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EX-32.B - QUANTUM MATERIALS CORP.ex32b.htm
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EX-23.2 - QUANTUM MATERIALS CORP.ex23-2.htm
EX-23.1 - QUANTUM MATERIALS CORP.ex23-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2018

 

or

 

  [  ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission File Number: 0-52956

 

QUANTUM MATERIALS CORP.

(Exact name of Registrant as specified in its charter)

 

Nevada   20-81955783

(State of jurisdiction of
incorporation or organization)

  (I.R.S. Employer
Identification Number)

 

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

 

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

 

(Former address of principal executive offices, if changed
since last report)
  (Zip Code)

 

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

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [  ] No [X]

 

Check whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [  ]

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [  ]. No [X].

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [  ].

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act:

 

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

 

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

 

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

 

As of December 31, 2017, of the 402,772,972 outstanding shares of common stock, the number of shares held by non-affiliates was approximately 375,069,671 shares with an aggregate market value of approximately $26,254,877 based upon the closing price of $0.07 of our common stock as of the close of business on December 29, 2017.

 

As of October 9, 2018, the issuer had 456,727,981 shares of common stock, $0.001 par value per share outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 
 

 

QUANTUM MATERIALS CORP.

 

FORM 10-K

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2018

 

TABLE OF CONTENTS

 

PART I  
Item 1. Business 4
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Mine Safety Disclosures 14
     
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
Item 6. Selected Financial Data 17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risks 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 36
Item 9B. Other Information 37
     
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 38
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 56
Item 13. Certain Relationships and Related Transactions and Director Independence 57
Item 14. Principal Accountant Fees and Services 58
     
PART IV  
Item 15. Exhibits and Financial Statement Schedules 58

 

2
 

 

FORWARD-LOOKING STATEMENTS

 

Some of the statements set forth this Form 10-K contain forward-looking statements within the meaning of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our plans, objectives, goals, strategies, future events, capital expenditures, future results, our competitive strengths, our business strategy and the trends in our industry are forward-looking statements. The words “believe,” “may,” “could,” “will,” “estimate,” “possible”, “target”, “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “forecast,” “future,” “likely,” “probably,” “suggest” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements.

 

Forward-looking statements reflect only our current expectations. We may not update these forward-looking statements, even though our situation may change in the future. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements due to a number of uncertainties, many of which are unforeseen, including, without limitation:

 

  we are a development stage company with no history of profitable operations;
     
  we may need additional capital to finance our business;
     
  our products may not gain market acceptance;
     
  we may not be able to establish distribution relationships and channels and strategic alliances for market penetration and revenue growth;
     
  competition within our industry; and
     
  the availability of additional capital on terms acceptable to us.

 

The foregoing list of factors is not exhaustive and new factors may emerge or changes to these factors may occur that would impact our business and cause actual results to differ materially from those expressed in any of our forward looking statements. Additional information regarding these and other factors may be contained in our filings with the Securities and Exchange Commission, including on Forms 10-Q and 8-K. All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depends on many events, some or all of which are not predictable or within our control. If one or more events related to these or other risks or uncertainties materialize, or if management’s underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. Accordingly, you should not place undue reliance on these forward-looking statements.

 

We qualify all the forward-looking statements contained in this Form 10-K by the foregoing cautionary statements. Throughout this Form 10-K, unless otherwise designated, the terms “we”, “us”, “our”, the “Company”, our “Company”, “QMC” and “Quantum” refer to Quantum Materials Corp., a Nevada corporation and its subsidiaries.

 

3
 

 

PART I

 

Item 1. Business

 

Overview

 

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

 

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

 

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

 

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

 

History of the Company

 

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

 

In October 2008, Solterra also entered into a license agreement with the University of Arizona, which was later amended, (the “UA License”) pursuant to which Solterra has been granted exclusive rights to use the University of Arizona’s patented screen-printing techniques in the production and sale of organic light emitting diodes (“OLEDs”) incorporating QDs in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr. Ghassan Jabbour, a member of the Company’s Board of Directors.

 

4
 

 

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

 

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

 

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

 

In 2015, the Company expanded its San Marcos facility and took delivery of a second, larger unit capable of producing approximately 2,000kg of QDs and other nanoparticles per year. This second unit is intended to be used for the Company’s initial commercial production. The Company believes this equipment has positioned the Company to quickly and efficiently scale up mass production of QDs and TQDs for commercial sale, solar panel production, and other applications allowing the Company to readily meet increases in volume demand by simply adding additional equipment units.

 

The Bayer Patents, the UA License, organically developed technologies and our proprietary continuous flow manufacturing process comprise our fundamental asset platform. We believe that the intellectual property and proprietary technologies position the 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.

 

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

 

5
 

 

Business Opportunities

 

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

 

  Entered into a licensing agreement to establish quantum dot production and solar film production in Asia;
     
  Expanded range of quantum dot base materials to include carbon quantum dots.
     
  Initiated collaborations with a number of LED and Micro LED companies;
     
  Developed stabilized cadmium free QDs and encapsulation process for remote phosphor LED applications and surpassed 8,000 hours continuous on time without measurable degradation;
     
  Reduced QD process cost by more than 45% and doubled annual production throughput capacity using existing process equipment and expanded capability to include Pervoskite quantum dots;
     
  Significantly improved emission color purity by narrowing the color wavelength, tuning the emission wave length and increasing the quantum yield (brightness) of our cadmium-free QD optical materials focused on display applications. These improvements have resulted in Rec. 2020 coverage in excess of 86%;
     
  Initiated collaborations for QD enhanced display film with numerous film companies including one of the world’s largest multinational chemical company;
     
  Developed blue cadmium-free high-performance QDs;
     
  Develop the first 100% quantum yield cadmium-free red QDs;
     
  Developed and began producing a range of plasmonic particles targeting specialized lighting and thermal management application in the automotive and commercial glass industry;
     
  Obtained an intellectual property portfolio of 50+ patents and applications granted, filed, or in preparation, including issued patents acquired from third parties, including those covering high volume production of QDs, including cadmium-free quantum dots, quantum dot enhancement technologies and quantum dot solar cell technologies;
     
  Expanded the number of display optical film companies that we are now in collaboration with and increased sample deliveries;
     
  Continued product development with leading global optical film manufacturers;
     
  Developed and began producing nano-materials for specialty lighting, nano-bio, energy storage, anti-counterfeiting, and other emerging applications; and
     
  Established a nanomaterials laboratory facility for research, development and production in Texas.

 

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

 

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

 

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

 

6
 

 

How Quantum Dots are Produced

 

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

 

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

 

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

 

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

 

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

 

7
 

 

Major Market Segments

 

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

 

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

 

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

 

Anti-counterfeiting. Piracy and counterfeiting cost businesses more than $200 billion annually and account for the loss of more than 750,000 jobs in the US alone. Counterfeit drugs cost the global pharmaceutical industry approximately $18 billion in lost profits annually and according to Interpol, result in as many as one million deaths annually. QDs and other custom nanoparticles added to ink can be used to create unclonable unique “fingerprints” for every package using current printing technology, and these “fingerprints” can be quickly verified with a handheld device or optical in-line screening in manufacturing or handling lines.

 

Life Sciences. The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both the in vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, and in vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues. The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators.

 

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

 

We anticipate that the biggest growth sectors for QDs will be in TVs, displays, sold-state lighting, and solar cells. Other current and potential applications for QD include nano-bio, commercial glass, batteries, security inks, sensors, lasers, and paints. QDs remain an expensive product. Although the high cost has slowed market growth, we believe the recent growth of mass manufacturing is quickly easing the cost constraints.

 

8
 

 

Current Position

 

Since January 2017, we have continued to reduce overhead costs and fine-tuned our operations. These efforts have enabled us to achieve the highest optical performance for cadmium free quantum dots in the company’s history. In addition, we have expanded the color range to now include blue in addition to red and green. While achieving extraordinary performance is important, management believes that being able to produce these materials repeatedly and at a low price point is the formula for success, and we have made these performance improvements while also doubling throughput and further reducing production. While we have been developing the infrastructure to support volume production, we have also explored the possibility of both a joint venture model and a licensing model and we believe there are merits to these models and we have begun to explore both of these options for the company to rapidly enter the revenue stage.

 

Widespread, rapid adoption of quantum dots by the display industry or in other markets may cause supply pressure that will need to be met with significant increases in available production capability. While we believe our current manufacturing capacity of approximately 4 metric tons per year is as big, if not bigger, than our largest competitors, we also realize that there are other challenges developing a supply chain and completing vendor qualifications that can be very time consuming. We believe a licensing model with a top tier chemical company could allow us to rapidly expand our market reach and capture substantially more market. We believe our low-cost high-volume manufacturing process is ideally positioned to meet these requirements. This is anticipated to be a key advantage to the Company to meet market demand and drive increased revenue.

 

The advantages and benefits of our automated production process and equipment are:

 

  large scale production with a compact footprint;
     
  less manpower and time needed for cost savings;
     
  economies of scale leading to lower costs;
     
  high production yield with little post-processing;
     
  Rapid R&D and improved quality control for higher uniformity; and
     
  assurance of backup systems for continuous supply.

 

Sales and Marketing Overview

 

During the past year, we have made significant progress in the development of QDs for use in electronic display applications, in particular for LCD TV applications. With a focus on cadmium free QDs, we have been developing technologies aimed at meeting key customer requirements, and we have been shipping product to customers for use, testing, and film integration.

