently broad to protect our technology. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. The outcome of any actions taken in these foreign countries may be different than if such actions were determined under the laws of the United States. If we are unable to protect our proprietary rights to the totality of the features (including aspects of products protected other than by patent rights) in a market, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time and effort required to create innovative products that have enabled us to be successful.
We may be found to infringe on intellectual property rights of others.
Third parties may assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. The asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that any arrangements with our suppliers will be available or adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
We rely on the availability of third-party licenses.
Much of our technology includes intellectual property licensed from third parties, including our license with the University of Arizona. It may be necessary in the future to seek or renew licenses relating to various aspects of these items. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.
Our business is subject to environmental and other regulations.
Our business is subject to various types of government regulations, including regulation of hazardous materials used in or produced by the manufacture or use of nanomaterials, the manufacture, transportation and export of chemical substances, and the restrictions on the chemical composition of QDs used in the various applications. These laws, regulations and standards impose numerous obligations that are applicable to our operations. Failure to comply with environmental laws, regulations, standards, permits and orders may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or preventing some or all of our operations. Certain environmental laws impose strict liability for the remediation of spills and releases of oil and hazardous substances that could subject us to liability without regard to whether we were negligent or at fault. In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly requirements with respect to our operations could materially and adversely affect our operations and financial results.
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As we grow, we will need to obtain and retain additional qualified management and personnel.
We have traditionally operated with limited resources and infrastructure. As of the date of this report, we have a total of thirty-one employees, including our management team. We believe our success will depend in large part on our ability to attract and retain highly skilled administrative, technical, managerial, sales, and marketing personnel. Competition for these personnel is intense, especially in Austin, Texas. Our financial condition or volatility or lack of positive performance in our stock price or equity incentive awards may also adversely affect our ability to hire and retain key employees. As a result of one or more of these factors, we may increase our hiring or otherwise enter into arrangements in geographic areas outside the United States, which could subject us to additional geopolitical and exchange rate risk. The loss of services of any of our key personnel; the inability to retain and attract qualified personnel in the future; or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product development, manufacturing and sales.
Our future success depends on our ability to develop our manufacturing capacity. If we are unable to achieve our capacity expansion goals, it would limit our growth potential and impair our operating results and financial condition.
In the future, we may seek to establish large scale production facilities. Our ability to complete the planning, construction and equipping of large scale manufacturing facilities is subject to significant risk and uncertainty, including:
| ● | we will need to raise additional capital in order to finance the costs of constructing and equipping of large scale manufacturing facilities, which we may be unable to do so on reasonable terms or at all, and which could be dilutive to our existing stockholders; | |
| ● | the build-out of any facilities will be subject to the risks inherent in the development of a manufacturing facility, including risks of delays and cost overruns as a result of a number of factors, many of which may be out of our control, such as delays in government approvals, burdensome permit conditions and delays in the delivery of manufacturing equipment from numerous suppliers; | |
| ● | we may be required to depend on third parties or strategic partnerships that we establish in the development and operation of additional production capacity, which may subject us to risks that such third parties do not fulfill their obligations to us under our arrangements with them; and | |
| ● | we may be required to obtain licenses, permits or authorizations from regulatory authorities, the failure of which to obtain, could delay or prevent the construction or opening of large-scale manufacturing facilities. |
If we are unable to develop and successfully operate manufacturing facilities, or if we encounter any of the risks described above, we may be unable to scale our business to the extent necessary to improve results of operations and achieve profitability. Moreover, there can be no assurance that if we do expand our manufacturing capacity that we will be able to generate customer demand for our QD products at these production levels or that we will increase our revenues or achieve profitability.
We may be unable to effectively manage the expansion of our operations.
We expect to expand our business in order to satisfy anticipated demand for our QDs and obtain market share. To manage the development and expansion of our operations, we will be required to improve our operational and financial systems, procedures and controls and to expand, train and manage a larger employee base. Our management will also be required to maintain and expand our relationships with customers, distribution partners, suppliers and other third parties and to attract new customers, distribution partners and suppliers. In addition, our current and planned operations, personnel, systems and internal procedures and controls might be inadequate to support our future growth. If we cannot manage our growth effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures, and our business and results of operations could be materially and adversely affected.
Technological changes in the QDs and end-user industries could render our products uncompetitive or obsolete.
The nanotechnology market is rapidly evolving and competitive, characterized by continually changing technology requiring improved features. We will need to invest significant financial resources in research and development to keep pace with technological advances in the industry and to effectively compete in the future. A variety of competing technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our products. Our failure to further refine our technology and develop and introduce new products could have a material adverse effect on our business, prospects, financial condition and operating results.
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Our success will depend on our ability to successfully grow our distribution relationships and distribution channels.
If we are unable to develop successfully our distribution relationships and distribution channels, our revenues and future prospects will be materially harmed. As we seek to enter into commercial production of our products, our business plan will depend substantially on our ability to establish and expand our distribution channels by identifying, developing and maintaining relationships with product manufacturers and resellers. For example, in February 2020, we 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 our research and development capabilities. We may be unable to enter into these relationships in the markets we target or on terms and conditions favorable to us, if at all. If we are unable to sell our products into new markets or to further penetrate existing markets for QDs, it could have a material adverse effect on our business, financial condition, and results of operations. In addition, if we enter into sales and marketing relationships that are not successful, our sales and distribution could suffer and it could have a material adverse effect on our business, financial condition, and results of operations.
Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful.
We intend to sell our products to product manufacturers, domestic and international distributors, and other resellers. We expect to collaborate closely with a number of manufacturers and distributors, both domestically and internationally. These resellers are expected to range from large, multinational corporations to small, development-stage companies to private-public partnerships with governmental entities. Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of these third parties and such plans may not be successful. Our failure to successfully choose, collaborate with and monitor our resellers could have a material adverse effect on our business, prospects, liquidity and results of operations.
We anticipate facing risks associated with the international marketing, distribution and sale of our products, and if we are unable to effectively manage these risks, it could impair our ability to develop and expand our business.
We expect that significant resources will be required to develop successfully our international sales channels. In addition, the manufacturing, marketing, distribution and sale of our products outside the United States expose us to a number of markets in which we have limited experience. If we are unable to manage effectively these risks, it could impair our ability to grow our business abroad. These risks include:
| ● | difficulty in recruiting and retaining individuals skilled in international business operations; | |
| ● | the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations; | |
| ● | our executive officers’ lack of proximity to the international activities being managed and the inherent limitations of cross-border information flow; | |
| ● | the management of our relationships with distributors outside the United States, whose sales and lead generation activities are very important to our international operations; | |
| ● | difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets; | |
| ● | tariffs and trade barriers and other regulatory limitations on our ability to sell our products in certain foreign markets; | |
| ● | increased exposure to foreign currency exchange rate risk; | |
| ● | potential exposure to adverse tax consequences; | |
| ● | shortages in component parts and raw materials; | |
| ● | import and export and trade regulation changes that could erode our profit margins or restrict our ability to transport our products; | |
| ● | the burden and cost of complying with foreign and U.S. laws governing corporate conduct outside the U.S.; | |
| ● | potential restrictions on the transfer of funds between countries; | |
| ● | import and export duties and value-added taxes; | |
| ● | natural disasters, including earthquakes, typhoons and tsunamis; | |
| ● | increased exposure to possible violations of U.S. laws regulating the export of our products, and to other U.S. and foreign laws affecting the conduct of business globally such as product certification, environmental and waste management and data privacy laws; | |
| ● | reduced protection for intellectual property rights in some countries; and | |
| ● | political and economic instability. |
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International operations may also result in greater shipping costs and additional expenses to conform our products to the requirements of local laws or local product specifications. As we develop our international business, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. For example, we have experienced extraordinary delays in constructing the facilities in India due to flooding and the Covid 19 pandemic. Our failure to manage any of these risks successfully could harm our international operations, reduce or delay our international sales, result in fines and penalties and have a material adverse effect on our business, prospects, liquidity and results of operations.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships could adversely affect our market penetration and revenue growth.
Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our technology and our products relative to our competitors. We can provide no assurance that we will be able to establish strategic relationships successfully. In addition, strategic alliances that we may establish, will subject us to a number of risks, including risks associated with sharing proprietary information and loss of control of operations that are material to our business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement, require us to issue additional shares of our common stock and subject us to the risk that the third party will not perform its obligations pursuant to the arrangement, which may subject us to losses over which we have no control or expensive termination arrangements.
Due to financial and experience constraints, we expect to rely on strategic relationships to develop our business, including those relating to product development, manufacturing, marketing and sales. Identifying and developing strategic alliance candidates is expensive and time-consuming. In addition, these arrangements may leave us vulnerable to capacity constraints and reduced component availability, and our control over customer relationships, product delivery schedules, manufacturing and costs would be limited. In addition, we may have limited control over quality systems and controls, and therefore must rely on our relationships to manufacture our products to our quality and performance standards and specifications. Delays, component shortages, including custom components that are manufactured for us at our direction, and other manufacturing and supply problems, could impair the manufacture and distribution of our products and ultimately our company’s reputation. Furthermore, any adverse change in the financial or business condition of our strategic alliance counterparts could disrupt our ability to develop, manufacture, market and sell our products. If we are required to change our strategic alliance counterparts or bring those functions in-house, we may lose revenue, incur increased costs, and damage our relationships with other customers and strategic alliances.
Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties and adverse publicity.
We expect our manufacturing operations and research and development activities to involve the use of mechanical equipment which involves a risk of potential injury to our employees. These operations are subject to regulation under the Occupational Safety and Health Act (“OSHA”). If we fail to comply with OSHA requirements, or if an employee injury occurs, we may be required to pay substantial penalties, incur significant capital expenditures, suspend or limit production or cease operations. Also, any such violations, employee injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.
Our business and financial results may be adversely affected by various legal and regulatory proceedings.
We are, and in the future may become, subject to lawsuits, claims and regulatory proceedings in the normal course of our business, such as our ongoing litigation with SBI Investments LLC, 2014-1, and L2 Capital, LLC. Some of these legal and regulatory proceeds could be material. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business, results of operations or financial condition in any particular period. For additional information regarding certain of the matters in which we are involved, see Note 15 to the consolidated financial statements, entitled “Litigation.”
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Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
Like other retailers, distributors and manufacturers of products that are used by consumers, we will face the risk of exposure to product liability claims in the event that the use of our products we sell results in injury. Since some of our products may be used in electricity producing devices, it is possible that consumers could be injured by our products, whether by product malfunctions, defects, improper installation or other causes. In addition, since the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. We intend to rely on our general liability insurance to cover product liability claims and currently do not expect to obtain separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and if our insurance protection is inadequate to cover these claims, such claims could require us to make significant payments. Also, any product liability claims and any adverse outcomes with respect thereto may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.
We have significant deferred tax assets, and any impairments of or valuation allowances against these deferred tax assets in the future could materially adversely affect our results of operations and financial condition.
We intend to use significant deferred tax assets to offset income. The extent to which we can use deferred tax assets may be limited for various reasons, including but not limited to changes in tax rules or regulations and if projected future taxable income becomes insufficient to recognize the full benefit of our net operating loss (“NOL”) carryforwards prior to their expiration. Additionally, our ability to fully use these tax assets will also be adversely affected if we have an “ownership change” within the meaning of Section 382 of the U.S. Internal Revenue Code of 1986, as amended. An ownership change is generally defined as a greater than 50% increase in equity ownership by “5% stockholders” (as that term is defined for purposes of Section 382) in any three-year period. Future changes in our stock ownership, depending on the magnitude, including the purchase or sale of our common stock by 5% stockholders, and issuances or redemptions of common stock by us, could result in an ownership change that would trigger the imposition of limitations under Section 382. Accordingly, there can be no assurance that in the future we will not experience limitations with respect to recognizing the benefits of our NOL carryforwards and other tax attributes for which limitations could have a material adverse effect on our results of operations, cash flows or financial condition. With current financing arrangements being pursued, we expect the Section 382 limitation to be materially limited.
Risks Related to Our Common Stock
The material weakness in our internal control over financial reporting may adversely impact our company.
As discussed in Part II, Item 9A, entitled “Controls and Procedures,” in this report, we have concluded that our internal control over financial reporting was not effective. The material weaknesses identified in our internal control over financial reporting related to the lack of timely and effective review of our period-end closing process and adequate personnel and resources.
We are currently working to remediate the material weakness. We cannot be sure when we will successfully remediate the material weakness or whether compensating controls will be effective in preventing or detecting material errors. The remediation may require substantial time and resources to successfully implement. We may be unable to remediate this weakness until we have received additional funding that may be necessary to hire additional personnel. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to document the existing financial processes, risk assessment, and internal controls systematically. This material weakness could cause creditors, customers, investors, regulators, strategic alliances and others to lose confidence in the effectiveness of our internal controls and the accuracy of our financial statements and other information, all of which could have a material adverse impact on our business, results of operations and financial condition.
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We are subject to the reporting requirements of the federal securities laws, which can be expensive.
We are a public reporting company in the United States and therefore, we are subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC will cause our expenses to be higher than they would be if we were a privately-held company.
The issuance or sale of equity, convertible or exchangeable securities in the market, or the perception of such future sales or issuances, could lead to a decline in the price, if any, of our common stock.
Our board of directors has the authority to issue up to 750,000,000 shares of our common stock. Any issuance of equity or securities convertible into or exchangeable for our equity securities, including for the purposes of expansion of our business, may have a dilutive effect on our existing stockholders.
The perceived risk associated with the possible issuance of a large number of shares of common stock or securities convertible into or exchange for a large number of shares of our common stock could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. Subsequent sales of our common stock in the open market or the private placement of our common stock or securities convertible into or exchangeable for our common stock could also have an adverse effect on the market price, if any, of our shares. If our stock price declines, it may be more difficult for us to or we may be unable to raise additional capital.
Over the course of meeting our capital needs, we have entered into various debentures and debt instruments, which generally have short maturity terms. Many of these instruments were accompanied by shares of our common stock and warrants to purchase shares of our common stock. We may conduct further equity offerings in the future. If common stock is issued in return for additional funds, property or services, the price per share could be lower than that paid by our current stockholders. Also, any stock we sell in the future may be valued on an arbitrary basis by us and the issuance of shares of common stock for future services, acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our existing stockholders.
Future sales of substantial amounts of our currently outstanding common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sales, will have on the market price of our stock.
We may experience volatility in our stock price, which could negatively affect your investment, and you may not be able to resell your shares at or above the offering price.
Our common stock is not traded on an established trading market or exchange. There can be no assurance that our common stock will continue to be, or be admitted to, trade on any established trading market or exchange. Additionally, there can be no assurance that if our common stock is admitted to a trading market or exchange, we will maintain the requirements for continued listing or trading.
Our common stock may not be traded actively. An illiquid market for shares of our common stock may result in lower trading prices and increased volatility, which could negatively affect the value of your investment or your ability to sell your shares. If an active trading market does develop, it may not last and the trading price of the shares may fluctuate widely as a result of a number of factors, many of which are outside our control. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:
| ● | our ability to commercialize our products and technologies; | |
| ● | the amount and timing of expenses associated with our research and development programs and our ability to develop enhancements to our manufacturing processes and our products; | |
| ● | additions or departures of key scientific or management personnel; | |
| ● | our ability to effectively manage our growth; | |
| ● | the cost of raw materials; | |
| ● | our ability and the terms upon which we are able to raise capital sufficient to continue our operations; | |
| ● | our cash position; |
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| ● | sales of our common stock by us or our stockholders in the future; | |
| ● | trading volume of our common stock; | |
| ● | changes in accounting practices; | |
| ● | ineffectiveness of our internal controls; | |
| ● | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; | |
| ● | significant lawsuits, including creditor, patent or stockholder litigation; | |
| ● | industry adoption of QD technology or other new competing technologies; | |
| ● | the rate and cost at which we are able to expand our manufacturing capacity to meet anticipated product demand, including the rate and cost at which we are able to implement advances in our QD technologies; | |
| ● | our ability to establish and expand key distribution partners; | |
| ● | our ability to establish strategic relationships with third parties to accelerate our growth plans; | |
| ● | announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; | |
| ● | developments in the competitive environment, including the introduction of improved products or technological advancements by our competitors; | |
| ● | overall performance of the equity markets; | |
| ● | publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts; | |
| ● | our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public; | |
| ● | changes in the market valuations of similar companies; | |
| ● | general political and economic conditions; and | |
| ● | other events or factors, many of which are beyond our control. |
We anticipate that our operating expenses will continue to increase significantly, particularly as we begin production and develop our internal infrastructure to support our anticipated growth. If our product revenues in any quarter do not increase correspondingly, our net losses for that period will increase. Moreover, given that a significant portion of our operating expenses cannot be quickly reduced, if we cannot obtain revenues from operations or our product revenues are delayed or below expectations, our operating results are likely to be adversely and disproportionately affected.
The stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.
We do not presently intend to pay any cash dividends on or repurchase any shares of our common stock.
We do not presently intend to pay any cash dividends on our common stock. Any payment of future dividends will be at the discretion of the board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Cash dividend payments in the future may only be made out of legally available funds and, if we experience substantial losses, such funds may not be available. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment and there is no guarantee that the price of our common stock that will prevail in the market after this offering may never exceed the price paid by you in this offering.
Because our shares are deemed “penny stock,” you may have difficulty selling them in the secondary trading market.
The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange, the equity security also would constitute a “penny stock.” As our common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. Disclosure is also required to be made regarding compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. In addition, monthly statements are required to be sent disclosing recent price information for the penny stocks. The ability of broker-dealers to sell our common stock and the ability of stockholders to sell our common stock in the secondary market may be limited. As a result, the market liquidity for our common stock may be severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.
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Item 1B. Unresolved Staff Comments
Not applicable.
In June 2013, we opened a Wet Lab facility and principal executive office in San Marcos, Texas for research and development and the production of QDs and other nanomaterials. The facility where the Company is located is owned by Texas State University. In June 2015, the Company moved into a larger lab space in the same facility. As of June 30, 2017, our monthly rent for the San Marcos facility and office was $9,075. We have decreased our laboratory and office space subsequent to the original agreement at the San Marcos facility, and as of the date of this Form 10-K, our monthly rent is $5,813.
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.
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.
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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.
On March 29, 2018, at a discovery hearing, wherein the Company asked the court to order L2 and SBI to produce evidence to support their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court. The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.
The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at June 30, 2019.
CAUSE NUMBER: PSC190273; Riverside California
Edward James Schloss filed a complaint against Quantum Materials Corp. and Solterra Renewable Technologies, Inc. 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 of Quantum who later became a contractor to the company after his dismissal. The Company acknowledges Mr. Schloss is owed some fees but expects to be successful in resolving the litigation. The ultimate outcome is not determinable and as such, other than unpaid accrued contractor and/or prior salary fees, no contingent liability has been recorded at June 30, 2019.
CAUSE NUMBER: 19-2774; Hays County Texas
This litigation filed November 12, 2019 in Hays County (San Marcos) alleged misappropriation of trade secrets and related claims based on Quantum Material Corp’s (“QMC” or “Company”) hiring of a previous employee of the Plaintiff (Practice Interactive, Inc. d/b/a Intiva Health “Intiva”). Intiva initiated the case by securing a no-notice temporary restraining order against the Company and the employee (“Hartigan”).
At a temporary injunction hearing in December 2019, the court granted a limited injunction against Hartigan and found that it should not 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. We believe that trial will most likely not go forward in July. Although the parties agreed in December that discovery can move forward without a firm trial date, Intiva has propounded no discovery or taken any other substantive action since then. Counsel for Intiva recently changed firms, a fact that we believed contributed to his client taking no action of late. He filed a change-of-firm notice with the Court recently, and we anticipate there will soon be activity in the case.
