UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

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

 

For the quarterly period ended March 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 June 27, 2017, there were 367,614,831 shares of common stock, $0.001 par value per share, outstanding.

 

Explanatory Note: The original Form 10-Q for the quarter ended March 31, 2017 was filed without the independent auditors completing their review. This Form 10-Q/A has been filed after the completion of such review.

 

 

 

QUANTUM MATERIALS CORP.

 

Table of Contents

 

	Page
PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Stockholders’ (Deficit) Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	28
Item 4. Controls and Procedures	29
PART II – OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults upon Senior Securities	30
Item 4. Mine Safety Disclosures	30
Item 5. Other Information	30
Item 6. Exhibits	31
Signatures	33

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

QUANTUM MATERIALS CORP.

CONSOLIDATED BALANCE SHEETS

 

		March 31, 2017				June 30, 2016
		(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	321,656			$	266,985
Accounts receivable			-				8,835
Prepaid expenses and other current assets			557,113				102,100
TOTAL CURRENT ASSETS			878,769				377,920
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $222,351 and $150,142			735,336				774,674
LICENSES AND PATENTS, net of accumulated amortization of $104,167 and $75,256			88,576				117,487
TOTAL ASSETS		$	1,702,681			$	1,270,081
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	1,663,531			$	617,292
Accrued salaries			428,150				238,182
Notes payable, net of unamortized discount			17,374				10,093
Current portion of convertible debentures, net of unamortized discount			1,115,164				407,702
TOTAL CURRENT LIABILITIES			3,224,219				1,273,269
CONVERTIBLE DEBENTURES, net of current portion, unamortized discount and debt issuance costs			1,693,448				1,039,656
TOTAL LIABILITIES			4,917,667				2,312,925
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Common stock, $.001 par value, authorized 400,000,000 shares, 344,755,437 and 324,563,789 issued and outstanding at March 31, 2017 and June 30, 2016, respectively			344,755				324,564
Additional paid-in capital			31,172,343				28,415,843
Accumulated deficit			(34,732,084	)			(29,783,251	)
TOTAL STOCKHOLDERS’ DEFICIT			(3,214,986	)			(1,042,844	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	1,702,681			$	1,270,081

 

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

 

 

QUANTUM MATERIALS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2017				2016				2017				2016
		(unaudited)								(unaudited)
REVENUES		$	2,500			$	225,000			$	27,000			$	225,000
OPERATING EXPENSES
General and administrative			737,022				903,795				3,750,806				4,212,120
Research and development			136,786				19,210				408,588				165,265
TOTAL OPERATING EXPENSES			873,808				923,005				4,159,394				4,377,385
LOSS FROM OPERATIONS			(871,308	)			(698,005	)			(4,132,394	)			(4,152,385	)
OTHER EXPENSE (INCOME)
Gain on settlement			-				-				-				(174,568	)
Beneficial conversion expense			102,797				-				197,095				-
Interest expense, net			90,013				10,452				218,921				32,023
Accretion of debt discount			100,566				43,903				400,423				129,127
TOTAL OTHER EXPENSE (INCOME)			293,376				54,355				816,439				(13,418	)
NET LOSS		$	(1,164,684	)		$	(752,360	)		$	(4,948,833	)		$	(4,138,967	)
LOSS PER COMMON SHARE
Basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted			339,943,771				322,675,999				333,385,603				316,418,240

 

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

 

 

QUANTUM MATERIALS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

		Common Stock								Additional Paid-in				Accumulated				Total Stockholders'
		Shares				Amount				Capital				Deficit				Deficit
Balances at June 30, 2016			324,563,789			$	324,564			$	28,415,843			$	(29,783,251	)		$	(1,042,844	)
Common stock issued for cash			833,333				833				99,167				-				100,000
Common stock issued for warrant and option exercises			10,000,000				10,000				415,000				-				425,000
Common stock issued for services			6,466,666				6,467				572,033				-				578,500
Common stock issued for debenture interest			102,374				102				12,183								12,285
Common stock issued for debenture conversions			2,083,334				2,083				247,917								250,000
Cancellation of shares			(194,059	)			(194	)			194				-				-
Stock-based compensation			500,000				500				821,674				-				822,174
Beneficial conversion feature of debenture			-				-				197,095				-				197,095
Allocated value of common stock and warrants related to debenture			400,000				400				391,237				-				391,637
Net loss			-				-				-				(4,948,833	)			(4,948,833	)
Balances at March 31, 2017			344,755,437			$	344,755			$	31,172,343			$	(34,732,084	)		$	(3,214,986	)

 

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

 

 

