UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2018

 

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

 

Commission File Number: 000-52956

 

QUANTUM MATERIALS CORP.

(Exact name of Registrant as specified in its charter)

 

Nevada   20-8195578

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

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

 

512-245-6646

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

[  ] Yes [  ] No

 

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

[  ] Yes [X] No

 

As of February 14, 2019, there were 501,011,483 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 
 

 

Table of Contents

 

  Page
   
PART I – FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Consolidated Balance Sheets 3
   
Consolidated Statements of Operations 4
   
Consolidated Statements of Cash Flows 5
   
Notes to Consolidated Financial Statements 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 38
   
Item 4. Controls and Procedures 39
   
PART II – OTHER INFORMATION 40
   
Item 1. Legal Proceedings 40
   
Item 1A. Risk Factors 40
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
   
Item 3. Defaults upon Senior Securities 40
   
Item 4. Mine Safety Disclosures 40
   
Item 5. Other Information 40
   
Item 6. Exhibits 41
   
Signatures 42

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    December 31, 2018     June 30, 2018  
      (unaudited)          
ASSETS                
                 
CURRENT ASSETS                
Cash and cash equivalents   $ 325,437     $ 2,025  
Subscription receivable     -       10,000  
Prepaid expenses and other current assets     828,600       1,746,181  
TOTAL CURRENT ASSETS     1,154,037       1,758,206  
                 
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $396,093 and $346,080     575,511       625,524  
                 
LICENSES AND PATENTS, net of accumulated amortization of $160,627 and $146,852     32,116       45,891  
                 
LONG TERM PORTION OF PREPAID EXPENSES     369,811       184,660  
                 
TOTAL ASSETS   $ 2,131,475     $ 2,614,281  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
Accounts payable   $ 1,580,378     $ 1,511,691  
Accrued expenses     546,615       548,667  
Accrued salaries     816,023       682,575  
Notes payable, net of unamortized discount     20,000       -  
Short term derivative liability     25,895       -  
Current portion of convertible debentures, net of unamortized discount     3,403,402       3,402,421  
TOTAL CURRENT LIABILITIES     6,392,313       6,145,354  
                 
CONVERTIBLE DEBENTURES, net of current portion, unamortized discount and debt issuance costs     483,701       40,224  
                 
TOTAL LIABILITIES     6,876,014       6,185,578  
                 
COMMITMENTS AND CONTINGENCIES (See Note 10)     -       -  
                 
STOCKHOLDERS’ DEFICIT                
Common stock, $.001 par value, authorized 750,000,000 shares, 492,313,256 and 442,564,332 issued and outstanding at December 31, 2018 and June 30, 2018, respectively     492,325       442,564  
Common stock issuable     576,042       800,131  
Additional paid-in capital     44,586,658       42,030,181  
Accumulated deficit     (50,399,564 )     (46,844,173 )
TOTAL STOCKHOLDERS’ DEFICIT     (4,744,539 )     (3,571,297 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 2,131,475     $ 2,614,281  

 

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

 

3

 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2018     2017     2018     2017  
    (unaudited)     (unaudited)  
                         
REVENUES   $ -     $ -     $ -     $ 11,870  
                                 
OPERATING EXPENSES                                
General and administrative     1,261,793       1,626,390       2,623,525       2,893,843  
Research and development     15,449       53,563       38,536       131,505  
TOTAL OPERATING EXPENSES     1,277,242       1,679,953       2,662,061       3,025,348  
                                 
LOSS FROM OPERATIONS     (1,277,242 )     (1,679,953 )     (2,662,061 )     (3,013,478 )
                                 
OTHER EXPENSE (INCOME)                                
Beneficial conversion expense     126,908       16,176       143,778       768,602  
Interest expense, net     441,196       154,847       492,281       855,540  
Change in value of derivative liability     23,706       (424,260 )     105,868       (514,969 )
Accretion of debt discount     61,393       393,845       151,403       725,007  
TOTAL OTHER EXPENSE     653,203       140,608       893,330       1,834,180  
                                 
NET LOSS   $ (1,930,445 )   $ (1,820,561 )   $ (3,555,391 )   $ (4,847,658 )
                                 
LOSS PER COMMON SHARE                                
Basic and diluted   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING                                
Basic and diluted     499,897,012       400,312,285       485,929,475       387,913,206  

 

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

 

4

 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Six Months Ended  
    December 31,  
    2018     2017  
    (unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (3,555,391 )   $ (4,847,658 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization expense     63,788       68,736  
Amortization of debt issuance costs, and debt discount     401,335       556,479  
Stock-based compensation     535,155       511,728  
Stock issued for services     1,311,192       1,365,455  
Beneficial conversion feature     143,778       768,602  
Deemed interest on extinguishment of debenture     -       118,000  
Change in fair value of derivative liability     105,868       (514,969 )
Accretion of debt discount and warrant expense     151,403       725,007  
Effects of changes in operating assets and liabilities:                
Prepaid expenses and other current assets     6,238       2,799  
Accounts payable and accrued expenses     305,646       637,590  
NET CASH USED IN OPERATING ACTIVITIES     (530,988 )     (608,231 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of common stock     333,900       93,000  
Proceeds from issuance of convertible debentures / promissory note     500,500       1,127,000  
Proceeds from issuance of note payable     20,000       -  
Principal payments on long-term debt     -       (552,650 )
Principal payments on note payable     -       (52,738 )
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES     854,400       614,612  
                 