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.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has traded in the over-the-counter marketplace on the OTCQB under the symbol “QTMM” since October 12, 2018. Previously, our common stock was quoted on the OTC Pink marketplace from November 2017 to October 2018 and on the OTCQB previous to November 2017.
As of March 12, 2021, the issuer had 693,367,942 shares of common stock outstanding held by 245 stockholders of record.
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The following table sets forth the high and low bid information for the periods indicated. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| Quarter Ended | High | Low | ||||||
| June 30, 2019 | $ | 0.06 | $ | 0.03 | ||||
| March 31, 2019 | $ | 0.05 | $ | 0.02 | ||||
| December 31, 2018 | $ | 0.05 | $ | 0.03 | ||||
| September 30, 2018 | $ | 0.05 | $ | 0.03 | ||||
| June 30, 2018 | $ | 0.06 | $ | 0.04 | ||||
| March 31, 2018 | $ | 0.08 | $ | 0.05 | ||||
| December 31, 2017 | $ | 0.09 | $ | 0.06 | ||||
| September 30, 2017 | $ | 0.12 | $ | 0.08 | ||||
Historically we have not paid cash dividends on our common stock, and the Board of Directors intends to retain all of our earnings, if any, to finance the development and expansion of our business. There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends. Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.
Issuer Sales of Unregistered Securities
From July 1, 2018 to June 30, 2019, we had the following sales of unregistered common stock:
| Date of Sale | Title of Security | Number Sold | Consideration
Received and Description of Underwriting or Other Discounts to Market Price or Convertible Security Afforded to Purchases | Exemption
from Registration Claimed | If
Option, Warrant | Security Holder | ||||||
| June 2018 | Common Stock | 205,980 | Shares issued for Subscription Agreements; no commissions paid | Section 4(2); and/or Rule 506 | Not Applicable | Allen Columbus | ||||||
| July 2018 | Common Stock | 166,210 | Shares issued in exchange for $9,973 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Carson Diversified Investments | ||||||
| July 2018 | Common Stock | 166,210 | Shares issued in exchange for $9,973 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Carson Haysco Holdings, LP | ||||||
| July 2018 | Common Stock | 513,333 | Shares issued for salary conversion; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Edward James Schloss | ||||||
| July 2018 | Common Stock Warrants | 1,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through July 9, 2021 | Lucas Hoppel | ||||||
| August 2018 | Common Stock | 1,531,375 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Steven Morse | ||||||
| August 2018 | Common Stock | 11,635 | Shares issued in exchange for $1,396 of interest; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Radha Jayaram | ||||||
| August 2018 | Common Stock Warrants | 1,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through August 27, 2021 | Lucas Hoppel | ||||||
| August 2018 | Common Stock Warrants | 300,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.04 per share through August 7, 2020 | Mathew McKnight | ||||||
| August 2018 | Common Stock Warrants | 246,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.04 per share through August 29, 2020 | Mathew McKnight | ||||||
| August 2018 | Common Stock Warrants | 62,500 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.04 per share through August 7, 2020 | Brian Fogarty | ||||||
| August 2018 | Common Stock Warrants | 93,750 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.04 per share through August 7, 2020 | Allen Columbus | ||||||
| September 2018 | Common Stock | 1,500,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Steven Morse | ||||||
| September 2018 | Common Stock | 4,516,553 | Shares issued for debenture; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| September 2018 | Common Stock Warrants | 1,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.12 per share through September 27, 2021 | Lucas Hoppel | ||||||
| December 2018 | Common Stock | 3,000,000 | Shares issued for debenture; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Amtronics, LLC | ||||||
| December 2018 | Common Stock Warrants | 5,000,000 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.04 per share through December 26, 2021 | Amtronics, LLC | ||||||
| December 2018 | Common Stock Warrants | 262,458 | Issuance of stock warrants | Section 4(2); and/or Rule 506 | Warrants exercisable at $0.15 per share through December 5, 2023 | Risk Grid Technologies, Inc. | ||||||
| January 2019 | Common Stock | 2,000,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Blue Heron Capital | ||||||
| January 2019 | Common Stock | 3,500,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Sound Capital, Inc. | ||||||
| February 2019 | Common Stock | 3,164,894 | Shares issued for debenture; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| February 2019 | Common Stock | 1,116,279 | Shares issued for debenture; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| March 2019 | Common Stock | 3,786,026 | Shares issued for debenture; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| March 2019 | Common Stock | 8,477,792 | Shares issued for debenture conversion; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| March 2019 | Common Stock | 4,484,305 | Shares issued for debenture; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| March 2019 | Common Stock | 11,666,667 | Shares issued for debenture conversion; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Amtronics, LLC | ||||||
| March 2019 | Common Stock | 5,573,863 | Shares issued for debenture conversion; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Carson Diversified Investments | ||||||
| March 2019 | Common Stock | 5,573,863 | Shares issued for debenture conversion; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Carson Haysco Holdings, LP | ||||||
| April 2019 | Common Stock | 17,000,000 | Shares issued for settlement of a convertible debenture | Section 4(2); and/or Rule 506 | Not applicable | Lucas Hoppel | ||||||
| April 2019 | Common Stock | 350,000 | Shares issued for legal services; no commissions paid | Section 4(2); and/or Rule 506 | Not Applicable | David & Santos, PC | ||||||
| April 2019 | Common Stock | 4,500,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not Applicable | Sheridan Global Advisors, LLC | ||||||
| April 2019 | Common Stock | 3,000,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not Applicable | Andrew Robinson | ||||||
| April 2019 | Common Stock | 965,517 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Brett Lamensky | ||||||
| April 2019 | Common Stock | 6.000,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Stephen Squires | ||||||
| April 2019 | Common Stock | 125,000 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Brian Fogarty | ||||||
| April 2019 | Common Stock | 2,769,700 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Clark Knopik | ||||||
| April 2019 | Common Stock | 533,705 | Shares issued for legal services; no commissions paid | Section 4(2); and/or Rule 506 | Not applicable | Doug Berman | ||||||
| April 2019 | Common Stock | 2,166,667 | Shares issued for Subscription Agreements; no commissions paid | Section 4(2); and/or Rule 506 | Not Applicable | Risk Grid Technologies | ||||||
| April 2019 | Common Stock | 4,014,273 | Shares issued for services; no commissions paid | Section 4(2); and/or Rule 506 | Not Applicable | Robert Phillips |
Repurchase of Securities
In the year ended June 30, 2019, there were no purchases by the Company of its common stock.
Item 6. Selected Financial Data
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section and elsewhere in this Form 10-K, which are incorporated herein by reference.
Business Overview
We are a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots (“QDs”), tetrapod quantum dots (“TQDs”), and other nanoparticles for a range of applications in televisions, displays and other optoelectronics, photovoltaics, solid state lighting, life sciences, security ink, battery, and sensor sectors of the market. Our wholly owned operating subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”), is focused on the next generation photovoltaic (solar cell) market, using quantum dot semiconductors.
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.
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.
Plan of Operation
We currently operate from a leased facility in San Marcos, Texas at the STAR Park Technology Center, an extension of Texas State University (the “San Marcos Facility”). This location provides us with convenient access to university faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University. Located approximately 30 miles south of Austin, Texas, this location is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets. We intend to relocate the operations to a larger facility capable of accommodating the manufacturing of QD processing equipment once sustained revenues are achieved.
The Company has established commercial-scale manufacturing equipment at the San Marcos facility and now through process optimizations has the capacity to produce more than four metric tons (4,000kg) per year of quantum dots and other nanomaterials for supply to its customers. The Company has continuously improved the Quantum Dot production process and have designed new reactors from the ground up. The Company is in the process is building 4 new reactors in-house using its own design and I.P. In order to preserve this I.P. the Company has determined that it will be manufacturing micro-reactors in-house for the foreseeable future.
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We expect to commence generating revenues from the production of materials at the San Marcos facility. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners and licensees.
Our marketing strategy is to engage in strategic arrangements with manufacturers, distributors, and others to jointly develop applications using its patented continuous production process. Such joint collaborations will involve us working closely with its industry counterparts to optimize the performance of our materials in each application or device and to use the results from product development and testing to further enhance product specifications. We continue to collaborate with a number of partners in the Life Science, consumer goods, Pharma and designer products industries. We have signed a licensing agreement to establish quantum dot production in Asia and to date, we have not entered into any formal commercial supply agreements.
We believe these collaborations will support our internal research and development activities which will continue to be a primary part our business. Our principal revenue streams are expected to come from (i) Licensing agreements for our quantum dot enabled end to end solutions. (ii) sales of quantum dots and other nanomaterials, (ii) royalties from manufacture and/or sales of products and components by third parties incorporating the Company’s products or technology, (iii) milestone payments under joint development arrangements with product developers and manufacturers, and (iv) fees where we engage in licensing/sub-licensing arrangements for our owned and/or licensed technology. (v) Fees from app deployment and usage.
Our ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing nanomaterials and quantum dot market. Nanomaterial and quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and intend to focus a significant part of our efforts on this, as we have done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, and the numerous other research centers and departments with which we have relationships will be important aspects of our strategy.
Solterra plans to utilize QMC’s patented low-cost, high-volume quantum dot production combined with the Bayer quantum dot solar cell patents to commercialize quantum dot solar cells at a cost that is competitive with conventional fossil fuel generation on an unsubsidized basis.
Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. Management believes the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop which could adversely affect the Company or its products in the future. See “Risk Factors” section.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determining our financial condition and operating results. Estimates are based upon information available as of the date of the consolidated financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments often as a result of the need to make estimates about the effect of matters inherently uncertain. The most critical accounting policies and estimates are described below.
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Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation.
Revenue Recognition: The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Title and risk of loss generally pass to our customers upon shipment. In limited circumstances where either title or risk of loss pass upon destination, we defer revenue recognition until such events occur. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis. For the years ended June 30, 2019 and 2018 our revenue was immaterial.
Contract liabilities are presented on our consolidated balance sheet and consist of advanced payments. As of June 30, 2019, and 2018 contract liabilities were $500,000 and $0, respectively.
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.
Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35 “Impairment or Disposal of Long-Lived Assets”, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and the carrying value. There were no impairment charges in the consolidated statements of operations during the years ended June 30, 2019 and 2018.
Debt Issuance Costs: The costs related to the issuance of debt are presented on the consolidated balance sheets 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.
Income Taxes: The Company follows ASC 740 “Income Taxes” regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.
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The Company follows ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes.
Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital.
Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities, as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
Liquidity and Capital Resources
Going Concern
The Company recorded losses from continuing operations in the current 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.
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.
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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 June 30, 2019, we had a working capital deficit of $7,141,117, with total current assets and liabilities of $20,069 and $7,161,186 respectively. Included in the liabilities are $757,569 owed to our officers, directors and employees for services rendered and accrued through June 30, 2019, $2,605,042 of convertible debentures, net of unamortized discount and $25,130 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 June 30, 2019, we have cash and cash equivalent assets of $478. 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:
| Years Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Operating activities | $ | (515,233 | ) | $ | (1,090,821 | ) | ||
| Investing activities | - | (1,877 | ) | |||||
| Financing activities | $ | 513,686 | $ | 1,042,112 | ||||
Operating Activities. Net cash used in operating activities was $515,233 for the year ended June 30, 2019 compared to $1,090,821 for the same period of 2018, a decrease in cash used of $575,591. The decrease was primarily driven by decreased in operating costs, decreased payments on accounts payable, the increase in contract liabilities, and an increase in services in exchange for stock.
Investing Activities. Net cash used in investing activities was $0 for the year ended June 30, 2019 compared to $1,877 for the year ended June 30, 2018. The decrease is related to fewer purchases of equipment in fiscal year 2019.
Financing Activities. Net cash provided by financing activities was $513,686 for the year ended June 30, 2019 compared to $1,042,112 for the same period of 2018, a decrease of $528,426. The decrease is primarily due to fewer issuances of convertible debentures, offset by an increase in sales of common stock for cash, and fewer principal payments on our long-term debt during the year ended June 30, 2019.
Our 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 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. As of June 30, 2019, we had not yet achieved profitable operations, had a working capital deficit of $7,141,117, and expect to incur further losses in the development of the business, all of which casts substantial doubt about our ability to continue as a going concern.
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Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We continue to explore available financing options, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that future financing, if needed, will be obtained on terms satisfactory to us, if at all. In this respect, see Note 1 in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a going concern.
Financing Arrangements
As of June 30, 2019, we had the following convertible debentures outstanding.
| Issuance Date | Outstanding Principal Amount ($) (1) | Interest Rate | Conversion Price ($) | Maturity Term | No. of Shares Exercisable Under Related Warrants | Warrants Strike Price ($) | Warrant Exercise Period | |||||||||||||||||
| Sep-14 | 25,050 | 6 | % | 0.15 | September 2019 - October 2019 | 3,333,667 | 0.3 | Sep-19 | ||||||||||||||||
| April - June 2016 (2) (2) | 1,218,772 | 8 | % | 0.01 | March 2018 - July 2019 | 5,686,590 | 0.15 | Aug-21 | ||||||||||||||||
| August 2016 (3) (2) | 200,000 | 8 | % | 0.01 | Aug-18 | 833,200 | 0.15 | Aug-21 | ||||||||||||||||
| January - March 2017 (3) (2) | 60,000 | 8 | % | 0.12 | January - March 2019 | 10,831,600 | 0.15 | January 2022 – March 2022 | ||||||||||||||||
| Jun-17 (2) | 100,000 | 8 | % | 0.12 | Feb-19 | 250,000 | 0.12 | Jun-20 | ||||||||||||||||
| Jul-17 (2) | 100,000 | 8 | % | 0.12 | Feb-19 | 250,000 | 0.12 | Jul-20 | ||||||||||||||||
| Sep-17 (2) | 150,000 | 8 | % | 0.12 | Feb-19 | 375,000 | 0.12 | Sep-20 | ||||||||||||||||
| Nov-17 | 27,000 | 8 | % | 0.12 | Nov-19 | 416,600 | 0.15 | Nov-22 | ||||||||||||||||
| Dec-17 (2) | 75,000 | 8 | % | 0.12 | Mar-19 | 250,000 | 0.12 | Dec-20 | ||||||||||||||||
| Feb-18 (2) | 45,000 | 8 | % | 0.12 | Feb-19 | 500,000 | 0.12 | Dec-20 | ||||||||||||||||
| Mar-18 (2) | 65,000 | 8 | % | 0.12 | Mar-19 | 500,000 | 0.12 | Mar-21 | ||||||||||||||||
| Apr-18 (2) | 60,000 | 8 | % | 0.12 | Mar-19 | 500,000 | 0.12 | Mar-21 | ||||||||||||||||
| Apr-18 | 70,000 | 8 | % | 0.12 | Apr-21 | 200,000 | 0.12 | Apr-21 | ||||||||||||||||
| Apr-18 | 20,000 | 8 | % | 0.12 | Apr-20 | 1,166,660 | 0.15 | Apr-23 | ||||||||||||||||
| Jun-18 | 40,000 | 8 | % | 0.12 | Dec-18 | 1,000,000 | 0.12 | Jun-21 | ||||||||||||||||
| Jul-18 | 45,000 | 8 | % | 0.12 | Jan-19 | 1,000,000 | 0.12 | Jun-21 | ||||||||||||||||
| Aug-18 | 30,000 | 8 | % | 0.12 | Mar-19 | 1,000,000 | 0.12 | Aug-21 | ||||||||||||||||
| Sep-18 | 25,000 | 8 | % | 0.12 | Apr-19 | 1,000,000 | 0.12 | Sep-21 | ||||||||||||||||
| Dec-18 | 52,000 | 8 | % | 0.12 | Dec-20 | 262,458 | 0.15 | Dec-23 | ||||||||||||||||
| (1) | This table does not include $222,350 of promissory notes held by SBI Investments LLC, 2014-1, and L2 Capital, LLC issued as consideration for an equity line of credit that did not close in the form of promissory notes, which bear interest at 8% per annum, matured on December 29, 2017 and are considered past due at the time of this report. The promissory notes are convertible into unregistered and restricted shares of shares of the Company’s common stock only if there is an Event of Default, as defined in the notes. These amounts are subject to ongoing litigation, and the Company does not intend to pay the balances or honor a conversion until the litigation has concluded. See Note 15 to the Notes to Condensed Consolidated Financial Statements. |
| (2) | These debentures are past due as of the date of this report |
| (3) | See Note 11 to the Notes to Condensed Consolidated Financial Statements. |
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Results of Operations - Year Ended June 30, 2019 Compared to Year Ended June 30, 2018
The following table sets forth our consolidated results of operations for the periods indicated:
| Years Ended | ||||||||||||||||
| June 30, | Increase/ | |||||||||||||||
| 2019 | 2018 | (Decrease) | % | |||||||||||||
| Statement of Operations Information: | ||||||||||||||||
| Revenues | $ | 400 | $ | 20,120 | $ | (19,720 | ) | -98.0 | % | |||||||
| General and administrative | 5,840,807 | 6,093,075 | (252,268 | ) | -4.1 | % | ||||||||||
| Research and development | 92,996 | 188,274 | (95,278 | ) | -50.6 | % | ||||||||||
| Beneficial conversion expense | 143,778 | 1,303,078 | (1,159,300 | ) | -89.0 | % | ||||||||||
| Interest expense, net | 1,262,150 | 1,023,989 | 238,161 | 23.3 | % | |||||||||||
| Change in value of derivative liability | 148,719 | (514,969 | ) | 663,688 | 128.9 | % | ||||||||||
| Accretion of debt discount | 318,070 | 1,327,742 | (1,009,672 | ) | -76.0 | % | ||||||||||
| Loss on shares unauthorized | 712,695 | - | 712,695 | N/A | ||||||||||||
| Loss on debt extinguishment | 438,589 | - | 438,589 | N/A | ||||||||||||
Revenues
During the year ended June 30, 2019 we recognized revenue of $400 compared to $20,120 for the year ended June 30, 2018, a decrease of $19,720, or 98.0%. At the Company’s stage of product development, our revenues are derived from funded product development agreements, and product testing agreements, and are not significant for fiscal years 2019 or 2018 as the Company has focused on product development.
General and Administrative Expenses
During the year ended June 30, 2019 the Company incurred $5,840,807 of general and administrative expenses, a decrease of $252,268, or 4.1%, from the $6,093,075 recorded for the year ended June 30, 2018. The decrease in general and administrative expenses breaks down as follows:
| Years Ended | ||||||||||||||||
| June 30, | Increase/ | |||||||||||||||
| 2019 | 2018 | (Decrease) | % | |||||||||||||
| Compensation | $ | 508,148 | $ | 864,345 | $ | (356,197 | ) | -41.2 | % | |||||||
| Stock-based compensation | 1,748,075 | 1,580,012 | 168,063 | 10.6 | % | |||||||||||
| Legal and audit expenses | 281,109 | 597,004 | (315,895 | ) | -52.9 | % | ||||||||||
| Corporate expenses | 1,108,717 | 539,813 | 568,904 | 105.4 | % | |||||||||||
| Other professional fees | 2,067,152 | 2,379,264 | (312,112 | ) | -13.1 | % | ||||||||||
| Depreciation | 100,009 | 99,589 | 420 | 0.4 | % | |||||||||||
| Amortization | 27,597 | 33,048 | (5,451 | ) | -16.5 | % | ||||||||||
| Total General and Administrative Expenses | 5,840,807 | 6,093,075 | $ | (252,268 | ) | -4.1 | % | |||||||||
The increase in corporate expenses was due primarily to various consultants that provided services throughout the year ended June 30, 2019. A portion of the increased corporate expenses was offset by having a lower headcount, and thus compensation being reduced. Stock-based compensation increased in 2019 due to some employees electing to be paid in stock or options, in lieu of cash, as well as the Company electing to extend the term of certain option grants, resulting in additional modification expense. Other legal and audit expenses, and professional fees were reduced for the fiscal year ended as less cost were incurred relating to litigation in process, along with less equity-based consulting incurred.
