Form 10-Q QUANTUM MATERIALS CORP. For: Dec 31

 

 

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, 2017

 

[  ] 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)

 

512-245-6646

(Registrant’s telephone number)

 

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such file). 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer [  ]

Accelerated Filer [  ]

Non-Accelerated Filer [  ]

Smaller Reporting Company [X]

 

As of August 24, 2018, there were 450,711,428 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

Table of Contents

 

	Page
PART I – FINANCIAL INFORMATION
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	28
Item 3. Quantitative and Qualitative Disclosures about Market Risk	35
Item 4. Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults upon Senior Securities	36
Item 4. Mine Safety Disclosures	37
Item 5. Other Information	37
Item 6. Exhibits	37
Signatures	39

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31, 2017				June 30, 2017
		(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	58,992			$	52,611
Prepaid expenses and other current assets			1,340,708				1,254,923
TOTAL CURRENT ASSETS			1,399,700				1,307,534
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $296,001 and $246,491			673,726				723,236
LICENSES AND PATENTS, net of accumulated amortization of $133,030 and $113,804			59,713				78,939
LONG TERM PORTION OF PREPAID EXPENSES			280,596				-
TOTAL ASSETS		$	2,413,735			$	2,109,709
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	1,954,567			$	1,809,456
Accrued salaries			664,175				361,375
Notes payable, net of unamortized discount			10,000				62,738
Short term derivative liability (see Note 4)			-				-
Current portion of convertible debentures, net of unamortized discount			2,815,593				2,511,829
TOTAL CURRENT LIABILITIES			5,444,335				4,745,398
CONVERTIBLE DEBENTURES, net of current portion, unamortized discount and debt issuance costs			100,060				559,283
TOTAL LIABILITIES			5,544,395				5,304,681
COMMITMENTS AND CONTINGENCIES (see Note 11)			-				-
STOCKHOLDERS’ DEFICIT
Common stock, $.001 par value, authorized 750,000,000 shares, 402,739,639 and 367,955,585 issued and outstanding at December 31, 2017 and June 30, 2017, respectively			402,740				367,955
Common stock issuable			608,663				-
Additional paid-in capital			38,148,699				33,880,177
Accumulated deficit			(42,290,762	)			(37,443,104	)
TOTAL STOCKHOLDERS’ DEFICIT			(3,130,660	)			(3,194,972	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	2,413,735			$	2,109,709

 

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

 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2017				2016				2017				2016
		(unaudited)								(unaudited)
REVENUES		$	-			$	19,500			$	11,870			$	24,500
OPERATING EXPENSES
General and administrative			1,626,390				1,825,983				2,893,843				3,013,784
Research and development			53,563				126,343				131,505				271,802
TOTAL OPERATING EXPENSES			1,679,953				1,952,326				3,025,348				3,285,586
LOSS FROM OPERATIONS			(1,679,953	)			(1,932,826	)			(3,013,478	)			(3,261,086	)
OTHER EXPENSE (INCOME)
Beneficial conversion expense			16,176				24,381				768,602				94,298
Interest expense, net			154,847				63,743				855,540				128,908
Change in value of derivative liability			(424,260	)			-				(514,969	)			-
Accretion of debt discount			393,845				186,569				725,007				299,857
TOTAL OTHER EXPENSE			140,608				274,693				1,834,180				523,063
NET LOSS		$	(1,820,561	)		$	(2,207,519	)		$	(4,847,658	)		$	(3,784,149	)
LOSS PER COMMON SHARE
Basic and diluted		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.01	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted			400,312,285				334,497,865				387,913,206				329,764,251

 

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

 

 

QUANTUM MATERIALS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Six Months Ended
		December 31,
		2017				2016
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(4,847,658	)		$	(3,784,149	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			68,736				66,226
Amortization of debt issuance costs			556,479				31,329
Stock-based compensation			511,728				846,652
Stock issued for services			1,365,455				180,464
Beneficial conversion feature			768,602				94,298
Change in fair value of derivative liability			(514,969	)			-
Accretion of debt discount			725,007				299,857
Deemed interest on extinguishment of debenture			118,000				-
Effects of changes in operating assets and liabilities:
Accounts receivable			-				8,835
Prepaid expenses and other current assets			2,799				75,075
Accounts payable and accrued expenses			637,590				1,029,120
Deferred revenue			-				-
NET CASH USED IN OPERATING ACTIVITIES			(608,231	)			(1,152,293	)
			-
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			-				(32,871	)
NET CASH USED IN INVESTING ACTIVITIES			-				(32,871	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from warrant exercises and issuance of common stock			93,000				375,000
Proceeds from issuance of convertible debentures / promissory note			1,127,000				650,000
Proceeds from issuance of note payable			-				-
Principal payments on note payable			(52,738	)			(100,000	)
Principal payments on long-term debt			(552,650	)			-
NET CASH PROVIDED BY FINANCING ACTIVITIES			614,612				925,000
NET DECREASE IN CASH			6,381				(260,164	)
CASH AND CASH EQUIVALENTS, beginning of period			52,611				266,985
CASH AND CASH EQUIVALENTS, end of period		$	58,992			$	6,821

 

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

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

General

 

The accompanying consolidated financial statements include the accounts of Quantum Materials Corp. and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred to as the “Company”).

 

The consolidated financial statements of the Company as of and for the six months ended December 31, 2017 are unaudited and have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended June 30, 2017. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. In the opinion of management, the accompanying unaudited financial information includes all adjustments necessary for a fair presentation of the interim financial information. Operating results for the interim periods are not necessarily indicative of the results of any subsequent periods. Certain information in the footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) has been condensed or omitted for the interim periods presented under the United States Securities and Exchange Commission (“SEC”) rules and regulations. As such, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017.

 

Nature of Operations

 

The Company is a nanotechnology company specializing in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high-performance variant of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology and technological changes, including those developed by the Company’s competitors, rendering the Company’s technology uncompetitive or obsolete.

 

Going Concern

 

The Company recorded losses from continuing operations in the current period presented and has a history of losses. As of December 31, 2017, the Company had a working capital deficit of $4,044,635 and net cash used in operating activities was $(620,969) for the six months ended December 31, 2017. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.

 

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

 

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

 

Recent Accounting Pronouncements

 

In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the first quarter of fiscal year 2018, the Company had a triggering event related to a down round feature which resulted in recording a charge for beneficial conversion expense of $530,000 during the six months ended December 31, 2017.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

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

 

Pronouncements Yet To Be Adopted

 

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. We will continue to evaluate this area and expect to finalize our conclusions by the first quarter of fiscal 2019.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In August 2014, the FASB issued ASU No. 2014-15 Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.

 

NOTE 2 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		December 31, 2017				June 30, 2017
		(unaudited)
Furniture and fixtures		$	1,625			$	1,625
Computers and software			11,447				11,447
Machinery and equipment			956,655				956,655
			969,727				969,727
Less: accumulated depreciation			296,001				246,491
Total property and equipment, net		$	673,726			$	723,236

 

Depreciation expense for the six months ended December 31, 2017 and 2016 was $49,470 and $46,952, respectively.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LICENSES AND PATENTS

 

Licenses and patents consisted of the following:

 

		December 31, 2017				June 30, 2017
		(unaudited)
William Marsh Rice University		$	40,000			$	40,000
University of Arizona			15,000				15,000
Bayer acquired patents			137,743				137,743
			192,743				192,743
Less: accumulated amortization			133,030				113,804
Total licenses and patents, net		$	59,713			$	78,939

 

Amortization expense for the six months ended December 31, 2017 and 2016 was $19,266 and $19,274, respectively.