QUANTUM MATERIALS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended
		March 31,
		2017				2016
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(4,948,833	)		$	(4,138,967	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			101,120				92,764
Amortization of debt issuance costs			47,469				-
Stock-based compensation			822,174				2,080,892
Stock issued for services			286,113				158,345
Stock issued for interest			12,285				-
Gain on settlement			-				(174,568	)
Beneficial conversion feature			197,095				-
Accretion of debt discount			400,423				129,127
Effects of changes in operating assets and liabilities:
Accounts receivable			8,835				-
Prepaid expenses and other current assets			54,654				237,899
Accounts payable and accrued expenses			1,236,207				321,258
NET CASH USED IN OPERATING ACTIVITIES			(1,782,458	)			(1,293,250	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(32,871	)			(47,459	)
Change in restricted cash investments			-				65,330
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES			(32,871	)			17,871
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock			525,000				460,500
Proceeds from issuance of convertible debentures / promissory note			1,360,000				-
Proceeds from issuance of note payable			100,000				150,000
Principal payments on note payable			(100,000	)			-
Debt issuance costs			(15,000	)			-
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,870,000				610,500
NET INCREASE (DECREASE) IN CASH			54,671				(664,879	)
CASH AND CASH EQUIVALENTS, beginning of period			266,985				673,839
CASH AND CASH EQUIVALENTS, end of period		$	321,656			$	8,960

 

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

 

 

QUANTUM MATERIALS CORP.

NOTES TO 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 nine months ended March 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, 2016. 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, 2016.

 

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 March 31, 2017, the Company had a working capital deficit of $2,345,450 and net cash used in operating activities was $1,782,458 for the nine months ended March 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.

 

 

NOTE 2 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		March 31, 2017				June 30, 2016
		(unaudited)
Furniture and fixtures		$	1,625			$	1,625
Computers and software			11,447				11,447
Machinery and equipment			944,615				911,744
			957,687				924,816
Less: accumulated depreciation			222,351				150,142
Total property and equipment, net		$	735,336			$	774,674

 

Depreciation expense for the three months ended March 31, 2017 and 2016 was $25,257 and $21,853, respectively, and $72,209 and $63,853 for the nine months ended March 31, 2017 and 2016, respectively.

 

NOTE 3 – LICENSES AND PATENTS

 

Licenses and patents consisted of the following:

 

		March 31, 2017				June 30, 2016
		(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			104,167				75,256
Total licenses and patents, net		$	88,576			$	117,487

 

Amortization expense for the three months ended March 31, 2017 and 2016 was $9,637 and $9,637, respectively, and $28,911 and $28,911 for the nine months ended March 31, 2017 and 2016, 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 – Inputs that are both significant to the fair value measurement and unobservable. The reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions. Accordingly, certain fair values may not represent actual values of the financial instruments that could have been realized as of March 31, 2017 and June 30, 2016 or that will be realized in the future and do not include expenses that could be incurred in an actual sale or settlement.

 

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 March 31, 2017, and June 30, 2016:

 

		March 31, 2017								June 30, 2016
		(unaudited)
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Convertible debentures issued in September 2014		$	25,050			$	44,093			$	25,050			$	21,710
Convertible debentures issued in January 2015		$	500,000			$	1,166,667			$	500,000			$	1,083,333
Convertible debentures issued in April - June 2016		$	1,465,000			$	1,958,670			$	1,565,000			$	1,695,417
Convertible debenture issued in August 2016		$	200,000			$	253,711			$	-			$	-
Convertible debenture issued in November 2016		$	200,000			$	245,990			$	-			$	-
Convertible debentures issued in January - March 2017		$	260,000			$	303,334			$	-			$	-
Convertible debenture issued in February 2017		$	100,000			$	116,667			$	-			$	-
Convertible debenture issued in March 2017		$	150,000			$	175,000			$	-			$	-
Convetible promissory notes issued in March 2017		$	541,850			$	632,158			$	-			$	-

 

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

 

 

NOTE 5 – CONVERTIBLE DEBENTURES

 

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

 

		March 31, 2017				June 30, 2016
		(unaudited)
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			1,565,000				1,565,000
Convertible debenture issued in August 2016			200,000				-
Convertible promissory note issued in September 2016			100,000				-
Convertible debenture issued in October 2016			50,000				-
Convertible debenture issued in November 2016			200,000				-
Convertible debentures issued in January - March 2017			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			541,850				-
			3,691,900				2,090,050
Less: amount converted to shares			250,000				-
Total convertible debentures outstanding			3,441,900				2,090,050
Less: unamortized discount			550,415				527,350
Less: debt issuance costs			82,873				115,342
			2,808,612				1,447,358
Less: current portion			1,115,164				407,702
Total convertible debentures, net of current portion		$	1,693,448			$	1,039,656

 

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.

 

Interest expense for the three months ended March 31, 2017 and 2016 was $376 and $380, respectively, and $1,144 and $1,148 for the nine months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 2017, $25,050 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 three months ended March 31, 2017 and 2016 of $0 and $43,903, respectively, and $92,298 and $129,127 for the nine months ended March 31, 2017 and 2016, respectively.

 

 

Interest expense for the three months ended March 31, 2017 and 2016 was $9,863 and $9,973, respectively, and $30,027 and $30,137 for the nine months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 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, 2016, 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. In October and November 2016, the Company sold 50 and 200, respectively, additional units for total proceeds of $50,000 and $200,000, respectively. 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 $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans, two years. The Company recognized accretion of debt discount expense for the three months ended March 31, 2017 and 2016 of $69,156 and $0, respectively, and $235,697 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

The Company recognized a beneficial conversion expense for the three months ended March 31, 2017 and 2016 of $0 and $0, respectively, and $64,775 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

Interest expense for the three months ended March 31, 2017 and 2016 of $37,300 and $0, respectively, and $108,276 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

During the nine months ended March 31, 2017, $150,000 of principal was converted into 1,250,000 shares of common stock.