NET DECREASE IN CASH     323,412       6,381  
                 
CASH AND CASH EQUIVALENTS, beginning of period     2,025       52,611  
                 
CASH AND CASH EQUIVALENTS, end of period   $ 325,437     $ 58,992  

 

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

 

5

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

Nature of Operations

 

Quantum Materials Corp., a Nevada corporation, and its wholly owned 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 December 31, 2018, the Company had a working capital deficit of $5,238,276 and net cash used in operating activities was $(530,988) for the six months ended December 31, 2018. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.

 

In conjunction with anticipated revenue streams, and cash flows from licensing and development agreements, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.

 

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

 

Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation.

 

Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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.

 

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  

 

6

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Licenses and Patents: Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated useful life of five years.

 

Earnings per Share: The Company accounts for earnings per share in accordance with ASC 260 “Earnings Per Share” . Basic earnings per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the periods, including the dilutive effect of stock options and warrants granted. Dilutive stock options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported.

 

Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital.

 

Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, “ Accounting for Derivative Instruments and Hedging Activities”, as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.

 

The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.

 

Fair value measurements: The Company estimates fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair value measurement according to the lowest level of input that is significant to the measurement even though other significant inputs that are more readily observable may have also utilized.

 

7

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recent Accounting Pronouncements

 

In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June 30, 2018.

 

In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.

 

The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation.

 

The Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

 

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.

 

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.

 

Effective July 1, 2018, the Company adopted the Financial Accounting Standards Board’s (“FASB”) provisions of ASC 606, Revenue from Contracts with Customers (ASC 606), using the prospective method for all contracts not completed as of the date of adoption. The Company had no contracts not completed as of the date of adoption, nor had contracts that were modified before the effective date.

 

8

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 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:

 

    December 31, 2018     June 30, 2018  
      (unaudited)          
                 
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     396,093       346,080  
                 
Total property and equipment, net   $ 575,511     $ 625,524  

 

Depreciation expense for the six months ended December 31, 2018 and 2017 was $50,007 and $49,470, respectively.

 

NOTE 3 – LICENSES AND PATENTS

 

Licenses and patents consisted of the following:

 

    December 31, 2018     June 30, 2018  
      (unaudited)          
                 
William Marsh Rice University   $ 40,000     $ 40,000  
University of Arizona     15,000       15,000  
Bayer acquired patents     137,743       137,743  
      192,743       192,743  
Less: accumulated amortization     160,627       146,852  
                 
Total licenses and patents, net   $ 32,116     $ 45,891  

 

Amortization expense for the six months ended December 31, 2018 and 2017 $13,775 and $19,266, respectively.

 

9

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 – Valuations based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

As of December 31, 2018, and June 30, 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 December 31, 2018, and June 30, 2018, the Company held no investments. The Company hired an independent resource to value its derivative liability as follows (unaudited):

 

Fair Value Table   Balance at
December 31,
2018
    Quoted Prices in Active Markets for Identical Liabilities (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  
                         
Derivative Liability   $ 25,895     $              -     $ -     $ 25,895  
Note Payable     20,000       -       20,000       -  
Convertible debentures     3,887,103       -       3,887,103       -  
                                 
    $ 3,932,998     $ -     $ 3,907,103     $ 25,895  

 

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     (178,618 )     (178,618 )
Change in fair value     105,868       105,868  
Balance December 31, 2018   $ 25,895     $ 25,895  

 

10

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Convertible Debentures

 

The Company measured the estimated fair value of the convertible debentures using significant other observable inputs, representative of a Level 2 fair value measurement, including the interest and conversion rates for the instruments. The following table sets forth the fair value of the Company’s convertible debentures as of December 31, 2018, and June 30, 2018:

 