 

Our discussions with chemical companies, film manufacturers, and OEMs in the display industry provide strong evidence that the market opportunity is substantial and that our business plan is aligned with the customers’ product specification needs. While we are pursuing applications in several other markets as well, we believe that the display industry represents the most substantial and most immediate opportunity. We further believe that our advantages in delivery of large volumes of high quality, high performance QDs and other nanomaterials via our patented continuous production process makes us an attractive supplier. While we continue to pursue direct sales opportunities, we are also actively marketing a licensing model to top tier chemical companies

 

In January 2018 the Company engaged Canaccord Genuity to provide financial advisory and investment banking services as the Company may reasonably request. The Company believes such advisory services will be instrumental as we explore licensing, merger and JV opportunities.

 

9
 

 

Operational Overview

 

Our operations are located in San Marcos, Texas at the Star Park Technology Center, an extension of Texas State University (“TSU”). This location provides us with space for future expansion and with convenient access to TSU faculty and specialized laboratory facilities and equipment that can support joint research and development efforts with Texas State University. Located 30 miles south of Austin, Texas, the San Marcos facility is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets. The company is also exploring the possibility of relocating to a standalone facility that will better facilitate our ability to produce micro reactors to support licensing and joint venture opportunities and also allow us to reduce fixed overhead cost.

 

We have recently achieved commercial-scale continuous manufacturing equipment at the San Marcos facility and now have the capacity to produce more than four metric tons (4,000kg) per year of nanomaterials for supply to our customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ factories which are much larger and require significantly larger capital expenditures to build and labor expense to operate. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing know how and equipment. While we plan to work extensively with our current providers of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the manufacturing equipment in-house, if necessary. This also holds true in the event we are successful negotiating a licensing agreement with a significant chemical company, in which case we would likely be responsible for managing their scale up efforts.

 

We expect to commence generating revenues from licensing agreements, joint ventures and/or the production of materials at the San Marcos facility in the fourth quarter of fiscal year 2019. In the event we secure a license agreement we anticipate an upfront licensing payment to the company with ongoing royalty payments. Revenues from materials manufactured by the company are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.

 

Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing nanomaterials and QD market. Nanomaterials and QD technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and will focus a significant part of our efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, University of Arizona, and the numerous other research centers and departments with which we have relationships will be important aspects of the Company’s strategy. We intend to increase its development of quantum dot solar cells in 2018/19 and are currently considering re-establishing our solar cell development in closer proximity to strategically significant solar technology resources.

 

Our key assets include patents, proprietary high-volume process equipment technology, licenses and other intellectual property rights, our knowhow and the expertise, capabilities, and relationships brought to us by our the Company by its management team. We are implementing a comprehensive patent strategy will put additional focus on building out our intellectual property portfolio and licensing rights.

 

Patent licenses with University of Arizona include provisions for milestones and milestone payments. To date, such payments have been waived and/or extended by University of Arizona, illustrating the support the university has given us as we have attempted to advance our business with measured resources. Solterra plans to utilize our patented low-cost, high-volume quantum dot production combined with carbon QD and TQD technology to commercialize QD solar cells at a fraction of the cost of current silicon based solar cells.

 

Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. In fiscal year 2017, we applied for and received a Low Volume Exemption (“LVE”) under the Toxic Substances Control Act (“TSCA”) which allows us to manufacture QD quantities of 10,000 kilograms or less per year in the United States. We also recently gained Chemical Abstract Service (CAS) registration for QDX cadmium-free quantum dots through a division of the American Chemical Society and has also completed the requisite analysis in support of the QDX Safety Data Sheet (SDS). Both CAS and the SDS are required in order to ship high volumes of advanced materials abroad. Management believes that the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us and our products in the future. See “Risk Factors” section.

 

10
 

 

Employees

 

We have traditionally operated with limited resources and infrastructure. As of the date of this Form 10-K, we have 9 employees, including 4 full time employees the management team.

 

Competition

 

The commercial nanomaterials industry and more specifically, the quantum dot industry, is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments by employing one or more competitive strategies. We believe that competition among these companies is based on the following factors:

 

  Product quality and performance characteristics: Manufacturers who will incorporate QDs in specific applications will carefully consider the quality, characteristics and physical properties of the QDs for efficacy in their targeted applications. This includes but is not necessarily limited to the following factors: the consistency of dots from batch to batch; resistance to degradation of performance characteristics by heat, oxygen, moisture, and luminous flux; brightness of emissions; purity of emissions; effective life spans; volume of dots necessary to produce the intended result; special characteristics such as dual emission capabilities; whether or not the QDs contain cadmium or other heavy metals or other hazardous compounds; the time needed to expand capacity; and the location of capacity relative to the manufacturer or ability to locate capacity nearby.
     
  Volume: Before a manufacturer makes the commitment and dedicates capital and marketing resources to incorporate QDs in its end product, it must be confident that the volume of QDs it can obtain from a supplier will be sufficient to meet production needs in the short term and long term, including substantial growth following a successful new product launch. The strategies employed by a quantum dot company to scale production rapidly are critical to its attracting commercial users for its product, regardless of the quality of its QDs.
     
  Price: The price at which QDs can be delivered for incorporation into a new product will dictate the rate at which new applications can be developed and supported. High prices have historically restricted the market for QDs to only the highest value uses such as in the life sciences, while the potential for lower prices of supply appears to be opening many new markets.
     
  Continuing R&D and Product Improvements: Research and industry relationships are important to ensure a quantum dot company stays on the leading edge of technological development and commercialization. R&D is supported by collaboration with academic institutions or industrial companies. The Company spent $188,274 and $1,006,214 on research and development in fiscal years 2018 and 2017 respectively, a decrease of $817,940. None of these costs were borne by customers.

 

We believe we are well positioned in all four areas described above. We believe our QDs, including cadmium/heavy metal-free QDs, meet or exceed our competitors’ current brightness and light purity specifications, and our patented continuous manufacturing process allows us to produce large volumes at competitive price points while also giving us the ability to quickly scale up capacity and locate it anywhere in the world it is needed. Lastly, our continuing relationships with universities such as University of Arizona, and Texas State University, private and public labs and our approach to joint development ventures should enable us to achieve and maintain a leading position in R&D and commercialization of new products.

 

The Company is subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than the Company.

 

Licenses and Intellectual Property

 

In 2010, we entered into an agreement with a third-party provider of industrial process equipment to develop proprietary equipment for continuous production of QDs under which we retained all ownership and rights to the design and any related intellectual property. We have, to date, received two production machines, a 250kg per year capacity unit primarily for internal research and development purposes and sample production, and a larger commercial production unit that process improvements have allowed us to increase from approximately 2,000kg per year when first delivered to 4,000kg per year today. We believe the design of this manufacturing equipment will position us to quickly and efficiently scale up mass production of QDs for commercial sale.

 

While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the equipment in-house, if necessary.

 

Bayer Patents

 

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

 

11
 

 

Agreement with University of Arizona

 

Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On November 22, 2017, Solterra memorialized prior oral agreements and entered into an amended license agreement with UA. Pursuant to the UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by January 31, 2019, $125,000 by June 30, 2019 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. As of June 30, 2017, and 2018, no royalties have been accrued for this obligation.

 

Agreement with Texas State University

 

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

 

Other Intellectual Property

 

The Company also owns additional intellectual property in the form of proprietary equipment designs, trademarks, trade names, copyrights, scientific and technical know-how, and “trade secrets” that it intends to further develop and apply in its business, seeking to protect same with appropriate governmental filings and/or secrecy agreements.

 

Governmental Approvals

 

Chemical substances manufactured in the Unites States in quantities of 10,000 kilograms or less per year are exempt from full premanufacture notice (“PMN”) review under section 5 of the Toxic Substances Control Act (“TSCA”). Low Volume Exemption (“LVE”) substances undergo a 30-day review. During fiscal year 2017, we applied for and received an LVE.

 

Item 1A. Risk Factors

 

Not Applicable

 

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Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

In June 2013, we opened a Wet Lab facility and principal executive office in San Marcos, Texas for research and development and the production of QDs and other nanomaterials. The facility where the Company is located is owned by Texas State University. In June 2015, the Company moved into a larger lab space in the same facility. As of June 30, 2017, our monthly rent for the San Marcos facility and office was $9,075. We recently decreased our laboratory and office space at the San Marcos facility and as of the date of this Form 10-K, our monthly rent is $4,538.

 

Item 3. Legal Proceedings

 

The Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-K, the balance in arrears is approximately $53,000 plus interest and other charges which has been accrued at June 30, 2018. The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.

 

CAUSE NUMBER 17-2033; Hays County, Texas

 

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

 

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

 

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

 

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

 

CAUSE NUMBER: 17CV06093; Johnson County, Kansas

 

The Kansas lawsuit, instituted on October 30, 2017, is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against the Company; the second claim is for breach of contract of the first L2 promissory note against the Company; the final claim is for breach of contract regarding the second L2 promissory note against both the Company and Stephen Squires, individually.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at June 30, 2018.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

14
 

 

PART II

 

Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock has traded in the over-the-counter marketplace on the OTCQB under the symbol “QTMM” since October 12, 2018. Previously, our common stock was quoted on the OTC Pink marketplace from November 2017 to October 2018 and on the OTCQB previous to November 2017.

 

As of October 9, 2018, the issuer had 456,727,981 shares of common stock outstanding and 239 stockholders of record according to our transfer agent.

 

The following table sets forth the high and low bid information for the most recent two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Quarter Ended  High   Low 
June 30, 2018  $0.06   $0.04 
March 31, 2018  $0.08   $0.05 
December 31, 2017  $0.09   $0.06 
September 30, 2017  $0.12   $0.08 
June 30, 2017  $0.14   $0.11 
March 31, 2017  $0.20   $0.07 
December 31, 2016  $0.11   $0.08 
September 30, 2016  $0.13   $0.10 

 

Historically we have not paid cash dividends on our common stock, and the Board of Directors intends to retain all of our earnings, if any, to finance the development and expansion of our business. There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends. Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.