 

As of March 31, 2017, $1,865,000 of principal was outstanding.

 

September 2016 Convertible Promissory Note

 

In September 2016, 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 September 15, 2019. The promissory note has a term of eight months maturing on May 15, 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 March 2017, the note and accrued interest were converted into 833,333 and 66,667 shares of common stock, respectively.

 

 

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 $29,522, 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 March 31, 2017 and 2016 of $14,957 and $0, respectively, and $29,522 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

The Company recognized a beneficial conversion expense for the three months ended March 31, 2017 and 2016 of $0 and $0, respectively, and $29,523 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

Interest expense for the three months ended March 31, 2017 and 2016 of $2,622 and $0, respectively, and $8,000 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 2017, $0 of principal was outstanding.

 

January-March, 2017 Convertible Debentures

 

During the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether 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 three and nine months ended March 31, 2017 and 2016 of $6,985 and $0, respectively.

 

The Company recognized a beneficial conversion expense for the three and nine months ended March 31, 2017 and 2016 of $62,400 and $0, respectively.

 

Interest expense for the three and nine months ended March 31, 2017 and 2016 of $3,343 and $0, respectively.

 

As of March 31, 2017, $260,000 of principal was outstanding.

 

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 and nine months ended March 31, 2017 and 2016 of $6,060 and $0, respectively.

 

Interest expense for the three and nine months ended March 31, 2017 and 2016 of $8,000 and $0, respectively.

 

As of March 31, 2017, $100,000 of principal was outstanding.

 

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 $27,897, 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 and nine months ended March 31, 2017 and 2016 of $3,407 and $0, respectively.

 

The Company recognized a beneficial conversion expense for the three and nine months ended March 31, 2017 and 2016 of $40,397 and $0, respectively.

 

Interest expense for the three and nine months ended March 31, 2017 and 2016 of $12,000 and $0, respectively.

 

As of March 31, 2017, $150,000 of principal was outstanding.

 

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 accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the three and nine months ended March 31, 2017 and 2016 of $0 and $0, respectively.

 

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

 

 

Interest expense for the three and nine months ended March 31, 2017 and 2016 of $138 and $0, respectively.

 

As of March 31, 2017, $541,850 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 March 31, 2017 and 2016 was $16,139 and $0, respectively, and $47,469 and $0 for the nine months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the balance of debt issuance costs was $82,873.

 

NOTE 6 – NOTES PAYABLE

 

Promissory Notes

 

In September 2016, the Company issued an unsecured promissory note for proceeds of $100,000. The note bears 0% interest and the Company issued 416,667 common stock warrants exercisable at $0.15 per share through September 29, 2021. The note was due October 13, 2016 and was repaid on October 11, 2016.

 

In accounting for the promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,454, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, fourteen days. The Company recognized accretion of debt discount expense for the three months ended March 31, 2017 and 2016 of $0 and $0, respectively, and $26,454 and $0 for the nine months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 2017, $0 of principal was outstanding. See Note 13 for additional information.

 

Note Payable – Insurance

 

In August 2016, to finance an insurance premium, the Company issued a negotiable promissory note for $13,959 at an interest rate of 4.87% per annum. The note is due in May 5, 2017. The balance outstanding at March 31, 2017 was $0.

 

In March, 2017, to finance an insurance premium, the Company issued a negotiable promissory note for $17,434 at an interest rate of 6.89% per annum. The note is due November 11, 2017. The balance outstanding at March 31, 2017 was $17,434.

 

NOTE 7 – EQUITY TRANSACTIONS

 

Common Stock

 

During the nine months ended March 31, 2017, the Company issued 833,333 shares of common stock for cash proceeds of $100,000. Additionally, investors exercised options and warrants to purchase 10,000,000 shares of common stock for cash proceeds of $425,000. Included were cashless exercises of 5,000,000 warrants that resulted in the issuance of 2,500,000 shares of common stock.

 

During the nine months ended March 31, 2017, the Company granted 3,250,000 shares of common stock to consultants at the fair market value of $262,500. This was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.

 

During the nine months ended March 31, 2017, the Company issued 3,216,666 shares to lenders as commitment fees at the fair market value of $316,000, of which $175,000 was recognized as general and administrative expense and $141,000 was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.

 

 

During the nine months ended March 31, 2017, holders of convertible notes elected to convert debt of $250,000 into 2,083,334 shares of common stock.

 

During the nine months ended March 31, 2017, the Company issued 102,374 shares of common stock to a lender, in exchange for interest due, in the amount of $12,285.

 

During the nine months ended March 31, 2017, the Company issued 400,000 shares in connection with the issuance of the September 2016 promissory note and the February 2017 convertible debenture.

 

During the nine months ended March 31, 2017, the Company cancelled 194,059 common shares.