    December 31, 2018     June 30, 2018  
    (unaudited)              
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Convertible debentures issued in September 2014   $ 25,050     $ 30,151     $ 25,050     $ 27,977  
Convertible debentures issued in January 2015     500,000       543,525       500,000       504,342  
Convertible debentures issued in April - June 2016     1,075,000       1,244,550       1,075,000       1,154,831  
Convertible debenture issued in August 2016     200,000       244,594       200,000       226,961  
Convertible debentures issued in January - March 2017     60,000       69,121       60,000       64,138  
Convertible promissory notes issued in March 2017     222,350       278,787       222,350       258,689  
Convertible debenture issued in June 2017     100,000       106,604       100,000       98,919  
Convertible debenture issued in July 2017     100,000       106,604       100,000       98,919  
Convertible debenture issued in September 2017     150,000       159,906       150,000       148,378  
Convertible debenture issued in September 2017     495,000       528,978       495,000       490,844  
Convertible debenture issued in November 2017     27,000       27,532       27,000       25,547  
Convertible debenture issued in November 2017     247,500       264,489       247,500       245,422  
Convertible debenture issued in December 2017     75,000       78,121       75,000       72,489  
Convertible debenture issued in February 2018     45,000       47,835       45,000       44,387  
Convertible debentures issued in March 2018     65,000       68,115       65,000       63,205  
Convertible debentures issued in April 2018     150,000       141,657       150,000       131,446  
Convertible debentures issued in June 2018     40,000       43,200       40,000       40,086  
Convertible debentures issued in July 2018     45,000       47,991       -       -  
Convertible debentures issued in August 2018     30,000       31,248       -       -  
Convertible debentures issued in September 2018     25,000       25,714       -       -  
Convertible promissory note issued in September 2018     20,000       20,622       -       -  
Convertible debentures issued in December 2018     52,000       42,180       -       -  
Convertible promissory note issued in December 2018     350,000       297,130       -       -  

 

The Company is not a party to any hedge arrangements or commodity swap agreement.

 

11

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – CONVERTIBLE DEBENTURES

 

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

 

    December 31,     June 30,     Debenture
    2018     2018     Reference
      (unaudited)              
Convertible debentures issued in September 2014   $ 25,050     $ 25,050     A
Convertible debentures issued in January 2015     500,000       500,000     B
Convertible debentures issued in April - June 2016     1,075,000       1,075,000     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     G
Convertible debenture issued in June 2017     100,000       100,000     I
Convertible debenture issued in July 2017     100,000       100,000     J
Convertible debenture issued in September 2017     645,000       645,000     K
Convertible debenture issued in November 2017     247,500       247,500     K
Convertible debenture issued in November 2017     27,000       27,000     L
Convertible debenture issued in December 2017     75,000       75,000     N
Convertible debenture issued in February 2018     45,000       45,000     O
Convertible debentures issued in March 2018     65,000       65,000     P
Convertible debentures issued in April 2018     60,000       60,000     Q
Convertible debentures issued in April 2018     70,000       70,000     R
Convertible debentures issued in April 2018     20,000       20,000     S
Convertible debentures issued in June 2018     40,000       40,000     T
Convertible debentures issued in July 2018     45,000       -     U
Convertible debentures issued in August 2018     30,000       -     V
Convertible debentures issued in September 2018     25,000       -     W
Convertible debentures issued in December 2018     52,000       -     X
Convertible promissory notes issued in December 2018     350,000       -     Y
                     
      4,078,900       3,576,900      
Less: unamortized discount     191,797       134,255      
                     
      3,887,103       3,442,645      
Less: current portion     3,403,402       3,402,421      
                     
Total convertible debentures, net of current portion   $ 483,701     $ 40,224      

 

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 six months ended December 31, 2018.

 

Interest expense for the six months ended December 31, 2018 and 2017 was $768 and $768, respectively

 

As of December 31, and June 30, 2018, $25,050 of principal was outstanding.

 

12

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 six months ended December 31, 2018 and 2017 was $20,164 and $20,164, respectively.

 

As of December 31, and June 30, 2018, $500,000 of principal was outstanding.

 

C) April – June, August, October and November 2016 Convertible Debentures

 

During the fourth quarter of the year ended June 30, 2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000 and sold $50,000 in proceeds in October 2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. The conversion price was reset to $0.012 per share in June 2018 as a result of a triggering event.

 

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 six months ended December 31, 2018, and 2017, of $2,564 and $167,029, respectively.

 

The Company recognized a beneficial conversion expense for the six months ended December 31, 2018, and 2017, of $0 and $530,000, respectively.

 

Interest expense for the six months ended December 31, 2018, and 2017, of $52,133 and $62,267, 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 December 30, and June 30, 2018, $1,275,000 of principal was outstanding. As of the date of this report, maturities totaling $825,000 of principal have been extended for one year until March and April of 2019, and the remaining $250,000 have not been extended, and are past due as of the date of this report.

 

13

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 six months ended December 31, 2018 and 2017 of $3,125 and $51,468, respectively.

 

During the year ended June 30, 2018, $200,000 of these debentures converted into 1,666,667 shares of common stock.

 

Interest expense for the six months ended December 31, 2018 and 2017 of $2,420 and $8,894, respectively.

 

As of December 30, and June 30, 2018, $60,000 of principal was outstanding.

 

G) March 2017 Convertible Promissory Notes

 

In March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2 received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.

 

In March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.

 

14

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $0 and $43,661, respectively.

 

Interest expense for the six months ended December 31, 2018 and 2017 of $0 and $116,015, respectively.

 

As of December 31, 2017, the Company no longer had a derivative liability related to these notes, and recognized interest expense of $418,786, and a change in derivative liability benefit of $373,004. As of December 31, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of $0 for the six months ended December 31, 2018.

 

As of December 31, and June 30, 2018, and 2017, $222,350 of principal was outstanding, respectively. During the year ended June 30, 2018, the Company paid $319,500 of principal.