Research and Development Expenses
During the year ended June 30, 2019 the Company incurred $92,996 of research and development expenses (“R&D”), a decrease of $95,278, or 50.6%, from the $188,274 recorded for the year ended June 30, 2018. The primary reasons for the decrease are, in fiscal year 2019, the Company has reduced its focus on quantum dot process enhancement and focusing on product creation. Projects are being evaluated and this slows the process of R&D until product evaluation and proof of concept has been attained.
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Beneficial Conversion Feature on Convertible Debenture
The beneficial conversion expense for the year ended June 30, 2019 was $143,778 compared to $1,303,078 during the year ended June 30, 2018, a decrease of $1,159,300, or 89.0%. The decrease was due primarily to issuance of new convertible debentures, and two triggering events creating down-round features in certain debentures to be recognized during the year ended March 31, 2018. Similar triggering events did not occur during the year ended June 30, 2019.
Interest Expense
Interest expense for the year ended June 30, 2019 was $1,262,150 compared to $1,023,989 during the year ended June 30, 2018, an increase of $238,161, or 23.2%. The increased interest expense recorded in the fiscal year 2019 was primarily related to default interest being charged for debentures that are past due at June 30, 2019.
Change in value of derivative liability
During the year ended June 30, 2019 the Company recorded an expense of $148,719 related to the change in value of derivative liability. The expense is related to the change in value of the derivative related to the “make-whole” provision issued in relation to certain debenture extensions during prior quarters that results in the revaluation of the liability at quarter, and year ends.
Accretion of Debt Discount
During the year ended June 30, 2019 the Company recorded $318,070 of accretion of debt discount expense, a decrease of $1,009,672, or 76.0% from the $1,327,742 recorded for the year ended June 30, 2018. The decrease in accretion of debt discount expense is primarily related to the issuance of the convertible debentures during the fiscal year, which were lower compared to the year end June 30, 2018.
Loss on shares unauthorized
During the year ended June 30, 2019 the Company recorded $712,695 of loss on shares unauthorized due to the contractual agreements for convertible debt, options and warrants for common stock, which exceeded the company’s authorized shares in the aggregate by approximately 23,756,000 shares.
Loss on debt extinguishment
During the year ended June 30, 2019 the Company recorded $438,589 of loss on debt extinguishment due to extensions of debentures of $825,000 in principal being extended, and the extensions of these maturity extensions created an effective extinguishment pursuant to the Debt Modification guidance, ASC 470-50. The Company recorded a loss on extinguishment of $438,589 in connection with these extensions.
Off-balance sheet arrangements
We have no off-balance sheet arrangements including arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June 30, 2018.
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In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.
The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation.
The Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. We will continue to evaluate this area and expect to finalize our conclusions by the first quarter of fiscal 2019.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases, which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15 Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.
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In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), which amends the existing revenue recognition requirements and guidance. The core principle of the new standard is to recognize revenue that reflects the consideration the Company expects to receive for goods or services when or as the promised goods or services are transferred to customers. Topic 606 requires more judgment than current guidance, as management will now be required to: (i) identify each performance obligation in contracts with customers, (ii) estimate any variable consideration included in the transaction price and (iii) allocate the transaction price to each performance obligation. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We adopted this standard effective July 1, 2018 and it did not have a material impact on our consolidated financial statements.
Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
Item 8. Financial Statements and Supplementary Data
Our Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the reports of our independent registered public accounting firms, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear beginning on page F-1 of this document and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitation of controls systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
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As of June 30, 2019, an evaluation was carried out under the supervision and with the participation of our management, including our interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2019, because of material weaknesses in our internal control over financial reporting described below.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness, as of June 30, 2019, of our internal control over financial reporting based on the framework in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was not effective as of June 30, 2019 due as described below.
Management did not maintain effective procedures in the areas of review of our annual report on Form 10-K, review of third-party valuation reports and income taxes. These material weaknesses resulted from the lack of timely and effective review of the Company’s period-end closing process and adequate personnel and resources. Specifically,
| ● | The Company’s Form 10-K and other filings need to be reviewed thoroughly by management on a timely basis. Management’s responsibility is to oversee that the Company is capable of developing accurate and timely financial information. The Company must reinforce procedures to ensure that Form 10-K as well as other required filings are done on a timely and accurate basis. | |
| ● | The Company is small and does not have sufficient staff to maintain satisfactory separation of duties. | |
| ● | Management reviewed all information available to them from the outside consultant’s valuation reports, which included all external models, however, all inputs of the consultants’ model were not available to management and were not verified by the management. A more thorough review which includes all inputs of the models used by the consultants will ensure no additional journal entries need to be recorded. | |
| ● | Management identified a few non-material unauthorized payments and access to internal systems by a former officer that occurred during the past 24 months. We have taken remediation steps including establishing a weekly review and approval of all payables, separation of duties for entry of payables, separate banking account to fund payroll, utilizing a payroll manager to secure control of payroll releases with a separation of duties and now employ a chief security officer to review all system access and password management. |
Remediation Plan
Management is committed to remediating each of the material weaknesses identified above. We have recruited experienced US GAAP/financial reporting professional to augment and upgrade our finance and accounting staff to address issues of accuracy, completeness, adequate segregation of duties, and timeliness in financial statement preparation and reporting. However, the Company may be unable to remediate this weakness until it has received additional funding that may be necessary to hire additional personnel. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to review and monitor our accounting procedures, perform internal audit procedures, and to prepare our consolidated financial statements and reports. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to document the existing financial processes, risk assessment, and internal controls systematically. We believe our recently hired accounting personnel, or through professional engagement of consultants, payroll manager for separation of duties from banking accounts and approvals will improve our documentation and internal control processes and procedures.
Changes in Internal Controls over Financial Reporting
Other than was described above, there were no material changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the year ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth certain information regarding our executive officers and directors as of March 15, 2021.
| Name | Age | Position with the Company | ||
| Stephen Squires (2) | 61 | Chief Executive Officer, President, Director | ||
| Robert Phillips | 61 | Chief Financial Officer | ||
| David Doderer | 51 | Director | ||
| Dr. Ghassan Jabbour (1) | 55 | Chief Science Officer, Director | ||
| Shane Squires (2) | 33 | Director |
| (1) | Independent director. |
| (2) | Stephen Squires is the father of Shane Squires. |
The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board of Directors and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time.
Officer and Director Backgrounds
The following is a brief summary of the background of each director and executive officer of our Company:
Stephen Squires, President and Chief Executive Officer, Director. Mr. Squires has over 25 years of experience in turnarounds, startups, business development, mergers and acquisitions and strategic planning. Mr. Squires is skilled at identifying emerging technologies and driving commercialization/global market introduction to position companies for growth. He has served as the Company’s President, CEO and Chairman from 2008 to June 30, 2016 and he has served as CEO and President since December 2016. Prior to QMC, from 2001 to 2008, Mr. Squires’ principal occupation was consulting and advising in the areas of advanced materials, nanotechnology, applications engineering, strategic international marketing with emphasis on middle east and commercialization of emerging technologies for Orasi LLC. From 1983 to 2001, Mr. Squires, as founder, served as President and Chief Executive Officer of Aviation Composite Technologies, Inc., a company whose principal business was the engineering, design, manufacture and refurbishment of advanced composite aero structures (“Aviation Composite”). Under Mr. Squires’ leadership, Aviation Composite grew from zero to over 200 employees and operated a 100,000 square foot state of the art facility. Aviation Composite was merged with USDR Aerospace in 2001. From 1977 to 1983, he worked at McDonnell Douglas Corporation, a company engaged in the business of building advanced tactical fighter aircraft and space vehicles, developing and adapting advanced materials for combat aircraft applications. Management believes that Mr. Squires’ background with the Company and its subsidiaries, his business experience in leading and managing businesses, and his extensive experience in the advanced materials, nanotechnology and engineering industries makes him qualified to serve as a director.
Robert Phillips, Chief Financial Officer: Mr. Phillips has served as CFO since January 2018. Mr. Phillips has extensive experience in accounting, finance, Security and Exchange Commission (“SEC”) financial reporting, Sarbanes Oxley compliance (“SOX”) and strategic planning in diverse industries including software, hardware manufacturing, medical technology and global communication services. Less than two years after completing his MBA at Texas A&M, he became CFO of a publicly traded company going through a difficult turnaround. A few years later he again became CFO and Chief Strategy Officer at publicly traded SecureCare Technologies, a medical technology spin-out and negotiated private equity investments. His early CFO experience has led him to positions and consulting engagements ranging from CFO of iStream Technologies, a startup business process management company specializing in regulatory compliance, to world-class Apple where he was a managing consultant of a high transaction volume stock operations team and managed accounting and related Form 10-Q and Form 10-K financial equity disclosure and technical accounting assessments as well as transitioned the departments operational site from Cupertino to Austin. He was also VP of Venture Development at a venture backed e-commerce startup incubator in Austin, Texas. He has served as Controller of Rocket Gaming Systems as well as Financial Reporting and Planning Director at Multimedia Games and at Rignet during an IPO. As financial consultant at Bridgepoint Consulting Group, he has held CFO services, Interim Controller and SEC Financial Reporting positions at Phunware, Hanger, Crossroads Systems, ActivePower, Harden Healthcare, ArthroCare, Boardbooks.com, Rainmaker Technologies and Fallbrook Technologies. Also, financial consulting and CFO services engagements at multinational companies including BMC Software, Natco Group, Respironics and FIC Group. Prior to joining Quantum Materials Corp as CFO in January 2018, he was also a founder of a blockchain startup established in 2016 related to secure transmission of medical records and transactions.
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David Doderer, Director. Mr. Doderer has over 20 years of research and development experience in emerging technologies including aerospace, biotech, and nano and quantum materials. Mr. Doderer was the Vice President of R&D for the company from 2008 through 2017 and has served as a director since December 2008. From 2006 to 2008, he managed Hudler Titan LLC, a technology consulting company, specializing in advanced nanofiber filtration for gaseous streams; experimental design and predictive modeling; and a clean energy/ clean air/ clean water initiative through aggregation of retail level contributions in alternative energy-based carbon offset programs. From 2002 to 2005, he served as principal investigator for USGN, a company engaged in the business of defense, safety and security solutions, where he contributed to numerous patents/patents pending and proprietary processes. Mr. Doderer’s experience in engineering, research and development in emerging technologies, his contributions to the filings of numerous patents and proprietary processes, and commercial planning provides significant experience to, and makes him qualified to be a member of, our Board of Directors.
Dr. Ghassan Jabbour. Dr. Jabbour has served as Chief Science Officer and a director of the Company since December 2008, taking a brief 6-month sabbatical in 2016. Dr. Jabbour is a Fellow SPIE and Fellow EOS and chairs our Advisory Board. Dr. Jabbour is the Canada Research Chair Tier 1-Professor of Electrical Engineering at the University of Ottawa. From 2013 to 2016 Dr. Jabbour was the Center Director and Lead Professor of Advanced Manufacturing, Renewable Energy Center, University of Nevada Reno. Prior to that, he served as Founding Director of the Solar and Alternative Energy Science and Engineering Research Center and also AlRawabi Endowed Research Chair at KAUST (King Abdullah University of Science and Technology) in Saudi Arabia from December 2009 to January 2013. Dr. Jabbour was the Director of Flexible and Organic Electronics Development at the Flexible Display Center (FDC) during 2006-2010, and a Professor of Chemical and Materials Engineering at Arizona State University. He was also the Technical Advisory Board Leader on Optoelectronic Materials, Devices and Encapsulation at FDC. He has been selected to the Asahi Shimbun 100 New Leaders of the USA and received the Presidential Award for Excellence from the Hariri Foundation in 1997. Dr. Jabbour’s research experience encompasses flexible-roll-to-roll-electronics and displays, smart textile, moisture and oxygen barrier technology, transparent conductors, organic light emitting devices, organic and hybrid photovoltaics, organic memory storage, organic thin film transistors, combinatorial discovery of materials, nano and macro printed devices, micro and nanofabrication, biosensors, and quantum simulations of electronic materials. Dr. Jabbour attended Northern Arizona University, the Massachusetts Institute of Technology (MIT), and the University of Arizona. Prof. Jabbour has authored and co-authored over 700 publications, invited talks, and conference proceedings. He is the editor of several books and symposia proceedings involving organic photonics and electronics, and nanotechnology. Professor Jabbour is guest editor of the MRS Bulletin issue on “Organic Photovoltaics”. He is the Chair and/or Co-Chair of over 50 conferences related to photonic and electronic properties of materials and their applications in displays and lighting, hybrid photosensitive materials, and hybrid integration of semiconducting and nanotechnology. We believe Dr. Jabbour is qualified to sit on the Board of Directors due to his extensive scientific and technical experience with the Company’s technology and proposed products.
Shane Squires. Mr. Squires has served as a director of the Company since December 2016. Mr. Squires is currently a research analyst with Howard Hughes Corp. engaged in the business of managing global investments in direct real estate, real estate securities, infrastructure securities and master limited partnerships (MLPs) From 2016 through 2017 he served as a research analyst at Invesco Real Estate (a subsidiary of Invesco Ltd.), engaged in the business of managing global investments in direct real estate, real estate securities, infrastructure securities and master limited partnerships (MLPs). Prior to this, Mr. Squires held the position of Senior Economist at Realpage Inc. from 2014 until 2016. Mr. Squires has a Masters in Applied Economic Analysis and a Bachelor of Science in Economics from the University of Texas at Arlington. We believe Mr. Squires is qualified to serve as a member of our Board of Directors due to his extensive experience in business and investing.
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Corporate Governance
Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Nevada Revised Statutes and our bylaws. Members of the Board of Directors are kept informed of our business through discussions with the Chief Executive Officer and other key members of management and by reviewing materials provided to them by management.
In the past, there have been no arrangements or understandings pursuant to which a director or executive officer was selected to be a director or executive officer other than employment contracts with our executive officers.
Director Qualifications and Diversity
Our Board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The Board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the renewable energy, finance and capital market industries. In evaluating nominations to the Board, our Board also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the willingness to assume and carry out fiduciary responsibilities. Qualified candidates for membership on the Board will be considered without regard to race, color, religion, sex, ancestry, national origin or disability.
Risk Oversight
The full Board has oversight of and will prioritize the following risks:
| ● | Risks and exposures associated with corporate governance, and management and director succession planning, strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation. | |
| ● | Risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters. | |
| ● | Risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans. |
Board Leadership Structure
The Chairman of the Board presides at all meetings of the Board according to our bylaws. The Chairman is appointed on an annual basis by at least a majority vote of the remaining directors. Currently, the office of Chairman of the Board and Chief Executive Officer, are held by Mr. Stephen Squires. The Company has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer.
Scientific Advisory Board
In July 2014, the Company announced the formation of the Scientific Advisory Board chaired by Dr. Ghassan Jabbour who is also a member of the Company’s Board of Directors. Other members of the Scientific Advisory Board were Dr. Michael Wong of Rice University and former member of our Board of Directors, Mr. Tomio Gotoh, a pioneer of the personal computer in Japan, and Dr. Munisamy Anandan.
Dr. Ghassan Jabbour. See biography under “Officers and Directors Backgrounds.”
Tomio Gotoh is a consultant for Diverse Technologies in Japan. Mr. Gotoh is a principal inventor of the NEC TK-80, the first Japanese microcomputer in 1976. He led numerous product launches that made Nippon Electric Company (“NEC”) the Japanese personal computer industry leader. As NEC’s visionary pioneer, Mr. Gotoh contributed significantly during the dawn of the personal computer era.
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Dr. Munisamy Anandan is a Managing Member of Organic Lighting Technologies LLC, Austin, Texas. He has 40 years of experience in various flat panel display technologies namely, LCD, plasma, OLED, FED and LCD backlight. He held senior level positions in various companies including Bell Communications Research, Matsushita Electric works and eMagin Corporation. Dr. Anandan is the past president of the Society for Information Display. For the past 12 years he has specialized in LED backlight, for LCDs for various applications including TV, and LED/OLED lighting. He has delivered several keynote addresses, seminars and invited talks at various international conferences around the world, on LED backlight, LED lighting and OLED lighting. He has issued patents on quantum dot and quantum rod based novel pixelated backlight for LCDs, employed in multiplicity of applications and has received several awards that include R&D 100 Award, in recognition of his work. He is a Senior Member of IEEE and SID. Dr. Anandan has recently completed writing one part of a book on ‘Quantum dots and rods and their application to LED backlight for LCD’s.
Committees/Independent Directors
Our Board of Directors has determined that David Doderer and Dr. Ghassan Jabbour are considered “independent directors.” Under the listing requirements of the NASDAQ Stock Market an “independent director” means a person other than an executive officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director.
On September 22, 2015, the Board of Directors formed an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation Committee. However, since certain resignations from our Board of Directors in December 2016, our full Board of Directors has performed the functions of our Audit, Compensation, and Nominating and Corporate Governance Committees. Other than David Doderer and Dr. Jabbour, neither Stephen Squires nor Shane Squires, meet the criteria for “independent director” under NASDAQ Stock Market listing requirements. In making these determinations, our Board of Directors considered the relationships that each director has with our company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each director.
The Board of Directors adopted charters for an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee in September 2015, copies of which is posted on our website, https://www.quantummaterialscorp.com/corporate-gevernance. However, as each of the charters requires that the applicable committee consist of independent members of the Board of Directors and given our size and the development of our business to date, we believe that the Board of Directors can presently perform all of the duties and responsibilities that might be contemplated by the committees. The Company intends to appoint committee members as it expands the Board of Directors and appoints individuals with applicable experience and expertise.
Our Board of Directors may establish other committees from time to time.
Code of Ethics
Our Board has adopted a Code of Business Conduct and Ethics that applies directors, officers and employees, which includes our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A current copy of the code is posted on our website, https://www.quantummaterialscorp.com/corporate-gevernance.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders (the “Reporting Persons”) are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.
Based solely on our review of the copies of such forms filed electronically with the SEC or written representations from the Reporting Persons that no Form 5 is required received by us, for the fiscal year ended June 30, 2019.
At June 30, 2019 we were delinquent in filing Form 3’s and Form 4’s. At the date of this filing, no current officer or director is delinquent in the filing of Form 3 or Form. Les Paull, a former director, was delinquent in filing a Form 3, and two Form 4’s at the time of this filing.