 

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

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

 

As of December 31, and June 30, 2017, the fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximates book value due to the short maturity of these instruments. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value. As of December 31, and June 30, 2017, the Company held no investments. The Company hired an independent resource to value its derivative liability as follows:

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Table

 

		Balance at December 31, 2017				Quoted Prices in Active Markets for Identical Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Derivative Liability		$	-			$	-			$	-			$	-
Convertible debentures			2,915,653				-				2,915,653				-
		$	2,915,653			$	-			$	2,915,653			$	-

 

Level Three Roll-forward

 

		Derivative Liability				Total
Balance June 30, 2017		$	-			$	-
Fair value of derivative liability reclassified from equity			514,969				514,969
Change in fair value			(514,969	)			(514,969	)
Balance December 31, 2017		$	-			$	-

 

The carrying amounts of cash and cash equivalents, accounts payable and current debt approximate their fair value due to the short maturity of those instruments.

 

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, 2017, and June 30, 2017:

 

		December 31, 2017								June 30, 2017
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Convertible debentures issued in September 2014		$	25,050			$	25,992			$	25,050			$	24,721
Convertible debentures issued in January 2015		$	500,000			$	583,333			$	500,000			$	916,667
Convertible debentures issued in April - June 2016		$	1,105,000			$	1,170,480			$	1,330,000			$	1,277,403
Convertible debenture issued in August 2016		$	200,000			$	244,594			$	200,000			$	197,815
Convertible debenture issued in November 2016		$	-			$	-			$	200,000			$	191,795
Convertible debentures issued in January - March 2017		$	60,000			$	60,244			$	260,000			$	240,718
Convertible debenture issued in February 2017		$	-			$	-			$	100,000			$	103,992
Convertible debenture issued in March 2017		$	-			$	-			$	150,000			$	152,352
Convertible promissory notes issued in March 2017		$	210,000			$	226,985			$	541,850			$	549,466
Convertible promissory notes issued in May 2017		$	-			$	-			$	213,650			$	215,158
Convertible debenture issued in June 2017		$	100,000			$	104,119			$	100,000			$	100,827
Convertible debenture issued in July 2017		$	100,000			$	107,169			$	-			$	-
Convertible debenture issued in September 2017		$	150,000			$	157,454			$	-			$	-
Convertible debenture issued in September 2017		$	450,000			$	463,608			$	-			$	-
Convertible debenture issued in November 2017		$	27,000			$	23,735			$	-			$	-
Convertible debenture issued in November 2017		$	225,000			$	231,804			$	-			$	-
Convertible debenture issued in December 2017		$	75,000			$	75,252			$	-			$	-

 

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

 

 

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, 2017				June 30, 2017
Convertible debentures issued in September 2014		$	25,050			$	25,050
Convertible debentures issued in January 2015			500,000				500,000
Convertible debentures issued in April - June 2016			1,105,000				1,330,000
Convertible debenture issued in August 2016			200,000				200,000
Convertible debenture issued in November 2016			-				200,000
Convertible debentures issued in January - March 2017			60,000				260,000
Convertible debenture issued in February 2017			-				100,000
Convertible debenture issued in March 2017			-				150,000
Convertible promissory notes issued in March 2017			222,350				541,850
Convertible promissory notes issued in May 2017			-				233,150
Convertible debenture issued in June 2017			100,000				100,000
Convertible debenture issued in July 2017			100,000				-
Convertible debenture issued in September 2017			645,000				-
Convertible debenture issued in November 2017			247,500				-
Convertible debenture issued in November 2017			27,000				-
Convertible debenture issued in December 2017			75,000				-
			3,306,900				3,640,050
Less: unamortized discount			373,768				490,448
Less: debt issuance costs			17,479				78,490
			2,915,653				3,071,112
Less: current portion			2,815,593				2,511,829
Total convertible debentures, net of current portion		$	100,060			$	559,283

 

The Company adopted 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. 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 implemented ASU 2017-11 retrospectively with a cumulative effect adjustment to outstanding financial instruments, which was $0 for the implementation period, six months ended December 31, 2017. A triggering event occurred in the three months ended September 30, 2017, increasing beneficial conversion expense in the amount of $530,000.

 

September 2014 Convertible Debenture

 

Between September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050 in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. A total of $475,000 of the Debentures were converted into common shares in 2016 and $0 converted during the six months ended December 31, 2017.

 

Interest expense for the six months ended December 31, 2017 and 2016 was $768.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of December 31, and June 30, 2017, $25,025 of principal was outstanding.

 

January 2015 Convertible Debenture

 

On January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in the event that 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.

 

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $0 and $92,298, respectively. Interest expense for the six months ended December 31, 2017 and 2016 was $20,164.

 

As of December 31, and June 30, 2017, $500,000 of principal was outstanding.

 

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

 

During the fourth quarter of the year ended June 30, 2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000 and sold $50,000 in proceeds in October 2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. The conversion price was reset to $0.08 per share in September 2017 as a result of a triggering event.

 

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017, and 2016, of $167,029 and $166,541, respectively.

 

The Company recognized a beneficial conversion expense for the six months ended December 31, 2017, and 2016, of $530,000 and $64,775, respectively.

 

Interest expense for the six months ended December 31, 2017, and 2016, of $62,267 and $71,189, respectively.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the year ended June 30, 2017, $285,000 of principal was converted into 2,375,000 shares of common stock. An additional $300,000 was converted into 2,500,000 shares during the first quarter of 2018. As of December 31, and June 30, 2017, $1,305,000 and $1,730,000 of principal was outstanding, respectively. As of the date of this report, maturities totaling $825,000 of principal have been extended for one year until March and April of 2019.

 

January-March 2017 Convertible Debentures

 

During the third quarter of the year ended June 30, 2017, the Company sold 260 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 or not 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, 2017 and 2016 of $51,468 and $0, respectively.

 

Interest expense for the six months ended December 31, 2017 and 2016 of $8,894 and $0, respectively.

 

As of December 31, and June 30, 2017, $60,000 and $260,000 of principal was outstanding, respectively.

 

February 2017 Convertible Promissory Note

 

In March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for 200,000 unregistered and restricted shares of common stock of the Company and a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through February 1, 2020. The promissory note has a term of eight months maturing on October 1, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the common stock and warrants to the proceeds received in the amount of $24,733, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the three months ended December 31, 2017 and 2016 of $9,012 and $0, respectively.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

There was no interest expense recorded for the six months ended December 31, 2017 and 2016.

 

As of December 31, and June 30, 2017, $0 and $100,000 of principal was outstanding, respectively. In August 2017, the Note Holder converted $100,000 of principal and $8,000 of accrued interest into 833,333 and 66,667 shares of common stock, respectively.

 

March 2017 Convertible Debenture

 

In March 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 375,000 common stock warrants exercisable at $0.12 per share through March 28, 2020. The promissory note has a term of eight months maturing on November 28, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $77,248, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $39,137 and $0, respectively.

 

The Company did not recognize an interest expense or a beneficial conversion expense for the six months ended December 31, 2017 and 2016. In September 2017 the debenture was converted in full to common stock. At December 31 and June 30, 2017, the principal balance remaining on this note was $0 and $150,000, respectively. The Company recognized 3.5 million common shares issuable and $118,000 of imputed interest expense during September 2017 as a result of this debt settlement.