 

I) June 2017 Convertible Debenture

 

In June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. Interest expense was recorded for the six months ended December 31, 2018 and 2017 of $0. Beneficial conversion expense was recorded for the six months ended December 31, 2018 and 2017 of $0. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $0 and $45,434, respectively. As of December 31, and June 30, 2018, and 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

 

J) July 2017 Convertible Debenture

 

In July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note originally had a term of six months maturing on December 16, 2017 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 24, 2018 in an extension agreement dated 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 six months ended December 31, 2018 and 2017 of $0 and $48,398, respectively. As of December 31, and June 30, 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

 

15

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 $49,798, and a change in derivative liability expense of $28,561 for the three months then ended. This derivative liability was settled for 1,591,549 shares during the second quarter of 2018, resulting in additional interest expense of $18,002 during the six months ended December 31, 2018.

 

Interest expense for the six months ended December 31, 2018 and 2017 of $0 and $8,000, respectively.

 

K) September 2017 Convertible Debenture

 

Debenture A)

 

In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note had 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 six months ended December 31, 2018 and 2017 of $0 and $49,708, respectively. As of December 31, and June 30, 2018, $150,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

 

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 six months ended December 31, 2018.

 

Interest expense for the six months ended December 31, 2018 and 2017 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.

 

16

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $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 six months ended December 31, 2018 and 2017 of $0 and $142,198, respectively. As of December 31, and June 30, 2018, $495,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

 

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 six months ended December 31, 2018.

 

Interest expense for the six months ended December 31, 2018 and 2017 of $0 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.

 

As of December 31, and June 30, 2018, $247,500 of principal was outstanding.

 

Interest expense for the six months ended December 31, 2018 and 2017 of $0 and $18,000, respectively.

 

L) November 2017 Convertible Debenture

 

In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 13, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $1,576 and $492, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $1,104 and $294, respectively. As of December 31, and June 30, 2018, $27,000 of principal was outstanding.

 

17

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

N) December 2017 Convertible Debenture

 

In December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $0 and $1,125, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $0 and $6,000, respectively. As of December 31, and June 30, 2018, $75,000 of principal was outstanding.

 

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 2018, resulting in additional interest expense of $21,420 during the six months ended December 31, 2018.

 

O) February 2018 Convertible Debenture

 

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

 

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 six months ended December 31, 2018 and 2017 of $6,761 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $0. As of December 31, and June 30, 2018, $45,000 of principal was outstanding.

 

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 2018, resulting in additional interest expense of $25,650 during the six months ended December 31, 2018.

 

18

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

P) March 2018 Convertible Debenture

 

In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note 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 six months ended December 31, 2018 and 2017 of $8,677 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $0 was recognized. As of December 31, and June 30, 2018, $30,000 of principal was outstanding.

 

In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $35,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $35,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 23, 2021. The promissory note has a term of six months maturing on September 23, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $12,254 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $0. As of December 31, and June 30, 2018, $35,000 of principal was outstanding.

 

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.

 

Q) April 2018 Convertible Debenture

 

In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately 6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

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 six months ended December 31, 2018 and 2017 of $26,720 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $0 was recognized. As of December 31, and June 30, 2018, $60,000 of principal was outstanding.

 

19

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

R) April 2018 Convertible Debenture

 

In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and 200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $7,444 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $2,862 and $0 was recognized, respectively. As of December 31, and June 30, 2018, $70,000 of principal was outstanding.

 

S) April 2018 Convertible Debenture

 

In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $3,452 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $818 and $0 was recognized, respectively. As of December 31, and June 30, 2018, $20,000 of principal was outstanding.

 

T) June 2018 Convertible Debenture

 

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

 

20

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $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 six months ended December 31, 2018 and 2017 of $27,440 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $0 was recognized. As of December 31, and June 30, 2018, $40,000 of principal was outstanding.

 

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at December 31, 2018 was $0, and there was no benefit nor expense for change in derivative liability for the six months then ended.

 

U) 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 six months ended December 31, 2018 of $26,667. Interest expense for the six months ended December 31, 2018 of $3,600 was recognized. As of December 31, $45,000 of principal was outstanding.

 

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at December 31, 2018 was $68, and a change in derivative liability expense of $68 for the six months then ended.

 

V) 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 six months ended December 31, 2018 of $14,122. Interest expense for the six months ended December 31, 2018 of $2,400 was recognized. As of December 31, 2018, $30,000 of principal was outstanding.

 

21

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at December 31, 2018 was $1,338, and a change in derivative liability expense of $1,338 for the six months then ended.

 

W) September 2018 Convertible Debenture

 

In September 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $25,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $25,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through September 17, 2021. The promissory note has a term of approximately 7 months maturing on April 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

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 six months ended December 31, 2018 of $9,148. Interest expense for the six months ended December 31, 2018 of $2,000 was recognized. As of December 31, 2018, $25,000 of principal was outstanding.

 

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at December 31, 2018 was $1,435, and a change in derivative liability expense of $1,435 for the six months then ended.