 

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Issuer Sales of Unregistered Securities

 

From April 1, 2018 to June 30, 2018, we had the following sales of unregistered common stock.

 

            Consideration Received and Description of       If Option, Warrant or    
Date of Sale   Title of Security   Number Sold   Underwriting or Other Discounts to Market Price or Convertible Security Afforded to Purchases   Exemption from Registration Claimed   Convertible Security,
Terms of Exercise or Conversion
  Security Holder
April 2018   Common Stock   2,410,000   Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable   Minns & Arnett Trial Lawyers
April 2018   Common Stock Warrants   1,000,000   Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.12 per share through April 26, 2021   Lucas Hoppel
April 2018   Common Stock Warrants   200,000   Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.12 per share through April 25, 2021   Radha Jayaram
April 2018   Common Stock Warrants   1,166,660   Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.15 per share through April 20, 2023   Howieco International
May 2018   Common Stock   880,000   Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable   Brett Lamensky
June 2018   Common Stock   17,500,000   Shares issued for debenture extensions; no commissions paid   Section 4(2); and/or Rule 506   Not applicable   Columbus Capital QP Partners
June 2018   Common Stock   1,000,000   Shares issued with convertible promissory note   Section 4(2); and/or Rule 506   Not applicable   Radha Jayaram
June 2018   Common Stock   3,125,000   Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable   Protek Financial Services
June 2018   Common Stock   3,000,000   Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable   Youth Theory Consultants
June 2018   Common Stock Warrants   1,000,000   Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.12 per share through June 7, 2021   Lucas Hoppel
June 2018   Common Stock Warrants   5,000,000   Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.03 per share through June 15, 2020   Kenneth Groenveld

 

Repurchase of Securities

 

In the year ended June 30, 2018, there were no purchases by the Company of its common stock, however, the company cancelled 5,725,000 shares of common stock during this time. These shares were held in escrow, pending a contractual deliverable, and returned to the company and cancelled during the fiscal year.

 

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Item 6. Selected Financial Data

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section and elsewhere in this Form 10-K, which are incorporated herein by reference.

 

Business Overview

 

We are a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots (“QDs”), tetrapod quantum dots (“TQDs”), and other nanoparticles for a range of applications in televisions, displays and other optoelectronics, photovoltaics, solid state lighting, life sciences, security ink, battery, and sensor sectors of the market. Our wholly-owned operating subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”), is focused on the next generation photovoltaic (solar cell) market, using quantum dot semiconductors.

 

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

 

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

 

A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications.

 

Plan of Operation

 

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

 

The Company has established commercial-scale manufacturing equipment at the San Marcos facility and now through process optimizations has the capacity to produce more than four metric tons (4,000kg) per year of quantum dots and other nanomaterials for supply to its customers. 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 process 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 early calendar year 2019. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners and licensees.

 

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Our marketing strategy is to engage in strategic arrangements with manufacturers, distributors, and others to jointly develop applications using its patented continuous production process. Such joint collaborations will involve us working closely with its industry counterparts to optimize the performance of our materials in each application or device and to use the results from product development and testing to further enhance product specifications. We continue to collaborate with a number of partners in the display industry. We have signed a licensing agreement to establish quantum dot production in Asia and we are currently awaiting receipt of the upfront license fee before commencing work. To date, we have not entered into any formal commercial supply agreements.

 

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

 

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, 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 the Bayer quantum dot solar cell patents to commercialize quantum dot solar cells at a cost that is competitive with conventional fossil fuel generation on an unsubsidized basis.

 

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

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determining our financial condition and operating results. Estimates are based upon information available as of the date of the consolidated financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments often as a result of the need to make estimates about the effect of matters inherently uncertain. The most critical accounting policies and estimates are described below.

 

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

 

Revenue Recognition: The Company recognizes revenue from the sale of products and services in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements.”

 

18
 

 

The Company recognizes revenue when product has been delivered and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after normal payment terms. If it is determined that the fee is not fixed or determinable, the Company recognizes revenue at the time the fee becomes due, provided that all other revenue recognition criteria have been met. Sales arrangements may contain customer-specific acceptance requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service and is recognized upon receipt of customer acceptance.

 

Accounts Receivable: Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company personnel and with the customers directly.

 

Financial Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures. The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

 

Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35 “Impairment or Disposal of Long-Lived Assets”, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and the carrying value. There were no impairment charges in the consolidated statements of operations during the years ended June 30, 2018 and 2017.

 

Debt Issuance Costs: The costs related to the issuance of debt are presented on the consolidated balance sheets as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt.

 

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

 

The Company follows ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes.

 

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

 

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

 

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

 

20
 

 

Liquidity and Capital Resources

 

Going Concern

 

The Company recorded losses from continuing operations in the current period presented and has a history of losses. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.

 

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

 

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

 

As of June 30, 2018, we had a working capital deficit of $4,387,148, with total current assets and liabilities of $1,758,206 and $6,145,354 respectively. Included in the liabilities are $682,242 owed to our officers, directors and employees for services rendered and accrued through June 30, 2018, $3,402,421 of convertible debentures, net of unamortized discount and $134,255 of notes payable that are due within one year. As a result, we have relied on financing through the issuance of common stock and convertible debentures.

 

As of June 30, 2018, we have cash and cash equivalent assets of $2,025. We continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into securities of the Company. Management believes it may be necessary for the Company to rely on external financing to supplement working capital to meet the Company’s liquidity needs in the fiscal years ended 2019 and 2020; the success of securing such financing on terms acceptable to the Company, if at all, cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.

 

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

 

   Years Ended 
   June 30, 
   2018   2017 
         
Operating activities  $(1,090,821)  $(2,222,107)
Investing activities   (1,877)   (44,911)
Financing activities  $1,042,112   $2,052,644 

 

Operating Activities. Net cash used in operating activities was $1,090,821 for the year ended June 30, 2018 compared to $2,222,107 for the same period of 2017, a decrease in cash used of $1,131,286. The decrease was primarily driven by decreased in research and development costs and decreased payments on accounts payable.

 

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Investing Activities. Net cash used in investing activities was $1,877 for the year ended June 30, 2018 compared to $44,911 for the same period of 2017, a decrease of $43,034. The decrease is related to fewer purchases of equipment.

 

Financing Activities. Net cash provided by financing activities was $1,042,112 for the year ended June 30, 2018 compared to $2,052,644 for the same period of 2017, a decrease of $1,010,532. The decrease is primarily due to fewer common stock sales and issuances of convertible debentures, and lower proceeds from notes payable. We also had higher principal payments on our long-term debt during the year ended June 30, 2018.

 

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern. As of June 30, 2018, we had not yet achieved profitable operations, had a working capital deficit of $4,387,148, 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 consolidated financial statements for additional information as to the possibility that we may not be able to continue as a going concern.

 

Financing Arrangements

 

September 2014 Convertible Debenture

 

Between September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050 in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. None of the Debentures were converted into common shares during the year ended June 30, 2018.

 

Interest expense for the years ended June 30, 2018 and 2017 was $1,524 and $1,524, respectively

 

As of June 30, 2018, $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 any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018, the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received 3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense.

 

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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 years ended June 30, 2018 and 2017 of $0 and $92,298, respectively. Interest expense for the years ended June 30, 2018 and 2017 was $40,000 and $40,000, respectively.

 

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

 

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

 

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

 

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018, and 2017, of $231,702 and $323,894, respectively.

 

The Company recognized a beneficial conversion expense for the years ended June 30, 2018, and 2017, of $1,021,500 and $64,775, respectively.

 

Interest expense for the years ended June 30, 2018, and 2017, of $113,570 and $144,878, respectively.

 

During the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into 3,791,666 and 2,375,000 shares of common stock respectively. As of June 30, 2018, $1,275,000 of principal was outstanding. As of the date of this report, maturities totaling $825,000 of principal have been extended for one year until March and April of 2019, and the remaining $250,000 have not been extended, and are past due as of the date of this report.

 

January-March 2017 Convertible Debentures

 

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

 

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In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $52,954 and $15,656, respectively. The Company recognized beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and $62,400, respectively.

 

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

 

Interest expense for the years ended June 30, 2018 and 2017 was $11,275 and $8,529, respectively.

 

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

 

February 2017 Convertible Promissory Note

 

In February 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 years ended June 30, 2018 and 2017 of $9,012 and $15,721, respectively.

 

There was no interest expense recorded for the year ended June 30, 2018 and $8,000 was recognized during 2017.

 

As of June 30, 2018, $0 of principal was outstanding. In August 2017, the Note Holder converted $100,000 of principal and $8,000 of accrued interest into 833,333 and 66,667 shares of common stock, respectively.

 

March 2017 Convertible Debenture

 

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

 

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In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $77,248, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $39,137 and $38,111, respectively. The Company recognized beneficial conversion expense for the years ended June 30, 2018 and 2017 of $0 and $72,752, respectively.

 

The Company recognized interest expense for the years ended June 30, 2018 and 2017 of $118,000 and $12,000, respectively. In September 2017 the debenture was converted in full to common stock. At March 31, 2018, and June 30, 2017, the principal balance remaining on this note was $0 and $150,000, respectively. The Company recognized 3.5 million common shares issuable and $118,000 of imputed interest expense during September 2017 as a result of this debt settlement.

 

March 2017 Convertible Promissory Notes

 

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

 

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

 

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

 

The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $43,661 and $52,764, respectively.

 

Interest expense for the years ended June 30, 2018 and 2017 of $421,901 and $9,418, respectively.

 

As of June 30, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of $514,969 for the year ended June 30, 2018.

 

As of June 30, 2018, and 2017, $222,350 and $541,850 of principal was outstanding, respectively. During the year ended June 30, 2018, the Company paid $319,500 of principal.