 

March 2017 Convertible Promissory Notes

 

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

 

In March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. Interest expense on the commitment fees for six months ended December 31, 2017 and 2016 of $8,353 and $0, respectively. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.

 

 

QUANTUM MATERIALS CORP.

NOTES TO 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 September 30, 2017 and 2016 of $43,661 and $0, respectively.

 

Interest expense on the promissory notes for the six months ended December 31, 2017 and 2016 of $8,364 and $0, respectively. As of December 30, 2017, the Company no longer had a derivative liability, unamortized discount of $0, and recognized interest expense of $418,786, and a change in derivative liability benefit of $373,004 for the six months ended December 31, 2017. As of December 31, and June 30, 2017, $222,350 and $541,850 of principal was outstanding, respectively. During the six months ended December 31, 2017, the Company paid $319,500 of principal.

 

May 2017 Convertible Promissory Notes

 

In May 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $213,650 in gross proceeds. In connection with the second funding tranche, SBI and L2 received 280,165 and 653,719 common stock warrants, respectively, exercisable at $0.13 per share through May 2, 2022. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $71,795, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company also recorded original issue discount (“OID”) of $13,650 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $48,101 and $0, respectively. As of December 31, 2017, the Company no longer had a derivative liability, unamortized discount of $0, and recognized interest expense of $117,276, and a change in derivative liability benefit of $141,965.

 

Interest Expense recorded for the six months ended December 31, 2017 and 2016 of $116,015 and $0 respectively. As of December 31, and June 30, 2017, $0 and $233,150 of principal was outstanding, respectively. In October 2017 the Company paid the principal of this note.

 

June 2017 Convertible Debenture

 

In June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The Maturity date of the Note was extended to May 1, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $45,434 and $0, respectively. As of December 31, and June 30, 2017, $100,000 of principal was outstanding. In April 2018 the maturity date was extended to May 24, 2018.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

July 2017 Convertible Debenture

 

In July 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 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The Maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $48,398 and $0, respectively. As of December 31, $100,000 of principal was outstanding. In April 2018 the maturity date was extended to May 24, 2018.

 

The Company recognized a beneficial conversion expense for the six months ended December 31, 2017 of $45,544. Interest expense for the six months ended December 31, 2017 and 2016 of $8,000 and $0, respectively.

 

September 2017 Convertible Debentures

 

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, 2020. The promissory note has a term of six months maturing on March 26, 2018 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The Maturity date of the Note was extended to May 24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $49,708 and $0, respectively. As of December 31, 2017, $150,000 of principal was outstanding. In April 2018 the maturity date was extended to May 24, 2018.

 

The Company recognized a beneficial conversion expense for the six months ended December 31, 2017 and 2016 of $45,219 and $0, respectively. Interest expense for the three months ended December 31, 2017 and 2016 of $12,000 and $0, respectively.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 maximum principal amount of $880,000. The Note Holder received 10,000,000 shares of common stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2020. The promissory note has a term of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The Maturity date of the Note was extended to May 24, 2018 in an extension agreement dated April 26, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months, of which $24,739 was unamortized at December 31, 2017. The Company recognized a fair value of the common shares issued at $1,000,000. The Company recorded a beneficial conversion expense of $131,663. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $142,198 and $0, respectively. As of December 31, 2017, $450,000 of principal was outstanding. In April 2018 the maturity date was extended to May 24, 2018.

 

The Company recognized a beneficial conversion expense for the six months ended December 31, 2017 and 2016 of $131,633 and $0, respectively. Interest expense for the six months ended December 31, 2017 and 2016 of $36,000 and $0, respectively.

 

November 2017 Convertible Debenture

 

In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates 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, 2017 and 2016 of $492 and $0, respectively. Interest expense for the six months ended December 31, 2017 and 2016 of $294 and $0, respectively. As of December 31, 2017, $27,000 of principal was outstanding.

 

November 2017 Convertible Debenture

 

In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 112,482 common stock warrants exercisable at $0.15 per share through November 13, 2022. The promissory note has a term of 24 months maturing on November 7, 2017 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

 

QUANTUM MATERIALS CORP.

NOTES TO 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 $23,250 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recorded a debenture discount of $18,864. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $18,864 and $0, respectively. As of December 31, 2017, $0 of principal was outstanding, as this debenture was fully converted to shares common stock.

 

December 2017 Convertible Debenture QTMM-8

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2017 and 2016 of $1,125 and $0, respectively. Interest expense for the six months ended December 31, 2017 and 2016 of $6,000 and $0, respectively. Beneficial conversion expense for the six months ended December 31, 2017 and 2016 of $16,176 and $0, respectively. As of December 31, 2017, $75,000 of principal was outstanding.

 

Debt Issuance Costs

 

The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for the three months ended December 31, 2017 and 2016 was $17,134 and $15,821 respectively. Amortization expense was $41,511 and $31,329 for the six months ending December 31, 2017 in 2016, respectively.

 

NOTE 6 – NOTES PAYABLE

 

Promissory Note

 

In June 2017, the Company issued a promissory note secured by the Company’s CEO for $50,000 with interest of $5,000 due on repayment of the loan. Interest expense for the six months ended December 31, 2017 and 2016 was $5,000 and $0, respectively. During the six months ended December 31, 2017, the Company made payment of $40,000 to the principal. As of December 31, and June 30, 2017, $10,000 and $50,000, of principal was outstanding, respectively. As of the date of this report, the balance was paid in full.

 

In September 2016, the Company issued an unsecured promissory note for proceeds of $100,000. The note bears 0% interest and the Company issued 416,667 common stock warrants exercisable at $0.15 per share through September 29, 2021. The note was due October 13, 2016 and was repaid on October 11, 2016. In accounting for the promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,454, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, fourteen days. As of December 31, and June 30, 2017, $0 of principal was outstanding.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note Payable – Insurance

 

In May 2017, to finance an insurance premium, the Company issued a negotiable promissory note for $17,374 at an interest rate of 6.89% per annum. The note was due in November 2017 and the outstanding balance was $0 and $12,738 at December 31, and June 30, 2017, respectively. Interest expense for the six months ended December 31, 2017 and 2016 was $415 and $115, respectively. The Note was paid in full in November 2017.

 

NOTE 7 – EQUITY TRANSACTIONS

 

Common Stock

 

During the six months ended December 31, 2017, the Company issued 23,670,060 shares for $1,867,635 in consulting services, some of which were accrued.

 

During the six months ended December 31, 2017, the Company issued 372,326 shares of common stock at the fair market value of $44,679 for payment of debenture interest.

 

During the six months ended December 31, 2017, the Company issued 6,875,001 shares of common stock at the fair market value of $825,000 as a result of debenture conversions.

 

During the six months ended December 31, 2017, the Company issued 2,650,000 shares, and accrued 1,000,000 shares in common stock issuable, in connection with the issuance of the convertible debenture notes with a fair market value of $120,132.

 

During the six months ended December 31, 2017, the Company issued 1,216,667 shares in exchange for cash with a value of $93,000.