 

X) 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 six months ended December 31, 2018, and 2017, of $264 and $0, respectively.

 

Interest expense for the six months ended December 31, 2018, and 2017, of $300 and $0, respectively.

 

22

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Y) 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. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $1,191 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $385 and $0 was recognized, respectively. As of December 31, and June 30, 2018, $350,000 of principal was outstanding.

 

Debt Issuance Costs

 

The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for the six months ended December 31, 2018 and 2017 was $151,403 and $725,007 respectively.

 

NOTE 6 – NOTES PAYABLE

 

Promissory Note

 

In September 2018, the Company issued a promissory note secured by the Company’s CEO for $20,000 with interest rate of 6%, maturing on March 9, 2019. The note is convertible into the Company’s common stock, at the lenders discretion, at a rate of $0.04 per share, with warrants to purchase an equal amount of stock. Interest expense for the six months ended December 31, 2018 was $319. As of December 31, 2018, $20,000 of principal was outstanding.

 

NOTE 7 – EQUITY TRANSACTIONS

 

Common Stock

 

During the six months ended December 31, 2018, the Company issued 15,048,042 shares for $602,922 in consulting services, $61,255 of which was accrued at June 30, 2018.

 

During the six months ended December 31, 2018, the Company issued 757,800 shares of common stock at the fair market value of $43,463 for payment of debenture interest.

 

During the six months ended December 31, 2018, the Company issued 16,714,339 shares of common stock at the fair market value of $708,840 in connection with debenture derivative liabilities, relieving $126,842 of the derivative liability, and resulting in $401,355 of additional interest expense.

 

23

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Common Stock Issuable

 

As of December 31, 2018, the company owed a total of 19,653,779 shares of common stock. 3,500,000 shares were in exchange for extinguishment of a $150,000 debenture, with a fair value of $280,000. 991,279 shares were for the settlement of a derivative liability related to price protection in the extinguishment agreement, with a fair value of $39,651. 600,000 shares were in relation to the extension of debt, with a fair value of $36,000. 14,250,000 shares were in relation to a new debenture borrowing of $615,000 in aggregate, valued at $150,524. 312,500 shares were in relation to the sale of shares for cash, valued at $12,500. 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 three and six months ended December 31, 2018.

 

15,173,333 shares with a fair value of $491,105, were issued, reducing shares issuable, during the six months ended December 31, 2018.

 

Stock Warrants

 

A summary of activity of the Company’s stock warrants for the six months ended December 31, 2018 is presented below (unaudited):

 

                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, 2018   $ 0.11       36,781,726                           2.80     $ 0.09  
Expired     -       -               -  
Granted     0.10       8,964,708               0.04  
Exercised     -       -               -  
Cancelled     -       -               -  
      -                          
Balance as of December 31, 2018   $ 0.11       45,746,434       2.29     $ 0.08  
                                 
Vested and exercisable as of December 31, 2018   $ 0.11       45,746,434       2.29     $ 0.08  

 

Outstanding warrants at December 31, 2018 expire during the period February 2019 to December 2023 and have exercise prices ranging from $0.03 to $0.30, valued at $4,805,468. These warrants are issued for salary conversions of employees and consultants, and the origination warrants related to debentures.

 

NOTE 8 – STOCK-BASED COMPENSATION

 

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

 

In October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of December 31, 2018, 9,200,000 options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled leaving a balance of 8,400,000 of options outstanding. During the six months ended December 31, 2018, we issued 1,500,000 shares of restricted stock out of the plan, leaving 100,000 options or grants available for grant under the plan.

 

In March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017, the term of these options was extended for an additional five years. In June 2016, and 2017, 6,000,000 and 17,000,000 stock options, with a term of ten years, were granted, respectively, outside of a stock option plan, and 3,000,000 shares were cancelled, leaving a balance of 23,500,000 outstanding outside of a defined option plan.

 

24

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 December 31, 2018, 80,153,473 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 57,941,914 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 December 30, 2018, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving a balance outstanding of 3,275,000 options.

 

Incentive Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation cost is not reduced by the Company for estimated forfeitures based on historical forfeiture rates for options granted after July 1, 2018. For grants prior to July 1, 2018, compensation cost was recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated forfeitures based on historical forfeiture rates, which were between 14% and 17%. 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 periods indicated:

 

    Six Months Ended  
    December 31,  
    2018     2017  
    (unaudited)  
Expected volatility     122.66 %     136.25 %
Expected dividend yield     -       -  
Risk-free interest rates     3.03 %     1.62 %
Expected term (in years)     5.0       5.0  

 

The computation of expected volatility during the six months ended December 31, 2018 and 2017 was based on the historical volatility. Historical volatility was calculated from historical data for the time approximately equal to the expected term of the option award starting from the grant date. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for the period corresponding with the expected life of the option.