 

Stock Warrants

 

A summary of activity of the Company’s stock warrants for the nine months ended March 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, 2016		$	0.11				39,262,305							$	0.15
Expired			0.18				(555,555	)							0.14
Granted			0.16				8,013,628								0.11
Exercised			0.06				(12,500,000	)							0.15
Cancelled			0.13				(2,104,637	)							0.15
Balance as of March 31, 2017		$	0.13				32,115,741				3.12			$	0.14
Vested and exercisable as of March 31, 2017		$	0.13				32,115,741				3.12			$	0.14

 

Outstanding warrants at March 31, 2017 expire during the period April 2017 to March 2022 and have exercise prices ranging from $0.06 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 March 31, 2017, 9,200,000 options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled. The balance outstanding at March 31, 2017 was 8,400,000.

 

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 March 31, 2017, 72,653,473 options have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 15,886,559 have been cancelled. The balance outstanding at March 31, 2017 was 53,441,914.

 

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 March 31, 2017, 2,800,000 options have been granted with a term of five years, and 1,625,000 have been cancelled. The balance outstanding at March 31, 2017 was 1,175,000.

 

 

In June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan. During the nine months ended March 31, 2017, 3,000,000 options were cancelled.

 

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 nine months ended March 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:

 

		Nine Months Ended
		March 31,
		2017				2016
Expected volatility			140.73	%			142.05	%
Expected dividend yield			-				-
Risk-free interest rates			1.25	%			1.19	%
Expected term (in years)			3.0 to 5.0				3.0 to 5.0

 

The computation of expected volatility during the nine months ended March 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 nine months ended March 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, 2016		$	0.08				75,375,248							$	0.11			$	3,771,601
Expired			-				-								-
Granted			0.12				2,500,000								0.10
Exercised			-				-								-
Cancelled			0.12				(8,358,334	)							0.12
Balance as of March 31, 2017		$	0.08				69,516,914				5.15			$	0.11			$	4,340,520
Vested and exercisable as of March 31, 2017		$	0.07				64,608,580				4.64			$	0.11			$	4,309,020

 

Outstanding options at March 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 three months ended March 31, 2017 and 2016 was $(76,259) and $98,316, respectively, and $664,530 and $1,439,221 for the nine months ended March 31, 2017 and 2016, respectively, and was included in general and administrative expenses in the consolidated statements of operations.

 

 

At March 31, 2017, the Company had 4,908,334 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company had not yet recognized was $403,944 at March 31, 2017. Such amounts are expected to be recognized over a period of 2.5 years.

 

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

 

		Number of
		Nonvested,				Weighted
		Nonissued				Average
		Restricted				Grant Date
		Share Awards				Fair Value
Nonvested, nonissued restricted shares outstanding at June 30, 2016			1,000,000			$	0.42
Granted			-				-
Vested			(500,000	)			0.42
Forfeited			-				-
Nonvested, nonissued restricted shares outstanding at March 31, 2017			500,000			$	0.42

 

Compensation expense associated with restricted stock for the three months ended March 31, 2017, and 2016, was $51,781 and $52,356, respectively, and $157,644 and $193,219 for the nine months ended March 31, 2017, and 2016, respectively, and was included in general and administrative expenses in the consolidated statements of operations. The total cost of nonvested stock awards which the Company had not yet recognized was $60,411 at March 31, 2017. This amount is expected to be recognized over a period of 0.5 years.

 

Agreements with Officers and Employees: In June 2016, the Company’s officers and certain employees owning options to purchase 56,087,599 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 56,087,599 options will be 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”).

 

 

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

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2017				2016				2017				2016
		(unaudited)								(unaudited)
Net loss		$	(1,164,684	)		$	(752,360	)		$	(4,948,833	)		$	(4,138,967	)
Weighted average common shares outstanding:
Basic and diluted			339,943,771				322,675,999				333,385,603				316,418,240
Basic and diluted loss per share		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)

 

For the three and nine months ended March 31, 2017 and 2016, 32,115,741 and 35,466,779 stock warrants, respectively, were excluded from diluted earnings per share because they are considered anti-dilutive.

 

For the three and nine months ended March 31, 2017 and 2016, 69,516,914 and 64,625,248 stock options, respectively, were excluded from diluted earnings per share because they are considered anti-dilutive.

 

NOTE 10- REVENUE

 

During the three months ended March 31, 2017, the Company recognized revenues of $2,500 compared with revenues of $225,000 recognized during the three months ended March 31, 2016. For the nine months ended March 31, 2017, the Company recognized revenues of $27,000 from merchandise samples compared with revenues of $225,000 from a development assistance contract recognized in the comparable period of 2016.

 

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.

 

The Company had verbal agreements with Rice University to modify the minimum royalty due dates that results in the Company being in full compliance with the agreements at March 31, 2017. On June 11, 2017 , the Company executed the revised agreements. Per the revised agreements, both Quantum Materials and Solterra shall pay to Rice a non-refundable, non-creditable annual maintenance fee of $10,000 (“Maintenance Fee”) each January 1, beginning on January 1, 2018 and each year thereafter until the first Sale of a Rice Licensed Product. Licensee’s obligation to pay the Maintenance Fee shall terminate upon first Sale of a Rice Licensed Product unless otherwise specified. In addition, Quantum Materials and Solterra shall pay to Rice an annual minimum royalty payment of $50,000 (“Annual Minimum Royalty”) on January 1 immediately following the first Sale of a Rice Licensed Product and each January 1 of every year thereafter for the term of the revised agreements, regardless of whether sales occur on an ongoing basis. The Annual Minimum Royalty shall be creditable towards royalties due in each respective royalty year, January 1 to December 31, following the due date.