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Item 11. Compensation of Directors and Executive Officers
The following table sets forth the overall compensation earned over the fiscal years ended June 30, 2019 and 2018 and each person who was named executive officer during the year ended June 20, 2019.
| Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($)(1)(2) | Warrants or Option Awards (1) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||
| Officers | ||||||||||||||||||||||||||||||||||||
| Stephen Squires (1)(4) | 2019 | 300,000 | - | 400,000 | 85,364 | - | - | - | 785,364 | |||||||||||||||||||||||||||
| Chief Execurive Officer, Chairman of the Board of Directors | 2018 | 300,000 | - | - | - | - | - | - | 300,000 | |||||||||||||||||||||||||||
| Robert Phillips (3) | 2019 | - | - | - | 172,730 | - | - | 130,000 | 302,730 | |||||||||||||||||||||||||||
| Chief Financial Officer | 2018 | - | - | - | - | - | - | 55,000 | 55,000 | |||||||||||||||||||||||||||
| (1) | The options and restricted stock awards presented in this table for 2019 and 2018 reflect the entire fair value of such awards in the year of grant. However, the accompanying consolidated financial statements reflect the dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to guidance issued by the FASB. Such guidance requires the company to determine the overall value of the stock awards and options as of the date of grant. The stock awards are valued based on the fair market value of such shares on the date of grant and are charged to compensation expense over the related vesting period. The options are valued at the date of grant based upon the Black-Scholes method of valuation, which is expensed over the service period over which the options become vested. As a general rule, for time-in-service-based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description of the guidance issued by the FASB and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the consolidated financial statements included with this Prospectus. | |
| (2) | Included in Mr. Squires stock awards during year ended June 30, 2019 was 5,000,000 shares of stock, valued at $100,000, that was awarded, but not yet paid, and are recorded in common stock issuable in the equity section of the balance sheet. | |
| (3) | Mr. Phillips became the CFO on January 1, 2018. He is engaged with a consulting contract with the Company. His compensation is reported as Other Compensation. | |
| (4) | The table is on an accrual basis. Amounts accrued and unpaid at June 30, 2019 for Mr. Squires is approximately $103,000. |
Outstanding Equity Awards at Fiscal Year-End- Officers
The following table provides certain information concerning any common share purchase options granted for employment compensation, stock awards, or equity incentive plan awards held by each of our named executive officers and directors employed at any point during the fiscal year covered in this Form 10-K that were outstanding, exercisable and/or vested as of June 30, 2019:
| Number of Securities Underlying Unexercised Options or Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options or Warrants (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | |||||||||||||
| Officers/Directors | ||||||||||||||||
| Stephen Squires | 1,000,000 | (1) | - | $ | 0.05 | 10/19/2020 | Options | |||||||||
| Chief Execurive Officer, Chairman of the Board of Directors | 5,000,000 | (2) | - | 0.05 | 1/20/2020 | Options | ||||||||||
| 1,000,000 | (3) | - | 0.12 | 4/13/2026 | Options | |||||||||||
| 3,500,000 | (4) | - | 0.05 | 3/2/2022 | Options | |||||||||||
| 5,000,000 | (5) | - | 0.05 | 3/29/2023 | Options | |||||||||||
| 2,968,750 | (6) | - | 0.06 | 2/10/2020 | Options | |||||||||||
| 1,562,500 | (7) | - | 0.08 | 6/6/2020 | Options | |||||||||||
| 600,000 | (8) | - | 0.05 | 10/19/2020 | Options | |||||||||||
| 937,500 | (9) | - | 0.08 | 6/6/2020 | Options | |||||||||||
| - | (10) | 2,000,000 | 0.30 | 4/13/2026 | Options | |||||||||||
| 9,900,000 | (11) | 5,100,000 | 0.12 | 6/26/2022 | Options | |||||||||||
| - | (12) | 10,000,000 | 0.12 | 6/26/2022 | Options | |||||||||||
| 5,000,000 | (13) | - | 0.03 | 1/2/2023 | Warrants | |||||||||||
| 5,000,000 | (14) | - | 0.02 | 2/22/2024 | Options | |||||||||||
| Robert Phillips Chief Financial Officer | 2,500,000 | (15) | 2,500,000 | 0.03 | 10/18/2023 | Options | ||||||||||
| (1) | These grants became fully vested October 20, 2011. The expiration date of this grant was extended on February of 2019. |
| (2) | These grants became fully vested January 20, 2012. |
| (3) | These grants became fully vested April 13, 2019. |
| (4) | These grants became fully vested March 3, 2014. |
| (5) | These grants became fully vested March 29, 2013. |
| (6) | These grants became fully vested February 10, 2016. The expiration date of this grant was extended on February of 2019. |
| (7) | These grants became fully vested June 6, 2016. The expiration date of this grant was extended on February of 2019. |
| (8) | These grants became fully vested October 20, 2011. These options are held by Robin Squires, wife of the CEO, and deemed controlled by the CEO. The expiration date of this grant was extended on February of 2019. |
| (9) | These grants became fully vested June 6, 2016. These options are held by Robin Squires, wife of the CEO, and deemed controlled by the CEO. The expiration date of this grant was extended on February of 2019. |
| (10) | In February 2016, the Board of Directors authorized certain performance-based stock options to be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The option exercise price of the unexercised unearned options is the greater of (i) $0.30 and (ii) the market price when deemed earned by the Board. |
| (11) | On June 26, 2017, Mr. Squires was awarded 15,000,000 options. This award vests 33% on July 1, 2017, 33% on June 1, 2018, and 34% on July 1, 2019 (34%). Unvested shares are valued at $612,000 as of June 30, 2019. |
| (12) | On June 26, 2017, Mr. Squires was granted options to purchase 10,000,000 shares of common stock at $0.12/share. The options vest in the event that the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control of the Company is sold based upon a purchase price paid to the Company or its shareholders of at least $90 million. |
| (13) | On January 2, 2018, Mr. Squires was awarded 5,000,000 warrants. This award vests immediately, as it is a conversion of salary. |
| (14) | On February 22, 2019, Mr. Squires was granted options to purchase 5,000,000 shares of common stock at $0.02/share. The options vested immediately. The options were valued at $85,364. |
| (15) | On October 18, 2018, Mr. Phillips was granted options to purchase 5,000,000 shares of common stock at $0.03/share. The options vest 50% immediately, and 50% one year from the grant date. The options were valued at $172,730. Unvested shares are valued at $86,365. |
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For a description of the material terms of each named executive officers’ employment agreement or arrangement, including the terms of any contract, agreement, plan or other arrangement that provides for any payment to a named executive officer in connection with his or her resignation, retirement or other termination, or a change in control of the company see section below entitled “Employment Agreements.”
No outstanding common share purchase option or other equity-based award granted to or held by any named executive officer in 2018 or 2017 were re-priced or otherwise materially modified, including extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined, nor was there any waiver or modification of any specified performance target, goal or condition to payout.
Outstanding Equity Awards at Fiscal Year-End - Directors
The following table provides certain information concerning any common share purchase options granted for employment compensation, stock awards, or equity incentive plan awards held by each of our named executive officers and directors employed at any point during the fiscal year covered in this Form 10-K that were outstanding, exercisable and/or vested as of June 30, 2019:
| Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | ||||||||||||
| Directors | |||||||||||||||
| Dr. Ghassan Jabbour | 300,000 | (1) | - | 0.05 | 10/19/2020 | ||||||||||
| Director | 3,750,000 | (2) | - | 0.06 | 2/10/2020 | ||||||||||
| 1,500,000 | (3) | - | 0.08 | 6/6/2020 | |||||||||||
| 300,000 | (4) | - | 0.12 | 6/26/2022 | |||||||||||
| 500,000 | (5) | - | 0.02 | 2/22/2024 | |||||||||||
| Shane Squires | 300,000 | (4) | - | 0.12 | 6/26/2022 | ||||||||||
| Director | 500,000 | (5) | - | 0.02 | 2/22/2024 | ||||||||||
| David Doderer | 500,000 | (6) | - | 0.05 | 10/19/2020 | ||||||||||
| Director, former Vice President | 750,000 | (7) | - | 0.12 | 4/13/2026 | ||||||||||
| 5,000,000 | (8) | - | 0.05 | 3/29/2023 | |||||||||||
| 781,250 | (9) | - | 0.06 | 2/10/2020 | |||||||||||
| - | (10) | 1,250,000 | 0.30 | 4/13/2026 | |||||||||||
| 300,000 | (11) | - | 0.12 | 6/14/2022 | |||||||||||
| 500,000 | (5) | - | 0.02 | 2/22/2024 | |||||||||||
| 3,000,000 | (12) | - | 0.05 | 1/20/2020 | |||||||||||
| (1) | These grants became fully vested October 20, 2009. The expiration date of this grant was extended on February of 2019. |
| (2) | These grants became fully vested February 10, 2014. The expiration date of this grant was extended on February of 2019. |
| (3) | These grants became fully vested June 6, 2014. The expiration date of this grant was extended on February of 2019. |
| (4) | These grants became fully vested June 14, 2017. |
| (5) | On February 22, 2019, Mr. Jabbour, Shane Squires, and Mr. Doderer were each granted options to purchase 500,000 shares of common stock at $0.22/share. The options vest immediately. The options were valued at $8,536. |
| (6) | These grants became fully vested October 20, 2011. The expiration date of this grant was extended on February of 2019. |
| (7) | These grants became fully vested April 13, 2018. |
| (8) | These grants became fully vested March 29, 2013. |
| (9) | These grants became fully vested February 10, 2016. The expiration date of this grant was extended on February of 2019. |
| (10) | In February 2016, the Board of Directors authorized certain performance-based stock options to be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The option exercise price of the unexercised unearned options is the greater of (i) $0.30 and (ii) the market price when deemed earned by the Board. |
| (11) | These grants became fully vested June 14, 2017. |
| (12) | In February 2019, Mr. Doderer’s expired option grant of 3,000,000, which was originally granted in January of 2013, was reinstated with an extended expiration date of January 20, 2020. For GAAP purposes, this was considered a new grant, and compensation expense of $16,685 for this modification. No other terms of the grant were modified. They are vested immediately. |
| 43 |
Compensation of Directors
Cash Fees
As of the filing date of this Form 10-K, no cash fees have been paid to any directors of the Company, although the Board reserves the right to pay such cash fees in the future.
Restricted Stock and Options
In February 2019, Mr. Shane Squires, Doderer, and Mr. Jabbour each received 500,000 options to purchase shares of the Company’s common stock. The options have a 5-year term, an exercise price of $0.02. In February 2019, Mr. Doderer’s expired option grant of 3,000,000, which was originally granted in January of 2013, was reinstated with an extended expiration date of January 20, 2020. For GAAP purposes, this was considered a new grant, and compensation expense of $16,685 was recorded for this modification. No other terms of the grant were modified.
No restricted stock, options, or other equity compensation were received by Directors during fiscal year 2019.
Travel Expenses
All directors are reimbursed for their reasonable out of pocket expenses associated with attending board meetings.
| 44 |
For the fiscal year ended June 30, 2019, compensation paid to directors (other than those listed in the Summary Table above) was as follows:
| Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Warrants or Option Awards (1) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||
| Directors | ||||||||||||||||||||||||||||||||||||
| Dr. Ghassan Jabbour | 2019 | - | - | - | 38,223 | - | - | - | 38,223 | |||||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||||||||||
| Shane Squires | 2019 | - | - | - | 8,536 | - | - | - | 8,536 | |||||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||||||||||
| David Doderer | 2019 | - | - | - | 32,050 | - | - | - | 32,050 | |||||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||||||||||
| (1) | In February 2019, Mr. Shane Squires, Doderer, and Mr. Jabbour each received 500,000 options to purchase shares of the Company’s common stock. The options have a 5-year term, an exercise price of $0.02. These grants were valued at $8,536, respectively. In February 2019, Mr. Doderer’s expired option grant of 3,000,000, which was originally granted in January of 2013, was reinstated with an extended expiration date of January 20, 2020. For GAAP purposes, this was considered a new grant, and compensation expense of $16,685 was recorded for this modification. No other terms of the grant were modified. Certain outstanding options for Mr. Doderer and Mr. Jabbour were also extended, prior to their expiration. This resulted in additional modification expense for Mr. Doderer and Mr. Jabbour of $23,514 and $29,687, respectively. |
Compensation Policies and Practices as They Relate to Our Risk Management
No risks arise from our Company’s compensation policies and practices for our employees that are reasonably likely to have a material adverse effect on our Company.
Salary or Consulting Accruals
As of June 30, 2019, the Company had accrued salaries (and/or consulting fees) and expense reimbursements to our current and former executive officers in the amounts set forth below.
| Salary | Expense Reimbursement | |||||||
| Name | Accrued | Accrued | ||||||
| Stephen Squires | $ | 227,613 | $ | 13,888 | ||||
| David Doderer | 275,000 | - | ||||||
| Ghassan Jabour | 130,000 | - | ||||||
| Robert Phillips | 44,000 | - | (1) | |||||
| Toshi Ando | 113,200 | 8,857 | ||||||
| E. Jamie Schloss | 106,740 | - | ||||||
| He Huang | 29,167 | - | ||||||
| Total | $ | 925,720 | $ | 22,745 | ||||
| (1) | Accrued in Accounts Payable as a portion of Mr. Phillips consulting agreement |
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Employment Agreements
Our executive officers, and our CEO, Stephen Squires, are each a party to an employment agreement with the Company.
| Name | Position | Annual Salary | Bonus | |||||||||
| Stephen Squires | CEO | $ | 300,000 | |||||||||
Employment Agreement – Stephen Squires
Stephen Squires, Chief Executive Officer, entered into an employment agreement dated October 26, 2012 to retain his services for the period January 1, 2013 through January 1, 2018. On December 10, 2015, the Company entered into an amended and restated employment agreement with Mr. Squires. On June 13, 2016, Mr. Squires, then our Chief Executive Officer and a member of our Board of Directors, agreed to step down from these positions effective June 30, 2016 and to become Managing Director of our wholly owned subsidiary, Solterra. Mr. Squires would again become the Company’s Chief Executive Officer and President on December 22, 2016. In June 2016, the Company entered into an Amended and Restated Employment Agreement (the “Squires Agreement”) with Mr. Squires which provides that, until such time as the Company records its first $10,000,000 in revenue (the “Revenue Trigger”), the Company shall pay Mr. Squires an annual base salary of no less than $225,000 and after the occurrence of the Revenue Trigger, the Company shall pay Mr. Squires an annual base salary of no less than $247,500. Mr. Squires shall also be eligible for certain annual bonuses and equity awards pursuant to the Squires Agreement. The term of the Squires Agreement is for two years and provides for severance payments in the event of termination or a change in control of the Company equal to the sum of Mr. Squires’ base salary for the remainder of his employment agreement.
In June 2017, the Company entered into an amendment to Mr. Squires’ employment agreement pursuant to which we agreed as follows:
| (1) | Mr. Squires will serve as CEO and receive an increase in annual salary to $300,000 effective June 1, 2017. | |
| (2) | Mr. Squires term of his agreement was extended three years to June 30, 2020. | |
| (3) | Mr. Squires received 25 million options to purchase common stock, exercisable at $0.12 per share, outside of any stock option plan with 15 million of the options vesting annually over three years beginning July 1, 2017 and the remaining 10 million options vesting in accordance with the terms of the revised and amended employment agreement but only in the event that the outstanding shares of the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control of the Company is sold during the term of the options based upon a purchase price paid to the Company and/or its shareholders of at least $90 million. |
In July 2020, the Company entered into an amendment to Mr. Squires’ employment agreement pursuant to which:
| ● | the term of the agreement expires on June 30, 2023. |
| 46 |
| ● | commencing July 1, 2020, Mr. Squires shall receive annual compensation at the rate of $350,000. | |
| ● | the Company granted to Mr. Squires five-year options to purchase 25,000,000 shares of common stock, exercisable at $0.02 per share, with one-half vesting on July 1, 2020 and one-half vesting on July 1, 2021, which were granted outside of any stock option plan and shall contain cashless exercise provisions. | |
| ● | The Company granted to Mr. Squires an additional 20,000,000 five-year options excisable at $0.02 per share with vesting to occur only in the event that the outstanding shares of the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control (more than 50%) of the Company is sold during the term of the options which were granted outside of any stock option plan and shall contain cashless exercise provisions. |
Consulting Agreement – Robert Phillips
Robert Phillips, Chief Financial Officer, entered into a consulting agreement dated January 1, 2019 as a consultant to perform all duties typically required of a Chief Financial Officer. The agreement provides that compensation for the services rendered under the agreement will be equivalent to $150,000 annually. Payments under the agreement accrue at a rate of $2,500 per month until such time that $2 million in cumulative external equity, debt or other funding events occur. In addition, the Company agreed to issue shares of restricted common stock on a monthly basis with a value of $10,000 after extending a 20% discount to the weighted average closing price on a public stock exchange during such respect payment month. At Mr. Phillips’ request, the monthly cash payment and any previously accrued and unpaid cash payments shall be paid in shares of restricted common stock on a monthly basis after extending a 20% discount to the weighted average closing price on a public stock exchange during such respective payment month. The original term of the agreement was for one year and may be extended annually by mutual agreement unless terminated earlier by operation of and in accordance with the agreement. The Company any terminate the agreement upon 30 days’ written notice to Mr. Phillips. Mr. Phillips has the right to cause the Company to register all of the stock or other securities he holds if the Company proposed to register any of its securities under the Securities Act of 1933, as amended. In the event of a change of control of the Company, as defined in the agreement, prior to termination of the agreement, the remaining balance of all cash payments and restricted common stock payable to Mr. Phillips under the terms of the agreement will be accelerated so as to become 300% payable of the remaining term.
| 47 |
2009 Stock Option Plan
On December 2, 2009, the Company established a 2009 Employee Benefit and Consulting Services Compensation Plan (the “2009 Plan”) covering 10,000,000 shares. The material features of the 2009 Plan are described below:
Administration
Our Board of Directors, Compensation Committee or both, in the sole discretion of our Board, administers the 2009 Plan, which was approved by the Company’s Board of Directors on December 2, 2009 and by stockholders as of January 25, 2010. The Board, subject to the provisions of the 2009 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of Options and Stock Awards issued to our officers or directors.
Types of Awards
The 2009 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2009 Plan contained provisions for granting incentive and non-statutory stock options and common stock Awards.
Stock Options. A “stock option” is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. The option price per share of common stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the common stock on the date of grant. The option price must be paid in cash, money order, check or common stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board, certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. “Common Stock Award” is shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse, and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board, the restricted stock award will be terminated.
Eligibility
The officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and Common Stock Awards. Eligibility shall be determined by the Board; however, all Options and Stock Awards granted to officers and directors must be approved by the Board.
Termination or Amendment of the 2009 Plan
The Board may at any time amend, discontinue, or terminate all or any part of the 2009 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.
| 48 |
Awards
As of June 30, 2019, options to purchase 8,400,000 shares were outstanding under the 2009 Plan. These include the following persons:
| Amount of Shares | Exercise Price | Net Realizable Value (1) | ||||||||||
| Stephen Squires (2) | 6,600,000 | $ | 0.05 | $ | - | |||||||
| David Doderer | 500,000 | 0.05 | - | |||||||||
| Ghassan Jabbour | 300,000 | 0.05 | - | |||||||||
| Non-Officers/Directors (3) | 1,000,000 | 0.04 - 0.05 | - | |||||||||
| Total | 8,400,000 | $ | 0.04 - 0.05 | $ | - | |||||||
| (1) | Based upon the closing last sale of $0.03 per share as of June 28, 2019, the last trading day of the fiscal year, after deducting the applicable exercise price. |
| (2) | Includes 600,000 options held pursuant to the 2009 plan held by Mr. Squires’ wife. |
| (3) | Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing. |
It is not possible to predict the individuals who will receive future awards under the 2009 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2009 Plan.
Shares Subject to the 2009 Plan
The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2009 Plan is 10,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2009 Plan does not limit the number of shares of common stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the 2009 Plan and the number of shares subject to options and awards to be granted under the 2009 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2009 Plan.
Option activity in the 2009 Plan was as follows for the years ended June 30, 2019 and 2018:
| 2019 | 2018 | |||||||||||||||
| Weighted- Average | Weighted- Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
| Shares reserved | 10,000,000 | 10,000,000 | ||||||||||||||
| Outstanding at beginning of year | 8,400,000 | $ | 0.050 | 8,950,000 | $ | 0.050 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited/cancelled | - | 0.045 | 550,000 | 0.045 | ||||||||||||
| Outstanding at end of year | 8,400,000 | $ | 0.051 | 8,400,000 | $ | 0.051 | ||||||||||
| Remaining options available to be issued | 100,000 | (1) | 1,600,000 | |||||||||||||
| (1) | During the year ended June 30, 2019, 1,500,000 restricted shares were granted out of the 2009 Plan. These are not outstanding options but these do reduce the remaining shares available to grant. |
| 49 |
2013 Stock Option Plan
In January 2013, the Company approved the 2013 Employee Benefit and Consulting Services Compensation Plan (the “2013 Plan”) covering 20,000,000 shares, which automatically increased to 60,000,000 shares on March 29, 2013. The 2013 Plan is otherwise identical to the terms of the 2009 Plan.