 

25

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of the activity of the Company’s stock options for the six months ended December 31, 2018 is presented below (unaudited):

 

                Weighted     Weighted        
    Weighted           Average     Average        
    Average     Number of     Remaining     Optioned     Aggregate  
    Exercise     Optioned     Contractual     Grant Date     Intrinsic  
    Price     Shares     Term in Years     Fair Value     Value  
                               
Balance as of June 30, 2018   $ 0.09       85,616,914       4.00     $ 0.11     $                   -  
Expired     -       -               -          
Granted     0.03       7,500,000               0.04          
Exercised     -       -               -          
Cancelled     0.06       (600,000 )             0.06          
                                         
Balance as of December 31, 2018   $ 0.08       92,516,914       3.54     $ 0.10     $ -  
                                         
Vested and exercisable as of December 31, 2018   $ 0.08       81,784,747       3.54     $ 0.11     $ -  

 

Outstanding options at December 31, 2018, expire during the period February 2019 to June 2026 and have exercise prices ranging from $0.03 to $0.17.

 

Compensation expense associated with stock options for the six months ended December 31, 2018 and 2017 was $535,155 and $511,728 respectively and was included in general and administrative expenses in the consolidated statements of operations.

 

At December 31, 2018, the Company had 10,732,167 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company had not yet recognized was $463,807 at December 31, 2018. Such amounts are expected to be recognized over a period of 1.0 years.

 

Restricted Stock: To encourage retention and performance, the Company granted certain employees restricted shares of common stock with a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization, as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock awards for the six months ended December 31, 2018, and year ended June 30, 2018 is presented below (unaudited):

 

    Number of        
    Nonvested,     Weighted  
    Unissued     Average  
    Restricted     Grant Date  
    Share Awards     Fair Value  
             
Nonvested, unissued restricted shares outstanding at June 30, 2017     1,500,000       0.21  
Granted     5,500,000       0.06  
Vested     (7,000,000 )               0.09  
Forfeited     -       -  
Nonvested, unissued restricted shares outstanding at June 30, 2018     -     $ -  
Granted     -       -  
Vested     -       -  
Forfeited     -       -  
Nonvested, unissued restricted shares outstanding at December 31, 2018     -     $ -  

 

Compensation expense associated with restricted stock awards for the six months ended December 31, 2018 and 2017 was $0 and $99,046, respectively, and was included in general and administrative expenses in the consolidated statements of operations.

 

26

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The total cost of nonvested stock awards which the Company had not yet recognized was $0 at December 31, 2018.

 

NOTE 9 – LOSS PER SHARE

 

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

 

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

 

    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2018     2017     2018     2017  
    (unaudited)     (unaudited)  
                         
Net loss   $ (1,930,445 )   $ (1,820,561 )   $ (3,555,391 )   $ (4,847,658 )
                                 
Weighted average common shares outstanding:                                
Basic and diluted     499,897,012       400,312,285       485,929,475       387,913,206  
                                 
Basic and diluted loss per share   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

Agreement with University of Arizona

 

Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On March 3, 2017, Solterra entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by June 30, 2017, $125,000 by September 15, 2017 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications have been agreed to a final amendment has not been finalized. As of December 31, 2018, no royalties have been accrued for this obligation.

 

Agreement with Texas State University

 

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

 

Operating Leases

 

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

 

Rental expense for the operating lease for the six months ended December 31, 2018 and 2017 was $63,572 and $108,812, respectively.

 

27

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11 — LITIGATION

 

The Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-Q, the balance in arrears is $95,000 plus interest and other charges which has been accrued at September 30, 2018. The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.

 

CAUSE NUMBER 17-2033; Hays County, Texas

 

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

 

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

 

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

 

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

 

CAUSE NUMBER: 17CV06093; Johnson County, Kansas

 

The Kansas lawsuit is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against Quantum; the second claim is for breach of contract of the first L2 promissory note against Quantum; the final claim is for breach of contract regarding the second L2 promissory note against both Quantum and Squires, individually.

 

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

 

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

 

The Florida lawsuit largely mirrors the suit in Kansas; defaults are alleged as follows:

 

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

 

On July 27, 2017, Quantum’s auditor resigned, and replaced its auditor without seeking or obtaining the consent of SBI. This replacement of Quantum’s auditor constituted an alleged breach of the SBI notes. Because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.

 

28

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

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

 

The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at December 31, 2018.

 

Quantum v. K&L Gates, Inc., 18-2393, pending in Hays County, Texas.

 

In September 2017, Quantum filed an injunction suit against two of its lenders, SBI Investments, LLC, 2014-1 and L2 Capital LLC, in Hays County, Texas (428th Judicial District; Cause No. 17-2033). On October 2017, these two lenders intervened in the proceeding, asserted affirmative claims for monetary damages against Quantum, and opposed Quantum’s request for temporary injunctive relief. The lenders’ law firm was K&L Gates. In 2016, the Board of Directors for Quantum retained the law firm of K&L Gates. In this professional capacity, K&L Gates attended confidential board meetings and reviewed, inter alia, corporate secrets. K&L Gates billed approximately $100,000 per month. The Company has accrued $319,000 in relation to this action. Quantum moved to disqualify K&L Gates. The day before Quantum’s motion to disqualify was ruled on, K&L Gates withdrew in lieu of the Austin law firm Cleveland & Terrazas. On September 21, 2018, the “Deputy General Counsel of K&L Gates,” Mr. Charles Tea, sent a demand for payment of over $300,000 to Quantum’s CEO. On October 16, 2018, Quantum filed suit against K&L Gates alleging Breach of Fiduciary Duty, Deceptive Trade Practices, and Legal Malpractice.