 

 

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 March 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.

 

NOTE 12 – INCOME TAX

 

The Company follows ASC 740 “Income Taxes” regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.

 

The Company assesses the likelihood that deferred tax assets will be recovered from the existing deferred tax liabilities or future taxable income. To the extent the Company believes that recovery will not meet the more likely than not threshold, it establishes a valuation allowance. The Company has recorded valuation allowances in the U.S. for its net deferred tax assets since management believes it is more likely than not that these assets will not be realized because future taxable income necessary to utilize these losses cannot be established or projected.

 

The Company had approximately $25,560,000 in U.S. net operating loss (“NOL”) carryforwards that expire beginning in 2029 as of its fiscal year ending June 30, 2016, and $29,079,000 in NOL’s available as of March 31, 2017 prior to any reductions under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”). Section 382 provides that a corporation that undergoes an “ownership change”, as defined therein, is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income.

 

The Company completed an evaluation study whether an “ownership change” had occurred and determined that the limitation would be approximately $750,000, thereby reducing the net operating loss at March 31, 2017 to approximately $28,329,000. The Company has recorded a valuation allowance on the entire NOL as it believes that it is more likely than not that all of the deferred tax asset associated with the NOLs will not be realized regardless of whether an “ownership change” has occurred.

 

When a company operates in a jurisdiction that generates ordinary losses but does not expect to realize them, ASC 740-270-30-36(a) requires the exclusion of the respective jurisdiction from the overall annual effective tax rate (“AETR”) calculation and instead, a separate AETR should be computed. The Company operates in one jurisdiction and has determined that its deferred tax assets are not realizable on a more likely than not basis and has recorded a full valuation allowance. The effective income tax rate for the three months and nine months ended March 31, 2017 and 2016 was 0%.

 

 

NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION

 

The following is supplemental cash flow information:

 

		Nine Months Ended
		March 31,
		2017				2016
		(unaudited)
Cash paid for interest		$	20,584			$	20,055
Cash paid for income taxes		$	-			$	-

 

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

 

		Nine Months Ended March 31,
		2017				2016
		(unaudited)
Conversion of debentures into shares of common stock		$	250,000			$	-
Allocated value of common stock and warrants issued with convertible debentures		$	391,237			$	-
Stock warrants issued for conversion of accrued salaries		$	-			$	409,667
Prepaid expense paid in shares of common stock		$	292,387			$	131,655
Prepaid expense financed with debt		$	210,000			$	-
Cancellation of shares		$	194			$	-
Financing of prepaid insurance		$	7,281			$	20,024

 

NOTE 14 – TRANSACTIONS WITH AFFILIATED PARTIES

 

During the nine months ended March 31, 2017, the Company issued a convertible debenture to a family member of a key executive for proceeds of $200,000. This transaction is described in more detail in Note 5 under the heading April – June, August, October and November 2016 Convertible Debentures.

 

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

 

NOTE 15 – RECENTLY ISSUED ACCOUNTING STANDARDS

 

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.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. This ASU requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. It thus simplifies the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and noncurrent. 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 adopted this guidance effective for the year ended June 30, 2016.

 

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. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

NOTE 16 – EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS

 

Equity Purchase Agreement

 

On March 29, 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital to purchase from them up to $5,000,000 of the Company’s common stock. Pursuant to the terms of the equity agreement, for a period of up to four years, SBI and L2 Capital are committed to purchase at the election of the Company, assuming an effective registration statement, and upon delivery by the Company of a put notice to Put Shares (as defined in the Eloc) (i) in a minimum amount of not less than $25,000 and (ii) in a maximum amount up to the lesser of (a) $250,000 or (b) 150% of the average daily trading value; provided such minimum amount of Put Shares may be decreased and such maximum amount of Put Shares may be increased, subject to the Company’s approval. Unless otherwise agreed to in writing by SBI and L2 Capital, the amount in the Put Notice shall be allocated pro rata among the participating investors based upon the Maximum Commitment Amount as defined in the Eloc. The purchase price of the Put Shares shall mean 80% of the market price (i.e. the lowest closing bid price for any trading day during the Valuation Period as defined in the Eloc). If 80% of the lowest closing bid price on the OTCQB for any trading day during the respective Valuation Period (as defined in Eloc) is less than the Company minimum price of $.12 per share, then SBI and/or L2 Capital may elect to purchase all or none of the Put Shares at the Company minimum price.

 

 

As further consideration for SBI and L2 Capital entering into the Eloc, the Company agreed to pay SBI and L2 Capital $63,000 and $147,000, respectively, in promissory notes. These promissory notes bear interest at 8% per annum and have a maturity date of nine months from the date of issuance. These notes are not convertible unless there is an Event of Default as defined in the notes.