Awards
As of June 30, 2019, options to purchase 54,833,433 shares were outstanding under the 2013 Plan. These include the following persons:
| Amount of Shares | Exercise Price | Net Realizable Value (1) | ||||||||||
| Stephen Squires (2) | 11,468,750 | $ | 0.05 - 0.12 | $ | - | |||||||
| David Doderer | 6,531,250 | 0.05 - 0.12 | - | |||||||||
| Ghassan Jabbour | 5,250,000 | 0.06 - 0.08 | - | |||||||||
| Shane Squires | 500,000 | 0.02 | 5,000 | |||||||||
| Robert Phillips | 5,000,000 | 0.03 | - | |||||||||
| Non-Officers/Directors (3) | 31,083,433 | 0.02 - 0.17 | 50,000 | |||||||||
| Total | 59,833,433 | $ | 0.02 - 0.17 | $ | 55,000 | |||||||
| (1) | Based upon the closing last sale of $0.03 per share as of June 28, 2019, the last trading day of the fiscal year, after deducting the applicable exercise price. |
| (2) | Includes 937,500 options held pursuant to the 2013 plan held by Mr. Squires’ wife. |
| (3) | Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing. |
It is not possible to predict the individuals who will receive future awards under the 2013 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2013 Plan.
Shares Subject to the 2013 Plan
The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2013 Plan is 60,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2013 Plan does not limit the number of shares of common stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the 2013 Plan and the number of shares subject to options and awards to be granted under the 2013 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2013 Plan.
| 50 |
Option activity in the 2013 Plan was as follows for the years ended June 30, 2019 and June 30, 2018:
| 2019 | 2018 | |||||||||||||||
| Weighted- Average | Weighted- Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
| Shares reserved | 60,000,000 | 60,000,000 | ||||||||||||||
| Outstanding at beginning of year | 50,441,914 | $ | 0.082 | 53,441,914 | $ | 0.082 | ||||||||||
| Granted | 13,000,000 | 0.029 | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited/cancelled | (3,608,481 | ) | 0.067 | (3,000,000 | ) | 0.050 | ||||||||||
| Outstanding at end of year | 59,833,433 | $ | 0.075 | 50,441,914 | $ | 0.082 | ||||||||||
| Remaining options available to be issued | 166,567 | 6,233,086 | ||||||||||||||
2015 Stock Option Plan
In December 2015, the Company approved the 2015 Employee Benefit and Consulting Services Compensation Plan (the “2015 Plan”) covering 15,000,000 shares. The 2015 Plan received stockholder approval in 2016. The 2015 Plan became effective upon the date that stockholders approved the plan. The material features of the 2015 Plan are summarized below:
Purpose
The 2015 Incentive Plan is intended to promote the interests of the Company and its stockholders by providing the employees and consultants of Quantum with incentives and rewards to encourage them to continue in the service of Quantum and with a proprietary interest in pursuing the long-term growth, profitability and financial success of Quantum.
Administration
The Board of Directors, the Compensation Committee or both, in the sole discretion of the Board of Directors, shall administer the 2015 Incentive Plan in accordance with its terms. The Board, subject to the provisions of the 2015 Plan, has the authority to determine and designate officers, employees, director and consultants to which awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of stock options and common stock awards issued to our officers or directors.
Eligibility
The Company’s officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and common stock awards. Eligibility shall be determined by the Board; however, all stock options and common stock awards granted to officers and directors must be approved by the Board.
Shares Subject to the Plan
The maximum number of shares of Common Stock that may be covered by stock options and common stock awards granted under the 2015 Plan shall not exceed 15,000,000 shares of common stock in the aggregate. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The aggregate number of shares subject to awards granted under this Plan during any fiscal year to any one employee or non-executive director shall not exceed 2,500,000 and 1,000,000 respectively.
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Award Types
The 2015 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2015 Plan contained provisions for granting incentive and non-statutory stock options and common stock awards.
Stock Options. A “stock option” is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. The option price per share of Common Stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the common stock on the date of grant. The option price must be paid in cash, money order, check or Common Stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board of Directors, certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions determined by the Board of Directors at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. A “common stock award” is shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board of Directors if he or she continues to be an employee, director or consultant of the Company. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse, and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of the Company for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board of Directors, the restricted stock award will be terminated.
Awards
As of June 30, 2019, options to purchase 14,975,000 shares were outstanding under the 2015 Plan. These include the following persons:
| Amount of Shares | Exercise Price | Net Realizable Value (1) | ||||||||||
| Stephen Squires (2) | 2,000,000 | $ | 0.30 | (2) | $ | - | ||||||
| David Doderer (3) | 2,050,000 | 0.02 – 0.12 | (2) | 5,000 | ||||||||
| Ghassan Jabbour | 800,000 | 0.02 – 0.12 | 5,000 | |||||||||
| Shane Squires | 300,000 | 0.12 | - | |||||||||
| Non-Officers/Directors (4) (5) | 9,825,000 | 0.02 – 0.12 | (2) | 115,000 | ||||||||
| Total | 14,975,000 | $ | 0.12 – 0.30 | (2) | $ | 125,000 | ||||||
| (1) | Based upon the closing last sale of $0.03 per share as of June 28, 2019, the last trading day of the fiscal year, after deducting the applicable exercise price. |
| (2) | Of this balance, 2,000,000, 1,250,000, and 1,550,000 of these options are currently unearned as of the filing date of this Form 10-K for Mr. Squires, Mr. Doderer, and Non-Officers/Directors, respectively. These options will be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The unearned options will have an exercise price of the greater of (i) $0.30 per share and (ii) the market price when earned. |
| (3) | 1,250,000 of the options are unearned as of the filing date of this Form 10-K as described in (2) above. |
| (4) | Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing unless otherwise noted. |
| (5) | 1,550,000 of the options held by non-officers/directors are unearned as of the filing date of this Form 10-K as described in (2) above. |
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It is not possible to predict the individuals who will receive future awards under the 2015 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2015 Plan.
Amendment and Termination
The Board may at any time amend, discontinue, or terminate all or any part of the 2015 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.
Adjustments Upon Certain Changes
The aggregate number of shares issuable under the 2015 Plan and the number of shares subject to stock options and common stock awards to be granted under the 2015 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2015 Plan.
Shares Subject to the 2015 Plan
The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2015 Plan is 15,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2015 Plan limits the number of shares of common stock with respect to which options or stock awards may be granted to any individual during any calendar year to a maximum of 2,500,000. Option or stock awards granted to any non-employee director during any fiscal year are limited to a maximum of 1,000,000. The aggregate number of shares issuable under the 2015 Plan and the number of shares subject to options and awards to be granted under the 2015 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2015 Plan.
Option activity in the 2015 Plan was as follows for the year ended June 30, 2019 and 2018:
| 2019 | 2018 | |||||||||||||||
| Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | |||||||||||||
| Shares reserved | 15,000,000 | 15,000,000 | ||||||||||||||
| Outstanding at beginning of year | 8,075,000 | $ | 0.294 | 7,175,000 | $ | 0.294 | ||||||||||
| Granted-Earned | 7,500,000 | 0.060 | 900,000 | 0.060 | ||||||||||||
| Granted-Unearned | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited/cancelled | (600,000 | ) | - | - | - | |||||||||||
| Outstanding at end of year (1) | 14,975,000 | $ | 0.220 | 8,075,000 | $ | 0.220 | ||||||||||
| Remaining options available to be issued | 25,000 | 6,925,000 | ||||||||||||||
(1) The weighted average exercise price at the end of the year includes the granted-unearned options at an exercise price of $0.30. The granted-unearned options will have an exercise price of the greater of (i) $0.30 per share and (ii) the market price when earned, therefore the actual weighted average exercise price of the options outstanding at the end of the year may be higher, but not lower, than shown in this table when the exercise price is established.
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Options outside the 2009 Plan, 2013 Plan, and 2015 Plan
In February 2019, 3,000,000 stock options with a term of 1 year and an exercise price of $0.02 were granted outside of the 2009, 2013, and 2015 Plans, were granted to Mr. Doderer.
In fiscal year 2018, no options or warrants were granted outside the 2009 Plan, 2013 Plan, and 2015 Plan.
Prior to fiscal year 2018, 31,500,000 options outside the 2009 Plan, 2013 Plan, and 2015 Plan were granted, of which 28,500,000 were outstanding. As of June 30, 2019, 31,500,000 options granted outside the 2009 Plan, 2013 Plan, and 2015 Plan were outstanding.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Need chart update
The following table sets forth as of March 14, 2021 certain information regarding beneficial ownership of our common stock by:
| ● | Each person known to us to beneficially own 5% or more of our common stock; | |
| ● | Each executive officer who in this proxy statement are collectively referred to as the “Named Executive Officers;” | |
| ● | Each of our directors; and | |
| ● | All of our executive officers (as that term is defined under the rules and regulations of the SEC) and directors as a group. |
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We have determined beneficial ownership in accordance with Rule 13d-3 under the Exchange Act. Beneficial ownership generally means having sole or shared voting or investment power with respect to securities. Unless otherwise indicated in the footnotes to the table, each shareholder named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite the shareholder’s name.
Common Stock Benefically Owned (1)(2) | Percent of Class (3) | |||||||
| Stephen Squires (4) | 80,633,301 | 10.8 | % | |||||
| David Doderer (5) | 13,720,000 | 2.0 | % | |||||
| Ghassan Jabbour (6) | 7,100,000 | 1.0 | % | |||||
| Shane Squires (7) | 1,400,000 | * | ||||||
| Robert Phillips (8) | 22,689,851 | 3.2 | % | |||||
| Directors and Executive Officers as a group of 5 persons | 125,543,152 | 16.3 | % | |||||
| Lucas Hoppel (9) | 44,936,237 | 6.1 | % | |||||
| Pasaca Capital, Inc. (10) | 249,661,287 | 26.5 | % | |||||
| Quantum Materials Vertical Technologies, LLC (11) | 74,166,667 | 9.7 | % | |||||
| Carson Group (12) | 35,485,398 | 5.1 | % | |||||
* Represents less than 1%
| (1) | Unless otherwise indicated, ownership represents sole voting and investment power. |
| (2) | The address for each officer and director named above is c/o the Company at 3055 Hunter Road, San Marcos, TX 78666. |
| (3) | Based upon 693,367,942 common shares outstanding as of March 14, 2021. |
| (4) | Includes 25,903,301 shares of common stock owned, 5,000,000 of which are payable, by Mr. Squires and 230,000 shares of common stock owned by Mr. Squires wife and options to purchase 54,500,000 shares owned by Mr. Squires. |
| (5) | Includes 6,670,000 shares of common stock and warrants and options to purchase 7,050,000 shares. |
| (6) | Includes 5,800,000 shares of common stock and warrants and options to purchase 1,300,000 shares. |
| (7) | Includes 100,000 shares of common stock and warrants to purchase 1,300,000 shares. |
| (8) | Includes 7,689,851 shares of common stock and options to purchase 15,000,000 shares. |
(9) |
Includes 31,436,237 shares of common stock issuable upon conversion of debentures, and 13,500,000 shares of common stock issuable upon exercise of warrants. Lucas Hoppel is an individual investor, located at 295 Palmas Inn Way, Ste 104, PMB 346, Humacao, PR 00791. |
(10) |
Includes 249,661,287 shares of common stock issuable upon conversion of debentures. |
| (11) | According to the Company’s subscription agreement with Quantum Materials Vertical Technologies, LLC. Includes warrants to purchase 7,500,000 shares, and 66,666,667 shares of common stock issuable upon conversion of debentures. The address for Quantum Materials Vertical Technologies, LLC is 11904 Versante Circle, Austin, TX 78726. Les Paull is the Manager of Quantum Materials Vertical Technologies, LLC, and has the power to vote and dispose of these shares. |
| (12) | Carson Haysco Holdings, LP is the beneficial owner of 17,742,699 shares of common stock; Carson Diversified Investments, LP is the beneficial owner of 17,742,699 shares of common stock. Carson Diversified GP, LLC is the general partner of each of Carson Haysco Holdings, LP and Carson Diversified Investments, LP, and W.C. Carson is the beneficial owner of 100% of the ownership interests in Carson Diversified GP, LLC. The address for the Carson Group is P. O. Box 666, San Marcos, TX 78667. |
Change in Control
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.
Registration Rights Agreement. 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.
Distribution Agreement. 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.
Securities Authorized for Issuance under Equity Incentive Plans
The table set forth below provides information as of June 30, 2019 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:
| Plan Category | Number of securities to be issued upon exercise of outstanding warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
| Equity compensation plans approved by security holders | 83,208,433 | $ | 0.065 | 291,567 | ||||||||
| Equity compensation plans not approved by security holders | - | $ | - | - | ||||||||
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Item 13. Certain Relationships and Transactions
Policies and Procedures for Related-Party Transactions
Our Company does not have any formal written policies or procedures for related party transactions, however in practice, our board of directors’ reviews and approves all related party transactions and other matters pertaining to the integrity of management, including potential conflicts of interest, trading in our securities, or adherence to standards of business conduct.
At June 30, 2019 and 2018, the Company had accrued salaries payable to executives and members of the board of directors, in the amount of $757,569 and $568,575, respectively.
During the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds of $200,000. This transaction is described in more detail in Note 5 under the heading April – June, August, October and November 2016 Convertible Debentures.
In September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing. This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the loan on October 11, 2016.
For a description of transactions during fiscal years 2018 and 2017 between the Company and its executive officers and directors, reference is made to Items 7 herein.
Director Independence
Our Board has determined that Dr. Ghassan Jabbour is considered an “independent director.” Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition, an “independent director” means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The Board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $120,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of the company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of the company’s outside auditor.
Item 14. Principal Accountant Fees and Services
In May 2018, the Company engaged RBSM, LLP of Larkspur, CA as the Company’s new registered independent public accountant. The following table presents the aggregate audit fees billed by RBSM, LLP for fiscal year 2019 and 2018:
| Services
Billed for the Year Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Audit Fees (1) | $ | 52,500 | $ | 30,000 | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 52,500 | $ | 30,000 | ||||
(1) |
The Audit fees for the years ended June 30, 2019 and 2018, respectively, were for professional services rendered for the audits of Company’s consolidated financial statements, the reviews of Company’s quarterly consolidated financial statements, the review of Company’s Annual Report, the review of documents filed with the SEC, and consents. |
Pre-Approval Policies and Procedures
The Board of Directors pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.