 

Common Stock Issuable

 

During the six months ended December 31, 2017, the company owed a total of 14,500,000 shares of common stock to a lender. 3,500,000 shares were in exchange for extinguishment of a $150,000 debenture, and 11,000,000 shares were in relation to a new debenture borrowing of $525,000 in aggregate, valued at $328,663. The shares are anticipated to be issued after fiscal year end June 30, 2018. The shares are included in the weighted average shares outstanding for purposes of calculation earning per share for the three and six months ended December 31, 2017.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Stock Warrants

 

A summary of activity of the Company’s stock warrants for the six months ended December 31, 2017 is presented below:

 

										Weighted
		Weighted								Average				Weighted
		Average								Remaining				Average
		Exercise				Number of				Contractual				Grant Date
		Price				Warrants				Term in Years				Fair Value
Balance as of June 30, 2017		$	0.13				29,953,551							$	0.14
Expired			0.06				(6,827,778	)							0.15
Granted			0.12				3,404,082								0.08
Exercised			-				-								-
Cancelled			-				-								-
Balance as of December 31, 2017		$	0.14				26,529,855				3.15			$	0.13
Vested and exercisable as of December 31, 2017		$	0.14				26,529,855				3.15			$	0.13

 

Outstanding warrants at December 31, 2017 expire during the period October 2017 to November 2022 and have exercise prices ranging from $0.07 to $0.30.

 

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, 2017, 9,200,000 options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled leaving a balance of 8,400,000 outstanding.

 

In March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017, the term of these options was extended for an additional five years.

 

In January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock, which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of December 31, 2017, 60,150,248 options have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 3,283,334 have been cancelled, and 53,641,914 remain outstanding.

 

On February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000 shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of December 31, 2017, 2,500,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving a balance outstanding of 875,000 options.

 

In June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan, and 3,000,000 shares were cancelled.

 

In the six months ended December 31, 2017 no options were canceled or expired.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Incentive Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation cost is recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated forfeitures based on historical forfeiture rates, which were between 14% and 17% during the six months ended December 31, 2017. 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,
		2017				2016
Expected volatility			-				140.73	%
Expected dividend yield			-				-
Risk-free interest rates			-				1.25	%
Expected term (in years)			-				5.0

 

The computation of expected volatility during the six months ended December 31, 2017 and 2016 was based on the historical volatility. Historical volatility was calculated from historical data for the time approximately equal to the expected term of the option award starting from the grant date. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for the period corresponding with the expected life of the option.

 

A summary of the activity of the Company’s stock options for the six months ended December 31, 2017 is presented below:

 

										Weighted				Weighted
		Weighted								Average				Average
		Average				Number of				Remaining				Optioned				Aggregate
		Exercise				Optioned				Contractual				Grant Date				Intrinsic
		Price				Shares				Term in Years				Fair Value				Value
Balance as of June 30, 2017		$	0.09				87,716,914							$	0.11			$	2,073,012
Expired			-				-								-
Granted			-				-								-
Exercised			-				-								-
Cancelled			-				-								-
Balance as of December 31, 2017		$	0.09				87,716,914				4.40			$	0.11			$	-
Vested and exercisable as of December 31, 2017		$	0.08				74,525,497				4.40			$	0.11			$	-

 

Outstanding options at December 31, 2017, expire during the period January 2018 to June 2026 and have exercise prices ranging from $0.05 to $0.17.

 

Compensation expense associated with stock options for the six months ended December 31, 2017and 2016 was $414,901 and $740,789, respectively and was included in general and administrative expenses in the consolidated statements of operations.

 

At December 31, 2017, the Company had 13,191,417 shares of non-vested stock option awards. The total cost of non-vested stock option awards which the Company had not yet recognized was $1,147,803 at December 31, 2017. Such amounts are expected to be recognized over a period of 1.75 years.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Restricted Stock: To encourage retention and performance, the Company granted certain employees restricted shares of common stock with a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization, as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock awards for the six months ended December 31, 2017 is presented below:

 

		Number of
		Nonvested,				Weighted
		Unissued				Average
		Restricted				Grant Date
		Share Awards				Fair Value
Nonvested, unissued restricted shares outstanding at June 30, 2017			1,500,000				0.21
Granted			-				-
Vested			(500,000	)			0.42
Forfeited			-				-
Nonvested, unissued restricted shares outstanding at December 31, 2017			1,000,000			$	0.10

 

Compensation expense associated with restricted stock awards for the six months ended December 31, 2017 and 2016 was $99,046 and $105,863 for the six months ended December 31, 2017 and 2016, respectively, and was included in general and administrative expenses in the consolidated statements of operations.

 

The total cost of non-vested stock awards which the Company had not yet recognized was $13,509 at December 31, 2017. This amount is expected to be recognized over a period of 0.25 years.

 

Agreements with Officers and Employees: In June 2016, the Company’s officers and certain employees owning options to purchase 57,670,933 shares of the Company’s common stock entered into an agreement with the Company that such persons cannot exercise their options and the Company does not have to reserve for the issuance of shares of common stock underlying their options until the earlier of June 30, 2017 or the Company having unreserved shares sufficient for all outstanding options to be exercised. On May 1, 2017, the Company’s shareholders approved an increase in the number of authorized common shares to 750,000,000. As a result of this increase all 57,670,933 options were exercisable as of May 1, 2017.

 

NOTE 9 – LOSS PER SHARE

 

The Company follows ASC 260, “Earnings Per Share”, for share-based payments that are considered to be participating securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings per share (“EPS”). Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all potential dilutive common shares, which is comprised of options granted, warrants, issued and convertible debt. As of December 31, 2017, the Company had no potentially dilutive shares.

 

 

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

 

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2017				2016				2017				2016
		(unaudited)
Net loss		$	(1,820,561	)		$	(2,207,519	)		$	(4,847,658	)		$	(3,784,149	)
Weighted average common shares outstanding:
Basic and diluted			400,312,285				334,497,865				387,913,206				329,764,251
Basic and diluted loss per share		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.01	)

 

NOTE 10- REVENUE

 

During the three months ending December 31, 2017, the Company recognized no revenues of compared with revenues of $19,500 recognized during the quarter ended December 31, 2016. For the six months ended December 31, 2017, the Company recognized revenues of $11,870 from merchandise samples compared with revenues of $24,500 from recognized in the comparable period of 2016.

 

The Company has expended $53,564 during the three months ended December 31, 2017 and $131,506 during the six months ended December 31, 2017 to complete the development of its patented quantum dots. In future quarters, it is expected that revenues will be earned as product is shipped.

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

Agreement with Rice University

 

On August 20, 2008, Solterra entered into a License Agreement with Rice University, which was amended and restated on September 26, 2011; also, on September 26, 2011, QMC entered into a new License Agreement with Rice (collectively the “Rice License Agreements”). On August 21, 2013, QMC and Solterra each entered into a second amended license agreements with Rice University. QMC and Solterra entered into third amended license agreements with Rice University on March 15 and 24, 2016, respectively.

 

The Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for QDs sold in electronic and medical applications.

 

We have a verbal agreement with Rice University to modify the minimum royalty due dates that will result in Quantum Materials Corp being in full compliance with the agreements at December 3X, 2017 and we anticipate this will be memorialized in writing by June 1, 2017. The modification to the license agreements for both Quantum Materials and Solterra specifically adjusts dates for annual minimum royalty obligations to coincide in timing with expected commercial sales of tetrapod quantum dots. The Annual Minimum Royalties will commence in 2019 but we expect a clause for a yearly maintenance fee (approximately $20,000 per year starting in January 2018) that would delay the annual royalties until commercial sales occur.