 

Registration Rights Agreement

 

On March 29, 2016, the Company entered into a registration rights agreement with SBI and L2 Capital. Pursuant to said agreement, the Company is required to file a registration statement with the Securities and Exchange Commission to register the shares of common stock under the Eloc and all shares of common stock underlying the notes and warrants issued to SBI and L2 Capital in connection with the Eloc and loan transactions described above.

 

NOTE 17 - SUBSEQUENT EVENTS

 

In April 2017, the Company issued 2,500,000 common shares for consulting services. The cost of this issuance was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.

 

In April 2017, the Company issued 595,238 common shares for consulting services. The cost of this issuance was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.

 

On or about April 27, 2017 the Company executed a funded collaboration agreement by which Quantum will work with Freschfield to integrate Quantum Materials Corp advanced Nanomaterials including quantum dot-based solar photovoltaics into Freschfield’s SmartSkinz. Freschfield has synthesized solar and hydrogen fuel cell technologies into an outer layer building skin – SmartSkinz – which creates a perpetual carbon-free energy source, under any weather condition, time of day and location. Quantum Materials’ development will focus on developing and deploying advanced nanomaterials to optimize system performance on several levels including the building-integrated photovoltaics (BIPV) component of SmartSkinz. Under terms of the agreement, Freschfield will fund development by providing $1 million over four quarters to Quantum Materials beginning June 2017.

 

On May 1, 2017, a Special Meeting of Stockholders was held by Quantum Materials Corp. At the Stockholder Meeting a quorum of 215,995,100 shares of common stock were present in person or by proxy. At the Special Meeting, the stockholders approved the filing of an amendment to the Corporation’s Articles of Incorporation to increase the number of authorized shares of $.001 par value common stock from 400,000,000 shares to 750,000,000 shares. Of the 215,995,100 shares of common stock that were present at the meeting in person or by proxy, 199,175,046 shares of common stock were voting in favor of the proposal, 15,870,085 shares against and 949,969 shares abstained from voting.

 

On May 4, 2017, the Company received $200,000 from L2 Capital and SBI in conjunction with their equity purchase agreement.

 

On May 5, 2017, the Company issued a total of 6,125,000 common shares for consulting services. The cost of these issuances were recognized as a prepaid asset and will be amortized to expense over the life of the agreements.

 

On May 19, 2017, the Company entered into two waiver and consent agreements with Lincoln Park Capital Fund, LLC (“Lincoln Park”) whereby the parties agreed that the prior equity line of credit agreement entered into on November 8, 2016 is canceled and various covenants made with respect to a $200,000 loan were waived in connection with certain loan transactions and in consideration thereof, the Company agreed to issue 1,000,000 shares of common stock to Lincoln Park in settlement of all claims.

 

In June 2017, the Company issued 771,211 shares for the conversion of $85,000 of convertible debentures plus accrued interest.

 

In June 2017, the Company issued 3,500,000 shares for consulting services. The cost of this issuance will be expensed during the three months ended June 30, 2017.

 

In June 2017, the Company issued a total of 5,333,333 shares for consulting services. The cost of these issuances was recognized as a prepaid asset and will be amortized to expense over the life of the agreement.

 

In June 2017, the Company issued a total of 717,945 common shares to various noteholders in payment of interest on convertible debentures.

 

 

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

 

This Form 10-Q/A 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/A and our Form 10-K filed September 23, 2016 for the fiscal year ended June 30, 2016. Except for the historical information contained herein, the discussion in this Form 10-Q/A 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/A 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 nine month periods ended March 31, 2017 and March 31, 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 mn in 2011 to US$8.2 bn 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.

 

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 in the second quarter of our fiscal year ending June 30, 2018. 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 March 31, 2017, we had a working capital deficit of $2,345,450, with total current assets and liabilities of $878,769 and $3,224,219, respectively. Included in the liabilities are $428,150 that is owed to our officers, directors and employees for services rendered and accrued through March 31, 2017, $1,115,164 of convertible debentures, net of unamortized discount and $17,374 of notes payable, net of unamortized discount, that are due within one year.

 

As of March 31, 2017, we have cash and cash equivalent assets of $321,656 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 the balance of fiscal year 2017 and in fiscal 2018; the success of securing such financing on terms acceptable to the Company cannot be assured. The Company is seeking to raise to $5,000,000 in equity and/or debt financings to support operations over the next twelve months from our Eloc financing agreement. 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:

 

		Nine Months Ended
		March 31,
		2016				2015
		(unaudited)
Operating activities		$	(1,782,458	)		$	(1,293,250	)
Investing activities		$	(32,871	)		$	17,871
Financing activities		$	1,870,000			$	610,500

 

Operating Activities: Net cash used in operating activities was $1,782,458 for the nine months ended March 31, 2017 compared to $1,293,250 for the same period of 2016, an increase of $489,208. The increase was due to primarily driven by an increase of research and development costs.

 

Investing Activities: Net cash used in investing activities was $32,871 for the nine months ended March 31, 2017 compared to net cash provided by investing activities of $17,871 for the same period of 2016, a net decrease of cash provided by $50,742. The decrease was due to the Company having freed up cash in the nine months ended March 31, 2016 that had been previously restricted. No such cash was received during the nine months ended March 31, 2017.