| 56 |
Item 15. Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this Report
| (1) | Consolidated Financial Statements: See index to Consolidated Financial Statements on page F-1 | |
| (2) | Financial Statement Schedules |
(b) Exhibits
The information required by this Item is set forth on the Exhibit Index that follows the signature page of this Report
| 57 |
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| QUANTUM MATERIALS CORP. | ||
| Date: March 22, 2021 | By: | /s/ Stephen Squires |
| Name: | Stephen Squires | |
| Title: | Principal Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /s/ Stephen Squires | Title: Principal Executive Officer, Director | Date: March 22, 2021 | ||
| Stephen Squires | ||||
| /s/ Robert Phillips | Title: Principal Financial Officer | Date: March 22, 2021 | ||
| Robert Phillips | ||||
| /s/ Ghassan Jabbour | Title: Director | Date: March 22, 2021 | ||
| Ghassan Jabbour | ||||
| /s/ David Doderer | Title: Director | Date: March 22, 2021 | ||
| David Doderer | ||||
| /s/ Shane Squires | Title: Director | Date: March 22, 2021 | ||
| Shane Squires |
| 58 |
| (b) | Exhibits (items indicated by an (*) are filed herewith) |
| 59 |
| 60 |
| 61 |
QUANTUM MATERIALS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Quantum Materials Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quantum Materials Corp. (the Company) as of June 30, 2019 and June 30, 2018, and the related consolidated statements of operations, consolidated stockholders’ deficit, and consolidated cash flows for the years ended June 30, 2019 and 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and June 30, 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ RBSM LLP | |
| We have served as the Company’s auditor since 2018. | |
| Larkspur, CA | |
| March 22, 2021 |
| F-2 |
CONSOLIDATED BALANCE SHEETS
| June 30, 2019 | June 30, 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 478 | $ | 2,025 | ||||
| Subscription receivable | - | 10,000 | ||||||
| Accounts Receivable | 400 | - | ||||||
| Prepaid expenses and other current assets | 19,191 | 34,252 | ||||||
| TOTAL CURRENT ASSETS | 20,069 | 46,277 | ||||||
| Property and equipment, net of accumulated depreciation of $446,095 and $346,080 | 525,509 | 625,524 | ||||||
| Licenses and patents, net of accumulated amortization of $174,449 and $146,852 | 18,294 | 45,891 | ||||||
| Long term portion of prepaid expenses | - | - | ||||||
| TOTAL ASSETS | $ | 563,872 | $ | 717,692 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 1,629,741 | $ | 1,511,691 | ||||
| Accrued expenses | 1,573,690 | 548,667 | ||||||
| Accrued salaries | 924,957 | 682,575 | ||||||
| Contract liabilities | 500,000 | - | ||||||
| Notes payable, net of unamortized discount | 20,000 | - | ||||||
| Short term derivative liability | 45,692 | - | ||||||
| Current portion of convertible debentures, net of unamortized discount | 2,467,106 | 3,402,421 | ||||||
| TOTAL CURRENT LIABILITIES | 7,161,186 | 6,145,354 | ||||||
| Convertible debentures, net of current portion, unamortized discount and debt issuance costs | 135,342 | 40,224 | ||||||
| TOTAL LIABILITIES | 7,296,528 | 6,185,578 | ||||||
| Commitments and contingencies (See Note 10) | - | - | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Common stock, $.001 par value, authorized 750,000,000 shares, 583,314,787 and 442,564,332 issued and outstanding at June 30, 2019 and June 30, 2018, respectively | 583,326 | 442,564 | ||||||
| Common stock issuable | 707,914 | 800,131 | ||||||
| Additional paid-in capital | 47,777,681 | 40,133,592 | ||||||
| Accumulated deficit | (55,801,577 | ) | (46,844,173 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (6,732,656 | ) | (5,467,886 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 563,872 | $ | 717,692 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| REVENUES | $ | 400 | $ | 20,120 | ||||
| OPERATING EXPENSES | ||||||||
| General and administrative | 5,840,807 | 6,093,075 | ||||||
| Research and development | 92,996 | 188,274 | ||||||
| TOTAL OPERATING EXPENSES | 5,933,803 | 6,281,349 | ||||||
| LOSS FROM OPERATIONS | (5,933,403 | ) | (6,261,229 | ) | ||||
| OTHER EXPENSE (INCOME) | ||||||||
| Beneficial conversion expense | 143,778 | 1,303,078 | ||||||
| Interest expense, net | 1,262,150 | 1,023,989 | ||||||
| Change in value of derivative liability | 148,719 | (514,969 | ) | |||||
| Accretion of debt discount | 318,070 | 1,327,742 | ||||||
| Loss on shares unauthorized | 712,695 | - | ||||||
| Loss on debt extinguishment | 438,589 | - | ||||||
| TOTAL OTHER EXPENSE | 3,024,001 | 3,139,840 | ||||||
| NET LOSS | $ | (8,957,404 | ) | $ | (9,401,069 | ) | ||
| LOSS PER COMMON SHARE | ||||||||
| Basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
| Basic and diluted | 519,503,594 | 413,738,050 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Issuable | Capital | Deficit | Deficit | |||||||||||||||||||
| Balances at June 30, 2017 | 367,955,585 | $ | 367,955 | $ | - | $ | 33,880,177 | $ | (37,443,104 | ) | $ | (3,194,972 | ) | |||||||||||
| Common stock issued for cash | 1,716,666 | 1,717 | - | 151,283 | - | 153,000 | ||||||||||||||||||
| Common stock issued for services | 34,100,060 | 34,100 | - | 474,650 | - | 508,750 | ||||||||||||||||||
| Common stock issued for debenture interest | 737,020 | 737 | - | 67,760 | - | 68,497 | ||||||||||||||||||
| Common stock issued for debenture conversions | 7,125,001 | 7,125 | - | 847,875 | - | 855,000 | ||||||||||||||||||
| Common stock issued for debenture and warrant extensions | 24,125,000 | 24,125 | 36,000 | 1,606,675 | - | 1,666,800 | ||||||||||||||||||
| Common stock and stock warrants issued in exchange for accrued salaries | - | - | 30,800 | 498,022 | - | 528,822 | ||||||||||||||||||
| Common stock and stock warrants issued in exchange for accounts payable | 1,880,000 | 1,880 | - | 175,120 | - | 177,000 | ||||||||||||||||||
| Cancellation of shares | (5,725,000 | ) | (5,725 | ) | - | (429,375 | ) | - | (435,100 | ) | ||||||||||||||
| Stock-based compensation | 7,000,000 | 7,000 | - | 1,294,060 | - | 1,301,060 | ||||||||||||||||||
| Beneficial conversion feature of debenture | - | - | - | 1,303,078 | - | 1,303,078 | ||||||||||||||||||
| Allocated value of common stock and warrants related to debenture | 3,650,000 | 3,650 | 453,331 | 264,267 | - | 721,248 | ||||||||||||||||||
| Common stock issued in exchange for debt extinguishment | - | - | 280,000 | - | - | 280,000 | ||||||||||||||||||
| Net loss | - | - | - | - | (9,401,069 | ) | (9,401,069 | ) | ||||||||||||||||
| Balances at June 30, 2018 | 442,564,332 | $ | 442,564 | $ | 800,131 | $ | 40,133,592 | $ | (46,844,173 | ) | $ | (5,467,886 | ) | |||||||||||
| Common stock issued for cash | 3,324,313 | 3,326 | 25,000 | 296,500 | - | 324,826 | ||||||||||||||||||
| Common stock issued for services | 37,124,904 | 37,128 | 5,610 | 2,557,657 | - | 2,600,395 | ||||||||||||||||||
| Common stock issued for debenture interest | 729,877 | 732 | 80,000 | 42,109 | - | 122,841 | ||||||||||||||||||
| Common stock issued for debenture conversions | 39,814,393 | 39,817 | (170 | ) | 1,350,394 | - | 1,390,041 | |||||||||||||||||
| Common stock issued for debenture and warrant extensions | 26,518,635 | 26,521 | 497,474 | 709,275 | - | 1,233,270 | ||||||||||||||||||
| Common stock allocated to debt discount | 3,000,000 | 3,000 | - | 123,908 | - | 126,908 | ||||||||||||||||||
| Issuance of common stock issuable | 24,113,333 | 24,113 | (800,131 | ) | 776,018 | - | - | |||||||||||||||||
| Stock-based compensation | 6,000,000 | 6,000 | 100,000 | 1,642,075 | - | 1,748,075 | ||||||||||||||||||
| Beneficial conversion feature of debenture | - | - | - | 143,778 | - | 143,778 | ||||||||||||||||||
| Allocated value of common stock and warrants related to debenture | 125,000 | 125 | - | 2,375 | - | 2,500 | ||||||||||||||||||
| Net loss | - | - | - | - | (8,957,404 | ) | (8,957,404 | ) | ||||||||||||||||
| Balances at June 30, 2019 | 583,314,787 | $ | 583,326 | $ | 707,914 | $ | 47,777,681 | $ | (55,801,577 | ) | $ | (6,732,656 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (8,957,404 | ) | $ | (9,401,069 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 127,612 | 132,637 | ||||||
| Amortization of debt issuance costs, stock paid for interest, and debt discount |
1,175,246 | 650,128 | ||||||
| Stock-based compensation | 1,748,075 | 1,580,012 | ||||||
| Stock issued for services | 2,600,395 | 1,318,274 | ||||||
| Stock issued for debenture extensions | 80,000 | 1,646,800 | ||||||
| Beneficial conversion feature | 143,778 | 1,303,078 | ||||||
| Deemed interest on extinguishment of debenture | - | 118,000 | ||||||
| Change in fair value of derivative liability | 148,719 | (514,969 | ) | |||||
| Loss on shares unauthorized | 712,695 | - | ||||||
| Loss on debt extinguishment | 438,589 | - | ||||||
| Loss on settlement of accounts payable | 138,325 | - | ||||||
| Accretion of debt discount and warrant expense | 318,070 | 1,020,772 | ||||||
| Effects of changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 9,600 | - | ||||||
| Prepaid expenses and other current assets | 15,061 | (23,983 | ) | |||||
| Accounts payable and accrued expenses | 286,006 | 1,079,499 | ||||||
| Contract liabilities | 500,000 | - | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (515,233 | ) | (1,090,821 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | - | (1,877 | ) | |||||
| NET CASH USED IN INVESTING ACTIVITIES | - | (1,877 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of common stock | 324,824 | 163,000 | ||||||
| Proceeds from issuance of convertible debentures / promissory note | 502,000 | 1,494,500 | ||||||
| Proceeds from issuance of note payable | 20,000 | - | ||||||
| Principal payments on long-term debt | (333,138 | ) | (552,650 | ) | ||||
| Principal payments on note payable | - | (62,738 | ) | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 513,686 | 1,042,112 | ||||||
| NET DECREASE IN CASH | (1,547 | ) | (50,586 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period | 2,025 | 52,611 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 478 | $ | 2,025 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 6,904 | $ | 25,555 | ||||
| Stock issued for conversion of debentures | $ | 1,390,041 | $ | 923,497 | ||||
| Issuance of common stock payable | $ | 800,131 | $ | 133,000 | ||||
| issuance of common stock for conversion of accrued salaries | $ | - | $ | 249,900 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Nature of Operations
Quantum Materials Corp., a Nevada corporation, and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred to as the “Company”) are headquartered in San Marcos, Texas. The Company is a nanotechnology company specializing in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high-performance variant of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology and technological changes, including those developed by the Company’s competitors, rendering the Company’s technology uncompetitive or obsolete.
Going Concern
The Company recorded losses from continuing operations in the current period presented and has a history of losses. As of June 30, 2019, the Company had a working capital deficit of $7,141,117 and net cash used in operating activities was $515,233 for the year ended June 30, 2019. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.
In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.
Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Title and risk of loss generally pass to our customers upon shipment. In limited circumstances where either title or risk of loss pass upon destination, we defer revenue recognition until such events occur. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis. For the years ended June 30, 2019 and 2018 our revenue was immaterial.
| F-7 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable: Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company personnel and with the customers directly.
Financial Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures. The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Concentrations of Credit Risk: The Company maintains its cash in bank deposits with financial institutions. These deposits, at times, exceed federally insured limits. The Company monitors the financial condition of the financial institution and has not experienced any losses on such accounts. The Company is not party to any financial instruments which would have off-balance sheet credit or interest rate risk.
Property and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the various classes of assets as follows:
| Furniture and fixtures | 7 years | |||
| Computers and software | 3 years | |||
| Machinery and equipment | 3 - 10 years |
Licenses and Patents: Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated useful life of five years.
Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35 “Impairment or Disposal of Long-Lived Assets”, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and the carrying value. There were no impairment charges in the consolidated statements of operations during the years ended June 30, 2019 and 2018.
Debt Issuance Costs: The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Unamortized debt discount was $27,724 and $134,255 at June 30, 2019 and 2018, respectively. Amortization expense for the years ended June 30, 2019 and 2018 was $318,070 and $1,327,742, respectively.
Income Taxes: The Company follows ASC 740 “Income Taxes” regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.
The Company follows ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes.
| F-8 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Share: The Company accounts for earnings per share in accordance with ASC 260 “Earnings Per Share”. Basic earnings per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the periods, including the dilutive effect of stock options and warrants granted. Dilutive stock options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported.
Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital.
Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities”, as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
Convertible Securities: Based upon ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities. We will evaluate our contracts based upon the earliest issuance date. In the event partial reclassification of contracts subject to ASC 815-40-25 is necessary, due to our inability to demonstrate we have sufficient shares authorized and unissued, shares will be allocated on the basis of issuance date, with the earliest issuance date receiving first allocation of shares. If a reclassification of an instrument were required, it would result in the instrument issued latest being reclassified first. As of December 31, 2019, we have recorded an expense of $712,695 for an authorized share shortfall of approximately 23,756,000 shares.
Fair value measurements: The Company estimates fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair value measurement according to the lowest level of input that is significant to the measurement even though other significant inputs that are more readily observable may have also utilized.
| F-9 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Costs: Research and development (R&D) costs are expensed as incurred. These expenses include the costs of the Company’s proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements. Research and development expenses were $92,991 and $188,274 for the years ended June 30, 2019 and 2018, respectively.
Reclassifications: Certain amounts in the June 30, 2018 consolidated financial statements have been reclassified to conform to the classifications in the June 30, 2019 consolidated financial statements.
Recent Accounting Pronouncements
Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all new or revised ASU’s.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), which amends the existing revenue recognition requirements and guidance. The core principle of the new standard is to recognize revenue that reflects the consideration the Company expects to receive for goods or services when or as the promised goods or services are transferred to customers. Topic 606 requires more judgment than current guidance, as management will now be required to: (i) identify each performance obligation in contracts with customers, (ii) estimate any variable consideration included in the transaction price and (iii) allocate the transaction price to each performance obligation. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We adopted this standard effective July 1, 2018 and it did not have a material impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June 30, 2018. No triggering events occurred in the year ended June 30, 2019.
In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.
The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation.
The Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The Company adopted the guidance effective July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
| F-10 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The Company adopted the guidance effective July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
Pronouncements Yet To Be Adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company will adopt ASU 2016-02 on July 1, 2019. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.
NOTE 2 — PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| June 30, 2019 | June 30, 2018 | |||||||
| Furniture and fixtures | $ | 3,502 | $ | 3,502 | ||||
| Computers and software | 11,447 | 11,447 | ||||||
| Machinery and equipment | 956,655 | 956,655 | ||||||
| 971,604 | 971,604 | |||||||
| Less: accumulated depreciation | 446,095 | 346,080 | ||||||
| Total property and equipment, net | $ | 525,509 | $ | 625,524 | ||||
Depreciation expense for the years ended June 30, 2019 and 2018 was $100,015 and $99,589, respectively.
| F-11 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — LICENSES AND PATENTS
Licenses and patents consisted of the following:
| June 30, 2019 | June 30, 2018 | |||||||
| William Marsh Rice University | $ | 40,000 | $ | 40,000 | ||||
| University of Arizona | 15,000 | 15,000 | ||||||
| Bayer acquired patents | 137,743 | 137,743 | ||||||
| 192,743 | 192,743 | |||||||
| Less: accumulated amortization | 174,449 | 146,852 | ||||||
| Total licenses and patents, net | $ | 18,294 | $ | 45,891 | ||||
Amortization expense for the years ended June 30, 2019 and 2018 was $27,597 and $33,048, respectively. Amortization expense is projected to be $18,294 for the twelve months ended June 30, 2020, and $0 thereafter.
NOTE 4 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2011-04 “Fair Value Measurement” as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements.
This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Valuations based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
| F-12 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2019, and 2018, the fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximates book value due to the short maturity of these instruments. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value. As of June 30, 2019, and 2018, the Company held no investments. The Company hired an independent resource to value its derivative liability as follows:
Fair Value Table
| Balance at June 30, 2019 | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Derivative Liability | $ | 45,692 | $ | - | $ | - | $ | 45,692 | ||||||||
| $ | 45,692 | $ | - | $ | - | $ | 45,692 | |||||||||
| Level Three Roll-forward | Derivative Liability | Total | ||||||
| Balance June 30, 2018 | $ | - | $ | - | ||||
| Fair value of derivative liability reclassified from equity | 98,645 | 98,645 | ||||||
| Settlement of derivative liabilities | (201,672 | ) | (201,672 | ) | ||||
| Change in fair value | 148,719 | 148,719 | ||||||
| Balance June 30, 2019 | $ | 45,692 | $ | 45,692 | ||||
The Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other than described above.
| F-13 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — CONVERTIBLE DEBENTURES
The following table sets forth activity associated with the convertible debentures:
| June 30, 2019 | June 30, 2018 | Debenture Reference | ||||||||||
| Convertible debentures issued in September 2014 | $ | 25,050 | $ | 25,050 | A | |||||||
| Convertible debentures issued in January 2015 | - | 500,000 | B | |||||||||
| Convertible debentures issued in April - June 2016 | 1,218,772 | 1,075,000 | C | |||||||||
| Convertible debenture issued in August 2016 | 200,000 | 200,000 | C | |||||||||
| Convertible debentures issued in January - March 2017 | 60,000 | 60,000 | D | |||||||||
| Convertible promissory notes issued in March 2017 | 222,350 | 222,350 | E | |||||||||
| Convertible debenture issued in June 2017 | 100,000 | 100,000 | F | |||||||||
| Convertible debenture issued in July 2017 | 100,000 | 100,000 | G | |||||||||
| Convertible debenture issued in September 2017 | 150,000 | 645,000 | H | |||||||||
| Convertible debenture issued in November 2017 | - | 247,500 | H | |||||||||
| Convertible debenture issued in November 2017 | 27,000 | 27,000 | I | |||||||||
| Convertible debenture issued in December 2017 | 75,000 | 75,000 | J | |||||||||
| Convertible debenture issued in February 2018 | 45,000 | 45,000 | K | |||||||||
| Convertible debentures issued in March 2018 | 65,000 | 65,000 | L | |||||||||
| Convertible debentures issued in April 2018 | 60,000 | 60,000 | M | |||||||||
| Convertible debentures issued in April 2018 | 70,000 | 70,000 | N | |||||||||
| Convertible debentures issued in April 2018 | 20,000 | 20,000 | O | |||||||||
| Convertible debentures issued in June 2018 | 40,000 | 40,000 | P | |||||||||
| Convertible debentures issued in July 2018 | 45,000 | - | Q | |||||||||
| Convertible debentures issued in August 2018 | 30,000 | - | R | |||||||||
| Convertible debentures issued in September 2018 | 25,000 | - | S | |||||||||
| Convertible debentures issued in December 2018 | 52,000 | - | T | |||||||||
| 2,630,172 | 3,576,900 | |||||||||||
| Less: unamortized discount | 27,724 | 134,255 | ||||||||||
| 2,602,448 | 3,442,645 | |||||||||||
| Less: current portion | 2,467,106 | 3,402,421 | ||||||||||
| Total convertible debentures, net of current portion | $ | 135,342 | $ | 40,224 | ||||||||
Future maturities of convertible debentures for each of the next five years and thereafter are as follows:
| Year Ending June 30, | ||||
| 2019 (Past due) | $ | 1,496,954 | ||
| 2020 | 1,101,218 | |||
| 2021 | 52,000 | |||
| 2022 | - | |||
| 2023 | - | |||
| Thereafter | - | |||
| $ | 2,650,172 | |||
| F-14 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Of the past due amounts disclosed above, $222,350 is, at the date of this report, involved in litigation involving L2 Capital, and SBI (See narrative E below, and litigation disclosure, Note 15). See remaining amounts due in narrative C below. The past due amounts also include a note payable of $20,000, disclosed in Note 6.
A) September 2014 Convertible Debenture
Between September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050 in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. None of the Debentures were converted into common shares during the years ended June 30, 2019 and 2018.
Interest expense for the years ended June 30, 2019 and 2018 was $1,524 and $1,524, respectively.
As of June 30, 2019, and 2018, $25,050 of principal was outstanding.
B) January 2015 Convertible Debenture
On January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in the event any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018, the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received 3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense. On January 14, 2019, partial payment was made of $150,000, and the debentures were extended to March 15, 2019.
On March 22, 2019, the remainder of the outstanding balance was converted to shares of common stock. 11,147,726 shares of common stock were issued, for the outstanding balance of $165,877, plus accrued interest of $29,205.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. Interest expense for the years ended June 30, 2019 and 2018 was $49,370 and $40,000, respectively.
As of June 30, 2019, and June 30, 2018, $0 and $500,000 of principal was outstanding, respectively.
C) April – June, August, October and November 2016 Convertible Debentures
During the fourth quarter of the year ended June 30, 2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000 and sold $50,000 in proceeds in October 2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. The conversion price was reset to $0.012 per share in June 2018 as a result of a triggering event.
| F-15 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2019, and 2018, of $2,594 and $231,702, respectively.
The Company recognized a beneficial conversion expense for the years ended June 30, 2019, and 2018, of $0 and $1,021,500, respectively.
Interest expense for the years ended June 30, 2019, and 2018, of $113,417 and $113,570, respectively.
During the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into 3,791,666 and 2,375,000 shares of common stock, respectively. As of June 30, 2019, and 2018, $1,275,000 of principal was outstanding. As of the date of this report, maturities totaling $825,000 of principal have been extended until July and August of 2019, and the extensions of these maturity extensions created an effective extinguishment pursuant to the Debt Modification guidance, ASC 470-50. The Company recorded a loss on extinguishment of $438,589 in connection with these extensions.
The remaining $450,000 have not been extended and are past due as of the date of this report. No payments have been made on these debentures as of the date of this report, as a result they are all past due.
D) January-March 2017 Convertible Debentures
During the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $3,125 and $52,954, respectively.
| F-16 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 2018, debentures for an aggregate principal amount of $200,000 were converted into 1,666,667 shares of common stock.
Interest expense for the years ended June 30, 2019 and 2018 of $4,800 and $11,275, respectively.
As of June 30, 2019, and 2018, $60,000 of principal was outstanding. This debenture was past due as of the date of this report.
E) March 2017 Convertible Promissory Notes
In March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2 received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months.
The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $43,661, respectively.
Interest expense for the years ended June 30, 2019 and 2018 of $0 and $421,901, respectively.
As of June 30, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of $514,969 for the year ended June 30, 2018.
As of June 30, 2019, and 2018, $222,350 of principal was outstanding. During the year ended June 30, 2018, the Company paid $319,500 of principal.
F) June 2017 Convertible Debenture
In June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
| F-17 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. Interest expense was recorded for the years ended June 30, 2019 and 2018 of $0 and $10,500, respectively. Beneficial conversion expense was recorded for the years ended June 30, 2019 and 2018 of $0. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $45,434, respectively. As of June 30, 2019, and 2018, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019. This debenture was past due as of the date of this report, and $36,500 in default interest has been accrued.
G) July 2017 Convertible Debenture
In July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $53,875, respectively. As of June 30, 2019, and 2018, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019. This debenture was past due as of the date of this report and $36,500 in default interest has been accrued.
Interest expense for the year ended June 30, 2019 and 2018 of $36,500 and $18,500, respectively.
H) September 2017 Convertible Debenture
Debenture A)
In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense for the year ended June 30, 2019, and 2018 of $0 and $82,720, respectively. As of June 30, 2019, $150,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019. This debenture was past due as of the date of this report.
| F-18 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The value of this derivative at September 30, 2018 was $22,666, and a change in derivative liability expense of $14,483 for the three months then ended. This derivative liability was settled for 1,781,690 shares during the second quarter of 2018, resulting in additional interest expense of $53,234 during the year ended June 30, 2019.
Interest expense for the year ended June 30, 2019, and 2018 of $0 and $12,000, respectively.
Debenture B)
In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $495,000. The Note Holder received 10,000,000 shares of common stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note had a term of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense of $131,663. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $318,337, respectively.