 

Minimum royalties payable under the Solterra Rice License Agreement are expected to be due March 1, 2019, and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, January 1 to December 31, following the due date. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty of 2-4% of adjusted gross sales for QDs sold in solar applications. Minimum royalties payable under the Solterra Rice License Agreement include $100,000 due March 1, 2019, $356,250 due January 1, 2020, $1,453,500 due January 1, 2021 and $3,153,600 each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. Pursuant to the QMC Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty of 7.5% of adjusted gross sales for QDs sold in electronic and medical applications. Minimum royalties payable under the QMC Rice License Agreement include $175,000 due March 1, 2019, $292,500 due January 1, 2020, $585,000 due January 1, 2021 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Agreement with University of Arizona

 

Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On March 3, 2017, Solterra entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by June 30, 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, 2017, no royalties have been accrued for this obligation.

 

Agreement with Texas State University

 

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

 

Operating Leases

 

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

 

Rental expense for the operating lease for the six months ended December 31, 2017 and 2016 was $108,812 and $43,117, respectively.

 

NOTE 12 — LITIGATION

 

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

 

CAUSE NUMBER 17-2033; Hays County, Texas

 

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

 

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

 

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

 

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

 

 

CAUSE NUMBER: 17CV06093; Johnson County, Kansas

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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, 2017.

 

NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION

 

The following is supplemental cash flow information:

 

		Six Months Ended
		December 31,
		2017				2016
		(unaudited)
Cash paid for interest		$	25,555			$	292
Cash paid for income taxes		$	-			$	-

 

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

 

		Six Months Ended
		December 31,
		2017				2016
		(unaudited)
Conversion of debentures, and accrued interest into shares of common stock		$	869,679			$	150,000
Allocated value of common stock and warrants issued with convertible debentures		$	517,676			$	179,084
Stock issued for interest payments		$	-			$	4,284
Prepaid expense paid in shares of common stock		$	1,587,624			$	19,536
Cancellation of shares		$	-			$	195
Financing of prepaid insurance		$	12,738			$	7,407

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 14 – TRANSACTIONS WITH AFFILIATED PARTIES

 

At December 31, and June 30, 2017, the Company had accrued salaries payable to executives in the amount of $361,375 and $230,000, respectively.

 

During the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds of $200,000. This transaction is described in more detail in Note 5 under the heading April – June, August, October and November 2016 Convertible Debentures.

 

In September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing. This transaction is described in more detail in Note 6 under the heading “Promissory Note”. The Company repaid the loan on October 11, 2016.

 

During the year ended June 30, 2016, the Company’s prior CFO and two of the Company’s directors invested $15,000, $10,000, and $25,000 respectively in the convertible debentures issued under the heading April – June, August, October and November 2016 Convertible Debentures as described in Note 5.

 

 

QUANTUM MATERIALS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 15 - SUBSEQUENT EVENTS

 

On February 8, 2018, the Company entered into Convertible Debenture Agreements to obtain $45,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on August 8, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 500,000 common stock warrants exercisable at $0.15 per share through February 8, 2021.

 

On March 6, 2018, the Company entered into Convertible Debenture Agreements to obtain $30,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on September 6, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 500,000 common stock warrants exercisable at $0.15 per share through March 6, 2021.

 

On March 23, 2018, the Company entered into Convertible Debenture Agreements to obtain $35,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on September 23, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 500,000 common stock warrants exercisable at $0.15 per share through March 23, 2021.

 

On April 25, 2018, the Company entered into Convertible Debenture Agreements to obtain $70,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on September 23, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 1,000,000 shares of common stock, and 200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021.

 

On April 26, 2018, the Company entered into Convertible Debenture Agreements to obtain $60,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on October 26, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 2,000,000 shares of common stock, and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021.

 

On June 7, 2018, the Company entered into Convertible Debenture Agreements to obtain $40,000 in gross proceeds from non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures had an initial term of six months maturing on December 7, 2018 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The Debenture Holders received 2,000,000 shares of common stock and 1.000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021.

 

 

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 April 30, 2018 for the fiscal year ended June 30, 2017. 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, 2017 and 2016 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. We are currently trading in the over-the-counter marketplace on the OTCQB under the ticker symbol “QTMM.” Our wholly-owned subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”) is a wholly-owned operating subsidiary of QMC that is focused on the photovoltaic (solar cell) market.

 

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 size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different 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 biomedical, 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 the television and display industries, the light emitting diode (“LED”) lighting (also known as solid-state lighting) industry, and the biomedical industry. LG, Samsung, and other manufacturers have recently launched new televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.

 

 

A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, however a number of recent market research reports have forecasted rapid growth of the QD market, including an April 2016 report by Credence Research which states “The quantum dots market is expected to cross US$ 8.0 Bn by 2022, expanding at a CAGR of 51.3% during the forecast period 2015 to 2022,” and a report published by Transparency Market Research, also in April 2014, which forecasts that “the market will develop at an exceptional 53.8% CAGR between 2013 and 2023. If the projections hold true, the market could rise from a valuation of US$88.5 million in 2011 to US$8.2 billion by 2023.”

 

In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, the global technological backbone and major innovation driver for Bayer AG of Leverkusen, Germany (the “Bayer Patents”). The Bayer Patents acquired provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for cadmium-free QDs and nanoparticles; increasing quantum yields; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high performance solar cells and printed electronics.

 

In addition to the Bayer Patents, we have a worldwide exclusive license from William Marsh Rice University (“Rice”) to a patented chemical process that permits it to produce high performance TQDs using a lower cost and environmentally friendly solvent for greater manufacturing flexibility.

 

In February 2018, the Company re-evaluated the Rice Technology and the business case and determined that it was highly unlikely that the Company would be using the cadmium-based Rice technology. The Company’s substantial advancement of cadmium free dots coupled with the high volume, low cost flow technology purchased from Bayer Advanced Materials and further developed by the Company has resulted in the obsolescence of the Rice Technology. The final decision not to continue with the Rice license was driven largely by concerns that the Rice royalties could unduly burden the cost of the Company’s quantum dot products.

 

We have developed proprietary equipment that allows it to mass produce consistent quantities of QDs and TQDs in a continuous process at lower capital costs than other existing processes. We also have the exclusive license from the University of Arizona (“UA”) to a patented technique for printing LEDs. We believe that these intellectual properties and proprietary technologies position us 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.

 

Plan of Operations

 

We currently operate from a leased facility in San Marcos, Texas at the STAR Park Technology Center, an extension of Texas State University (the “San Marcos Facility”). This location provides us with convenient access to university faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University. Located approximately 30 miles south of Austin, Texas, this location is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets.

 

The Company has established commercial-scale manufacturing equipment at the San Marcos facility and now has the capacity to produce more than two metric tons (2,000kg) per year of quantum dots and other nanomaterials for supply to its customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ operating factories which are much larger and required significantly higher capital expenditures. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing knowhow and equipment. While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development project and could contract with one or more other competent suppliers of equipment, if necessary.

 

 

We expect to commence generating revenues from the production of materials at the San Marcos facility in the fourth quarter of 2017. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.

 

Our marketing strategy is to engage in strategic arrangements with manufacturers, distributors, and others to jointly develop applications using its patented continuous production process. Such joint collaborations will involve us working closely with its industry counterparts to optimize the performance of our materials in each application or device and to use the results from product development and testing to further enhance product specifications. On July 15, 2015 we entered into a joint development agreement with a major display panel manufacturer and on September 11, 2015 we entered into a funded product development agreement with a leading global optical film manufacturer, Nitto Denko Corporation. In June 2016 we entered into a development agreement with an unnamed company in the oil and natural gas sector to produce novel technology for use in that industry. To date, we have not entered into any formal commercial supply agreements, joint ventures, or licensing agreements.