 

May 2017 Convertible Promissory Notes

 

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

 

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In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $71,795, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company also recorded original issue discount (“OID”) of $13,650 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the years ended June 30, 2018 and 2017 of $48,101 and $23,693, respectively.

 

Interest Expense was recorded for the years ended June 30, 2018 and 2017 of $112,900 and $2,065 respectively. As of June 30, 2018, and June 30, 2017, $0 and $233,150 of principal was outstanding, respectively. In October 2017 the Company paid the principal of this note.

 

June 2017 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. Interest expense was recorded for the years ended June 30, 2018 and 2017 of $10,500 and $8,000 respectively. Beneficial conversion expense was recorded for the years ended June 30, 2018 and 2017 of $0 and $45,660 respectively. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 and 2017 of $45,434 and $8,907, respectively. As of June 30, 2018, and 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

 

July 2017 Convertible Debenture

 

In July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $53,875. As of June 30, 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

 

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Interest expense was recorded for the years ended June 30, 2018 and 2017 of $18,500 and $0, respectively.

 

September 2017 Convertible Debenture

 

Debenture A)

 

In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $82,720. As of June 30, 2018, $150,000 of principal was outstanding.

 

Interest expense was recorded for the years ended June 30, 2018 of $12,000 and $0, respectively.

 

Debenture B)

 

In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $495,000. The Note Holder received 10,000,000 shares of common stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note has a term of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense of $131,663. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $318,337. As of June 30, 2018, $450,000 of principal was outstanding.

 

Interest expense for the year ended June 30, 2018 of $36,000.

 

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Debenture C)

 

In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2018 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

The Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months.

 

Interest expense was recorded for the year ended June 30, 2018 of $18,000.

 

November 2017 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,007. Interest expense was recorded for the year ended June 30, 2018 of $1,380. As of June 30, 2018, $27,000 of principal was outstanding.

 

November 2017 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $18,864 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $18,864. As of June 30, 2018, $0 of principal was outstanding, as it was converted into 833,333 shares of common stock. (This debenture is not scheduled above, as it originated, and terminated within the same fiscal year.)

 

December 2017 Convertible Debenture

 

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

 

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

 

February 2018 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $24,785. Interest expense was recorded for the year ended June 30, 2018 of $3,600. As of June 30, 2018, $45,000 of principal was outstanding.

 

March 2018 Convertible Debenture

 

In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,697. Interest expense was recorded for the year ended June 30, 2018 of $2,400 was recognized. As of June 30, 2018, $30,000 of principal was outstanding.

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,043. Interest expense was recorded for the year ended June 30, 2018 of $2,800. As of June 30, 2018, $35,000 of principal was outstanding.

 

April 2018 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $14,455. Interest expense was recorded for the year ended June 30, 2018 of $4,800 was recognized. As of June 30, 2018, $60,000 of principal was outstanding.

 

April 2018 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $2,616. Interest expense for the year ended June 30, 2018 of $1,027 was recognized. As of June 30, 2018, $70,000 of principal was outstanding.

 

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April 2018 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $1,675. Interest expense was recorded for the year ended June 30, 2018 of $316 was recognized. As of June 30, 2018, $20,000 of principal was outstanding.

 

June 2018 Convertible Debenture

 

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

 

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the year ended June 30, 2018 of $3,431. Interest expense was recorded for the year ended June 30, 2018 of $3,200 was recognized. As of June 30, 2018, $40,000 of principal was outstanding.

 

Results of Operations - Year Ended June 30, 2018 Compared to Year Ended June 30, 2017

 

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

 

   Years Ended         
   June 30,   Increase/     
   2018   2017   (Decrease)   % 
Statement of Operations Information:                    
                     
Revenues  $20,120   $33,250   $(13,130)   -39.5%
General and administrative   6,093,075    5,447,576    645,499    11.8%
Research and development   188,274    1,006,214    (817,940)   -81.3%
Beneficial conversion expense   1,303,078    275,110    1,027,968    373.7%
Interest expense, net   1,023,989    314,679    709,310    225.4%
Change in value of derivative liability   (514,969)   -    (514,969)   N/A 
Accretion of debt discount   1,327,742    649,524    678,218    104.4%

 

Revenues

 

During the year ended June 30, 2018 we recognized revenue of $20,120 compared to $33,250 for the year ended June 30, 2017, a decrease of $13,130, or 65.3%. At the Company’s stage of product development, our revenues are derived from funded product development agreements, and product testing agreements, and are not significant for fiscal years 2018 or 2017 as the Company has focused on product development.

 

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General and Administrative Expenses

 

During the year ended June 30, 2018 the Company incurred $6,093,075 of general and administrative expenses, an increase of $645,499, or 11.8%, from the $5,447,576 recorded for the year ended June 30, 2017. The increase in general and administrative expenses breaks down as follows:

 

   Years Ended         
   June 30,   Increase/     
   2018   2017   (Decrease)   % 
                 
Compensation and severance related expenses  $864,345   $1,096,401   $(232,056)   -21.2%
Stock-based compensation   1,580,012    1,438,570    141,442    9.8%
Legal and audit expenses   597,004    852,058    (255,054)   -29.9%
Travel expenses   10,334    45,863    (35,529)   -77.5%
Corporate expenses   529,479    597,298    (67,819)   -11.4%
Other professional fees   2,379,264    1,282,489    1,096,775    85.5%
Depreciation   99,589    96,349    3,240    3.4%
Amortization   33,048    38,548    (5,500)   -14.3%
Total General and Administrative Expenses  $6,093,075   $5,447,576   $645,499    11.8%

 

The increase in other professional fees was due primarily to various consultants that provided services throughout the year ended June 30, 2018. A portion of the increased professional fees was offset by having a lower headcount, and thus compensation being reduced. Stock-based compensation increased in 2018 due to some employees electing to be paid in stock or options, in lieu of cash.

 

Research and Development Expenses

 

During the year ended June 30, 2018 the Company incurred $188,274 of research and development expenses (“R&D”), a decrease of $817,940, or 81.3%, from the $1,006,214 recorded for the year ended June 30, 2017. The primary reasons for the decrease are, in fiscal year 2017, the Company incurred i) costs associated with a sponsored research agreement the Company has in place with Texas State University, ii) expenditures for lab equipment, supplies, and other consumables and iii) costs associated with the development of new products. These costs were reduced, awaiting financing of further R&D expenditures.

 

Beneficial Conversion Feature on Convertible Debenture

 

The beneficial conversion expense for the year ended June 30, 2018 was $1,303,078 compared to $275,110 during the year ended June 30, 2017, an increase of $1,027,968, or 373.7%. The increase was due primarily to issuance of new convertible debentures, and two triggering events creating down-round features in certain debentures to be recognized during the year ended March 31, 2018. See Note 6 to the Consolidated Financial Statements.

 

Interest Expense

 

Interest expense for the year ended June 30, 2018 was $1,023,989 compared to $314,679 during the year ended June 30, 2017, an increase of $709,310, or 225.4%. The increased interest expense recorded in the fiscal year 2018 was primarily related to the 8% interest rate on additional debentures of outstanding convertible debentures, recognition of additional debt discount related to certain debt, and interest recorded due to debenture extensions.

 

Change in value of derivative liability

 

During the year ended June 30, 2018 the Company recorded a benefit of $514,969 related to the change in value of derivative liability. The benefit is related to the change in value of the convertible debentures feature issued in March and May of 2017 during the year ended June 30, 2018.

 

Accretion of Debt Discount

 

During the year ended June 30, 2018 the Company recorded $1,327,742 of accretion of debt discount expense, an increase of $678,218, or 104.4% from the $649,524 recorded for the year ended June 30, 2017. The increase in accretion of debt discount expense is primarily related to the issuance of the convertible debentures during the fiscal year.

 

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Off-balance sheet arrangements

 

We have no off-balance sheet arrangements including arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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 anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements, when adopted.

 

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

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

Our Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the reports of our independent registered public accounting firms, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear beginning on page F-1 of this document and are incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

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Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitation of controls systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

 

As of June 30, 2018, an evaluation was carried out under the supervision and with the participation of our management, including our interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) under the Securities Exchange Act of 1934). Based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2018, because of material weaknesses in our internal control over financial reporting described below.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of management, including our interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness, as of June 30, 2018, of our internal control over financial reporting based on the framework in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was not effective as of June 30, 2018 due as described below.

 

Management did not maintain effective procedures in the areas of review of the 10K, review of third-party valuation reports and income taxes. These material weaknesses resulted from the lack of timely and effective review of the Company’s period-end closing process and adequate personnel and resources. Specifically,

 

  The Company’s Form 10-K and other filings need to be reviewed thoroughly by management on a timely basis. Management’s responsibility is to oversee that the Company is capable of developing accurate and timely financial information. The Company must reinforce procedures to ensure that Form 10-K as well as other required filings are done on a timely and accurate basis.
     
  The Company is small, and does not have sufficient staff to maintain satisfactory separation of duties.
     
  Management reviewed all information available to them from the outside consultant’s valuation reports, which included all external models, however, all inputs of the consultants’ model were not available to management and were not verified by the management. A more thorough review which includes all inputs of the models used by the consultants will ensure no additional journal entries need to be recorded.

 

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Remediation Plan

 

Management is committed to remediating each of the material weaknesses identified above. We have recruited experienced US GAAP/financial reporting professional to augment and upgrade our finance and accounting staff to address issues of accuracy, completeness, adequate segregation of duties, and timeliness in financial statement preparation and reporting. However, the Company may be unable to remediate this weakness until it has received additional funding that may be necessary to hire additional personnel. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to review and monitor our accounting procedures, perform internal audit procedures, and to prepare our consolidated financial statements and reports. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to document the existing financial processes, risk assessment, and internal controls systematically. We believe our recently hired personnel, or through professional engagement of consultants, will improve our documentation and internal control processes and procedures.