As part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The value of this derivative at September 30, 2018 was $43,998, and a change in derivative liability expense of $28,864 for the three months then ended. This derivative liability was settled for 7,432,432 shares during the second quarter of 2018, resulting in additional interest expense of $283,029 during the year ended June 30, 2019.
On April 5, 2019 this note was converted to 11,333,333 shares of common stock. This was an effective conversion rate of $0.04 a share. This conversion resulted in an additional interest expense of $35,667.
Interest expense for the years ended June 30, 2019 and 2018 of $35,667 and $36,000, respectively.
Debenture C)
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
The Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months.
| F-19 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 5, 2019 this note was converted to 5,666,667 shares of common stock. This was an effective conversion rate of $0.04 a share. This conversion resulted in an additional interest expense of $17,833.
Interest expense for the years ended June 30, 2019 and 2018 of $17,833 and $18,000, respectively.
These non-converted debentures were past due as of the date of this report and $47,300 in default interest has been accrued.
I) November 2017 Convertible Debenture
In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2019 and 2018 of $3,217, and $2,007, respectively. Interest expense for the year ended June 30, 2019 and 2018 of $2,190 and $1,380, respectively. As of June 30, 2019, and 2018 $27,000 of principal was outstanding.
J) December 2017 Convertible Debenture
In December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $0 and $41,175, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $0 and $6,000, respectively. As of June 30, 2019, and June 30, 2018, $75,000 of principal was outstanding. This debenture was past due as of the date of this report and $25,400 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at September 30, 2018 was $10,380, and a change in derivative liability expense of $8,061 for the three months then ended. This derivative liability was settled for 809,160 shares during the second quarter of fiscal year 2019, resulting in additional interest expense of $21,420 during the year ended June 30, 2019.
| F-20 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K) February 2018 Convertible Debenture
In February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $6,761 and $24,785, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $0 and $3,600. As of June 30, 2019, and June 30, 2018, $45,000 of principal was outstanding. This debenture was past due as of the date of this report. This debenture was past due as of the date of this report and $23,920 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at September 30, 2018 was $64, and a change in derivative liability expense of $64 for the three months then ended. This derivative liability was settled for 582,955 shares during the second quarter of fiscal year 2019, resulting in additional interest expense of $25,650 during the years ended June 30, 2019.
L) March 2018 Convertible Debenture
In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note had a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $8,677 and $14,697, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $0 and $2,400 was recognized, respectively. As of June 30, 2019, and June 30, 2018, $30,000 of principal was outstanding. This debenture was past due as of the date of this report, and $18,080 in default interest has been accrued.
In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $35,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $35,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 23, 2021. The promissory note has a term of six months maturing on September 23, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
| F-21 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $12,254 and $14,043, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $0 and $2,800, respectively. As of June 30, 2019, and June 30, 2018, $35,000 of principal was outstanding. This debenture was past due as of the date of this report, and $17,460 in default interest has been accrued.
The debenture agreements above include a “make-whole” provision, creating a potential derivative liability. The value of this derivative at December 31, 2018 was $20,823, and a change in derivative liability expense of $18,751 for the six months then ended. This derivative liability was settled for 3,950,920 shares during the third quarter of fiscal year 2019, resulting in additional interest expense of $74,844 during the year ended June 30, 2019.
M) April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately 6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $26,720 and $14,455, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $4,800 was recognized. As of June 30, 2019, and 2018, $60,000 of principal was outstanding. This debenture was past due as of the date of this report, and $18,960 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at December 31, 2018 was $2,230, and a change in derivative liability expense of $2,182 for the six months then ended. This derivative liability was settled for 2,484,305 shares during the third quarter of fiscal year 2019, resulting in additional interest expense of $97,142 during the year ended June 30, 2019.
N) April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and 200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
| F-22 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $15,190 and $2,616, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $5,678 and $1,027 was recognized, respectively. As of June 30, 2019, and 2018, $70,000 of principal was outstanding.
O) April 2018 Convertible Debenture
In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $7,044 and $1,675, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $1,622 and $316 was recognized, respectively. As of June 30, 2019, and June 30, 2018, $20,000 of principal was outstanding.
P) June 2018 Convertible Debenture
In June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately 7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the years ended June 30, 2019 and 2018 of $28,526 and $3,431, respectively. Interest expense for the years ended June 30, 2019 and 2018 of $0 and $3,200 was recognized, respectively. As of June 30, 2019, and 2018, $40,000 of principal was outstanding. This debenture was past due as of the date of this report and $26,740 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at June 30, 2019 was $10,700, and a change in derivative liability expense of $10,700 for the year ended June 30, 2019.
| F-23 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Q) July 2018 Convertible Debenture
In July 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through July 9, 2021. The promissory note has a term of approximately 7 months maturing on January 31, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $7,235 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $33,485 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2019 of $33,485. Interest expense for the year ended June 30, 2019 of $3,600 was recognized. As of June 30, 2019, $45,000 of principal was outstanding. This debenture was past due as of the date of this report and $24,720 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at June 30, 2019 was $19,467, and a change in derivative liability expense of $19,467 for the year ended June 30, 2019.
R) August 2018 Convertible Debenture
In August 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,250,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through August 27, 2021. The promissory note has a term of approximately 7 months maturing on March 30, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $5,160 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $22,659 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2019 of $22,659. Interest expense for the year ended June 30, 2019 of $2,400 was recognized. As of June 30, 2019, $30,000 of principal was outstanding. This debenture was past due as of the date of this report and $15,680 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at June 30, 2019 was $8,625, and a change in derivative liability expense of $8,625 for the year ended June 30, 2019.
S) September 2018 Convertible Debenture
In September 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $25,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $25,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through September 17, 2021. The promissory note has a term of approximately 7 months maturing on April 30, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights, and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
| F-24 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,475 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,058 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2019 of $19,058. Interest expense for the year ended June 30, 2019 of $2,000 was recognized. As of June 30, 2019, $25,000 of principal was outstanding. This debenture was past due as of the date of this report and $11,500 in default interest has been accrued.
The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at June 30, 2019 was $6,900, and a change in derivative liability expense of $6,900 for the year ended June 30, 2019.
T) December 2018 Convertible Debenture
During the second quarter of the year ended June 30, 2019, the Company sold 52 Units for total proceeds of $52,000 from three affiliated and fourteen non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. An additional 45,826 warrants with identical terms, were granted with this debenture. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.08 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.
In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $6,835, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the year ended June 30, 2019 of $1,882.
Interest expense for the year ended June 30, 2019 of $2,392.
December 2018 Convertible Promissory Note
In December 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $350,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $350,000. The Note Holder received 3,000,000 shares of common stock and 5,000,000 common stock warrants exercisable at $0.04 per share through December 26, 2021. The promissory note has a term of 20 months maturing on August 14, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.03 per share at any date. The promissory note includes piggyback registration rights, and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.
In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $126,908 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $126,908 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 20 months.
| F-25 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 22, 2019, the remainder of the outstanding balance was converted to shares of common stock. 11,666,667 shares of common stock were issued, for the outstanding balance of $350,000.
The Company recognized accretion of debt discount expense for the year ended June 30, 2019 of $126,908. Interest expense for the year ended June 30, 2019 of $6,615 was recognized. As of June 30, 2019, $0 of principal was outstanding. This convertible promissory note is not in the table above, as the debt was entered into and paid off in the same fiscal year.
Debt Issuance Costs
The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for the years ended June 30, 2019 and 2018 was $318,070 and $58,990 respectively.
NOTE 6 — NOTES PAYABLE
Promissory Note
In September 2018, the Company issued a promissory note secured by the Company’s CEO for $20,000 with an interest rate of 6%, maturing on March 9, 2019. The note is convertible into the Company’s common stock, at the lenders discretion, at a rate of $0.04 per share, with warrants to purchase an equal amount of stock. Interest expense for the year ended June 30, 2019 was $967. As of June 30, 2019, $20,000 of principal was outstanding, and is past due as of the date of this report.
NOTE 7 — ACCRUED EXPENSES
Accrued expenses consist of the following:
| June 30, 2019 | June 30, 2018 | |||||||
| Accrued interest | $ | 581,821 | $ | 343,437 | ||||
| Other accrued expenses | 981,869 | 205,230 | ||||||
| Total accrued expenses | $ | 1,563,690 | $ | 548,667 | ||||
NOTE 8 — EQUITY TRANSACTIONS
Common Stock
During the year ended June 30, 2019, the Company issued 37,124,904 shares for $2,594,785 in consulting services, $61,255 of which was accrued at June 30, 2018.
During the year ended June 30, 2019, the Company issued 729,877 shares of common stock at the fair market value of $42,841 for payment of debenture interest.
| F-26 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Issuable
As of June 30, 2019, the company owed a total of 19,442,619 shares of common stock. 1,872,208 shares were in relation to a new debenture borrowing of $405,000 in aggregate, valued at $22,553. 2,000,000 shares were in relation to the extinguishment of debt, valued at $80,000. 6,039,161 shares were in relation to amounts owed for salaries and consulting fees, valued at $130,609. 9,531,250 were in relation to debt extensions, valued at $476,563. These subscribed shares also included 702,250 warrants to purchase shares of common stock at $0.04 per share. The shares are included in the weighted average shares outstanding for purposes of calculation earning per share for the year ended June 30, 2019.
During the year ended June 30, 2019, 33,488,609 shares with a fair value of $1,065,112, were issued, reducing shares issuable.
Stock Warrants
A summary of activity of the Company’s stock warrants for the years ended June 30, 2019 and 2018 is presented below:
| Weighted | ||||||||||||||||
| Weighted | Average | Weighted | ||||||||||||||
| Average | Remaining | Average | ||||||||||||||
| Exercise | Number of | Contractual | Grant Date | |||||||||||||
| Price | Warrants | Term in Years | Fair Value | |||||||||||||
| Balance as of June 30, 2017 | 0.13 | 29,953,551 | 0.14 | |||||||||||||
| Expired | 0.06 | (12,077,778 | ) | 0.15 | ||||||||||||
| Granted | 0.07 | 21,087,409 | 0.06 | |||||||||||||
| Exercised | - | - | - | |||||||||||||
| Cancelled | 0.13 | (2,181,456 | ) | 0.12 | ||||||||||||
| Balance as of June 30, 2018 | $ | 0.11 | 36,781,726 | 2.80 | $ | 0.09 | ||||||||||
| Expired | - | - | - | |||||||||||||
| Granted | 0.07 | 8,964,708 | 0.04 | |||||||||||||
| Exercised | - | - | - | |||||||||||||
| Cancelled | 0.12 | (833,333 | ) | 0.15 | ||||||||||||
| - | ||||||||||||||||
| Balance as of June 30, 2019 | $ | 0.10 | 44,913,101 | 1.83 | $ | 0.08 | ||||||||||
| Vested and exercisable as of June 30, 2019 | $ | 0.10 | 44,913,101 | 1.83 | $ | 0.08 | ||||||||||
During the years ended June 30, 2019 and 2018, 0 warrants were exercised.
Outstanding warrants at June 30, 2019 expire during the period September 2019 to December 2023 and have exercise prices ranging from $0.03 to $0.30.
The following assumptions were used for the years ended June 30, 2019 and 2018:
| Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Expected volatility | 122.52% - 126.99 | % | 129.46 | % | ||||
| Expected dividend yield | - | % | - | % | ||||
| Risk-free interest rates | 2.46% - 2.95 | % | 2.62 | % | ||||
| Expected term (in years) | 2-3 | 5.0 | ||||||
| F-27 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Salaries Converted to Equity
There were no salary conversions during the year ended June 30, 2019.
During the year ended June 30, 2018, certain officers, employees and consultants converted accrued salaries and other amounts owed of $249,900 into 513,333 shares of common stock and 7,816,667 warrants to purchase the Company’s common stock. The warrants are exercisable at $0.03 per share for a period of five years. The fair value of the common stock and stock warrants at the time of conversion was $30,800 and $498,022, respectively. The variance of $263,522 was recognized as stock-based compensation in general and administrative expense.
NOTE 9 — STOCK-BASED COMPENSATION
The Company follows FASB Accounting Standards Codification (“ASC”) 718 “Compensation — Stock Compensation” for share-based payments which requires all stock-based payments, including stock options, to be recognized as an operating expense over the vesting period, based on their grant date fair values.
In October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2018, 9,200,000 options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled leaving a balance of 8,400,000 outstanding.
In March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017, the term of these options was extended for an additional five years. In June 2016, and 2017, 6,000,000 and 17,000,000 stock options, with a term of ten years, were granted, respectively, outside of a stock option plan, and 3,000,000 shares were cancelled, leaving a balance of 23,500,000 outstanding outside of a defined option plan.
In January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock, which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2018, 72,653,473 options have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 18,886,559 have been cancelled, and 50,441,914 remain outstanding.
On February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000 shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2018, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving a balance outstanding of 3,275,000 options.
Incentive Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. As the Company has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.
The following assumptions were used for the years ended June 30, 2019 and 2018:
| Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Expected volatility | 122.52% - 126.99 | % | 129.46 | % | ||||
| Expected dividend yield | - | % | - | % | ||||
| Risk-free interest rates | 2.46% - 2.95 | % | 2.62 | % | ||||
| Expected term (in years) | 5.0 | 5.0 | ||||||
| F-28 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The computation of expected volatility during the years ended June 30, 2019 and 2018 was based on the historical volatility. Historical volatility was calculated from historical data for the time approximately equal to the expected term of the option award starting from the grant date. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for the period corresponding with the expected life of the option.
A summary of the activity of the Company’s stock options for the years ended June 30, 2019 and 2018 is presented below:
| Weighted | ||||||||||||||||||||
| Average | Weighted | |||||||||||||||||||
| Weighted | Remaining | Average | ||||||||||||||||||
| Average | Number of | Contractual | Optioned | Aggregate | ||||||||||||||||
| Exercise | Optioned | Term in | Grant Date | Intrinsic | ||||||||||||||||
| Price | Shares | Years | Fair Value | Value | ||||||||||||||||
| Balance as of June 30, 2017 | $ | 0.09 | 87,716,914 | $ | 0.11 | $ | 2,073,012 | |||||||||||||
| Expired | 0.05 | (3,000,000 | ) | 0.09 | ||||||||||||||||
| Granted | 0.06 | 900,000 | 0.06 | |||||||||||||||||
| Exercised | - | - | - | |||||||||||||||||
| Cancelled | - | - | - | |||||||||||||||||
| Balance as of June 30, 2018 | $ | 0.09 | 85,616,914 | 4.00 | $ | 0.11 | $ | - | ||||||||||||
| Expired | - | - | - | |||||||||||||||||
| Granted | 0.03 | 28,500,000 | 0.03 | |||||||||||||||||
| Exercised | - | - | - | |||||||||||||||||
| Cancelled | 0.07 | (4,208,481 | ) | 0.09 | ||||||||||||||||
| Balance as of June 30, 2019 | $ | 0.07 | 109,908,433 | 3.93 | $ | 0.09 | $ | - | ||||||||||||
| Vested and exercisable as of June 30, 2019 | $ | 0.07 | 100,760,933 | 3.62 | $ | 0.09 | $ | - | ||||||||||||
Outstanding options at June 30, 2019, expire during the period October 2019 to June 2026 and have exercise prices ranging from $0.02 to $0.17.
Compensation expense associated with stock options for the year ended June 30, 2019 and 2018 was $1,347,349 and $860,724 respectively and was included in general and administrative expenses in the consolidated statements of operations. Included in expense associated with stock options for the year ended June 30, 2019 is a charge for $111,746 for stock option modification, as the Company extended the expiration date on certain stock option grants.
At June 30, 2019, the Company had 9,147,500 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company had not yet recognized was $69,723 at June 30, 2019. Such amounts are expected to be recognized over a period of 0.5 years.
| F-29 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock: To encourage retention and performance, the Company granted certain employees restricted shares of common stock with a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization, as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock awards for the year ended June 30, 2019 and 2018 is presented below:
| Number of Nonvested, Unissued Restricted Share Awards | |
Weighted Average Grant Date Fair Value | ||||||
| Nonvested, unissued restricted shares outstanding at June 30, 2017 | 1,500,000 | 0.21 | ||||||
| Granted | 5,500,000 | 0.06 | ||||||
| Vested | (7,000,000 | ) | 0.09 | |||||
| Forfeited | - | - | ||||||
| Nonvested, unissued restricted shares outstanding at June 30, 2018 | - | - | ||||||
| Granted | - | - | ||||||
| Vested | - | - | ||||||
| Forfeited | - | - | ||||||
| Nonvested, unissued restricted shares outstanding at June 30, 2019 | - | - | ||||||
Compensation expense associated with restricted stock awards for the year ended June 30, 2019 and 2018 was $0 and $440,336, respectively, and was included in general and administrative expenses in the consolidated statements of operations.
The total cost of nonvested stock awards which the Company had not yet recognized was $0 at June 30, 2019.
NOTE 10 — LOSS PER SHARE
The Company follows ASC 260, “Earnings Per Share” for share-based payments that are considered to be participating securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings per share (“EPS”).
The following table sets forth the computation of basic and diluted loss per share:
| Years Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| - | ||||||||
| Net loss | $ | (8,957,399 | ) | $ | (9,401,069 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic and diluted | 519,503,594 | 413,738,050 | ||||||
| Basic and diluted loss per share | $ | (0.02 | ) | $ | (0.02 | ) | ||
For the years ended June 30, 2019 and 2018, 44,913,101 and 37,065,053 stock warrants, respectively, were excluded from diluted earnings per share because they are considered anti-dilutive.
For the years ended June 30, 2019 and 2018, 109,908,433 and 85,616,914 stock options, respectively, were excluded from diluted earnings per share because they are considered anti-dilutive.
| F-30 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Agreement with University of Arizona
Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On March 3, 2017, Solterra entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by June 30, 2017, $125,000 by September 15, 2017 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications have been agreed to a final amendment has not been finalized. As of June 30, 2018, and 2019, no royalties have been accrued for this obligation.
Agreement with Texas State University
The Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month and can be terminated with 60-days written notice of either party.
Operating Leases
The Company leases certain office and lab space under a month-to-month operating lease agreement.
Rental expense for the operating lease for the years ended June 30, 2019 and 2018 was $71,519 and $110,202, respectively.
NOTE 12 — CONCENTRATIONS
The Company owns the design of its microreactors and currently contracts with only one supplier to manufacture this equipment. No long-term supply contract exists. There are a limited number of manufacturers of this kind of equipment, and a change in suppliers could result in a significant delay in the delivery time of future equipment. Unless such a delay involved replacement of current capacity, it would not necessarily have an adverse effect on the Company’s near-term operating results.
The Company has licensed certain patents from the University of Arizona. While neither is required for the Company’s immediate business opportunities in displays and solid-state lighting, it is expected that the Company will market products utilizing these patents or otherwise derive revenue from them in the future. It may not be possible to replace this intellectual property if the Company loses its rights, and future business opportunities could be adversely affected if these rights are lost.
NOTE 13 — INCOME TAXES
The components of income tax expense/(benefit) are as follows:
| Year Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Current | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| - | - | |||||||
| Deferred | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| - | - | |||||||
| Income Tax Expense/(Benefit) | $ | - | $ | - | ||||
| F-31 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the expected U.S. tax expense/(benefit) to income taxes is as follows:
| Year Ended June 30, | ||||||||||||||||
| 2019 | Rate | 2018 | Rate | |||||||||||||
| Expected tax expense / (benefit) at U.S. statutory rate | $ | (1,881,054 | ) | 21.0 | % | $ | (2,594,695 | ) | 27.6 | % | ||||||
| Meals and entertainment | 326 | 0.0 | % | 1,325 | 0.0 | % | ||||||||||
| Derivatives | - | - | ||||||||||||||
| Beneficial conversion | 30,193 | -0.3 | % | 359,649 | -3 .8 | % | ||||||||||
| Prior year NOL true-up adjustment | - | 256,167 | -2 .7 | % | ||||||||||||
| Change in tax rate | - | 5,287,019 | -56.2 | % | ||||||||||||
| Prior year warrant valuation adjustment | - | - | ||||||||||||||
| Change in valuation allowance | 1,850,535 | -20.7 | % | (3,309,465 | ) | 35.2 | % | |||||||||
| Total Income Tax Expense/(Benefit) | $ | - | 0.0 | % | $ | - | 0.0 | % | ||||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes at the enacted tax rates in effect when the differences are anticipated to reverse. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.