 

Financing Activities: Net cash provided by financing activities was $1,870,000 for the nine months ended March 31, 2017 compared to $610,500 for the same period of 2016, an increase of $1,259,500. The increase is due primarily to proceeds received from the issuance of convertible debentures and promissory notes.

 

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 March 31, 2017, we had not yet achieved profitable operations, had a working capital deficit of $2,345,450 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 March 31, 2017 Compared to Three Months Ended March 31, 2016

 

General and administrative expenses

 

During the three months ended March 31, 2017, the Company incurred $737,022 of general and administrative expenses compared with $903,795 incurred in the three-month period ended March 31, 2016, an decrease of $166,773. The decrease in general and administrative expenses was primarily due to decreases in stock-based compensation of $175,150.

 

 

Included in general and administrative expenses for the three months ended March 31, 2017 was employee compensation of $293,658, legal and audit fees of $130,771, other professional fees of $110,589, travel expense of $7,209, corporate expenses of $184,379 and stock-based compensation of $(24,478).

 

Included in general and administrative expenses for the three months ended March 31, 2016 was employee compensation of $294,602, legal and audit fees of $100,393, other professional fees of $148,763, travel expense of $31,957, corporate expense of $145,918 and stock-based compensation of $150,672.

 

Research and development expenses

 

During the three months ended March 31, 2017, the Company incurred $136,786 of research and development expenses, an increase of $117,576 from the $19,210 recorded for the three months ended March 31, 2016. The increase is primarily due to increased expenditures for lab equipment, chemicals and consumables in the San Marcos facility.

 

Beneficial conversion feature on convertible debenture

 

During the three months ended March 31, 2017 the Company incurred $102,797 of beneficial conversion expense compared to $0 recorded for the three months ended March 31, 2016. The increase in beneficial conversion expenses was due to the issuance of new convertible debentures during the three months ended March 31, 2017.

 

Interest expense, net

 

Interest expense recorded for the three months ended March 31, 2017 was $90,013 compared to $10,452 in the three months ended March 31, 2016, an increase of $79,561. The increased interest expense recorded in the three months ended March 31, 2017 was primarily related to the 8% interest on the April to June, August, October and November 2016 debentures as well as the convertible debentures issued during the three months ended March 31, 2017.

 

Accretion of debt discount

 

During the three months ended March 31, 2017 the Company recorded $100,566 of accretion of debt discount expense, an increase of $56,663 from the $43,903 recorded for the three months ended March 31, 2016. The increase in accretion of debt discount expense is related to the issuance of convertible debentures during and prior to the three months ended March 31, 2017.

 

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

 

		Three Months Ended
		March 31,
		2017				2016
Statement of Operations Information:		(unaudited)
Revenues		$	2,500			$	225,000
General and administrative			737,022				903,795
Research and development			136,786				19,210
Beneficial conversion expense			102,797				-
Interest expense, net			90,013				10,452
Accretion of debt discount			100,566				43,903

 

Nine Months Ended March 31, 2017 Compared to Nine Months Ended March 31, 2016

 

General and administrative

 

During the nine months ended March 31, 2017, the Company incurred $3,750,806 of general and administrative expenses compared with $4,212,120 incurred in the nine-month period ended March 31, 2016, a decrease of $461,314. The decrease in general and administrative expenses was primarily due to a decrease in stock-based compensation of $1,258,718, offset by increases in compensation of $517,458, legal and audit of $187,532 and corporate expenses of $147,427.

 

 

Included in general and administrative expenses for the nine months ended March 31, 2017 was employee compensation of $1,294,852, legal and audit fees of $557,696, other professional fees of $464,721, travel expense of $30,639, corporate expense of $479,604 and stock-based compensation of $822,174.

 

Included in general and administrative expenses for the nine months ended March 31, 2016 was employee compensation of $777,394, legal and audit fees of $370,164, other professional fees of $477,884, travel expense of $80,845, corporate expense of $332,177 and stock based compensation of $2,080,892.

 

Research and development expenses

 

During the nine months ended March 31, 2017 the Company incurred $408,588 of research and development expenses, an increase of $243,323 from the $165,265 recorded for the nine months ended March 31, 2016. The increase is primarily due to increased expenditures for lab equipment, chemicals and consumables in the San Marcos facility as the Company prepares for full production.

 

Beneficial conversion feature on convertible debenture

 

During the nine months ended March 31, 2017 the Company incurred $197,095 of beneficial conversion expense compared to $0 recorded for the nine months ended March 31, 2016. The increase in beneficial conversion expenses was due to the issuance of new convertible debentures during the nine months ended March 31, 2017.

 

Interest expense

 

Interest expense recorded in the nine months ended March 31, 2017 was $218,921 compared to interest expense of $32,023, for the nine months ended March 31, 2016, an increase of $186,898. The increased interest expense recorded in the nine months ended March 31, 2017 was primarily related to the 8% interest on the April to June, August, October and November 2016 debentures as well as the convertible debentures issued during the nine months ended March 31, 2017.

 

Accretion of debt discount

 

Accretion of debt discount expense recorded in the nine months ended March 31, 2017, was $400,423 compared with $129,127 for the period ended March 31, 2016, an increase of $271,296. The increase in accretion of debt discount expense is related to the issuance of convertible debentures during and prior to the nine months ended March 31, 2017.