 

These collaborations will support our internal research and development activities which will continue to be a primary part our business. Our principal revenue streams are expected to come from (i) sales of quantum dots and other nanomaterials, (ii) royalties from sales of products and components by third parties incorporating the Company’s products, (iii) milestone payments under joint development arrangements with product developers and manufacturers, and (iv) sublicensing fees where we engage in sublicensing arrangements for its owned and/or licensed technology.

 

On January 29, 2016 Quantum Materials Corp. (QMC) announced the formation of a Joint Venture with Guanghui Technology Group (GTG) to establish infrastructure in China to both produce quantum dots and to further develop quantum dot-based technology solutions for display, solid state lighting (SSL), lithium ion batteries, security and solar energy markets. GTG is a Financial Advisory and Services Company that assists advanced technological companies enter the China market. GTG is investing US$20 million into the joint venture to build out QDXTM quantum dot production facilities and fund quantum dot application development in China.

 

On January 30, 2017, Guanghui Technology Group (GTG) reported an investment commitment from the China Government Guidance Fund of 150 million RMB (US $21.8 million) for the benefit of the QMA partnership.  Quantum Materials Asia intends to initiate production upon completion of matching funds required to access the China Government Guidance funding. The initial focus will be the delivery of quantum dot materials to the China Display industry. Quantum Materials Corp is currently training key personnel intended to be deployed to support QMA’s schedule and is providing sample materials to a number of Chinese display industry companies. Quantum Materials Corp. will supply production knowledge and personnel to the joint venture in return for a 50% profit interest and a 25% ownership interest in QMA.

 

Our ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing nanomaterials and quantum dot market. Nanomaterial and quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and intend to focus a significant part of our efforts on this, as we have done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, Rice, UA, and the numerous other research centers and departments with which we have relationships will be important aspects of our strategy.

 

Solterra plans to utilize QMC’s patented low-cost, high-volume quantum dot production combined with TQD technology licensed from Rice to commercialize quantum dot solar cells at a cost that is competitive with conventional fossil fuel generation on an unsubsidized basis.

 

Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, and regulation of hazardous materials used in or produced by the manufacture or use of QDs. Management believes the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop which could adversely affect the Company or its products in the future.

 

 

Liquidity and Capital Resources

 

As of December 31, 2017, we had a working capital deficit of $(4,044,635) with total current assets and liabilities of $1,399,700 and $5,444,335, respectively. Included in the liabilities are $664,175 owed to our officers, directors and employees for services rendered and accrued through December 31, 2017, and $2,815,593 of net debentures. In view of our working capital deficit we have relied on financing through the issuance of common stock and convertible debentures and we expect that conversions of outstanding notes will reduce our working capital deficit in the future.

 

As of December 31, 2017, we have cash and cash equivalent assets of $58,992 primarily obtained from recent debt offerings and we will continue to incur losses in operations until we generate revenues from scaled up production. 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 will be necessary for the Company to rely on external financing to supplement working capital in order to meet the Company’s liquidity needs in fiscal year 2017 and 2018; the success of securing such financing on terms acceptable to the Company cannot be assured. The Company is seeking to raise to $2,000,000 in equity and/or debt financings to support operations over the next twelve months. These financings, plus the potential exercise of stock options and stock purchase warrants previously issued, coupled with material reductions in general & administrative expenses, should provide sufficient working capital to scale up to full production over the next nine months. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.

 

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

 

		Six Months Ended
		December 31,
		2017				2016
Operating activities		$	(608,231	)		$	(1,152,293	)
Investing activities		$	-			$	(32,871	)
Financing activities		$	614,612			$	925,000

 

Operating Activities: Net cash used in operating activities was $608,231 for the six months ended December 31, 2017 compared to $1,152,293 for the same period of 2016, a decrease of $544,062. The decrease was due to primarily driven by a decrease of general and administrative expenses and decreased in operating payments on accounts payable, and accrued expenses and offset by an increase in prepaid expenses and stock issued for services.

 

Investing Activities: Net cash used in investing activities was $0 for the six months ended December 31, 2017 compared to net cash used by investing activities of $32,871 for the same period of 2016.

 

Financing Activities: Net cash provided by financing activities was $614,612 for the six months ended December 31, 2017 compared to $925,000 for the same period of 2016, a decrease of $310,388. The decrease is primarily due to greater sales of common stock and issuances of convertible debentures and offset by higher principal payments and debt issuance costs during the six months ended December 31, 2017.

 

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern. As of December 31, 2017, we had not yet achieved profitable operations, had a working capital deficit of $3,926,039 and expect to incur further losses in the development of the business, all of which casts substantial doubt about our ability to continue as a going concern.

 

 

Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We continue to explore available financing options, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that future financing, if needed, will be obtained on terms satisfactory to us, if at all. In this respect, see Note 1 in our notes to the unaudited consolidated financial statements for additional information as to the possibility that we may not be able to continue as a going concern.

 

Results of Operations

 

Three Months Ended December 31, 2017, Compared to Three Months Ended December 31, 2016.

 

General and administrative expenses

 

During the three months ended December 31, 2017, the Company incurred $1,266,388 of general and administrative expenses compared with 1,825,983 incurred in the three-month period ended December 31, 2016, a decrease of $199,595. The decrease in general and administrative expenses was primarily due to decreases in compensation expense and stock-based compensation offset by an increase other professional compensation and legal and audit fees.

 

Included in general and administrative expenses for the three months ended December 31, 2017 and 2016 are the following:

 

		Three Months Ended
		December 31,
		2017				2016
G&A Expense Breakdown
Compensation		$	240,010			$	579,993
Stock-based compensation			254,055				621,530
Legal and audit			347,713				164,305
Travel			3,257				14,556
Corporate			155,000				155,353
Other professional fees			592,104				256,672
Depreciation			24,660				23,937
Amortization			9,589				9,637
		$	1,626,388			$	1,825,983

 

Research and development expenses

 

During the three months ended December 31, 2017, the Company incurred $53,564 of research and development expenses, a decrease of $72,779 from the $126,343 recorded for the three months ended December 31, 2016. The decrease is primarily due to decreased expenditures for lab equipment, chemicals and consumables in the San Marcos facility.

 

Beneficial conversion feature on convertible debenture

 

During the three months ended December 31, 2017 the Company incurred $16,176 of beneficial conversion expense compared to $24,381 recorded for the three months ended December 31, 2016. The decrease in beneficial conversion expenses of $8,205 was due primarily to reduced issuance of new convertible debentures during the three months ending December 31, 2016, being fully amortized.

 

 

Change in value of derivative liability

 

During the three months ended December 31, 2017 the Company recorded a benefit of $424,260 related to the change in value of derivative liability. The benefit is related to the change in value of the convertible debentures feature issued in March and May of 2017 during the quarter.

 

Interest expense, net

 

Interest expense recorded for the three months ended December 31, 2017 was $154,847 compared to $63,743 in the three months ended December 31, 2016, an increase of $91,104. The increased interest expense recorded in the three months ending December 31, 2017 was primarily related to the 8% interest rate on the debentures of outstanding convertible debentures.