 

Changes in Internal Controls over Financial Reporting

 

Other than was described above, there were no material changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the year ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth certain information regarding our executive officers and directors as of October 15, 2018.

 

Name  Age   Position with the Company
Stephen Squires (2)   58   Chief Executive Officer, President, Director
Robert Phillips   58   Chief Financial Officer
David Doderer   48   Director
Dr. Ghassan Jabbour (1)   56   Director
Shane Squires (2)   32   Director

 

(1) Independent director.
   
(2) Stephen Squires is the father of Shane Squires.

 

The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board of Directors and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time.

 

Officer and Director Backgrounds

 

The following is a brief summary of the background of each director and executive officer of our Company:

 

Stephen Squires, President and Chief Executive Officer, Director. Mr. Squires has over 25 years of experience in turnarounds, startups, business development, mergers and acquisitions and strategic planning. Mr. Squires is skilled at identifying emerging technologies and driving commercialization/global market introduction to position companies for growth. He has served as the Company’s President, CEO and Chairman from 2008 to June 30, 2016 and he has served as CEO and President since December 2016. Prior to QMC, from 2001 to 2008, Mr. Squires’ principal occupation was consulting and advising in the areas of advanced materials, nanotechnology, applications engineering, strategic international marketing with emphasis on middle east and commercialization of emerging technologies for Orasi LLC. From 1983 to 2001, Mr. Squires, as founder, served as President and Chief Executive Officer of Aviation Composite Technologies, Inc., a company whose principal business was the engineering, design, manufacture and refurbishment of advanced composite aero structures (“Aviation Composite”). Under Mr. Squires’ leadership, Aviation Composite grew from zero to over 200 employees and operated a 100,000 square foot state of the art facility. Aviation Composite was merged with USDR Aerospace in 2001. From 1977 to 1983, he worked at McDonnell Douglas Corporation, a company engaged in the business of building advanced tactical fighter aircraft and space vehicles, developing and adapting advanced materials for combat aircraft applications. Management believes that Mr. Squires’ background with the Company and its subsidiaries, his business experience in leading and managing businesses, and his extensive experience in the advanced materials, nanotechnology and engineering industries makes him qualified to serve as a director.

 

Robert Phillips, Chief Financial Officer: Mr. Phillips has extensive experience in accounting, finance, Security and Exchange Commission (“SEC”) financial reporting, Sarbanes Oxley compliance (“SOX”) and strategic planning in diverse industries including software, hardware manufacturing, medical technology and global communication services. Less than two years after completing his MBA at Texas A&M, he became CFO of a publicly traded company going through a difficult turnaround. A few years later he again became CFO and Chief Strategy Officer at publicly traded SecureCare Technologies, a medical technology spin-out and negotiated private equity investments. His early CFO experience has led me to positions and consulting engagements ranging from CFO of iStream Technologies, a startup business process management company specializing in regulatory compliance, to world-class Apple where he was a managing consultant of a high transaction volume stock operations team and managed accounting and related Form 10-Q and Form 10-K financial equity disclosure and technical accounting assessments as well as transitioned the departments operational site from Cupertino to Austin. He was also VP of Venture Development at a venture backed e-commerce startup incubator in Austin, Texas. He has served as Controller of Rocket Gaming Systems as well as Financial Reporting and Planning Director at Multimedia Games and at Rignet during an IPO. As financial consultant at Bridgepoint Consulting Group, he has held CFO services, Interim Controller and SEC Financial Reporting positions at Phunware, Crossroads Systems, ActivePower, Harden Healthcare, ArthroCare, Boardbooks.com, Rainmaker Technologies and Fallbrook Technologies. Also, financial consulting and CFO services engagements at multinational companies including BMC Software, Natco Group, Respironics and FIC Group

 

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David Doderer, Director. Mr. Doderer has over 20 years of research and development experience in emerging technologies including aerospace, biotech, and nano and quantum materials. Mr. Doderer was the Vice President of R&D for the company from 2008 through 2017. From 2006 to 2008, he managed Hudler Titan LLC, a technology consulting company, specializing in advanced nanofiber filtration for gaseous streams; experimental design and predictive modeling; and a clean energy/ clean air/ clean water initiative through aggregation of retail level contributions in alternative energy-based carbon offset programs. From 2002 to 2005, he served as principal investigator for USGN, a company engaged in the business of defense, safety and security solutions, where he contributed to numerous patents/patents pending and proprietary processes. Mr. Doderer’s experience in engineering, research and development in emerging technologies, his contributions to the filings of numerous patents and proprietary processes, and commercial planning provides significant experience to, and makes him qualified to be a member of, our Board of Directors.

 

Dr. Ghassan Jabbour. Dr. Jabbour has served as Chief Science Officer and a director of the Company since December 2008, taking a brief 6-month sabbatical in 2016. Dr. Jabbour is a Fellow SPIE and Fellow EOS and chairs our Advisory Board. Dr. Jabbour is the Canada Research Chair Tier 1-Professor of Electrical Engineering at the Univeristy of Ottawa. From 2013 to 2016 Dr. Jabbour was the Center Director and Lead Professor of Advanced Manufacturing, Renewable Energy Center, University of Nevada Reno. Prior to that, he served as Founding Director of the Solar and Alternative Energy Science and Engineering Research Center and also AlRawabi Endowed Research Chair at KAUST (King Abdullah University of Science and Technology) in Saudi Arabia from December 2009 to January 2013. Dr. Jabbour was the Director of Flexible and Organic Electronics Development at the Flexible Display Center (FDC) during 2006-2010, and a Professor of Chemical and Materials Engineering at Arizona State University. He was also the Technical Advisory Board Leader on Optoelectronic Materials, Devices and Encapsulation at FDC. He has been selected to the Asahi Shimbun 100 New Leaders of the USA and received the Presidential Award for Excellence from the Hariri Foundation in 1997. Dr. Jabbour’s research experience encompasses flexible-roll-to-roll-electronics and displays, smart textile, moisture and oxygen barrier technology, transparent conductors, organic light emitting devices, organic and hybrid photovoltaics, organic memory storage, organic thin film transistors, combinatorial discovery of materials, nano and macro printed devices, micro and nanofabrication, biosensors, and quantum simulations of electronic materials. Dr. Jabbour attended Northern Arizona University, the Massachusetts Institute of Technology (MIT), and the University of Arizona. Prof. Jabbour has authored and co-authored over 700 publications, invited talks, and conference proceedings. He is the editor of several books and symposia proceedings involving organic photonics and electronics, and nanotechnology. Professor Jabbour is guest editor of the MRS Bulletin issue on “Organic Photovoltaics”. He is the Chair and/or Co-Chair of over 50 conferences related to photonic and electronic properties of materials and their applications in displays and lighting, hybrid photosensitive materials, and hybrid integration of semiconducting and nanotechnology. We believe Dr. Jabbour is qualified to sit on the Board of Directors due to his extensive scientific and technical experience with the Company’s technology and proposed products.

 

Shane Squires. Mr. Squires has served as a director of the Company since 2016. Mr. Squires is currently a research analyst with Howard Hughes Corp. engaged in the business of managing global investments in direct real estate, real estate securities, infrastructure securities and master limited partnerships (MLPs) From 2016 through 2017 he served as a research analyst at Invesco Real Estate (a subsidiary of Invesco Ltd.), engaged in the business of managing global investments in direct real estate, real estate securities, infrastructure securities and master limited partnerships (MLPs). Prior to this, Mr. Squires held the position of Senior Economist at Realpage Inc. from 2014 until 2016. Mr. Squires has a Masters in Applied Economic Analysis and a Bachelor of Science in Economics from the University of Texas at Arlington. We believe Mr. Squires is qualified to serve as a member of our Board of Directors due to his extensive experience in business and investing.

 

Corporate Governance

 

Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Nevada Revised Statutes and our bylaws. Members of the Board of Directors are kept informed of our business through discussions with the Chief Executive Officer and other key members of management and by reviewing materials provided to them by management.

 

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In the past, there have been no arrangements or understandings pursuant to which a director or executive officer was selected to be a director or executive officer other than employment contracts with our executive officers.

 

Director Qualifications and Diversity

 

Our Board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The Board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the renewable energy, finance and capital market industries. In evaluating nominations to the Board, our Board also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the willingness to assume and carry out fiduciary responsibilities. Qualified candidates for membership on the Board will be considered without regard to race, color, religion, sex, ancestry, national origin or disability. See “Nominating and Corporate Governance Committee” section.

 

Risk Oversight

 

The full Board has oversight of and will prioritize the following risks:

 

  Risks and exposures associated with corporate governance, and management and director succession planning, strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation.
     
  Risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters.
     
  Risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans.

 

Board Leadership Structure

 

The Chairman of the Board presides at all meetings of the Board according to our bylaws. The Chairman is required to be appointed on an annual basis by at least a majority vote of the remaining directors. Currently, the office of Chairman of the Board and Chief Executive Officer, are held by Mr. Stephen Squires. The Company has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer.

 

Scientific Advisory Board

 

In July 2014, the Company announced the formation of the Scientific Advisory Board chaired by Dr. Ghassan Jabbour who is also a member of the Company’s Board of Directors. Other members of the Scientific Advisory Board were Dr. Michael Wong of Rice University and former member of our Board of Directors, Mr. Tomio Gotoh, a pioneer of the personal computer in Japan, and Dr. Munisamy Anandan.

 

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Dr. Ghassan Jabbour. See biography under “Officers and Directors Backgrounds.”