 

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

 

		Nine Months Ended
		March 31,
		2017				2016
Statement of Operations Information:		(unaudited)
Revenues		$	27,000			$	225,000
General and administrative			3,750,806				4,212,120
Research and development			408,588				165,265
Gain on settlement			-				(174,568	)
Beneficial conversion expense			197,095				-
Interest expense, net			218,921				32,023
Accretion of debt discount			400,423				129,127

 

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 March 31, 2017.

 

Change in Accounting Staff

 

Subsequent to December 31, 2016 and prior to the filing of this Form 10-Q/A, there has been a complete change in the Company’s accounting staff, including the Chief Financial Officer. Prior to March 31, 2017, the Chief Executive Officer (“CEO”) and 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/A 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 March 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 nine-month period ended March 31, 2017.

 

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, 2016 to March 31, 2017, we had the following sales and issuances of unregistered equity securities:

 

Date of Sale

Title of Security

Number Sold

Consideration Received and Description of Underwriting or Other Discounts to Market Price or Convertible Security Afforded to Purchases

Exemption from Registration Claimed

If Option, Warrant or Convertible Security, Terms of Exercise or Conversion

August 2016

Common Stock

500,000

Shares issued as stock-based compensation; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

August 2016

Common Stock

250,000

Shares issued for services; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

August 2016

Common Stock Warrants

833,200

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.15 per share through August 23, 2021

September 2016

Common Stock

200,000

Shares issued with convertible promissory note

Section 4(2); and/or Rule 506

Not applicable

September 2016

Common Stock Options

2,450,000

Issuance of stock options

Section 4(2); and/or Rule 506

Options exercisable at $0.12 per share through September 20, 2021

September 2016

Common Stock Warrants

250,000

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.12 per share through September 15, 2019

September 2016

Common Stock Warrants

416,667

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.15 per share through September 29, 2021

October 2016

Common Stock

6,250,000

Shares issued for warrants exercised; $375,000 cash received; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

October 2016

Common Stock

2,500,000

Shares issued for warrants in cashless exercise; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

October 2016

Common Stock

833,334

Shares issued upon conversion of $100,000 of debentures; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

October 2016

Common Stock

17,899

Shares issued in exchange for $2,147 of interest; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

October 2016

Common Stock Warrants

208,300

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.15 per share through October 6, 2021

October 2016

Common Stock Warrants

1,916,667

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable between $0.20 and $0.24 per share through April 25, 2017

November 2016

Common Stock

416,667

Shares issued upon conversion of $50,000 of debentures; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

November 2016

Common Stock

17,808

Shares issued in exchange for $2,137 of interest; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

November 2016

Common Stock

1,750,000

Shares issued for services; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

November 2016

Common Stock Warrants

833,200

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.15 per share through November 7, 2021

January 2017

Common Stock

1,000,000

Shares issued for services; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

January 2017

Common Stock Warrants

666,560

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.15 per share through January 17 - 31, 2022

February 2017

Common Stock

833,333

$100,000 cash received; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

February 2017

Common Stock

200,000

Shares issued with convertible promissory note

Section 4(2); and/or Rule 506

Not applicable

February 2017

Common Stock

3,466,666

Shares issued for services; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

February 2017

Common Stock Warrants

416,600

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.15 per share through February 14 - 28, 2022

February 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 February 1, 2020

February 2017

Common Stock Warrants

833,333

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.12 per share through February 13, 2019

March 2017

Common Stock

1,250,000

Shares issued for warrants exercised; $50,000 cash received; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

March 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

March 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

March 2017

Common Stock Warrants

375,000

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.12 per share through March 27, 2020

March 2017

Common Stock Warrants

1,014,101

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.13 per share through March 29, 2022

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

On May 19, 2017, the Company entered into two waiver and consent agreements with Lincoln Park Capital Fund, LLC (“Lincoln Park”) whereby the parties agreed that the prior equity line of credit agreement entered into on November 8, 2016 is canceled and various covenants made with respect to a $200,000 loan were waived in connection with certain loan transactions and in consideration thereof, the Company agreed to issue 1,000,000 shares of common stock to Lincoln Park in settlement of all claims.

 

 

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.)
10.1		License Agreement by and between William Marsh Rice University and Solterra Renewable Technologies, Inc. dated August 20, 2008.
10.2		Letter dated October 2, 2008 from Rice University amending the License Agreement contained in Exhibit 10.1.
10.3		Agreement with Arizona State University executed by ASU on October 8, 2008 and executed by Solterra on September 18, 2008.
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 September 30, 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 September 30, 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.)
10.27		Waiver and Consent - $200,000 loan – Lincoln Park (Incorporated by reference to Form 10-Q for the quarter ended March 31, 2017 filed May 15, 2017).
10.28		Waiver and Consent – Eloc – Lincoln Park (Incorporated by reference to Form 10-Q for the quarter ended March 31, 2017 filed May 15, 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 *

 

 

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: July 6, 2017	/s/ Stephen Squires
	Stephen Squires
	Principal Executive Officer
Date: July 6, 2017	/s/ E. J. Schloss
	E.J. Schloss
	Principal Financial Officer