 

Accretion of debt discount

 

During the three months ended December 31, 2017 the Company recorded $393,845 of accretion of debt discount expense, an increase of $207,276 from the $186,569 recorded for the three months ended December 31, 2016. The increase in accretion of debt discount expense is primarily related to the issuance of the convertible debentures during the quarter.

 

The following table sets forth our consolidated results of operations for the periods indicated:

 

		Three Months Ended
		December 31,
		2017				2016
Statement of Operations Information:
Revenues		$	-			$	19,500
General and administrative			1,626,390				1,825,983
Research and development			53,563				126,343
Change in fair value of derivative liabilities			(424,260	)			-
Beneficial conversion expense			16,176				24,381
Interest expense, net			154,847				63,743
Accretion of debt discount			393,845				186,569

 

Six Months Ended December 31, 2017, Compared to Six Months Ended December 31, 2016.

 

General and administrative expenses

 

During the six months ended December 31, 2017, the Company incurred $2,893,842 of general and administrative expenses compared with 3,013,784 incurred in the six-month period ended December 31, 2016, a decrease of $119,942. The decrease in general and administrative expenses was primarily due to decreases in compensation expense and stock-based compensation offset by an increase other professional compensation and legal and audit fees.

 

 

Included in general and administrative expenses for the three months ended December 3, 2017 and 2016 are the following:

 

		Six Months Ended
		December 31,
		2017				2016
G&A Expense Breakdown
Compensation		$	505,568			$	1,001,194
Stock-based compensation			511,728				846,652
Legal and audit			398,909				426,925
Travel			3,675				23,430
Corporate			298,122				295,225
Other professional fees			1,107,104				354,132
Depreciation			49,510				46,952
Amortization			19,226				19,274
		$	2,893,842			$	3,013,784

 

Research and development expenses

 

During the six months ended December 31, 2017, the Company incurred $131,506 of research and development expenses, a decrease of $140,296 from the $271,802 recorded for the six months ended December 31, 2016. The decrease is primarily due to decreased expenditures for lab related equipment, chemicals and consumables in the San Marcos facility.

 

Beneficial conversion feature on convertible debenture

 

During the six months ended December 31, 2017 the Company incurred $768,602 of beneficial conversion expense compared to $94,298 recorded for the six months ended December 31, 2016. The increase in beneficial conversion expenses of $674,304 was due primarily to issuance of new convertible debentures, and the adoption of ASU 2017-11 during the six months ending December 31, 2017.

 

Interest expense, net

 

Interest expense recorded for the six months ended December 31, 2017 was $855,540 compared to $128,908 in the six months ended December 31, 2016, an increase of $726,632. The increased interest expense recorded in the six months ending December 31, 2017 was primarily related to the 8% interest rate on the debentures of outstanding convertible debentures and deemed interest expense on debenture extinguishment.

 

Change in value of derivative liability

 

During the six months ended December 31, 2017 the Company recorded a benefit of $514,969 related to the change in value of derivative liability. The benefit is related to the change in value of the convertible debentures feature issued in March and May of 2017 during the six months ended.

 

Accretion of debt discount

 

During the six months ended December 31, 2017 the Company recorded $725,007 of accretion of debt discount expense, an increase of $425,150 from the $299,857 recorded for the six months ended December 31, 2016. The increase in accretion of debt discount expense is primarily related to the issuance of the convertible debentures during the quarter.

 

 

The following table sets forth our consolidated results of operations for the periods indicated:

 

		Six Months Ended
		December 31,
		2017				2016
Statement of Operations Information:
Revenues		$	11,870			$	24,500
General and administrative			2,893,843				3,013,784
Research and development			131,505				271,802
Change in fair value of derivative liabilities			(514,969	)			-
Beneficial conversion expense			768,602				94,298
Interest expense, net			855,540				128,908
Accretion of debt discount			725,007				299,857

 

Off-balance sheet arrangements

 

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective at December 31, 2017.

 

Change in Accounting Staff

 

Subsequent to December 31, 2017 and prior to the filing of this Form 10-Q, there has been a complete change in the Company’s accounting staff, including the Chief Financial Officer. Prior to December 31, 2017, the Chief Executive Officer (“CEO”) and the prior Chief Financial Officer (“CFO”) conducted an evaluation of the Company’s disclosure controls and internal controls which include a review of the controls’ (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in quarterly and annual reports. In the course of the evaluation, the CEO and CFO will seek to identify data errors, control problems, acts of fraud, and if appropriate, then seek to confirm that appropriate corrective action, including process improvements to be undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-Q and annual reports on Form 10-K. The overall goals of these various evaluation activities are to monitor our disclosure controls and internal controls, and to make modifications if and as necessary.

 

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting except as set forth above.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company was served in Hays County, Texas in a compliant for breach of contract in February 2017. In April 2017 the Company settled this complaint for $129,000 payable over a 4-month period. The entire $129,000 was accrued as an expense during the three-month period ending December 31, 2017.

 

See “Note 12” regarding pending litigation.

 

Item 1A. Risk Factors

 

As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

From July 1, 2017 to December 31, 2017, we had the following sales and issuances of unregistered equity securities:

 

						Consideration Received and Description of
						Underwriting or Other Discounts to Market Price		Exemption from		If Option, Warrant or Convertible
Date of Sale		Title of Security		Number Sold		or Convertible Security Afforded to Purchases		Registration Claimed		Security,Terms of Exercise or Conversion
July 2017		Common Stock		2,500,000		Shares issued for services; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
July 2017		Common Stock		1,666,667		Shares issued upon conversion of $200,000 of debentures; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
July 2017		Common Stock		88,401		Shares issued in exchange for $10,608 of interest; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
July 2017		Common Stock		1,000,000		Shares issued with convertible promissory note		Section 4(2); and/or Rule 506		Not applicable
July 2017		Common Stock		1,000,000		Shares issued for services; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
July 2017		Common Stock Warrants		250,000		Issuance of stock warrants		Section 4(2); and/or Rule 506		Warrants exercisable at $0.12 per share through July 19, 2020
August 2017		Common Stock		250,000		$20,000 cash received; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
August 2017		Common Stock		833,333		Shares issued upon conversion of $100,000 of debentures; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
August 2017		Common Stock		66,667		Shares issued in exchange for $8,000 of interest; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
September 2017		Common Stock		1,650,000		Shares issued with convertible promissory note		Section 4(2); and/or Rule 506		Not applicable
September 2017		Common Stock Warrants		2,375,000		Issuance of stock warrants		Section 4(2); and/or Rule 506		Warrants exercisable at $0.12 per share through September 11 - 26, 2020
October 2017		Common Stock		2,000,000		Shares issued for services; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
October 2017		Common Stock		416,667		$40,000 cash received; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
November 2017		Common Stock		10,735,060		Shares issued for services; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
November 2017		Common Stock		2,333,334		Shares issued upon conversion of $280,000 of debentures; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
November 2017		Common Stock		95,414		Shares issued in exchange for $11,449 of interest; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
November 2017		Common Stock Warrants		529,082		Issuance of stock warrants		Section 4(2); and/or Rule 506		Warrants exercisable at $0.15 per share through November 7 - 13, 2022
December 2017		Common Stock		2,041,667		Shares issued upon conversion of $245,000 of debentures; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
December 2017		Common Stock		121,844		Shares issued in exchange for $14,621 of interest; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
December 2017		Common Stock		7,435,000		Shares issued for services; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
December 2017		Common Stock		550,000		$33,000 cash received; no commissions paid		Section 4(2); and/or Rule 506		Not applicable
December 2017		Common Stock		1,000,000		Shares issued with convertible promissory note		Section 4(2); and/or Rule 506		Not applicable
December 2017		Common Stock Warrants		250,000		Issuance of stock warrants		Section 4(2); and/or Rule 506		Warrants exercisable at $0.12 per share through December 27, 2020

 

Item 3. Defaults Upon Senior Securities

 

None.