 

NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION

 

The following is supplemental cash flow information:

 

    Six Months Ended  
    December 31,  
    2018     2017  
    (unaudited)  
             
Cash paid for interest   $        -     $ 25,555  
                 
Cash paid for income taxes   $ -     $ -  

 

29

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

    Six Months Ended  
    December 31,  
    2018     2017  
    (unaudited)  
             
Conversion of debentures, and accrued interest into shares of common stock   $ 42,809     $ 869,679  
                 
Allocated value of common stock and warrants issued with convertible debentures   $ 208,945     $ 517,676  
                 
Stock issued for amounts in accounts payable   $ 61,255     $ -  
                 
Prepaid expense paid in shares of common stock   $ 585,000     $ 1,587,624  
                 
Financing of prepaid insurance   $ -     $ 12,738  

 

NOTE 13 – TRANSACTIONS WITH AFFILIATED PARTIES

 

At December 31, 2018 and June 30, 2018, the Company had accrued salaries payable to executives in the amount of $536,825 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 debenture reference C) April – June, August, October and November 2016 Convertible Debentures.

 

NOTE 14 - SUBSEQUENT EVENTS

 

January 2015 Convertible Debenture — On January 14, 2019, partial payment was made of $150,000, and the debentures were extended to March 1, 2019. The payment was allocated first to interest, the remainder was allocated to outstanding principal. $7,890 was allocated to interest, and $143,110 was principal payment.

 

Share issuances

 

During the period January 1, 2019 through the date of this report, the Company issued 5,500,000 for services.

 

During the period January 1, 2019 through the date of this report, the Company issued 1,664,894 shares in connection with the settlement of the recorded derivative liability, which was $9,835 as of December 31, 2018.

 

During the period January 1, 2019 through the date of this report, the Company issued 1,500,000 shares which were issuable at December 31, 2018, in connection with a debenture entered into March of 2018.

 

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

 

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

 

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

 

The following discussion should be read in conjunction with the Company’s risk factors, consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Form 10-K filed October 15, 2018 for the fiscal year ended June 30, 2018. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear herein. The Company’s actual results could differ materially from those discussed here.

 

The financial information furnished herein has not been audited by an independent accountant; however, in the opinion of management, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the three and six-month periods ended December 31, 2018 and 2017 have been included.

 

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.

 

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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

 

We were formed in January 2007 as a Nevada corporation in the business of the exploitation of mineral interests. We acquired Solterra in November 2008 and changed our business to the development of QDs.

 

Intellectual Property Portfolio

 

In October 2008, Solterra 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 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.

 

Corporate Realignment

 

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 continually refine and increase the throughput of our production equipment to the metric ton range of QDs per year. All 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.

 

License Agreement

 

In November 2018, the Company entered into a license and development agreement with Amtronics India LLC related to the volume production of quantum dots in Assam, India. The agreement is part of a larger project for the design, training, research and development of a quantum dot manufacturing facility in Assam. This project has been under discussion for nearly three years. A ground-breaking ceremony took place in Assam on January 16, 2019, and the Company anticipates operations being established and operational prior to year-end 2019. In addition to an upfront fee and royalty, the agreement provides for the Company to sell equipment and training services, which the Company expects will provide additional revenues.

 

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

 

On or about December 23, 2018, Assam Electronics Development Corporation LTD (an Indian government enterprise involved in the development of the manufacturing facility in India) paid the first investment of $1M USD into the overall project fund. Amtronics then transferred a $500K USD commitment fee to the group that has secured the $20M investment funding. In terms of direct funding to the Company, on December 29, 2018 the Company received a letter from the managing director of the Assam Electronics Development Corporation LTD confirming that the $1M USD upfront license fee would be paid to the Company on or before January 31, 2019. The Company has recently been provided additional validation that the governmental transfer approval was complete and that funds should be received by the Company on or before February 20, 2019.

 

32

 

 

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

 

We have continued to maintain aggressive cost control measures, never forgetting this is a marathon and not a sprint. We are continuing to focus more resources on R&D and with our continuous flow technology we have been able to leverage every dollar spent. To further streamline our operations, we have continued to analyze our operating costs and make reductions whenever and wherever possible. To that end we have recently changed transfer agents in order to further reduce overhead cost and we have made additional cost cutting measures in our compliance operations to reduce audit fees.

 

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, if at all.

 

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

 

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

 

As of December 31, 2018, we had a working capital deficit of $5,238,276, with total current assets and liabilities of $1,154,037 and $6,392,014 respectively. Included in the liabilities are $779,125 owed to our officers, directors and employees for services rendered and accrued through December 31, 2018, $3,403,402 of convertible debentures, net of unamortized discount and $191,979 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 December 31, 2018, we have cash and cash equivalent assets of $325,437. 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 2019 and 2020; 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.