 

Dr. Michael S. Wong is a Principal Investigator, Associate Professor in Chemical and Biomolecular Engineering, and Associate Professor in Chemistry (Joint Appointment) at Rice University. Dr. Wong heads the Catalysis and Nanomaterials Laboratory and is the inventor of the patented synthesis for tetrapod quantum dots licensed exclusively worldwide by the Company. His research interests lie in the areas of nanostructured materials, heterogeneous catalysis, bioengineering applications, and developing new approaches to assembling nanoparticles into functional macrostructures.

His accomplishments include:

 

  Smithsonian Magazine “37 Under 36” Young Innovator Award (2007)
     
  3M Non-tenured Faculty Award (2006, 2007)
     
  GOLD 2006 Conference Best Presentation Award, for “best new idea in gold catalysis” (2006)
     
  AIChE South Texas Section Best Applied Paper Award (2006)
     
  AIChE Nanoscale Science and Engineering Forum Young Investigator Award (2006)
     
  MIT Technology Review’s TR35 Young Innovator Award (2006)
     
  Hershel M. Rich Invention Award (2006)
     
  National Academy of Engineering Indo-America Frontiers of Engineering Symposium, Invited Speaker (2006)
     
  Smalley/Curl Innovation Award (2005)
     
  National Academies Keck Futures Initiative (NAKFI) Symposium, Invited Participant (2004)
     
  Oak Ridge Associated Universities Ralph E. Powe Junior Faculty Enhancement Award (2003)
     
  National Academy of Engineering Japan-America Frontiers of Engineering (JAFOE)
     
  Symposium, Invited Participant (2002)
     
  Rice Quantum Institute (RQI), Fellow (2002)
     
  Robert P. Goldberg Grand Prize, MIT $50K Entrepreneurship Competition (2001)
     
  Union Carbide Innovation Recognition Award (2000)
     
  MIT Chemical Engineering Edward W. Merrill Outstanding Teaching Assistant Award (1997)
     
  Faculty advisor for Phi Lambda Upsilon, chemical sciences honorary society (2003 - present)

 

Dr. Michael S. Wong joined the Department of Chemical Engineering of Rice University in 2001 and received a joint appointment in the Department of Chemistry in 2002. Before coming to Rice University, he did post-doctoral research with Dr. Galen D. Stucky of the Department of Chemistry and Biochemistry at University of California, Santa Barbara. Mr. Wong’s educational background includes a B.S. in Chemical Engineering from Caltech, an M.S. in Chemical Engineering Practice (“Practice School”) from MIT, and a Ph.D. in Chemical Engineering from MIT (under the supervision of Dr. Jackie Y. Ying, he is co-author of “Supramolecular Templating of Mesoporous Zirconia-Based Nanocomposite Catalysts”). With the underlying theme of designing and engineering novel materials for catalytic and encapsulation applications, his research interests lie in the areas of nanostructured materials (e.g. nanoporous materials, nanoparticle-based hollow spheres, and quantum dots), heterogeneous catalysis, and bioengineering applications. He is particularly interested in developing new chemical approaches to assembling nanoparticles into functional macrostructures. His scientific experience was particularly valuable as a member of the Company’s Board of Directors from 2008 through 2014, at which time he elected to resign from the Board and to join the Company’s Scientific Advisory Board.

 

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Tomio Gotoh is a consultant for Diverse Technologies in Japan. Mr. Gotoh is a principal inventor of the NEC TK-80, the first Japanese microcomputer in 1976. He led numerous product launches that made Nippon Electric Company (“NEC”) the Japanese personal computer industry leader. As NEC’s visionary pioneer, Mr. Gotoh contributed significantly during the dawn of the personal computer era.

 

Dr. Munisamy Anandan is a Managing Member of Organic Lighting Technologies LLC, Austin, Texas. He has 40 years of experience in various flat panel display technologies namely, LCD, plasma, OLED, FED and LCD backlight. He held senior level positions in various companies including Bell Communications Research, Matsushita Electric works and eMagin Corporation. Dr. Anandan is the past president of the Society for Information Display. For the past 12 years he has specialized in LED backlight, for LCDs for various applications including TV, and LED/OLED lighting. He has delivered several keynote addresses, seminars and invited talks at various international conferences around the world, on LED backlight, LED lighting and OLED lighting. He has issued patents on quantum dot and quantum rod based novel pixelated backlight for LCDs, employed in multiplicity of applications and has received several awards that include R&D 100 Award, in recognition of his work. He is a Senior Member of IEEE and SID. Dr. Anandan has recently completed writing one part of a book on ‘Quantum dots and rods and their application to LED backlight for LCD’.

 

Committees/Independent Directors

 

Our Board of Directors has determined that David Doderer and Dr. Ghassan Jabbour are considered “independent directors.” Under the listing requirements of the NASDAQ Stock Market an “independent director” means a person other than an executive officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director.

 

On September 22, 2015, the Board of Directors formed an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation Committee. Charters for each of these three committees were adopted as of that date and are available on our website at www.qmcdots.com. However, since certain resignations from our Board of Directors in December 2016, our full Board of Directors has performed the functions of our Audit, Compensation, and Nominating and Corporate Governance Committees. Other than David Doderer and Dr. Jabbour, neither Stephen Squires nor Shane Squires, meet the criteria for “independent director” under NASDAQ Stock Market listing requirements. In making these determinations, our Board of Directors considered the relationships that each director has with our company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each director.

 

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The Board of Directors adopted charters for an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee in September 2015, copies of which is posted on our website, www.qmcdots.com. However, as each of the charters requires that the applicable committee consist of independent members of the Board of Directors and given our size and the development of our business to date, we believe that the Board of Directors can presently perform all of the duties and responsibilities that might be contemplated by the committees. The Company intends to appoint committee members as it expands the Board of Directors and appoints individuals with applicable experience and expertise.

 

Our Board of Directors may establish other committees from time to time.

 

Code of Ethics

 

Our Board has adopted a Code of Business Conduct and Ethics that applies directors, officers and employees, which includes our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A current copy of the code is posted on our website, www.qmcdots.com.

 

Section 16(a) Compliance

 

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders (the “Reporting Persons”) are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.

 

Based solely on our review of the copies of such forms received by us, or written representations from the Reporting Persons, we believe all required filings have been filed during the fiscal year ended June 30, 2018, other than the failure to file a Form 4 for Stephen Squires relating to a single transaction and a Form 3 for Robert Phillips relating to his becoming an executive officer.

 

Item 11. Compensation of Directors and Executive Officers

 

The following table sets forth the overall compensation earned over the fiscal years ended June 30, 2018 and 2017.

 

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    Fiscal Year    Salary ($)    Bonus ($)    Stock Awards ($)    Warrants or Option Awards (2)    Non-Equity Incentive Plan Compensation ($)    Nonqualified Deferred Compensation Earnings ($)    All Other Compensation
($)
    Total ($) 
Officers                                             
Stephen Squires (1)   2018    300,000    -    -    -    -    -             -    300,000 
Chief Execurive Officer, Chairman of the Board of Directors   2017    150,000    -    -    28,848    -    -    -    178,848 
                                              
Robert Phillips (3)   2018    -    -    -    -    -    -    55,000    55,000 
Chief Financial Officer   2017    -    -    -    -    -    -    -    - 
                                              
E. Jamie Schloss (4)   2018    30,800    -    -    -    -    -    -    30,800 
Former Chief Financial Officer   2017    30,800    -    -    -    -    -    -    30,800 
                                              
David Doderer (5)   2018    -    -    -    -    -    -    -    - 
Former Vice President, Director   2017    150,000    -    -    23,584    -    -    -    173,584 

 

  (1) Mr. Squires resigned as CEO and director of the Company, effective June 30, 2016. He became CEO again in December 2016. Fiscal year 2017 only contains 6 months of compensation for Mr. Squires.
     
  (2) The options and restricted stock awards presented in this table for 2018 and 2017 reflect the entire fair value of such awards in the year of grant. However, the accompanying consolidated financial statements reflect the dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to guidance issued by the FASB. Such guidance requires the company to determine the overall value of the stock awards and options as of the date of grant. The stock awards are valued based on the fair market value of such shares on the date of grant and are charged to compensation expense over the related vesting period. The options are valued at the date of grant based upon the Black-Scholes method of valuation, which is expensed over the service period over which the options become vested. As a general rule, for time-in-service-based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description of the guidance issued by the FASB and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the consolidated financial statements included with this Prospectus.
     
  (3) Mr. Phillips became the CFO on January 1, 2018. He is engaged with a consulting contract with the Company. His compensation is reported as Other Compensation.
     
  (4) Mr. Schloss became the CFO on January 1, 2017 and became the Corporate Controller on January 1, 2018. Fiscal years 2018 includes 6 months of CFO salary and does not include any salary earned under the position of Corporate Controller.
     
  (5) Mr. Doderer resigned January 2016. He still serves in the capacity of Director on the Board.

 

For a description of the material terms of each named executive officers’ employment agreement or arrangement, including the terms of any contract, agreement, plan or other arrangement that provides for any payment to a named executive officer in connection with his or her resignation, retirement or other termination, or a change in control of the company see section below entitled “Employment Agreements.”