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Item 6. Exhibits (items indicated by an (*) are filed herewith)

 

The following exhibits are all previously filed in connection with our Form 8-K filed November 10, 2008, unless otherwise noted.

 

2.1		Agreement and Plan of Merger and Reorganization, dated as of October 15, 2008, by and among Quantum Materials Corp., Solterra Renewable Technologies, Inc., the shareholders of Solterra and Greg Chapman, as Indemnitor.
3.1		Articles of Incorporation. (Incorporated by reference to Form SB-2 Registration Statement filed October 5, 2007.)
3.2		2010 Amendment to Articles of Incorporation. (Incorporated by reference to the Form 10-K filed for the fiscal year ended June 30, 2014 filed on September 29, 2014.)
3.3		2013 Amendment to Articles of Incorporation. (Incorporated by reference to the Form 10-K filed for the fiscal year ended June 30, 2014 filed on September 29, 2014.)
3.4		Bylaws. (Incorporated by reference to Form SB-2 Registration Statement filed October 5, 2007.)
10.4		Letters dated November 5, 2009 and November 5, 200 amending Rice University Agreement. (Incorporated by reference to Form 10-K filed for the year ended June 30, 2009.)
10.5		License Agreement between The University of Arizona and the issuer dated July 2009. (Incorporated by reference to the Registrant’s Form 10-Q for the quarter ended December 31, 2009.)
10.6		Letter dated December 16, 2010 from Rice University amending the License Agreement contained in Exhibit 10.1 (Incorporated by reference to the Registrant’s Form 10-K for its fiscal year ended June 30, 2010.)
10.7		Amendment to Exclusive Patent License Agreement between University of Arizona and Solterra Renewable Technologies (i.e. amendment to exhibit 10.7). (Incorporated by reference to the Registrant’s Form 10-K for its fiscal year ended June 30, 2010 filed on February 14, 2011.)
10.8		Amended License Agreement by and between William Marsh Rice University and Solterra Renewable Technologies, Inc. (Incorporated by reference to Form 8-K dated September 19, 2013.)
10.9		License Agreement by and between William Marsh Rice University and Quantum Materials Corp. (Incorporated by reference to Form 8-K dated September 19, 2013.)
10.10		Second Amendment to Issuer’s Agreement with University of Arizona. (Incorporated by reference to Form 10-K for the fiscal year ended June 30, 2012.)
10.11		Employment Agreement — Stephen Squires. (Incorporated by reference to Form 8-K filed January 23, 2013.)
10.12		Employment Agreement — David Doderer (Incorporated by reference to Form 8-K filed January 23, 2013.)
10.13		Employment Agreement – Craig Lindberg (Incorporated by reference to Form 8-K filed June 17, 2015.)

 

 

10.14		Agreement with Christopher Benjamin, former officer/director (Incorporated by reference to Form 10-Q for the quarter ended December 31, 2015.)
10.15		Amended and Restated Employment Agreement – Stephen Squires (Incorporated by reference to Form 8-K filed December 15, 2015.)
10.16		Amended and Restated Employment Agreement – David Doderer (Incorporated by reference to Form 8-K filed December 15, 2015.)
10.17		Amended and Restated Employment Agreement – Craig Lindberg (Incorporated by reference to Form 8-K filed December 15, 2015.)
10.18		Amended License Agreement by and between William Marsh Rice University and Solterra Renewable Technologies, Inc. (Incorporated by reference to Form 8-K filed April 1, 2016.)
10.19		Amended License Agreement by and between William Marsh Rice University and Quantum Materials Corp. (Incorporated by reference to Form 8-K filed April 1, 2016.)
10.20		Amended License Agreement by and between The University of Arizona and Solterra Renewable Technologies, Inc. (Incorporated by reference to Form 8-K filed June 9, 2016.)
10.21		Employment Agreement – Sri Peruvemba (Incorporated by reference to Form 8-K filed June 16, 2016.)
10.22		Amended and Restated Employment Agreement – Stephen Squires (Incorporated by reference to Form 8-K filed June 16, 2016.)
10.23		Amended and Restated Subscription Agreement dated January 15, 2015 by and among Quantum Materials Corp., Carson Diversified Investments, LP and Carson Haysco Holdings, LP. (Incorporated by reference to Form 8-K filed October 14, 2016.)
10.24		Agreement dated October 10, 2016 by and among Quantum Materials Corp., Carson Diversified Investments, LP and Carson Haysco Holdings, LP. (Incorporated by reference to Form 8-K filed October 14, 2016.)
10.25		Resignation Agreement of Sriram Peruvemba dated December 22, 2016. (Incorporated by reference to Form 8-K filed December 30, 2016.)
10.26		Resignation Agreement of Craig Lindberg dated as of February 1, 2017. (Incorporated by reference to Form 8-K filed February 3, 2017.)
21.1		Subsidiaries of Registrant listing state of incorporation (Incorporated by reference to Form 10-K for fiscal year ended June 30, 2011.)
31(a)		Rule 13a-14(a) Certification — Principal Executive Officer *
31(b)		Rule 13a-14(a) Certification — Principal Financial Officer *
32(a)		Section 1350 Certification — Principal Executive Officer *
32(b)		Section 1350 Certification — Principal Financial Officer *
101.INS		XBRL Instance Document *
101.SCH		Document, XBRL Taxonomy Extension *
101.CAL		Calculation Linkbase, XBRL Taxonomy Extension Definition *
101.DEF		Linkbase, XBRL Taxonomy Extension Labels *
101.LAB		Linkbase, XBRL Taxonomy Extension *
101.PRE		Presentation Linkbase *

 

*Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	QUANTUM MATERIALS CORP.
Date: August 27, 2018	/s/ Stephen Squires
	Stephen Squires
	Principal Executive Officer
Date: August 27, 2018	/s/ Robert A. Phillips
	Robert A. Phillips
	Principal Financial Officer

 

 

Exhibit 31(a)

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

 

I, Stephen Squires, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Quantum Materials Corp. for the period ending December 31, 2017:

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer (if any) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 27, 2018	/s/ STEPHEN SQUIRES
	Stephen Squires, Principal Executive Officer

 

 

Exhibit 31(b)

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

I, Robert A.Phillips, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Quantum Materials Corp. for the period ending December 31, 2017;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer (if any) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 27, 2018	/s/ Robert A. Phillips
	Robert A. Phillips, Principal Financial Officer

 

 

Exhibit 32(a)

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18U.S.C. SECTION 1350

 

In connection with the Quarterly Report of Quantum Materials Corp. (the “Company”) on Form 10-Q for the period ending December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen Squires, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

	By:	/s/ STEPHEN SQUIRES
		Stephen Squires
		Principal Executive Officer
		August 27, 2018

 

 

Exhibit 32(b)

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18U.S.C. SECTION 1350

 

In connection with the Quarterly Report of Quantum Materials Corp. (the “Company”) on Form 10-Q for the period ending December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert Phillips, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

	By:	/s/ Robert A. Phillips
		Robert A. Phillips
		Principal Financial Officer
		August 27, 2018