 

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

 

    Six Months Ended  
    December 31,  
    2018     2017  
             
Operating activities   $ (530,988 )   $ (608,231 )
Investing activities     -       -  
Financing activities   $ 854,400     $ 614,612  

 

 

Operating Activities. Net cash used in operating activities was $530,988 for the six months ended December 31, 2018 compared to $608,231 for the same period of 2017, a decrease in cash used of $77,243. The decrease was primarily driven by decreased in net loss for the quarter, and decreased payments on accounts payable.

 

Investing Activities. Net cash used in investing activities was primarily related to purchases of equipment. No purchases of capital equipment occurred in the six months ended December 31, 2018 or 2017.

 

Financing Activities. Net cash provided by financing activities was $854,400 for the six months ended December 31, 2018 compared to $614,612 for the same period of 2017, an increase of $239,788. The increase is primarily due to an increase of proceeds for the sale of common stock, fewer principal payments on debentures and notes payable due to maturities, partially offset by fewer issuances of convertible debentures during the six months ended December 31, 2018.

 

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.

 

Financing Arrangements

 

Over the course of meeting our capital needs, we have entered into various debentures and debt instruments, which generally have short maturity terms, typically 6 to 18 months. Many of these instruments were accompanied by shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock. The outstanding principal amount of these instruments at December 31, 2018 was $3,856,550. The terms of the instruments are set forth in the following table.

 

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Issuance
Date
  Outstanding
Principal
Amount ($) (1)
    Interest
Rate
    Conversion
Price ($)
    Maturity
Term
  No. of Shares
Exercisable
Under
Related
Warrant
    Warrants
Strike
Price ($)
    Warrant
Exercise
Period
 
Sep-14     25,050       6 %     0.15     September 2019 - October 2019     3,333,667       0.3       Sep-19  
January 2015(2)     356,890       8 %     0.06     Mar -19     -       -       -  
April - June 2016 (3)     1,075,000       8 %     0.01     March 2018 - April 2019     5,686,590       0.15       Aug-21  
August 2016 (4)     200,000       8 %     0.01     Aug-18     833,200       0.15       Aug-21  
January - March 2017     60,000       8 %     0.12     January - March 2019     10,831,600       0.15       January 2022 – March 2022  
Jun-17     100,000       8 %     0.12     Feb-19     250,000       0.12       Jun-20  
Jul-17     100,000       8 %     0.12     Feb-19     250,000       0.12       Jul-20  
Sep-17     150,000       8 %     0.12     Feb-19     375,000       0.12       Sep-20  
Sep-17     495,000       8 %     0.12     Jan-19     2,000,000       0.12       Sep-20  
Nov-17     247,500       8 %     0.12     Jan-19     -       -       -  
Nov-17     27,000       8 %     0.12     Nov-19     416,600       0.15       Nov-22  
Dec-17     75,000       8 %     0.12     Mar-19     250,000       0.12       Dec-20  
Feb-18     45,000       8 %     0.12     Feb-19     500,000       0.12       Dec-20  
Mar-18     65,000       8 %     0.12     Mar-19     500,000       0.12       Mar-21  
Apr-18     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  
Dec-18     350,000       8 %     0.03     Aug-20     5,000,000       0.04       Dec-21  

 

(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 11 to the Notes to Condensed Consolidated Financial Statements.
(2) Secured by a security interest in certain microreactor equipment.
(3) $250,000 is past due as of the date of this report.
(4) $200,000 is past due as of the date of this report.

 

Results of Operations

 

Three Months Ended December 31, 2018, Compared to Three Months Ended December 31, 2017.

 

Revenue

 

Revenue for the three months ended December 31, 2017 and 2018 was $0. No revenue was recorded for the license and development agreement in Assam, India for the three months ended December 31, 2018, as our performance obligation has not been fulfilled as of December 31, 2018.

 

General and administrative expenses

 

During the three months ended December 31, 2018, the Company incurred $1,261,793 of general and administrative expenses compared with $1,626,390 incurred in the three-month period ended December 31, 2017, a decrease of $364,597, or 22.4%. The decrease in general and administrative expenses was primarily due to decreases in legal and audit, compensation, and general corporate expenses, partially offset by stock-based compensation expense, and other professional fees.

 

35

 

 

Included in general and administrative expenses for the three months ended December 31, 2018 and 2017 are the following:

 

    Three Months Ended              
    December 31,              
    2018     2017              
                         
Compensation   $ 122,600     $ 240,011     $ (117,411 )     -48.9 %
Stock-based compensation     327,703       254,055       73,648       29.0 %
Legal and audit expenses     9,961       347,712       (337,751 )     -97.1 %
Corporate expenses     144,045       158,259       (14,214 )     -9.0 %
Other professional fees     625,572       592,104       33,468       5.7 %
Depreciation     25,001       24,660       341       1.4 %
Amortization     6,911       9,589       (2,678 )     -27.9 %