 

No outstanding common share purchase option or other equity-based award granted to or held by any named executive officer in 2017 or 2016 were re-priced or otherwise materially modified, including extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined, nor was there any waiver or modification of any specified performance target, goal or condition to payout.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table provides certain information concerning any common share purchase options granted for employment compensation, stock awards, or equity incentive plan awards held by each of our named executive officers and directors employed at any point during the fiscal year covered in this Form 10-K that were outstanding, exercisable and/or vested as of June 30, 2018:

 

   Number of Securities Underlying Unexercised Options or Warrants (#) Exercisable   Number of Securities Underlying Unexercised Options or Warrants (#) Unexercisable   Option
Exercise
Price ($)
   Option Expiration Date 
Officers/Directors                    
Stephen Squires   1,000,000(1)   -   $0.05    10/19/2019 
Chief Execurive Officer, Chairman of the Board of Directors   5,000,000(2)   -    0.05    1/20/2020 
    660,000(3)   340,000    0.12    4/13/2026 
    3,500,000(4)   -    0.05    3/2/2022 
    5,000,000(5)   -    0.05    3/29/2023 
    2,968,750(6)   -    0.06    2/10/2019 
    1,562,500(7)   -    0.08    6/6/2019 
    600,000(8)   -    0.05    10/19/2019 
    937,500(9)   -    0.08    6/6/2019 
    -(10)   2,000,000    0.30    4/13/2026 
    4,950,000(11)   10,050,000    0.12    6/26/2022 
    -(12)   10,000,000    0.12    6/26/2022 
    5,000,000(13)   -    0.03    1/2/2023 
                     
Robert Phillips                    
Chief Financial Officer   -    -    -      
                     
E. Jamie Schloss                    
Former Chief Financial Officer   -    -    -      

 

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  (1) These grants became fully vested October 20, 2011.
  (2) These grants became fully vested January 20, 2012.
  (3) On April 13, 2016, Mr. Squires was awarded 1,000,000 options. This award vests 33% on April 13, 2017, 33% on April 13, 2018, and 34% on April 13, 2019 (34%). Unvested shares are valued at $40,800 as of June 30, 2018.
  (4) These grants became fully vested March 3, 2014.
  (5) These grants became fully vested March 29, 2013.
  (6) These grants became fully vested February 10, 2016.
  (7) These grants became fully vested June 6, 2016.
  (8) These grants became fully vested October 20, 2011. These options are held by Robin Squires, wife of the CEO, and deemed controlled by the CEO.
  (9) These grants became fully vested June 6, 2016. These options are held by Robin Squires, wife of the CEO, and deemed controlled by the CEO.
  (10) In February 2016, the Board of Directors authorized certain performance-based stock options to be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The option exercise price of the unexercised unearned options is the greater of (i) $0.30 and (ii) the market price when deemed earned by the Board.
  (11) On June 26, 2017, Mr. Squires was awarded 15,000,000 options. This award vests 33% on June 1, 2017, 33% on June 1, 2018, and 34% on June 1, 2019 (34%). Unvested shares are valued at $1,206,000 as of June 30, 2018.
  (12) On June 26, 2017, Mr. Squires was granted options to purchase 10,000,000 shares of common stock at $0.12/share. The options vest in the event that the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control of the Company is sold based upon a purchase price paid to the Company or its shareholders of at least $90 million.
  (13) On January 2, 2018, Mr. Squires was awarded 5,000,000 warrants. This award vests immediately, with an exercise price of $0.03, and expire on January 2, 2023, as a conversion of salary.

 

Compensation of Directors

 

Cash Fees

 

As of the filing date of this Form 10-K, no cash fees have been paid to any directors of the Company, although the Board reserves the right to pay such cash fees in the future.

 

Restricted Stock and Options

 

In June 2017, Mr. Shane Squires and Mr. Jabbour each received 300,000 options to purchase shares of the Company’s common stock. The options have a 5-year term, an exercise price of $0.12.

 

No restricted stock, option, or other equity compensation were received by Directors during fiscal year 2018.

 

Travel Expenses

 

All directors are reimbursed for their reasonable out of pocket expenses associated with attending board meetings.

 

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For the fiscal year ended June 30, 2018, compensation paid to directors (other than those listed in the Summary Table above) was as follows:

 

    Fiscal Year    Salary ($)    Bonus ($)    Stock Awards ($)    Warrants or Option Awards    Non-Equity Incentive Plan Compensation ($)    Nonqualified Deferred Compensation Earnings ($)    All Other Compensation
($)
    Total ($) 
Directors                                             
Dr. Ghassan Jabbour   2018    -    -    -    -    -    -    -    - 
Director                                             
                                              
Shane Squires   2018    -    -    -    -    -    -    -    - 
Director                                             
                                              
David Doderer (1)   2018    -    -    -    -    -    -    -    - 
Director, former Vice President                                             

 

  (1) No compensation was awarded to the Board of Directors during fiscal year 2018. Compensation earned by David Doderer were in the capacity of Vice President, and not as a Director. See Summary Table for Officers above.

 

Compensation Policies and Practices as They Relate to Our Risk Management

 

No risks arise from our Company’s compensation policies and practices for our employees that are reasonably likely to have a material adverse effect on our Company.

 

Salary or Consulting Accruals

 

In January 2018, certain officers, employees, and consultants of the Company listed below converted accrued salaries (and/or consulting fees) into common stock warrants as follows:

 

Name  $ Amount Converted   # Warrants Received   # Shares Received 
Stephen Squires  $150,000    5,000,000    - 
Toshi Ando   66,500    2,216,667    - 
E. Jamie Schloss   15,400    -    513,333(1)
Andy Robinson   18,000    600,000    - 
Total  $304,900    7,816,667    513,333 

 

  (1) These shares are recorded in shares issuable on the consolidated balance sheet.

 

As of June 30, 2017, the Company had accrued salaries (and/or consulting fees) and expense reimbursements to our current and former executive officers in the amounts set forth below.

 

Name 

Salary

Accrued

  

Expense

Reimbursements
Accrued

 
Stephen Squires  $31,375   $3,210 
Sriram Peruvemba   122,060    11,730 
Craig Lindberg   30,000    13,419 
David Doderer   250,000    0 
Total  $433,435    28,359 

 

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As of June 30, 2018, the Company had accrued salaries (and/or consulting fees) and expense reimbursements to our current and former executive officers in the amounts set forth below.

 

    Salary     Expense Reimbursement  
Name   Accrued     Accrued  
Stephen Squires   $ 163,575     $ 12,722  
David Doderer     275,000       -  
Ghassan Jabour     130,000       -  
Robert Phillips     55,000       - (1)
Toshi Ando     58,600       18,471  
E. Jamie Schloss     26,400       -  
He Huang     28,667       -  
Total   $ 737,242     $ 31,193  

 

  (1) Accrued in Accounts Payable as a portion of Mr. Phillips consulting agreement

 

Employment Agreements

 

Our executive officers, David Doderer and our CEO, Stephen Squires, are each a party to an employment agreement with the Company.

 

Name  Position   Annual Salary   Bonus 
David Doderer   VP Research & Development   $150,000   (1)
Stephen Squires   CEO   $300,000 (2)   (1)

 

(1) Discretionary bonus as determined by the Compensation Committee based upon company and individual performance. Mr. Doderer’s employment agreement expires on December 31, 2017.
(2) In June 2017, Mr. Squires’ salary has been increased to $300,000 per annum.

 

Employment Agreement – Stephen Squires

 

Stephen Squires, Chief Executive Officer, entered into an employment agreement dated October 26, 2012 to retain his services for the period January 1, 2013 through January 1, 2018. On December 10, 2015, the Company entered into an amended and restated employment agreement with Mr. Squires. On June 13, 2016, Mr. Squires, then our Chief Executive Officer and a member of our Board of Directors, agreed to step down from these positions effective June 30, 2016 and to become Managing Director of our wholly-owned subsidiary, Solterra. Mr. Squires would again become the Company’s Chief Executive Officer and President on December 22, 2016. In June 2016, the Company entered into an Amended and Restated Employment Agreement (the “Squires Agreement”) with Mr. Squires which provides that, until such time as the Company records its first $10,000,000 in revenue (the “Revenue Trigger”), the Company shall pay Mr. Squires an annual base salary of no less than $225,000 and after the occurrence of the Revenue Trigger, the Company shall pay Mr. Squires an annual base salary of no less than $247,500. Mr. Squires shall also be eligible for certain annual bonuses and equity awards pursuant to the Squires Agreement. The term of the Squires Agreement is for two years and provides for severance payments in the event of termination or a change in control of the Company equal to the sum of Mr. Squires’ base salary for the remainder of his employment agreement.

 

In June 2017, the Company entered into an amendment to Mr. Squires’ employment agreement pursuant to which we agreed as follows:

 

  (1) Mr. Squires will serve as CEO and receive an increase in annual salary to $300,000 effective June 1, 2017.
  (2) Mr. Squires term of his agreement was extended three years to June 30, 2020.
  (3) Mr. Squires received 25 million options to purchase common stock, exercisable at $0.12 per share, outside of any stock option plan with 15 million of the options vesting annually over three years beginning July 1, 2017 and the remaining 10 million options vesting in accordance with the terms of the revised and amended employment agreement but only in the event that the outstanding shares of the Company’s common stock reaches a market cap of at least $100 million for at least five consecutive trading days or control of the Company is sold during the term of the options based upon a purchase price paid to the Company and/or its shareholders of at least $90 million.