Components of deferred income taxes are as follows:
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating losses - federal | $ | 8,739,159 | $ | 7,497,834 | ||||
| Stock-based compensation | 2,109,735 | 1,826,639 | ||||||
| Amortization of licenses and patents | 3,762 | 4,522 | ||||||
| Disallowed Interest | 128,031 | |||||||
| Expense to cover authorized shortfall | 149,666 | |||||||
| Accrued Expenses | 106,747 | 128,254 | ||||||
| Total deferred tax assets | 11,237,100 | 9,457,249 | ||||||
| Deferred tax (liabilities): | ||||||||
| Depreciation of property, plant and equipment | (47,886 | ) | (51,775 | ) | ||||
| Warrant Expense | (5,277 | ) | (28,194 | ) | ||||
| Total deferred tax (liabilities) | (53,163 | ) | (79,969 | ) | ||||
| Less valuation allowance | (11,183,937 | ) | (9,377,280 | ) | ||||
| Net deferred tax assets/(liabilities) | $ | - | $ | - | ||||
The Company’s management has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance increased by approximately $1,850,000 and decreased by approximately $3,310,000 during the years ended June 30, 2019 and 2018, respectively, primarily due to operations and the change in the tax rate due to the 2017 Tax Act.
| F-32 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2019, and 2018, the Company had U.S. net operating loss (“NOL”) carryforwards of approximately $42,368,000 and $36,460,000, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules which combine unrelated shareholders that do not individually own 5% or more of the corporation’s stock into one or more “public groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The Company believes there is a 382 limitation on its NOLs so that approximately $750,000 will expire unutilized, resulting in a remaining NOL carryforward of approximately $41,615,000 and $35,700,000 as of June 30, 2019 and 2018, respectively. The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that the deferred tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred. The NOL carryforwards expire beginning in 2029, if not utilized. The net operating loss carryforwards are subject to Internal Revenue Service adjustments until the statute closes on the year the net operating loss is utilized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of June 30, 2019, and 2018, the Company has recorded no unrecognized tax benefits or related penalty and interest. Additionally, the Company does not expect any unrecognized tax benefits to change significantly over the next twelve months.
During the fiscal year ended June 30, 2019, the Company had a net increase in deferred tax asset of $1,850,000. This change is a result of current year activity.
Given the significant impact of the Tax Cuts and Jobs Act, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for uncertainties of the effects of the Tax Act. Specifically, SAB 118 allows companies to record a provisional estimate of the impact of the Tax Act during a one year “measurement period”. The company has recognized the provisional tax impact related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the fiscal year ended June 30, 2018. During the year ended June 30, 2019, the Company finalized its calculations of the impact of the Tax Act and recorded no material adjustments to the provisional amounts recorded as December 31, 2017.
As of June 30, 2019, the Company had net operating loss carryforwards of approximately $42,368,000 and $0 for federal and state income tax purposes, respectively. These may be used to offset future taxable income and will begin to expire in varying amounts in 2029.
Utilization of the Company’s net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to an “ownership change” that may have occurred, or that could occur in the future, as defined and required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards, and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. Any limitation may result in the expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards before utilization. The net operating loss carryforwards and research and development credit carryforwards inherited as a result of the merger with Telik, Inc. have been severely limited under these rules and will likely not be realized.
In general, an “ownership change” results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. The Company intends to complete a study in the future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation and will complete such study before the use of any of the aforementioned attributes.
| F-33 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company files income tax returns in the United States and Texas and is subject to examination by income tax authorities for years 2008 to present. The Company is not currently under examination in any tax jurisdiction.
NOTE 14 — SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information:
| Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| (unaudited) | ||||||||
| Cash paid for interest | $ | 9,716 | $ | 29,023 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
The following is supplemental disclosure of non-cash investing and financing activities:
| Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Conversion of debentures, and accrued interest into shares of common stock | $ | 1,390,041 | $ | 923,497 | ||||
| Allocated value of common stock and warrants issued with convertible debentures | $ | 208,945 | $ | 721,248 | ||||
| Stock issued for amounts in accounts payable | $ | 81,602 | $ | 177,000 | ||||
| Stock and stock warrants issued for conversion of accrued salaries | $ | - | $ | 249,900 | ||||
| Prepaid expense paid in shares of common stock | $ | 2,265,709 | $ | 1,896,588 | ||||
| Cancellation of shares of common stock | $ | - | $ | 435,100 | ||||
| Financing of prepaid insurance | $ | - | $ | 12,738 | ||||
| Subscription receivable from warrants extension | $ | - | $ | 10,000 | ||||
| Shares of common stock issued for settlement of note payable and accrued interest | $ | - | $ | 162,000 | ||||
NOTE 15 — LITIGATION
The Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears is approximately $53,000 plus interest and other charges which has been accrued at June 30, 2019. The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.
| F-34 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAUSE NUMBER 17-2033; Hays County, Texas
Two lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked the Company’ transfer agent, Empire Stock Transfer, Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements the Company had entered into in late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus accrued interest of $10,170) on two of the loans. Subsequently, in November 2017, the Company also repaid $213,650 and $8,636 of accrued interest on two of the remaining loans on their due dates.
Quantum filed suit for an injunction to stop the release of the stock on September 28, 2017. The two lenders, SBI Investments LLC, 2014-1 (SBI), and L2 Capital, LLC (L2), hired the national law firm of K&L Gates to stop the injunction; problematically, this same firm had previously represented the Company. The Company filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.
SBI and L2, with new counsel, and Cleveland Terrazas PLLC, brought suit against the Company on October 10, 2017 for $1.5 million on the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed technical defaults. The court in Hays County granted the Company’s temporary injunction and set the full case for trial. The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against the Company and refiled similar actions in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three suits are related to the same transactions. The lenders claimed 140% interest, attorney’s fees, 20 million shares of stock, and damages.
The case has been dismissed as of the date of this report.
CAUSE NUMBER: 17CV06093; Johnson County, Kansas
The Kansas lawsuit, instituted on October 30, 2017, is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against the Company; the second claim is for breach of contract of the first L2 promissory note against the Company; the final claim is for breach of contract regarding the second L2 promissory note against both the Company and Stephen Squires, individually. The claims against Squires individually were abandoned. Trial was conducted October 13th, 2020. Final arguments were submitted in writing to the court February 2021. The court has not yet ruled.
The Company denies all the above-mentioned allegations and will vigorously defend all claims.
CAUSE NUMBER: 2017-025283-CA-01; Miami-Dade County, Florida
The Florida lawsuit, instituted on October 30, 2017, largely mirrors the suit in Kansas; defaults are alleged as follows:
On July 6, 2017, the Company filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In comparison to the unrestated financial statement previously filed by the Company, SBI alleged that the Revised Report materially and adversely affects SBI’s rights with respect to the notes, constituting a breach of each of the notes. Furthermore, because each note contains a cross-default clause, SBI alleged that each of the Company’s breaches of a specific note also constituted a breach of every other note.
On July 27, 2017, the Company’s auditor resigned, and the Company replaced its auditor without seeking or obtaining the consent of SBI. SBI alleged that this replacement of the Company’s auditor constituted a breach of the SBI notes, and because each note contains a cross-default clause, of every other note.
The Company denies all of the above-mentioned allegations and will vigorously defend all claims.
The case was reheard in late March 2018 and a 45-day continuance was decided resulting in an April 30, 2018 rehearing. After a day of litigation in San Marcos, the Company’s motion to enjoin L2 and SBI and prevent them from obtaining stock before a full trial on the merits was granted on October 27, 2017, by Judge Gary Steel. L2 and SBI objected to the injunction and appealed to the Third Court of Appeals in Austin, TX. On March 8, 2018, in a unanimous opinion, the Third Court of Appeals denied the appeal, sustained the injunction in favor of the Company and awarded costs of court.
| F-35 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 29, 2018, at a discovery hearing, wherein the Company asked the court to order L2 and SBI to produce evidence to support their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court. The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.
The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at June 30, 2019.
CAUSE NUMBER: PSC190273; Riverside California
Edward James Schloss file a complaint against Quantum Materials Corp and Solterra alleging financial elder abuse, fraud, breach of written contract, breach of oral contract, constructive termination, retaliation, failure to pay wages, waiting time penalties, failure to permit inspection of employee records, unfair competition, intentional infliction of emotional distress and failure to indemnify employee expenses. Mr. Schloss was a former officer and later a contractor to the company after his dismissal and is owed fees. The Company expects to successful in the litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at June 30, 2019.
CAUSE NUMBER: 19-2774; Hays County Texas
This litigation filed November 12, 2019 in Hays County (San Marcos) alleged misappropriation of trade secrets and related claims based on Quantum Material Corp’s (“QMC” or “Company”) hiring of a previous employee of the Plaintiff (Practice Interactive, Inc. d/b/a Intiva Health “Intiva”). Intiva initiated the case by securing a no-notice temporary restraining order against the Company and the employee (“Hartigan”).
At a temporary injunction trial in December 2019, the court granted a limited injunction against Hartigan and found no basis to enjoin the Company. The court set the bond at $50,000: Intiva never took action to post the bond; thus the injunction never went into effect. The order also set the case for trial in July 2021. Although the plaintiff only recently proposed a discovery and trial schedule, no discovery has occurred. The parties filed a Rule 11 Agreement on December 15, 2020.
CAUSE NUMBER: 18-2393; Hays County, Texas
The current litigation with K&L Gates was pending before the Texas Supreme Court. It was awaiting a ruling to determine if the strong opinion at the 3rd Court of Appeals in Austin in favor of Quantum Materials will be reversed. The state Supreme Court on Oct 15, 2020 declined to take the interlocutory appeal. The case has now been sent back to Hays County for a jury trial.
Quantum Materials retained K&L Gates (“Gates”) on a myriad of issues. As part of that representation, a lawyer from Gates sat in on confidential board meetings and participated in the company’s most important negotiations, including but not limited to a new contract with the founder and former CEO, Steve Squires, to become CEO again. Gates billed a very substantial fee in a very short period of time. Over $300,000. Before negotiations occurred on what Squires believed to be an excessive bill, SBI Investments and L2, creditors of Quantum Materials, demanded that the transfer agent, Empire Stock Transfer, transfer huge amounts of stock as collateral for loans.
Quantum Materials sued Empire to prevent this transfer, first winning a Temporary Restraining Order, then a Temporary Injunction, and finally, after an appeal to the 3rd Court of Appeals in Austin, an appellate victory.
Before that appellate victory and before the Injunction trial, K&L Gates entered an appearance for SBI Investments and L2, even though they were still under contract with Quantum Materials as intervenors. Quantum Materials objected and raised objections to their firm, entering an appearance against them. K&L Gates forced substantial research, and briefs to be filed before withdrawing before the Temporary Injunction trial. (see TRO, TI order, appellate opinion.)
Either K&L Gates shared all information with their “new” client, to the disadvantage of their “old” client, a duty under full disclosure, or they didn’t share. Gates claimed that the contract with Quantum Materials waived all conflicts.
Following up on the actions begun by Gates on behalf of SBI Investments and L2, the suit by Gates against Quantum Materials was dismissed in Texas, and another law firm sued Quantum Materials in both Florida and Kansas. In Florida, the case was ultimately dismissed, and legal fees were ordered to be paid to Quantum Materials. Much of the Kansas case has been dismissed, but the balance is set to be tried in Kansas in October. (see the report on Kansas case.)
Ultimately, Quantum Materials sued K&L Gates for fiduciary violations and Deceptive Trade Practices and other claims (see suit), and Gates filed a counterclaim for its $300,000 in alleged fees. Gates filed an action to dismiss the case, called a “SLAPP” action, and after a hearing on the merits in Hays county, lost. Gates then appealed to the 3rd court of appeals in Austin, and after briefing and oral argument, again lost. Gates has now appealed its most recent defeat to the Texas Supreme Court.
NOTE 16 — TRANSACTIONS WITH AFFILIATED PARTIES
At June 30, 2019 and 2018, the Company had accrued salaries payable to executives and members of the board of directors, in the amount of $738,219 and $568,575, respectively.
During the year ended June 30, 2019, 11,000,000 shares of common stock were granted to the CEO, with a total value of $400,000. At June 30, 2019, 5,000,000 of these shares, valued at $100,000, were issuable, and not paid.
During the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds of $200,000. This transaction is described in more detail in Note 5 under the heading C) April – June, August, October and November 2016 Convertible Debentures.
NOTE 17 - SUBSEQUENT EVENTS
Debentures Issues
During July 2019, the company issued two convertible debentures for $175,000 with a one-year term at 10% annual interest accompanied by warrants to purchase 700,000 common shares at fair market value with a five-year term.
During November 2019, the company issued five convertible debentures for $175,000 with a one-year term at 8% annual interest accompanied by warrants to purchase 1,309,665 common shares at fair market value with a five-year term.
During the three months ended March 31, 2020, the company issued five convertible debentures for $ 2,145,000 with a one-year to two-year term at 8% annual interest accompanied by warrants to purchase 1,838,964 common shares at fair market value with a five-year term.
During the three months ended June 30, 2020, under the Small Business Administration (“SBA”), the Company received proceeds the Paycheck Protection Program (“PPP”) loan. These loans are forgiven if used for payroll, payroll benefits, including health insurance and retirement plans, as well as certain rent payments, leases, and utility payments, which are limited to 40% of the loan proceeds, all of which if paid within either 8 weeks or 24 weeks of the receipt of the loan proceeds. At the time of this filing, we have been funded for $147,300 in loans. At the time of this filing, we anticipate having a significant amount of this loan forgiven, however the forgiveness application process is not yet complete. If a portion of these loans are not forgiven, the unqualified portion is to be repaid over 5 years, accruing interest at 1% per annum.
During the three months ended June 30, 2020, the company issued five convertible debentures for $ 150,000 with a one-year term at 8% annual interest accompanied by warrants to purchase 3,750,000 common shares at fair market value with a five-year term
During the three months ended September 30, 2020, the company issued seven convertible debentures for $525,000 with a one-year term at 8% annual interest accompanied by warrants to purchase 8,035,725 common shares at fair market value with a five-year term.
During the three months ended December 31, 2020, the company issued three convertible debentures for $ 3,000,000 with a one-year term at 8% annual interest which were subsequently converted into a single convertible note payable in January 2021 as part of the Pasaca Capital investment transaction.
| F-36 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During February 2020, the company entered into a marketing consulting and distribution agreement with QMVT Vertical Markets, LLC to assist in building a marketing and sales force to operate in parallel with Research and development at Quantum Materials Corp. To move forward along with this effort, QMVT invested a total of $2 million in two convertible notes with a 2-year term at 8% interest and convertible into 66 million shares of common stock.
On January 26, 2021, Quantum Materials Corp. (the “Company”) and Pasaca Capital Inc. (“Pasaca”) entered into a Securities Purchase and Financing Agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, at the first closing, Pasaca will convert three previously issued promissory notes made by the Company payable to Pasaca and loan to the Company an additional $1,500,000 pursuant to a certain Secured Convertible Promissory Note (the “Convertible Note”) made by the Company payable to Pasaca in the principal amount of $4,500,000 (the “Senior Note”). The Senior Note is convertible into 154,228,625 shares of the Company’s common stock (the “Note Shares”). At the second closing, Pasaca will purchase common stock of the Company (“Common Stock”) in an amount such that, after such purchase and the conversion of the Senior Note into the Note Shares, Pasaca will own fifty-one percent (51.0%) of the fully diluted common stock of the Company. The purchase price for the Common Stock to be sold in the second closing is $10,500,000. Pasaca will also have the right to appoint three members to the Company’s Board of Directors. Both the first and second closing are subject to numerous contingencies, as set forth in the Purchase Agreement.
Also as set forth on January 26, 2021, the Company and Pasaca entered into a Registration Rights Agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, holders of twenty percent of the total shares of Note Shares and Common Stock issued pursuant to the Purchase Agreement (the “Registrable Shares”) shall have the right to require the Company to register at least thirty percent of such shares for sale on Form S-1 of Form S-3 under the Securities Act of 1933, as amended (the “33 Act”). In addition, holders of ten percent of the Registrable Securities shall have the right to require the Company to register such shares for sale on Form S-3 under the 33 Act. The Registration Rights Agreement also provides for piggy-back registration rights. Pursuant to the Registration Rights Agreement, should the Company determine to issue new equity securities of the Company, or securities convertible into equity securities of the Company, it must offer such new securities to Pasaca and/or its assigns.
Also, on January 26, 2021, the Company and Pasaca entered into a Distribution Agreement (the “Distribution Agreement”). Pursuant to the terms of the Distribution Agreement, the Company appointed Pasaca to act as an independent distributor to resell and distribute the Company’s Quantum Dots and QMC HealthID products. Under the Distribution Agreement, Pasaca guaranteed that the Company would receive cumulative gross royalties and/or gross sales, licensing or other revenues under the Distribution Agreement of no less than $15,000,000, over the period including 2020 and continuing until twelve months after the Company has completed development of a functioning product integrating the QMC HealthID IP and Innova Medical Group’s products. Pasaca has the right to extend the revenue period by up to twenty-four months upon payment of advance royalties. At the date of this report, we have drawn $7,250,000 in advance draws, and these accrued interest at 8% until the date of conversion.
Common Share issuances
On August 6, 2019, the Company purchased the distributed ledger technology assets of Capstan Platform, Inc. for $650,000 payable in common shares. The asset purchase is considered a purchase of intangible assets under development. The company issued 9,718,182 common shares during August 2019 and an additional 3,527,337 common shares were issued during March 2021 in connection with this asset purchase and 6,095,535 remain issuable at the date of this filing.
In August 2019, the company converted a past due $100,000 debenture plus $25,778 of interest into 1,253,751 shares of common stock. The Company also issued 11,531,250 common shares on four debentures in exchange for term extensions and interest. Also, subsequent to June 30, 2019, the company issued 68,233,517 shares related to the conversion of ten outstanding debentures totaling $630,000 in principal and $320,000 interest common shares.
During the first three month of the 2020 fiscal year the company issued 1,119,856 common shares for legal fees, 8,948,916 in exchange for accounting and technology consulting services and 5,000,000 shares were awarded to the CEO as a performance bonus by the Board of Directors.
During the first three months of calendar year 2021, the company issued 3,333,333 shares in due from a subscription agreement entered into during 2019, as well as 2,133,333 in exchange for legal fees payable and 2,081,017 shares in exchange for exercise of warrants.
| F-37 |
QUANTUM MATERIALS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
| Balance at beginning | Charged to costs and | Charged to other | Balance at end | |||||||||||||||||
| For the year ended | of period | expenses | accounts | Deductions | of period | |||||||||||||||
| June 30, 2018 | ||||||||||||||||||||
| Valuation allowance on deferred tax assets | $ | 12,686,746 | $ | (3,309,466 | ) | $ | - | $ | - | $ | 9,377,280 | |||||||||
| June 30, 2019 | ||||||||||||||||||||
| Valuation allowance on deferred tax assets | $ | 9,377,280 | $ | 1,850,535 | $ | - | $ | (43,878 | ) | $ | 11,183,937 | |||||||||
All other financial schedules are not required under the related instructions or are inapplicable and therefore have been omitted.
| F-38 |