 

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Employment Agreement — David Doderer

 

Pursuant to an employment agreement dated October 26, 2012, the Company entered into a five-year employment contract to retain the services of David Doderer as Vice President of Research and Development of the Company for the period of January 1, 2013 through January 1, 2018. The agreement is subject to automatic successive renewal terms of one year, unless either party provides written notice to the other party terminating the initial term of any extension thereof at least 60 days prior to the scheduled termination date of the contract. Mr. Doderer is to receive an annual salary of $150,000, paid in monthly installments at the rate of $12,500 per month. Mr. Doderer also received a signing bonus of 5,000,000 restricted shares of Common Stock and 5,000,000 stock options with an amended exercise price of $0.05 per share, fully vested, expiring on March 29, 2023. In the event Mr. Doderer’s services as a director are terminated for any reason, including, termination by his own choice, within six months of a change in control event as defined in said agreement, he shall receive one year’s fees of $120,000 payable in one lump sum no later than 30 days after the termination of his services as a director and, in such event, any options that are not fully vested shall become immediately vested and the options shall be extended for an additional one year following the final exercise date of said option agreement. Mr. Doderer’s employment agreement may be terminated for cause as defined in the agreement. In such event, he shall receive his unpaid portion of his base salary computed up to the date of termination, plus certain other benefits. In the event of death, his estate shall receive compensation of the unpaid portion of his base salary up to the date of his death, plus certain benefits. The agreement contains certain prohibitions against soliciting employees and clients of the Company for his own personal benefit during the term of the agreement and for a period of one year thereafter. Mr. Doderer’s employment agreement does not reflect the following approved by the Company’s Board:

 

  Mr.Doderer received in October 2009 options to purchase 500,000 shares of the Company, issued under the 2009 Plan, at $0.05 per share through October 2019;
  The November 2010 issuance of five-year warrants to purchase 833,333 shares exercisable at $0.075 per share in exchange for the cancellation of $62,500 of accrued salary;
  The May 2011 issuance of five-year warrants to purchase 738,636 shares exercisable at $0.11 per share in exchange for the cancellation of $81,250 of accrued salary; and
  Mr. Doderer received in January 2013 options to purchase a total of 3,000,000 shares of the Company, issued under the 2013 Plan, at $0.05 per share through January 2018.

 

2009 Stock Option Plan

 

On December 2, 2009, the Company established a 2009 Employee Benefit and Consulting Services Compensation Plan (the “2009 Plan”) covering 10,000,000 shares. The material features of the 2009 Plan are described below:

 

Administration

 

Our Board of Directors, Compensation Committee or both, in the sole discretion of our Board, administers the 2009 Plan, which was approved by the Company’s Board of Directors on December 2, 2009 and by stockholders as of January 25, 2010. The Board, subject to the provisions of the 2009 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of Options and Stock Awards issued to our officers or directors.

 

Types of Awards

 

The 2009 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2009 Plan contained provisions for granting incentive and non-statutory stock options and common stock Awards.

 

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Stock Options. A “stock option” is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. The option price per share of common stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the common stock on the date of grant. The option price must be paid in cash, money order, check or common stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board, certain other cashless exercise provisions.

 

Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.

 

Common Stock Award. “Common Stock Award” is shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse, and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board, the restricted stock award will be terminated.

 

Eligibility

 

The officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and Common Stock Awards. Eligibility shall be determined by the Board; however, all Options and Stock Awards granted to officers and directors must be approved by the Board.

 

Termination or Amendment of the 2009 Plan

 

The Board may at any time amend, discontinue, or terminate all or any part of the 2009 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.

 

Awards

 

As of June 30, 2018, options to purchase 8,400,000 shares were outstanding under the 2009 Plan. These include the following persons:

 

   Amount of Shares   Exercise Price   Net Realizable Value (1) 
Stephen Squires (2)   6,600,000   $0.05   $- 
David Doderer   500,000    0.05    - 
Ghassan Jabbour   300,000    0.05    - 
Non-Officers/Directors (3)   1,000,000    0.04 - 0.05     55,000 
Total   8,400,000   $0.04 - 0.05   $55,000 

 

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(1) Based upon the closing last sale of $0.05 per share as of June 30, 2018, after deducting the applicable exercise price.
   
(2) Includes 600,000 options held pursuant to the 2009 plan held by Mr. Squires’ wife.
   
(3) Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing.

 

It is not possible to predict the individuals who will receive future awards under the 2009 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2009 Plan.

 

Shares Subject to the 2009 Plan

 

The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2009 Plan is 10,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2009 Plan does not limit the number of shares of common stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the 2009 Plan and the number of shares subject to options and awards to be granted under the 2009 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2009 Plan.

 

Option activity in the 2009 Plan was as follows for the years ended June 30, 2018 and 2017:

 

   2018   2017 
       Weighted-
Average
       Weighted-
Average
 
   Shares   Exercise Price   Shares   Exercise Price 
                 
Shares reserved   10,000,000         10,000,000      
Outstanding at beginning of year   8,950,000   $       0.050    8,950,000   $0.050 
Granted   -    -    -    - 
Exercised   -    -    -    - 
Forfeited/cancelled   -    0.045    550,000    0.045 
                     
Outstanding at end of year   8,400,000   $0.051    8,400,000   $0.051 
                     
Remaining options available to be issued   1,600,000         1,600,000      

 

2013 Stock Option Plan

 

In January 2013, the Company approved the 2013 Employee Benefit and Consulting Services Compensation Plan (the “2013 Plan”) covering 20,000,000 shares, which automatically increased to 60,000,000 shares on March 29, 2013. The 2013 Plan is otherwise identical to the terms of the 2009 Plan.

 

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Awards

 

As of June 30, 2017, options to purchase 50,441,914 shares were outstanding under the 2013 Plan. These include the following persons:

 

   Amount of Shares   Exercise Price  

Net Realizable
Value (1)

 
Stephen Squires (2)   11,468,750   $0.05 - 0.12   $- 
David Doderer   6,531,250    0.05 - 0.12    - 
Ghassan Jabbour   5,250,000    0.06 - 0.08    - 
Non-Officers/Directors (3)   27,191,914    0.05 - 0.17    - 
Total   50,441,914   $0.05 - 0.17   $- 

 

(1) Based upon the closing last sale of $0.05 per share as of June 29, 2018, the last trading day of the fiscal year, after deducting the applicable exercise price.
   
(2) Includes 937,500 options held pursuant to the 2013 plan held by Mr. Squires’ wife.
   
(3) Represents options owned by persons who are not currently officers or directors of the Company as of the date of this filing.

 

It is not possible to predict the individuals who will receive future awards under the 2013 Plan or the number of shares of common stock covered by any future award because such awards are wholly within the discretion of the Board. The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2013 Plan.

 

Shares Subject to the 2013 Plan

 

The maximum number of shares of common stock that may be issued pursuant to awards granted under the 2013 Plan is 60,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The 2013 Plan does not limit the number of shares of common stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the 2013 Plan and the number of shares subject to options and awards to be granted under the 2013 Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the common stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the 2013 Plan.

 

Option activity in the 2013 Plan was as follows for the years ended June 30, 2018 and June 30, 2017:

 

   2018   2017 
       Weighted-
Average
       Weighted-
Average
 
   Shares   Exercise Price   Shares   Exercise Price 
                 
Shares reserved   60,000,000         60,000,000      
Outstanding at beginning of year   53,441,914   $0.080    56,625,248   $0.082 
Granted   -    -    -    - 
Exercised   -    -    -    - 
Forfeited/cancelled   3,000,000    0.050    3,183,334    0.124 
                     
Outstanding at end of year   50,441,914   $0.082    53,441,914   $0.080 
                     
Remaining options available to be issued   6,233,086         3,233,086      

 

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2015 Stock Option Plan

 

In December 2015, the Company approved the 2015 Employee Benefit and Consulting Services Compensation Plan (the “2015 Plan”) covering 15,000,000 shares. The 2015 Plan received stockholder approval in 2016. The 2015 Plan became effective upon the date that stockholders approved the plan. The material features of the 2015 Plan are summarized below:

 

Purpose

 

The 2015 Incentive Plan is intended to promote the interests of the Company and its stockholders by providing the employees and consultants of Quantum with incentives and rewards to encourage them to continue in the service of Quantum and with a proprietary interest in pursuing the long-term growth, profitability and financial success of Quantum.

 

Administration

 

The Board of Directors, the Compensation Committee or both, in the sole discretion of the Board of Directors, shall administer the 2015 Incentive Plan in accordance with its terms. The Board, subject to the provisions of the 2015 Plan, has the authority to determine and designate officers, employees, director and consultants to which awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of stock options and common stock awards issued to our officers or directors.

 

Eligibility

 

The Company’s officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and common stock awards. Eligibility shall be determined by the Board; however, all stock options and common stock awards granted to officers and directors must be approved by the Board.

 

Shares Subject to the Plan

 

The maximum number of shares of Common Stock that may be covered by stock options and common stock awards granted under the 2015 Plan shall not exceed 15,000,000 shares of common stock in the aggregate. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The aggregate number of shares subject to awards granted under this Plan during any fiscal year to any one employee or non-executive director shall not exceed 2,500,000 and 1,000,000 respectively.

 

Award Types

 

The 2015 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2015 Plan contained provisions for granting incentive and non-statutory stock options and common stock awards.

 

Stock Options. A “stock option” is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. The option price per share of Common Stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the common stock on the date of grant. The option price must be paid in cash, money order, check or Common Stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board of Directors, certain other cashless exercise provisions.

 

Options shall be exercisable at the times and subject to the conditions determined by the Board of Directors at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.

 

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Common Stock Award. A “common stock award” is shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board of Directors if he or she continues to be an employee, director or consultant of the Company. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse, and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of the Company for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board of Directors, the restricted stock award will be terminated.

 

Awards

 

As of June 30, 2018, options to purchase 8,075,000 shares were outstanding under the 2015 Plan. These include the following persons:

 

   Amount of Shares   Exercise Price   Net Realizable Value (1) 
Stephen Squires (2)   2,000,000   $0.30(2)  $- 
David Doderer (3)   1,550,000    0.12 – 0.30(2)            - 
Ghassan Jabbour   300,000    0.12    - 
Shane Squires   300,000    0.12    - 
Non-Officers/Directors (4) (5)   3,925,000    0.06 – 0.30(2)   - 
Total   8,075,000   $0.12 – 0.30(2)